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    March 31, 1997
  
  
  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 May 12, 1997
  Common Stock ($5.00 par value)                           3,951,583 shares
  
  <PAGE>
  
                            KEYSTONE HERITAGE GROUP, INC.
  
  
  
                                        Index
  
  
  PART I - FINANCIAL INFORMATION                                              Page
  
  
  Item 1 - Financial Statements
  
           Consolidated Balance Sheets as of
           March 31, 1997 and December 31, 1996 (Unaudited)                     3
  
           Consolidated Statements of Income for the
           Three Months ended March 31, 1997 and
           1996 (Unaudited)                                                     4
  
           Consolidated Statements of Stockholders' Equity
           for the Three Months ended March 31, 1997 and
           1996 (Unaudited)                                                     5
  
           Consolidated Statements of Cash Flows for the
           Three Months ended March 31, 1997 and
           1996 (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                                                               17
  
  
  
  
                                         -2-
  
  <PAGE>
                            KEYSTONE HERITAGE GROUP, INC.
  
                             CONSOLIDATED BALANCE SHEETS
  
                               (Dollars In Thousands)
  
  
  
  <TABLE>
  <CAPTION>
                                                                March 31          December 31
                                                                  1997               1996
  <S>                                                          <C>                 <C>      
  ASSETS
        Cash and due from banks                                $  20,118           $  22,832
        Interest bearing deposits with banks                         225                 181
        Federal funds sold                                        14,700                   0
        Investment securities available for sale                  61,340              62,596
        Investment securities held to maturity
             (fair value of $80,591 and $92,079
             for 1997 and 1996, respectively)                     80,749              91,652
        Loans held for sale                                        4,321               6,019
        Loans, net of unearned income of
           $1,688 for 1997 and $1,812 for 1996                   428,035             422,534
        Allowance for loan losses                                 (7,899)             (7,736)
                                                               ---------           ---------
  
             Loans, net                                          420,136             414,798
  
        Premises and equipment, net                                8,550               8,132
        Accrued interest receivable                                3,819               3,677
        Other real estate owned                                      180                 695
        Deferred tax asset, net                                    2,683               2,604
        Other assets                                               3,773               3,121
                                                               ---------           ---------
  
             Total assets                                      $ 620,594           $ 616,307
                                                               =========           =========
  
  LIABILITIES
        Non-interest bearing deposits                          $  67,059           $  72,683
        Interest bearing deposits                                461,971             454,150
                                                               ---------           ---------
  
             Total deposits                                      529,030             526,833
  
        Short-term borrowings                                     14,295              12,478
        Other borrowings                                           6,277               6,438
        Accrued interest payable                                   4,680               5,184
        Other liabilities                                          3,216               3,135
                                                               ---------           ---------
  
             Total liabilities                                   557,498             554,068
  
  STOCKHOLDERS' EQUITY
  
        Common stock - $5 par value; 10,000,000
             shares authorized; 4,071,683 outstanding
             at March 31, 1997 and December 31, 1996              20,358              20,358
        Capital surplus                                           22,078              22,078
        Retained earnings                                         22,762              21,418
        Net unrealized gain on investment securities
             available for sale, net of taxes                        355                 508
        Treasury stock, 106,100 shares at March 31,
         1997 and 93,700 shares at December 31, 1996              (2,457)             (2,123)
                                                               ---------           ---------
  
             Total stockholders' equity                           63,096              62,239
  
             Total liabilities and stockholders'
               equity                                          $ 620,594           $ 616,307
                                                               =========           =========
  </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
                                                                          March 31
                                                                   1997             1996
  <S>                                                            <C>              <C>    
  INTEREST INCOME
                Interest and fees on loans                       $ 9,449          $ 8,753
                Interest and dividends on investment
                  securities available for sale:
                    Taxable investment securities                    829              737
                    Equity investments                                63               55
                Interest and dividends on investment
                  securities held to maturity:
                    Taxable investment securities                  1,109            1,145
                    Non-taxable investment securities                173              125
                                                                 -------          -------
                      Total interest on investment
                       securities                                  2,174            2,062
                Interest on money market investments                  59               37
                                                                 -------          -------
                    Total interest income                         11,682           10,852
  
  INTEREST EXPENSE
                Interest on deposits                               4,906            4,503
                Interest on short-term borrowings                    122              121
                Interest on other borrowings                          97              162
                                                                 -------          -------
                    Total interest expense                         5,125            4,786
  
                    Net interest income                            6,557            6,066
  
                Provision for loan losses                              0                0
                                                                 -------          -------
                    Net interest income after provision
                     for loan losses                               6,557            6,066
  OTHER OPERATING INCOME
                Trust income                                         317              317
                Service charges on deposits                          342              306
                Net realized gain on investment
                    securities available for sale                    174               23
                Net gain on sale of mortgage loans                   214               74
                Other income                                         605              483
                                                                 -------          -------
                    Total other operating income                   1,652            1,203
  
  OTHER OPERATING EXPENSE
                Salaries and employee benefits                     2,744            2,364
                Occupancy expense, net                               361              328
                Equipment expense                                    454              506
                Deposit insurance expense                             15                1
                Other expense                                      1,275            1,276
                                                                 -------          -------
                    Total other operating expense                  4,849            4,475
  
                    Income before income taxes                     3,360            2,794
                Income taxes                                       1,023              871
                                                                 -------          -------
  
                    Net income                                   $ 2,337          $ 1,923
                                                                 =======          =======
  
  PER COMMON SHARE
                    Net income                                   $   .59          $   .47
                                                                 =======          =======
  
                    Cash dividends paid                          $   .25          $   .20
  </TABLE>
  
                                         -4-
  
  <PAGE>
                            KEYSTONE HERITAGE GROUP, INC.
                   CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             Three Months Ended March 31
  
                               (Dollars in thousands)
  
  
  <TABLE>
  <CAPTION>
                                                                                                          Net Unrealized
                                                                                                          Gain (Loss) On
                                                                                                          Securities 
                                                           Common      Capital    Retained   Treasury     Available
                                                            Stock      Surplus    Earnings     Stock      for Sale       Total
  <S>                                                     <C>          <C>        <C>        <C>          <C>          <C>     
  Balance, December 31, 1995                              $ 20,358     $22,078    $16,107    $      0     $    336     $ 58,879
       Net Income                                              -0-         -0-      1,923         -0-          -0-        1,923
       Cash dividends ($.20 per share)                         -0-         -0-       (814)        -0-          -0-         (814)
       Change in unrealized gain (loss)
        on investment securities
        available for sale, net of taxes                       -0-         -0-        -0-         -0-         (111)        (111)
                                                          --------     -------    -------    --------     --------     --------
  
  Balance, March 31, 1996                                 $ 20,358     $22,078    $17,216    $      0     $    225     $ 59,877
                                                          ========     =======    =======    ========     ========     ========
  
  Balance, December 31, 1996                              $ 20,358     $22,078    $21,418    $ (2,123)    $    508     $ 62,239
       Net income                                              -0-         -0-      2,337         -0-          -0-        2,337
       Cash dividends ($.25 per share)                         -0-         -0-       (993)        -0-          -0-         (993)
       Acquisition of 12,400 shares of
        treasury stock at cost                                 -0-         -0-        -0-        (334)         -0-         (334)
       Change in unrealized gain
        (loss) on investment securities
        available for sale, net of taxes                       -0-         -0-        -0-         -0-         (153)        (153)
                                                          --------     -------    -------    --------     --------     --------
  
  Balance, March 31, 1997                                 $ 20,358     $22,078    $22,762    ($ 2,457)    $    355     $ 63,096
                                                          ========     =======    =======    ========     ========     ========
  </TABLE>
  
  
  
                                         -5-
  
  
  <PAGE>
                            KEYSTONE HERITAGE GROUP, INC.
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (Dollars in thousands)
  
  <TABLE>
  <CAPTION>
                                                                      Three Months Ended
                                                                           March 31
                                                                    1997              1996
  <S>                                                            <C>                <C>     
  CASH FLOW FROM OPERATING ACTIVITIES:
      Net income                                                 $  2,337           $  1,923
      Adjustments to reconcile net income to cash:
          Depreciation and amortization                               307                391
          Deferred income taxes                                        (2)               242
          Increase in accrued interest receivable                    (142)              (102)
          Decrease increase in accrued interest payable              (504)            (1,278)
          Net gain on sale of loans                                  (214)               (74)
          Originations of residential mortgage loans sold          (7,010)            (5,994)
          Proceeds from sale of residential mortgage loans          8,400              4,725
          Net realized gain on investment
           securities available for sale                             (174)               (23)
          Other, net                                                 (819)              (504)
                                                                 --------           --------
              Net cash provided by operating activities             2,179               (694)
  
  CASH FLOWS FROM INVESTING ACTIVITIES:
      Net increase in money market investments                    (14,744)            (4,952)
      Maturities of investment securities
        held to maturity                                           12,402              9,726
      Maturities of investment securities
        available for sale                                          5,130             11,291
      Sale of investment securities available for sale                378                 63
      Funds invested in investment securities
        held to maturity                                           (1,460)            (4,958)
      Funds invested in investment securities
        available for sale                                         (4,194)            (3,174)
      Net increase in loans made to customers                      (4,781)              (423)
      Net expenditures for premises and equipment                    (725)              (133)
      Proceeds from sale of other real estate owned                   575                  0
                                                                 --------           --------
          Net cash (used in) provided from
              investing activities                                 (7,419)             7,440
  
  
  CASH FLOWS FROM FINANCING ACTIVITIES:
      Net increase  (decrease) in deposits                          2,197            (10,077)
      Net increase in short-term borrowings                         1,817                470
      Net (decrease) in other borrowings                             (161)            (3,068)
      Acquisition of treasury stock                                  (334)                 0
      Cash dividends paid                                            (993)              (814)
                                                                 --------           --------
          Net cash used by (provided by)
           financing activities                                     2,526            (13,489)
  
      Net decrease in cash and due from banks                      (2,714)            (6,743)
  
      Cash and due from banks at beginning of period               22,832             23,766
      Cash and due from banks at end of period                   $ 20,118           $ 17,023
  
  SUPPLEMENTAL DISCLOSURES:
      Interest paid                                              $  2,771           $  2,824
      Income taxes paid                                               400                 74
  
  NON-CASH INVESTING AND FINANCING ACTIVITIES:
      Loans charged-off                                                99                345
  </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 March 31, 1997 and December
       31, 1996, the consolidated statements of income for the three months ended
       March 31, 1997 and 1996 and the consolidated statements stockholders'
       equity and the consolidated statements of cash flows for the three months
       ended March 31, 1997 and 1996. The accounting policies followed in the
       presentation of interim financial results are the same as those followed on
       an annual basis or those adopted during the first quarter of 1997. 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.   Earnings per common share are based upon the weighted average number of
       shares outstanding. The weighted average number of shares outstanding was
       3,970,113 and 4,071,683 for the three months ended March 31 1997 and 1996.
  
  3.   In February 1997, the Financial Accounting Standards Board issued Statement
       of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share".
       SFAS 128, which supersedes APB Opinion No. 15 (APB 15), "Earnings Per
       Share", specifies the computation, presentation, and disclosure
       requirements for earnings per share (EPS) for entities with publicly held
       common stock. It replaces the presentation of primary EPS with a
       presentation of basic EPS and fully diluted EPS with diluted EPS, Basic
       EPS, unlike primary EPS, excludes dilution and is computed by dividing
       income available to common stockholders by the weighted average number of
       common shares outstanding for the period. Diluted EPS is computed similarly
       to fully diluted EPS under APB 15. The Company will adopt SFAS 128 as of
       December 31, 1997. Management does not expect SFAS 128 to have a material
       effect on the EPS of the Company.
  
  
                                         -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 March 31, 1997 was
  $2.337 million or $.59 per share, compared to $1.923 million or $.47 per share
  for the three months ended March 31, 1996. Return on average stockholders'
  equity and return on average assets for the 1997 period were 15.14 percent and
  1.56 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 35 percent.
  
       The table presented on page 15 is a comparative statement of average
  balances of interest earning assets and interest bearing liabilities, interest
  income and interest expense, and interest rates for the three months ended March
  31, 1997 and 1996.
  
       Net interest income for the three months ended March 31, 1997 was $6.7
  million, a $518 thousand or 8.4 percent increase from the same period of 1996.
  The net interest margin for the first quarter of 1997 was 4.72 percent compared
  to 4.65 percent for the same period of 1996. Average earning assets for the
  three month period ended March 31, 1997 were $578.6 million, a $41.0 million or
  a 7.6 percent increase from the same period of 1996. For the three month
  comparative periods, net interest income and the net interest margin increased
  in 1997 primarily as a result of an increase in average loans outstanding of
  $38.3 million or 9.8 percent. This loan growth was primarily funded by increases
  in average interest bearing deposit balances of $38.3 million, or 9.2 percent.
  
       The aforementioned increase in average loans outstanding was attributable
  to a $41 million increase in commercial and agricultural loans. The Company's
  consumer loan portfolio increased by $2 million from the same period of 1996.
  The was due to the net effect of an $8.4 million increase in direct installment
  and home equity loans which was somewhat offset by a $5.5 million decrease in
  indirect automobile installment loans which are originated through third-party
  dealerships. The trend in indirect loans should continue as the Company has been
  concentrating its marketing and sales efforts on direct installment loans
  originated through the Company's branch network.
  
       The increase in average deposit balances resulted from a $39.9 million
  increase in time deposits. This increase is somewhat attributable to five new
  branch offices which opened between September 1996 and April 1997. These new
  branches had a total of $15.4 million in time deposits and $17.2 million in
  total deposits as of March 31, 1997.
  
                                         -8-
  <PAGE>
  Provision and Allowance for Loan Losses
       There was no provision for loan losses charged to net income during the
  three month period ended March 31, 1997 or 1996.
  
       Net recoveries of $163 thousand were recorded for the three months ended
  March 31, 1997 compared to net charge-offs of $249 thousand for the same period
  of 1996. There were no commercial loan charge-offs in 1997 compared to $264
  thousand in 1996.
  
       The allowance for loan losses was $7.9 million or 1.85 percent of total
  loans outstanding at March 31, 1997 and $7.7 million or 1.83 percent at December
  31, 1996. The allowance for 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 loan losses. The allowance
  for 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 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 loan losses.
  
  
                                         -9-
  
  <PAGE>
  
       The following is a summary of the activity in the allowance for loan losses
  for the three months ended March 31, 1997 and 1996:
  
                                                          Three Months Ended
                                                                March 31
  (Dollars in thousands)                                1997               1996
  Allowance for loan losses
   at beginning of period                              $ 7,736           $ 8,025
  Loans charged-off:
   Commercial                                                0               264
   Agriculture                                               0                 0
   Real estate construction                                  0                 0
   Loans to individuals                                     99                81
   Real estate - residential mortgage                        0                 0
                                                       -------           -------
  Total loans charged-off                                   99               345
  
  Recoveries of loans previously charged-off:
   Commercial                                              246                81
   Agriculture                                               0                 0
   Real estate construction                                  0                 4
   Loans to individuals                                     16                11
   Real estate - residential mortgage                        0                 0
                                                       -------           -------
   Total recoveries of loans previously
                            charged-off                    262                96
  
   Net loans charged-off                                  (163)              249
   Current period's provision for
   loan losses                                               0                 0
                                                       -------           -------
  
   Allowance for loan
   losses at end of period                             $ 7,899           $ 7,776
                                                       =======           =======
  
  Other Operating Income and Expense
       Other operating income was $1.7 million and $1.2 million for the three
  months ended March 31, 1997 and 1996, respectively. The increase in other
  operating income is primarily attributable to mortgage banking operations;
  results from this line of business were increased significantly following the
  acquisition, during the first quarter of 1996, of the business assets and
  operations of Central Mortgage, a mortgage banking company located in Lancaster,
  Pennsylvania. Other operating income is generated from mortgage banking
  activities through the sale of originated mortgage loans in the secondary
  market. The Company recognized $214 thousand of gains from the sale of $8.4
  million of mortgages in the secondary market in the three month period of 1997
  compared to recognizing $74 thousand from selling $4.7 million in the secondary
  market in the same period of 1996. In addition, the Company recognized $174
  thousand from the sale of investments securities available for sale in 1997
  compared to $23 thousand for the same period in 1996. Other income increased by
  $122 thousand from 1996 which was due to a number of factors such as fee income
  pricing increases and due to the introduction of a direct debit card product
  during the third quarter of 1996.
  
       Other operating expense for the three months ended March 31, 1997 was $4.9
  million, a 8.4 percent increase over the $4.5 million reported for the same
  period of 1996.
  
       Salaries and benefits expense increased by $380 thousand or 16.1 percent
  for the three months ended March 31, 1997 compared to the same period of 1996.
  The increase in salary and benefit expenses is primarily a result of the
  staffing expense for Central Mortgage being present for the full quarter in 1997
  compared to one month in 1996, the opening of five de novo branch offices, which
  opened between the second half of 1996 and April of 1997 and overall merit
  increases of 3.5 percent which were applied to base salaries as of January 1,
  1997.
  
                                        -10-
  
  <PAGE>
  
  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 March 31, 1997 totalled $573 thousand or .13
  percent of total loans outstanding, compared to $973 thousand or .23 percent of
  loans at December 31, 1996 and $1.0 million or .26 percent of loans at March 31,
  1996. Non-performing assets at March 31, 1997 were $753 thousand or .18 percent
  of loans plus other real estate owned compared to $1.7 million or .39 percent of
  loans plus other real estate owned at December 31, 1996 and $2.0 million or .50
  percent of loans plus other real estate owned at March 31, 1996. The improvement
  in non-performing assets at March 31, 1997 as compared to March 31, 1996 was a
  result of decreased levels of non-accrual loans and decreased levels of other
  real estate owned.
  
       The following is a presentation of non-performing assets as of March 31,
  1997, December 31, 1996, and March 31, 1996:
  
  <TABLE>
  <CAPTION>
                                                           March 31         Dec. 31         March 31
  (Dollars in thousands)                                     1997             1996            1996
  <S>                                                      <C>              <C>             <C>     
  Non-performing loans                                     $    573         $    973        $  1,008
  Other real estate owned, net                                  180              695             947
                                                           --------         --------        --------
  Total non-performing assets                              $    753         $  1,668        $  1,955
                                                           ========         ========        ========
  
  Loans past due 90 days or more as to
    principal or interest                                       578              624             524
  
  Allowance for loan losses to
    non-performing loans                                    13.79x           12.58x           7.71x
  Non-performing loans as a
    percent of loans outstanding                              .13%             .23%            .26%
  Non-performing assets as a
    percent of loans outstanding
    plus other real estate owned                              .18%             .39%            .50%
  </TABLE>
  
       Interest income of approximately $11 thousand would have been recognized
  during the three months ended March 31, 1997, 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 $1 thousand was recognized
  during the three months ended March 31, 1997.
  
       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 March 31, 1997 totalled $110 million or 26.1
  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 March 31,
  1997 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 months ended March 31, 1997.
  
  Financial Position
       Total assets at March 31, 1997 were $621 million compared to $616 million
  at December 31, 1996. Total loans outstanding at March 31, 1997 were $428
  million compared to $423 million at December 31, 1996. Total deposits at March
  31, 1997 were $529 million compared to $527 million at December 31, 1996.
  
                                        -11-
  
  <PAGE>
  
  Capital Adequacy
       The Company's stockholders' equity was $63.1 million at March 31, 1997 and
  $62.2 million at December 31, 1996. Total stockholders' equity increased by 1.4
  percent from December 31, 1996 which was the net effect of the recognition of
  $2.3 million in net income for the three month period, cash dividend payments to
  stockholders of $993 thousand, an unfavorable change in net unrealized gains or
  losses on investment securities available for sale of $153 thousand, and due to
  the acquisition of treasury stock at a cost of $334 thousand. Net unrealized
  gains on investment securities available for sale of $355 thousand and $508
  thousand were included as a component of stockholders' equity at March 31, 1997
  and December 31, 1996, respectively.
  
       The Company announced its intentions to repurchase up to 5 percent or
  203,584 shares of its outstanding common stock in June, 1996. These repurchased
  shares will be available for reissuance through the Company's Dividend
  Reinvestment or Stock Option Plans or for other general corporate purposes. A
  total of 12,400 shares of common stock were re-acquired by the Company during
  the first quarter of 1997 with a cumulative total of 106,100 acquired as of
  March 31, 1997.
  
       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 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 March 31, 1997 the
  Company's Tier 1 and Total Capital ratios were 13.18 percent and 14.49 percent,
  respectively. Tier 1 and Total Capital ratios were 13.12 percent and 14.43
  percent respectively, at December 31, 1996. 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. The Company's Leverage
  ratio was 10.28 percent at March 31, 1997 and December 31, 1996, respectively.
  
  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.
  
  
                                        -12-
  
  <PAGE>
  
  
       The Company has entered into interest rate swap contracts as part of its
  asset-liability management activities. These contracts are used primarily for
  the purpose of managing interest rate risk in order to minimize mismatches in
  the Bank's interest rate sensitivity and interest rate risk positions.
  
       Interest rate swap 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 swap 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 on the accrual basis as a component of interest
  income or interest expense over the life of the contract. Gains or losses from
  early termination of interest rate 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 of 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's use of these interest rate swap contracts is closely
  monitored by the Company's Board of Directors and is closely controlled as to
  levels of exposure. At March 31, 1997 the Company had seven interest rate
  agreements outstanding having a total notional amount of $70 million. These
  agreements consisted of interest rate swap agreements each with a notional
  amount of $10 million.
  
           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 following is the amount of financial instruments with off-balance sheet
  risk not reflected in the consolidated balance sheets at March 31, 1997 and
  December 31, 1996:
  
                                                     Contractual Amounts
                                                  March 31        December 31
  (Dollars in thousands)                            1997             1996
  Financial instruments whose
  contractual amounts represent
   credit risk:
       Commitments to extend credit                $94,339          $93,811
       Standby letters of credit                     7,118            7,335
  Contractual amounts of off-balance
  sheet financial instruments not
  constituting credit risk:
       Interest rate swap, notional
       value                                        70,000           70,000
  
  
  Supervision and Regulation
  
       During the latter part of 1996, Congress agreed on a legislative package to
  stabilize the Savings and Loan (S&L) industry's deposit insurance fund (SAIF).
  The legislation required the S&L industry to recapitalize its insurance fund
  with a one-time assessment. Previous proposals required the bank insurance fund
  (BIF) to contribute a substantial amount to help recapitalize SAIF. Under the
  current legislation, banks are required to pay an annual rate of 1.29 cents for
  every $100 of domestic deposits from 1997 through 1999 and pay 2.43 cents per
  $100 of domestic deposits for the years of 2000 through 2017. The amount of FDIC
  insurance to be paid under this new legislation will not materially impact the
  financial position, equity or the results of operations for the Company in
  future periods.
  
     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.
  
                                        -13-
  
  <PAGE>
  
  New Accounting Standards
  
       In February 1997, the Financial Accounting Standards Board issued Statement
  of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share". SFAS
  128, which supersedes APB Opinion No. 15 (APB 15), "Earnings Per Share",
  specifies the computation, presentation, and disclosure requirements for
  earnings per share (EPS) for entities with publicly held common stock. It
  replaces the presentation of primary EPS with a presentation of basic EPS and
  fully diluted EPS with diluted EPS, Basic EPS, unlike primary EPS, excludes
  dilution and is computed by dividing income available to common stockholders by
  the weighted average number of common shares outstanding for the period. Diluted
  EPS is computed similarly to fully diluted EPS under APB 15. The Company will
  adopt SFAS 128 as of December 31, 1997. Management does not expect SFAS 128 to
  have a material effect on the EPS of the Company.
  
  
  
  
  
  
                                        -14-
  <PAGE>
  
            AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
                               (Dollars in thousands)
  <TABLE>
  <CAPTION>
  
                                                   Three Months Ended March 31, 1997    Three Months Ended March 31, 1996
                                                   Average                    Average   Average                  Average
                                                   Balance     Interest        Rate     Balance     Interest       Rate
  <S>                                             <C>          <C>             <C>      <C>         <C>            <C>  
  Assets
      Loans                                       $428,693     $  9,532        9.02%    $390,350    $  8,833       9.10%
      Money market investments                       4,440           59        5.39        2,729          37       5.42
      Investment securities:
          Taxable                                  130,111        2,001        6.24      132,655       1,938       5.87
          Non-taxable                               15,372          266        7.01       11,863         193       6.54
                                                  --------     --------        ----     --------    --------       ---- 
               Total investment securities         145,483        2,267        6.32      144,518       2,131       5.93
               Total earning assets                578,616     $ 11,858        8.31%     537,597    $ 11,001       8.23%
                                                               ========        ====                 ========       ==== 
  
      Other assets                                  29,544                               27,023
                                                  --------                             --------
               Total assets                       $608,161                             $564,620
                                                  ========                             ========
  
  Liabilities and stockholders' equity
      Interest bearing deposits:
          Now accounts                            $ 54,065     $    170        1.27%    $ 55,062    $    191       1.39%
          Savings and money market                 127,198          983        3.13      127,790         986       3.10
          Time                                     273,633        3,753        5.56      233,735       3,326       5.72
                                                  --------     --------        ----     --------    --------       ---- 
               Total interest bearing deposits     454,896        4,906        4.37      416,587       4,503       4.35
  
      Short-term borrowings                         12,068          122        4.08       11,505         121       4.22
      Other Borrowings                               6,338           97        6.21       11,111         162       5.86
                                                  --------     --------        ----     --------    --------       ---- 
          Total interest bearing liabilities       473,302     $  5,125        4.39%     439,203    $  4,786       4.38%
                                                               ========        ====                 ========       ==== 
  
      Non-interest bearing deposits                 63,832                                58,060
      Other liabilities                              8,434                                 8,138
      Stockholders' equity                          62,593                                59,219
                                                  --------                              --------
          Total liabilities and
          stockholders' equity                    $608,161                              $564,620
                                                  ========                              ========
  
      Net interest income                                      $  6,733                             $  6,215
      Total yield on earning assets                                            8.31%                               8.23%
      Rate on supporting liabilities                                           3.59%                               3.58%
                                                                               ----                                ---- 
      Net interest margin                                                      4.72%                               4.65%
                                                                               ====                                ==== 
  </TABLE>
  
  Interest and average interest rates are presented on a fully taxable equivalent
  basis, using an effective tax rate of 35%. For purposes of calculating loan
  yields, average loan balances include non-accrual loans. Loan fees are included
  in interest income.
  
  
                                        -15-
  <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.
  
  
  
  
  
  
                                        -16-
  
  
  <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  May 12, 1997              By /s/ Kurt A. Phillips
                                     Kurt A. Phillips
                                     Chief Financial and Accounting Officer
  
  
  
  
  
  
  
  
  
  
  
                                        -17-
metadata_documents: [{"type": "10-Q", "sequence": "1", "secsgml_size_bytes": 52547}]
metadata_filer: {"company-data": {"conformed-name": "KEYSTONE HERITAGE GROUP INC", "cik": "0000715366", "assigned-sic": "6021", "irs-number": "232219740", "state-of-incorporation": "PA", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "10-Q", "act": "34", "file-number": "001-13744", "film-number": "97606745"}, "business-address": {"street1": "55 WILLOW ST", "street2": "P O BOX 1285", "city": "LEBANON", "state": "PA", "zip": "17042-1285", "phone": "7172746800"}, "mail-address": {"street1": "55 WILLOW ST", "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    March 31, 1997
  
  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 May 12, 1997
  Common Stock ($5.00 par value)                           3,951,583 shares
  KEYSTONE HERITAGE GROUP, INC.
  
                                        Index
  
  PART I - FINANCIAL INFORMATION                                              Page
  
  Item 1 - Financial Statements
  
           Consolidated Balance Sheets as of
           March 31, 1997 and December 31, 1996 (Unaudited)                     3
  
           Consolidated Statements of Income for the
           Three Months ended March 31, 1997 and
           1996 (Unaudited)                                                     4
  
           Consolidated Statements of Stockholders' Equity
           for the Three Months ended March 31, 1997 and
           1996 (Unaudited)                                                     5
  
           Consolidated Statements of Cash Flows for the
           Three Months ended March 31, 1997 and
           1996 (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                                                               17
  
                                         -2-
  KEYSTONE HERITAGE GROUP, INC.
  
                             CONSOLIDATED BALANCE SHEETS
  
                               (Dollars In Thousands)
  March 31          December 31
                                                                  1997               1996
  ASSETS
        Cash and due from banks                                $  20,118           $  22,832
        Interest bearing deposits with banks                         225                 181
        Federal funds sold                                        14,700                   0
        Investment securities available for sale                  61,340              62,596
        Investment securities held to maturity
             (fair value of $80,591 and $92,079
             for 1997 and 1996, respectively)                     80,749              91,652
        Loans held for sale                                        4,321               6,019
        Loans, net of unearned income of
           $1,688 for 1997 and $1,812 for 1996                   428,035             422,534
        Allowance for loan losses                                 (7,899)             (7,736)
                                                               ---------           ---------
  
             Loans, net                                          420,136             414,798
  
        Premises and equipment, net                                8,550               8,132
        Accrued interest receivable                                3,819               3,677
        Other real estate owned                                      180                 695
        Deferred tax asset, net                                    2,683               2,604
        Other assets                                               3,773               3,121
                                                               ---------           ---------
  
             Total assets                                      $ 620,594           $ 616,307
                                                               =========           =========
  
  LIABILITIES
        Non-interest bearing deposits                          $  67,059           $  72,683
        Interest bearing deposits                                461,971             454,150
                                                               ---------           ---------
  
             Total deposits                                      529,030             526,833
  
        Short-term borrowings                                     14,295              12,478
        Other borrowings                                           6,277               6,438
        Accrued interest payable                                   4,680               5,184
        Other liabilities                                          3,216               3,135
                                                               ---------           ---------
  
             Total liabilities                                   557,498             554,068
  
  STOCKHOLDERS' EQUITY
  
        Common stock - $5 par value; 10,000,000
             shares authorized; 4,071,683 outstanding
             at March 31, 1997 and December 31, 1996              20,358              20,358
        Capital surplus                                           22,078              22,078
        Retained earnings                                         22,762              21,418
        Net unrealized gain on investment securities
             available for sale, net of taxes                        355                 508
        Treasury stock, 106,100 shares at March 31,
         1997 and 93,700 shares at December 31, 1996              (2,457)             (2,123)
                                                               ---------           ---------
  
             Total stockholders' equity                           63,096              62,239
  
             Total liabilities and stockholders'
               equity                                          $ 620,594           $ 616,307
                                                               =========           =========
  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
                                                                          March 31
                                                                   1997             1996
  INTEREST INCOME
                Interest and fees on loans                       $ 9,449          $ 8,753
                Interest and dividends on investment
                  securities available for sale:
                    Taxable investment securities                    829              737
                    Equity investments                                63               55
                Interest and dividends on investment
                  securities held to maturity:
                    Taxable investment securities                  1,109            1,145
                    Non-taxable investment securities                173              125
                                                                 -------          -------
                      Total interest on investment
                       securities                                  2,174            2,062
                Interest on money market investments                  59               37
                                                                 -------          -------
                    Total interest income                         11,682           10,852
  
  INTEREST EXPENSE
                Interest on deposits                               4,906            4,503
                Interest on short-term borrowings                    122              121
                Interest on other borrowings                          97              162
                                                                 -------          -------
                    Total interest expense                         5,125            4,786
  
                    Net interest income                            6,557            6,066
  
                Provision for loan losses                              0                0
                                                                 -------          -------
                    Net interest income after provision
                     for loan losses                               6,557            6,066
  OTHER OPERATING INCOME
                Trust income                                         317              317
                Service charges on deposits                          342              306
                Net realized gain on investment
                    securities available for sale                    174               23
                Net gain on sale of mortgage loans                   214               74
                Other income                                         605              483
                                                                 -------          -------
                    Total other operating income                   1,652            1,203
  
  OTHER OPERATING EXPENSE
                Salaries and employee benefits                     2,744            2,364
                Occupancy expense, net                               361              328
                Equipment expense                                    454              506
                Deposit insurance expense                             15                1
                Other expense                                      1,275            1,276
                                                                 -------          -------
                    Total other operating expense                  4,849            4,475
  
                    Income before income taxes                     3,360            2,794
                Income taxes                                       1,023              871
                                                                 -------          -------
  
                    Net income                                   $ 2,337          $ 1,923
                                                                 =======          =======
  
  PER COMMON SHARE
                    Net income                                   $   .59          $   .47
                                                                 =======          =======
  
                    Cash dividends paid                          $   .25          $   .20
  -4-
  KEYSTONE HERITAGE GROUP, INC.
                   CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             Three Months Ended March 31
  
                               (Dollars in thousands)
  Net Unrealized
                                                                                                          Gain (Loss) On
                                                                                                          Securities 
                                                           Common      Capital    Retained   Treasury     Available
                                                            Stock      Surplus    Earnings     Stock      for Sale       Total
  Balance, December 31, 1995                              $ 20,358     $22,078    $16,107    $      0     $    336     $ 58,879
       Net Income                                              -0-         -0-      1,923         -0-          -0-        1,923
       Cash dividends ($.20 per share)                         -0-         -0-       (814)        -0-          -0-         (814)
       Change in unrealized gain (loss)
        on investment securities
        available for sale, net of taxes                       -0-         -0-        -0-         -0-         (111)        (111)
                                                          --------     -------    -------    --------     --------     --------
  
  Balance, March 31, 1996                                 $ 20,358     $22,078    $17,216    $      0     $    225     $ 59,877
                                                          ========     =======    =======    ========     ========     ========
  
  Balance, December 31, 1996                              $ 20,358     $22,078    $21,418    $ (2,123)    $    508     $ 62,239
       Net income                                              -0-         -0-      2,337         -0-          -0-        2,337
       Cash dividends ($.25 per share)                         -0-         -0-       (993)        -0-          -0-         (993)
       Acquisition of 12,400 shares of
        treasury stock at cost                                 -0-         -0-        -0-        (334)         -0-         (334)
       Change in unrealized gain
        (loss) on investment securities
        available for sale, net of taxes                       -0-         -0-        -0-         -0-         (153)        (153)
                                                          --------     -------    -------    --------     --------     --------
  
  Balance, March 31, 1997                                 $ 20,358     $22,078    $22,762    ($ 2,457)    $    355     $ 63,096
                                                          ========     =======    =======    ========     ========     ========
  -5-
  KEYSTONE HERITAGE GROUP, INC.
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (Dollars in thousands)
  Three Months Ended
                                                                           March 31
                                                                    1997              1996
  CASH FLOW FROM OPERATING ACTIVITIES:
      Net income                                                 $  2,337           $  1,923
      Adjustments to reconcile net income to cash:
          Depreciation and amortization                               307                391
          Deferred income taxes                                        (2)               242
          Increase in accrued interest receivable                    (142)              (102)
          Decrease increase in accrued interest payable              (504)            (1,278)
          Net gain on sale of loans                                  (214)               (74)
          Originations of residential mortgage loans sold          (7,010)            (5,994)
          Proceeds from sale of residential mortgage loans          8,400              4,725
          Net realized gain on investment
           securities available for sale                             (174)               (23)
          Other, net                                                 (819)              (504)
                                                                 --------           --------
              Net cash provided by operating activities             2,179               (694)
  
  CASH FLOWS FROM INVESTING ACTIVITIES:
      Net increase in money market investments                    (14,744)            (4,952)
      Maturities of investment securities
        held to maturity                                           12,402              9,726
      Maturities of investment securities
        available for sale                                          5,130             11,291
      Sale of investment securities available for sale                378                 63
      Funds invested in investment securities
        held to maturity                                           (1,460)            (4,958)
      Funds invested in investment securities
        available for sale                                         (4,194)            (3,174)
      Net increase in loans made to customers                      (4,781)              (423)
      Net expenditures for premises and equipment                    (725)              (133)
      Proceeds from sale of other real estate owned                   575                  0
                                                                 --------           --------
          Net cash (used in) provided from
              investing activities                                 (7,419)             7,440
  
  CASH FLOWS FROM FINANCING ACTIVITIES:
      Net increase  (decrease) in deposits                          2,197            (10,077)
      Net increase in short-term borrowings                         1,817                470
      Net (decrease) in other borrowings                             (161)            (3,068)
      Acquisition of treasury stock                                  (334)                 0
      Cash dividends paid                                            (993)              (814)
                                                                 --------           --------
          Net cash used by (provided by)
           financing activities                                     2,526            (13,489)
  
      Net decrease in cash and due from banks                      (2,714)            (6,743)
  
      Cash and due from banks at beginning of period               22,832             23,766
      Cash and due from banks at end of period                   $ 20,118           $ 17,023
  
  SUPPLEMENTAL DISCLOSURES:
      Interest paid                                              $  2,771           $  2,824
      Income taxes paid                                               400                 74
  
  NON-CASH INVESTING AND FINANCING ACTIVITIES:
      Loans charged-off                                                99                345
  -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 March 31, 1997 and December
       31, 1996, the consolidated statements of income for the three months ended
       March 31, 1997 and 1996 and the consolidated statements stockholders'
       equity and the consolidated statements of cash flows for the three months
       ended March 31, 1997 and 1996. The accounting policies followed in the
       presentation of interim financial results are the same as those followed on
       an annual basis or those adopted during the first quarter of 1997. 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.   Earnings per common share are based upon the weighted average number of
       shares outstanding. The weighted average number of shares outstanding was
       3,970,113 and 4,071,683 for the three months ended March 31 1997 and 1996.
  
  3.   In February 1997, the Financial Accounting Standards Board issued Statement
       of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share".
       SFAS 128, which supersedes APB Opinion No. 15 (APB 15), "Earnings Per
       Share", specifies the computation, presentation, and disclosure
       requirements for earnings per share (EPS) for entities with publicly held
       common stock. It replaces the presentation of primary EPS with a
       presentation of basic EPS and fully diluted EPS with diluted EPS, Basic
       EPS, unlike primary EPS, excludes dilution and is computed by dividing
       income available to common stockholders by the weighted average number of
       common shares outstanding for the period. Diluted EPS is computed similarly
       to fully diluted EPS under APB 15. The Company will adopt SFAS 128 as of
       December 31, 1997. Management does not expect SFAS 128 to have a material
       effect on the EPS of the Company.
  
                                         -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 March 31, 1997 was
  $2.337 million or $.59 per share, compared to $1.923 million or $.47 per share
  for the three months ended March 31, 1996. Return on average stockholders'
  equity and return on average assets for the 1997 period were 15.14 percent and
  1.56 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 35 percent.
  
       The table presented on page 15 is a comparative statement of average
  balances of interest earning assets and interest bearing liabilities, interest
  income and interest expense, and interest rates for the three months ended March
  31, 1997 and 1996.
  
       Net interest income for the three months ended March 31, 1997 was $6.7
  million, a $518 thousand or 8.4 percent increase from the same period of 1996.
  The net interest margin for the first quarter of 1997 was 4.72 percent compared
  to 4.65 percent for the same period of 1996. Average earning assets for the
  three month period ended March 31, 1997 were $578.6 million, a $41.0 million or
  a 7.6 percent increase from the same period of 1996. For the three month
  comparative periods, net interest income and the net interest margin increased
  in 1997 primarily as a result of an increase in average loans outstanding of
  $38.3 million or 9.8 percent. This loan growth was primarily funded by increases
  in average interest bearing deposit balances of $38.3 million, or 9.2 percent.
  
       The aforementioned increase in average loans outstanding was attributable
  to a $41 million increase in commercial and agricultural loans. The Company's
  consumer loan portfolio increased by $2 million from the same period of 1996.
  The was due to the net effect of an $8.4 million increase in direct installment
  and home equity loans which was somewhat offset by a $5.5 million decrease in
  indirect automobile installment loans which are originated through third-party
  dealerships. The trend in indirect loans should continue as the Company has been
  concentrating its marketing and sales efforts on direct installment loans
  originated through the Company's branch network.
  
       The increase in average deposit balances resulted from a $39.9 million
  increase in time deposits. This increase is somewhat attributable to five new
  branch offices which opened between September 1996 and April 1997. These new
  branches had a total of $15.4 million in time deposits and $17.2 million in
  total deposits as of March 31, 1997.
  
                                         -8-
  Provision and Allowance for Loan Losses
       There was no provision for loan losses charged to net income during the
  three month period ended March 31, 1997 or 1996.
  
       Net recoveries of $163 thousand were recorded for the three months ended
  March 31, 1997 compared to net charge-offs of $249 thousand for the same period
  of 1996. There were no commercial loan charge-offs in 1997 compared to $264
  thousand in 1996.
  
       The allowance for loan losses was $7.9 million or 1.85 percent of total
  loans outstanding at March 31, 1997 and $7.7 million or 1.83 percent at December
  31, 1996. The allowance for 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 loan losses. The allowance
  for 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 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 loan losses.
  
                                         -9-
  The following is a summary of the activity in the allowance for loan losses
  for the three months ended March 31, 1997 and 1996:
  
                                                          Three Months Ended
                                                                March 31
  (Dollars in thousands)                                1997               1996
  Allowance for loan losses
   at beginning of period                              $ 7,736           $ 8,025
  Loans charged-off:
   Commercial                                                0               264
   Agriculture                                               0                 0
   Real estate construction                                  0                 0
   Loans to individuals                                     99                81
   Real estate - residential mortgage                        0                 0
                                                       -------           -------
  Total loans charged-off                                   99               345
  
  Recoveries of loans previously charged-off:
   Commercial                                              246                81
   Agriculture                                               0                 0
   Real estate construction                                  0                 4
   Loans to individuals                                     16                11
   Real estate - residential mortgage                        0                 0
                                                       -------           -------
   Total recoveries of loans previously
                            charged-off                    262                96
  
   Net loans charged-off                                  (163)              249
   Current period's provision for
   loan losses                                               0                 0
                                                       -------           -------
  
   Allowance for loan
   losses at end of period                             $ 7,899           $ 7,776
                                                       =======           =======
  
  Other Operating Income and Expense
       Other operating income was $1.7 million and $1.2 million for the three
  months ended March 31, 1997 and 1996, respectively. The increase in other
  operating income is primarily attributable to mortgage banking operations;
  results from this line of business were increased significantly following the
  acquisition, during the first quarter of 1996, of the business assets and
  operations of Central Mortgage, a mortgage banking company located in Lancaster,
  Pennsylvania. Other operating income is generated from mortgage banking
  activities through the sale of originated mortgage loans in the secondary
  market. The Company recognized $214 thousand of gains from the sale of $8.4
  million of mortgages in the secondary market in the three month period of 1997
  compared to recognizing $74 thousand from selling $4.7 million in the secondary
  market in the same period of 1996. In addition, the Company recognized $174
  thousand from the sale of investments securities available for sale in 1997
  compared to $23 thousand for the same period in 1996. Other income increased by
  $122 thousand from 1996 which was due to a number of factors such as fee income
  pricing increases and due to the introduction of a direct debit card product
  during the third quarter of 1996.
  
       Other operating expense for the three months ended March 31, 1997 was $4.9
  million, a 8.4 percent increase over the $4.5 million reported for the same
  period of 1996.
  
       Salaries and benefits expense increased by $380 thousand or 16.1 percent
  for the three months ended March 31, 1997 compared to the same period of 1996.
  The increase in salary and benefit expenses is primarily a result of the
  staffing expense for Central Mortgage being present for the full quarter in 1997
  compared to one month in 1996, the opening of five de novo branch offices, which
  opened between the second half of 1996 and April of 1997 and overall merit
  increases of 3.5 percent which were applied to base salaries as of January 1,
  1997.
  
                                        -10-
  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 March 31, 1997 totalled $573 thousand or .13
  percent of total loans outstanding, compared to $973 thousand or .23 percent of
  loans at December 31, 1996 and $1.0 million or .26 percent of loans at March 31,
  1996. Non-performing assets at March 31, 1997 were $753 thousand or .18 percent
  of loans plus other real estate owned compared to $1.7 million or .39 percent of
  loans plus other real estate owned at December 31, 1996 and $2.0 million or .50
  percent of loans plus other real estate owned at March 31, 1996. The improvement
  in non-performing assets at March 31, 1997 as compared to March 31, 1996 was a
  result of decreased levels of non-accrual loans and decreased levels of other
  real estate owned.
  
       The following is a presentation of non-performing assets as of March 31,
  1997, December 31, 1996, and March 31, 1996:
  March 31         Dec. 31         March 31
  (Dollars in thousands)                                     1997             1996            1996
  Non-performing loans                                     $    573         $    973        $  1,008
  Other real estate owned, net                                  180              695             947
                                                           --------         --------        --------
  Total non-performing assets                              $    753         $  1,668        $  1,955
                                                           ========         ========        ========
  
  Loans past due 90 days or more as to
    principal or interest                                       578              624             524
  
  Allowance for loan losses to
    non-performing loans                                    13.79x           12.58x           7.71x
  Non-performing loans as a
    percent of loans outstanding                              .13%             .23%            .26%
  Non-performing assets as a
    percent of loans outstanding
    plus other real estate owned                              .18%             .39%            .50%
  Interest income of approximately $11 thousand would have been recognized
  during the three months ended March 31, 1997, 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 $1 thousand was recognized
  during the three months ended March 31, 1997.
  
       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 March 31, 1997 totalled $110 million or 26.1
  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 March 31,
  1997 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 months ended March 31, 1997.
  
  Financial Position
       Total assets at March 31, 1997 were $621 million compared to $616 million
  at December 31, 1996. Total loans outstanding at March 31, 1997 were $428
  million compared to $423 million at December 31, 1996. Total deposits at March
  31, 1997 were $529 million compared to $527 million at December 31, 1996.
  
                                        -11-
  Capital Adequacy
       The Company's stockholders' equity was $63.1 million at March 31, 1997 and
  $62.2 million at December 31, 1996. Total stockholders' equity increased by 1.4
  percent from December 31, 1996 which was the net effect of the recognition of
  $2.3 million in net income for the three month period, cash dividend payments to
  stockholders of $993 thousand, an unfavorable change in net unrealized gains or
  losses on investment securities available for sale of $153 thousand, and due to
  the acquisition of treasury stock at a cost of $334 thousand. Net unrealized
  gains on investment securities available for sale of $355 thousand and $508
  thousand were included as a component of stockholders' equity at March 31, 1997
  and December 31, 1996, respectively.
  
       The Company announced its intentions to repurchase up to 5 percent or
  203,584 shares of its outstanding common stock in June, 1996. These repurchased
  shares will be available for reissuance through the Company's Dividend
  Reinvestment or Stock Option Plans or for other general corporate purposes. A
  total of 12,400 shares of common stock were re-acquired by the Company during
  the first quarter of 1997 with a cumulative total of 106,100 acquired as of
  March 31, 1997.
  
       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 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 March 31, 1997 the
  Company's Tier 1 and Total Capital ratios were 13.18 percent and 14.49 percent,
  respectively. Tier 1 and Total Capital ratios were 13.12 percent and 14.43
  percent respectively, at December 31, 1996. 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. The Company's Leverage
  ratio was 10.28 percent at March 31, 1997 and December 31, 1996, respectively.
  
  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.
  
                                        -12-
  The Company has entered into interest rate swap contracts as part of its
  asset-liability management activities. These contracts are used primarily for
  the purpose of managing interest rate risk in order to minimize mismatches in
  the Bank's interest rate sensitivity and interest rate risk positions.
  
       Interest rate swap 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 swap 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 on the accrual basis as a component of interest
  income or interest expense over the life of the contract. Gains or losses from
  early termination of interest rate 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 of 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's use of these interest rate swap contracts is closely
  monitored by the Company's Board of Directors and is closely controlled as to
  levels of exposure. At March 31, 1997 the Company had seven interest rate
  agreements outstanding having a total notional amount of $70 million. These
  agreements consisted of interest rate swap agreements each with a notional
  amount of $10 million.
  
           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 following is the amount of financial instruments with off-balance sheet
  risk not reflected in the consolidated balance sheets at March 31, 1997 and
  December 31, 1996:
  
                                                     Contractual Amounts
                                                  March 31        December 31
  (Dollars in thousands)                            1997             1996
  Financial instruments whose
  contractual amounts represent
   credit risk:
       Commitments to extend credit                $94,339          $93,811
       Standby letters of credit                     7,118            7,335
  Contractual amounts of off-balance
  sheet financial instruments not
  constituting credit risk:
       Interest rate swap, notional
       value                                        70,000           70,000
  
  Supervision and Regulation
  
       During the latter part of 1996, Congress agreed on a legislative package to
  stabilize the Savings and Loan (S&L) industry's deposit insurance fund (SAIF).
  The legislation required the S&L industry to recapitalize its insurance fund
  with a one-time assessment. Previous proposals required the bank insurance fund
  (BIF) to contribute a substantial amount to help recapitalize SAIF. Under the
  current legislation, banks are required to pay an annual rate of 1.29 cents for
  every $100 of domestic deposits from 1997 through 1999 and pay 2.43 cents per
  $100 of domestic deposits for the years of 2000 through 2017. The amount of FDIC
  insurance to be paid under this new legislation will not materially impact the
  financial position, equity or the results of operations for the Company in
  future periods.
  
     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.
  
                                        -13-
  New Accounting Standards
  
       In February 1997, the Financial Accounting Standards Board issued Statement
  of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share". SFAS
  128, which supersedes APB Opinion No. 15 (APB 15), "Earnings Per Share",
  specifies the computation, presentation, and disclosure requirements for
  earnings per share (EPS) for entities with publicly held common stock. It
  replaces the presentation of primary EPS with a presentation of basic EPS and
  fully diluted EPS with diluted EPS, Basic EPS, unlike primary EPS, excludes
  dilution and is computed by dividing income available to common stockholders by
  the weighted average number of common shares outstanding for the period. Diluted
  EPS is computed similarly to fully diluted EPS under APB 15. The Company will
  adopt SFAS 128 as of December 31, 1997. Management does not expect SFAS 128 to
  have a material effect on the EPS of the Company.
  
                                        -14-
  AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
                               (Dollars in thousands)
  Three Months Ended March 31, 1997    Three Months Ended March 31, 1996
                                                   Average                    Average   Average                  Average
                                                   Balance     Interest        Rate     Balance     Interest       Rate
  Assets
      Loans                                       $428,693     $  9,532        9.02%    $390,350    $  8,833       9.10%
      Money market investments                       4,440           59        5.39        2,729          37       5.42
      Investment securities:
          Taxable                                  130,111        2,001        6.24      132,655       1,938       5.87
          Non-taxable                               15,372          266        7.01       11,863         193       6.54
                                                  --------     --------        ----     --------    --------       ---- 
               Total investment securities         145,483        2,267        6.32      144,518       2,131       5.93
               Total earning assets                578,616     $ 11,858        8.31%     537,597    $ 11,001       8.23%
                                                               ========        ====                 ========       ==== 
  
      Other assets                                  29,544                               27,023
                                                  --------                             --------
               Total assets                       $608,161                             $564,620
                                                  ========                             ========
  
  Liabilities and stockholders' equity
      Interest bearing deposits:
          Now accounts                            $ 54,065     $    170        1.27%    $ 55,062    $    191       1.39%
          Savings and money market                 127,198          983        3.13      127,790         986       3.10
          Time                                     273,633        3,753        5.56      233,735       3,326       5.72
                                                  --------     --------        ----     --------    --------       ---- 
               Total interest bearing deposits     454,896        4,906        4.37      416,587       4,503       4.35
  
      Short-term borrowings                         12,068          122        4.08       11,505         121       4.22
      Other Borrowings                               6,338           97        6.21       11,111         162       5.86
                                                  --------     --------        ----     --------    --------       ---- 
          Total interest bearing liabilities       473,302     $  5,125        4.39%     439,203    $  4,786       4.38%
                                                               ========        ====                 ========       ==== 
  
      Non-interest bearing deposits                 63,832                                58,060
      Other liabilities                              8,434                                 8,138
      Stockholders' equity                          62,593                                59,219
                                                  --------                              --------
          Total liabilities and
          stockholders' equity                    $608,161                              $564,620
                                                  ========                              ========
  
      Net interest income                                      $  6,733                             $  6,215
      Total yield on earning assets                                            8.31%                               8.23%
      Rate on supporting liabilities                                           3.59%                               3.58%
                                                                               ----                                ---- 
      Net interest margin                                                      4.72%                               4.65%
                                                                               ====                                ====
  Interest and average interest rates are presented on a fully taxable equivalent
  basis, using an effective tax rate of 35%. For purposes of calculating loan
  yields, average loan balances include non-accrual loans. Loan fees are included
  in interest income.
  
                                        -15-
  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.
  
                                        -16-
  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  May 12, 1997              By /s/ Kurt A. Phillips
                                     Kurt A. Phillips
                                     Chief Financial and Accounting Officer
  
                                        -17-