content: UNITED STATES
  
                         SECURITIES AND EXCHANGE COMMISSION
  
                               Washington, D.C. 20549
  
                                     Form 10-Q
  
  
       Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
  Act of 1934
  
  For the period ended    September 30, 1995
  
  
  Commission File Number:  0-13775
  
  
  
                           KEYSTONE HERITAGE GROUP, INC.
                                    (Registrant)
  
  
       PENNSYLVANIA                                               23-2219740
  (State of incorporation)                                     (I.R.S. Employer
                                                               Identification No.)
  
                   555 WILLOW STREET, LEBANON, PENNSYLVANIA 17046
                (Address of principal executive offices) (Zip Code)
  
  
                                    717-274-6800
                (Registrant's telephone number, including area code)
  
  
       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.
  
  
  
  
  
                Class                             Outstanding at November 8, 1995
  Common Stock ($5.00 par value)                          3,053,762 shares
  
  
  
  
  
  <PAGE>
  
                           KEYSTONE HERITAGE GROUP, INC.
  
  
  
                                       Index
  
  
  
  
  PART I - FINANCIAL INFORMATION                                             Page
  
  
  Item 1 - Financial Statements
  
           Consolidated Balance Sheets as of
           September 30, 1995 and December 31, 1994 (Unaudited)                 3
  
           Consolidated Statements of Income for the
           Three and Nine Months ended September 30, 1995 and
           1994 (Unaudited)                                                     4
  
           Consolidated Statements of Stockholders' Equity
           for the Nine Months ended September 30, 1995 and
           1994 (Unaudited)                                                     5
  
           Consolidated Statements of Cash Flows for the
           Nine Months ended September 30, 1995 and 1994 (Unaudited)            6
  
           Notes to Consolidated Financial Statements                           7
  
  
  Item 2 - Management's Discussion and Analysis of
           Financial Condition and Results of Operations                        8
  
  
  
  
  PART II - OTHER INFORMATION
  
  
  Signature Page                                                               18
  
  
  
  
  
  
  
  
  
  
  
  
                                        -2-
  
  
  <PAGE>
  
  
                           KEYSTONE HERITAGE GROUP, INC.
  
                            CONSOLIDATED BALANCE SHEETS
  
                               (Dollars In Thousands)
  
  
  
  <TABLE>
  <CAPTION>
                                                       September 30    December 31
                                                           1995            1994
                                                        ---------       --------
  <S>                                                 <C>            <C>
  ASSETS
        Cash and due from banks                        $    15,834    $    23,568
        Interest bearing deposits with banks                 3,560            150
        Federal funds sold                                     900          1,300
        Investment securities available for sale            56,724         55,664
        Investment securities held to maturity
             (fair value of $91,415 and $70,037
             for 1995 and 1994, respectively)               91,130         72,704
        Loans, net of unearned income of
        $3,220 for 1995 and $5,088 for 1994                384,011        383,154
        Allowance for possible loan losses                  (8,125)        (8,140)
                                                       -----------    -----------
  
             Loans, net                                    375,886        375,014
  
        Premises and equipment, net                          8,044          8,082
        Accrued interest receivable                          3,533          3,185
        Other real estate owned                              1,059          1,969
        Deferred tax asset, net                              3,447          4,031
        Other assets                                         2,518          2,527
                                                       -----------    -----------
  
             Total assets                              $   562,635    $   548,194
                                                       ===========    ===========
  
  LIABILITIES
        Non-interest bearing deposits                  $    57,764    $    64,063
        Interest bearing deposits                          418,325        404,677
                                                       -----------    -----------
  
             Total deposits                                476,089        468,740
  
        Short-term borrowings                               10,815         12,087
        Other borrowings                                    11,580          9,926
        Accrued interest payable                             4,440          3,068
        Other liabilities                                    2,661          2,271
                                                       -----------    -----------
  
             Total liabilities                             505,585        496,092
  
  STOCKHOLDERS' EQUITY
  
        Common stock - $5 par value; Authorized
             10,000,000 shares; Outstanding
             3,053,762 shares at September 30,
             1995 and 3,046,213 shares at
             December 31, 1994                              15,269         15,231
        Capital surplus                                     30,214         30,053
        Retained earnings                                   11,678          8,269
        Net unrealized loss on investment securities
             available for sale, net of taxes                 (111)        (1,451)
                                                       -----------    -----------
  
             Total stockholders' equity                     57,050         52,102
  
             Total liabilities and stockholders'
               equity                                  $   562,635    $   548,194
                                                       ===========    ===========
  </TABLE>
  
  
  
  See accompanying notes to financial statements.
  
  
  
                                        -3-
  
  
  <PAGE>
  
  
                           KEYSTONE HERITAGE GROUP, INC.
                         CONSOLIDATED STATEMENTS OF INCOME
  
                   (Dollars in thousands, except per share data)
  
  
  
  <TABLE>
  <CAPTION>
                                                            Three Months Ended       Nine Months Ended
                                                              September 30              September 30
                                                             1995          1994      1995          1994
                                                           -------       -------    -------       ------
  <S>                                                    <C>          <C>          <C>        <C>
  INTEREST INCOME
                Interest and fees on loans                $   8,856    $   7,926   $  26,080   $  22,442
                Interest on investment securities
                    available for sale:
                    Taxable investment securities               671          726       1,982       2,341
                    Equity investments                           52           39         142         117
                Interest on investment securities
                  held to maturity:
                    Taxable investment securities             1,170          814       3,207       2,142
                    Non-taxable investment securities           111          133         340         433
                                                          ---------    ---------   ---------   ---------
                      Total interest on investment
                      securities                              2,004        1,712       5,671       5,033
                Interest on money market investments            175           53         422          83
                                                          ---------    ---------   ---------   ---------
                    Total interest income                    11,035        9,691      32,173      27,558
  
  INTEREST EXPENSE
                Interest on deposits                          4,674        3,374      13,126       9,640
                Interest on short-term borrowings               118          167         362         422
                Interest on other borrowings                    178          172         581         474
                                                          ---------    ---------   ---------   ---------
                    Total interest expense                    4,970        3,713      14,069      10,536
  
                    Net interest income                       6,065        5,978      18,104      17,022
  
                Provision for possible loan losses                0            0           0         300
                                                          ---------    ---------   ---------   ---------
                    Net interest income after provision
                    for possible loan losses                  6,065        5,978      18,104      16,722
  
  OTHER OPERATING INCOME
                Trust income                                    324          330         961         990
                Service charges on deposits                     333          299         972         912
                Net realized gain (loss) on investment
                    securities available for sale                51           22         109         (29)
                Net gain on sale of loans                        78           64         156         244
                Other income                                    517          602       1,525       1,568
                                                          ---------    ---------   ---------   ---------
                    Total other operating income              1,303        1,317       3,723       3,685
  
  OTHER OPERATING EXPENSE
                Salaries and employee benefits                2,510        2,190       7,255       6,626
                Occupancy expense, net                          331          319         974         932
                Equipment expense                               452          465       1,413       1,362
                Deposit insurance expense                       (26)         252         492         764
                Other expense                                 1,323        1,307       3,661       3,465
                                                          ---------    ---------   ---------   ---------
                    Total other operating expense             4,590        4,533      13,795      13,149
  
                    Income before income taxes                2,778        2,762       8,032       7,258
                Income taxes                                    857          899       2,490       2,365
                                                          ---------    ---------   ---------   ---------
  
                    Net income                            $   1,921    $   1,863   $   5,542   $   4,893
                                                          =========    =========   =========   =========
  
  PER COMMON SHARE
                    Net income                            $     .63    $     .61   $    1.82   $    1.61
                                                          =========    =========   =========   =========
  
                    Cash dividends paid                   $     .24    $     .21   $     .70   $     .62
  </TABLE>
  
                                        -4-
  
  
  <PAGE>
  
  
                           KEYSTONE HERITAGE GROUP, INC.
                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                           Nine Months Ended September 30
  
                               (Dollars in thousands)
  
  
  <TABLE>
  <CAPTION>
                                                                                        Net
                                                                                    Unrealized
                                                                                  Gain (Loss) on
                                                                                    Investment
                                                                                    Securities
                                                                                   Available for
                                                   Common     Capital    Retained    Sale, Net
                                                    Stock     Surplus     Earnings    of Taxes       Total
  <S>                                           <C>          <C>         <C>          <C>          <C>
  Balance, December 31, 1993                     $  12,185   $  30,053   $   7,120    $     468    $  49,826
       Net Income                                      -0-         -0-       4,893          -0-        4,893
       Cash dividends ($.62 per share)                 -0-         -0-      (1,901)         -0-       (1,901)
       Change in unrealized gain (loss) on
           investment securities available
           for sale, net of taxes                      -0-         -0-         -0-       (1,441)      (1,441)
                                                 ---------   ---------   ---------    ---------    ---------
  
  Balance, September 30, 1994                    $  12,185   $  30,053   $  10,112    ($    973)   $  51,377
                                                 =========   =========   =========    =========    =========
  
  
  Balance, December 31, 1994                     $  15,231   $  30,053   $   8,269    ($  1,451)   $  52,102
       Net income                                    5,542       5,542
       Cash dividends ($.70 per share)                 -0-         -0-      (2,133)         -0-       (2,133)
       Stock issued under dividend
           reinvestment plan                            38         161         -0-          -0-          199
       Change in unrealized gain (loss) on
           investment securities available for
           sale, net of taxes                          -0-         -0-         -0-        1,340        1,340
                                                 ---------   ---------   ---------    ---------    ---------
  
  Balance, September 30, 1995                    $  15,269   $  30,214   $  11,678    $    (111)   $  57,050
                                                 =========   =========   =========    =========    =========
  </TABLE>
  
  
  
  
  
                                        -5-
  
  
  <PAGE>
  
  
  
                           KEYSTONE HERITAGE GROUP, INC.
                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (Dollars in thousands)
  
  
  <TABLE>
  <CAPTION>
                                                               Nine Months Ended
                                                                 September 30
                                                              1995        1994
  <S>                                                      <C>          <C>
  CASH FLOW FROM OPERATING ACTIVITIES:
      Net income                                           $   5,542    $   4,893
      Adjustments to reconcile net income to cash:
          Capitalized interest on deposits                     4,918        4,449
          Provision for possible loan losses                       0          300
          Depreciation and amortization                        1,054        1,009
          Deferred income taxes                                  (96)        (565)
          Increase in accrued interest receivable               (348)        (546)
          Increase (decrease) in
           accrued interest payable                            1,372         (218)
          Net gain on sale of loans                             (156)        (244)
          Net realized (gain) loss on investment
           securities available for sale                        (109)          29
              Other, net                                         561         (707)
                                                           ---------    ---------
              Net cash provided by operating activities       12,738        8,400
  
  CASH FLOWS FROM INVESTING ACTIVITIES:
      Net (increase)decrease in money market investments      (3,010)         574
      Maturities of investment securities
           held to maturity                                   55,284       20,319
      Maturities of investment securities
           available for sale                                  3,358       35,649
      Sale of investment securities available for sale           542       20,760
      Funds invested in investment securities
           held to maturity                                  (73,893)     (28,895)
      Funds invested in investment securities
           available for sale                                 (2,818)     (38,893)
      Net decrease (increase) in loans
           made to customers                                   1,865      (20,734)
      Originations of residential mortgage loans sold        (10,046)     (10,447)
      Proceeds from sale of residential mortgage loans         7,481       10,651
      Net expenditures for premises and equipment             (1,008)        (907)
      Proceeds from sale of other real estate owned              894        1,529
                                                           ---------    ---------
          Net cash used by investing activities              (21,351)     (10,394)
  
  
  CASH FLOWS FROM FINANCING ACTIVITIES:
      Net increase (decrease) in deposits                      2,431       (4,333)
      Net (decrease) increase in short-term borrowings        (1,272)      10,114
      Net increase (decrease) in other borrowings              1,654       (2,678)
      Proceeds from issuance of common stock                     199            0
      Cash dividends paid                                     (2,133)      (1,901)
                                                           ---------    ---------
          Net cash provided from financing activities            879        1,202
  
      Net decrease in cash and due from banks                 (7,734)        (792)
  
      Cash and due from banks at beginning of period          23,568       19,176
      Cash and due from banks at end of period             $  15,834    $  18,384
  
  SUPPLEMENTAL DISCLOSURES:
      Interest paid                                        $   7,779    $   6,324
      Income taxes paid                                        2,800        2,469
  
  NON-CASH INVESTING AND FINANCING ACTIVITIES:
      Loans charged-off                                          385          769
  </TABLE>
  
  
  
                                        -6-
  
  
  <PAGE>
  
  
                           KEYSTONE HERITAGE GROUP, INC.
  
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
  
  1.   The accompanying  consolidated  financial  statements of Keystone  Heritage
       Group,  Inc.  have  not  been  reviewed  by  independent  certified  public
       accountants.  However, in management's  opinion, the statements reflect all
       adjustments  and  disclosures  necessary  for a  fair  presentation  of the
       consolidated  balance  sheet of the  Company as of  September  30, 1995 and
       December 31, 1994, the consolidated  statements of income for the three and
       nine month periods ended  September 30, 1995 and 1994 and the  consolidated
       statements of cash flows for the nine months ended  September 30, 1995. The
       accounting  policies  followed  in the  presentation  of interim  financial
       results  are the  same as  those  followed  on an  annual  basis,  with the
       exception of the accounting  policies  related to impaired loans which have
       been  included in the March 31, 1995 10-Q report filed with the  Securities
       and Exchange Commission.  The consolidated financial statements of Keystone
       Heritage Group,  Inc. and subsidiaries  include the accounts of the Company
       and its  wholly  owned  subsidiaries,  Lebanon  Valley  National  Bank  and
       Keystone  Heritage Life Insurance  Company.  All  significant  intercompany
       balances  and  transactions   have  been  eliminated  in  the  consolidated
       financial  statements.  For purposes of  comparability,  certain prior year
       amounts have been reclassified.
  
  2.   In May  1995,  the  Financial  Accounting  Standards  Board  (FASB)  issued
       Statement  of  Financial  Accounting  Standards  No. 122,  "Accounting  for
       Mortgage  Servicing  Rights,  an amendment of FASB  Statement No. 65" (SFAS
       122).  SFAS 122 amends  Statement 65 to require an institution to recognize
       as separate  assets the rights to service  mortgage loans for others when a
       mortgage loan is sold or securitized and servicing  rights  retained.  SFAS
       122 also requires an entity to measure the  impairment of servicing  rights
       based on the difference between the carrying amount of the servicing rights
       and their current fair value.  SFAS 122 is to be applied  prospectively  in
       fiscal years beginning after December 15, 1995.
  
       Presently,  the Company  does not sell or  securitize  mortgage  loans with
       servicing rights retained. Accordingly, the Company will not be impacted by
       the provisions of SFAS 122.
  
  3.   In October 1995, the Financial  Accounting Standards Board issued Statement
       of Financial  Accounting  Standards No. 123,  "Accounting  for  Stock-Based
       Compensation"  (SFAS 123).  SFAS 123 establishes a new method of accounting
       for stock-based compensation arrangements with employees. The new method is
       a fair value based method rather than the intrinsic value based method that
       is  currently  utilized.  However,  SFAS 123 does not  require an entity to
       adopt the new fair value  based  method for  purposes  of  preparing  basic
       financial  statements.  If an entity  chooses  not to adopt the fair  value
       based  method,  SFAS 123 requires an entity to display in the footnotes pro
       forma net income and  earnings per share  information  as if the fair value
       based method had been adopted.
  
       Currently,  the Company has not  determined  whether it will adopt the fair
       value based method and accordingly, cannot estimate the impact on the basic
       financial statements that SFAS 123 will have upon adoption.
  
       SFAS 123 is effective for financial  statements for fiscal years  beginning
       after December 15, 1995.
  
  
  4.   Earnings  per common share are based upon the  weighted  average  number of
       shares  outstanding.  The weighted average number of shares outstanding was
       3,052,224 and  3,046,213  for the three month  periods ended  September 30,
       1995 and 1994,  respectively,  and  3,049,003  and  3,046,213  for the nine
       months ended  September 30, 1995 and 1994,  respectively.  All prior period
       per share data has been restated to give effect for the 5-for-4 stock split
       that was effective for November 10, 1994.
  
  
                                        -7-
  
  
  <PAGE>
  
  
                        MANAGEMENT'S DISCUSSION AND ANALYSIS
                  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
       Keystone  Heritage  Group,  Inc. (the  "Company") is a bank holding company
  organized under the laws of Pennsylvania  and registered  under the Federal Bank
  Holding  Company Act of 1956.  The  Company's  principal  subsidiary  is Lebanon
  Valley National Bank (the "Bank").
  
  Results of Operations
  
       Net income for the Company for the three  months ended  September  30, 1995
  was $1.921  million or $.63 per share,  compared  to $1.863  million or $.61 per
  share  for the  three  months  ended  September  30,  1994.  Return  on  average
  stockholders' equity and return on average assets for the 1995 period were 13.53
  percent and 1.35 percent, respectively.
  
       Net income for the nine months ended  September 30, 1995 was $5.542 million
  or $1.82 per share,  compared to net income of $4.893 million or $1.61 per share
  for 1994.  Return on average  stockholders'  equity and return on average assets
  for the 1995 period were 13.60 percent and 1.34 percent, respectively.
  
  Net Interest Income
  
       Net interest  income is the primary  source of income for the Company.  Net
  interest  income  is  the  difference  between  interest  earned  on  loans  and
  investments  and interest paid on deposits and other funding  sources.  Deposits
  are the primary source of funds for the Company. The factors which influence net
  interest  income  include  changes in  interest  rates and  changes in asset and
  liability balances.
  
       For  purposes of this  discussion,  interest  income and the average  yield
  earned on loans and  investments  are presented on a taxable  equivalent  basis.
  This provides a basis for  comparison of tax exempt loans and  investments  with
  taxable loans and  investments by giving effect to interest earned on tax exempt
  loans and  investments  by an amount  equivalent  to federal  income taxes which
  would have been paid on the assumption  that the interest earned on those assets
  was taxable at the Company's statutory tax rate of 34 percent.
  
       The  tables  presented  on pages 15 and 16 are  comparative  statements  of
  average balances of interest  earning assets and interest  bearing  liabilities,
  interest  income and interest  expense,  and interest rates for the three months
  ended  September 30, 1995 and 1994, and for the nine months ended  September 30,
  1995 and 1994.
  
       Net interest  income for the three months ended September 30, 1995 was $6.2
  million,  a $77 thousand or 1.3 percent  increase  from the same period of 1994.
  The net interest margin for the third quarter of 1995 was 4.57 percent  compared
  to 4.76  percent for the same  period of 1994.  Average  earning  assets for the
  three month period ended September 30, 1995 were $536.2 million, a $26.8 million
  or a 5.3 percent increase from the same period of 1994.
  
       For the three month comparative  periods,  net interest income increased in
  1995 as a result of the  increase in average  earning  assets and an increase in
  the yield on earning  assets by 60 basis  points  from the same  period of 1994.
  These increases were partially  offset by an increase in total  interest-bearing
  deposits of $23.4  million and from  increases in average  deposit  rates during
  1995. Average time deposits increased by $37.3 million while average transaction
  and savings deposits decreased by $11.3 million. The increase in average earning
  assets and the shift in deposit  volumes and increasing  rates had the effect of
  reducing the net interest  margin for the three months ended  September 30, 1995
  compared to the same period of 1994.
  
       Net interest  income for the nine months ended September 30, 1995 was $18.5
  million,  a $1.1 million or 6.3 percent  increase  from the same period of 1994.
  The net interest  margin for the nine months ended  September  30, 1995 was 4.70
  percent  compared to 4.64 percent for the same period of 1994.  Average  earning
  assets for the nine month period ended September 30, 1995 were $526.9 million, a
  $23.1 million or a 4.8 percent increase from the same period of 1994.
  
  
                                        -8-
  
  
  <PAGE>
  
  
  
       For the nine month comparative  periods, net interest income also increased
  in 1995 as a result of increases in average earning asset  balances,  a shift in
  the deposit mix and increases in average  rates.  Several  prime rate  increases
  which  occurred  during 1994  contributed  to the $1.1  million  increase in net
  interest income and the increase in the net interest margin for the 1995 period.
  Average  loans   increased  by  $13.6   million  or  3.7%  from  1994.   Average
  interest-bearing deposit balances increased by $17.5 million for the nine months
  ended September 30, 1995 compared to the same period of 1994.
  
  Provision and Allowance for Possible Loan Losses
  
       There was no  provision  for  possible  loan  losses  charged to net income
  during the nine month  period  ended  September  30,  1995.  The  provision  for
  possible loan losses for the nine month period ended September 30, 1994 was $300
  thousand.
  
       Net  recoveries  of $63 thousand  were  recorded for the three months ended
  September  30, 1995  compared to net  charge-offs  of $52  thousand for the same
  period of 1994. For the nine month  comparative  period the Company recorded net
  charge-offs  of $15  thousand and $397  thousand for the 1995 and 1994  periods,
  respectively.
  
       The  allowance for possible loan losses was $8.1 million or 2.12 percent of
  total loans  outstanding  at  September  30, 1995 and  December  31,  1994.  The
  allowance  for possible loan losses is a reserve for  estimated  potential  loan
  losses in the loan  portfolio.  Losses occur  primarily from the loan portfolio,
  but may also be derived from commitments to extend credit and standby letters of
  credit.  Loan losses and recoveries of previously  charged-off loans are charged
  or credited  directly to the allowance  for possible loan losses.  The allowance
  for possible  loan losses is an amount  which,  in  management's  judgement,  is
  considered  adequate to absorb  potential losses inherent in the loan portfolio.
  Management  performs a  quarterly  assessment  of the Bank's loan  portfolio  to
  determine the appropriate  level of the allowance for possible loan losses.  The
  factors considered in this evaluation  include,  but are not necessarily limited
  to,  estimated  loan  losses  identified  through  the  review  of  loans by the
  Company's  personnel;   general  economic  conditions;   deterioration  in  loan
  concentrations or pledged  collateral;  historic loss experience;  and trends in
  portfolio volume,  composition,  delinquencies,  and non-accruals.  In addition,
  various regulatory  agencies,  as an integral part of their examination process,
  periodically review the Bank's allowance for possible loan losses.
  
  
  
  
  
                                        -9-
  
  
  <PAGE>
  
  
       The  following is a summary of the activity in the  allowance  for possible
  loan losses for the three and nine month  periods  ended  September 30, 1995 and
  1994:
  
  <TABLE>
  <CAPTION>
                                                Three Months Ended    Nine Months Ended
                                                    September 30         September 30
                                               -------------------     --------------
  (Dollars in thousands)                          1995      1994      1995      1994
                                                -------   -------    ------    -----
  <S>                                          <C>        <C>       <C>       <C>
  Allowance for possible loan losses
   at beginning of period                       $ 8,062    $ 8,491   $ 8,140   $ 8,486
  Loans charged-off:
   Commercial                                         0         89       113       543
   Agriculture                                        0          0         0         0
   Real estate construction                           0          0         0         0
   Loans to individuals                              71         76       272       226
   Real estate - residential mortgage                 0          0         0         0
                                                -------    -------   -------   -------
  Total loans charged-off                            71        165       385       769
  
  Recoveries of loans previously charged-off:
   Commercial                                       123         96       306       346
   Agriculture                                        0          0         0         0
   Real estate construction                           7          9        38        58
   Loans to individuals                               4          8        26        18
   Real estate - residential mortgage                 0          0         0         0
                                                -------    -------   -------   -------
   Total recoveries of loans previously
                            charged-off             134        113       370       422
  
   Net loans charged-off                            (63)        52        15       397
   Current period's provision for
   possible loan losses                               0          0         0       300
                                                -------    -------   -------   -------
  
   Allowance for possible loan
   losses at end of period                      $ 8,125    $ 8,439   $ 8,125   $ 8,439
                                                =======    =======   =======   =======
  </TABLE>
  
  Other Operating Income and Expense
  
       Other  operating  income  was  $1.3  million  for the  three  months  ended
  September  30, 1995 and 1994.  Other  operating  income was $3.7 million for the
  nine months ended September 30, 1995 and 1994.
  
       Other  operating  income  included the recognition of net realized gains on
  the sales of investment  securities  available for sale of $109 thousand  during
  the nine month period ended  September 30, 1995 compared to net realized  losses
  of $29 thousand for the same period of 1994.  Lower  income from  mortgage  loan
  sales resulted during the nine month period ended September 30, 1995 compared to
  1994 as the  volume of loans  that were  originated  and sold  during the period
  decreased  from $10.7  million in 1994 to $7.5 million in 1995, a decrease of 30
  percent from the 1994 level.
  
       Other  operating  expense for the three months ended September 30, 1995 was
  $4.6 million, a 1.3 percent increase over the $4.5 million reported for the same
  period of 1994.  For the nine months ended  September  30, 1995 and 1994,  other
  operating  expense was $13.8  million  and $13.1  million,  respectively,  a 4.9
  percent increase.
  
       Salaries and benefits  expense  increased by $320  thousand or 14.6 percent
  for the three months  ended  September  30, 1995  compared to the same period of
  1994.  For the nine months  ended  September  30,  1995,  salaries  and benefits
  increased by $629 thousand or 9.5 percent,  compared to the same period of 1994.
  The increase in salary and benefit expenses  primarily related to the opening of
  the Company's  eighteenth and nineteenth  branch sites during the mid and latter
  part of 1994 and employee bonuses recorded during the third quarter of 1995. The
  Company  recognized a credit of $26 thousand for FDIC insurance premiums charged
  during  the third  quarter  of 1995  compared  to an  expense  of $252  thousand
  recognized  during  the  third  quarter  of  1994.  The FDIC  insurance  expense
  recognized  for the nine months ended  September  30, 1995  compared to the same
  period of 1994 was $492 thousand and $764 thousand,  respectively.  The decrease
  in FDIC insurance was  attributable to a decrease in the assessment rate charged
  by the Federal Deposit Insurance Corporation. The assessment rate charged to the
  Bank on deposit  accounts  decreased  from $23 cents per $100 of  deposits to $4
  cents per $100 of deposits.  This reduction in premium resulted from a refund of
  a portion of the FDIC insurance  assessments  that were  previously  paid by the
  Company.  This refund was received during the third quarter of 1995 and amounted
  to $290 thousand.  Based on the Company's  current  deposit  volumes and current
  FDIC assessment rate, the Company's FDIC expense should approximate $50 thousand
  per  quarter in future  periods.  The $4 cents per $100 of deposits is in effect
  for the  current  quarter  and is the lowest  assessment  rate  charged to "Well
  Capitalized"  institutions.  Occupancy and equipment  expenses  increased by $93
  thousand from the nine month  comparative  periods  ended  September 30, 1994 to
  September 30,
  
                                        -10-
  
  
  <PAGE>
  
  
  
  1995, which resulted from the  aforementioned new branch openings in 1994. Other
  expenses  increased by $196  thousand for the nine month period ended  September
  30,  1995  compared  to the  same  period  for  1994 as a  result  of  increased
  expenditures  related to marketing and  advertising,  bank card  processing  and
  outside professional services.
  
  Non-Performing Assets
  
       Loans,  other than consumer loans not secured by real estate, are typically
  classified  as  non-accrual  at the  time  they  reach  90 days  past  due as to
  principal or interest.  Loans may also be placed on non-accrual  status when, in
  management's  opinion,  the collectability of principal or interest is doubtful,
  or should management  believe that circumstances  warrant such action.  Consumer
  loans not secured by residential  real estate are  charged-off  when they become
  120 days past due.
  
       Non-performing  loans at September  30, 1995  totalled  $1.7 million or .43
  percent of total loans  outstanding,  compared to $1.3 million or .35 percent of
  loans at  December  31,  1994  and  $4.0  million  or 1.06  percent  of loans at
  September  30,  1994.  Non-performing  assets at  September  30,  1995 were $2.7
  million or .71  percent of loans plus other real estate  owned  compared to $3.3
  million or .86  percent of loans plus other real estate  owned at  December  31,
  1994 and $6.6  million or 1.73  percent of loans plus other real estate owned at
  September 30, 1994. The  improvement in  non-performing  assets at September 30,
  1995 as  compared to  September  30,  1994 was a result of  decreased  levels of
  non-accrual  loans and other  real  estate  owned.  During  1995,  disposals  of
  non-performing  assets consisted of third-party  transactions  amounting to $1.5
  million.
  
       The following is a presentation  of  non-performing  assets as of September
  30, 1995, December 31, 1994, and September 30, 1994:
  
  <TABLE>
  <CAPTION>
                                        Sept. 30     Dec. 31   Sept. 30
  (Dollars in thousands)                  1995        1994       1994
                                        --------     -------    ------
  <S>                                   <C>         <C>         <C>
  Non-performing loans                   $1,665      $1,346      $4,028
  
  Other real estate owned, net            1,059       1,969       2,621
                                         ------      ------      ------
  Total non-performing assets            $2,724      $3,315      $6,649
                                         ======      ======      ======
  
  Loans past due 90 days or more 
    as to principal or interest          $1,235      $  647      $  175
  
  
  Non-performing loans as a
    percent of loans outstanding            .43%        .35%       1.06%
  Non-performing assets as a
    percent of loans outstanding
    plus other real estate owned            .71%        .86%       2.73%
  </TABLE>
  
       Interest income of approximately  $41 thousand and $118 thousand would have
  been  recognized  during the three and nine month  periods  ended  September 30,
  1995,  had these loans been current in accordance  with their original terms and
  been  outstanding  through the period or since  origination.  Interest income on
  these loans of $13 thousand and $40 thousand was recognized during the three and
  nine months ended September 30, 1995.
  
       Group  concentrations  of  credit  are  considered  to exist if a number of
  counterparties  are  engaged in similar  activities  and have  similar  economic
  characteristics  that would cause their ability to meet contractual  obligations
  to  be  similarly   affected  by  changes  in  economic  or  other   conditions.
  Agriculture-related  borrowings  at September  30, 1995  totalled $87 million or
  22.7 percent of total loans outstanding.  These loans may be impacted by adverse
  climate or economic  conditions  not common to other  industries.  The Company's
  exposure to possible loss in the event of  nonperformance  by these borrowers is
  represented by the contractual amount of those instruments. The Company's policy
  is to require  supporting  collateral  for these loans which is generally in the
  form of agriculture real estate, livestock, and farm equipment. At September 30,
  1995  there  were no  significant  agriculture  related  borrowings  which  were
  classified as non-performing assets and there were no charge-offs of agriculture
  related loans during the three or nine months ended September 30, 1995.
  
  Financial Position
  
       Total  assets at  September  30,  1995 were $563  million  compared to $548
  million at December 31, 1994. Total loans outstanding at September 30, 1995 were
  $384 million  compared to $383 million at December 31, 1994.  Total  deposits at
  September  30, 1995 were $476  million  compared to $469 million at December 31,
  1994.
  
  
  
                                        -11-
  
  
  <PAGE>
  
  
  Capital Adequacy
  
       The Company's  stockholders' equity was $57.1 million at September 30, 1995
  and $52.1 million at December 31, 1994. Total stockholders'  equity increased by
  9.5 percent from  December 31, 1994 which was the net effect of the  recognition
  of $5.5 million in net income for the nine month period,  cash dividend payments
  to stockholders of $2.1 million and a favorable  change in net unrealized  gains
  or losses on  investment  securities  available  for sale of $1.3  million.  Net
  unrealized losses on investment  securities  available for sale of $111 thousand
  and $1.4  million  were  included  as a  component  of  stockholders'  equity at
  September 30, 1995 and December 31, 1994, respectively.
  
       The  maintenance  of an  appropriate  level of capital is a priority of the
  Company's  management.  The Company's  capital  adequacy and dividend policy are
  closely  monitored  by  management  and are  reviewed  regularly by the Board of
  Directors of the Company.  The Company  intends to provide an adequate return to
  its stockholders while retaining a sufficient capital base to provide for future
  growth and to comply with regulatory standards.
  
       Banking  regulators'  risk-based  capital  guidelines  address  the capital
  adequacy of banking  organizations.  These  guidelines  include a definition  of
  capital and a framework for calculating risk-weighted assets by assigning assets
  and off-balance sheet items to broad risk categories,  as well as minimum ratios
  to be maintained by banking  organizations.  The  risk-based  capital ratios are
  calculated by dividing qualifying capital by risk-weighted assets.
  
       Under the risk-based  capital  guidelines,  Total Capital is defined as the
  sum of core or "Tier 1" Capital and "Tier 2" Capital. As the guidelines apply to
  Keystone Heritage Group, Inc., Tier 1 Capital is total stockholders'  equity and
  Tier 2 Capital includes a portion of the allowance for possible loan losses. The
  rules  require that banking  organizations  must have ratios of 4.00 percent and
  8.00 percent for Tier 1 and Total Capital,  respectively.  At September 30, 1995
  the  Company's  Tier 1 and Total  Capital  ratios  were 13.55  percent and 14.90
  percent,  respectively.  Tier 1 and Total Capital  ratios were 12.77 percent and
  14.12 percent respectively,  at December 31, 1994. In addition to the risk-based
  capital ratio, a bank is also required to maintain a "Leverage  ratio" of Tier 1
  capital to average  total assets of 3 percent or higher.  At September 30, 1995,
  the Company's  Leverage ratio was 10.07 percent and was 9.89 percent at December
  31, 1994.
  
  Off-Balance Sheet Items
  
       The  Company's  loan   portfolio   consists  of  loans  to  businesses  and
  individuals  primarily  in its  five-county  market area of Lebanon,  Lancaster,
  Berks, Dauphin, and Schuylkill counties.
  
       In the ordinary course of business, the Company enters into agreements with
  customers,  such as commitments  to extend credit and standby  letters of credit
  which involve, to varying degrees,  elements of credit and interest rate risk in
  excess of the amounts presented in the balance sheet. The Company's  exposure to
  possible loss in the event of nonperformance by the other party to the financial
  instruments for commitments to extend credit and financial guarantees written is
  represented by the contractual amount of those instruments.  The Company may not
  be obligated to advance funds if the customer's financial condition deteriorates
  or if the customer fails to meet certain terms.
  
       Commitments and  conditional  obligations  generally have fixed  expiration
  dates or termination clauses and may require payment of a fee. Since many of the
  commitments  are expected to expire  without  being used,  the total  commitment
  amounts do not  necessarily  represent  future  cash  requirements.  The Company
  evaluates each customer's creditworthiness on a case-by-case basis, applying the
  same  credit   standards  used  in  the  lending   process,   through   periodic
  reassessments  of the  customer's  creditworthiness  and through  ongoing credit
  reviews. The amount of collateral  obtained,  if deemed necessary by the Company
  upon  extension of credit,  is based on  management's  credit  evaluation of the
  counterparty.  Collateral  held  varies  but may  include  accounts  receivable,
  inventory,  property,  plant  and  equipment,  and  income-producing  commercial
  properties.
  
       The Bank has entered into interest rate swap  contracts,  and interest rate
  cap and interest rate collar contracts as part of its asset-liability management
  activities.  These  contracts  are used  primarily  for the  purpose of managing
  interest rate risk against  specific assets and liabilities in order to minimize
  mismatches  in the Bank's  interest  rate  sensitivity  and  interest  rate risk
  positions.
  
  
                                        -12-
  
  
  <PAGE>
  
  
       Interest  rate  contracts  generally  involve  the  exchange  of fixed  and
  floating-rate   interest  payment   obligations  without  the  exchange  of  the
  underlying principal amounts. Entering into interest rate contracts involves not
  only the risk of dealing with counterparties and their ability to meet the terms
  of the  contracts  but also the interest  rate risk  associated  with  unmatched
  positions.  Notional  principal  amounts often are used to express the volume of
  these transactions.
  
       The interest  income or interest  expense  differential  from interest rate
  swap  contracts is  recognized as interest  income or interest  expense over the
  life of the contract. The interest income or interest expense resulting from the
  cap and collar  contracts would be recognized when the national prime rate moves
  below or above a predetermined  interest rate level.  Gains or losses from early
  termination of swap contracts are deferred and amortized over the remaining term
  of the underlying  assets or  liabilities.  The Company is not exposed to credit
  risk in terms the notional amounts of these contracts,  however,  the receipt of
  payments representing the interest differential is based on the creditworthiness
  of the counterparty to each contract.
  
       The Company entered into an interest rate  cap/collar  contract on November
  5, 1993 with a notional  amount of $10  million.  The  contract  states that the
  Company would receive a spread  between the national prime rate and 6.00 percent
  should the prime rate fall below 6.00 percent. The Company would pay an interest
  rate spread  between the national  prime and 7.00 percent  should the prime rate
  exceed 7.00 percent. The contract expires on February 5, 1996.
  
       During the third  quarter of 1995 the Company  entered into three  interest
  rate swap  contracts.  On July 7, 1995 the Company entered into an interest rate
  swap contract with a notional  amount of $10 million.  The contract  states that
  the Company would receive a fixed rate of 8.41 percent and pay a floating  prime
  rate based on the national prime rate. The contract expires on July 7, 1998. The
  Company  entered  into an  interest  rate swap  contract on July 28, 1995 with a
  notional  amount of $10 million.  This  contract  states that the Company  would
  receive a fixed rate of 8.65 percent and pay a floating  prime rate based on the
  national prime rate. This contract expires on July 28, 1997. The Company entered
  into  another  interest  rate swap  contract  on August 15, 1995 with a notional
  amount of $10 million.  This  contract  states that the Company  would receive a
  fixed rate of 8.75  percent and pay a floating  prime rate based on the national
  prime rate. This contract expires on August 15, 1997.
  
       The  Company  does not  obtain  collateral  or other  security  to  support
  financial instruments subject to credit risk but monitors the credit standing of
  counterparties. The counterparties of the aforementioned interest rate contracts
  are commercial banks having a rating of A1 from Moody's Investor Service.
  
       The interest rate swap contracts and the interest rate cap/collar  contract
  were entered into to protect the Company's  interest rate risk in a declining or
  stable interest rate  environment.  Specifically,  these  contracts  protect the
  Company's risk from negative  movements in its prime rate based asset  portfolio
  which would not be perfectly matched by repricing liabilities.
  
       The following is the amount of financial instruments with off-balance sheet
  risk not reflected in the consolidated  balance sheets at September 30, 1995 and
  December 31, 1994:
  
  <TABLE>
  <CAPTION>
                                         Contractual Amounts
  
                                      September 30     December 31
  (Dollars in thousands)                   1995            1994
                                      ------------       --------
  <S>                                  <C>             <C>
  Financial instruments whose
  contractual
    amounts represent credit risk:
  Commitments to extend credit            $86,065        $84,398
  Standby letters of credit                 9,151          7,983
  Contractual amounts of off-balance
  sheet financial instruments not
  constituting credit risk:
     Interest rate swap, notional
       value                               30,000         10,000
     Interest rate cap/collar,
       notional value                      10,000         10,000
  </TABLE>
  
  
                                        -13-
  
  
  <PAGE>
  
  
  
  Supervision and Regulation
  
       The Bank is a national bank,  chartered under the National Bank Act, and is
  subject to the primary  supervision  of, and is examined by, the  Comptroller of
  the Currency.  As a member of the Federal Reserve System, the Bank is subject to
  provisions of the Federal  Reserve Act, which restricts the ability of a bank to
  extend  credit to its parent  holding  company  or to  certain  of the  parent's
  subsidiaries,  or to invest in the Company's  common stock or to take such stock
  as  collateral  for loans to any borrower.  The  operations of the Bank are also
  subject to regulation by the FDIC.
  
       The Company is affected by the monetary and credit  policies of the Federal
  Reserve System. The Federal Reserve System regulates the national supply of bank
  credit through open market operations in U. S. Government securities, changes in
  the  discount  rate  charged  for  bank   borrowing,   and  changes  in  reserve
  requirements on bank deposits.
  
  New Accounting Standards
  
       In May  1995,  the  Financial  Accounting  Standards  Board  (FASB)  issued
  Statement of Financial  Accounting  Standards No. 122,  "Accounting for Mortgage
  Servicing  Rights,  an amendment of FASB Statement No. 65" (SFAS 122).  SFAS 122
  amends  Statement 65 to require an institution  to recognize as separate  assets
  the rights to service  mortgage loans for others when a mortgage loan is sold or
  securitized and servicing rights  retained.  SFAS 122 also requires an entity to
  measure the impairment of servicing  rights based on the difference  between the
  carrying amount of the servicing  rights and their current fair value.  SFAS 122
  is to be applied  prospectively  in fiscal years  beginning  after  December 15,
  1995.
  
       Presently,  the Company  does not sell or  securitize  mortgage  loans with
  servicing rights retained.  Accordingly, the Company will not be impacted by the
  provisions of SFAS 122.
  
       In October 1995, the Financial  Accounting Standards Board issued Statement
  of  Financial   Accounting   Standards  No.  123,  "Accounting  for  Stock-Based
  Compensation"  (SFAS 123).  SFAS 123  establishes a new method of accounting for
  stock-based  compensation  arrangements with employees. The new method is a fair
  value  based  method  rather  than the  intrinsic  value  based  method  that is
  currently  utilized.  However,  SFAS 123 does not require an entity to adopt the
  new  fair  value  based  method  for  purposes  of  preparing   basic  financial
  statements.  If an entity chooses not to adopt the fair value based method, SFAS
  123  requires  an entity to  display in the  footnotes  pro forma net income and
  earnings  per share  information  as if the fair  value  based  method  had been
  adopted.
  
       Currently,  the Company has not  determined  whether it will adopt the fair
  value based  method and  accordingly,  cannot  estimate  the impact on the basic
  financial statements that SFAS 123 will have upon adoption.
  
       SFAS 123 is effective for financial  statements with fiscal years beginning
  after December 15, 1995.
  
  
  
                                        -14-
  
  
  <PAGE>
  
  
  
  
           AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
                               (Dollars in thousands)
  
  <TABLE>
  <CAPTION>
                                                   Three Months Ended Sept. 30, 1995   Three Months Ended Sept. 30, 1994
                                                   Average                    Average      Average              Average
                                                   Balance       Interest       Rate       Balance    Interest    Rate
  <S>                                             <C>            <C>           <C>        <C>         <C>         <C>
  Assets
      Loans                                       $ 382,460      $   8,908      9.24%     $ 373,998   $   7,981   8.47%
      Money market investments                       12,101            175      5.74          4,656          53   4.52
      Investment securities:
          Taxable                                   130,597          1,875      5.70        118,149       1,572   5.28
          Non-taxable                                11,001            194      7.00         12,509         212   6.72
                                                  ---------      ---------      ----      ---------   ---------   ----
               Total investment securities          141,598          2,069      5.80        130,658       1,784   5.42
               Total earning assets                 536,159      $  11,152      8.25%       509,312   $   9,818   7.65%
                                                                 =========      ====                  =========   ==== 
  
      Other assets                                   28,164                                  28,756
                                                     ------                                  ------
               Total assets                       $ 564,323                               $ 538,068
                                                  =========                               =========
  
  Liabilities and stockholders' equity Interest
     bearing deposits:
          Now accounts                            $  55,746      $     202      1.44%     $  62,262   $     225   1.43%
          Savings and money market                  123,734            956      3.07        131,064         818   2.48
          Time                                      240,402          3,516      5.80        203,140       2,331   4.55
                                                  ---------      ---------      ----      ---------   ---------   ----
               Total interest bearing deposits      419,882          4,674      4.42        396,466       3,374   3.38
  
      Short-term borrowings                          11,664            118      4.01         19,018         167   3.48
      Long-term debt                                 11,949            178      5.91         11,843         172   5.76
                                                  ---------      ---------      ----      ---------   ---------   ----
          Total interest bearing liabilities        443,495      $   4,970      4.45%       427,327   $   3,713   3.45%
                                                                 =========      ====                  =========   ==== 
  
      Non-interest bearing deposits                  57,427                                  54,888
      Other liabilities                               7,085                                   4,963
      Stockholders' equity                           56,316                                  50,890
                                                     ------                                  ------
          Total liabilities and
          stockholders' equity                    $ 564,323                               $ 538,068
                                                  =========                               =========
  
      Net interest income                                        $   6,182                            $   6,105
      Total yield on earning assets                                             8.25%                             7.65%
      Rate on supporting liabilities                                            3.68%                             2.89%
                                                                                ----                              ---- 
      Net interest margin                                                       4.57%                             4.76%
                                                                                ====                              ==== 
  </TABLE>
  
  Interest and average interest rates are presented on a fully taxable  equivalent
  basis,  using an effective  tax rate of 34%. For  purposes of  calculating  loan
  yields,  average loan balances include non-accrual loans. Loan fees are included
  in interest income.
  
  
  
                                        -15-
  
  
  <PAGE>
  
  
  
           AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
                               (Dollars in thousands)
  
  <TABLE>
  <CAPTION>
                                                   Nine Months Ended Sept. 30, 1995     Nine Months Ended Sept. 30, 1994
                                                  Average                    Average      Average              Average
                                                  Balance       Interest       Rate       Balance    Interest    Rate
  <S>                                           <C>            <C>            <C>       <C>         <C>         <C>
  Assets
      Loans                                      $ 380,883      $  26,283      9.23%     $ 367,268   $  22,599   8.23%
      Money market investments                       9,605            422      5.87          2,723          83   4.08
      Investment securities:
          Taxable                                  125,198          5,282      5.13        119,626       4,592   5.06
          Non-taxable                               11,190            590      6.90         12,920         667   6.97
                                                 ---------      ---------      ----      ---------   ---------   ----
               Total investment securities         136,388          5,872      5.30        132,546       5,259   5.25
               Total earning assets                526,876      $  32,577      7.43%       502,537   $  27,941   7.32%
                                                                =========      ====                  =========   ==== 
  
      Other assets                                  26,949                                  30,726
                                                    ------                                  ------
               Total assets                      $ 553,825                               $ 533,263
                                                 =========                               =========
  
  Liabilities and stockholders' equity
     Interest bearing deposits:
          Now accounts                           $  55,866      $     601      1.45%     $  65,226   $     705   1.45%
          Savings and money market                 120,639          2,666      2.45        134,759       2,465   2.43
          Time                                     236,125          9,859      4.43        195,172       6,470   4.37
                                                 ---------      ---------      ----      ---------   ---------   ----
               Total interest bearing deposits     412,630         13,126      3.26        395,157       9,640   3.20
  
      Short-term borrowings                         11,998            362      3.17         17,808         422   2.99
      Long-term debt                                11,684            581      5.89         10,768         474   5.48
                                                 ---------      ---------      ----      ---------   ---------   ----
          Total interest bearing liabilities       436,312      $  14,069      3.32%       423,733   $  10,536   3.25%
                                                                =========      ====                  =========   ==== 
  
      Non-interest bearing deposits                 56,320                                  54,064
      Other liabilities                              6,697                                   4,902
      Stockholders' equity                          54,496                                  50,564
                                                    ------                                  ------
          Total liabilities and
          stockholders' equity                   $ 553,825                               $ 533,263
                                                 =========                               =========
  
      Net interest income                                       $  18,508                            $  17,405
      Total yield on earning assets                                            8.27%                             7.43%
      Rate on supporting liabilities                                           3.57%                             2.79%
                                                                               ----                              ---- 
      Net interest margin                                                      4.70%                             4.64%
                                                                               ====                              ==== 
  </TABLE>
  
  Interest and average interest rates are presented on a fully taxable  equivalent
  basis,  using an effective  tax rate of 34%. For  purposes of  calculating  loan
  yields,  average loan balances include non-accrual loans. Loan fees are included
  in interest income.
  
  
                                        -16-
  
  
  <PAGE>
  
  
  
  
  PART II.  OTHER INFORMATION
  
  ITEM 1.  LEGAL PROCEEDINGS
  
  None.
  
  ITEM 2.  CHANGES IN SECURITIES
  
  None.
  
  ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
  
  None.
  
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
  None.
  
  ITEM 5.  OTHER INFORMATION
  
  None.
  
  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
  
  (a.)  None.
  
  (b.)  The Company did not file any reports on Form 8-K during the quarter ended
  September 30, 1995.
  
  
  
  
  
  
  
                                        -17-
  
  
  <PAGE>
  
  
  
                           KEYSTONE HERITAGE GROUP, INC.
  
                                     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.
  
  
  
                                           Keystone Heritage Group, Inc.
                                           (Registrant)
  
  
  Date  November 8, 1995               By /s/ Kurt A. Phillips
        --------------------              --------------------------------------
                                          Kurt A. Phillips
                                          Chief Financial and Accounting Officer
  
  
  
  
                                        -18-
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metadata_filer: {"company-data": {"conformed-name": "KEYSTONE HERITAGE GROUP INC", "cik": "0000715366", "assigned-sic": "6022", "irs-number": "232219740", "state-of-incorporation": "PA", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "10-Q", "act": "34", "file-number": "000-13775", "film-number": "95589395"}, "business-address": {"street1": "555 WILLOW ST", "street2": "P O BOX 1285", "city": "LEBANON", "state": "PA", "zip": "17042-1285", "phone": "7172746800"}, "mail-address": {"street2": "555 WILLOW ST P O BOX 1285", "city": "LEBANON", "state": "PA", "zip": "17042-1285"}}
text: UNITED STATES
  
                         SECURITIES AND EXCHANGE COMMISSION
  
                               Washington, D.C. 20549
  
                                     Form 10-Q
  
       Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
  Act of 1934
  
  For the period ended    September 30, 1995
  
  Commission File Number:  0-13775
  
                           KEYSTONE HERITAGE GROUP, INC.
                                    (Registrant)
  
       PENNSYLVANIA                                               23-2219740
  (State of incorporation)                                     (I.R.S. Employer
                                                               Identification No.)
  
                   555 WILLOW STREET, LEBANON, PENNSYLVANIA 17046
                (Address of principal executive offices) (Zip Code)
  
                                    717-274-6800
                (Registrant's telephone number, including area code)
  
       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.
  
                Class                             Outstanding at November 8, 1995
  Common Stock ($5.00 par value)                          3,053,762 shares
  KEYSTONE HERITAGE GROUP, INC.
  
                                       Index
  
  PART I - FINANCIAL INFORMATION                                             Page
  
  Item 1 - Financial Statements
  
           Consolidated Balance Sheets as of
           September 30, 1995 and December 31, 1994 (Unaudited)                 3
  
           Consolidated Statements of Income for the
           Three and Nine Months ended September 30, 1995 and
           1994 (Unaudited)                                                     4
  
           Consolidated Statements of Stockholders' Equity
           for the Nine Months ended September 30, 1995 and
           1994 (Unaudited)                                                     5
  
           Consolidated Statements of Cash Flows for the
           Nine Months ended September 30, 1995 and 1994 (Unaudited)            6
  
           Notes to Consolidated Financial Statements                           7
  
  Item 2 - Management's Discussion and Analysis of
           Financial Condition and Results of Operations                        8
  
  PART II - OTHER INFORMATION
  
  Signature Page                                                               18
  
                                        -2-
  KEYSTONE HERITAGE GROUP, INC.
  
                            CONSOLIDATED BALANCE SHEETS
  
                               (Dollars In Thousands)
  September 30    December 31
                                                           1995            1994
                                                        ---------       --------
  ASSETS
        Cash and due from banks                        $    15,834    $    23,568
        Interest bearing deposits with banks                 3,560            150
        Federal funds sold                                     900          1,300
        Investment securities available for sale            56,724         55,664
        Investment securities held to maturity
             (fair value of $91,415 and $70,037
             for 1995 and 1994, respectively)               91,130         72,704
        Loans, net of unearned income of
        $3,220 for 1995 and $5,088 for 1994                384,011        383,154
        Allowance for possible loan losses                  (8,125)        (8,140)
                                                       -----------    -----------
  
             Loans, net                                    375,886        375,014
  
        Premises and equipment, net                          8,044          8,082
        Accrued interest receivable                          3,533          3,185
        Other real estate owned                              1,059          1,969
        Deferred tax asset, net                              3,447          4,031
        Other assets                                         2,518          2,527
                                                       -----------    -----------
  
             Total assets                              $   562,635    $   548,194
                                                       ===========    ===========
  
  LIABILITIES
        Non-interest bearing deposits                  $    57,764    $    64,063
        Interest bearing deposits                          418,325        404,677
                                                       -----------    -----------
  
             Total deposits                                476,089        468,740
  
        Short-term borrowings                               10,815         12,087
        Other borrowings                                    11,580          9,926
        Accrued interest payable                             4,440          3,068
        Other liabilities                                    2,661          2,271
                                                       -----------    -----------
  
             Total liabilities                             505,585        496,092
  
  STOCKHOLDERS' EQUITY
  
        Common stock - $5 par value; Authorized
             10,000,000 shares; Outstanding
             3,053,762 shares at September 30,
             1995 and 3,046,213 shares at
             December 31, 1994                              15,269         15,231
        Capital surplus                                     30,214         30,053
        Retained earnings                                   11,678          8,269
        Net unrealized loss on investment securities
             available for sale, net of taxes                 (111)        (1,451)
                                                       -----------    -----------
  
             Total stockholders' equity                     57,050         52,102
  
             Total liabilities and stockholders'
               equity                                  $   562,635    $   548,194
                                                       ===========    ===========
  See accompanying notes to financial statements.
  
                                        -3-
  KEYSTONE HERITAGE GROUP, INC.
                         CONSOLIDATED STATEMENTS OF INCOME
  
                   (Dollars in thousands, except per share data)
  Three Months Ended       Nine Months Ended
                                                              September 30              September 30
                                                             1995          1994      1995          1994
                                                           -------       -------    -------       ------
  INTEREST INCOME
                Interest and fees on loans                $   8,856    $   7,926   $  26,080   $  22,442
                Interest on investment securities
                    available for sale:
                    Taxable investment securities               671          726       1,982       2,341
                    Equity investments                           52           39         142         117
                Interest on investment securities
                  held to maturity:
                    Taxable investment securities             1,170          814       3,207       2,142
                    Non-taxable investment securities           111          133         340         433
                                                          ---------    ---------   ---------   ---------
                      Total interest on investment
                      securities                              2,004        1,712       5,671       5,033
                Interest on money market investments            175           53         422          83
                                                          ---------    ---------   ---------   ---------
                    Total interest income                    11,035        9,691      32,173      27,558
  
  INTEREST EXPENSE
                Interest on deposits                          4,674        3,374      13,126       9,640
                Interest on short-term borrowings               118          167         362         422
                Interest on other borrowings                    178          172         581         474
                                                          ---------    ---------   ---------   ---------
                    Total interest expense                    4,970        3,713      14,069      10,536
  
                    Net interest income                       6,065        5,978      18,104      17,022
  
                Provision for possible loan losses                0            0           0         300
                                                          ---------    ---------   ---------   ---------
                    Net interest income after provision
                    for possible loan losses                  6,065        5,978      18,104      16,722
  
  OTHER OPERATING INCOME
                Trust income                                    324          330         961         990
                Service charges on deposits                     333          299         972         912
                Net realized gain (loss) on investment
                    securities available for sale                51           22         109         (29)
                Net gain on sale of loans                        78           64         156         244
                Other income                                    517          602       1,525       1,568
                                                          ---------    ---------   ---------   ---------
                    Total other operating income              1,303        1,317       3,723       3,685
  
  OTHER OPERATING EXPENSE
                Salaries and employee benefits                2,510        2,190       7,255       6,626
                Occupancy expense, net                          331          319         974         932
                Equipment expense                               452          465       1,413       1,362
                Deposit insurance expense                       (26)         252         492         764
                Other expense                                 1,323        1,307       3,661       3,465
                                                          ---------    ---------   ---------   ---------
                    Total other operating expense             4,590        4,533      13,795      13,149
  
                    Income before income taxes                2,778        2,762       8,032       7,258
                Income taxes                                    857          899       2,490       2,365
                                                          ---------    ---------   ---------   ---------
  
                    Net income                            $   1,921    $   1,863   $   5,542   $   4,893
                                                          =========    =========   =========   =========
  
  PER COMMON SHARE
                    Net income                            $     .63    $     .61   $    1.82   $    1.61
                                                          =========    =========   =========   =========
  
                    Cash dividends paid                   $     .24    $     .21   $     .70   $     .62
  -4-
  KEYSTONE HERITAGE GROUP, INC.
                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                           Nine Months Ended September 30
  
                               (Dollars in thousands)
  Net
                                                                                    Unrealized
                                                                                  Gain (Loss) on
                                                                                    Investment
                                                                                    Securities
                                                                                   Available for
                                                   Common     Capital    Retained    Sale, Net
                                                    Stock     Surplus     Earnings    of Taxes       Total
  Balance, December 31, 1993                     $  12,185   $  30,053   $   7,120    $     468    $  49,826
       Net Income                                      -0-         -0-       4,893          -0-        4,893
       Cash dividends ($.62 per share)                 -0-         -0-      (1,901)         -0-       (1,901)
       Change in unrealized gain (loss) on
           investment securities available
           for sale, net of taxes                      -0-         -0-         -0-       (1,441)      (1,441)
                                                 ---------   ---------   ---------    ---------    ---------
  
  Balance, September 30, 1994                    $  12,185   $  30,053   $  10,112    ($    973)   $  51,377
                                                 =========   =========   =========    =========    =========
  
  Balance, December 31, 1994                     $  15,231   $  30,053   $   8,269    ($  1,451)   $  52,102
       Net income                                    5,542       5,542
       Cash dividends ($.70 per share)                 -0-         -0-      (2,133)         -0-       (2,133)
       Stock issued under dividend
           reinvestment plan                            38         161         -0-          -0-          199
       Change in unrealized gain (loss) on
           investment securities available for
           sale, net of taxes                          -0-         -0-         -0-        1,340        1,340
                                                 ---------   ---------   ---------    ---------    ---------
  
  Balance, September 30, 1995                    $  15,269   $  30,214   $  11,678    $    (111)   $  57,050
                                                 =========   =========   =========    =========    =========
  -5-
  KEYSTONE HERITAGE GROUP, INC.
                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (Dollars in thousands)
  Nine Months Ended
                                                                 September 30
                                                              1995        1994
  CASH FLOW FROM OPERATING ACTIVITIES:
      Net income                                           $   5,542    $   4,893
      Adjustments to reconcile net income to cash:
          Capitalized interest on deposits                     4,918        4,449
          Provision for possible loan losses                       0          300
          Depreciation and amortization                        1,054        1,009
          Deferred income taxes                                  (96)        (565)
          Increase in accrued interest receivable               (348)        (546)
          Increase (decrease) in
           accrued interest payable                            1,372         (218)
          Net gain on sale of loans                             (156)        (244)
          Net realized (gain) loss on investment
           securities available for sale                        (109)          29
              Other, net                                         561         (707)
                                                           ---------    ---------
              Net cash provided by operating activities       12,738        8,400
  
  CASH FLOWS FROM INVESTING ACTIVITIES:
      Net (increase)decrease in money market investments      (3,010)         574
      Maturities of investment securities
           held to maturity                                   55,284       20,319
      Maturities of investment securities
           available for sale                                  3,358       35,649
      Sale of investment securities available for sale           542       20,760
      Funds invested in investment securities
           held to maturity                                  (73,893)     (28,895)
      Funds invested in investment securities
           available for sale                                 (2,818)     (38,893)
      Net decrease (increase) in loans
           made to customers                                   1,865      (20,734)
      Originations of residential mortgage loans sold        (10,046)     (10,447)
      Proceeds from sale of residential mortgage loans         7,481       10,651
      Net expenditures for premises and equipment             (1,008)        (907)
      Proceeds from sale of other real estate owned              894        1,529
                                                           ---------    ---------
          Net cash used by investing activities              (21,351)     (10,394)
  
  CASH FLOWS FROM FINANCING ACTIVITIES:
      Net increase (decrease) in deposits                      2,431       (4,333)
      Net (decrease) increase in short-term borrowings        (1,272)      10,114
      Net increase (decrease) in other borrowings              1,654       (2,678)
      Proceeds from issuance of common stock                     199            0
      Cash dividends paid                                     (2,133)      (1,901)
                                                           ---------    ---------
          Net cash provided from financing activities            879        1,202
  
      Net decrease in cash and due from banks                 (7,734)        (792)
  
      Cash and due from banks at beginning of period          23,568       19,176
      Cash and due from banks at end of period             $  15,834    $  18,384
  
  SUPPLEMENTAL DISCLOSURES:
      Interest paid                                        $   7,779    $   6,324
      Income taxes paid                                        2,800        2,469
  
  NON-CASH INVESTING AND FINANCING ACTIVITIES:
      Loans charged-off                                          385          769
  -6-
  KEYSTONE HERITAGE GROUP, INC.
  
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
  1.   The accompanying  consolidated  financial  statements of Keystone  Heritage
       Group,  Inc.  have  not  been  reviewed  by  independent  certified  public
       accountants.  However, in management's  opinion, the statements reflect all
       adjustments  and  disclosures  necessary  for a  fair  presentation  of the
       consolidated  balance  sheet of the  Company as of  September  30, 1995 and
       December 31, 1994, the consolidated  statements of income for the three and
       nine month periods ended  September 30, 1995 and 1994 and the  consolidated
       statements of cash flows for the nine months ended  September 30, 1995. The
       accounting  policies  followed  in the  presentation  of interim  financial
       results  are the  same as  those  followed  on an  annual  basis,  with the
       exception of the accounting  policies  related to impaired loans which have
       been  included in the March 31, 1995 10-Q report filed with the  Securities
       and Exchange Commission.  The consolidated financial statements of Keystone
       Heritage Group,  Inc. and subsidiaries  include the accounts of the Company
       and its  wholly  owned  subsidiaries,  Lebanon  Valley  National  Bank  and
       Keystone  Heritage Life Insurance  Company.  All  significant  intercompany
       balances  and  transactions   have  been  eliminated  in  the  consolidated
       financial  statements.  For purposes of  comparability,  certain prior year
       amounts have been reclassified.
  
  2.   In May  1995,  the  Financial  Accounting  Standards  Board  (FASB)  issued
       Statement  of  Financial  Accounting  Standards  No. 122,  "Accounting  for
       Mortgage  Servicing  Rights,  an amendment of FASB  Statement No. 65" (SFAS
       122).  SFAS 122 amends  Statement 65 to require an institution to recognize
       as separate  assets the rights to service  mortgage loans for others when a
       mortgage loan is sold or securitized and servicing  rights  retained.  SFAS
       122 also requires an entity to measure the  impairment of servicing  rights
       based on the difference between the carrying amount of the servicing rights
       and their current fair value.  SFAS 122 is to be applied  prospectively  in
       fiscal years beginning after December 15, 1995.
  
       Presently,  the Company  does not sell or  securitize  mortgage  loans with
       servicing rights retained. Accordingly, the Company will not be impacted by
       the provisions of SFAS 122.
  
  3.   In October 1995, the Financial  Accounting Standards Board issued Statement
       of Financial  Accounting  Standards No. 123,  "Accounting  for  Stock-Based
       Compensation"  (SFAS 123).  SFAS 123 establishes a new method of accounting
       for stock-based compensation arrangements with employees. The new method is
       a fair value based method rather than the intrinsic value based method that
       is  currently  utilized.  However,  SFAS 123 does not  require an entity to
       adopt the new fair value  based  method for  purposes  of  preparing  basic
       financial  statements.  If an entity  chooses  not to adopt the fair  value
       based  method,  SFAS 123 requires an entity to display in the footnotes pro
       forma net income and  earnings per share  information  as if the fair value
       based method had been adopted.
  
       Currently,  the Company has not  determined  whether it will adopt the fair
       value based method and accordingly, cannot estimate the impact on the basic
       financial statements that SFAS 123 will have upon adoption.
  
       SFAS 123 is effective for financial  statements for fiscal years  beginning
       after December 15, 1995.
  
  4.   Earnings  per common share are based upon the  weighted  average  number of
       shares  outstanding.  The weighted average number of shares outstanding was
       3,052,224 and  3,046,213  for the three month  periods ended  September 30,
       1995 and 1994,  respectively,  and  3,049,003  and  3,046,213  for the nine
       months ended  September 30, 1995 and 1994,  respectively.  All prior period
       per share data has been restated to give effect for the 5-for-4 stock split
       that was effective for November 10, 1994.
  
                                        -7-
  MANAGEMENT'S DISCUSSION AND ANALYSIS
                  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
       Keystone  Heritage  Group,  Inc. (the  "Company") is a bank holding company
  organized under the laws of Pennsylvania  and registered  under the Federal Bank
  Holding  Company Act of 1956.  The  Company's  principal  subsidiary  is Lebanon
  Valley National Bank (the "Bank").
  
  Results of Operations
  
       Net income for the Company for the three  months ended  September  30, 1995
  was $1.921  million or $.63 per share,  compared  to $1.863  million or $.61 per
  share  for the  three  months  ended  September  30,  1994.  Return  on  average
  stockholders' equity and return on average assets for the 1995 period were 13.53
  percent and 1.35 percent, respectively.
  
       Net income for the nine months ended  September 30, 1995 was $5.542 million
  or $1.82 per share,  compared to net income of $4.893 million or $1.61 per share
  for 1994.  Return on average  stockholders'  equity and return on average assets
  for the 1995 period were 13.60 percent and 1.34 percent, respectively.
  
  Net Interest Income
  
       Net interest  income is the primary  source of income for the Company.  Net
  interest  income  is  the  difference  between  interest  earned  on  loans  and
  investments  and interest paid on deposits and other funding  sources.  Deposits
  are the primary source of funds for the Company. The factors which influence net
  interest  income  include  changes in  interest  rates and  changes in asset and
  liability balances.
  
       For  purposes of this  discussion,  interest  income and the average  yield
  earned on loans and  investments  are presented on a taxable  equivalent  basis.
  This provides a basis for  comparison of tax exempt loans and  investments  with
  taxable loans and  investments by giving effect to interest earned on tax exempt
  loans and  investments  by an amount  equivalent  to federal  income taxes which
  would have been paid on the assumption  that the interest earned on those assets
  was taxable at the Company's statutory tax rate of 34 percent.
  
       The  tables  presented  on pages 15 and 16 are  comparative  statements  of
  average balances of interest  earning assets and interest  bearing  liabilities,
  interest  income and interest  expense,  and interest rates for the three months
  ended  September 30, 1995 and 1994, and for the nine months ended  September 30,
  1995 and 1994.
  
       Net interest  income for the three months ended September 30, 1995 was $6.2
  million,  a $77 thousand or 1.3 percent  increase  from the same period of 1994.
  The net interest margin for the third quarter of 1995 was 4.57 percent  compared
  to 4.76  percent for the same  period of 1994.  Average  earning  assets for the
  three month period ended September 30, 1995 were $536.2 million, a $26.8 million
  or a 5.3 percent increase from the same period of 1994.
  
       For the three month comparative  periods,  net interest income increased in
  1995 as a result of the  increase in average  earning  assets and an increase in
  the yield on earning  assets by 60 basis  points  from the same  period of 1994.
  These increases were partially  offset by an increase in total  interest-bearing
  deposits of $23.4  million and from  increases in average  deposit  rates during
  1995. Average time deposits increased by $37.3 million while average transaction
  and savings deposits decreased by $11.3 million. The increase in average earning
  assets and the shift in deposit  volumes and increasing  rates had the effect of
  reducing the net interest  margin for the three months ended  September 30, 1995
  compared to the same period of 1994.
  
       Net interest  income for the nine months ended September 30, 1995 was $18.5
  million,  a $1.1 million or 6.3 percent  increase  from the same period of 1994.
  The net interest  margin for the nine months ended  September  30, 1995 was 4.70
  percent  compared to 4.64 percent for the same period of 1994.  Average  earning
  assets for the nine month period ended September 30, 1995 were $526.9 million, a
  $23.1 million or a 4.8 percent increase from the same period of 1994.
  
                                        -8-
  For the nine month comparative  periods, net interest income also increased
  in 1995 as a result of increases in average earning asset  balances,  a shift in
  the deposit mix and increases in average  rates.  Several  prime rate  increases
  which  occurred  during 1994  contributed  to the $1.1  million  increase in net
  interest income and the increase in the net interest margin for the 1995 period.
  Average  loans   increased  by  $13.6   million  or  3.7%  from  1994.   Average
  interest-bearing deposit balances increased by $17.5 million for the nine months
  ended September 30, 1995 compared to the same period of 1994.
  
  Provision and Allowance for Possible Loan Losses
  
       There was no  provision  for  possible  loan  losses  charged to net income
  during the nine month  period  ended  September  30,  1995.  The  provision  for
  possible loan losses for the nine month period ended September 30, 1994 was $300
  thousand.
  
       Net  recoveries  of $63 thousand  were  recorded for the three months ended
  September  30, 1995  compared to net  charge-offs  of $52  thousand for the same
  period of 1994. For the nine month  comparative  period the Company recorded net
  charge-offs  of $15  thousand and $397  thousand for the 1995 and 1994  periods,
  respectively.
  
       The  allowance for possible loan losses was $8.1 million or 2.12 percent of
  total loans  outstanding  at  September  30, 1995 and  December  31,  1994.  The
  allowance  for possible loan losses is a reserve for  estimated  potential  loan
  losses in the loan  portfolio.  Losses occur  primarily from the loan portfolio,
  but may also be derived from commitments to extend credit and standby letters of
  credit.  Loan losses and recoveries of previously  charged-off loans are charged
  or credited  directly to the allowance  for possible loan losses.  The allowance
  for possible  loan losses is an amount  which,  in  management's  judgement,  is
  considered  adequate to absorb  potential losses inherent in the loan portfolio.
  Management  performs a  quarterly  assessment  of the Bank's loan  portfolio  to
  determine the appropriate  level of the allowance for possible loan losses.  The
  factors considered in this evaluation  include,  but are not necessarily limited
  to,  estimated  loan  losses  identified  through  the  review  of  loans by the
  Company's  personnel;   general  economic  conditions;   deterioration  in  loan
  concentrations or pledged  collateral;  historic loss experience;  and trends in
  portfolio volume,  composition,  delinquencies,  and non-accruals.  In addition,
  various regulatory  agencies,  as an integral part of their examination process,
  periodically review the Bank's allowance for possible loan losses.
  
                                        -9-
  The  following is a summary of the activity in the  allowance  for possible
  loan losses for the three and nine month  periods  ended  September 30, 1995 and
  1994:
  Three Months Ended    Nine Months Ended
                                                    September 30         September 30
                                               -------------------     --------------
  (Dollars in thousands)                          1995      1994      1995      1994
                                                -------   -------    ------    -----
  Allowance for possible loan losses
   at beginning of period                       $ 8,062    $ 8,491   $ 8,140   $ 8,486
  Loans charged-off:
   Commercial                                         0         89       113       543
   Agriculture                                        0          0         0         0
   Real estate construction                           0          0         0         0
   Loans to individuals                              71         76       272       226
   Real estate - residential mortgage                 0          0         0         0
                                                -------    -------   -------   -------
  Total loans charged-off                            71        165       385       769
  
  Recoveries of loans previously charged-off:
   Commercial                                       123         96       306       346
   Agriculture                                        0          0         0         0
   Real estate construction                           7          9        38        58
   Loans to individuals                               4          8        26        18
   Real estate - residential mortgage                 0          0         0         0
                                                -------    -------   -------   -------
   Total recoveries of loans previously
                            charged-off             134        113       370       422
  
   Net loans charged-off                            (63)        52        15       397
   Current period's provision for
   possible loan losses                               0          0         0       300
                                                -------    -------   -------   -------
  
   Allowance for possible loan
   losses at end of period                      $ 8,125    $ 8,439   $ 8,125   $ 8,439
                                                =======    =======   =======   =======
  Other Operating Income and Expense
  
       Other  operating  income  was  $1.3  million  for the  three  months  ended
  September  30, 1995 and 1994.  Other  operating  income was $3.7 million for the
  nine months ended September 30, 1995 and 1994.
  
       Other  operating  income  included the recognition of net realized gains on
  the sales of investment  securities  available for sale of $109 thousand  during
  the nine month period ended  September 30, 1995 compared to net realized  losses
  of $29 thousand for the same period of 1994.  Lower  income from  mortgage  loan
  sales resulted during the nine month period ended September 30, 1995 compared to
  1994 as the  volume of loans  that were  originated  and sold  during the period
  decreased  from $10.7  million in 1994 to $7.5 million in 1995, a decrease of 30
  percent from the 1994 level.
  
       Other  operating  expense for the three months ended September 30, 1995 was
  $4.6 million, a 1.3 percent increase over the $4.5 million reported for the same
  period of 1994.  For the nine months ended  September  30, 1995 and 1994,  other
  operating  expense was $13.8  million  and $13.1  million,  respectively,  a 4.9
  percent increase.
  
       Salaries and benefits  expense  increased by $320  thousand or 14.6 percent
  for the three months  ended  September  30, 1995  compared to the same period of
  1994.  For the nine months  ended  September  30,  1995,  salaries  and benefits
  increased by $629 thousand or 9.5 percent,  compared to the same period of 1994.
  The increase in salary and benefit expenses  primarily related to the opening of
  the Company's  eighteenth and nineteenth  branch sites during the mid and latter
  part of 1994 and employee bonuses recorded during the third quarter of 1995. The
  Company  recognized a credit of $26 thousand for FDIC insurance premiums charged
  during  the third  quarter  of 1995  compared  to an  expense  of $252  thousand
  recognized  during  the  third  quarter  of  1994.  The FDIC  insurance  expense
  recognized  for the nine months ended  September  30, 1995  compared to the same
  period of 1994 was $492 thousand and $764 thousand,  respectively.  The decrease
  in FDIC insurance was  attributable to a decrease in the assessment rate charged
  by the Federal Deposit Insurance Corporation. The assessment rate charged to the
  Bank on deposit  accounts  decreased  from $23 cents per $100 of  deposits to $4
  cents per $100 of deposits.  This reduction in premium resulted from a refund of
  a portion of the FDIC insurance  assessments  that were  previously  paid by the
  Company.  This refund was received during the third quarter of 1995 and amounted
  to $290 thousand.  Based on the Company's  current  deposit  volumes and current
  FDIC assessment rate, the Company's FDIC expense should approximate $50 thousand
  per  quarter in future  periods.  The $4 cents per $100 of deposits is in effect
  for the  current  quarter  and is the lowest  assessment  rate  charged to "Well
  Capitalized"  institutions.  Occupancy and equipment  expenses  increased by $93
  thousand from the nine month  comparative  periods  ended  September 30, 1994 to
  September 30,
  
                                        -10-
  1995, which resulted from the  aforementioned new branch openings in 1994. Other
  expenses  increased by $196  thousand for the nine month period ended  September
  30,  1995  compared  to the  same  period  for  1994 as a  result  of  increased
  expenditures  related to marketing and  advertising,  bank card  processing  and
  outside professional services.
  
  Non-Performing Assets
  
       Loans,  other than consumer loans not secured by real estate, are typically
  classified  as  non-accrual  at the  time  they  reach  90 days  past  due as to
  principal or interest.  Loans may also be placed on non-accrual  status when, in
  management's  opinion,  the collectability of principal or interest is doubtful,
  or should management  believe that circumstances  warrant such action.  Consumer
  loans not secured by residential  real estate are  charged-off  when they become
  120 days past due.
  
       Non-performing  loans at September  30, 1995  totalled  $1.7 million or .43
  percent of total loans  outstanding,  compared to $1.3 million or .35 percent of
  loans at  December  31,  1994  and  $4.0  million  or 1.06  percent  of loans at
  September  30,  1994.  Non-performing  assets at  September  30,  1995 were $2.7
  million or .71  percent of loans plus other real estate  owned  compared to $3.3
  million or .86  percent of loans plus other real estate  owned at  December  31,
  1994 and $6.6  million or 1.73  percent of loans plus other real estate owned at
  September 30, 1994. The  improvement in  non-performing  assets at September 30,
  1995 as  compared to  September  30,  1994 was a result of  decreased  levels of
  non-accrual  loans and other  real  estate  owned.  During  1995,  disposals  of
  non-performing  assets consisted of third-party  transactions  amounting to $1.5
  million.
  
       The following is a presentation  of  non-performing  assets as of September
  30, 1995, December 31, 1994, and September 30, 1994:
  Sept. 30     Dec. 31   Sept. 30
  (Dollars in thousands)                  1995        1994       1994
                                        --------     -------    ------
  Non-performing loans                   $1,665      $1,346      $4,028
  
  Other real estate owned, net            1,059       1,969       2,621
                                         ------      ------      ------
  Total non-performing assets            $2,724      $3,315      $6,649
                                         ======      ======      ======
  
  Loans past due 90 days or more 
    as to principal or interest          $1,235      $  647      $  175
  
  Non-performing loans as a
    percent of loans outstanding            .43%        .35%       1.06%
  Non-performing assets as a
    percent of loans outstanding
    plus other real estate owned            .71%        .86%       2.73%
  Interest income of approximately  $41 thousand and $118 thousand would have
  been  recognized  during the three and nine month  periods  ended  September 30,
  1995,  had these loans been current in accordance  with their original terms and
  been  outstanding  through the period or since  origination.  Interest income on
  these loans of $13 thousand and $40 thousand was recognized during the three and
  nine months ended September 30, 1995.
  
       Group  concentrations  of  credit  are  considered  to exist if a number of
  counterparties  are  engaged in similar  activities  and have  similar  economic
  characteristics  that would cause their ability to meet contractual  obligations
  to  be  similarly   affected  by  changes  in  economic  or  other   conditions.
  Agriculture-related  borrowings  at September  30, 1995  totalled $87 million or
  22.7 percent of total loans outstanding.  These loans may be impacted by adverse
  climate or economic  conditions  not common to other  industries.  The Company's
  exposure to possible loss in the event of  nonperformance  by these borrowers is
  represented by the contractual amount of those instruments. The Company's policy
  is to require  supporting  collateral  for these loans which is generally in the
  form of agriculture real estate, livestock, and farm equipment. At September 30,
  1995  there  were no  significant  agriculture  related  borrowings  which  were
  classified as non-performing assets and there were no charge-offs of agriculture
  related loans during the three or nine months ended September 30, 1995.
  
  Financial Position
  
       Total  assets at  September  30,  1995 were $563  million  compared to $548
  million at December 31, 1994. Total loans outstanding at September 30, 1995 were
  $384 million  compared to $383 million at December 31, 1994.  Total  deposits at
  September  30, 1995 were $476  million  compared to $469 million at December 31,
  1994.
  
                                        -11-
  Capital Adequacy
  
       The Company's  stockholders' equity was $57.1 million at September 30, 1995
  and $52.1 million at December 31, 1994. Total stockholders'  equity increased by
  9.5 percent from  December 31, 1994 which was the net effect of the  recognition
  of $5.5 million in net income for the nine month period,  cash dividend payments
  to stockholders of $2.1 million and a favorable  change in net unrealized  gains
  or losses on  investment  securities  available  for sale of $1.3  million.  Net
  unrealized losses on investment  securities  available for sale of $111 thousand
  and $1.4  million  were  included  as a  component  of  stockholders'  equity at
  September 30, 1995 and December 31, 1994, respectively.
  
       The  maintenance  of an  appropriate  level of capital is a priority of the
  Company's  management.  The Company's  capital  adequacy and dividend policy are
  closely  monitored  by  management  and are  reviewed  regularly by the Board of
  Directors of the Company.  The Company  intends to provide an adequate return to
  its stockholders while retaining a sufficient capital base to provide for future
  growth and to comply with regulatory standards.
  
       Banking  regulators'  risk-based  capital  guidelines  address  the capital
  adequacy of banking  organizations.  These  guidelines  include a definition  of
  capital and a framework for calculating risk-weighted assets by assigning assets
  and off-balance sheet items to broad risk categories,  as well as minimum ratios
  to be maintained by banking  organizations.  The  risk-based  capital ratios are
  calculated by dividing qualifying capital by risk-weighted assets.
  
       Under the risk-based  capital  guidelines,  Total Capital is defined as the
  sum of core or "Tier 1" Capital and "Tier 2" Capital. As the guidelines apply to
  Keystone Heritage Group, Inc., Tier 1 Capital is total stockholders'  equity and
  Tier 2 Capital includes a portion of the allowance for possible loan losses. The
  rules  require that banking  organizations  must have ratios of 4.00 percent and
  8.00 percent for Tier 1 and Total Capital,  respectively.  At September 30, 1995
  the  Company's  Tier 1 and Total  Capital  ratios  were 13.55  percent and 14.90
  percent,  respectively.  Tier 1 and Total Capital  ratios were 12.77 percent and
  14.12 percent respectively,  at December 31, 1994. In addition to the risk-based
  capital ratio, a bank is also required to maintain a "Leverage  ratio" of Tier 1
  capital to average  total assets of 3 percent or higher.  At September 30, 1995,
  the Company's  Leverage ratio was 10.07 percent and was 9.89 percent at December
  31, 1994.
  
  Off-Balance Sheet Items
  
       The  Company's  loan   portfolio   consists  of  loans  to  businesses  and
  individuals  primarily  in its  five-county  market area of Lebanon,  Lancaster,
  Berks, Dauphin, and Schuylkill counties.
  
       In the ordinary course of business, the Company enters into agreements with
  customers,  such as commitments  to extend credit and standby  letters of credit
  which involve, to varying degrees,  elements of credit and interest rate risk in
  excess of the amounts presented in the balance sheet. The Company's  exposure to
  possible loss in the event of nonperformance by the other party to the financial
  instruments for commitments to extend credit and financial guarantees written is
  represented by the contractual amount of those instruments.  The Company may not
  be obligated to advance funds if the customer's financial condition deteriorates
  or if the customer fails to meet certain terms.
  
       Commitments and  conditional  obligations  generally have fixed  expiration
  dates or termination clauses and may require payment of a fee. Since many of the
  commitments  are expected to expire  without  being used,  the total  commitment
  amounts do not  necessarily  represent  future  cash  requirements.  The Company
  evaluates each customer's creditworthiness on a case-by-case basis, applying the
  same  credit   standards  used  in  the  lending   process,   through   periodic
  reassessments  of the  customer's  creditworthiness  and through  ongoing credit
  reviews. The amount of collateral  obtained,  if deemed necessary by the Company
  upon  extension of credit,  is based on  management's  credit  evaluation of the
  counterparty.  Collateral  held  varies  but may  include  accounts  receivable,
  inventory,  property,  plant  and  equipment,  and  income-producing  commercial
  properties.
  
       The Bank has entered into interest rate swap  contracts,  and interest rate
  cap and interest rate collar contracts as part of its asset-liability management
  activities.  These  contracts  are used  primarily  for the  purpose of managing
  interest rate risk against  specific assets and liabilities in order to minimize
  mismatches  in the Bank's  interest  rate  sensitivity  and  interest  rate risk
  positions.
  
                                        -12-
  Interest  rate  contracts  generally  involve  the  exchange  of fixed  and
  floating-rate   interest  payment   obligations  without  the  exchange  of  the
  underlying principal amounts. Entering into interest rate contracts involves not
  only the risk of dealing with counterparties and their ability to meet the terms
  of the  contracts  but also the interest  rate risk  associated  with  unmatched
  positions.  Notional  principal  amounts often are used to express the volume of
  these transactions.
  
       The interest  income or interest  expense  differential  from interest rate
  swap  contracts is  recognized as interest  income or interest  expense over the
  life of the contract. The interest income or interest expense resulting from the
  cap and collar  contracts would be recognized when the national prime rate moves
  below or above a predetermined  interest rate level.  Gains or losses from early
  termination of swap contracts are deferred and amortized over the remaining term
  of the underlying  assets or  liabilities.  The Company is not exposed to credit
  risk in terms the notional amounts of these contracts,  however,  the receipt of
  payments representing the interest differential is based on the creditworthiness
  of the counterparty to each contract.
  
       The Company entered into an interest rate  cap/collar  contract on November
  5, 1993 with a notional  amount of $10  million.  The  contract  states that the
  Company would receive a spread  between the national prime rate and 6.00 percent
  should the prime rate fall below 6.00 percent. The Company would pay an interest
  rate spread  between the national  prime and 7.00 percent  should the prime rate
  exceed 7.00 percent. The contract expires on February 5, 1996.
  
       During the third  quarter of 1995 the Company  entered into three  interest
  rate swap  contracts.  On July 7, 1995 the Company entered into an interest rate
  swap contract with a notional  amount of $10 million.  The contract  states that
  the Company would receive a fixed rate of 8.41 percent and pay a floating  prime
  rate based on the national prime rate. The contract expires on July 7, 1998. The
  Company  entered  into an  interest  rate swap  contract on July 28, 1995 with a
  notional  amount of $10 million.  This  contract  states that the Company  would
  receive a fixed rate of 8.65 percent and pay a floating  prime rate based on the
  national prime rate. This contract expires on July 28, 1997. The Company entered
  into  another  interest  rate swap  contract  on August 15, 1995 with a notional
  amount of $10 million.  This  contract  states that the Company  would receive a
  fixed rate of 8.75  percent and pay a floating  prime rate based on the national
  prime rate. This contract expires on August 15, 1997.
  
       The  Company  does not  obtain  collateral  or other  security  to  support
  financial instruments subject to credit risk but monitors the credit standing of
  counterparties. The counterparties of the aforementioned interest rate contracts
  are commercial banks having a rating of A1 from Moody's Investor Service.
  
       The interest rate swap contracts and the interest rate cap/collar  contract
  were entered into to protect the Company's  interest rate risk in a declining or
  stable interest rate  environment.  Specifically,  these  contracts  protect the
  Company's risk from negative  movements in its prime rate based asset  portfolio
  which would not be perfectly matched by repricing liabilities.
  
       The following is the amount of financial instruments with off-balance sheet
  risk not reflected in the consolidated  balance sheets at September 30, 1995 and
  December 31, 1994:
  Contractual Amounts
  
                                      September 30     December 31
  (Dollars in thousands)                   1995            1994
                                      ------------       --------
  Financial instruments whose
  contractual
    amounts represent credit risk:
  Commitments to extend credit            $86,065        $84,398
  Standby letters of credit                 9,151          7,983
  Contractual amounts of off-balance
  sheet financial instruments not
  constituting credit risk:
     Interest rate swap, notional
       value                               30,000         10,000
     Interest rate cap/collar,
       notional value                      10,000         10,000
  -13-
  Supervision and Regulation
  
       The Bank is a national bank,  chartered under the National Bank Act, and is
  subject to the primary  supervision  of, and is examined by, the  Comptroller of
  the Currency.  As a member of the Federal Reserve System, the Bank is subject to
  provisions of the Federal  Reserve Act, which restricts the ability of a bank to
  extend  credit to its parent  holding  company  or to  certain  of the  parent's
  subsidiaries,  or to invest in the Company's  common stock or to take such stock
  as  collateral  for loans to any borrower.  The  operations of the Bank are also
  subject to regulation by the FDIC.
  
       The Company is affected by the monetary and credit  policies of the Federal
  Reserve System. The Federal Reserve System regulates the national supply of bank
  credit through open market operations in U. S. Government securities, changes in
  the  discount  rate  charged  for  bank   borrowing,   and  changes  in  reserve
  requirements on bank deposits.
  
  New Accounting Standards
  
       In May  1995,  the  Financial  Accounting  Standards  Board  (FASB)  issued
  Statement of Financial  Accounting  Standards No. 122,  "Accounting for Mortgage
  Servicing  Rights,  an amendment of FASB Statement No. 65" (SFAS 122).  SFAS 122
  amends  Statement 65 to require an institution  to recognize as separate  assets
  the rights to service  mortgage loans for others when a mortgage loan is sold or
  securitized and servicing rights  retained.  SFAS 122 also requires an entity to
  measure the impairment of servicing  rights based on the difference  between the
  carrying amount of the servicing  rights and their current fair value.  SFAS 122
  is to be applied  prospectively  in fiscal years  beginning  after  December 15,
  1995.
  
       Presently,  the Company  does not sell or  securitize  mortgage  loans with
  servicing rights retained.  Accordingly, the Company will not be impacted by the
  provisions of SFAS 122.
  
       In October 1995, the Financial  Accounting Standards Board issued Statement
  of  Financial   Accounting   Standards  No.  123,  "Accounting  for  Stock-Based
  Compensation"  (SFAS 123).  SFAS 123  establishes a new method of accounting for
  stock-based  compensation  arrangements with employees. The new method is a fair
  value  based  method  rather  than the  intrinsic  value  based  method  that is
  currently  utilized.  However,  SFAS 123 does not require an entity to adopt the
  new  fair  value  based  method  for  purposes  of  preparing   basic  financial
  statements.  If an entity chooses not to adopt the fair value based method, SFAS
  123  requires  an entity to  display in the  footnotes  pro forma net income and
  earnings  per share  information  as if the fair  value  based  method  had been
  adopted.
  
       Currently,  the Company has not  determined  whether it will adopt the fair
  value based  method and  accordingly,  cannot  estimate  the impact on the basic
  financial statements that SFAS 123 will have upon adoption.
  
       SFAS 123 is effective for financial  statements with fiscal years beginning
  after December 15, 1995.
  
                                        -14-
  AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
                               (Dollars in thousands)
  Three Months Ended Sept. 30, 1995   Three Months Ended Sept. 30, 1994
                                                   Average                    Average      Average              Average
                                                   Balance       Interest       Rate       Balance    Interest    Rate
  Assets
      Loans                                       $ 382,460      $   8,908      9.24%     $ 373,998   $   7,981   8.47%
      Money market investments                       12,101            175      5.74          4,656          53   4.52
      Investment securities:
          Taxable                                   130,597          1,875      5.70        118,149       1,572   5.28
          Non-taxable                                11,001            194      7.00         12,509         212   6.72
                                                  ---------      ---------      ----      ---------   ---------   ----
               Total investment securities          141,598          2,069      5.80        130,658       1,784   5.42
               Total earning assets                 536,159      $  11,152      8.25%       509,312   $   9,818   7.65%
                                                                 =========      ====                  =========   ==== 
  
      Other assets                                   28,164                                  28,756
                                                     ------                                  ------
               Total assets                       $ 564,323                               $ 538,068
                                                  =========                               =========
  
  Liabilities and stockholders' equity Interest
     bearing deposits:
          Now accounts                            $  55,746      $     202      1.44%     $  62,262   $     225   1.43%
          Savings and money market                  123,734            956      3.07        131,064         818   2.48
          Time                                      240,402          3,516      5.80        203,140       2,331   4.55
                                                  ---------      ---------      ----      ---------   ---------   ----
               Total interest bearing deposits      419,882          4,674      4.42        396,466       3,374   3.38
  
      Short-term borrowings                          11,664            118      4.01         19,018         167   3.48
      Long-term debt                                 11,949            178      5.91         11,843         172   5.76
                                                  ---------      ---------      ----      ---------   ---------   ----
          Total interest bearing liabilities        443,495      $   4,970      4.45%       427,327   $   3,713   3.45%
                                                                 =========      ====                  =========   ==== 
  
      Non-interest bearing deposits                  57,427                                  54,888
      Other liabilities                               7,085                                   4,963
      Stockholders' equity                           56,316                                  50,890
                                                     ------                                  ------
          Total liabilities and
          stockholders' equity                    $ 564,323                               $ 538,068
                                                  =========                               =========
  
      Net interest income                                        $   6,182                            $   6,105
      Total yield on earning assets                                             8.25%                             7.65%
      Rate on supporting liabilities                                            3.68%                             2.89%
                                                                                ----                              ---- 
      Net interest margin                                                       4.57%                             4.76%
                                                                                ====                              ====
  Interest and average interest rates are presented on a fully taxable  equivalent
  basis,  using an effective  tax rate of 34%. For  purposes of  calculating  loan
  yields,  average loan balances include non-accrual loans. Loan fees are included
  in interest income.
  
                                        -15-
  AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
                               (Dollars in thousands)
  Nine Months Ended Sept. 30, 1995     Nine Months Ended Sept. 30, 1994
                                                  Average                    Average      Average              Average
                                                  Balance       Interest       Rate       Balance    Interest    Rate
  Assets
      Loans                                      $ 380,883      $  26,283      9.23%     $ 367,268   $  22,599   8.23%
      Money market investments                       9,605            422      5.87          2,723          83   4.08
      Investment securities:
          Taxable                                  125,198          5,282      5.13        119,626       4,592   5.06
          Non-taxable                               11,190            590      6.90         12,920         667   6.97
                                                 ---------      ---------      ----      ---------   ---------   ----
               Total investment securities         136,388          5,872      5.30        132,546       5,259   5.25
               Total earning assets                526,876      $  32,577      7.43%       502,537   $  27,941   7.32%
                                                                =========      ====                  =========   ==== 
  
      Other assets                                  26,949                                  30,726
                                                    ------                                  ------
               Total assets                      $ 553,825                               $ 533,263
                                                 =========                               =========
  
  Liabilities and stockholders' equity
     Interest bearing deposits:
          Now accounts                           $  55,866      $     601      1.45%     $  65,226   $     705   1.45%
          Savings and money market                 120,639          2,666      2.45        134,759       2,465   2.43
          Time                                     236,125          9,859      4.43        195,172       6,470   4.37
                                                 ---------      ---------      ----      ---------   ---------   ----
               Total interest bearing deposits     412,630         13,126      3.26        395,157       9,640   3.20
  
      Short-term borrowings                         11,998            362      3.17         17,808         422   2.99
      Long-term debt                                11,684            581      5.89         10,768         474   5.48
                                                 ---------      ---------      ----      ---------   ---------   ----
          Total interest bearing liabilities       436,312      $  14,069      3.32%       423,733   $  10,536   3.25%
                                                                =========      ====                  =========   ==== 
  
      Non-interest bearing deposits                 56,320                                  54,064
      Other liabilities                              6,697                                   4,902
      Stockholders' equity                          54,496                                  50,564
                                                    ------                                  ------
          Total liabilities and
          stockholders' equity                   $ 553,825                               $ 533,263
                                                 =========                               =========
  
      Net interest income                                       $  18,508                            $  17,405
      Total yield on earning assets                                            8.27%                             7.43%
      Rate on supporting liabilities                                           3.57%                             2.79%
                                                                               ----                              ---- 
      Net interest margin                                                      4.70%                             4.64%
                                                                               ====                              ====
  Interest and average interest rates are presented on a fully taxable  equivalent
  basis,  using an effective  tax rate of 34%. For  purposes of  calculating  loan
  yields,  average loan balances include non-accrual loans. Loan fees are included
  in interest income.
  
                                        -16-
  PART II.  OTHER INFORMATION
  
  ITEM 1.  LEGAL PROCEEDINGS
  
  None.
  
  ITEM 2.  CHANGES IN SECURITIES
  
  None.
  
  ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
  
  None.
  
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
  None.
  
  ITEM 5.  OTHER INFORMATION
  
  None.
  
  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
  
  (a.)  None.
  
  (b.)  The Company did not file any reports on Form 8-K during the quarter ended
  September 30, 1995.
  
                                        -17-
  KEYSTONE HERITAGE GROUP, INC.
  
                                     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.
  
                                           Keystone Heritage Group, Inc.
                                           (Registrant)
  
  Date  November 8, 1995               By /s/ Kurt A. Phillips
        --------------------              --------------------------------------
                                          Kurt A. Phillips
                                          Chief Financial and Accounting Officer
  
                                        -18-