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    June 30, 1995
  
  
  Commission File Number:  0-13775
  
  
  
                           KEYSTONE HERITAGE GROUP, INC.
                                    (Registrant)
  
  
       PENNSYLVANIA                                               23-2219740
  (State of incorporation)                                     (I.R.S. Employer
                                                               Identification No.)
  
                   555 WILLOW STREET, LEBANON, PENNSYLVANIA 17046
                (Address of principal executive offices) (Zip Code)
  
  
                                    717-274-6800
                (Registrant's telephone number, including area code)
  
  
       Indicate  by check mark  whether the  registrant  (1) has filed all reports
  required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
  1934  during  the  preceding  12 months  (or for such  shorter  period  that the
  registrant was required to file such reports),  and (2) has been subject to such
  filing requirements for the past 90 days.
  Yes X    No
     ---     --- 
  
       Indicate the number of shares  outstanding of each of the issuer's  classes
  of common stock, as of the latest practicable date.
  
  
  
                Class                              Outstanding at August 4, 1995
  Common Stock ($5.00 par value)                           3,050,224 shares
  
  
  
  
  <PAGE>
  
                           KEYSTONE HERITAGE GROUP, INC.
  
  
  
                                       Index
  
  
  
  
  PART I - FINANCIAL INFORMATION                                             Page
  
  
  Item 1 - Financial Statements
  
           Consolidated Balance Sheets as of
           June 30, 1995 and December 31, 1994 (Unaudited) ....................3
  
           Consolidated Statements of Income for the
           Three and Six Months ended June 30, 1995 and
           1994 (Unaudited) ...................................................4
  
           Consolidated Statements of Stockholders' Equity
           for the Six Months ended June 30, 1995 and
           1994 (Unaudited) ...................................................5
  
  
           Consolidated Statements of Cash Flows for the
           Six Months ended June 30, 1995 and 1994 (Unaudited) ................6
  
           Notes to Consolidated Financial Statements .........................7
  
  
  Item 2 - Management's Discussion and Analysis of
            Financial Condition and Results of Operations .....................8
  
  
  
  
  
  
  PART II - OTHER INFORMATION
  
  
  Item 4 - Submission of Matters To A Vote of Security Holders ...............16
  
  Signature Page .............................................................18
  
  
  
  
  
  
  
                                        -2-
  
  
  <PAGE>
  
                           KEYSTONE HERITAGE GROUP, INC.
  
                            CONSOLIDATED BALANCE SHEETS
  
                               (Dollars In Thousands)
  
  <TABLE>
  <CAPTION>
                                                                             June  30              December 31
                                                                               1995                    1994
  <S>                                                                    <C>                     <C>
  ASSETS
        Cash and due from banks                                             $  18,254              $  23,568
        Interest bearing deposits with banks                                      150                    150
        Federal funds sold                                                          0                  1,300
        Investment securities available for sale                               54,850                 55,664
        Investment securities held to maturity
             (fair value of $99,021 and $70,037
             for 1995 and 1994, respectively)                                  98,739                 72,704
        Loans, net of unearned income of
        $3,734 for 1995 and $5,088 for 1994                                   379,703                383,154
        Allowance for possible loan losses                                     (8,062)                (8,140)
                                                                            ----------             ----------
  
             Loans, net                                                       371,641                375,014
  
        Premises and equipment, net                                             7,951                  8,082
        Accrued interest receivable                                             3,176                  3,185
        Other real estate owned                                                 1,448                  1,969
        Deferred tax asset, net                                                 3,451                  4,031
        Other assets                                                            3,054                  2,527
                                                                            ----------             ---------
  
             Total assets                                                   $ 562,714              $ 548,194
                                                                            ==========             =========
  
  LIABILITIES
        Non-interest bearing deposits                                       $  62,366              $  64,063
        Interest bearing deposits                                             416,445                404,677
                                                                            ----------             ---------
  
             Total deposits                                                   478,811                468,740
  
        Short-term borrowings                                                  10,318                 12,087
        Other borrowings                                                       11,664                  9,926
        Accrued interest payable                                                3,949                  3,068
        Other liabilities                                                       2,173                  2,271
                                                                            ----------             ---------
  
             Total liabilities                                                506,915                496,092
  
  STOCKHOLDERS' EQUITY
  
        Common stock - $5 par value; 
             Authorized 10,000,000 shares;  
             Outstanding 3,050,224 shares at 
             June 30, 1995 and 3,046,213 shares
             at December 31, 1994                                              15,251                 15,231
        Capital surplus                                                        30,136                 30,053
        Retained earnings                                                      10,490                  8,269
        Net unrealized loss on investment securities
             available for sale, net of taxes                                     (78)                (1,451)
                                                                            ----------             ----------
  
             Total stockholders' equity                                        55,799                 52,102
  
             Total liabilities and stockholders'
               equity                                                       $ 562,714             $  548,194
                                                                            ==========            ==========
  </TABLE>
  
  See accompanying notes to financial statements.
  
  
  
  
  
  
  
                                        -3-
  
  
  <PAGE>
  
                           KEYSTONE HERITAGE GROUP, INC.
                         CONSOLIDATED STATEMENTS OF INCOME
  
                   (Dollars in thousands, except per share data)
  <TABLE>
  <CAPTION>
                                                                        Three Months Ended                Six Months Ended
                                                                               June  30                       June 30
                                                                         1995            1994            1995           1994
                                                                       -------         -------         -------        ------
  <S>                                                                <C>            <C>             <C>            <C>
  INTEREST INCOME
                Interest and fees on loans                             $ 8,743         $ 7,481         $17,224        $14,516
                Interest on investment securities
                    available for sale:
                    Taxable investment securities                          650             773           1,312          1,614
                    Equity investments                                      47              40              90             78
                Interest on investment securities held to maturity:
                    Taxable investment securities                        1,180             695           2,036          1,329
                    Non-taxable investment securities                                      113             145            229 
                                                                       --------        --------        --------       -------
                      Total interest on investment
                      securities                                         1,990           1,653           3,667          3,321
                Interest on money market investments                       113              12             247             30
                                                                       --------        --------       --------        -------
                    Total interest income                               10,846           9,146          21,138         17,867
  
  INTEREST EXPENSE
                Interest on deposits                                     4,496           3,124           8,452          6,266
                Interest on short-term borrowings                          112             135             243            255
                Interest on other borrowings                               222             146             404            302
                                                                       --------        --------        --------       -------
                    Total interest expense                               4,830           3,405           9,099          6,823
  
                    Net interest income                                  6,016           5,741          12,039         11,044
  
                Provision for possible loan losses                           0             100               0            300
                                                                       --------        --------       --------        -------
                    Net interest income after provision
                    for possible loan losses                             6,016           5,641          12,039         10,744
  
  OTHER OPERATING INCOME
                Trust income                                               322             329             637            660
                Service charges on deposits                                328             310             639            613
                Net realized (loss) gain on investment
                    securities available for sale                           65             (65)             58            (51)
                Net gain on sale of loans                                   38              68              78            180
                Other income                                               527             492           1,008            966
                                                                       --------        --------        --------       -------
                    Total other operating income                         1,280           1,134           2,420          2,368
  
  OTHER OPERATING EXPENSE
                Salaries and employee benefits                           2,308           2,224           4,745          4,436
                Occupancy expense, net                                     326             309             643            613
                Equipment expense                                          495             474             961            897
                Deposit insurance expense                                  259             256             518            512
                Other expense                                            1,197           1,162           2,338          2,158
                                                                       --------        --------        --------       -------
                    Total other operating expense                        4,585           4,425           9,205          8,616
  
                    Income before income taxes                           2,711           2,350           5,254          4,496
                Income taxes                                               847             795           1,633          1,466
                                                                       --------        --------        --------       -------
  
                    Net income                                         $ 1,864         $ 1,555         $ 3,621        $ 3,030
                                                                       ========        ========        ========       =======
  
  PER COMMON SHARE
                    Net income                                         $   .61         $   .51         $  1.19        $  1.00
                                                                       ========        ========        ========       =======
  
                    Cash dividends paid                                $   .24         $   .21         $   .46        $   .42
  </TABLE>
  
  
  
  
  
  
  
                                        -4-
  
  
  <PAGE>
  
                           KEYSTONE HERITAGE GROUP, INC.
                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                              Six Months Ended June 30
  
                               (Dollars in thousands)
  
  <TABLE>
  <CAPTION>
                                                                                                           Net
                                                                                                        Unrealized
                                                                                                      Gain (Loss) on
                                                                                                        Investment
                                                                                                        Securities
                                                                                                       Available for
                                                                Common       Capital      Retained      Sale, Net
                                                                 Stock       Surplus      Earnings       of Taxes          Total
  <S>                                                          <C>         <C>          <C>           <C>            <C>
  Balance, December 31, 1993                                    $12,185      $30,053      $ 7,120         $   468         $49,826
       Net Income                                                   -0-          -0-        3,030             -0-           3,030
       Cash dividends ($.42 per share)                              -0-          -0-       (1,267)            -0-          (1,267)
       Change in unrealized gain (loss) on
           investment securities available
           for sale, net of taxes                                   -0-          -0-          -0-          (1,262)         (1,262)
                                                                -------      -------      -------         --------        --------
  
  Balance, June 30, 1994                                        $12,185      $30,053      $ 8,883         ($  794)        $50,327
                                                                =======      =======      =======         ========        =======
  
  
  Balance, December 31, 1994                                    $15,231      $30,053      $ 8,269         ($1,451)        $52,102
       Net income                                                                           3,621                           3,621
       Cash dividends ($.46 per share)                              -0-          -0-       (1,400)            -0-          (1,400)
       Stock issued under dividend
           reinvestment plan                                         20           83          -0-              -0-            103
       Change in unrealized gain (loss) on
           investment securities available for
           sale, net of taxes                                       -0-          -0-          -0-           1,373           1,373
                                                                -------      -------      --------        --------        -------
  
  Balance, June 30, 1995                                        $15,251      $30,136      $10,490         $   (78)        $55,799
                                                                =======      =======      ========        ========        =======
  </TABLE>
  
  
  
  
  
  
  
  
  
  
  
                                        -5-
  
  
  <PAGE>
  
  
  
                           KEYSTONE HERITAGE GROUP, INC.
                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (Dollars in thousands)
  
  <TABLE>
  <CAPTION>
                                                                Six Months Ended
                                                                    June 30
                                                              1995           1994
                                                            -------        ------
  <S>                                                   <C>            <C>
  CASH FLOW FROM OPERATING ACTIVITIES:
      Net income                                           $   3,621    $   3,030
      Adjustments to reconcile net income to cash:
          Capitalized interest on deposits                     3,184        3,168
          Provision for possible loan losses                       0          300
          Depreciation and amortization                          697          666
          Deferred income taxes                                  (37)         214
          Decrease (increase) in
           accrued interest receivable                             9         (168)
          Increase (decrease) in
           accrued interest payable                              881         (501)
          Net gain on sale of loans                              (78)        (180)
          Net realized (gain) loss on investment
           securities available for sale                         (58)          51
              Other, net                                        (554)      (1,202)
                                                           ---------    ---------
              Net cash provided by operating activities        7,665        5,378
  
  CASH FLOWS FROM INVESTING ACTIVITIES:
      Net decrease in money market investments                 1,300          574
      Maturities of investment securities
           held to maturity                                   32,127       16,721
      Maturities of investment securities
           available for sale                                  3,230       31,055
      Sale of investment securities available for sale           401       15,915
      Funds invested in investment securities
           held to maturity                                  (58,437)     (23,123)
      Funds invested in investment securities
           available for sale                                   (616)     (29,087)
      Net decrease (increase) in loans
           made to customers                                   6,186       (9,750)
      Originations of residential mortgage loans sold         (6,298)      (7,930)
      Proceeds from sale of residential mortgage loans         3,610        8,406
      Net expenditures for premises and equipment               (566)        (465)
      Proceeds from sale of other real estate owned              524        1,529
                                                           ---------    ---------
          Net cash (used by) provided from investing         (18,539)       3,845
              activities
  
  CASH FLOWS FROM FINANCING ACTIVITIES:
      Net increase (decrease) in deposits                      6,887      (12,220)
      Net (decrease) increase in short-term borrowings        (1,769)       2,401
      Net (decrease) increase in other borrowings              1,739         (192)
      Proceeds from issuance of common stock                     103            0
      Cash dividends paid                                     (1,400)      (1,267)
                                                           ---------    ---------
          Net cash provided from (used by)
              financing activities                             5,560      (11,278)
  
      Net increase (decrease) in cash and due from banks      (5,314)      (2,055)
  
      Cash and due from banks at beginning of period          23,568       19,176
      Cash and due from banks at end of period             $  18,254    $  17,121
  
  SUPPLEMENTAL DISCLOSURES:
      Interest paid                                        $   5,034    $   4,169
      Income taxes paid                                        1,900        1,839
  
  NON-CASH INVESTING AND FINANCING ACTIVITIES:
      Loans charged-off                                          314          604
  </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 June 30, 1995 and December
       31, 1994, the consolidated statements of income for the three and six month
       periods  ended June 30, 1995 and 1994 and the  consolidated  statements  of
       cash flows for the six months ended June 30, 1995. The accounting  policies
       followed in the presentation of interim  financial  results are the same as
       those  followed on an annual basis,  with the  exception of the  accounting
       policies  related to impaired  loans which have been  included in the March
       31, 1995 10-Q report filed with the Securities and Exchange  Commission and
       the  accounting  policies  related to mortgage  servicing  rights which are
       discussed  further  in Note 2. The  consolidated  financial  statements  of
       Keystone Heritage Group, Inc. and subsidiaries  include the accounts of the
       Company and its wholly owned subsidiaries, Lebanon Valley National Bank and
       Keystone  Heritage Life Insurance  Company.  All  significant  intercompany
       balances  and  transactions   have  been  eliminated  in  the  consolidated
       financial  statements.  For purposes of  comparability,  certain prior year
       amounts have been reclassified.
  
  2.   In May  1995,  the  Financial  Accounting  Standards  Board  (FASB)  issued
       Statement  of  Financial  Accounting  Standards  No. 122,  "Accounting  for
       Mortgage  Servicing  Rights,  an amendment of FASB  Statement No. 65" (SFAS
       122).  SFAS 122 amends  Statement 65 to require an institution to recognize
       as separate  assets the rights to service  mortgage loans for others when a
       mortgage loan is sold or securitized and servicing  rights  retained.  SFAS
       122 also requires an entity to measure the  impairment of servicing  rights
       based on the difference between the carrying amount of the servicing rights
       and their current fair value.  SFAS 122 is to be applied  prospectively  in
       fiscal years beginning after December 15, 1995.
  
       Presently,  the Company  does not sell or  securitize  mortgage  loans with
       servicing rights retained. Accordingly, the Company will not be impacted by
       the provisions of SFAS 122.
  
  3.   Earnings  per common share are based upon the  weighted  average  number of
       shares  outstanding.  The weighted average number of shares outstanding was
       3,048,505 and 3,046,213 for the three month periods ended June 30, 1995 and
       1994,  respectively,  and  3,047,365 and 3,046,213 for the six months ended
       June 30, 1995 and 1994,  respectively.  All prior period per share data has
       been restated to give effect for the 5-for-4 stock split that was effective
       for November 10, 1994.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
                                        -7-
  
  
  <PAGE>
  
                        MANAGEMENT'S DISCUSSION AND ANALYSIS
                  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
       Keystone  Heritage  Group,  Inc. (the  "Company") is a bank holding company
  organized under the laws of Pennsylvania  and registered  under the Federal Bank
  Holding  Company Act of 1956.  The  Company's  principal  subsidiary  is Lebanon
  Valley National Bank (the "Bank").
  
  Results of Operations
  
       Net income for the  Company  for the three  months  ended June 30, 1995 was
  $1.864  million or $.61 per share,  compared to $1.555 million or $.51 per share
  for the three months ended June 30, 1994. Return on average stockholders' equity
  and return on average  assets for the 1995  period  were 13.73  percent and 1.35
  percent, respectively.
  
        Net income for the six months  ended June 30,  1995 was $3.621  million or
  $1.19 per share, compared to net income of $3.030 million or $1.00 per share for
  1994.  Return on average  stockholders'  equity and return on average assets for
  the 1995 period were 13.63 percent and 1.33 percent, respectively.
  
  Net Interest Income
  
       Net interest  income is the primary  source of income for the Company.  Net
  interest  income  is  the  difference  between  interest  earned  on  loans  and
  investments  and interest paid on deposits and other funding  sources.  Deposits
  are the primary source of funds for the Company. The factors which influence net
  interest  income  include  changes in  interest  rates and  changes in asset and
  liability balances.
  
       For  purposes of this  discussion,  interest  income and the average  yield
  earned on loans and  investments  are presented on a taxable  equivalent  basis.
  This provides a basis for  comparison of tax exempt loans and  investments  with
  taxable loans and  investments by giving effect to interest earned on tax exempt
  loans and  investments  by an amount  equivalent  to federal  income taxes which
  would have been paid on the assumption  that the interest earned on those assets
  was taxable at the Company's statutory tax rate of 34 percent.
  
       The  tables  presented  on pages 14 and 15 are  comparative  statements  of
  average balances of interest  earning assets and interest  bearing  liabilities,
  interest  income and interest  expense,  and interest rates for the three months
  ended June 30,  1995 and 1994,  and for the six months  ended June 30,  1995 and
  1994.
  
       Net  interest  income for the three  months  ended  June 30,  1995 was $6.2
  million,  a $281 thousand or 4.8 percent  increase from the same period of 1994.
  The net interest margin for the second quarter of 1995 was 4.67 percent compared
  to 4.72  percent for the same  period of 1994.  Average  earning  assets for the
  three month period ended June 30, 1995 were $527.9 million, a $28.9 million or a
  5.8 percent increase from the same period of 1994.
  
       For the three month comparative  periods,  net interest income increased in
  1995 as a result of the  increase in average  earning  assets and an increase in
  the yield on earning  assets by 88 basis  points  from the same  period of 1994.
  These  increases  partially  offset  by an  increase  in total  interest-bearing
  deposits of $20.3  million which  resulted from the increase in average  deposit
  rates during 1995. Time deposit volumes increased by $48.1 million while average
  transaction  and savings  deposits  decreased by $27.8 million.  The increase in
  average earning assets and the shift in deposit volumes and increasing rates had
  the effect of slightly  reducing  the net  interest  margin for the three months
  ended June 30, 1995 compared to the same period of 1994.
  
       Net  interest  income  for the six  months  ended  June 30,  1995 was $12.3
  million,  a $1.0 million or 8.9 percent  increase  from the same period of 1994.
  The net interest  margin for the six months ended June 30, 1995 was 4.75 percent
  compared to 4.57 percent for the same period of 1994. Average earning assets for
  the six month period ended June 30, 1995 were $522.2 million, a $23.1 million or
  a 4.6 percent increase from the same period of 1994.
  
       For the six month comparative  periods,  net interest income also increased
  in 1995 as a result of increases in average  earning asset  volumes,  a shift in
  the deposit mix and increases in average  rates.  Several  prime rate  increases
  which  occurred  during 1994  contributed  to the $1.1  million  increase in net
  interest  income and an increase in the net  interest  margin of 18 basis points
  for the 1995
  
                                        -8-
  
  
  <PAGE>
  
  period.  Average loans increased by $16.2 million or 4.5% from 1994. As was seen
  in the three month comparative periods, average interest-bearing deposit volumes
  increased by $14.5  million for the six months  ended June 30, 1995  compared to
  the same period of 1994.
  
  Provision and Allowance for Possible Loan Losses
  
       There was no  provision  for  possible  loan  losses  charged to net income
  during the six month period ended June 30, 1995. The provision for possible loan
  losses for the three months  ended June 30, 1994 was $100  thousand and was $300
  thousand for the six months ended June 30, 1994.
  
       Net  charge-offs  of $89 thousand  were recorded for the three months ended
  June 30, 1995 compared to net  recoveries of $78 thousand for the same period of
  1994. For the six month comparative  period the Company recorded net charge-offs
  of $78 thousand and $295 thousand for the 1995 and 1994 periods, respectively.
  
       The  allowance for possible loan losses was $8.1 million or 2.12 percent of
  total loans  outstanding  at June 30, 1995 and December 31, 1994.  The allowance
  for possible loan losses is a reserve for estimated potential loan losses in the
  loan portfolio.  Losses occur primarily from the loan portfolio, but may also be
  derived from  commitments to extend credit and standby  letters of credit.  Loan
  losses and  recoveries of previously  charged-off  loans are charged or credited
  directly to the allowance  for possible loan losses.  The allowance for possible
  loan  losses  is an amount  which,  in  management's  judgement,  is  considered
  adequate to absorb potential  losses inherent in the loan portfolio.  Management
  performs a quarterly  assessment  of the Bank's loan  portfolio to determine the
  appropriate  level of the  allowance  for  possible  loan  losses.  The  factors
  considered  in this  evaluation  include,  but are not  necessarily  limited to,
  estimated  loan losses  identified  through the review of loans by the Company's
  personnel; general economic conditions;  deterioration in loan concentrations or
  pledged  collateral;  historic loss experience;  and trends in portfolio volume,
  composition,  delinquencies,  and non-accruals.  In addition, various regulatory
  agencies, as an integral part of their examination process,  periodically review
  the Bank's allowance for possible loan losses.
  
  
  
  
  
  
  
  
  
                                        -9-
  
  
  <PAGE>
  
        The  following is a summary of the activity in the  allowance for possible
  loan losses for the three and six month periods ended June 30, 1995 and 1994:
  
  <TABLE>
  <CAPTION>
                                               Three Months Ended     Six Months Ended
                                                     June 30              June 30
  <S>                                         <C>        <C>        <C>      <C>
  (Dollars in thousands)                         1995      1994       1995      1994
  Allowance for possible loan losses
   at beginning of period                       $ 8,151   $ 8,313    $ 8,140   $ 8,486
  Loans charged-off:
   Commercial                                        98        83        113       454
   Agriculture                                        0         0          0         0
   Real estate construction                           0         0          0         0
   Loans to individuals                              79        49        201       150
   Real estate - residential mortgage                 0         0          0         0
                                                -------   -------    -------   -------
  Total loans charged-off                           177       132        314       604
  
  Recoveries of loans previously charged-off:
   Commercial                                        57       167        183       250
   Agriculture                                        0         0          0         0
   Real estate construction                          22        39         31        49
   Loans to individuals                               9         4         22        10
   Real estate - residential mortgage                 0         0          0         0
                                                -------   -------    -------   -------
   Total recoveries of loans previously
                            charged-off              88       210        236       309
  
   Net loans charged-off                             89       (78)        78       295
   Current period's provision for
   possible loan losses                               0       100          0       300
                                                -------   -------    -------   -------
  
   Allowance for possible loan
   losses at end of period                      $ 8,062   $ 8,491    $ 8,062   $ 8,491
                                                =======   =======    =======   =======
  </TABLE>
  
  
  Other Operating Income and Expense
  
       Other operating income was $1.3 million for the three months ended June 30,
  1995 and $1.1 million for the three months ended June 30, 1994.  Other operating
  income  for the six  months  ended  June 30,  1995  and  1994 was $2.4  million,
  respectively.
  
       The increases in other operating income for the three and six month periods
  of 1995 as compared to 1994 were primarily  attributable  to the  recognition of
  net  realized  gains  on sales  of  investment  securities  during  1995.  These
  increases  were  somewhat  offset as a result of lower income from mortgage loan
  sales.  The volume of loans that were  originated  and sold during the six month
  period of 1995 was $3.6 million or 57 percent below the 1994 level.
  
       Other  operating  expense for the three months ended June 30, 1995 was $4.6
  million,  a 3.6 percent  increase  over the $4.4  million  reported for the same
  period of 1994. For the six months ended June 30, 1995 and 1994, other operating
  expense was $9.2 million and $8.6 million, respectively, a 6.8 percent increase.
  
       Salaries and benefits expense  increased by $84 thousand or 3.8 percent for
  the three  months ended June 30, 1995  compared to the same period of 1994.  For
  the six months  ended June 30, 1995,  salaries  and  benefits  increased by $309
  thousand or 7.0  percent,  compared to the same period of 1994.  The increase in
  salary and benefit  expenses  primarily  related to the opening of the Company's
  eighteenth and  nineteenth  branch sites during the mid and latter part of 1994.
  Occupancy  and  equipment  expenses  increased  by $38 thousand and $94 thousand
  compared to the three and six month  periods of 1994,  which  resulted  from the
  aforementioned  new branch  openings in 1994.  Other expenses  increased by $180
  thousand  for the six month  period  ended June 30,  1995  compared  to the same
  period for 1994 as a result of increased  expenditures  related to marketing and
  advertising, bank card processing and outside professional services.
  
  
  
  
  
  
  
  
                                        -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 June 30, 1995 totalled $1.8 million or .48 percent
  of total loans outstanding,  compared to $1.3 million or .35 percent of loans at
  December  31, 1994 and $5.3  million or 1.43  percent of loans at June 30, 1994.
  Non-performing assets at June 30, 1995 were $3.3 million or .85 percent of loans
  plus other real estate  owned  compared to $3.3  million or .86 percent of loans
  plus other real  estate  owned at  December  31,  1994 and $7.7  million or 2.07
  percent of loans plus other real estate owned at June 30, 1994. The  improvement
  in  non-performing  assets at June 30,  1995 as  compared to June 30, 1994 was a
  result of decreased  levels of  non-accrual  loans and other real estate  owned.
  During  1994,  disposals  of  non-performing  assets  consisted  of  third-party
  transactions  amounting to $4.5 million,  charge-offs or writedowns amounting to
  $1.6  million and  reclassifications  to  performing  assets  amounting  to $900
  thousand.
  
       The following is a  presentation  of  non-performing  assets as of June 30,
  1995, December 31, 1994, and June 30, 1994:
  
                                         June 30   December 31  June 30
  (Dollars in thousands)                  1995       1994         1994
  
  Non-performing loans                   $1,806      $1,346      $5,309
  
  Other real estate owned, net            1,448       1,969       2,412
                                         ------      ------      ------
  Total non-performing assets            $3,254      $3,315      $7,720
                                         ======      ======      ======
  
  Loans past due 90 days or more as to
    principal or interest                $  384      $  647      $   15
  
  
  Non-performing loans as a
    percent of loans outstanding            .48%        .35%       1.43%
  Non-performing assets as a
    percent of loans outstanding
    plus other real estate owned            .85%        .86%       2.07%
  
       Interest income of  approximately  $43 thousand and $84 thousand would have
  been recognized  during the three and six month periods ended June 30, 1995, had
  these  loans been  current in  accordance  with  their  original  terms and been
  outstanding  through the period or since  origination.  Interest income on these
  loans of $34 thousand and $38 thousand was  recognized  during the three and six
  months ended June 30, 1995.
  
       Group  concentrations  of  credit  are  considered  to exist if a number of
  counterparties  are  engaged in similar  activities  and have  similar  economic
  characteristics  that would cause their ability to meet contractual  obligations
  to  be  similarly   affected  by  changes  in  economic  or  other   conditions.
  Agriculture-related  borrowings  at June 30, 1995  totalled  $87 million or 22.8
  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 June 30, 1995
  there were no significant  agriculture  related borrowings which were classified
  as  non-performing  assets and there were no charge-offs of agriculture  related
  loans during the three or six months ended June 30, 1995.
  
  Financial Position
  
       Total assets at June 30, 1995 were $563 million compared to $548 million at
  December 31, 1994.  Total loans  outstanding  at June 30, 1995 were $380 million
  compared to $383 million at December 31, 1994.  Total  deposits at June 30, 1995
  were $479 million compared to $469 million at December 31, 1994.
  
  
  
  
  
                                        -11-
  
  
  <PAGE>
  
  Capital Adequacy
  
       The Company's  stockholders'  equity was $55.8 million at June 30, 1995 and
  $52.1 million at December 31, 1994. Total stockholders'  equity increased by 7.1
  percent from  December 31, 1994 which was the net effect of the  recognition  of
  $3.6 million in net income for the six month period,  cash dividend  payments to
  stockholders of $1.4 million and a favorable  change in net unrealized  gains or
  losses  on  investment  securities  available  for  sale  of $1.4  million.  Net
  unrealized  losses on investment  securities  available for sale of $78 thousand
  and $1.4 million were  included as a component of  stockholders'  equity at June
  30, 1995 and December 31, 1994, respectively.
  
       The  maintenance  of an  appropriate  level of capital is a priority of the
  Company's  management.  The Company's  capital  adequacy and dividend policy are
  closely  monitored  by  management  and are  reviewed  regularly by the Board of
  Directors of the Company.  The Company  intends to provide an adequate return to
  its stockholders while retaining a sufficient capital base to provide for future
  growth and to comply with regulatory standards.
  
       Banking  regulators'  risk-based  capital  guidelines  address  the capital
  adequacy of banking  organizations.  These  guidelines  include a definition  of
  capital and a framework for calculating risk-weighted assets by assigning assets
  and off-balance sheet items to broad risk categories,  as well as minimum ratios
  to be maintained by banking  organizations.  The  risk-based  capital ratios are
  calculated by dividing qualifying capital by risk-weighted assets.
  
       Under the risk-based  capital  guidelines,  Total Capital is defined as the
  sum of core or "Tier 1" Capital and "Tier 2" Capital. As the guidelines apply to
  Keystone Heritage Group, Inc., Tier 1 Capital is total stockholders'  equity and
  Tier 2 Capital includes a portion of the allowance for possible loan losses. The
  rules  require that banking  organizations  must have ratios of 4.00 percent and
  8.00 percent for Tier 1 and Total  Capital,  respectively.  At June 30, 1995 the
  Company's  Tier 1 and Total Capital ratios were 13.40 percent and 14.75 percent,
  respectively.  Tier 1 and Total  Capital  ratios  were 12.77  percent  and 14.12
  percent  respectively,  at December  31,  1994.  In  addition to the  risk-based
  capital ratio, a bank is also required to maintain a "Leverage  ratio" of Tier 1
  capital to average  total assets of 3 percent or higher.  At June 30, 1995,  the
  Company's  Leverage  ratio was 9.99 percent and was 9.89 percent at December 31,
  1994.
  
  Off-Balance Sheet Items
  
       The  Company's  loan   portfolio   consists  of  loans  to  businesses  and
  individuals  primarily  in its  five-county  market area of Lebanon,  Lancaster,
  Berks, Dauphin, and Schuylkill counties.
  
       In the ordinary course of business, the Company enters into agreements with
  customers,  such as commitments  to extend credit and standby  letters of credit
  which involve, to varying degrees,  elements of credit and interest rate risk in
  excess of the amounts presented in the balance sheet. The Company's  exposure to
  possible loss in the event of nonperformance by the other party to the financial
  instruments for commitments to extend credit and financial guarantees written is
  represented by the contractual amount of those instruments.  The Company may not
  be obligated to advance funds if the customer's financial condition deteriorates
  or if the customer fails to meet certain terms.
  
       Commitments and  conditional  obligations  generally have fixed  expiration
  dates or termination clauses and may require payment of a fee. Since many of the
  commitments  are expected to expire  without  being used,  the total  commitment
  amounts do not  necessarily  represent  future  cash  requirements.  The Company
  evaluates each customer's creditworthiness on a case-by-case basis, applying the
  same  credit   standards  used  in  the  lending   process,   through   periodic
  reassessments  of the  customer's  creditworthiness  and through  ongoing credit
  reviews. The amount of collateral  obtained,  if deemed necessary by the Company
  upon  extension of credit,  is based on  management's  credit  evaluation of the
  counterparty.  Collateral  held  varies  but may  include  accounts  receivable,
  inventory,  property,  plant  and  equipment,  and  income-producing  commercial
  properties.
  
       The Bank has entered into interest rate swap  contracts,  and interest rate
  cap and interest rate collar contracts as part of its asset-liability management
  activities.  These  contracts are effected  primarily to hedge  against  certain
  assets or  liabilities  in order to minimize  mismatches in the Bank's  interest
  rate sensitivity and interest rate risk positions.
  
       Interest  rate  contracts  generally  involve  the  exchange  of fixed  and
  floating-rate   interest  payment   obligations  without  the  exchange  of  the
  underlying principal amounts. Entering into interest rate contracts involves not
  only the risk of dealing with counterparties and their ability to meet the terms
  of the  contracts  but also the interest  rate risk  associated  with  unmatched
  positions.  Notional  principal  amounts often are used to express the volume of
  these transactions,  but the amounts potentially subject to credit risk are much
  smaller.
                                        -12-
  
  
  <PAGE>
  
       The interest  income or interest  expense  differential  from interest rate
  swap  contracts is  recognized as interest  income or interest  expense over the
  life of the contract. The interest income or interest expense resulting from the
  cap and collar  contracts would be recognized when the national prime rate moves
  below or above a predetermined  interest rate level.  Gains or losses from early
  termination of swap contracts are deferred and amortized over the remaining term
  of the underlying assets or liabilities.
  
       The Company entered into an interest rate  cap/collar  contract on November
  5, 1993 with a notional  amount of $10  million.  The  contract  states that the
  Company would receive a spread  between the national prime rate and 6.00 percent
  should the prime rate fall below 6.00 percent. The Company would pay an interest
  rate spread  between the national  prime and 7.00 percent  should the prime rate
  exceed 7.00 percent. The contract expires on February 5, 1996.
  
       During the third quarter of 1994, the Company entered into an interest rate
  swap with a notional  amount of $10 million and a  termination  date of July 25,
  1995.  Under the  terms of this  agreement,  the  Company  will  receive a fixed
  interest  rate of 8.00  percent  and pay a  floating  prime  rate  based  on the
  national prime rate. 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.
  
       Both the interest rate swap and the interest rate cap/collar  contract were
  entered into to hedge the Company's  interest rate risk in a declining or stable
  interest rate  environment.  Specifically,  these  contracts hedge the Company's
  risk from negative movements in its prime rate based asset portfolio which would
  not be perfectly matched by repricing liabilities.
  
       The following is the amount of financial instruments with off-balance sheet
  risk not  reflected  in the  consolidated  balance  sheets at June 30,  1995 and
  December 31, 1994:
  
                                Contractual Amounts
  
                                           June 30   December 31
  (Dollars in thousands)                     1995       1994
  Financial instruments whose
    contractual amounts represent 
    credit risk:                            $89,722   $84,398
  Commitments to extend credit                9,010     7,983
  Standby letters of credit
  Contractual amounts of off-balance
   sheet financial instruments 
   not constituting credit risk:
     Interest rate swap, contractual
       value                                 10,000    10,000
     Interest rate cap/collar,
       contractual value                     10,000    10,000
  
  Supervision and Regulation
  
       The Bank is a national bank,  chartered under the National Bank Act, and is
  subject to the primary  supervision  of, and is examined by, the  Comptroller of
  the Currency.  As a member of the Federal Reserve System, the Bank is subject to
  provisions of the Federal  Reserve Act, which restricts the ability of a bank to
  extend  credit to its parent  holding  company  or to  certain  of the  parent's
  subsidiaries,  or to invest in the Company's  common stock or to take such stock
  as  collateral  for loans to any borrower.  The  operations of the Bank are also
  subject to regulation by the FDIC.
  
       The Company is affected by the monetary and credit  policies of the Federal
  Reserve System. The Federal Reserve System regulates the national supply of bank
  credit through open market operations in U. S. Government securities, changes in
  the  discount  rate  charged  for  bank   borrowing,   and  changes  in  reserve
  requirements on bank deposits.
  
  New Accounting Standards
  
           In May 1995,  the Financial  Accounting  Standards  Board (FASB) issued
  Statement of Financial  Accounting  Standards No. 122,  "Accounting for Mortgage
  Servicing  Rights,  an amendment of FASB Statement No. 65" (SFAS 122).  SFAS 122
  amends  Statement 65 to require an institution  to recognize as separate  assets
  the rights to service  mortgage loans for others when a mortgage loan is sold or
  securitized and servicing rights  retained.  SFAS 122 also requires an entity to
  measure the impairment of servicing  rights based on the difference  between the
  carrying amount of the servicing  rights and their current fair value.  SFAS 122
  is to be applied  prospectively  in fiscal years  beginning  after  December 15,
  1995.
  
           Presently,  the Company does not sell or securitize mortgage loans with
  servicing rights retained.  Accordingly, the Company will not be impacted by the
  provisions of SFAS 122.
                                        -13-
  
  
  <PAGE>
  
           AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
                               (Dollars in thousands)
  <TABLE>
  <CAPTION>
                                                            Three Months Ended June 30, 1995       Three Months Ended June 30, 1994
                                                             Average                   Average      Average                Average
                                                             Balance       Interest      Rate       Balance     Interest    Rate
  <S>                                                    <C>            <C>           <C>        <C>          <C>         <C>
  Assets
      Loans                                                $ 378,365      $   8,809      9.34%     $ 366,096   $   7,534   8.25%
      Money market investments                                 7,436            113      6.10          1,199          12   4.01
      Investment securities:
          Taxable                                            130,830          1,860      5.70        118,767       1,509   5.10
          Non-taxable                                         11,247            198      7.06         12,891         219   6.81
                                                              ------            ---      ----         ------         ---   ----
               Total investment securities                   142,077          2,058      5.81        131,658       1,728   5.26
               Total earning assets                          527,878      $  10,980      8.34%       498,953   $   9,274   7.46%
                                                                          =========      ====                  =========   ==== 
  
      Other assets                                            26,476                                  31,453
                                                              ------                                  ------
               Total assets                                $ 554,354                               $ 530,406
                                                           =========                               =========
  
  Liabilities and stockholders' equity
      Interest bearing deposits:
          Now accounts                                     $  54,638      $     197      1.45%     $  65,458   $     235   1.44%
          Savings and money market                           119,171            917      3.09        136,144         826   2.43
          Time                                               238,735          3,382      5.68        190,618       2,063   4.34
                                                             -------          -----      ----        -------       -----   ----
               Total interest bearing deposits               412,544          4,496      4.37        392,220       3,124   3.19
  
      Short-term borrowings                                   11,207            112      4.01         17,085         135   3.17
      Long-term debt                                          13,364            222      6.67         11,063         146   5.29
                                                              ------            ---      ----         ------         ---   ----
          Total interest bearing liabilities                 437,115      $   4,830      4.43%       420,368   $   3,405   3.25%
                                                                          =========      ====                  =========   ==== 
  
      Non-interest bearing deposits                           56,958                                  55,782
      Other liabilities                                        5,845                                   3,697
      Stockholders' equity                                    54,436                                  50,559
                                                              ------                                  ------
          Total liabilities and
          stockholders' equity                             $ 554,354                               $ 530,406
                                                           =========                               =========
  
      Net interest income                                                 $   6,150                            $   5,869
      Total yield on earning assets                                                      8.34%                             7.46%
      Rate on supporting liabilities                                                     3.67%                             2.74%
                                                                                         ----                              ---- 
      Net interest margin                                                                4.67%                             4.72%
                                                                                         ====                              ==== 
  </TABLE>
  
  Interest and average interest rates are presented on a fully taxable  equivalent
  basis,  using an effective  tax rate of 34%. For  purposes of  calculating  loan
  yields,  average loan balances include non-accrual loans. Loan fees are included
  in interest income.
  
  
  
  
  
  
  
                                        -14-
  
  
  <PAGE>
  
           AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
                               (Dollars in thousands)
  
  <TABLE>
  <CAPTION>
                                                  Six Months Ended June 30, 1995       Six Months Ended June 30, 1994
                                                Average                    Average      Average              Average
                                                Balance       Interest       Rate       Balance    Interest    Rate
  <S>                                         <C>            <C>           <C>        <C>        <C>         <C>
  Assets
    Loans                                      $ 380,081      $  17,356      9.21%     $ 363,847   $  14,618   8.10%
    Money market investments                       8,337            247      5.97          1,740          30   3.48
    Investment securities:
        Taxable                                  122,455          3,406      5.61        120,377       3,021   5.06
        Non-taxable                               11,285            396      7.08         13,129         454   6.97
                                               ---------      ---------      ----      ---------   ---------   ----
             Total investment securities         133,740          3,802      5.73        133,506       3,475   5.25
             Total earning assets                522,158      $  21,405      8.27%       499,093   $  18,123   7.32%
                                                              =========      ====                  =========   ==== 
  
    Other assets                                  26,331                                  31,728
                                                  ------                                  ------
             Total assets                      $ 548,489                               $ 530,821
                                               =========                               =========
  
  Liabilities and stockholders' equity
        Interest bearing deposits:
        Now accounts                           $  55,926      $     399      1.44%     $  66,733   $     480   1.45%
        Savings and money market                 119,066          1,711      2.90        136,637       1,648   2.43
        Time                                     233,954          6,342      5.47        191,123       4,138   4.37
                                               ---------      ---------      ----      ---------   ---------   ----
             Total interest bearing deposits     408,946          8,452      4.17        394,493       6,266   3.20
  
    Short-term borrowings                         12,167            243      4.03         17,192         255   2.99
    Long-term debt                                12,503            404      6.52         11,111         302   5.48
                                               ---------      ---------      ----      ---------   ---------   ----
        Total interest bearing liabilities       433,616      $   9,099      4.23%       422,796   $   6,823   3.25%
                                                              =========      ====                  =========   ==== 
  
    Non-interest bearing deposits                 55,757                                  53,645
    Other liabilities                              5,545                                   3,981
    Stockholders' equity                          53,571                                  50,399
                                                  ------                                  ------
        Total liabilities and
        stockholders' equity                   $ 548,489                               $ 530,821
                                               =========                               =========
  
    Net interest income                                       $  12,306                            $  11,300
    Total yield on earning assets                                            8.27%                             7.32%
    Rate on supporting liabilities                                           3.52%                             2.75%
                                                                             ----                              ---- 
    Net interest margin                                                      4.75%                             4.57%
                                                                             ====                              ==== 
  </TABLE>
  
  Interest and average interest rates are presented on a fully taxable  equivalent
  basis,  using an effective  tax rate of 34%. For  purposes of  calculating  loan
  yields,  average loan balances include non-accrual loans. Loan fees are included
  in interest income.
  
  
  
  
  
  
  
  
                                        -15-
  
  
  <PAGE>
  
  
  
  
  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
  
  1995 Annual Stockholders' Meeting
  
       The 1995 Annual Meeting of Stockholders'  for the Company was held on April
  18, 1995.  Stockholders' of the Company voted on the following issues:  Election
  of Directors Lance M. Frehafer, Charles V. Henry, III, Bruce A. Johnson and John
  E.  Wengert;  a proposal to Approve an  amendment to the  Company's  Articles of
  Incorporation to increase the authorized  shares from 5,000,000 common shares of
  $5.00 par value to 10,000,000  common shares of $5.00 par value;  and a proposal
  to ratify the  selection of KPMG Peat Marwick LLP as the  Company's  independent
  public  accountants for the fiscal year ending December 31, 1995. Eighty percent
  of the 3,046,213  shares  eligible to vote were voted in either proxy form or in
  person at the meeting.
  
       All  matters  subject to a vote at the Annual  Meeting  were  approved as a
  result of the votes cast at the Annual Meeting.  The following is a presentation
  of the voting results from the April 18, 1995 Annual Stockholders' Meeting:
  
  Election of Directors                 For            Withheld         Total
  
  Lance M. Frehafer                  2,275,092         170,734        2,445,826
  
  Charles V. Henry, III              2,278,530         167,296        2,445,826
  
  Bruce A. Johnson                   2,271,904         173,922        2,445,826
  
  John E. Wengert                    2,278,444         167,382        2,445,826
  
       The term of the Directors  elected at the annual  meeting  expires in 1998.
  The following  Directors  remain on the Company's  Board of Directors  until the
  expiration of their terms in 1996 and 1997:
  
  Directors Term Expiring in 1996:
  
  Harry J. Gensemer
  Albert B. Murry
  Thomas I. Siegel
  Brett H. Tennis
  Earnest D. Williams, Jr.
  
  Directors Term Expiring in 1997:
  
  Raymond M. Dorsch, Jr.
  Wendie DiMatteo Holsinger
  Donald W. Lesher, Jr.
  Mark Randolph Tice
  
       The amendment to the Company's  Articles of  Incorporation  to increase the
  authorized  shares from 5,000,000 common shares of $5.00 par value to 10,000,000
  common shares of $5.00 par value was voted as follows:
  
                  FOR              AGAINST            ABSTAIN
  
               2,288,224           149,645             7,957
  
  
  
                                        -16-
  
  
  <PAGE>
  
       The  proposal  to ratify  the  selection  of KPMG Peat  Marwick  LLP as the
  Company's independent public accountants for the fiscal year ending December 31,
  1995 was voted as follows:
  
                  FOR              AGAINST            ABSTAIN
  
               2,375,257            57,843            12,726
  
  
  ITEM 5.  OTHER INFORMATION
  
  None.
  
  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
  
  (a.)  None.
  
  (b.)  The Company did not file any reports on Form 8-K during the quarter ended
  June 30, 1995.
  
  
  
  
  
  
  
  
  
  
                                        -17-
  
  
  <PAGE>
  
                           KEYSTONE HERITAGE GROUP, INC.
  
                                     SIGNATURES
  
  
       Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
  registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
  undersigned thereunto duly authorized.
  
  
  
                                           Keystone Heritage Group, Inc.
                                           (Registrant)
  
  
  Date  August 4, 1995                  By /s/ Kurt A. Phillips
                                           Kurt A. Phillips
                                           Chief Financial and Accounting Officer
  
  
  
  
  
  
  
  
  
  
  
                                        -18-
metadata_documents: [{"type": "10-Q", "sequence": "1", "secsgml_size_bytes": 65130}]
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    June 30, 1995
  
  Commission File Number:  0-13775
  
                           KEYSTONE HERITAGE GROUP, INC.
                                    (Registrant)
  
       PENNSYLVANIA                                               23-2219740
  (State of incorporation)                                     (I.R.S. Employer
                                                               Identification No.)
  
                   555 WILLOW STREET, LEBANON, PENNSYLVANIA 17046
                (Address of principal executive offices) (Zip Code)
  
                                    717-274-6800
                (Registrant's telephone number, including area code)
  
       Indicate  by check mark  whether the  registrant  (1) has filed all reports
  required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
  1934  during  the  preceding  12 months  (or for such  shorter  period  that the
  registrant was required to file such reports),  and (2) has been subject to such
  filing requirements for the past 90 days.
  Yes X    No
     ---     --- 
  
       Indicate the number of shares  outstanding of each of the issuer's  classes
  of common stock, as of the latest practicable date.
  
                Class                              Outstanding at August 4, 1995
  Common Stock ($5.00 par value)                           3,050,224 shares
  KEYSTONE HERITAGE GROUP, INC.
  
                                       Index
  
  PART I - FINANCIAL INFORMATION                                             Page
  
  Item 1 - Financial Statements
  
           Consolidated Balance Sheets as of
           June 30, 1995 and December 31, 1994 (Unaudited) ....................3
  
           Consolidated Statements of Income for the
           Three and Six Months ended June 30, 1995 and
           1994 (Unaudited) ...................................................4
  
           Consolidated Statements of Stockholders' Equity
           for the Six Months ended June 30, 1995 and
           1994 (Unaudited) ...................................................5
  
           Consolidated Statements of Cash Flows for the
           Six Months ended June 30, 1995 and 1994 (Unaudited) ................6
  
           Notes to Consolidated Financial Statements .........................7
  
  Item 2 - Management's Discussion and Analysis of
            Financial Condition and Results of Operations .....................8
  
  PART II - OTHER INFORMATION
  
  Item 4 - Submission of Matters To A Vote of Security Holders ...............16
  
  Signature Page .............................................................18
  
                                        -2-
  KEYSTONE HERITAGE GROUP, INC.
  
                            CONSOLIDATED BALANCE SHEETS
  
                               (Dollars In Thousands)
  June  30              December 31
                                                                               1995                    1994
  ASSETS
        Cash and due from banks                                             $  18,254              $  23,568
        Interest bearing deposits with banks                                      150                    150
        Federal funds sold                                                          0                  1,300
        Investment securities available for sale                               54,850                 55,664
        Investment securities held to maturity
             (fair value of $99,021 and $70,037
             for 1995 and 1994, respectively)                                  98,739                 72,704
        Loans, net of unearned income of
        $3,734 for 1995 and $5,088 for 1994                                   379,703                383,154
        Allowance for possible loan losses                                     (8,062)                (8,140)
                                                                            ----------             ----------
  
             Loans, net                                                       371,641                375,014
  
        Premises and equipment, net                                             7,951                  8,082
        Accrued interest receivable                                             3,176                  3,185
        Other real estate owned                                                 1,448                  1,969
        Deferred tax asset, net                                                 3,451                  4,031
        Other assets                                                            3,054                  2,527
                                                                            ----------             ---------
  
             Total assets                                                   $ 562,714              $ 548,194
                                                                            ==========             =========
  
  LIABILITIES
        Non-interest bearing deposits                                       $  62,366              $  64,063
        Interest bearing deposits                                             416,445                404,677
                                                                            ----------             ---------
  
             Total deposits                                                   478,811                468,740
  
        Short-term borrowings                                                  10,318                 12,087
        Other borrowings                                                       11,664                  9,926
        Accrued interest payable                                                3,949                  3,068
        Other liabilities                                                       2,173                  2,271
                                                                            ----------             ---------
  
             Total liabilities                                                506,915                496,092
  
  STOCKHOLDERS' EQUITY
  
        Common stock - $5 par value; 
             Authorized 10,000,000 shares;  
             Outstanding 3,050,224 shares at 
             June 30, 1995 and 3,046,213 shares
             at December 31, 1994                                              15,251                 15,231
        Capital surplus                                                        30,136                 30,053
        Retained earnings                                                      10,490                  8,269
        Net unrealized loss on investment securities
             available for sale, net of taxes                                     (78)                (1,451)
                                                                            ----------             ----------
  
             Total stockholders' equity                                        55,799                 52,102
  
             Total liabilities and stockholders'
               equity                                                       $ 562,714             $  548,194
                                                                            ==========            ==========
  See accompanying notes to financial statements.
  
                                        -3-
  KEYSTONE HERITAGE GROUP, INC.
                         CONSOLIDATED STATEMENTS OF INCOME
  
                   (Dollars in thousands, except per share data)
  Three Months Ended                Six Months Ended
                                                                               June  30                       June 30
                                                                         1995            1994            1995           1994
                                                                       -------         -------         -------        ------
  INTEREST INCOME
                Interest and fees on loans                             $ 8,743         $ 7,481         $17,224        $14,516
                Interest on investment securities
                    available for sale:
                    Taxable investment securities                          650             773           1,312          1,614
                    Equity investments                                      47              40              90             78
                Interest on investment securities held to maturity:
                    Taxable investment securities                        1,180             695           2,036          1,329
                    Non-taxable investment securities                                      113             145            229 
                                                                       --------        --------        --------       -------
                      Total interest on investment
                      securities                                         1,990           1,653           3,667          3,321
                Interest on money market investments                       113              12             247             30
                                                                       --------        --------       --------        -------
                    Total interest income                               10,846           9,146          21,138         17,867
  
  INTEREST EXPENSE
                Interest on deposits                                     4,496           3,124           8,452          6,266
                Interest on short-term borrowings                          112             135             243            255
                Interest on other borrowings                               222             146             404            302
                                                                       --------        --------        --------       -------
                    Total interest expense                               4,830           3,405           9,099          6,823
  
                    Net interest income                                  6,016           5,741          12,039         11,044
  
                Provision for possible loan losses                           0             100               0            300
                                                                       --------        --------       --------        -------
                    Net interest income after provision
                    for possible loan losses                             6,016           5,641          12,039         10,744
  
  OTHER OPERATING INCOME
                Trust income                                               322             329             637            660
                Service charges on deposits                                328             310             639            613
                Net realized (loss) gain on investment
                    securities available for sale                           65             (65)             58            (51)
                Net gain on sale of loans                                   38              68              78            180
                Other income                                               527             492           1,008            966
                                                                       --------        --------        --------       -------
                    Total other operating income                         1,280           1,134           2,420          2,368
  
  OTHER OPERATING EXPENSE
                Salaries and employee benefits                           2,308           2,224           4,745          4,436
                Occupancy expense, net                                     326             309             643            613
                Equipment expense                                          495             474             961            897
                Deposit insurance expense                                  259             256             518            512
                Other expense                                            1,197           1,162           2,338          2,158
                                                                       --------        --------        --------       -------
                    Total other operating expense                        4,585           4,425           9,205          8,616
  
                    Income before income taxes                           2,711           2,350           5,254          4,496
                Income taxes                                               847             795           1,633          1,466
                                                                       --------        --------        --------       -------
  
                    Net income                                         $ 1,864         $ 1,555         $ 3,621        $ 3,030
                                                                       ========        ========        ========       =======
  
  PER COMMON SHARE
                    Net income                                         $   .61         $   .51         $  1.19        $  1.00
                                                                       ========        ========        ========       =======
  
                    Cash dividends paid                                $   .24         $   .21         $   .46        $   .42
  -4-
  KEYSTONE HERITAGE GROUP, INC.
                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                              Six Months Ended June 30
  
                               (Dollars in thousands)
  Net
                                                                                                        Unrealized
                                                                                                      Gain (Loss) on
                                                                                                        Investment
                                                                                                        Securities
                                                                                                       Available for
                                                                Common       Capital      Retained      Sale, Net
                                                                 Stock       Surplus      Earnings       of Taxes          Total
  Balance, December 31, 1993                                    $12,185      $30,053      $ 7,120         $   468         $49,826
       Net Income                                                   -0-          -0-        3,030             -0-           3,030
       Cash dividends ($.42 per share)                              -0-          -0-       (1,267)            -0-          (1,267)
       Change in unrealized gain (loss) on
           investment securities available
           for sale, net of taxes                                   -0-          -0-          -0-          (1,262)         (1,262)
                                                                -------      -------      -------         --------        --------
  
  Balance, June 30, 1994                                        $12,185      $30,053      $ 8,883         ($  794)        $50,327
                                                                =======      =======      =======         ========        =======
  
  Balance, December 31, 1994                                    $15,231      $30,053      $ 8,269         ($1,451)        $52,102
       Net income                                                                           3,621                           3,621
       Cash dividends ($.46 per share)                              -0-          -0-       (1,400)            -0-          (1,400)
       Stock issued under dividend
           reinvestment plan                                         20           83          -0-              -0-            103
       Change in unrealized gain (loss) on
           investment securities available for
           sale, net of taxes                                       -0-          -0-          -0-           1,373           1,373
                                                                -------      -------      --------        --------        -------
  
  Balance, June 30, 1995                                        $15,251      $30,136      $10,490         $   (78)        $55,799
                                                                =======      =======      ========        ========        =======
  -5-
  KEYSTONE HERITAGE GROUP, INC.
                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (Dollars in thousands)
  Six Months Ended
                                                                    June 30
                                                              1995           1994
                                                            -------        ------
  CASH FLOW FROM OPERATING ACTIVITIES:
      Net income                                           $   3,621    $   3,030
      Adjustments to reconcile net income to cash:
          Capitalized interest on deposits                     3,184        3,168
          Provision for possible loan losses                       0          300
          Depreciation and amortization                          697          666
          Deferred income taxes                                  (37)         214
          Decrease (increase) in
           accrued interest receivable                             9         (168)
          Increase (decrease) in
           accrued interest payable                              881         (501)
          Net gain on sale of loans                              (78)        (180)
          Net realized (gain) loss on investment
           securities available for sale                         (58)          51
              Other, net                                        (554)      (1,202)
                                                           ---------    ---------
              Net cash provided by operating activities        7,665        5,378
  
  CASH FLOWS FROM INVESTING ACTIVITIES:
      Net decrease in money market investments                 1,300          574
      Maturities of investment securities
           held to maturity                                   32,127       16,721
      Maturities of investment securities
           available for sale                                  3,230       31,055
      Sale of investment securities available for sale           401       15,915
      Funds invested in investment securities
           held to maturity                                  (58,437)     (23,123)
      Funds invested in investment securities
           available for sale                                   (616)     (29,087)
      Net decrease (increase) in loans
           made to customers                                   6,186       (9,750)
      Originations of residential mortgage loans sold         (6,298)      (7,930)
      Proceeds from sale of residential mortgage loans         3,610        8,406
      Net expenditures for premises and equipment               (566)        (465)
      Proceeds from sale of other real estate owned              524        1,529
                                                           ---------    ---------
          Net cash (used by) provided from investing         (18,539)       3,845
              activities
  
  CASH FLOWS FROM FINANCING ACTIVITIES:
      Net increase (decrease) in deposits                      6,887      (12,220)
      Net (decrease) increase in short-term borrowings        (1,769)       2,401
      Net (decrease) increase in other borrowings              1,739         (192)
      Proceeds from issuance of common stock                     103            0
      Cash dividends paid                                     (1,400)      (1,267)
                                                           ---------    ---------
          Net cash provided from (used by)
              financing activities                             5,560      (11,278)
  
      Net increase (decrease) in cash and due from banks      (5,314)      (2,055)
  
      Cash and due from banks at beginning of period          23,568       19,176
      Cash and due from banks at end of period             $  18,254    $  17,121
  
  SUPPLEMENTAL DISCLOSURES:
      Interest paid                                        $   5,034    $   4,169
      Income taxes paid                                        1,900        1,839
  
  NON-CASH INVESTING AND FINANCING ACTIVITIES:
      Loans charged-off                                          314          604
  -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 June 30, 1995 and December
       31, 1994, the consolidated statements of income for the three and six month
       periods  ended June 30, 1995 and 1994 and the  consolidated  statements  of
       cash flows for the six months ended June 30, 1995. The accounting  policies
       followed in the presentation of interim  financial  results are the same as
       those  followed on an annual basis,  with the  exception of the  accounting
       policies  related to impaired  loans which have been  included in the March
       31, 1995 10-Q report filed with the Securities and Exchange  Commission and
       the  accounting  policies  related to mortgage  servicing  rights which are
       discussed  further  in Note 2. The  consolidated  financial  statements  of
       Keystone Heritage Group, Inc. and subsidiaries  include the accounts of the
       Company and its wholly owned subsidiaries, Lebanon Valley National Bank and
       Keystone  Heritage Life Insurance  Company.  All  significant  intercompany
       balances  and  transactions   have  been  eliminated  in  the  consolidated
       financial  statements.  For purposes of  comparability,  certain prior year
       amounts have been reclassified.
  
  2.   In May  1995,  the  Financial  Accounting  Standards  Board  (FASB)  issued
       Statement  of  Financial  Accounting  Standards  No. 122,  "Accounting  for
       Mortgage  Servicing  Rights,  an amendment of FASB  Statement No. 65" (SFAS
       122).  SFAS 122 amends  Statement 65 to require an institution to recognize
       as separate  assets the rights to service  mortgage loans for others when a
       mortgage loan is sold or securitized and servicing  rights  retained.  SFAS
       122 also requires an entity to measure the  impairment of servicing  rights
       based on the difference between the carrying amount of the servicing rights
       and their current fair value.  SFAS 122 is to be applied  prospectively  in
       fiscal years beginning after December 15, 1995.
  
       Presently,  the Company  does not sell or  securitize  mortgage  loans with
       servicing rights retained. Accordingly, the Company will not be impacted by
       the provisions of SFAS 122.
  
  3.   Earnings  per common share are based upon the  weighted  average  number of
       shares  outstanding.  The weighted average number of shares outstanding was
       3,048,505 and 3,046,213 for the three month periods ended June 30, 1995 and
       1994,  respectively,  and  3,047,365 and 3,046,213 for the six months ended
       June 30, 1995 and 1994,  respectively.  All prior period per share data has
       been restated to give effect for the 5-for-4 stock split that was effective
       for November 10, 1994.
  
                                        -7-
  MANAGEMENT'S DISCUSSION AND ANALYSIS
                  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
       Keystone  Heritage  Group,  Inc. (the  "Company") is a bank holding company
  organized under the laws of Pennsylvania  and registered  under the Federal Bank
  Holding  Company Act of 1956.  The  Company's  principal  subsidiary  is Lebanon
  Valley National Bank (the "Bank").
  
  Results of Operations
  
       Net income for the  Company  for the three  months  ended June 30, 1995 was
  $1.864  million or $.61 per share,  compared to $1.555 million or $.51 per share
  for the three months ended June 30, 1994. Return on average stockholders' equity
  and return on average  assets for the 1995  period  were 13.73  percent and 1.35
  percent, respectively.
  
        Net income for the six months  ended June 30,  1995 was $3.621  million or
  $1.19 per share, compared to net income of $3.030 million or $1.00 per share for
  1994.  Return on average  stockholders'  equity and return on average assets for
  the 1995 period were 13.63 percent and 1.33 percent, respectively.
  
  Net Interest Income
  
       Net interest  income is the primary  source of income for the Company.  Net
  interest  income  is  the  difference  between  interest  earned  on  loans  and
  investments  and interest paid on deposits and other funding  sources.  Deposits
  are the primary source of funds for the Company. The factors which influence net
  interest  income  include  changes in  interest  rates and  changes in asset and
  liability balances.
  
       For  purposes of this  discussion,  interest  income and the average  yield
  earned on loans and  investments  are presented on a taxable  equivalent  basis.
  This provides a basis for  comparison of tax exempt loans and  investments  with
  taxable loans and  investments by giving effect to interest earned on tax exempt
  loans and  investments  by an amount  equivalent  to federal  income taxes which
  would have been paid on the assumption  that the interest earned on those assets
  was taxable at the Company's statutory tax rate of 34 percent.
  
       The  tables  presented  on pages 14 and 15 are  comparative  statements  of
  average balances of interest  earning assets and interest  bearing  liabilities,
  interest  income and interest  expense,  and interest rates for the three months
  ended June 30,  1995 and 1994,  and for the six months  ended June 30,  1995 and
  1994.
  
       Net  interest  income for the three  months  ended  June 30,  1995 was $6.2
  million,  a $281 thousand or 4.8 percent  increase from the same period of 1994.
  The net interest margin for the second quarter of 1995 was 4.67 percent compared
  to 4.72  percent for the same  period of 1994.  Average  earning  assets for the
  three month period ended June 30, 1995 were $527.9 million, a $28.9 million or a
  5.8 percent increase from the same period of 1994.
  
       For the three month comparative  periods,  net interest income increased in
  1995 as a result of the  increase in average  earning  assets and an increase in
  the yield on earning  assets by 88 basis  points  from the same  period of 1994.
  These  increases  partially  offset  by an  increase  in total  interest-bearing
  deposits of $20.3  million which  resulted from the increase in average  deposit
  rates during 1995. Time deposit volumes increased by $48.1 million while average
  transaction  and savings  deposits  decreased by $27.8 million.  The increase in
  average earning assets and the shift in deposit volumes and increasing rates had
  the effect of slightly  reducing  the net  interest  margin for the three months
  ended June 30, 1995 compared to the same period of 1994.
  
       Net  interest  income  for the six  months  ended  June 30,  1995 was $12.3
  million,  a $1.0 million or 8.9 percent  increase  from the same period of 1994.
  The net interest  margin for the six months ended June 30, 1995 was 4.75 percent
  compared to 4.57 percent for the same period of 1994. Average earning assets for
  the six month period ended June 30, 1995 were $522.2 million, a $23.1 million or
  a 4.6 percent increase from the same period of 1994.
  
       For the six month comparative  periods,  net interest income also increased
  in 1995 as a result of increases in average  earning asset  volumes,  a shift in
  the deposit mix and increases in average  rates.  Several  prime rate  increases
  which  occurred  during 1994  contributed  to the $1.1  million  increase in net
  interest  income and an increase in the net  interest  margin of 18 basis points
  for the 1995
  
                                        -8-
  period.  Average loans increased by $16.2 million or 4.5% from 1994. As was seen
  in the three month comparative periods, average interest-bearing deposit volumes
  increased by $14.5  million for the six months  ended June 30, 1995  compared to
  the same period of 1994.
  
  Provision and Allowance for Possible Loan Losses
  
       There was no  provision  for  possible  loan  losses  charged to net income
  during the six month period ended June 30, 1995. The provision for possible loan
  losses for the three months  ended June 30, 1994 was $100  thousand and was $300
  thousand for the six months ended June 30, 1994.
  
       Net  charge-offs  of $89 thousand  were recorded for the three months ended
  June 30, 1995 compared to net  recoveries of $78 thousand for the same period of
  1994. For the six month comparative  period the Company recorded net charge-offs
  of $78 thousand and $295 thousand for the 1995 and 1994 periods, respectively.
  
       The  allowance for possible loan losses was $8.1 million or 2.12 percent of
  total loans  outstanding  at June 30, 1995 and December 31, 1994.  The allowance
  for possible loan losses is a reserve for estimated potential loan losses in the
  loan portfolio.  Losses occur primarily from the loan portfolio, but may also be
  derived from  commitments to extend credit and standby  letters of credit.  Loan
  losses and  recoveries of previously  charged-off  loans are charged or credited
  directly to the allowance  for possible loan losses.  The allowance for possible
  loan  losses  is an amount  which,  in  management's  judgement,  is  considered
  adequate to absorb potential  losses inherent in the loan portfolio.  Management
  performs a quarterly  assessment  of the Bank's loan  portfolio to determine the
  appropriate  level of the  allowance  for  possible  loan  losses.  The  factors
  considered  in this  evaluation  include,  but are not  necessarily  limited to,
  estimated  loan losses  identified  through the review of loans by the Company's
  personnel; general economic conditions;  deterioration in loan concentrations or
  pledged  collateral;  historic loss experience;  and trends in portfolio volume,
  composition,  delinquencies,  and non-accruals.  In addition, various regulatory
  agencies, as an integral part of their examination process,  periodically review
  the Bank's allowance for possible loan losses.
  
                                        -9-
  The  following is a summary of the activity in the  allowance for possible
  loan losses for the three and six month periods ended June 30, 1995 and 1994:
  Three Months Ended     Six Months Ended
                                                     June 30              June 30
  (Dollars in thousands)                         1995      1994       1995      1994
  Allowance for possible loan losses
   at beginning of period                       $ 8,151   $ 8,313    $ 8,140   $ 8,486
  Loans charged-off:
   Commercial                                        98        83        113       454
   Agriculture                                        0         0          0         0
   Real estate construction                           0         0          0         0
   Loans to individuals                              79        49        201       150
   Real estate - residential mortgage                 0         0          0         0
                                                -------   -------    -------   -------
  Total loans charged-off                           177       132        314       604
  
  Recoveries of loans previously charged-off:
   Commercial                                        57       167        183       250
   Agriculture                                        0         0          0         0
   Real estate construction                          22        39         31        49
   Loans to individuals                               9         4         22        10
   Real estate - residential mortgage                 0         0          0         0
                                                -------   -------    -------   -------
   Total recoveries of loans previously
                            charged-off              88       210        236       309
  
   Net loans charged-off                             89       (78)        78       295
   Current period's provision for
   possible loan losses                               0       100          0       300
                                                -------   -------    -------   -------
  
   Allowance for possible loan
   losses at end of period                      $ 8,062   $ 8,491    $ 8,062   $ 8,491
                                                =======   =======    =======   =======
  Other Operating Income and Expense
  
       Other operating income was $1.3 million for the three months ended June 30,
  1995 and $1.1 million for the three months ended June 30, 1994.  Other operating
  income  for the six  months  ended  June 30,  1995  and  1994 was $2.4  million,
  respectively.
  
       The increases in other operating income for the three and six month periods
  of 1995 as compared to 1994 were primarily  attributable  to the  recognition of
  net  realized  gains  on sales  of  investment  securities  during  1995.  These
  increases  were  somewhat  offset as a result of lower income from mortgage loan
  sales.  The volume of loans that were  originated  and sold during the six month
  period of 1995 was $3.6 million or 57 percent below the 1994 level.
  
       Other  operating  expense for the three months ended June 30, 1995 was $4.6
  million,  a 3.6 percent  increase  over the $4.4  million  reported for the same
  period of 1994. For the six months ended June 30, 1995 and 1994, other operating
  expense was $9.2 million and $8.6 million, respectively, a 6.8 percent increase.
  
       Salaries and benefits expense  increased by $84 thousand or 3.8 percent for
  the three  months ended June 30, 1995  compared to the same period of 1994.  For
  the six months  ended June 30, 1995,  salaries  and  benefits  increased by $309
  thousand or 7.0  percent,  compared to the same period of 1994.  The increase in
  salary and benefit  expenses  primarily  related to the opening of the Company's
  eighteenth and  nineteenth  branch sites during the mid and latter part of 1994.
  Occupancy  and  equipment  expenses  increased  by $38 thousand and $94 thousand
  compared to the three and six month  periods of 1994,  which  resulted  from the
  aforementioned  new branch  openings in 1994.  Other expenses  increased by $180
  thousand  for the six month  period  ended June 30,  1995  compared  to the same
  period for 1994 as a result of increased  expenditures  related to marketing and
  advertising, bank card processing and outside professional services.
  
                                        -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 June 30, 1995 totalled $1.8 million or .48 percent
  of total loans outstanding,  compared to $1.3 million or .35 percent of loans at
  December  31, 1994 and $5.3  million or 1.43  percent of loans at June 30, 1994.
  Non-performing assets at June 30, 1995 were $3.3 million or .85 percent of loans
  plus other real estate  owned  compared to $3.3  million or .86 percent of loans
  plus other real  estate  owned at  December  31,  1994 and $7.7  million or 2.07
  percent of loans plus other real estate owned at June 30, 1994. The  improvement
  in  non-performing  assets at June 30,  1995 as  compared to June 30, 1994 was a
  result of decreased  levels of  non-accrual  loans and other real estate  owned.
  During  1994,  disposals  of  non-performing  assets  consisted  of  third-party
  transactions  amounting to $4.5 million,  charge-offs or writedowns amounting to
  $1.6  million and  reclassifications  to  performing  assets  amounting  to $900
  thousand.
  
       The following is a  presentation  of  non-performing  assets as of June 30,
  1995, December 31, 1994, and June 30, 1994:
  
                                         June 30   December 31  June 30
  (Dollars in thousands)                  1995       1994         1994
  
  Non-performing loans                   $1,806      $1,346      $5,309
  
  Other real estate owned, net            1,448       1,969       2,412
                                         ------      ------      ------
  Total non-performing assets            $3,254      $3,315      $7,720
                                         ======      ======      ======
  
  Loans past due 90 days or more as to
    principal or interest                $  384      $  647      $   15
  
  Non-performing loans as a
    percent of loans outstanding            .48%        .35%       1.43%
  Non-performing assets as a
    percent of loans outstanding
    plus other real estate owned            .85%        .86%       2.07%
  
       Interest income of  approximately  $43 thousand and $84 thousand would have
  been recognized  during the three and six month periods ended June 30, 1995, had
  these  loans been  current in  accordance  with  their  original  terms and been
  outstanding  through the period or since  origination.  Interest income on these
  loans of $34 thousand and $38 thousand was  recognized  during the three and six
  months ended June 30, 1995.
  
       Group  concentrations  of  credit  are  considered  to exist if a number of
  counterparties  are  engaged in similar  activities  and have  similar  economic
  characteristics  that would cause their ability to meet contractual  obligations
  to  be  similarly   affected  by  changes  in  economic  or  other   conditions.
  Agriculture-related  borrowings  at June 30, 1995  totalled  $87 million or 22.8
  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 June 30, 1995
  there were no significant  agriculture  related borrowings which were classified
  as  non-performing  assets and there were no charge-offs of agriculture  related
  loans during the three or six months ended June 30, 1995.
  
  Financial Position
  
       Total assets at June 30, 1995 were $563 million compared to $548 million at
  December 31, 1994.  Total loans  outstanding  at June 30, 1995 were $380 million
  compared to $383 million at December 31, 1994.  Total  deposits at June 30, 1995
  were $479 million compared to $469 million at December 31, 1994.
  
                                        -11-
  Capital Adequacy
  
       The Company's  stockholders'  equity was $55.8 million at June 30, 1995 and
  $52.1 million at December 31, 1994. Total stockholders'  equity increased by 7.1
  percent from  December 31, 1994 which was the net effect of the  recognition  of
  $3.6 million in net income for the six month period,  cash dividend  payments to
  stockholders of $1.4 million and a favorable  change in net unrealized  gains or
  losses  on  investment  securities  available  for  sale  of $1.4  million.  Net
  unrealized  losses on investment  securities  available for sale of $78 thousand
  and $1.4 million were  included as a component of  stockholders'  equity at June
  30, 1995 and December 31, 1994, respectively.
  
       The  maintenance  of an  appropriate  level of capital is a priority of the
  Company's  management.  The Company's  capital  adequacy and dividend policy are
  closely  monitored  by  management  and are  reviewed  regularly by the Board of
  Directors of the Company.  The Company  intends to provide an adequate return to
  its stockholders while retaining a sufficient capital base to provide for future
  growth and to comply with regulatory standards.
  
       Banking  regulators'  risk-based  capital  guidelines  address  the capital
  adequacy of banking  organizations.  These  guidelines  include a definition  of
  capital and a framework for calculating risk-weighted assets by assigning assets
  and off-balance sheet items to broad risk categories,  as well as minimum ratios
  to be maintained by banking  organizations.  The  risk-based  capital ratios are
  calculated by dividing qualifying capital by risk-weighted assets.
  
       Under the risk-based  capital  guidelines,  Total Capital is defined as the
  sum of core or "Tier 1" Capital and "Tier 2" Capital. As the guidelines apply to
  Keystone Heritage Group, Inc., Tier 1 Capital is total stockholders'  equity and
  Tier 2 Capital includes a portion of the allowance for possible loan losses. The
  rules  require that banking  organizations  must have ratios of 4.00 percent and
  8.00 percent for Tier 1 and Total  Capital,  respectively.  At June 30, 1995 the
  Company's  Tier 1 and Total Capital ratios were 13.40 percent and 14.75 percent,
  respectively.  Tier 1 and Total  Capital  ratios  were 12.77  percent  and 14.12
  percent  respectively,  at December  31,  1994.  In  addition to the  risk-based
  capital ratio, a bank is also required to maintain a "Leverage  ratio" of Tier 1
  capital to average  total assets of 3 percent or higher.  At June 30, 1995,  the
  Company's  Leverage  ratio was 9.99 percent and was 9.89 percent at December 31,
  1994.
  
  Off-Balance Sheet Items
  
       The  Company's  loan   portfolio   consists  of  loans  to  businesses  and
  individuals  primarily  in its  five-county  market area of Lebanon,  Lancaster,
  Berks, Dauphin, and Schuylkill counties.
  
       In the ordinary course of business, the Company enters into agreements with
  customers,  such as commitments  to extend credit and standby  letters of credit
  which involve, to varying degrees,  elements of credit and interest rate risk in
  excess of the amounts presented in the balance sheet. The Company's  exposure to
  possible loss in the event of nonperformance by the other party to the financial
  instruments for commitments to extend credit and financial guarantees written is
  represented by the contractual amount of those instruments.  The Company may not
  be obligated to advance funds if the customer's financial condition deteriorates
  or if the customer fails to meet certain terms.
  
       Commitments and  conditional  obligations  generally have fixed  expiration
  dates or termination clauses and may require payment of a fee. Since many of the
  commitments  are expected to expire  without  being used,  the total  commitment
  amounts do not  necessarily  represent  future  cash  requirements.  The Company
  evaluates each customer's creditworthiness on a case-by-case basis, applying the
  same  credit   standards  used  in  the  lending   process,   through   periodic
  reassessments  of the  customer's  creditworthiness  and through  ongoing credit
  reviews. The amount of collateral  obtained,  if deemed necessary by the Company
  upon  extension of credit,  is based on  management's  credit  evaluation of the
  counterparty.  Collateral  held  varies  but may  include  accounts  receivable,
  inventory,  property,  plant  and  equipment,  and  income-producing  commercial
  properties.
  
       The Bank has entered into interest rate swap  contracts,  and interest rate
  cap and interest rate collar contracts as part of its asset-liability management
  activities.  These  contracts are effected  primarily to hedge  against  certain
  assets or  liabilities  in order to minimize  mismatches in the Bank's  interest
  rate sensitivity and interest rate risk positions.
  
       Interest  rate  contracts  generally  involve  the  exchange  of fixed  and
  floating-rate   interest  payment   obligations  without  the  exchange  of  the
  underlying principal amounts. Entering into interest rate contracts involves not
  only the risk of dealing with counterparties and their ability to meet the terms
  of the  contracts  but also the interest  rate risk  associated  with  unmatched
  positions.  Notional  principal  amounts often are used to express the volume of
  these transactions,  but the amounts potentially subject to credit risk are much
  smaller.
                                        -12-
  The interest  income or interest  expense  differential  from interest rate
  swap  contracts is  recognized as interest  income or interest  expense over the
  life of the contract. The interest income or interest expense resulting from the
  cap and collar  contracts would be recognized when the national prime rate moves
  below or above a predetermined  interest rate level.  Gains or losses from early
  termination of swap contracts are deferred and amortized over the remaining term
  of the underlying assets or liabilities.
  
       The Company entered into an interest rate  cap/collar  contract on November
  5, 1993 with a notional  amount of $10  million.  The  contract  states that the
  Company would receive a spread  between the national prime rate and 6.00 percent
  should the prime rate fall below 6.00 percent. The Company would pay an interest
  rate spread  between the national  prime and 7.00 percent  should the prime rate
  exceed 7.00 percent. The contract expires on February 5, 1996.
  
       During the third quarter of 1994, the Company entered into an interest rate
  swap with a notional  amount of $10 million and a  termination  date of July 25,
  1995.  Under the  terms of this  agreement,  the  Company  will  receive a fixed
  interest  rate of 8.00  percent  and pay a  floating  prime  rate  based  on the
  national prime rate. 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.
  
       Both the interest rate swap and the interest rate cap/collar  contract were
  entered into to hedge the Company's  interest rate risk in a declining or stable
  interest rate  environment.  Specifically,  these  contracts hedge the Company's
  risk from negative movements in its prime rate based asset portfolio which would
  not be perfectly matched by repricing liabilities.
  
       The following is the amount of financial instruments with off-balance sheet
  risk not  reflected  in the  consolidated  balance  sheets at June 30,  1995 and
  December 31, 1994:
  
                                Contractual Amounts
  
                                           June 30   December 31
  (Dollars in thousands)                     1995       1994
  Financial instruments whose
    contractual amounts represent 
    credit risk:                            $89,722   $84,398
  Commitments to extend credit                9,010     7,983
  Standby letters of credit
  Contractual amounts of off-balance
   sheet financial instruments 
   not constituting credit risk:
     Interest rate swap, contractual
       value                                 10,000    10,000
     Interest rate cap/collar,
       contractual value                     10,000    10,000
  
  Supervision and Regulation
  
       The Bank is a national bank,  chartered under the National Bank Act, and is
  subject to the primary  supervision  of, and is examined by, the  Comptroller of
  the Currency.  As a member of the Federal Reserve System, the Bank is subject to
  provisions of the Federal  Reserve Act, which restricts the ability of a bank to
  extend  credit to its parent  holding  company  or to  certain  of the  parent's
  subsidiaries,  or to invest in the Company's  common stock or to take such stock
  as  collateral  for loans to any borrower.  The  operations of the Bank are also
  subject to regulation by the FDIC.
  
       The Company is affected by the monetary and credit  policies of the Federal
  Reserve System. The Federal Reserve System regulates the national supply of bank
  credit through open market operations in U. S. Government securities, changes in
  the  discount  rate  charged  for  bank   borrowing,   and  changes  in  reserve
  requirements on bank deposits.
  
  New Accounting Standards
  
           In May 1995,  the Financial  Accounting  Standards  Board (FASB) issued
  Statement of Financial  Accounting  Standards No. 122,  "Accounting for Mortgage
  Servicing  Rights,  an amendment of FASB Statement No. 65" (SFAS 122).  SFAS 122
  amends  Statement 65 to require an institution  to recognize as separate  assets
  the rights to service  mortgage loans for others when a mortgage loan is sold or
  securitized and servicing rights  retained.  SFAS 122 also requires an entity to
  measure the impairment of servicing  rights based on the difference  between the
  carrying amount of the servicing  rights and their current fair value.  SFAS 122
  is to be applied  prospectively  in fiscal years  beginning  after  December 15,
  1995.
  
           Presently,  the Company does not sell or securitize mortgage loans with
  servicing rights retained.  Accordingly, the Company will not be impacted by the
  provisions of SFAS 122.
                                        -13-
  AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
                               (Dollars in thousands)
  Three Months Ended June 30, 1995       Three Months Ended June 30, 1994
                                                             Average                   Average      Average                Average
                                                             Balance       Interest      Rate       Balance     Interest    Rate
  Assets
      Loans                                                $ 378,365      $   8,809      9.34%     $ 366,096   $   7,534   8.25%
      Money market investments                                 7,436            113      6.10          1,199          12   4.01
      Investment securities:
          Taxable                                            130,830          1,860      5.70        118,767       1,509   5.10
          Non-taxable                                         11,247            198      7.06         12,891         219   6.81
                                                              ------            ---      ----         ------         ---   ----
               Total investment securities                   142,077          2,058      5.81        131,658       1,728   5.26
               Total earning assets                          527,878      $  10,980      8.34%       498,953   $   9,274   7.46%
                                                                          =========      ====                  =========   ==== 
  
      Other assets                                            26,476                                  31,453
                                                              ------                                  ------
               Total assets                                $ 554,354                               $ 530,406
                                                           =========                               =========
  
  Liabilities and stockholders' equity
      Interest bearing deposits:
          Now accounts                                     $  54,638      $     197      1.45%     $  65,458   $     235   1.44%
          Savings and money market                           119,171            917      3.09        136,144         826   2.43
          Time                                               238,735          3,382      5.68        190,618       2,063   4.34
                                                             -------          -----      ----        -------       -----   ----
               Total interest bearing deposits               412,544          4,496      4.37        392,220       3,124   3.19
  
      Short-term borrowings                                   11,207            112      4.01         17,085         135   3.17
      Long-term debt                                          13,364            222      6.67         11,063         146   5.29
                                                              ------            ---      ----         ------         ---   ----
          Total interest bearing liabilities                 437,115      $   4,830      4.43%       420,368   $   3,405   3.25%
                                                                          =========      ====                  =========   ==== 
  
      Non-interest bearing deposits                           56,958                                  55,782
      Other liabilities                                        5,845                                   3,697
      Stockholders' equity                                    54,436                                  50,559
                                                              ------                                  ------
          Total liabilities and
          stockholders' equity                             $ 554,354                               $ 530,406
                                                           =========                               =========
  
      Net interest income                                                 $   6,150                            $   5,869
      Total yield on earning assets                                                      8.34%                             7.46%
      Rate on supporting liabilities                                                     3.67%                             2.74%
                                                                                         ----                              ---- 
      Net interest margin                                                                4.67%                             4.72%
                                                                                         ====                              ====
  Interest and average interest rates are presented on a fully taxable  equivalent
  basis,  using an effective  tax rate of 34%. For  purposes of  calculating  loan
  yields,  average loan balances include non-accrual loans. Loan fees are included
  in interest income.
  
                                        -14-
  AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
                               (Dollars in thousands)
  Six Months Ended June 30, 1995       Six Months Ended June 30, 1994
                                                Average                    Average      Average              Average
                                                Balance       Interest       Rate       Balance    Interest    Rate
  Assets
    Loans                                      $ 380,081      $  17,356      9.21%     $ 363,847   $  14,618   8.10%
    Money market investments                       8,337            247      5.97          1,740          30   3.48
    Investment securities:
        Taxable                                  122,455          3,406      5.61        120,377       3,021   5.06
        Non-taxable                               11,285            396      7.08         13,129         454   6.97
                                               ---------      ---------      ----      ---------   ---------   ----
             Total investment securities         133,740          3,802      5.73        133,506       3,475   5.25
             Total earning assets                522,158      $  21,405      8.27%       499,093   $  18,123   7.32%
                                                              =========      ====                  =========   ==== 
  
    Other assets                                  26,331                                  31,728
                                                  ------                                  ------
             Total assets                      $ 548,489                               $ 530,821
                                               =========                               =========
  
  Liabilities and stockholders' equity
        Interest bearing deposits:
        Now accounts                           $  55,926      $     399      1.44%     $  66,733   $     480   1.45%
        Savings and money market                 119,066          1,711      2.90        136,637       1,648   2.43
        Time                                     233,954          6,342      5.47        191,123       4,138   4.37
                                               ---------      ---------      ----      ---------   ---------   ----
             Total interest bearing deposits     408,946          8,452      4.17        394,493       6,266   3.20
  
    Short-term borrowings                         12,167            243      4.03         17,192         255   2.99
    Long-term debt                                12,503            404      6.52         11,111         302   5.48
                                               ---------      ---------      ----      ---------   ---------   ----
        Total interest bearing liabilities       433,616      $   9,099      4.23%       422,796   $   6,823   3.25%
                                                              =========      ====                  =========   ==== 
  
    Non-interest bearing deposits                 55,757                                  53,645
    Other liabilities                              5,545                                   3,981
    Stockholders' equity                          53,571                                  50,399
                                                  ------                                  ------
        Total liabilities and
        stockholders' equity                   $ 548,489                               $ 530,821
                                               =========                               =========
  
    Net interest income                                       $  12,306                            $  11,300
    Total yield on earning assets                                            8.27%                             7.32%
    Rate on supporting liabilities                                           3.52%                             2.75%
                                                                             ----                              ---- 
    Net interest margin                                                      4.75%                             4.57%
                                                                             ====                              ====
  Interest and average interest rates are presented on a fully taxable  equivalent
  basis,  using an effective  tax rate of 34%. For  purposes of  calculating  loan
  yields,  average loan balances include non-accrual loans. Loan fees are included
  in interest income.
  
                                        -15-
  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
  
  1995 Annual Stockholders' Meeting
  
       The 1995 Annual Meeting of Stockholders'  for the Company was held on April
  18, 1995.  Stockholders' of the Company voted on the following issues:  Election
  of Directors Lance M. Frehafer, Charles V. Henry, III, Bruce A. Johnson and John
  E.  Wengert;  a proposal to Approve an  amendment to the  Company's  Articles of
  Incorporation to increase the authorized  shares from 5,000,000 common shares of
  $5.00 par value to 10,000,000  common shares of $5.00 par value;  and a proposal
  to ratify the  selection of KPMG Peat Marwick LLP as the  Company's  independent
  public  accountants for the fiscal year ending December 31, 1995. Eighty percent
  of the 3,046,213  shares  eligible to vote were voted in either proxy form or in
  person at the meeting.
  
       All  matters  subject to a vote at the Annual  Meeting  were  approved as a
  result of the votes cast at the Annual Meeting.  The following is a presentation
  of the voting results from the April 18, 1995 Annual Stockholders' Meeting:
  
  Election of Directors                 For            Withheld         Total
  
  Lance M. Frehafer                  2,275,092         170,734        2,445,826
  
  Charles V. Henry, III              2,278,530         167,296        2,445,826
  
  Bruce A. Johnson                   2,271,904         173,922        2,445,826
  
  John E. Wengert                    2,278,444         167,382        2,445,826
  
       The term of the Directors  elected at the annual  meeting  expires in 1998.
  The following  Directors  remain on the Company's  Board of Directors  until the
  expiration of their terms in 1996 and 1997:
  
  Directors Term Expiring in 1996:
  
  Harry J. Gensemer
  Albert B. Murry
  Thomas I. Siegel
  Brett H. Tennis
  Earnest D. Williams, Jr.
  
  Directors Term Expiring in 1997:
  
  Raymond M. Dorsch, Jr.
  Wendie DiMatteo Holsinger
  Donald W. Lesher, Jr.
  Mark Randolph Tice
  
       The amendment to the Company's  Articles of  Incorporation  to increase the
  authorized  shares from 5,000,000 common shares of $5.00 par value to 10,000,000
  common shares of $5.00 par value was voted as follows:
  
                  FOR              AGAINST            ABSTAIN
  
               2,288,224           149,645             7,957
  
                                        -16-
  The  proposal  to ratify  the  selection  of KPMG Peat  Marwick  LLP as the
  Company's independent public accountants for the fiscal year ending December 31,
  1995 was voted as follows:
  
                  FOR              AGAINST            ABSTAIN
  
               2,375,257            57,843            12,726
  
  ITEM 5.  OTHER INFORMATION
  
  None.
  
  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
  
  (a.)  None.
  
  (b.)  The Company did not file any reports on Form 8-K during the quarter ended
  June 30, 1995.
  
                                        -17-
  KEYSTONE HERITAGE GROUP, INC.
  
                                     SIGNATURES
  
       Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
  registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
  undersigned thereunto duly authorized.
  
                                           Keystone Heritage Group, Inc.
                                           (Registrant)
  
  Date  August 4, 1995                  By /s/ Kurt A. Phillips
                                           Kurt A. Phillips
                                           Chief Financial and Accounting Officer
  
                                        -18-