content: UNITED STATES
  
                         SECURITIES AND EXCHANGE COMMISSION
  
                               Washington, D.C. 20549
  
                                      Form 10-Q
  
  
       Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
  Act of 1934
  
  For the period ended    March 31, 1996
  
  
  Commission File Number:  0-13775
  
  
  
                            KEYSTONE HERITAGE GROUP, INC.
                                    (Registrant)
  
  
       PENNSYLVANIA                                               23-2219740
  (State of incorporation)                                     (I.R.S. Employer
                                                               Identification No.)
  
                   555 WILLOW STREET, LEBANON, PENNSYLVANIA 17046
                 (Address of principal executive offices) (Zip Code)
  
  
                                    717-274-6800
                (Registrant's telephone number, including area code)
  
  
       Indicate  by check mark  whether the  registrant  (1) has filed all reports
  required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
  1934  during  the  preceding  12 months  (or for such  shorter  period  that the
  registrant was required to file such reports),  and (2) has been subject to such
  filing requirements for the past 90 days. Yes X No
  
           Indicate  the  number of  shares  outstanding  of each of the  issuer's
  classes of common stock, as of the latest practicable date.
  
  
  
                Class                                  Outstanding at May 9, 1996
  Common Stock ($5.00 par value)                                4,071,683 shares
  
  
  
  
  <PAGE>
  
                            KEYSTONE HERITAGE GROUP, INC.
  
                                        Index
  
  
  PART I - FINANCIAL INFORMATION                                        Page
  
  
  Item 1 - Financial Statements
  
           Consolidated Balance Sheets as of
           March 31, 1996 and December 31, 1995 (Unaudited)                3
  
           Consolidated Statements of Income for the
           Three Months ended March 31, 1996 and
           1995 (Unaudited)                                                4
  
           Consolidated Statements of Stockholders' Equity
           for the Three Months ended March 31, 1996 and
           1995 (Unaudited)                                                5
  
           Consolidated Statements of Cash Flows for the
           Three Months ended March 31, 1996 and 1995 (Unaudited)          6
  
           Notes to Consolidated Financial Statements                      7
  
  
  Item 2 - Management's Discussion and Analysis of
            Financial Condition and Results of Operations                  9
  
  
  PART II - OTHER INFORMATION
  
  Signature Page                                                          19
  
                                         -2-
  
  
  <PAGE>
                            KEYSTONE HERITAGE GROUP, INC.
  
                             CONSOLIDATED BALANCE SHEETS
  
                               (Dollars In Thousands)
  
  
  <TABLE>
  <CAPTION>
  
                                                                             March 31              December 31
                                                                               1996                    1995
  
  <S>                                                                       <C>                    <C>      
  ASSETS
        Cash and due from banks                                             $  17,023              $  23,766
        Interest bearing deposits with banks                                      198                    246
        Federal funds sold                                                      5,000                      0
        Investment securities available for sale                               57,393                 65,799
        Investment securities held to maturity
            (fair value of $82,607 and $88,052
            for 1996 and 1995, respectively)                                   82,142                 86,885
        Loans, net of unearned income of
            $2,530 for 1996 and $2,830 for 1995                               392,545                391,009
        Allowance for possible loan losses                                     (7,776)                (8,025)
                                                                            ----------             ----------
  
             Loans, net                                                       384,769                382,984
  
        Premises and equipment, net                                             7,675                  7,933
        Accrued interest receivable                                             3,946                  3,844
        Other real estate owned                                                   947                    913
        Deferred tax asset, net                                                 2,914                  3,100
        Other assets                                                            2,664                  2,307
                                                                            ----------             ---------
  
             Total assets                                                   $ 564,671              $ 577,777
                                                                            ==========             =========
  
  LIABILITIES
        Non-interest bearing deposits                                       $  60,537              $  65,530
        Interest bearing deposits                                             417,303                422,387
                                                                            ----------             ---------
  
             Total deposits                                                   477,840                487,917
  
        Short-term borrowings                                                   9,110                  8,640
        Other borrowings                                                       10,941                 14,009
        Accrued interest payable                                                4,006                  5,284
        Other liabilities                                                       2,897                  3,048
                                                                            ----------             ---------
  
             Total liabilities                                                504,794                518,898
  
  STOCKHOLDERS' EQUITY
  
        Common stock - $5 par value; Authorized 
            10,000,000 shares; Outstanding
            4,071,683 shares at March 31, 1996 and
            December 31, 1995, respectively                                    20,358                 20,358
        Capital surplus                                                        22,078                 22,078
        Retained earnings                                                      17,216                 16,107
        Net unrealized loss on investment securities
             available for sale, net of taxes                                     225                    336
                                                                            ----------             ---------
  
             Total stockholders' equity                                        59,877                 58,879
  
             Total liabilities and stockholders'
               equity                                                       $ 564,671              $ 577,777
                                                                            ==========             ==========
  
  </TABLE>
  
  See accompanying notes to financial statements.
  
  
                                         -3-
  <PAGE>
  
  
                            KEYSTONE HERITAGE GROUP, INC.
                          CONSOLIDATED STATEMENTS OF INCOME
  
                    (Dollars in thousands, except per share data)
  <TABLE>
  <CAPTION>
  
                                                                          Three Months Ended
                                                                               March 31
                                                                         1996            1995
  
  <S>                                                                  <C>             <C>    
  INTEREST INCOME
                Interest and fees on loans                             $ 8,753         $ 8,481
                Interest on investment securities
                    available for sale:
                    Taxable investment securities                          737             662
                    Equity investments                                      55              43
                Interest on investment securities held to maturity:
                    Taxable investment securities                        1,145             856
                    Non-taxable investment securities                      125             116
                                                                       --------        -------
                      Total interest on investment
                      securities                                         2,062           1,677
                Interest on money market investments                        37             134
                                                                       --------        -------
                    Total interest income                               10,852          10,292
  
  INTEREST EXPENSE
                Interest on deposits                                     4,503           3,956
                Interest on short-term borrowings                          121             131
                Interest on other borrowings                               162             182
                                                                       --------        -------
                    Total interest expense                               4,786           4,269
  
                    Net interest income                                  6,066           6,023
  
                Provision for possible loan losses                           0               0
                                                                       --------        -------
                    Net interest income after provision
                    for possible loan losses                             6,066           6,023
  
  OTHER OPERATING INCOME
                Trust income                                               317             315
                Service charges on deposits                                306             311
                Net realized gain (loss) on investment
                    securities available for sale                           23              (7)
                Net gain on sale of loans                                   74              40
                Other income                                               483             481
                                                                       --------        -------
                    Total other operating income                         1,203           1,140
  
  OTHER OPERATING EXPENSE
                Salaries and employee benefits                           2,364           2,437
                Occupancy expense, net                                     328             317
                Equipment expense                                          506             466
                Deposit insurance expense                                    1             259
                Other expense                                            1,276           1,141
                                                                       --------        -------
                    Total other operating expense                        4,475           4,620
  
                    Income before income taxes                           2,794           2,543
                Income taxes                                               871             786
                                                                       --------        -------
  
                    Net income                                         $ 1,923         $ 1,757
                                                                       ========        =======
  
  PER COMMON SHARE
                    Net income                                         $   .47         $   .43
                                                                       ========        =======
  
                    Cash dividends paid                                $   .20         $  .165
  
  </TABLE>
  
  
                                         -4-
  
  <PAGE>
  
                            KEYSTONE HERITAGE GROUP, INC.
                   CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             Three Months Ended March 31
  
                               (Dollars in thousands)
  <TABLE>
  <CAPTION>
  
                                                                                                            Net
                                                                                                         Unrealized
                                                                                                       Gain (Loss) on
                                                                                                         Investment
                                                                                                         Securities
                                                                                                        Available for
                                                                 Common      Capital       Retained      Sale, Net
                                                                  Stock      Surplus       Earnings       of Taxes         Total
  
  <S>                                                           <C>          <C>          <C>             <C>             <C>    
  Balance, December 31, 1994                                    $15,231      $30,053      $ 8,269         ($1,451)        $52,102
       Net Income                                                   -0-          -0-        1,757             -0-           1,757
       Cash dividends ($.165 per share)                             -0-          -0-         (670)            -0-            (670)
       Change in unrealized gain (loss) on
           investment securities available
           for sale, net of taxes                                   -0-          -0-          -0-             694             694
                                                                -------      -------      -------         --------        -------
  
  Balance, March 31, 1995                                       $15,231      $30,053      $ 9,356         ($  757)        $53,883
                                                                =======      =======      =======         ========        =======
  
  
  Balance, December 31, 1995                                    $20,358      $22,078      $16,107          $  336         $58,879
       Net income                                                                           1,923                           1,923
       Cash dividends ($.20 per share)                              -0-          -0-         (814)            -0-            (814)
       Change in unrealized gain (loss) on
           investment securities available for
           sale, net of taxes                                       -0-          -0-          -0-            (111)           (111)
                                                                -------      -------      --------        --------        --------
  
  Balance, March 31, 1996                                       $20,358      $22,078      $17,216         $   225         $59,877
                                                                =======      =======      ========        ========        =======
  
  
  </TABLE>
  
                                         -5-
  
  
  <PAGE>
  
                            KEYSTONE HERITAGE GROUP, INC.
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (Dollars in thousands)
  
  
  <TABLE>
  <CAPTION>
  
                                                                                     Three Months Ended
                                                                                        March 31
                                                                                      1996           1995
  <S>                                                                               <C>            <C>    
  CASH FLOW FROM OPERATING ACTIVITIES:
      Net income                                                                    $ 1,923        $ 1,757
      Adjustments to reconcile net income to cash:
          Provision for possible loan losses                                              0              0
          Depreciation and amortization                                                 391            344
          Deferred income taxes                                                         242            (41)
          Increase in accrued interest receivable                                      (102)          (100)
          Increase (decrease) in
           accrued interest payable                                                  (1,278)           412
          Net gain on sale of loans                                                     (74)           (40)
          Net realized (gain) loss on investment
           securities available for sale                                                (23)             7
          Other, net                                                                   (504)          (143)
                                                                                    --------       --------
              Net cash provided by operating activities                                 575          2,196
  
  CASH FLOWS FROM INVESTING ACTIVITIES:
      Net increase in money market investments                                       (4,952)        (1,300)
      Maturities of investment securities
           held to maturity                                                           9,726         10,376
      Maturities of investment securities
           available for sale                                                        11,291          3,128
      Sale of investment securities available for sale                                   63            100
      Funds invested in investment securities
           held to maturity                                                          (4,958)       (25,992)
      Funds invested in investment securities
           available for sale                                                        (3,174)          (184)
      Net (increase) decrease in loans
           made to customers                                                           (423)         3,520
      Originations of residential mortgage loans sold                                (5,994)        (1,617)
      Proceeds from sale of residential mortgage loans                                4,725          1,862
      Net expenditures for premises and equipment                                      (133)          (301)
      Proceeds from sale of other real estate owned                                       0            412
                                                                                    --------       -------
          Net cash provided from (used by)
            investing activities                                                      6,171         (9,996)
  
  
  CASH FLOWS FROM FINANCING ACTIVITIES:
      Net decrease in deposits                                                      (10,077)          (514)
      Net increase (decrease) in short-term borrowings                                  470         (1,274)
      Net (decrease) increase in other borrowings                                    (3,068)         2,871
      Cash dividends paid                                                              (814)          (670)
                                                                                    --------       --------
          Net cash used by (provided from)
            financing activities                                                    (13,489)           413
  
      Net decrease in cash and due from banks                                        (6,743)        (7,387)
  
      Cash and due from banks at beginning of period                                 23,766         23,568
      Cash and due from banks at end of period                                      $17,023        $16,181
  
  SUPPLEMENTAL DISCLOSURES:
      Interest paid                                                                 $ 2,824        $ 2,451
      Income taxes paid                                                                  74            300
  
  NON-CASH INVESTING AND FINANCING ACTIVITIES:
      Loans charged-off                                                                 345            137
  </TABLE>
  
                                         -6-
  
  <PAGE>
  
                            KEYSTONE HERITAGE GROUP, INC.
  
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
  
  1.   The accompanying  consolidated  financial  statements of Keystone  Heritage
       Group,  Inc.  have  not  been  reviewed  by  independent  certified  public
       accountants.  However, in management's  opinion, the statements reflect all
       adjustments  and  disclosures  necessary  for a  fair  presentation  of the
       consolidated balance sheet of the Company as of March 31, 1996 and December
       31, 1995, the consolidated statements of income for the three month periods
       ended March 31, 1996 and 1995 and the consolidated statements of cash flows
       for the three months ended March 31, 1996. 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
       discussed  below,  which were  adopted  during the quarter  ended March 31,
       1996. 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.   On January 1, 1996 the  Company  adopted the  provisions  of  Statement  of
       Financial  Accounting  Standards  No. 121 (SFAS 121),  "Accounting  for the
       Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed
       Of". SFAS provides  guidance for  recognition and measurement of impairment
       of long-lived assets, certain identifiable intangibles and goodwill related
       both to assets held and used and assets to be disposed of.
  
       SFAS  121  requires  that  long-lived   assets  and  certain   identifiable
       intangibles held and used by an entity be reviewed for impairment  whenever
       events or changes in circumstances  indicate that the carrying amount of an
       asset may not be recoverable.  In performing the review for recoverability,
       an entity should estimate the future cash flows expected to result from the
       use of the asset and its eventual  disposition.  If the sum of the expected
       future cash flows  (undiscounted and without interest charges) is less than
       the  carrying  amount  of the  asset,  an  impairment  loss is  recognized.
       Otherwise,  an  impairment  loss  is  not  recognized.  Measurement  of  an
       impairment loss for long-lived assets and identifiable  intangibles that an
       entity  expects  to hold and use  should be based on the fair  value of the
       asset.
  
       SFAS  121  requires  that  long  lived  assets  and  certain   identifiable
       intangibles  to be disposed of be reported at the lower of carrying  amount
       or fair value  less cost to sell.  The  implementation  of SFAS 121 did not
       impact the Company's financial condition or results of operations
  
  3.   On January 1, 1996, the Company  adopted the provisions of the 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.
  
       Presently,  the Company  does not sell or  securitize  mortgage  loans with
       servicing rights retained.  Accordingly,  the Company has not been impacted
       by the provisions of SFAS 122.
  
  
                                         -7-
  <PAGE>
  
  4.   On January 1, 1996 the  Company  adopted the  provisions  of  Statement  of
       Financial   Accounting  Standards  No.  123,  "Accounting  for  Stock-Based
       Compensation"  (SFAS 123).  SFAS 123 establishes a new method of accounting
       for stock-based compensation arrangements with employees. The new method is
       a fair value based method rather than the intrinsic value based method that
       is  currently  utilized.  However,  SFAS 123 does not  require an entity to
       adopt the new fair value  based  method for  purposes  of  preparing  basic
       financial  statements.  If an entity  chooses  not to adopt the fair  value
       based  method,  SFAS 123 requires an entity to display in the footnotes pro
       forma net income and  earnings per share  information  as if the fair value
       based method had been adopted.
  
       The Company has not adopted the fair value method as described in SFAS 123.
       The Company will disclose in the footnotes,  in the 1996 Annual Report, pro
       forma net income and  earnings per share  information  as if the fair value
       method had been adopted.
  
  5.   Earnings  per common share are based upon the  weighted  average  number of
       shares  outstanding.  The weighted average number of shares outstanding was
       4,071,683 and 4,061,617 for the three month periods ended March 31,1996 and
       1995,  respectively.  All prior period per share data has been  restated to
       give effect for the  4-for-3  stock  split that was  effective  for January
       1996.
  
  6.   On March 1, 1996 the Company  acquired the business  operations  of Central
       Mortgage Company, a Lancaster,  Pennsylvania  mortgage origination company.
       As consideration for this  transaction,  the Company will pay the seller an
       amount equal to one-tenth of one percent (.1%) of all mortgages  closed and
       located in Lancaster  County during the next five years, up to a maximum of
       $50,000 per year. In addition,  the building premises and the equipment are
       being leased by the Company from the seller.
  
                                         -8-
  <PAGE>
  
                        MANAGEMENT'S DISCUSSION AND ANALYSIS
                  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
       Keystone  Heritage  Group,  Inc. (the  "Company") is a bank holding company
  organized under the laws of Pennsylvania  and registered  under the Federal Bank
  Holding  Company Act of 1956.  The  Company's  principal  subsidiary  is Lebanon
  Valley National Bank (the "Bank").
  
  Results of Operations
       Net income for the  Company for the three  months  ended March 31, 1996 was
  $1.923  million or $.47 per share,  compared to $1.757 million or $.43 per share
  for the three  months  ended  March 31,  1995.  Return on average  stockholders'
  equity and return on average  assets for the 1996 period were 13.06  percent and
  1.37 percent, respectively.
  
  
  Net Interest Income
       Net interest  income is the primary  source of income for the Company.  Net
  interest  income  is  the  difference  between  interest  earned  on  loans  and
  investments  and interest paid on deposits and other funding  sources.  Deposits
  are the primary source of funds for the Company. The factors which influence net
  interest  income  include  changes in  interest  rates and  changes in asset and
  liability balances.
  
       For  purposes of this  discussion,  interest  income and the average  yield
  earned on loans and  investments  are presented on a taxable  equivalent  basis.
  This provides a basis for  comparison of tax exempt loans and  investments  with
  taxable loans and  investments by giving effect to interest earned on tax exempt
  loans and  investments  by an amount  equivalent  to federal  income taxes which
  would have been paid on the assumption  that the interest earned on those assets
  was taxable at the Company's statutory tax rate of 35 percent.
  
       The  table  presented  on page 17 is a  comparative  statement  of  average
  balances of interest earning assets and interest bearing  liabilities,  interest
  income and interest expense, and interest rates for the three months ended March
  31, 1996 and 1995.
  
       Net interest income for the three months ended March 31, 1996 and March 31,
  1995 was $6.2  million,  respectively.  The net  interest  margin  for the first
  quarter of 1996 was 4.65 percent compared to 4.84 percent for the same period of
  1995.  Average  earning  assets for the three month  period ended March 31, 1996
  were $537.6  million,  a $21.2  million or a 4.1 percent  increase from the same
  period of 1995.
  
       For the three month comparative  periods,  net interest income increased by
  $60  thousand,  which was  comprised  of  volume  associated  increases  of $290
  thousand  offset  by a $230  thousand  decrease  which  was  associated  to rate
  variances.  The volume  increases  were  primarily  a result of a $21.2  million
  increase in average  earning  assets  from the same period of 1995.  The average
  investment   portfolio  grew  by  $19.2  million  and  average   commercial  and
  agricultural loans grew by $13.2 million. This was partially offset by decreases
  in average  mortgage  loans of $2.9 million and average  personal  loans of $2.2
  million. The decrease in personal loans outstanding was due to the net effect of
  decreases of $6.8 million in indirect auto  installment  loans and a decrease of
  $1.1  million in  personal  credit line loans  offset by a $5.8  million or 15.8
  percent increase in direct  installment loans. The Company has been able to grow
  its commercial loan and direct personal loan portfolios  through increased sales
  efforts.  The credit quality of the Company's loan portfolio continues to remain
  strong, as indicated by the low level of non-performing  loans presented on page
  12 and the low amount of net  charge-offs  presented  on page 11. The  Company's
  management of credit risk continues to be emphasized as loan volumes increase.
  
                                         -9-
  
  
  <PAGE>
  
       The  aforementioned  asset growth was  primarily  funded by a $14.8 million
  increase in average deposit volumes.  This was comprised of increases in average
  savings and money market  deposits of $8.8 million,  a $4.6 million  increase in
  average  time  deposits  and a $3.5  million  increase  in average  non-interest
  bearing demand  deposits.  The increase in average  deposit volume was primarily
  due to an increased sales and marketing effort on gathering deposits in order to
  support the  Company's  loan  growth.  In  addition,  the Company  introduced  a
  competitive  money  market  product on March 1, 1995 which has a tiered  pricing
  structure and is tied  directly to the prime rate.  This was a key factor in the
  growth of the money market  deposit  volumes  from the first  quarter of 1995 to
  1996.
  
       The decline in the net interest  margin from the first  quarter of 1995 was
  due to the fact that higher  rates were paid on time  deposit  and money  market
  accounts.  The cost of time deposits and money market  deposits  increased by 48
  and 93 basis  points,  respectively.  The  increase  in the money  market  costs
  resulted from the prime rate based money market  product which was introduced on
  March 1, 1995.
  
  Provision and Allowance for Possible Loan Losses
  
       There was no  provision  for  possible  loan  losses  charged to net income
  during the three month  period ended March 31, 1996 or 1995.  The asset  quality
  continues to remain strong as indicated by the low level of non-performing loans
  indicated on page 11.
  
       Net  charge-offs  of $249 thousand were recorded for the three months ended
  March 31, 1996 compared to net recoveries of $11 thousand for the same period of
  1995.
  
       The  allowance for possible loan losses was $7.8 million or 1.98 percent of
  total loans  outstanding  at March 31, 1996 and $8.0  million or 2.05 percent at
  December  31, 1995.  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.
  
                                        -10-
  
  
  <PAGE>
  
       The  following is a summary of the activity in the  allowance  for possible
  loan losses for the three month periods ended March 31, 1996 and 1995:
  <TABLE>
  <CAPTION>
  
                                                                          Three Months Ended
                                                                               March   31
  (Dollars in thousands)                                                   1996             1995
  <S>                                                                  <C>              <C>   
  Allowance for possible loan losses
    at beginning of period                                               $8,025           $8,140
   Loans charged-off:
    Commercial                                                              264               15
    Agriculture                                                               0                0
    Real estate construction                                                  0                0
    Loans to individuals                                                     81              122
    Real estate - residential mortgage                                        0                0
                                                                         ------           ------
   Total loans charged-off                                                  345              137
  
   Recoveries of loans previously charged-off:
    Commercial                                                               81              126
    Agriculture                                                               0                0
    Real estate construction                                                  4                9
    Loans to individuals                                                     11               13
    Real estate - residential mortgage                                        0                0
                                                                         ------           ------
    Total recoveries of loans previously
     charged-off                                                             96              148
    Net loans charged-off                                                   249              (11)
    Current period's provision for
    possible loan losses                                                      0                0
                                                                         ------           ------
  
    Allowance for possible loan
    losses at end of period                                              $7,776           $8,151
                                                                         ======           ======
  </TABLE>
  
  
  Other Operating Income and Expense
  
       Other  operating  income was $1.2  million for the three months ended March
  31, 1996 and $1.1  million for the same  period of 1995.  The  increase in other
  income was due to a $34 thousand increase in the gain on sale of loans. On March
  1, 1996,  the Company  completed a  transaction  to  purchase  Central  Mortgage
  Company,  a mortgage  origination  company based in Lancaster,  Pennsylvania.  A
  total of $4.7  million in  mortgage  loans were  originated  and sold during the
  first quarter of 1996 compared to $1.9 million  during the same periods of 1995.
  The Company  plans to continue  selling  mortgages in the  secondary  market and
  anticipates  an  increase  in gains on the sale of  loans,  as a result  of this
  transaction.  As consideration  for this  transaction,  the Company will pay the
  seller an amount equal to one-tenth of one percent (.1%) of all mortgages closed
  and located in Lancaster  County during the next five years,  up to a maximum of
  $50,000 per year. In addition, the building premises and the equipment are being
  leased by the Company from the seller.
  
       Other operating  expense for the three months ended March 31, 1996 was $4.5
  million,  a 1.3 percent  decrease  from the $4.6  million  reported for the same
  period of 1995.  The decrease was due to a $258 thousand  decrease in the amount
  paid for FDIC  insurance and a $73 thousand or 3 percent  decrease in the amount
  of salary and benefit expenses. The decrease in FDIC insurance expense is due to
  the lower  premium  rate  being  charged  to the Bank by the  FDIC.  The Bank is
  currently paying a quarterly  assessment  amount of $500.  Salaries and benefits
  decreased as a result of an internal productivity  enhancement program that will
  strengthen the Company's sales efforts of the Bank's  products while  maximizing
  its overhead efficiency. This plan resulted in a 3 percent reduction in staffing
  positions which were realized through attrition.
  
  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.
  
  
                                        -11-
  <PAGE>
  
       Non-performing loans at March 31, 1996 totalled $1.5 million or .39 percent
  of total loans outstanding,  compared to $1.5 million or .39 percent of loans at
  December  31, 1995 and $2.6  million or .68 percent of loans at March 31,  1995.
  Non-performing  assets at March 31,  1996 were $2.5  million  or .63  percent of
  loans plus other real  estate  owned  compared  to 2.5 million or .62 percent of
  loans plus other real estate owned at December 31, 1995 and $4.2 million or 1.09
  percent of loans plus other real estate owned at March 31, 1995. The improvement
  in  non-performing  assets at March 31, 1996 as compared to March 31, 1995 was a
  result of decreased  levels of  non-accrual  loans and other real estate  owned.
  Non-accruing  loans  increased by $267  thousand  from  December 31, 1995 as the
  result of adding four loans to non-accrual status during the quarter.
  
       The  Company  has  determined  that  loans  with a  carrying  value of $1.0
  million,  $1.2 million and $1.9 million at March 31, 1996, December 31, 1995 and
  March 31, 1995,  respectively,  are deemed to be impaired. The specific reserves
  related to such  loans,  although  not  material,  are  included  in the general
  allowance for possible loan losses.  The average balance of loans  classified as
  impaired for the three month  comparative  periods  amounted to $784 thousand at
  March 31, 1996 and $1.8  million  1995.  Interest  income of  approximately  $13
  thousand and $4 thousand was  recognized  during the three month periods of 1996
  and 1995, respectively, on loans classified as impaired loans.
  
       The following is a presentation  of  non-performing  assets as of March 31,
  1996, December 31, 1995, and March 31 1995:
  <TABLE>
  <CAPTION>
  
                                                            March 31         Dec. 31       March 31
  (Dollars in thousands)                                     1996              1995           1995
  <S>                                                      <C>              <C>             <C>     
  Non-accruing loans                                       $  1,008         $    741        $  1,864
  Loans past due 90 days of more as to
    principal or interest                                       524         $    793        $    724
                                                           --------         --------        --------
  Total non-performing loans                                  1,532            1,534           2,588
  
  Other real estate owned, net                                  947              913           1,560
                                                           --------         --------        --------
  Total non-performing assets                              $  2,479         $  2,447        $  4,148
                                                           ========         ========        ========
  
  Allowance for possible loan losses to
    non-performing loans                                     5.08x            5.23x           3.15x
  Non-performing loans as a
    percent of loans outstanding                              .39%             .39%            .68%
  Non-performing assets as a
    percent of loans outstanding
    plus other real estate owned                              .63%             .62%           1.09%
  </TABLE>
  
  
       Interest  income of  approximately  $21 thousand would have been recognized
  during the three month period ended March 31, 1996, had these loans been current
  in accordance with their original terms and been outstanding  through the period
  or since  origination.  Interest  income  on these  loans  of $13  thousand  was
  recognized during the three months ended March 31, 1996.
  
       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 March 31, 1996  totalled $93 million or 23.7
  percent of total  loans  outstanding.  These  loans may be  impacted  by adverse
  climate or economic  conditions  not common to other  industries.  The Company's
  exposure to possible loss in the event of  nonperformance  by these borrowers is
  represented by the contractual amount of those instruments. The Company's policy
  is to require  supporting  collateral  for these loans which is generally in the
  form of agriculture  real estate,  livestock,  and farm equipment.  At March 31,
  1996  there  were no  significant  agriculture  related  borrowings  which  were
  classified as non-performing assets and there were no charge-offs of agriculture
  related loans during the three months ended March 31, 1996.
  
                                        -12-
  
  <PAGE>
  
  Financial Position
  
       Total assets at March 31, 1996 were $565  million  compared to $578 million
  at  December  31,  1995.  Total  loans  outstanding  at March 31, 1996 were $393
  million  compared to $391 million at December 31, 1995.  Total deposits at March
  31, 1996 were $478 million  compared to $488  million at December 31, 1995.  The
  change in deposits  from  December  31, 1995 to March 31, 1996 was the result of
  fluctuations non-interest bearing demand deposits and other transaction accounts
  and was not due to a continuing downward trend in deposit volumes.
  
  Capital Adequacy
  
       The Company's  stockholders' equity was $59.9 million at March 31, 1996 and
  $58.9 million at December 31, 1995. Total stockholders'  equity increased by 1.7
  percent from  December 31, 1995 which was the net effect of the  recognition  of
  $1.9 million in net income for the three month period, cash dividend payments to
  stockholders of $814 thousand and an unfavorable  change in net unrealized gains
  or losses on  investment  securities  available for sale of $111  thousand.  Net
  unrealized  gains on investment  securities  available for sale of $225 thousand
  and $336 thousand were included as a component of stockholders'  equity at March
  31, 1996 and December 31, 1995, 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 March 31, 1996 the
  Company's  Tier 1 and Total Capital ratios were 13.88 percent and 15.21 percent,
  respectively.  Tier 1 and Total  Capital  ratios  were 13.59  percent  and 14.93
  percent  respectively,  at December  31,  1995.  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 March 31, 1996,  the
  Company's Leverage ratio was 10.52 percent and was 10.29 percent at December 31,
  1995.
  
  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.
  
                                        -13-
  
  
  <PAGE>
  
       The Bank has entered into interest rate swap  contracts,  and interest rate
  cap and interest rate collar contracts as part of its asset-liability management
  activities.  These  contracts  are used  primarily  for the  purpose of managing
  interest rate risk against  specific assets and liabilities in order to minimize
  mismatches  in the Bank's  interest  rate  sensitivity  and  interest  rate risk
  positions.
  
       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 should the counterparties fail to perform.  Notional principal amounts
  often are used to express the volume of these transactions.
  
       The interest  income or interest  expense  differential  from interest rate
  swap  contracts is  recognized  on the accrual  basis as a component of interest
  income or interest  expense over the life of the  contract.  Interest  income or
  interest  expense  resulting from the cap and collar  contracts is recognized on
  the  accrual  basis  when  the  national  prime  rate  moves  below  or  above a
  predetermined  interest rate level.  Gains or losses from early  termination  of
  swap  contracts  are  deferred  and  amortized  over the  remaining  term of the
  underlying  assets or liabilities.  The Company is not exposed to credit risk in
  terms of the  notional  amounts  of these  contracts,  however,  the  receipt of
  payments representing the interest differential is based on the creditworthiness
  of the counterparty to each contract.
  
       Interest rate sensitivity is a function of the repricing characteristics of
  the Company's assets and liabilities.  Each asset and liability  reprices either
  at  maturity or during the life of the  instrument.  Interest  rate  sensitivity
  measures the difference  between the volume of assets and  liabilities  that are
  subject to repricing at a future period of time. These  differences are known as
  interest sensitivity gaps.
  
       The principal  objectives of  asset-liability  management are to manage the
  funding and investment  strategies  necessary to maintain an appropriate balance
  of the  sensitivity  between assets and  liabilities  to potential  movements in
  interest rates and to provide adequate  liquidity while enhancing  profitability
  through returns from managed levels of interest rate risk. The Company  actively
  manages the interest rate  sensitivity  of its assets and  liabilities.  Several
  techniques are used for measuring  interest rate  sensitivity.  The  traditional
  maturity "gap" analysis,  which reflects the volume difference  between interest
  rate sensitive  assets and liabilities  during a given time period,  is reviewed
  regularly by management.  An interest rate risk simulation model is also used to
  assess the level of  interest  rate risk  inherent in the  Company's  assets and
  liabilities  under various interest rate scenarios.  The Company  recognizes the
  importance  of  managing  both  assets and  liabilities  simultaneously  for the
  purpose of reducing interest rate risk, providing  liquidity,  and enhancing the
  market value of the Company.
  
       Managing  interest rate  sensitivity is an inexact  science.  The repricing
  intervals  between assets and liabilities  change on a daily basis.  Contractual
  maturities  are not  always  the  same  as  actual  maturities  as a  result  of
  prepayments prior to scheduled maturities.  Additionally,  demand deposits,  NOW
  accounts,  and money  market fund  accounts may be  withdrawn  upon demand,  and
  savings  deposits may be withdrawn upon a very short period of notice.  However,
  for asset-liability management purposes, the Company considers a portion of each
  of these types of deposits to be "core"  amounts which may be considered to have
  various maturities.
  
           The Company  manages its interest rate  sensitivity by changing mix and
  repricing  characteristics of its assets and liabilities  through its investment
  securities  portfolio,  its loan  and  deposit  terms,  and  through  the use of
  off-balance sheet  derivatives,  primarily interest rate swaps and interest rate
  cap/collar  contracts.  These  interest rate  contracts  will have the effect of
  decreasing net interest  income in a rising rate  environment and increasing net
  interest income in a decreasing rate environment.
  
           The Company's use of these interest rate contracts is closely monitored
  by the Company's  Board of Directors  and is closely  controlled as to levels of
  exposure.  At March 31,  1996 the  Company  had five  interest  rate  agreements
  outstanding having a total notional amount of $50 million.  These agreements are
  in the form of interest rate swap  agreements each with a notional amount of $10
  million.
  
                                        -14-
  
  
  <PAGE>
  
       The Company entered into two interest rate swap contracts  during the first
  quarter of 1996.  On March 4, 1996,  the Company  entered into an interest  rate
  swap contract with a notional  amount of $10 million.  This contract states that
  the Company would receive a fixed rate of 8.25 percent and pay a floating  prime
  rate based on the national prime rate. The Company entered into another interest
  rate swap contract on March 14, 1996 with a notional amount of $10 million. This
  contract  states that the Company would receive a fixed rate of 8.65 percent and
  pay a floating prime rate based on the national prime rate.
  
       The  Company  does not  obtain  collateral  or other  security  to  support
  financial instruments subject to credit risk but monitors the credit standing of
  counterparties. The counterparties of the aforementioned interest rate contracts
  are commercial banks having a rating of A1 from Moody's Investor Service.
  
       The interest rate swap contracts were entered into to protect the Company's
  interest  rate  risk  in  a  declining  or  stable  interest  rate  environment.
  Specifically, these contracts protect the Company's risk from negative movements
  in its prime rate based asset portfolio which would not be perfectly  matched by
  repricing  liabilities.  These  contracts  were  entered  into to  minimize  the
  negative effects that the Bank will realize in falling rate  environments  (e.g.
  reduction in prime based rates).
  
       The following is the amount of financial instruments with off-balance sheet
  risk not  reflected  in the  consolidated  balance  sheets at March 31, 1996 and
  December 31, 1995:
  <TABLE>
  <CAPTION>
  
                                                                   Contractual Amounts
  
                                                         March 31                        December 31
  (Dollars in thousands)                                   1996                             1995
  <S>                                                    <C>                              <C>    
  Financial instruments whose
  contractual
    amounts represent credit risk:
  Commitments to extend credit                           $92,388                          $88,242
  Standby letters of credit                                7,599                            8,862
  Contractual amounts of off-balance
  sheet financial instruments not
  constituting credit risk:
     Interest rate swap, notional
  value                                                   50,000                           30,000
     Interest rate cap/collar,
  notional value                                             -0-                           10,000
  
  
  </TABLE>
  
  Supervision and Regulation
  
       During 1994, Congress passed legislation to remove geographic  restrictions
  on bank expansion.  The Riegle-Neal Interstate Banking and Branch Efficiency Act
  of 1994  will  allow  banks to  expand  across  state  lines  to merge  existing
  multi-state  branching  operations  into a single  institution or to acquire new
  branches in other states.  Interstate  banking and branching  authority  will be
  subject to  certain  conditions  and  restrictions,  such as  capital  adequacy,
  management,  CRA compliance and limits on deposit concentrations.  The effective
  date for this legislation will be June 1, 1997.  Individual states will have the
  option to opt in early or to opt out completely prior to June 1, 1997.
  
       Although  the  passage  of this  legislation  should  have  the  impact  of
  quickening the pace of consolidation  within the banking  industry,  the Company
  does not  anticipate  any immediate  impact upon its financial  condition or its
  operations as a result of this new law.
  
       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.
  
                                        -15-
  <PAGE>
  
  New Accounting Standards
  
       On January 1, 1996 the  Company  adopted the  provisions  of  Statement  of
  Financial  Accounting  Standards  No.  121  (SFAS  121),   "Accounting  for  the
  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of".
  SFAS  provides  guidance  for  recognition  and  measurement  of  impairment  of
  long-lived assets, certain identifiable intangibles and goodwill related both to
  assets held and used and assets to be disposed of.
  
       SFAS  121  requires  that  long-lived   assets  and  certain   identifiable
  intangibles  held and used by an  entity be  reviewed  for  impairment  whenever
  events or changes in circumstances indicate that the carrying amount of an asset
  may not be recoverable.  In performing the review for recoverability,  an entity
  should  estimate  the future  cash flows  expected to result from the use of the
  asset and its eventual disposition. If the sum of the expected future cash flows
  (undiscounted  and without interest charges) is less than the carrying amount of
  the asset,  an impairment loss is recognized.  Otherwise,  an impairment loss is
  not  recognized.  Measurement of an impairment  loss for  long-lived  assets and
  identifiable  intangibles that an entity expects to hold and use should be based
  on the fair value of the asset.
  
       SFAS  121  requires  that  long  lived  assets  and  certain   identifiable
  intangibles  to be disposed  of be  reported at the lower of carrying  amount or
  fair value less cost to sell. The  implementation of SFAS 121 did not impact the
  Company's financial condition or results of operation.
  
       On January 1, 1996, the Company  adopted the provisions of the 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.
  
       Presently,  the Company  does not sell or  securitize  mortgage  loans with
  servicing rights retained. Accordingly, the Company has not been impacted by the
  provisions of SFAS 122.
  
       On January 1, 1996 the  Company  adopted the  provisions  of  Statement  of
  Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
  Compensation"  (SFAS 123).  SFAS 123  establishes a new method of accounting for
  stock-based  compensation  arrangements with employees. The new method is a fair
  value  based  method  rather  than the  intrinsic  value  based  method  that is
  currently  utilized.  However,  SFAS 123 does not require an entity to adopt the
  new  fair  value  based  method  for  purposes  of  preparing   basic  financial
  statements.  If an entity chooses not to adopt the fair value based method, SFAS
  123  requires  an entity to  display in the  footnotes  pro forma net income and
  earnings  per share  information  as if the fair  value  based  method  had been
  adopted.
  
       The Company has not adopted the fair value method as described in SFAS 123.
  The Company will disclose in the footnotes, in the 1996 Annual Report, pro forma
  net income and  earnings per share  information  as if the fair value method had
  been adopted.
  
                                        -16-
  
  
  <PAGE>
  
            AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
                               (Dollars in thousands)
  
  <TABLE>
  <CAPTION>
                                              Three Months Ended March 31, 1996         Three Months Ended March 31, 1995
                                                 Average               Average              Average              Average
                                                 Balance    Interest    Rate               Balance    Interest    Rate
  <S>                                         <C>          <C>         <C>               <C>         <C>          <C>  
  Assets
      Loans                                    $390,350     $  8,833    9.10%             $381,817    $  8,552     9.01%
      Money market investments                    2,729           37    5.42                 9,247         134     5.81
      Investment securities:
          Taxable                               132,655        1,938    5.87               114,843       1,559     5.46
          Non-taxable                            11,863          193    6.54                10,466         179     6.88
                                               --------     --------   -----              --------    --------     ----
               Total investment securities      144,518        2,131    5.93               125,309       1,738     5.58
               Total earning assets             537,597     $ 11,001    8.23%              516,373    $ 10,424     8.12%
                                               ========      =======   =====                          ========     ====
  
      Other assets                               27,023                                     26,186
                                               --------                                   --------
               Total assets                    $564,620                                   $542,559
                                               ========                                   ========
  
  Liabilities and stockholders' equity 
      Interest bearing deposits:
          Now accounts                         $ 55,062     $    191    1.39%             $ 57,230    $    202     1.43%
          Savings and money market              127,790          986    3.10               118,960         794     2.71
          Time                                  233,735        3,326    5.72               229,119       2,960     5.24
                                               --------     --------   -----              --------    --------     ----
               Total interest bearing deposits  416,587        4,503    4.35               405,309       3,956     3.96
  
      Short-term borrowings                      11,505          121    4.22                13,138         131     4.04
      Long-term debt                             11,111          162    5.85                10,678         182     6.91
                                               --------     --------   -----              --------    --------     ----
          Total interest bearing liabilities    439,203     $  4,786    4.38%              429,125    $  4,261     4.03%
                                                            ========   =====                          ========    =====
  
      Non-interest bearing deposits              58,060                                     54,543
      Other liabilities                           8,138                                      6,195
      Stockholders' equity                       59,219                                     52,696
                                               --------                                   --------
          Total liabilities and
          stockholders' equity                 $564,620                                   $542,559
                                               ========                                   ========
  
      Net interest income                                   $  6,215                                  $  6,155
      Total yield on earning assets                                      8.23%                                     8.19%
      Rate on supporting liabilities                                     3.58%                                     3.35%
                                                                        -----                                     -----
      Net interest margin                                                4.65%                                     4.84%
                                                                         ====                                     =====
  
  </TABLE>
  
  
  Interest and average interest rates are presented on a fully taxable  equivalent
  basis,  using an effective  tax rate of 35%. For  purposes of  calculating  loan
  yields,  average loan balances include non-accrual loans. Loan fees are included
  in interest income.
  
                                        -17-
  
  
  <PAGE>
  
  PART II.  OTHER INFORMATION
  
  ITEM 1.  LEGAL PROCEEDINGS
  
  None.
  
  ITEM 2.  CHANGES IN SECURITIES
  
  None.
  
  ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
  
  None.
  
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
  None.
  
  ITEM 5.  OTHER INFORMATION
  
  None.
  
  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
  
  (a.)  None.
  
  (b.)  The Company did not file any reports on Form 8-K during the quarter ended
  March 31, 1996.
  
                                        -18-
  
  
  <PAGE>
  
  
  
                            KEYSTONE HERITAGE GROUP, INC.
  
                                     SIGNATURES
  
  
       Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
  registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
  undersigned thereunto duly authorized.
  
  
  
                                         Keystone Heritage Group, Inc.
                                         (Registrant)
  
  
  Date  May 9, 1996                     By /s/ Kurt A. Phillips
                                           --------------------------------------
                                           Kurt A. Phillips
                                           Chief Financial and Accounting Officer
  
  
                                        -19-
metadata_documents: [{"type": "10-Q", "sequence": "1", "secsgml_size_bytes": 68809}]
metadata_filer: {"company-data": {"conformed-name": "KEYSTONE HERITAGE GROUP INC", "cik": "0000715366", "assigned-sic": "6022", "irs-number": "232219740", "state-of-incorporation": "PA", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "10-Q", "act": "34", "file-number": "000-13775", "film-number": "96561350"}, "business-address": {"street1": "555 WILLOW ST", "street2": "P O BOX 1285", "city": "LEBANON", "state": "PA", "zip": "17042-1285", "phone": "7172746800"}, "mail-address": {"street2": "555 WILLOW ST P O BOX 1285", "city": "LEBANON", "state": "PA", "zip": "17042-1285"}}
text: UNITED STATES
  
                         SECURITIES AND EXCHANGE COMMISSION
  
                               Washington, D.C. 20549
  
                                      Form 10-Q
  
       Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
  Act of 1934
  
  For the period ended    March 31, 1996
  
  Commission File Number:  0-13775
  
                            KEYSTONE HERITAGE GROUP, INC.
                                    (Registrant)
  
       PENNSYLVANIA                                               23-2219740
  (State of incorporation)                                     (I.R.S. Employer
                                                               Identification No.)
  
                   555 WILLOW STREET, LEBANON, PENNSYLVANIA 17046
                 (Address of principal executive offices) (Zip Code)
  
                                    717-274-6800
                (Registrant's telephone number, including area code)
  
       Indicate  by check mark  whether the  registrant  (1) has filed all reports
  required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
  1934  during  the  preceding  12 months  (or for such  shorter  period  that the
  registrant was required to file such reports),  and (2) has been subject to such
  filing requirements for the past 90 days. Yes X No
  
           Indicate  the  number of  shares  outstanding  of each of the  issuer's
  classes of common stock, as of the latest practicable date.
  
                Class                                  Outstanding at May 9, 1996
  Common Stock ($5.00 par value)                                4,071,683 shares
  KEYSTONE HERITAGE GROUP, INC.
  
                                        Index
  
  PART I - FINANCIAL INFORMATION                                        Page
  
  Item 1 - Financial Statements
  
           Consolidated Balance Sheets as of
           March 31, 1996 and December 31, 1995 (Unaudited)                3
  
           Consolidated Statements of Income for the
           Three Months ended March 31, 1996 and
           1995 (Unaudited)                                                4
  
           Consolidated Statements of Stockholders' Equity
           for the Three Months ended March 31, 1996 and
           1995 (Unaudited)                                                5
  
           Consolidated Statements of Cash Flows for the
           Three Months ended March 31, 1996 and 1995 (Unaudited)          6
  
           Notes to Consolidated Financial Statements                      7
  
  Item 2 - Management's Discussion and Analysis of
            Financial Condition and Results of Operations                  9
  
  PART II - OTHER INFORMATION
  
  Signature Page                                                          19
  
                                         -2-
  KEYSTONE HERITAGE GROUP, INC.
  
                             CONSOLIDATED BALANCE SHEETS
  
                               (Dollars In Thousands)
  March 31              December 31
                                                                               1996                    1995
  ASSETS
        Cash and due from banks                                             $  17,023              $  23,766
        Interest bearing deposits with banks                                      198                    246
        Federal funds sold                                                      5,000                      0
        Investment securities available for sale                               57,393                 65,799
        Investment securities held to maturity
            (fair value of $82,607 and $88,052
            for 1996 and 1995, respectively)                                   82,142                 86,885
        Loans, net of unearned income of
            $2,530 for 1996 and $2,830 for 1995                               392,545                391,009
        Allowance for possible loan losses                                     (7,776)                (8,025)
                                                                            ----------             ----------
  
             Loans, net                                                       384,769                382,984
  
        Premises and equipment, net                                             7,675                  7,933
        Accrued interest receivable                                             3,946                  3,844
        Other real estate owned                                                   947                    913
        Deferred tax asset, net                                                 2,914                  3,100
        Other assets                                                            2,664                  2,307
                                                                            ----------             ---------
  
             Total assets                                                   $ 564,671              $ 577,777
                                                                            ==========             =========
  
  LIABILITIES
        Non-interest bearing deposits                                       $  60,537              $  65,530
        Interest bearing deposits                                             417,303                422,387
                                                                            ----------             ---------
  
             Total deposits                                                   477,840                487,917
  
        Short-term borrowings                                                   9,110                  8,640
        Other borrowings                                                       10,941                 14,009
        Accrued interest payable                                                4,006                  5,284
        Other liabilities                                                       2,897                  3,048
                                                                            ----------             ---------
  
             Total liabilities                                                504,794                518,898
  
  STOCKHOLDERS' EQUITY
  
        Common stock - $5 par value; Authorized 
            10,000,000 shares; Outstanding
            4,071,683 shares at March 31, 1996 and
            December 31, 1995, respectively                                    20,358                 20,358
        Capital surplus                                                        22,078                 22,078
        Retained earnings                                                      17,216                 16,107
        Net unrealized loss on investment securities
             available for sale, net of taxes                                     225                    336
                                                                            ----------             ---------
  
             Total stockholders' equity                                        59,877                 58,879
  
             Total liabilities and stockholders'
               equity                                                       $ 564,671              $ 577,777
                                                                            ==========             ==========
  See accompanying notes to financial statements.
  
                                         -3-
  KEYSTONE HERITAGE GROUP, INC.
                          CONSOLIDATED STATEMENTS OF INCOME
  
                    (Dollars in thousands, except per share data)
  Three Months Ended
                                                                               March 31
                                                                         1996            1995
  INTEREST INCOME
                Interest and fees on loans                             $ 8,753         $ 8,481
                Interest on investment securities
                    available for sale:
                    Taxable investment securities                          737             662
                    Equity investments                                      55              43
                Interest on investment securities held to maturity:
                    Taxable investment securities                        1,145             856
                    Non-taxable investment securities                      125             116
                                                                       --------        -------
                      Total interest on investment
                      securities                                         2,062           1,677
                Interest on money market investments                        37             134
                                                                       --------        -------
                    Total interest income                               10,852          10,292
  
  INTEREST EXPENSE
                Interest on deposits                                     4,503           3,956
                Interest on short-term borrowings                          121             131
                Interest on other borrowings                               162             182
                                                                       --------        -------
                    Total interest expense                               4,786           4,269
  
                    Net interest income                                  6,066           6,023
  
                Provision for possible loan losses                           0               0
                                                                       --------        -------
                    Net interest income after provision
                    for possible loan losses                             6,066           6,023
  
  OTHER OPERATING INCOME
                Trust income                                               317             315
                Service charges on deposits                                306             311
                Net realized gain (loss) on investment
                    securities available for sale                           23              (7)
                Net gain on sale of loans                                   74              40
                Other income                                               483             481
                                                                       --------        -------
                    Total other operating income                         1,203           1,140
  
  OTHER OPERATING EXPENSE
                Salaries and employee benefits                           2,364           2,437
                Occupancy expense, net                                     328             317
                Equipment expense                                          506             466
                Deposit insurance expense                                    1             259
                Other expense                                            1,276           1,141
                                                                       --------        -------
                    Total other operating expense                        4,475           4,620
  
                    Income before income taxes                           2,794           2,543
                Income taxes                                               871             786
                                                                       --------        -------
  
                    Net income                                         $ 1,923         $ 1,757
                                                                       ========        =======
  
  PER COMMON SHARE
                    Net income                                         $   .47         $   .43
                                                                       ========        =======
  
                    Cash dividends paid                                $   .20         $  .165
  -4-
  KEYSTONE HERITAGE GROUP, INC.
                   CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             Three Months Ended March 31
  
                               (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, 1994                                    $15,231      $30,053      $ 8,269         ($1,451)        $52,102
       Net Income                                                   -0-          -0-        1,757             -0-           1,757
       Cash dividends ($.165 per share)                             -0-          -0-         (670)            -0-            (670)
       Change in unrealized gain (loss) on
           investment securities available
           for sale, net of taxes                                   -0-          -0-          -0-             694             694
                                                                -------      -------      -------         --------        -------
  
  Balance, March 31, 1995                                       $15,231      $30,053      $ 9,356         ($  757)        $53,883
                                                                =======      =======      =======         ========        =======
  
  Balance, December 31, 1995                                    $20,358      $22,078      $16,107          $  336         $58,879
       Net income                                                                           1,923                           1,923
       Cash dividends ($.20 per share)                              -0-          -0-         (814)            -0-            (814)
       Change in unrealized gain (loss) on
           investment securities available for
           sale, net of taxes                                       -0-          -0-          -0-            (111)           (111)
                                                                -------      -------      --------        --------        --------
  
  Balance, March 31, 1996                                       $20,358      $22,078      $17,216         $   225         $59,877
                                                                =======      =======      ========        ========        =======
  -5-
  KEYSTONE HERITAGE GROUP, INC.
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (Dollars in thousands)
  Three Months Ended
                                                                                        March 31
                                                                                      1996           1995
  CASH FLOW FROM OPERATING ACTIVITIES:
      Net income                                                                    $ 1,923        $ 1,757
      Adjustments to reconcile net income to cash:
          Provision for possible loan losses                                              0              0
          Depreciation and amortization                                                 391            344
          Deferred income taxes                                                         242            (41)
          Increase in accrued interest receivable                                      (102)          (100)
          Increase (decrease) in
           accrued interest payable                                                  (1,278)           412
          Net gain on sale of loans                                                     (74)           (40)
          Net realized (gain) loss on investment
           securities available for sale                                                (23)             7
          Other, net                                                                   (504)          (143)
                                                                                    --------       --------
              Net cash provided by operating activities                                 575          2,196
  
  CASH FLOWS FROM INVESTING ACTIVITIES:
      Net increase in money market investments                                       (4,952)        (1,300)
      Maturities of investment securities
           held to maturity                                                           9,726         10,376
      Maturities of investment securities
           available for sale                                                        11,291          3,128
      Sale of investment securities available for sale                                   63            100
      Funds invested in investment securities
           held to maturity                                                          (4,958)       (25,992)
      Funds invested in investment securities
           available for sale                                                        (3,174)          (184)
      Net (increase) decrease in loans
           made to customers                                                           (423)         3,520
      Originations of residential mortgage loans sold                                (5,994)        (1,617)
      Proceeds from sale of residential mortgage loans                                4,725          1,862
      Net expenditures for premises and equipment                                      (133)          (301)
      Proceeds from sale of other real estate owned                                       0            412
                                                                                    --------       -------
          Net cash provided from (used by)
            investing activities                                                      6,171         (9,996)
  
  CASH FLOWS FROM FINANCING ACTIVITIES:
      Net decrease in deposits                                                      (10,077)          (514)
      Net increase (decrease) in short-term borrowings                                  470         (1,274)
      Net (decrease) increase in other borrowings                                    (3,068)         2,871
      Cash dividends paid                                                              (814)          (670)
                                                                                    --------       --------
          Net cash used by (provided from)
            financing activities                                                    (13,489)           413
  
      Net decrease in cash and due from banks                                        (6,743)        (7,387)
  
      Cash and due from banks at beginning of period                                 23,766         23,568
      Cash and due from banks at end of period                                      $17,023        $16,181
  
  SUPPLEMENTAL DISCLOSURES:
      Interest paid                                                                 $ 2,824        $ 2,451
      Income taxes paid                                                                  74            300
  
  NON-CASH INVESTING AND FINANCING ACTIVITIES:
      Loans charged-off                                                                 345            137
  -6-
  KEYSTONE HERITAGE GROUP, INC.
  
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
  1.   The accompanying  consolidated  financial  statements of Keystone  Heritage
       Group,  Inc.  have  not  been  reviewed  by  independent  certified  public
       accountants.  However, in management's  opinion, the statements reflect all
       adjustments  and  disclosures  necessary  for a  fair  presentation  of the
       consolidated balance sheet of the Company as of March 31, 1996 and December
       31, 1995, the consolidated statements of income for the three month periods
       ended March 31, 1996 and 1995 and the consolidated statements of cash flows
       for the three months ended March 31, 1996. 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
       discussed  below,  which were  adopted  during the quarter  ended March 31,
       1996. 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.   On January 1, 1996 the  Company  adopted the  provisions  of  Statement  of
       Financial  Accounting  Standards  No. 121 (SFAS 121),  "Accounting  for the
       Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed
       Of". SFAS provides  guidance for  recognition and measurement of impairment
       of long-lived assets, certain identifiable intangibles and goodwill related
       both to assets held and used and assets to be disposed of.
  
       SFAS  121  requires  that  long-lived   assets  and  certain   identifiable
       intangibles held and used by an entity be reviewed for impairment  whenever
       events or changes in circumstances  indicate that the carrying amount of an
       asset may not be recoverable.  In performing the review for recoverability,
       an entity should estimate the future cash flows expected to result from the
       use of the asset and its eventual  disposition.  If the sum of the expected
       future cash flows  (undiscounted and without interest charges) is less than
       the  carrying  amount  of the  asset,  an  impairment  loss is  recognized.
       Otherwise,  an  impairment  loss  is  not  recognized.  Measurement  of  an
       impairment loss for long-lived assets and identifiable  intangibles that an
       entity  expects  to hold and use  should be based on the fair  value of the
       asset.
  
       SFAS  121  requires  that  long  lived  assets  and  certain   identifiable
       intangibles  to be disposed of be reported at the lower of carrying  amount
       or fair value  less cost to sell.  The  implementation  of SFAS 121 did not
       impact the Company's financial condition or results of operations
  
  3.   On January 1, 1996, the Company  adopted the provisions of the 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.
  
       Presently,  the Company  does not sell or  securitize  mortgage  loans with
       servicing rights retained.  Accordingly,  the Company has not been impacted
       by the provisions of SFAS 122.
  
                                         -7-
  4.   On January 1, 1996 the  Company  adopted the  provisions  of  Statement  of
       Financial   Accounting  Standards  No.  123,  "Accounting  for  Stock-Based
       Compensation"  (SFAS 123).  SFAS 123 establishes a new method of accounting
       for stock-based compensation arrangements with employees. The new method is
       a fair value based method rather than the intrinsic value based method that
       is  currently  utilized.  However,  SFAS 123 does not  require an entity to
       adopt the new fair value  based  method for  purposes  of  preparing  basic
       financial  statements.  If an entity  chooses  not to adopt the fair  value
       based  method,  SFAS 123 requires an entity to display in the footnotes pro
       forma net income and  earnings per share  information  as if the fair value
       based method had been adopted.
  
       The Company has not adopted the fair value method as described in SFAS 123.
       The Company will disclose in the footnotes,  in the 1996 Annual Report, pro
       forma net income and  earnings per share  information  as if the fair value
       method had been adopted.
  
  5.   Earnings  per common share are based upon the  weighted  average  number of
       shares  outstanding.  The weighted average number of shares outstanding was
       4,071,683 and 4,061,617 for the three month periods ended March 31,1996 and
       1995,  respectively.  All prior period per share data has been  restated to
       give effect for the  4-for-3  stock  split that was  effective  for January
       1996.
  
  6.   On March 1, 1996 the Company  acquired the business  operations  of Central
       Mortgage Company, a Lancaster,  Pennsylvania  mortgage origination company.
       As consideration for this  transaction,  the Company will pay the seller an
       amount equal to one-tenth of one percent (.1%) of all mortgages  closed and
       located in Lancaster  County during the next five years, up to a maximum of
       $50,000 per year. In addition,  the building premises and the equipment are
       being leased by the Company from the seller.
  
                                         -8-
  MANAGEMENT'S DISCUSSION AND ANALYSIS
                  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
       Keystone  Heritage  Group,  Inc. (the  "Company") is a bank holding company
  organized under the laws of Pennsylvania  and registered  under the Federal Bank
  Holding  Company Act of 1956.  The  Company's  principal  subsidiary  is Lebanon
  Valley National Bank (the "Bank").
  
  Results of Operations
       Net income for the  Company for the three  months  ended March 31, 1996 was
  $1.923  million or $.47 per share,  compared to $1.757 million or $.43 per share
  for the three  months  ended  March 31,  1995.  Return on average  stockholders'
  equity and return on average  assets for the 1996 period were 13.06  percent and
  1.37 percent, respectively.
  
  Net Interest Income
       Net interest  income is the primary  source of income for the Company.  Net
  interest  income  is  the  difference  between  interest  earned  on  loans  and
  investments  and interest paid on deposits and other funding  sources.  Deposits
  are the primary source of funds for the Company. The factors which influence net
  interest  income  include  changes in  interest  rates and  changes in asset and
  liability balances.
  
       For  purposes of this  discussion,  interest  income and the average  yield
  earned on loans and  investments  are presented on a taxable  equivalent  basis.
  This provides a basis for  comparison of tax exempt loans and  investments  with
  taxable loans and  investments by giving effect to interest earned on tax exempt
  loans and  investments  by an amount  equivalent  to federal  income taxes which
  would have been paid on the assumption  that the interest earned on those assets
  was taxable at the Company's statutory tax rate of 35 percent.
  
       The  table  presented  on page 17 is a  comparative  statement  of  average
  balances of interest earning assets and interest bearing  liabilities,  interest
  income and interest expense, and interest rates for the three months ended March
  31, 1996 and 1995.
  
       Net interest income for the three months ended March 31, 1996 and March 31,
  1995 was $6.2  million,  respectively.  The net  interest  margin  for the first
  quarter of 1996 was 4.65 percent compared to 4.84 percent for the same period of
  1995.  Average  earning  assets for the three month  period ended March 31, 1996
  were $537.6  million,  a $21.2  million or a 4.1 percent  increase from the same
  period of 1995.
  
       For the three month comparative  periods,  net interest income increased by
  $60  thousand,  which was  comprised  of  volume  associated  increases  of $290
  thousand  offset  by a $230  thousand  decrease  which  was  associated  to rate
  variances.  The volume  increases  were  primarily  a result of a $21.2  million
  increase in average  earning  assets  from the same period of 1995.  The average
  investment   portfolio  grew  by  $19.2  million  and  average   commercial  and
  agricultural loans grew by $13.2 million. This was partially offset by decreases
  in average  mortgage  loans of $2.9 million and average  personal  loans of $2.2
  million. The decrease in personal loans outstanding was due to the net effect of
  decreases of $6.8 million in indirect auto  installment  loans and a decrease of
  $1.1  million in  personal  credit line loans  offset by a $5.8  million or 15.8
  percent increase in direct  installment loans. The Company has been able to grow
  its commercial loan and direct personal loan portfolios  through increased sales
  efforts.  The credit quality of the Company's loan portfolio continues to remain
  strong, as indicated by the low level of non-performing  loans presented on page
  12 and the low amount of net  charge-offs  presented  on page 11. The  Company's
  management of credit risk continues to be emphasized as loan volumes increase.
  
                                         -9-
  The  aforementioned  asset growth was  primarily  funded by a $14.8 million
  increase in average deposit volumes.  This was comprised of increases in average
  savings and money market  deposits of $8.8 million,  a $4.6 million  increase in
  average  time  deposits  and a $3.5  million  increase  in average  non-interest
  bearing demand  deposits.  The increase in average  deposit volume was primarily
  due to an increased sales and marketing effort on gathering deposits in order to
  support the  Company's  loan  growth.  In  addition,  the Company  introduced  a
  competitive  money  market  product on March 1, 1995 which has a tiered  pricing
  structure and is tied  directly to the prime rate.  This was a key factor in the
  growth of the money market  deposit  volumes  from the first  quarter of 1995 to
  1996.
  
       The decline in the net interest  margin from the first  quarter of 1995 was
  due to the fact that higher  rates were paid on time  deposit  and money  market
  accounts.  The cost of time deposits and money market  deposits  increased by 48
  and 93 basis  points,  respectively.  The  increase  in the money  market  costs
  resulted from the prime rate based money market  product which was introduced on
  March 1, 1995.
  
  Provision and Allowance for Possible Loan Losses
  
       There was no  provision  for  possible  loan  losses  charged to net income
  during the three month  period ended March 31, 1996 or 1995.  The asset  quality
  continues to remain strong as indicated by the low level of non-performing loans
  indicated on page 11.
  
       Net  charge-offs  of $249 thousand were recorded for the three months ended
  March 31, 1996 compared to net recoveries of $11 thousand for the same period of
  1995.
  
       The  allowance for possible loan losses was $7.8 million or 1.98 percent of
  total loans  outstanding  at March 31, 1996 and $8.0  million or 2.05 percent at
  December  31, 1995.  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.
  
                                        -10-
  The  following is a summary of the activity in the  allowance  for possible
  loan losses for the three month periods ended March 31, 1996 and 1995:
  Three Months Ended
                                                                               March   31
  (Dollars in thousands)                                                   1996             1995
  Allowance for possible loan losses
    at beginning of period                                               $8,025           $8,140
   Loans charged-off:
    Commercial                                                              264               15
    Agriculture                                                               0                0
    Real estate construction                                                  0                0
    Loans to individuals                                                     81              122
    Real estate - residential mortgage                                        0                0
                                                                         ------           ------
   Total loans charged-off                                                  345              137
  
   Recoveries of loans previously charged-off:
    Commercial                                                               81              126
    Agriculture                                                               0                0
    Real estate construction                                                  4                9
    Loans to individuals                                                     11               13
    Real estate - residential mortgage                                        0                0
                                                                         ------           ------
    Total recoveries of loans previously
     charged-off                                                             96              148
    Net loans charged-off                                                   249              (11)
    Current period's provision for
    possible loan losses                                                      0                0
                                                                         ------           ------
  
    Allowance for possible loan
    losses at end of period                                              $7,776           $8,151
                                                                         ======           ======
  Other Operating Income and Expense
  
       Other  operating  income was $1.2  million for the three months ended March
  31, 1996 and $1.1  million for the same  period of 1995.  The  increase in other
  income was due to a $34 thousand increase in the gain on sale of loans. On March
  1, 1996,  the Company  completed a  transaction  to  purchase  Central  Mortgage
  Company,  a mortgage  origination  company based in Lancaster,  Pennsylvania.  A
  total of $4.7  million in  mortgage  loans were  originated  and sold during the
  first quarter of 1996 compared to $1.9 million  during the same periods of 1995.
  The Company  plans to continue  selling  mortgages in the  secondary  market and
  anticipates  an  increase  in gains on the sale of  loans,  as a result  of this
  transaction.  As consideration  for this  transaction,  the Company will pay the
  seller an amount equal to one-tenth of one percent (.1%) of all mortgages closed
  and located in Lancaster  County during the next five years,  up to a maximum of
  $50,000 per year. In addition, the building premises and the equipment are being
  leased by the Company from the seller.
  
       Other operating  expense for the three months ended March 31, 1996 was $4.5
  million,  a 1.3 percent  decrease  from the $4.6  million  reported for the same
  period of 1995.  The decrease was due to a $258 thousand  decrease in the amount
  paid for FDIC  insurance and a $73 thousand or 3 percent  decrease in the amount
  of salary and benefit expenses. The decrease in FDIC insurance expense is due to
  the lower  premium  rate  being  charged  to the Bank by the  FDIC.  The Bank is
  currently paying a quarterly  assessment  amount of $500.  Salaries and benefits
  decreased as a result of an internal productivity  enhancement program that will
  strengthen the Company's sales efforts of the Bank's  products while  maximizing
  its overhead efficiency. This plan resulted in a 3 percent reduction in staffing
  positions which were realized through attrition.
  
  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.
  
                                        -11-
  Non-performing loans at March 31, 1996 totalled $1.5 million or .39 percent
  of total loans outstanding,  compared to $1.5 million or .39 percent of loans at
  December  31, 1995 and $2.6  million or .68 percent of loans at March 31,  1995.
  Non-performing  assets at March 31,  1996 were $2.5  million  or .63  percent of
  loans plus other real  estate  owned  compared  to 2.5 million or .62 percent of
  loans plus other real estate owned at December 31, 1995 and $4.2 million or 1.09
  percent of loans plus other real estate owned at March 31, 1995. The improvement
  in  non-performing  assets at March 31, 1996 as compared to March 31, 1995 was a
  result of decreased  levels of  non-accrual  loans and other real estate  owned.
  Non-accruing  loans  increased by $267  thousand  from  December 31, 1995 as the
  result of adding four loans to non-accrual status during the quarter.
  
       The  Company  has  determined  that  loans  with a  carrying  value of $1.0
  million,  $1.2 million and $1.9 million at March 31, 1996, December 31, 1995 and
  March 31, 1995,  respectively,  are deemed to be impaired. The specific reserves
  related to such  loans,  although  not  material,  are  included  in the general
  allowance for possible loan losses.  The average balance of loans  classified as
  impaired for the three month  comparative  periods  amounted to $784 thousand at
  March 31, 1996 and $1.8  million  1995.  Interest  income of  approximately  $13
  thousand and $4 thousand was  recognized  during the three month periods of 1996
  and 1995, respectively, on loans classified as impaired loans.
  
       The following is a presentation  of  non-performing  assets as of March 31,
  1996, December 31, 1995, and March 31 1995:
  March 31         Dec. 31       March 31
  (Dollars in thousands)                                     1996              1995           1995
  Non-accruing loans                                       $  1,008         $    741        $  1,864
  Loans past due 90 days of more as to
    principal or interest                                       524         $    793        $    724
                                                           --------         --------        --------
  Total non-performing loans                                  1,532            1,534           2,588
  
  Other real estate owned, net                                  947              913           1,560
                                                           --------         --------        --------
  Total non-performing assets                              $  2,479         $  2,447        $  4,148
                                                           ========         ========        ========
  
  Allowance for possible loan losses to
    non-performing loans                                     5.08x            5.23x           3.15x
  Non-performing loans as a
    percent of loans outstanding                              .39%             .39%            .68%
  Non-performing assets as a
    percent of loans outstanding
    plus other real estate owned                              .63%             .62%           1.09%
  Interest  income of  approximately  $21 thousand would have been recognized
  during the three month period ended March 31, 1996, had these loans been current
  in accordance with their original terms and been outstanding  through the period
  or since  origination.  Interest  income  on these  loans  of $13  thousand  was
  recognized during the three months ended March 31, 1996.
  
       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 March 31, 1996  totalled $93 million or 23.7
  percent of total  loans  outstanding.  These  loans may be  impacted  by adverse
  climate or economic  conditions  not common to other  industries.  The Company's
  exposure to possible loss in the event of  nonperformance  by these borrowers is
  represented by the contractual amount of those instruments. The Company's policy
  is to require  supporting  collateral  for these loans which is generally in the
  form of agriculture  real estate,  livestock,  and farm equipment.  At March 31,
  1996  there  were no  significant  agriculture  related  borrowings  which  were
  classified as non-performing assets and there were no charge-offs of agriculture
  related loans during the three months ended March 31, 1996.
  
                                        -12-
  Financial Position
  
       Total assets at March 31, 1996 were $565  million  compared to $578 million
  at  December  31,  1995.  Total  loans  outstanding  at March 31, 1996 were $393
  million  compared to $391 million at December 31, 1995.  Total deposits at March
  31, 1996 were $478 million  compared to $488  million at December 31, 1995.  The
  change in deposits  from  December  31, 1995 to March 31, 1996 was the result of
  fluctuations non-interest bearing demand deposits and other transaction accounts
  and was not due to a continuing downward trend in deposit volumes.
  
  Capital Adequacy
  
       The Company's  stockholders' equity was $59.9 million at March 31, 1996 and
  $58.9 million at December 31, 1995. Total stockholders'  equity increased by 1.7
  percent from  December 31, 1995 which was the net effect of the  recognition  of
  $1.9 million in net income for the three month period, cash dividend payments to
  stockholders of $814 thousand and an unfavorable  change in net unrealized gains
  or losses on  investment  securities  available for sale of $111  thousand.  Net
  unrealized  gains on investment  securities  available for sale of $225 thousand
  and $336 thousand were included as a component of stockholders'  equity at March
  31, 1996 and December 31, 1995, 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 March 31, 1996 the
  Company's  Tier 1 and Total Capital ratios were 13.88 percent and 15.21 percent,
  respectively.  Tier 1 and Total  Capital  ratios  were 13.59  percent  and 14.93
  percent  respectively,  at December  31,  1995.  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 March 31, 1996,  the
  Company's Leverage ratio was 10.52 percent and was 10.29 percent at December 31,
  1995.
  
  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.
  
                                        -13-
  The Bank has entered into interest rate swap  contracts,  and interest rate
  cap and interest rate collar contracts as part of its asset-liability management
  activities.  These  contracts  are used  primarily  for the  purpose of managing
  interest rate risk against  specific assets and liabilities in order to minimize
  mismatches  in the Bank's  interest  rate  sensitivity  and  interest  rate risk
  positions.
  
       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 should the counterparties fail to perform.  Notional principal amounts
  often are used to express the volume of these transactions.
  
       The interest  income or interest  expense  differential  from interest rate
  swap  contracts is  recognized  on the accrual  basis as a component of interest
  income or interest  expense over the life of the  contract.  Interest  income or
  interest  expense  resulting from the cap and collar  contracts is recognized on
  the  accrual  basis  when  the  national  prime  rate  moves  below  or  above a
  predetermined  interest rate level.  Gains or losses from early  termination  of
  swap  contracts  are  deferred  and  amortized  over the  remaining  term of the
  underlying  assets or liabilities.  The Company is not exposed to credit risk in
  terms of the  notional  amounts  of these  contracts,  however,  the  receipt of
  payments representing the interest differential is based on the creditworthiness
  of the counterparty to each contract.
  
       Interest rate sensitivity is a function of the repricing characteristics of
  the Company's assets and liabilities.  Each asset and liability  reprices either
  at  maturity or during the life of the  instrument.  Interest  rate  sensitivity
  measures the difference  between the volume of assets and  liabilities  that are
  subject to repricing at a future period of time. These  differences are known as
  interest sensitivity gaps.
  
       The principal  objectives of  asset-liability  management are to manage the
  funding and investment  strategies  necessary to maintain an appropriate balance
  of the  sensitivity  between assets and  liabilities  to potential  movements in
  interest rates and to provide adequate  liquidity while enhancing  profitability
  through returns from managed levels of interest rate risk. The Company  actively
  manages the interest rate  sensitivity  of its assets and  liabilities.  Several
  techniques are used for measuring  interest rate  sensitivity.  The  traditional
  maturity "gap" analysis,  which reflects the volume difference  between interest
  rate sensitive  assets and liabilities  during a given time period,  is reviewed
  regularly by management.  An interest rate risk simulation model is also used to
  assess the level of  interest  rate risk  inherent in the  Company's  assets and
  liabilities  under various interest rate scenarios.  The Company  recognizes the
  importance  of  managing  both  assets and  liabilities  simultaneously  for the
  purpose of reducing interest rate risk, providing  liquidity,  and enhancing the
  market value of the Company.
  
       Managing  interest rate  sensitivity is an inexact  science.  The repricing
  intervals  between assets and liabilities  change on a daily basis.  Contractual
  maturities  are not  always  the  same  as  actual  maturities  as a  result  of
  prepayments prior to scheduled maturities.  Additionally,  demand deposits,  NOW
  accounts,  and money  market fund  accounts may be  withdrawn  upon demand,  and
  savings  deposits may be withdrawn upon a very short period of notice.  However,
  for asset-liability management purposes, the Company considers a portion of each
  of these types of deposits to be "core"  amounts which may be considered to have
  various maturities.
  
           The Company  manages its interest rate  sensitivity by changing mix and
  repricing  characteristics of its assets and liabilities  through its investment
  securities  portfolio,  its loan  and  deposit  terms,  and  through  the use of
  off-balance sheet  derivatives,  primarily interest rate swaps and interest rate
  cap/collar  contracts.  These  interest rate  contracts  will have the effect of
  decreasing net interest  income in a rising rate  environment and increasing net
  interest income in a decreasing rate environment.
  
           The Company's use of these interest rate contracts is closely monitored
  by the Company's  Board of Directors  and is closely  controlled as to levels of
  exposure.  At March 31,  1996 the  Company  had five  interest  rate  agreements
  outstanding having a total notional amount of $50 million.  These agreements are
  in the form of interest rate swap  agreements each with a notional amount of $10
  million.
  
                                        -14-
  The Company entered into two interest rate swap contracts  during the first
  quarter of 1996.  On March 4, 1996,  the Company  entered into an interest  rate
  swap contract with a notional  amount of $10 million.  This contract states that
  the Company would receive a fixed rate of 8.25 percent and pay a floating  prime
  rate based on the national prime rate. The Company entered into another interest
  rate swap contract on March 14, 1996 with a notional amount of $10 million. This
  contract  states that the Company would receive a fixed rate of 8.65 percent and
  pay a floating prime rate based on the national prime rate.
  
       The  Company  does not  obtain  collateral  or other  security  to  support
  financial instruments subject to credit risk but monitors the credit standing of
  counterparties. The counterparties of the aforementioned interest rate contracts
  are commercial banks having a rating of A1 from Moody's Investor Service.
  
       The interest rate swap contracts were entered into to protect the Company's
  interest  rate  risk  in  a  declining  or  stable  interest  rate  environment.
  Specifically, these contracts protect the Company's risk from negative movements
  in its prime rate based asset portfolio which would not be perfectly  matched by
  repricing  liabilities.  These  contracts  were  entered  into to  minimize  the
  negative effects that the Bank will realize in falling rate  environments  (e.g.
  reduction in prime based rates).
  
       The following is the amount of financial instruments with off-balance sheet
  risk not  reflected  in the  consolidated  balance  sheets at March 31, 1996 and
  December 31, 1995:
  Contractual Amounts
  
                                                         March 31                        December 31
  (Dollars in thousands)                                   1996                             1995
  Financial instruments whose
  contractual
    amounts represent credit risk:
  Commitments to extend credit                           $92,388                          $88,242
  Standby letters of credit                                7,599                            8,862
  Contractual amounts of off-balance
  sheet financial instruments not
  constituting credit risk:
     Interest rate swap, notional
  value                                                   50,000                           30,000
     Interest rate cap/collar,
  notional value                                             -0-                           10,000
  Supervision and Regulation
  
       During 1994, Congress passed legislation to remove geographic  restrictions
  on bank expansion.  The Riegle-Neal Interstate Banking and Branch Efficiency Act
  of 1994  will  allow  banks to  expand  across  state  lines  to merge  existing
  multi-state  branching  operations  into a single  institution or to acquire new
  branches in other states.  Interstate  banking and branching  authority  will be
  subject to  certain  conditions  and  restrictions,  such as  capital  adequacy,
  management,  CRA compliance and limits on deposit concentrations.  The effective
  date for this legislation will be June 1, 1997.  Individual states will have the
  option to opt in early or to opt out completely prior to June 1, 1997.
  
       Although  the  passage  of this  legislation  should  have  the  impact  of
  quickening the pace of consolidation  within the banking  industry,  the Company
  does not  anticipate  any immediate  impact upon its financial  condition or its
  operations as a result of this new law.
  
       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.
  
                                        -15-
  New Accounting Standards
  
       On January 1, 1996 the  Company  adopted the  provisions  of  Statement  of
  Financial  Accounting  Standards  No.  121  (SFAS  121),   "Accounting  for  the
  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of".
  SFAS  provides  guidance  for  recognition  and  measurement  of  impairment  of
  long-lived assets, certain identifiable intangibles and goodwill related both to
  assets held and used and assets to be disposed of.
  
       SFAS  121  requires  that  long-lived   assets  and  certain   identifiable
  intangibles  held and used by an  entity be  reviewed  for  impairment  whenever
  events or changes in circumstances indicate that the carrying amount of an asset
  may not be recoverable.  In performing the review for recoverability,  an entity
  should  estimate  the future  cash flows  expected to result from the use of the
  asset and its eventual disposition. If the sum of the expected future cash flows
  (undiscounted  and without interest charges) is less than the carrying amount of
  the asset,  an impairment loss is recognized.  Otherwise,  an impairment loss is
  not  recognized.  Measurement of an impairment  loss for  long-lived  assets and
  identifiable  intangibles that an entity expects to hold and use should be based
  on the fair value of the asset.
  
       SFAS  121  requires  that  long  lived  assets  and  certain   identifiable
  intangibles  to be disposed  of be  reported at the lower of carrying  amount or
  fair value less cost to sell. The  implementation of SFAS 121 did not impact the
  Company's financial condition or results of operation.
  
       On January 1, 1996, the Company  adopted the provisions of the 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.
  
       Presently,  the Company  does not sell or  securitize  mortgage  loans with
  servicing rights retained. Accordingly, the Company has not been impacted by the
  provisions of SFAS 122.
  
       On January 1, 1996 the  Company  adopted the  provisions  of  Statement  of
  Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
  Compensation"  (SFAS 123).  SFAS 123  establishes a new method of accounting for
  stock-based  compensation  arrangements with employees. The new method is a fair
  value  based  method  rather  than the  intrinsic  value  based  method  that is
  currently  utilized.  However,  SFAS 123 does not require an entity to adopt the
  new  fair  value  based  method  for  purposes  of  preparing   basic  financial
  statements.  If an entity chooses not to adopt the fair value based method, SFAS
  123  requires  an entity to  display in the  footnotes  pro forma net income and
  earnings  per share  information  as if the fair  value  based  method  had been
  adopted.
  
       The Company has not adopted the fair value method as described in SFAS 123.
  The Company will disclose in the footnotes, in the 1996 Annual Report, pro forma
  net income and  earnings per share  information  as if the fair value method had
  been adopted.
  
                                        -16-
  AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
                               (Dollars in thousands)
  Three Months Ended March 31, 1996         Three Months Ended March 31, 1995
                                                 Average               Average              Average              Average
                                                 Balance    Interest    Rate               Balance    Interest    Rate
  Assets
      Loans                                    $390,350     $  8,833    9.10%             $381,817    $  8,552     9.01%
      Money market investments                    2,729           37    5.42                 9,247         134     5.81
      Investment securities:
          Taxable                               132,655        1,938    5.87               114,843       1,559     5.46
          Non-taxable                            11,863          193    6.54                10,466         179     6.88
                                               --------     --------   -----              --------    --------     ----
               Total investment securities      144,518        2,131    5.93               125,309       1,738     5.58
               Total earning assets             537,597     $ 11,001    8.23%              516,373    $ 10,424     8.12%
                                               ========      =======   =====                          ========     ====
  
      Other assets                               27,023                                     26,186
                                               --------                                   --------
               Total assets                    $564,620                                   $542,559
                                               ========                                   ========
  
  Liabilities and stockholders' equity 
      Interest bearing deposits:
          Now accounts                         $ 55,062     $    191    1.39%             $ 57,230    $    202     1.43%
          Savings and money market              127,790          986    3.10               118,960         794     2.71
          Time                                  233,735        3,326    5.72               229,119       2,960     5.24
                                               --------     --------   -----              --------    --------     ----
               Total interest bearing deposits  416,587        4,503    4.35               405,309       3,956     3.96
  
      Short-term borrowings                      11,505          121    4.22                13,138         131     4.04
      Long-term debt                             11,111          162    5.85                10,678         182     6.91
                                               --------     --------   -----              --------    --------     ----
          Total interest bearing liabilities    439,203     $  4,786    4.38%              429,125    $  4,261     4.03%
                                                            ========   =====                          ========    =====
  
      Non-interest bearing deposits              58,060                                     54,543
      Other liabilities                           8,138                                      6,195
      Stockholders' equity                       59,219                                     52,696
                                               --------                                   --------
          Total liabilities and
          stockholders' equity                 $564,620                                   $542,559
                                               ========                                   ========
  
      Net interest income                                   $  6,215                                  $  6,155
      Total yield on earning assets                                      8.23%                                     8.19%
      Rate on supporting liabilities                                     3.58%                                     3.35%
                                                                        -----                                     -----
      Net interest margin                                                4.65%                                     4.84%
                                                                         ====                                     =====
  Interest and average interest rates are presented on a fully taxable  equivalent
  basis,  using an effective  tax rate of 35%. For  purposes of  calculating  loan
  yields,  average loan balances include non-accrual loans. Loan fees are included
  in interest income.
  
                                        -17-
  PART II.  OTHER INFORMATION
  
  ITEM 1.  LEGAL PROCEEDINGS
  
  None.
  
  ITEM 2.  CHANGES IN SECURITIES
  
  None.
  
  ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
  
  None.
  
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
  None.
  
  ITEM 5.  OTHER INFORMATION
  
  None.
  
  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
  
  (a.)  None.
  
  (b.)  The Company did not file any reports on Form 8-K during the quarter ended
  March 31, 1996.
  
                                        -18-
  KEYSTONE HERITAGE GROUP, INC.
  
                                     SIGNATURES
  
       Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
  registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
  undersigned thereunto duly authorized.
  
                                         Keystone Heritage Group, Inc.
                                         (Registrant)
  
  Date  May 9, 1996                     By /s/ Kurt A. Phillips
                                           --------------------------------------
                                           Kurt A. Phillips
                                           Chief Financial and Accounting Officer
  
                                        -19-