Selected Financial Data
<TABLE>
<CAPTION>
(in thousands except per share data)               Year Ended December 31,
                                 1997       1996        1995        1994        1993
<S>                              <C>       <C>         <C>         <C>         <C>
---------------------------    ---------- ----------- ----------- ----------- -----------
Operations:
---------------------------    ---------- ----------- ----------- ----------- -----------
Interest income                  $510,738    $473,420    $446,786    $386,894    $378,403
Interest expense                  232,494     211,301     200,775     152,463     151,943
---------------------------    ---------- ----------- ----------- ----------- -----------
Net interest income               278,244     262,119     246,011     234,431     226,460
Provision for credit losses        15,316      10,713       8,568      10,324      11,580
Noninterest income                 89,932      71,525      58,137      51,921      52,684
Noninterest expense               225,990     196,245     182,130     182,333     176,034
Income tax expense                 38,953      37,180      34,001      25,907      25,846
---------------------------    ---------- ----------- ----------- ----------- -----------
Net Income                        $87,917     $89,506     $79,449     $67,788     $65,684
---------------------------    ---------- ----------- ----------- ----------- -----------
Pre-tax security gains,
included above                     $6,071        $871      $1,789        $978      $1,707

Net interest spread                  3.87%       3.87%       3.90%       4.11%       4.19%
Impact of noninterest funds           .72         .74         .71         .57         .55
---------------------------    ---------- ----------- ----------- ----------- -----------
Net interest margin                  4.59%       4.61%       4.61%       4.68%       4.74%
---------------------------    ---------- ----------- ----------- ----------- -----------

Per Share:
---------------------------    ---------- ----------- ----------- ----------- -----------
Net income:
     Basic                          $1.70       $1.72       $1.60       $1.38       $1.34
     Diluted                         1.68        1.70        1.59        1.37        1.33
Dividends                            1.06        0.98        0.93        0.86        0.79
Dividend payout ratio               63.65%      56.98%      58.13%      54.85%      44.67%
Average shares outstanding     51,692,534  52,118,819  49,557,082  49,188,961  49,036,666

Balances at December 31:
---------------------------    ---------- ----------- ----------- ----------- -----------
Loans & leases                 $4,712,566  $4,336,470  $4,096,866  $3,900,900  $3,440,210
Allowance for credit losses       (65,091)    (56,256)    (55,415)    (53,708)    (51,084)
Total assets                    6,841,337   6,450,579   6,213,222   5,796,576   5,414,897
Deposits                        5,233,165   5,059,721   4,993,608   4,726,842   4,419,421
FHLB borrowings & long-term debt  349,943     226,776     168,564     155,752     136,605
Shareholders' equity              685,485     660,406     621,766     533,643     527,617

Ratios:
---------------------------     ---------- ----------- ----------- ----------- -----------
Return on average assets             1.33%       1.44%       1.35%       1.23%       1.24%
Return on average equity            13.27       14.09       14.00       12.90       13.01
Equity to assets, average            9.99       10.19        9.66        9.53        9.51

Risk adjusted capital ratios:
 Leverage ratio                      9.15%      10.03%      10.12%       9.59%       9.74%
 "Tier 1"                           12.50       14.43       14.48       13.75       13.95
 "Total" capital                    13.75       15.66       15.67       15.00       15.20

Loans to deposits, year-end         90.05%      85.71%      82.04%      82.53%      77.84%
Allowance for credit losses to
loans                                1.38        1.30        1.35        1.38        1.48

Nonperforming assets to loans        0.55%       0.65%       0.72%       0.87%       1.21%
Loans 90 days past due               0.70        0.46        0.41        0.25        0.16
---------------------------     ---------- ----------- ----------- ----------- -----------
Total risk elements to loans         1.25%       1.11%       1.13%       1.12%       1.37%
---------------------------     ---------- ----------- ----------- ----------- -----------
</TABLE>

                                        2
<PAGE>

Financial Review

This review has been provided to present  information needed to fully understand
the financial  condition  and the results of  operations  of Keystone  Financial
Inc.,  (Keystone).  In May of 1997, Keystone consummated the merger of Financial
Trust  Corp(FTC),  a bank holding  company with $1.2 billion in assets,  and the
acquisition of First Financial  Corporation of Western Maryland (FFWM), a thrift
institution with $355 million in assets.  The merger of FTC was accounted for as
a pooling of  interests  and all prior  periods have been  restated.  The thrift
institution  acquired  through the FFWM  transaction was merged into an existing
Keystone  bank and was accounted  for under the purchase  method of  accounting.
Accordingly,  the acquired  assets and  liabilities and results of operations of
FFWM  were  included  in  combined  results  from  May 29,  1997  and  reflected
approximately  half of the growth in average  earning assets and the majority of
the increase in total deposits.

Throughout  this  review net  interest  income  and yield on earning  assets are
presented on a fully taxable-equivalent basis. Additionally,  balances represent
average daily balances unless otherwise indicated.

1997 Summary

Performance Results

Performance  during  1997  was  significantly  influenced  by the  expansion  of
Keystone's  franchise during the year. The merger of FTC added another strategic
partner  in  Keystone's  expanding  financial  services  marketplace  while  the
acquisition  of  FFWM  added  important  market  share  to  Keystone's  existing
franchise in Maryland and West Virginia.

Net income,  which was affected by special  charges  incurred in connection with
the FTC  merger,  was $87.9  million in 1997  versus  $89.5  million in 1996,  a
decrease of 1.8%.  Special  charges,  which included  pre-tax merger expenses of
$11.4 million as well as certain portfolio  restructuring  charges,  reduced net
income by $8.6 million, or $.17 per basic share.  Excluding special charges, net
income in 1997 was $96.5  million or $1.87 per basic  share,  compared  to $89.5
million and $1.72 in 1996,  an 8.7%  improvement  in basic  earnings  per share.
Keystone's return on average assets (ROA)and return on average equity (ROE), the
most commonly used measures of financial institution performance, were 1.33% and
13.27%, respectively,  versus 1.44% and 14.09%, in the prior year. Excluding the
effect  of the  special  charges,  ROA and ROE were  1.46%  and  14.54% in 1997.
Comparable  ratios for  Keystone's  peer group of  financial  institutions  with
assets of $5 billion to $10  billion,  as compiled  by Keefe,  Bruyette & Woods,
Inc. for 1997, were 1.39% and 16.03%, respectively.

Core  operating  performance  in 1997 was marked by an increase in net  interest
income,   substantial  growth  in  fee-based   revenues,   prudent  credit  risk
management,  and expense  growth  which  accompanied  revenue  expansion.  Total
revenues,  excluding security gains, grew 8.6%, including a 5.9% increase in net
interest  income and 18.7%  growth in  noninterest  revenues.  The growth in net
interest  income was stimulated by both increased loan volume and improvement in
the  proportionate  mix of  earnings  assets.  The  growth  rate of  noninterest
revenues continued to be driven by new and expanded asset management activities,
strength in mortgage  banking  performance  and  successful  electronic  banking
initiatives.  Keystone  continues to execute a strategic  diversification of its
revenue stream by expanding its menu of financial services.  The introduction of
KeyPremier Funds,  Keystone's own proprietary  mutual funds, and the acquisition
of MMC&P, a retirement benefit services firm, reflected Keystone's commitment to
meeting the expanding needs of its financial services customers.

Consumer credit concerns were an integral component of asset quality issues on a
national level,  particularly  in the area of credit card debt.  Though Keystone
had  eliminated its credit card  operations  prior to 1996,  increased  consumer
delinquencies  and rising levels of personal  bankruptcies  did impact  consumer
loan charge-offs levels during 1997. Though  improvements in credit quality were
experienced  through the course of the year,  Keystone  prudently  increased its
provision  for credit  losses and sustained a strong ratio of allowance to loans
of 1.38% at December 31, 1997.

                                      3

<PAGE>

Growth in operating expenses was influenced by expenses associated with the 1997
merger activity,  by investments in activities  connected with the growth in fee
income,  and by ongoing  improvement in Keystone's  financial  services delivery
system.  During  1997,  Keystone  completed an  aggressive  effort to expand its
banking  franchise  and, at the same time,  continued its expansion of financial
services capabilities. These efforts, combined with a prudent strategy to evolve
Keystone's  delivery  system,  were  critical  to the overall  expansion  of the
revenue base.

Strategic Focus

Keystone  has  always  been  driven  by  its  fundamental   goal  of  increasing
shareholder value through continuous performance  improvement.  Managerial focus
on this  goal  has  shaped  Keystone's  competitive  market  strategy,  which is
designed  to provide  value to  customers  through  local  delivery  of superior
financial  services.  This has led to the  development  of Keystone's  operating
structure,  now commonly  described as "Super Community  Banking".  During 1997,
Keystone  executed   strategies  in  six  major  areas,  which  influenced  1997
performance  and provided a  foundation  for  improved  performance  in 1998 and
beyond.  These  six  areas  include  relationship  banking,   marketing,   asset
management,   delivery  systems,   overhead  expense  management  and  franchise
expansion.

Strategic  focus within Keystone begins with  relationship  banking,  a business
approach executed to deliver a value proposition that is  customer-focused.  The
execution  of  relationship  banking  began with the  formation  of market teams
composed  of  competent,   well-trained   financial   professionals  capable  of
delivering both customary and specialized  financial  services within  specified
geographic  regions.  These teams focus on the delivery of  financial  solutions
built upon,  simplified customer access to services that is distinguishable from
competitors'   product-focused   strategies.   Successful   execution   requires
investment in Keystone's  human  capital,  including  targeted  selection of new
associates,  combined with training,  skill  development and  performance-driven
variable compensation for Keystone's existing employee base.

Keystone's  second  strategic focus involves its approach to marketing  efforts.
Keystone's  customer-focused  approach to the delivery of financial services has
dramatically  influenced its overall marketing execution.  Marketing begins with
life cycle  segmentation,  a process  which allows  Keystone to  understand  the
financial needs of its customer base by understanding  the financial  profile of
its individual customer segments. This understanding shapes Keystone's marketing
philosophy  by reducing mass  marketing  initiatives  and  delivering a targeted
service delivery approach.

Keystone's  asset  management  capabilities  have had a  dramatic  impact on its
organizational evolution and performance.  Over the last several years, Keystone
augmented   existing  financial  products  and  services  with  more  integrated
financial solutions.  Keystone is now able to more effectively compete with both
financial  institutions and other financial  service  providers.  Prior to 1997,
Keystone acquired Martindale Andres & Company, a registered  investment advisory
firm that provided expanded revenues, improved trust-related performance and, in
late 1996,  introduced KeyPremier mutual funds. Keystone continued its expansion
of financial  service  capabilities  in August of 1997,  with the acquisition of
MMC&P, a retirement benefit services  consulting firm specializing in retirement
plan   recordkeeping   and  plan  management  for  employee  benefit   programs.
Additionally,  Keystone's  asset  management  capabilities  were extended to the
retail sector through  Keystone  Investor  Services,  a newly-formed  subsidiary
specializing in the delivery of brokerage and annuity products.

Effective  integration of financial  services  would not be complete  without an
ongoing evaluation of the service delivery system. During 1997, Keystone evolved
its  multi-channel  service delivery system by transforming its community office
network and by expanding its  alternate  channel  capabilities  through ATMs and
telephone banking.  Constant evaluation and modification of the service delivery
network is necessary to ensure a competitive advantage in the financial services
industry.

                                      4

<PAGE>

Overhead expense  management  requires  multi-skilled  job training,  continuing
investment  in   technology,   evaluation  of  outsourcing   alternatives,   and
development  of  specialized  expertise.  An  important  gauge  of  management's
effectiveness  in  this  area  involves  merger  integration   efforts  and  the
realization of anticipated  efficiencies.  The extent of merger integration made
necessary  by  Keystone's  market and  product  expansion  activities  presented
special challenges during 1997. Keystone's  demonstrated skill in directing this
effort has provided a strong foundation that will effectively accommodate future
growth.

Keystone's final key strategy involves  franchise  expansion.  The year 1997 has
been  pivotal to Keystone as it grows into an  increasingly  important  regional
franchise in the mid-Atlantic  states.  Franchise expansion includes achievement
of  performance  gains  from  both the  banking  business  as well as  specialty
offerings necessary for a fully-developed financial services company.

Successful  achievement of improved  shareholder  value through "Super Community
Banking" has been driven by aligning the needs of Keystone's  customers with the
skills of its professional  workforce,  engaging the customer base with a shared
objective  of  improving  the  customer's  financial  position,  and  delivering
financial products and services consistent with Keystone's value proposition.

Economic Trends & Interest Rates

The  financial  services  industry is  constantly  influenced  by a multitude of
factors,  not the least of which are overall  economic  trends and the  interest
rate  environment.  Through the third  quarter of 1997,  virtually  all critical
indicators of economic  activity  suggested  that the economy was operating near
peak  performance  levels.  Low  interest  rates,  record-high  employment,  and
virtually  nonexistent  inflationary  concerns  created  conditions  wherein the
economic  expansion  was expected to continue  unabated.  The U.S.  economy,  in
particular,  continued along a record-setting period of economic expansion.  The
optimism born of a strong economy  influenced stock market valuations as the Dow
Jones industrial average increased 23% during the year to 7908.

Entering the fourth quarter, emerging trends were observed which raised concerns
over  the  long-term  sustainability  of the  robust  economy.  Global  economic
developments,  particularly the turmoil in Asian markets,  caused speculation on
the impact of a crisis in that  region and the  potential  ripple  effect on the
U.S.  economy.  Interest rate  conditions,  which have been  characterized  by a
relatively flat yield curve throughout 1997, exhibited the potential for further
flattening  that could  compress  net  interest  income by reducing  traditional
spreads between long and short term rates. Despite these concerns,  however, the
overall economic picture remained the most optimistic in a generation and fueled
the third  largest  economic  expansion  in history.  The  confidence  born of a
fundamentally strong U.S. economy continues to heighten expectations for 1998.

The economic and interest rate conditions  present during 1997 provided  special
challenges for financial  institutions.  On the asset generation side,  Keystone
has been  responsive  to strong  consumer  credit  demand  through  its  product
development and management  effort,  best exemplified by the Personal  Financial
Analysis (PFA) program.  This program is a unique financial  service designed to
blend  credit and debt  consolidation  needs  with an  effective  investment  or
savings plan. Demand for an expanded array of financial products also led to the
introduction of Keystone's family of KeyPremier mutual funds that are managed by
Keystone's   nationally-recognized  fund  managers,   Martindale  Andres  &  Co.
Expanding  consumer  demand for enhanced  retirement  plan  services  influenced
Keystone's  acquisition  of MMC&P,  thus  improving  its  ability  to  provide a
complete  package of  retirement  plan  services.  Performance  beyond 1997 will
continue  to depend  largely  on  Keystone's  ability to  deliver  products  and
services which meet the changing financial needs of its customers.

Forward-Looking Statements

From time to time,  Keystone has and will continue to make statements  which may
include "forward-looking" information.  Keystone cautions that "forward-looking"
information disseminated through financial presentations should not be construed
as guarantees of future performance. Furthermore, actual results may differ from
expectations  contained  in such  "forward-looking"  information  as a result of
factors which are not  predictable.  Financial  institution  performance  can be
affected  by any number of factors,  many of which are  outside of  management's
direct  control.  Examples  include,  but are not  limited  to,  the  effect  of
prevailing economic  conditions;  the overall direction of government  policies;
unforseen  changes in the general  interest  rate  environment;  the actions and
policy directives of the Federal Reserve Board; competitive factors in the

                                      5

<PAGE>

marketplace,  and business  risk  associated  with the  management of the credit
extension function and fiduciary activities.  Each of these factors could affect
estimates,  assumptions,  uncertainties, and risks considered in the development
of  "forward-looking"  information,  and could  cause  actual  results to differ
materially from management's expectations regarding future performance.

                                      6

<PAGE>

NET INTEREST INCOME

Keystone  derives revenue from both  intermediation  activities,  the results of
which are  reflected  in net  interest  income,  and from fee and service  based
income, which is included in noninterest income performance. Net interest income
continues to be the most significant  component of revenue,  comprising over 77%
of total revenues.

Net interest  income is defined as the  difference  between  interest  income on
earning assets and interest expense on deposits and borrowed funds. Net interest
margin  provides a  relative  measure of a  financial  institution's  ability to
efficiently  deliver net interest  income from a given level of average  earning
assets.  Both net interest  income and net  interest  margin are  influenced  by
interest rate changes,  changes in the relationships  between rates, and changes
in the composition or absolute volumes of earning assets and liabilities.

The  following  table  compares  net  interest  income and net  interest  margin
components between 1997 and 1996 (in thousands):

<TABLE>

                                1997                 1996                Change
----------------------- -------------------- -------------------- --------------------
                                    Yield/               Yield/                 Yield/
                         Amount      Rate      Amount     Rate         Amount     Rate
<S>                     <C>        <C>        <C>       <C>           <C>      <C>
======================= ========== ========= ========== ========= =========== ========
Interest income           $519,598     8.32%   $482,393     8.20%     $37,205     0.12
Interest expense           232,494     4.45     211,301     4.33       21,193    (0.12)
----------------------- ---------- --------- ---------- --------- ----------- --------
Net interest income       $287,104             $271,092              $16,012*
======================= ========== ========= ========== ========= =========== ========
Interest spread                        3.87%                3.87%              -----
Impact of
 noninterest funds                     0.72                 0.74                (0.02)
----------------------- ---------- --------- ---------- --------- ----------- --------
Net interest margin                    4.59%                4.61%               (0.02)
======================= ========== ========= ========== ========= =========== ========
   *The change in net interest income  consisted of a favorable  volume variance
      of $24.2 million, offset by an unfavorable rate variance of $8.2 million.
</TABLE>

Interest Rates

The interest rate environment,  combined with Keystone's  management of pricing,
product  mix, and  execution of  relationship  banking,  influenced  the rate of
growth in net  interest  income.  The  interest  rate  environment  has remained
remarkably constant through the last three years, and rates throughout 1997 were
only  slightly  above the rates that existed  throughout  1996.  These  slightly
higher rates  influenced  both a rise in earning  asset yield and an increase in
the cost of funding  sources.  By the end of 1997,  rates began to slide  toward
historic   lows  and  included  an  overall   flattening  of  the  yield  curve.
Continuation  of this trend on an extended basis would reduce the opportunity to
extend asset  maturities to improve yields and would compress the natural spread
between long-term asset yields and short-term funding sources.

The  following  is a  comparison  of the average  yield curve for U.S.  Treasury
instruments for specific  intervals between three months and thirty years, which
serves as an illustration of the relative  comparability of interest rate trends
between 1997 and 1996.
<TABLE>
<CAPTION>

         Three      Six       One       Two      Three     Five       Ten     Thirty
        Months    Months     Year      Years     Years     Years     Years     Years
<S>     <C>      <C>        <C>       <C>       <C>       <C>       <C>      <C>
------ --------- --------- --------- --------- --------- --------- --------- ---------
1997       5.18%     5.37%     5.60%     5.96%     6.07%     6.21%     6.34%     6.60%
1996       5.14%     5.28%     5.49%     5.83%     5.97%     6.17%     6.43%     5.70%

</TABLE>

                                      7

<PAGE>

The  similarity  of  performance  in net  interest  margin  belies the fact that
Keystone has continued to actively  manage the  development,  the delivery,  and
pricing of products in response to changes in customer  preferences.  Keystone's
relationship  banking  focus  remains  at the core of loan and  deposit  product
innovations, including the Personal Financial Analysis (PFA) lending product and
the highly regarded variable-rate CD. Successful management of both net interest
income and net interest margin is a function of proactively  fulfilling customer
needs and preferences in a manner which is considerate of the changing  interest
rate environment.

Interest Income/Earning Assets

Interest  income grew 7.7% on the strength of slightly higher interest rates and
steady growth in loans,  driving an improved earning asset mix.  Interest income
grew to $520  million  in 1997  from $482  million  in 1996 an  increase  of $38
million.  Generation of increased levels of interest income is influenced by the
evolution of relationship  banking,  overall trends in interest  rates,  dynamic
changes in rate  relationships,  and overall  liquidity  management.  The credit
component of Keystone's  relationship  banking strategy has affected both growth
in earning  assets and earning  asset mix trends.  Relationship  banking,  which
focuses primarily on middle market businesses and retail customers, has fostered
significant  growth of both  commercial  real estate  loans and direct  consumer
credits,  which  grew 23% and 27%,  respectively,  during  1997 and have  become
increasing  components  of  Keystone's  earning  asset  mix.  At the same  time,
customers  are  demanding  products  which are more  responsive to interest rate
changes.  Increasing  components of both earning assets and funding  sources are
now more sensitive to changes in interest rates,  particularly specific maturity
points along the Treasury curve.  By balancing  customer needs with a successful
pricing  strategy,  Keystone  has  attempted  to more  effectively  insulate net
interest income performance from interest rate risk.

Growth in loans was also  affected by balance  sheet  management  and  liquidity
strategies.  For example, a sale of approximately $259 million of mortgage loans
was  executed  as a  strategic  component  of  Keystone's  acquisition  of FFWM.
Keystone's ongoing mortgage banking operations and the strategic  curtailment of
the  indirect   automobile  lending  business  preserved  funding  capacity  for
relationship  banking and eliminated the need to aggressively  price deposits to
fund commodity-based  activities.  Keystone's on-going execution of its mortgage
banking  operations,  which includes both the sale and service  components,  has
preserved customer affinity and permitted  consistent  customer access to a full
menu of mortgage products under various interest rate conditions.

Keystone's focus on relationship banking,  responsiveness to interest rates, and
prudent  liquidity  management have enabled it to achieve an increase in earning
asset yields at 8.32% verses 8.20% in 1996.  The 12 basis point  improvement  in
yields,  combined  with a 6% increase  in earning  assets,  allowed  Keystone to
sustain steady revenue growth.

Interest Expense/Funding Sources

Improvement  in net interest  income must include  increased  levels of interest
income  combined  with prudent  management  of both  funding cost and  capacity.
Financial  institutions  have been  consistently  challenged to achieve  revenue
improvement  despite an erosion of the funding base as customers  seek increased
investment  returns.  Successful  integration of relationship  banking  requires
innovative and responsive  product  management in terms of both deposit  product
lines and asset management offerings. As competitive pressures constrain deposit
growth,   deposit-gathering  strategies  have  been  augmented  by  self-funding
securitization activities as well as prudent use of credit markets, most notably
FHLB  advances.  Keystone's  funding  approach  resulted  in an  increase in the
overall  funding  costs  from 4.33% in 1996 to 4.45% in 1997,  a 12 basis  point
increase which was equal to the improvement in asset yield.

                                      8

<PAGE>

Net Interest Spread and Net Interest Margin

Combining  the impact of both yield on earning  assets  with the cost of funding
sources  results in  interest  spread,  a measure of a  financial  institution's
ability to effectively  blend the impact of changing  rates,  shifting  interest
rate indexes,  and earning assets and funding mix changes with evolving consumer
needs.  Net interest margin combines the impact of interest spread with both the
investment of noninterest funding sources and the level of nonearning assets. In
1997, Keystone  successfully  sustained both its overall interest spread and its
net interest  margin,  rising to the challenges of an  increasingly  competitive
marketplace for financial  services.  Interest spread was 3.87% in both 1997 and
1996.  Similarly,  net interest  margin  remained  constant at 4.59% compared to
4.61% in 1996,  reflecting  little change in either  interest  spread or the net
impact of noninterest funding sources and nonearning assets.

Quarterly Performance

The  following  table  provides a  comparative  summary of earning asset yields,
funding costs,  and other  information for each of the four quarters of 1997 and
1996 (in thousands):

<TABLE>
<CAPTION>

                                                   1997
------------------------------ --------------------------------------------
                                 Fourth      Third      Second     First
                                 Quarter    Quarter    Quarter    Quarter
============================== =========== ========== ========== ==========
<S>                                  <C>        <C>        <C>        <C>
Asset yield                          8.38%      8.38%      8.33%      8.20%
Funding cost                         4.55       4.47       4.44       4.36
------------------------------ ----------- ---------- ---------- ----------
 Interest spread                     3.83%      3.91%      3.89%      3.84%
------------------------------ ----------- ---------- ---------- ----------
 Net interest margin                 4.56%      4.62%      4.63%      4.56%
------------------------------ ----------- ---------- ---------- ----------
Net interest income                $72,788    $74,087    $71,687    $68,542
============================== =========== ========== ========== ==========

                                                   1996
------------------------------ --------------------------------------------
                                 Fourth       Third     Second      First
                                 Quarter     Quarter    Quarter    Quarter
============================== =========== ========== ========== ==========
Asset yield                          8.20%      8.11%      8.20%      8.26%
Funding cost                         4.36       4.35       4.24       4.35
------------------------------ ----------- ---------- ---------- ----------
 Interest spread                     3.84%      3.76%      3.96%      3.91%
------------------------------ ----------- ---------- ---------- ----------
 Net interest margin                 4.58%      4.50%      4.68%      4.63%
------------------------------ ----------- ---------- ---------- ----------
Net interest income                $69,012    $67,228    $67,532    $67,320
============================== =========== ========== ========== ==========
</TABLE>

Quarterly performance  throughout 1997 and 1996 was marked by the consistency of
yields and cost of funds, reflecting similar interest rate conditions throughout
those periods.  Factors  influencing  both net interest  spread and net interest
margin  performances  gave rise to a relatively  constant band of conditions and
consistent quarter-to-quarter performance.


PROVISION FOR CREDIT LOSSES

The  provision  for credit losses grew by 43% during the year from $10.7 million
in 1996 to $15.3 million in 1997.  The provision was influenced by higher levels
of consumer  charge-offs  and the changing  risk  characteristics  of Keystone's
credit  portfolio.  Charge-offs  were  primarily  affected by the evolving  risk
characteristics  of consumer  debt as reflected in higher levels of defaults and
personal  bankruptcy  trends.  Since the end of 1996,  the  allowance for credit
losses expressed as a percentage of loans grew from 1.30% to 1.38%. In addition,
the allowance  expressed as a percentage of  nonperforming  loans increased from
285% at the end of 1996  to  310%  at the  end of  1997,  reflecting  Keystone's
commitment to maintaining  appropriate coverage of risk elements within its loan
portfolio. See the Allowance for Credit Losses and Asset Quality section of this
review for additional information.


                                      9
<PAGE>

NONINTEREST INCOME

Revenue  stream  diversification  has been  directly  influenced  by  Keystone's
commitment  to enhance  its  position  as the  "financial  services  provider of
choice" in the market in which it operates.  This focus has manifested itself in
an  increasing  relative  contribution  of  noninterest  revenues to the overall
revenue  stream.   During  1997,   noninterest   revenues   (excluding  security
transactions) accounted for 22.6% of aggregate revenues versus 20.7% in 1996. In
total, noninterest revenues grew 18.7% over 1996 performance.

Keystone's commitment to the expansion and diversification of the revenue stream
was exemplified  not only by the growth of noninterest  revenues but also by its
corporate  acquisition  and  product  development  strategies.  In prior  years,
Keystone  successfully  integrated  both  Martindale  Andres & Co. and  Keystone
Financial Mortgage  Corporation into its traditional  banking franchise and also
expanded its  cutting-edge  electronic  delivery of financial  services.  During
1997, Keystone's roll-out of KeyPremier, its proprietary family of mutual funds,
and the  acquisition of MMC&P,  a retirement  benefit  services  firm,  provided
additional  complimentary financial services capabilities geared toward customer
needs.  These  services  are  particularly   relevant  in  today's  increasingly
competitive marketplace, reflecting the trend toward personal responsibility for
retirement  planning  efforts.  This trend,  exemplified by the growth in 401(K)
plans  and  self-directed  IRA  products,  has  created  a need  for  responsive
retirement  plan  counseling,  monitored  investment  performance,  and enhanced
record-keeping capabilities for employers, employees, and individual consumers.

Trust and investment  advisory  services,  the largest single source of fee-base
revenues  within  Keystone,  was a major  driver of the  improved  revenues  and
reflected  21% growth over 1996  performance.  Assets  under  management  within
Keystone now exceed $3.5 billion,  growth of nearly 10% since 1996.  Such growth
has been influenced by the emergence of Martindale  Andres & Co., now nationally
recognized  as one of the top  portfolio  managers of its class in the  country.
Expansion  of  revenue  sources  is  also  expected  to  continue   through  the
acquisition of MMC&P.

Keystone has been equally  successful in evolving its mortgage  banking strategy
through  leveraging  its  traditional  banking  network as a source of  mortgage
originations.  The specialized  expertise  provided through  Keystone  Financial
Mortgage Corporation has been successfully  integrated within Keystone's banking
network, providing seamless access to a full complement of mortgage products and
consistent  delivery  of  this  core  component  of the  consumer  relationship.
Keystone has demonstrated an ability to provide both a high level of service and
a  competitive  product  menu  under  a  variety  of  interest  rate  or  market
conditions.  Originations  during 1997 approached $300 million,  reflecting a 5%
increase over 1996.  Residential mortgage loans serviced at the end of 1997 grew
to nearly  $1.9  billion.  As a result of the growth in  originations  and loans
serviced, mortgage banking revenues grew 31% during 1997.

During the third quarter of 1997,  Keystone  began a deliberate  curtailment  of
activities  related  to  the  indirect  financing  of  automobiles  through  its
automobile  dealer network in an attempt to focus on more  relationship-oriented
lines of  business.  Execution  of this  strategic  decision  was  completed  by
year-end.  Despite the reduction in indirect  lending,  both  automobile  dealer
floor  plan  financing  and other more  direct  forms of  automobile  lending to
consumers  remain vital and profitable  elements of Keystone's  product delivery
strategy that will continue to be explored and enhanced.

Deposit account service charges in 1997 were flat as compared to the prior year.
In late 1996, Keystone had introduced "KeyFree",  its free checking option which
served as a vehicle to  introduce  consumers to the various  financial  services
available  through  Keystone  including  credit  products,  deposit services and
alternative  investment  products.  This  strategic  initiative,  which provided
Keystone with a competitive  position in its  marketplace,  has  constrained the
rate of growth in deposit fee income.


                                      10

<PAGE>

Similar to the  strategies  employed  within both asset  management and mortgage
banking,  Keystone has successfully  leveraged its impressive electronic banking
configuration to improve related fee income growth. Growing demand for access to
funds and  technological  innovations  contributed to a $2.3 million increase in
ATM and debit card fees.  Keystone has consistently made strategic alliances and
prudent   investments   in  ATM   technology  to  improve  its  fee   generation
capabilities. Keystone's joint ventures to place ATMs in convenience stores; the
expansion of KeyCheck,  Keystone's ATM/debit card product; and the investment in
advanced function ATMs have all provided  Keystone with a competitive  advantage
in serving  customers and generating  fee income.  Keystone now has an expansive
network of over 450 ATMs including both  traditional and expanded  service ATMs.
The investment in ATMs has allowed  Keystone to become one of the 40 largest ATM
networks  in the  United  States.  Keystone  remains  committed  to ATM  network
expansion  which will include  partnerships  with other  convenience  stores and
retail outlets.  Aggregate ATM transaction activity grew 33% from 1996 and debit
card activity rose 63% over the same period,  convincing  evidence of Keystone's
successful  execution of its electronic  banking  initiatives.  Surcharge  fees,
which  enable  Keystone to charge  noncustomers  who access  their bank  through
Keystone's  ATM  network,   also  have  strategic  relevance  for  improved  fee
generation.  These factors  combined with other  fee-based  initiatives  to grow
aggregate fee income by 26.5%.

Keystone has developed an effective  distribution  channel  analysis model which
provides a framework to constantly  evaluate Keystone's various delivery channel
networks. This model has been used to evaluate current and prospective networks,
including the most visible  distribution  channel,  the community office. With a
current  network of nearly 200  offices,  Keystone  must  constantly  evaluate a
number of factors,  including  demographic  trends and market share, to maximize
its return on investment.  Decisions  regarding this investment are subjected to
thorough analysis. During 1997, Keystone sold nine offices resulting in gains of
$4.5 million,  which are  reflected in other  income.  This strategy has allowed
Keystone to increase  investments  in those  markets  which  provide  acceptable
profit contributions and explore alternative delivery options in other markets.

NONINTEREST EXPENSE

Noninterest  expenses,  exclusive  of the special  charges  associated  with the
merger of FTC, rose to $214.6 million from $196.2 million,  an increase of $18.4
million or 9.3%. Of the overall  increase,  approximately  26% was attributed to
the   absorption  of  the  expense   structures  in  both  the  FFWM  and  MMC&P
acquisitions,  both of which were  accounted  for under the  purchase  method of
accounting. Core operating expenses, excluding the impact of acquisitions,  grew
approximately 7%, resulting in an efficiency ratio of 57.8% for 1997,  virtually
unchanged from the previous year.  Special charges in connection with the merger
of FTC totaled $11.4 million and included  professional  fees,  integration  and
conversion  expenses,  and costs of various separation plans directly related to
the merger.

The most  significant  individual  component  of  noninterest  expense  involves
salary-related expenses. Traditionally,  salary and benefit expenses approximate
50% of total  operating  expense of a  financial  institution  and this  pattern
remained  constant  during 1997.  Salary  expenses grew to $92.6 million  versus
$81.9  million in 1996,  an increase of 13.1%.  A portion of this  increase  was
related to personnel additions from the FFWM and MMC&P transactions. On average,
the  number of full time  equivalent  employees  grew only 3% from 1996 to 1997,
reflecting  efficiency gains which offset  employees added in the  acquisitions.
Several additional  factors influenced the growth in salary expenses,  including
average salary increases  approximating 4%. Effective in 1997, Keystone executed
a  comprehensive  sales  compensation  program  that has been  coordinated  with
corporate  efforts to improve  revenue  performance.  This  program  resulted in
higher levels of variable  compensation  correlated to improved  market  revenue
performance,  increased  mortgage banking revenues and enhanced asset management
fees. This program was designed to provide  additional  incentive  opportunities
and  manage   compensation   expenses  at  levels   commensurate   with  revenue
improvement.

Over the last several years, Keystone has demonstrated an ability to control the
pace of growth in employee benefits, a significant  component of which is linked
to the cost of providing  employee health care.  Consistent with national health
care trends,  the cost control  features of managed  care have  constrained  the
growth in these  expenses  while  providing  high quality  health care services.
Further,  Keystone's  ability to efficiently  and effectively  absorb  employees
through its merger and  acquisition  strategies  has enabled it to leverage  its
health care structure over a more substantial employee base.

                                      11

<PAGE>

The  evaluation  and constant  evolution of delivery  channels in the  financial
services industry  continues to affect changes in the related expense structure.
During 1997, Keystone expanded the use of  technology-related  delivery channels
while,  at the same  time,  subjecting  its more  traditional  community  office
network to analysis which quantified the effectiveness and efficiency of product
and service  delivery.  Technology  investment in delivery channels included the
expanded ATM network and Keystone's  automated  telephone  banking network.  The
telephone  banking network  facilitates  increased sales and services to new and
existing customers through this convenient  delivery channel.  The investment in
this  program  will also support  more  aggressive  inbound and  outbound  sales
initiatives,  providing  enterprise-wide sales support and focused telemarketing
capabilities.  Keystone will also continue to explore  other,  less  traditional
delivery  channels,  such as PC and internet  banking,  as customer affinity for
these channels increases.

The  reconfiguration of delivery channels has also affected the most traditional
and visible financial  services outlet,  the community  banking office,  and the
occupancy expenses related thereto.  During 1997, Keystone modified its delivery
approach to certain  markets by selling  offices in these markets and relying on
more  effective  and  efficient  alternative  channels of delivery for providing
products and services to customers  within these  markets.  This  strategy  will
enable Keystone to make incremental  investments in markets more closely aligned
with the changing  flow of economic  commerce.  Keystone will continue to pursue
strategic  initiatives  through  its  on-going  analysis  of markets  and market
potential.  Through  effective use of these analyses,  Keystone will continue to
prudently manage the rate of growth in occupancy-focused expenses.

Other expenses grew to $68.7  million,  or 6.1% compared with 1996 and were also
affected  by the  impact  of the  purchase  accounting  for the FFWM  and  MMC&P
transactions.  Exclusive  of the  impact  of the  absorption  of  these  expense
structures, increases in specific categories included merchant banking expenses,
postage  and  communication-related  costs,  each of which  were  influenced  by
revenue-related  activities or expansions of customer-focused product or service
capabilities.

Year 2000

Much has been  written  about the  approach of the Year 2000 and the  widespread
concern  over its  potential  impact on  computer  systems.  Historically,  most
computer  programs were written with two digits,  rather than four, to designate
the  applicable  year.  Accordingly,  it is  anticipated  that most  systems may
recognize  a date  using  "00" as the  year  "1900"  rather  than  "2000",  thus
increasing the possibility of computer  system  failures,  miscalculations,  and
disruption of normal business  operations.  Issues  surrounding the concern over
the approach of the Year 2000,  particularly  as it would  affect the  financial
services  industry,  have been the subject of intense management focus. Prior to
1997, Keystone began a planning effort designed to ensure identification of Year
2000  business  issues and develop a strategic  response  to those  issues.  The
resulting  business plan was designed to achieve  substantial  implementation of
its  Year  2000  compliance  program  by the  end of 1998 in  order  to  provide
sufficient   time  and  resources  for  testing  and  resolution  of  unforeseen
complexities that may arise prior to final implementation in 1999.

It is  difficult  to isolate the  incremental  cost of this effort given that it
primarily impacts technical  manpower already in place and modestly  accelerates
already planned technological  investments.  Costs incurred to execute this plan
have been reflected in Keystone's  operating  expenses in both 1996 and 1997 and
will  continue  to affect  expense  levels  through  the Year  2000 and  beyond.
Keystone  currently  projects that it will incur capital  investment  and period
expenses  in excess of $9 million  over the  course of  program  implementation,
inclusive of nearly $1 million that has been  expensed  through the end of 1997.
Period expense should aggregate approximately $3 to $4 million in 1998 and 1999,
with an  additional  $4 to $5  million of  investments  in  software  and system
replacements  which will be capitalized  and amortized over a three to five year
period. These  forward-looking cost estimates may be influenced by any number of
factors and risks  including,  but not limited to, the  availability and cost of
properly trained  programmers,  the ability to identify all possible issues, the
timely availability of compliant software, and other uncertainties.

                                      12

<PAGE>

Keystone  also  continues to analyze and discuss  these issues with its vendors,
service partners, and customer base to determine the extent to which Keystone is
vulnerable  to those third  parties'  failure to  remediate  their own Year 2000
issues. The projected costs include the estimated time and costs associated with
the impact of third party issues.  While Keystone has taken and will continue to
take appropriate actions to mitigate the risk of adverse consequences associated
with the  failure of a third  party to  address  these  issues,  there can be no
guarantee  that the systems of third  parties will be timely  converted and will
not have an adverse effect on Keystone.

Income Taxes

Income tax  expense  reached  $39  million in 1997  versus $37  million in 1996,
reflecting effective tax rates of 30.7% and 29.3% respectively.

                                      13
<PAGE>

BALANCE SHEET OVERVIEW

At the end of 1997,  Keystone's  total assets  reached $6.8 billion  versus $6.4
billion at December 31, 1996. Approximately $355 million of assets were acquired
in connection  with the  acquisition  of FFWM.  During 1997,  Keystone  executed
certain asset sales,  including the restructuring of its mortgage loan portfolio
in  connection  with the  FFWM  acquisition,  which  constrained  asset  growth.
However, this strategy precluded the need for aggressive acquisition pricing for
deposit funding to support increased strategic lending activities. Average loans
grew 9% to $4.6 billion at the end of 1997 versus $4.2 billion in 1996.  Deposit
acquisition  continued  to be less than robust  though  growth did occur in both
variable rate CD's and the insured money market product lines.

LOANS

Keystone  experienced  solid growth in its loan  portfolio as well as changes in
the loan mix consistent with its  relationship  banking focus.  Loans grew 9.1%,
including  increases in commercial  real estate and direct consumer loans of 23%
and 27%, respectively. The absolute level of loan growth was offset by runoff in
indirect  automobile  loans  and  consumer  mortgages,   influenced  largely  by
Keystone's  securitization  strategies.  The  following  is a summary of various
lending categories within Keystone between 1996 and 1997.
<TABLE>
<CAPTION>

                              1997               1996               Change
------------------------ ------------------ ----------------- ------------------
                            Amount     %      Amount      %    Amount       %
------------------------ ---------- ------- ---------- ------ ----------- ------
<S>                        <C>        <C>     <C>       <C>     <C>        <C>
Commercial                 $622,569     14%   $558,276   13%   $ 64,293     12 %
Floor plan financing        186,737      4     150,052    4      36,685     24
Commercial-real estate
  secured                 1,294,933     28   1,055,688   25     239,245     23
Consumer mortgages          944,731     21   1,153,491   28    (208,760)   (18)
Direct consumer             856,225     19     675,783   16     180,442     27
Indirect consumer           293,013      6     330,463    8     (37,450)   (11)
Lease financing             374,421      8     265,416    6     109,005     41
------------------------ ---------- ------- ---------- ------ ----------- ------
                         $4,572,629    100% $4,189,169  100%   $383,460      9 %
------------------------ ---------- ------- ---------- ------ ----------- ------

</TABLE>

Keystone's  focus on relationship  banking has manifested  itself in the pace of
growth in both commercial real estate and commercial  lending.  This improvement
demonstrated Keystone's commitment to meeting the credit needs of these critical
segments of Keystone's market.  Keystone's emphasis on meeting the needs of both
middle market and smaller business  customers  requires  skillful  execution and
understanding of real estate-based  lending issues. The delivery of products and
services  which are  adaptable  to  individual  business  situations  has been a
hallmark of Keystone's focus on relationship banking.

One  of the  more  specialized  business  segments  that  remains  important  to
Keystone's  strategic  execution  of its lending  strategy  involves  automobile
dealer floor plan financing.  Keystone's  commitment to this and other facets of
automobile  dealer  financial  needs remains a natural  extension of its overall
relationship banking focus for business customers.

Similarly,  Keystone's  emphasis on direct consumer  lending,  combined with its
ability to develop, deliver, and manage products for that important segment, has
influenced  the growth in various forms of consumer  lending.  Traditional  home
equity  lending,   including   credit  products  growing  out  of  PFA  efforts,
contributed  to the  substantial  increase  in  lending to this  market  sector.
Additionally,  growth in lease financing,  primarily automobile  financing,  has
evidenced  Keystone's  attention  to  providing  competitive  products  that are
responsive to consumer  needs.  Keystone's  array of consumer credit products is
undergoing  continuous  improvement  in  order  to  facilitate  service  to this
important market segment.

                                      14

<PAGE>

Keystone  experienced  runoff of  various  degrees  in  mortgages  and  indirect
lending.  With  respect to  mortgages,  Keystone  has  executed  a  strategy  of
providing  competitive  mortgage  products with an emphasis on service delivery.
Keystone   established   Keystone  Financial  Mortgage   Corporation  (KFMC)  to
facilitate  delivery of specialized  services to its consumer base and to ensure
consistent access to competitive products. KFMC's expertise in product delivery,
combined  with its ability to access the  secondary  market via  securitization,
continues to provide a competitive advantage throughout Keystone's market.

During  1996,  Keystone  had  executed  a  similar  securitization  strategy  to
accommodate  consumer financing needs through its automobile dealer network. The
indirect  securitization  programs provided automobile financing to customers of
automobile  dealers on a self-funding  basis,  thus  preserving core funding for
core relationship activities.  In 1997, Keystone evaluated the profitability and
alignment  of  its  indirect   automobile  lending  business  with  its  overall
relationship  banking  strategy and elected to curtail this  activity.  Keystone
will continue to explore  opportunities  designed to expand automobile financing
activities into more comprehensive retail relationships.

                                      15

<PAGE>

ALLOWANCE FOR CREDIT LOSSES AND ASSET QUALITY

Keystone's  ratio of the  allowance  for credit losses to loans reached 1.38% at
December  31, 1997 versus 1.30% at the end of 1996.  The  absolute  level of the
allowance  reached $65.1 million at the end of 1997 compared to $56.3 million at
the end of the  previous  year.  The  following  table  sets forth five years of
activity  within the  allowance  for loan losses  beginning  January 1, 1993 (in
thousands):
<TABLE>
<CAPTION>

                                 1997      1996       1995      1994       1993
============================= ========== ========= ================================
<S>                <C>           <C>       <C>        <C>        <C>        <C>
Balance at January 1,           $56,256   $55,415    $53,708    $51,084    $46,405
Allowance obtained through
acquisitions                      8,311     -----        935      2,096      -----
Loans charged off:
 Commercial                      (1,930)   (1,936)      (874)    (4,417)    (2,871)
 Real estate-secured:
  Commercial                     (1,234)   (1,646)    (1,971)    (4,265)    (2,834)
  Consumer                       (1,116)     (651)      (708)      (638)      (470)
 Consumer                       (10,010)   (6,702)    (5,498)    (2,932)    (3,704)
 Lease financing                 (2,987)   (1,330)      (786)      (198)      (238)
----------------------------- ---------- --------- --------------------------------
Total loans charged off         (17,277)  (12,265)    (9,837)   (12,450)   (10,117)
----------------------------- ---------- --------- --------------------------------
Recoveries:
 Commercial                         501       461        281        528      1,743
 Real estate-secured:
  Commercial                        410       465        538        849        359
  Consumer                          219       152        164        280         73
 Consumer                         1,104     1,138        900        968        997
 Lease financing                    251       177        158         29         44
----------------------------- ---------- --------- --------------------------------
Total recoveries                  2,485     2,393      2,041      2,654      3,216
----------------------------- ---------- --------- --------------------------------
Net loans charged off           (14,792)   (9,872)    (7,796)    (9,796)    (6,901)
Provision charged to
operations                       15,316    10,713      8,568     10,324     11,580
----------------------------- ---------- --------- --------------------------------
Balance at December 31,         $65,091   $56,256    $55,415    $53,708    $51,084
============================= ========== ========= ================================
Ratio of allowance to
year-end loans                     1.38%     1.30%      1.35%      1.38%      1.48%
============================= ========== ========= ================================
</TABLE>

The following  statistics are relevant to activity that has occurred  within the
allowance for credit losses during the most recent five year period:
<TABLE>
<CAPTION>

                                    1997    1996     1995    1994     1993
--------------------------------- -------- ------- -------- ------- --------
<S>                               <C>      <C>     <C>      <C>    <C>
Ratio to Average Loans:
 Provision                          .33%    .26%     .21%    .29%     .34%
 Net charge-offs                    .32%    .24%     .20%    .27%     .20%
</TABLE>

Traditionally,  Keystone  has  reflected a loan loss  provision in excess of the
level of net  charge-offs,  a pattern which was  sustained  over the most recent
five year  period.  During that time,  trends  have  emerged  which  reflect the
underlying risk  characteristics and the changing composition of Keystone's loan
portfolio.

                                      16

<PAGE>

While commercial credits have experienced less significant  charge-off activity,
consumer credit charge-offs have grown substantially. This shift was affected by
both Keystone's  strategic  emphasis on consumer  lending and by national trends
associated  with higher levels of consumer  defaults and personal  bankruptcies.
Keystone  will  continue to manage its  exposure to credit risk as it relates to
its strategic focus on  relationship  banking,  with particular  emphasis on the
consumer sector.

Risk Elements

As a means of  assessing  the risk profile of its loan  portfolio,  Keystone has
monitored  the level of aggregate  risk elements  which  include the  following:
nonaccrual  loans,  nonperforming  assets (NPA's)and loans past due more than 90
days. Keystone will also review trends with respect to less severe categories of
past due loans,  including  loans  which are 30 to 60 days past due and 60 to 90
days past due.  Nonperforming  assets include nonaccrual loans,  restructurings,
and other  real  estate  (ORE).  Nonaccrual  loans are loans for which  interest
income is not accrued due to concerns  about the  collection of interest  and/or
principal. Restructured loans may involve renegotiated interest rates, repayment
terms,  or both,  because of a deterioration  in the financial  condition of the
borrower. ORE activity in 1997 reflected no unusual or significant  fluctuations
in balances. The following table provides a comparative summary of nonperforming
assets  and total  risk  elements  at the end of each of the last five years (in
thousands):
<TABLE>
<CAPTION>

                                1997       1996       1995       1994       1993
----------------------------- --------- ---------- ---------- ---------- ----------
<S>                             <C>        <C>        <C>        <C>        <C>
Nonaccrual loans                $20,520    $19,350    $19,142    $26,701    $26,571
Restructurings                      489        393        503        144      5,508
----------------------------- --------- ---------- ---------- ---------- ----------
Nonperforming loans              21,009     19,743     19,645     26,845     32,079
Other real estate                 5,028      8,305      9,777      7,028      9,505
----------------------------- --------- ---------- ---------- ---------- ----------
Nonperforming assets             26,037     28,048     29,422     33,873     41,584
Loans past due 90 days
 or more                         33,062     20,141     16,798     10,062      5,771
----------------------------- --------- ---------- ---------- ---------- ----------
Total risk elements             $59,099    $48,189    $46,220    $43,935    $47,355
----------------------------- --------- ---------- ---------- ---------- ----------
</TABLE>

Substantially all of the loans in the nonaccrual  category at December 31, 1997,
were contractually past due as to principal or interest.

The relationships of nonperforming assets and total risk elements to total loans
and to the  allowance  for credit  losses  provide  important  measures of asset
quality.  The allowance for credit losses must be adequate to absorb credit risk
in these  categories and in the remainder of the loan  portfolio.  The following
table summarizes the total risk element components  expressed as a percentage of
year-end  loans and  relevant  coverage  provided  by the  allowance  for credit
losses.
<TABLE>
<CAPTION>

                                             1997    1996    1995    1994    1993
------------------------------------------- ------- ------- ------- ------- -------
<S>                                           <C>     <C>     <C>     <C>     <C>
Ratio to Year-End Loans:
 Nonperforming assets                         0.55%   0.65%   0.72%   0.87%   1.21%
 90 days past due                             0.70    0.46    0.41    0.25    0.16
------------------------------------------- ------- ------- ------- ------- -------
 Total risk elements                          1.25%   1.11%   1.13%   1.12%   1.37%
------------------------------------------- ------- ------- ------- ------- -------
Coverage Ratios:
 Ending allowance to nonperforming loans       310%   285%     282%    200%    159%
 Ending allowance to risk  elements*           120%   141%     152%    146%    135%
 Ending  allowance to net charge-offs          4.4x   5.7x     7.1x    5.5x    7.4x
------------------------------------------- ------- ------- ------- ------- -------
* Excludes ORE.

</TABLE>

While the level of nonperforming assets has continued to decline,  loans 90 days
past due as a percent of loans  have  increased  over the last few  years.  As a
result, total risk elements expressed as a percent of loans increased from 1.11%
at December 31, 1996 to 1.25% at December 31, 1997.  The increase was due to the
migration of a single  credit of  approximately  $5.7 million into loans 90 days
past due as well as an increase in consumer loan delinquencies.  Management will
continue to closely  monitor  these and other  components  of risk  elements and
manage the level of adversely classified assets.  Coverage ratios, which measure
the capacity of the  allowance  to absorb the impact of possible  collectability
problems, remained at strong levels.

Credit risk associated with  nonperforming  assets also can be measured in terms
of exposure to specific  categories of loans.  The following  table provides the
components of nonperforming assets,  detailed by loan categories,  at the end of
each of the past five years, (in thousands):
<TABLE>
<CAPTION>
------------------------------- ---------------------------------------------------
                                   1997      1996       1995      1994      1993
------------------------------- ---------- --------- ---------- --------- ---------
<S>                                 <C>       <C>        <C>       <C>       <C>
Commercial                          $4,550    $4,340     $4,833    $5,651    $8,762
Commercial real estate:
 Construction and
  development                          220       764      1,951     5,690     6,007
 Permanent                          11,960    12,196     10,919    10,597    12,871
Residential real estate              1,465     1,014      1,173     4,486     3,443
Consumer                             2,814     1,429        769       421       996
------------------------------- ---------- --------- ---------- --------- ---------
Nonperforming loans                 21,009    19,743     19,645    26,845    32,079
Other real estate                    5,028     8,305      9,777     7,028     9,505
------------------------------- ---------- --------- ---------- --------- ---------
 Total nonperforming assets        $26,037   $28,048    $29,422   $33,873   $41,584
------------------------------- ---------- --------- ---------- --------- ---------
</TABLE>

The following is a comparative  summary of past due loans at the end of 1997 and
1996 (in thousands):
<TABLE>
<CAPTION>

                               % of Total                % of Total
                      1997       Loans        1996         Loans
------------------ ---------- ------------ ----------- --------------
<C>                   <C>          <C>      <C>             <C>
30-59 days           $53,320        1.1%     $47,135         1.1%
60-89 days            15,807        0.3       16,421         0.4
Over 90 days          33,062        0.8       20,141         0.4
------------------ ---------- ------------ ----------- --------------
                    $102,189        2.2%     $83,697         1.9%
------------------ ---------- ------------ ----------- --------------
</TABLE>

The level of past due credits in the over 90-days category increased as a result
of the  aforementioned  $5.7 million  credit and higher  consumer  delinquencies
brought about by the stress of high debt levels on consumer  credit.

Management has  identified  approximately  $8.3 million of loans  outstanding at
December  31,  1997  where  concern  exists  as  to  the  potential  for  future
classification  into one of the risk element  categories.  Substantially  all of
these loans were current at the end of 1997.  Such loans totaled $9.1 million at
December 31, 1996.

Overall Assessment

Keystone  has  assessed  all of the above  factors in the  establishment  of the
allowance  for  credit  losses.  The  determination  as to the  adequacy  of the
allowance reflects management's judgment, and was based upon collateral, various
estimates, local market conditions, and other information that requires

                                      17

<PAGE>

subjective analysis.  These factors, which are prone to change, are monitored by
management to evaluate their potential impact on management's  assessment of the
adequacy of the allowance.  Based on its evaluation of loan quality,  management
believes  that the allowance for credit losses at December 31, 1997 was adequate
to absorb potential losses within the loan portfolio.

INVESTMENTS

Keystone has  established  corporate  investment  policies that address  various
aspects  of  portfolio  management  including,   but  not  limited  to,  quality
standards,  liquidity  and  maturity  limits,  investment  concentrations,   and
regulatory  guidelines.  Compliance with these policies is reported regularly to
the  Board of  Directors.  Keystone's  objectives  with  respect  to  investment
management include  maintenance of appropriate asset liquidity,  facilitation of
asset/liability management strategies, and maximization of return.

At December 31, 1997, Keystone's investments  represented 23.7% of total assets.
The following is a summary of the carrying values of investments at December 31,
1997 and 1996 (in thousands):


                                         1997                   1996
--------------------------- ------------------------- -------------------------
                             Available     Held to     Available     Held to
                              for Sale     Maturity     for Sale     Maturity
--------------------------- ------------ ------------ ------------ ------------
Negotiable money market
 investments                    $178,404       $-----     $194,566      $ -----
U.S. Treasury securities         194,120        -----      244,542        -----
U.S. Government agency
  obligations                    503,078      366,238      559,438      230,402
Obligations of states and
 political subdivisions           74,171      143,910      103,520      134,194
Corporate and other              141,627       18,240      108,028       15,362
--------------------------- ------------ ------------ ------------ ------------
                              $1,091,400     $528,388   $1,210,094     $379,958
=========================== ============ ============ ============ ============

FASB Statement No. 119,  "Disclosures About Derivative Financial Instruments and
the Fair Value of  Financial  Instruments"  defined two  distinct  types of off-
balance  sheet  derivative  activities:   "trading"  activities  and  "end-user"
activities.  Keystone does not engage in derivatives  trading activities and has
made only  limited  use, as an end-user,  of interest  rate swaps.  These swaps,
together  with other  strategies,  have been used to manage  Keystone's  overall
exposure to the effect of changes in interest rates.  Keystone has also made use
of forward  mortgage  commitments as well as put options and short sales of U.S.
Treasury  securities.  These instruments were executed to reduce the market risk
associated with interest rate  fluctuations in fixed consumer  mortgages and the
indirect automobile loans held for sale. Further disclosures of these activities
are included in the footnotes of the financial statements. Both the FASB and SEC
have issued  pronouncements  concerning the derivatives,  hedging activities and
overall  market risk.  The FASB Exposure  Draft on accounting  for  derivatives,
which has undergone  considerable  revision,  continues to be deliberated  and a
final  standard is  expected in 1998.  Key  elements  of the  expected  standard
include provisions to measure derivatives at fair value as assets or liabilities
as  well as  establishment  of  more  specific  criteria  for  hedge  accounting
treatment. Currently, these proposed changes are not expected to have a material
impact on Keystone's future financial statement presentations.

A broader definition of derivatives would include any financial instrument which
derives  its  value or  contractual  cash  flows  from the  price of some  other
security or index. Keystone's investment policy governs the nature and extent of
on- balance sheet financial  derivative  holdings,  which currently include both
collateralized  mortgage  obligations and structured  notes.  This policy limits
Keystone's  exposure to derivatives risk by defining  restrictions on the amount
of  credit,  prepayment,  extension,  and  interest-rate  risk  associated  with
derivative financial  instruments.  Keystone's aggregate investment in this form
of financial derivative holdings is substantially composed of U.S. Government

                                      18

<PAGE>

Agency holdings.

The weighted average life of Keystone's fixed rate investments was 4.16 years at
December 31, 1997.  Ratings for state and  municipal,  and corporate  issues are
provided by major rating agencies, principally Moody's and Standard & Poor's. At
the end of 1997, the portion of all state and municipal holdings rated "AAA" was
90.0% and the portion of all corporate issues rated "A" or better was 98.5%.

The  relationship  of  market  value to the  amortized  cost of  investments  at
December 31, 1997, was 101.4% compared to 100.6% at the end of 1996. At December
31, 1997, investments  "held-to-maturity",  which are carried at amortized cost,
contained  gross  unrealized  gains and  losses  of $10  million  and  $173,000,
respectively.  Unrealized gains and losses included in the carrying value of the
"available-for-sale"  investments  of $15 million and $2 million,  respectively,
were reflected, on a net of tax basis, as an adjustment to shareholders' equity.
Keystone holds no concentration of corporate or municipal investment  securities
of any single issuer which exceeds 10% of shareholders' equity.

DEPOSITS

Customer deposits remained the primary source of funding for traditional banking
activities.  Keystone has actively responded to competitive pressures which have
the  potential to  contribute  to the erosion of this  important  funding  base.
During 1997,  Keystone  experienced  growth of 3% in overall deposit funding due
primarily  to the late  May  acquisition  of FFWM,  summarized  as  follows  (in
thousands):

                                                                   Change
                                                                 ==========
                                   1997          1996         Amount       %
============================== ============= ============ ============== ======
Noninterest-bearing demand          $606,907     $604,536        $2,371   --%
NOW                                  330,514      532,480      (201,966)  (38)
Savings                              600,759      569,814        30,945     5
Money market                         650,082      536,237       113,845    21
Variable-rate CD                     575,025      415,812       159,213    38
Other time deposits less than
  $100,000                         2,114,231    2,055,888        58,343     3
Time deposits $100,000 or more       278,181      288,273       (10,092)   (4)
------------------------------ ------------- ------------ -------------- ------
                                  $5,155,699   $5,003,040      $152,659     3%
============================== ============= ============ ============== ======

Keystone's  retail  customers  continued to express a preference for competitive
deposit  products which are responsive  both to individual  liquidity  needs and
competitive  investment  returns.  Both the indexed money market account (IMMA),
which  is  included  in  the  money  market  category,  and  the  variable  rate
certificate  of  deposit  have been  developed  in  response  to these  customer
preferences.  The IMMA,  whose rate is pegged to the Treasury Bill, has provided
customers  with a  market-based  rate of  return  combined  with  the  liquidity
features of a more traditional money market account. Of the total growth of $114
million in money market  deposits,  approximately  $71 million was attributed to
growth  in the IMMA  accounts.  Similarly,  the  variable-rate  CD has  provided
Keystone with a significant  competitive  advantage in retaining and growing its
certificate of deposit funding.  Consumer access to  variable-rate  deposits has
furnished a viable alternative,  blending the security of deposit insurance with
the flexibility to achieve higher returns.  Keystone experienced some erosion of
its  traditional  NOW deposits,  which was partially  attributable  to growth in
these other,  more innovative  product lines. NOW deposits were also impacted by
the introduction of a sweep account product now provided to retail customers. As
a consequence of these various initiatives, Keystone has been able to grow these
competitive deposit products and sustain its critical funding composition.

                                      19

<PAGE>

BORROWED FUNDS

While deposits remain the most  significant  bank funding  source,  Keystone has
consistently  accessed  other funding  sources  critical to its overall  funding
strategy.  The following  table provides a summary of the various  components of
borrowed funds(in thousands):
<TABLE>
<CAPTION>
                                                              Change
                                                              ------
                                1997        1996        Amount         %
---------------------------- ----------- ----------- ------------- ----------
<S>                             <C>         <C>            <C>        <C>
  Short-term borrowings         $371,645    $323,938       $47,707       15%
  FHLB borrowings                240,533     159,503        81,030       51
  Long-term debt                  64,016       3,569        60,447      100+
---------------------------- ----------- ----------- ------------- ----------
                                $676,194    $487,010      $189,184       39%
---------------------------- ----------- ----------- ------------- ----------
</TABLE>

Growth in Keystone's  lending and strategic  acquisition  efforts has influenced
the volume and composition of nondeposit  funding sources.  The most common form
of these funding sources,  short-term borrowings,  are obtained to meet both the
short-term funding needs and the short-term investment requirements of primarily
commercial and governmental entities. FHLB borrowings,  which are collateralized
by Keystone's mortgage portfolio, reflect a variety of credit products available
to Keystone  through the  membership of its banks in the Federal Home Loan Bank.
These  borrowings  consist  primarily  of  fixed-rate  borrowings  with  various
maturities,  primarily  in the one to five  year  time  frames.  In May of 1997,
Keystone  issued $100  million of senior  medium-term  notes at a coupon rate of
7.30%, with a maturity date of 2004 under a $400 million shelf registration. The
proceeds were used primarily to fund the acquisition of FFWM. From time to time,
Keystone expects to access this funding source for general corporate purposes as
the need arises.

SHAREHOLDERS' EQUITY

The changing nature of the financial services industry,  including the expansion
of fee-based  activities such as asset management services and mortgage banking,
requires a proactive  view of capital  management.  Maintenance  of  appropriate
levels of  capital is  subjected  to  constraints  and  restrictions  imposed by
regulatory authorities,  dividend requirements,  and acquisition  opportunities.
Keystone's capital management  policies have been designed to ensure maintenance
of appropriate levels of capital under a variety of economic conditions.  At the
end of 1997,  shareholders'  equity  reached $685 million versus $660 million at
December 31, 1996 resulting in an equity to assets ratio of 10.02%.

The principal source of new capital for Keystone is earnings retention, which is
a  function  of its  return  on  beginning  equity  and  the  dividends  paid to
shareholders.  Keystone,  in its  capital  management  policies,  has set  forth
specific guidelines to ensure a favorable,  consistent,  and sustainable pattern
of dividend payments.  Dividend declarations during 1997 equated to an 8% payout
on year-end 1996 book value. Many financial  institutions,  including  Keystone,
continued to generate earnings  retention levels in excess of asset growth rates
which has resulted in increased relative levels of capital.

Under  guidelines  set forth in its capital  management  policies,  Keystone has
sought to execute strategies and tactics which would moderate capital growth and
increase the level of earning assets, thus improving the leverage of its capital
base. The  acquisition of treasury stock reissued in the acquisition of FFWM and
the annual  dividend to  shareholders  were  influenced  by  Keystone's  capital
management  strategies.  Despite these  efforts,  the ability to manage  capital
levels continues to be constrained by external factors.  Among these factors are
the desire to  preserve  pooling-of-interests  accounting  treatment  for future
merger  opportunities  as  well  as  Keystone's  objective  to  preserve  "well-
capitalized" ratings for its member banks.

Bank  regulators  have set forth  requirements  for  risk-based  capital,  which
resulted in the  establishment  of  international  capital  standards for banks.
These requirements set forth minimum "leverage", "Tier 1" and "Total" capital

                                      20

<PAGE>

ratios in order to  provide  measures  of  capital  adequacy  that are more risk
responsive than previous  regulatory  guidelines.  Risk-based  capital standards
included  the  establishment  of ranges of capital  adequacy  which  extend from
"significantly  undercapitalized"  to  "well-capitalized".  These assessments of
capital adequacy directly influence the focus of regulatory oversight, including
the premium rates charged for deposit insurance.  Regulators, including both the
Federal  Reserve Board and the Office of the  Comptroller  of the Currency,  now
operate under a risk-based supervisory approach designed to encourage management
focus on the most  effective  use of limited  capital and the  generation of the
highest  possible  returns  with the  least  amount  of  associated  risk.  With
regulatory oversight increasingly focused on capital issues,  Keystone and other
financial  institutions  have been  challenged to develop a capital  measurement
system that will ensure  effective  management of capital  levels and associated
business  risk.  Keystone  will continue to be responsive to the need to balance
both capital adequacy levels and business risk issues.

The following table provides  Keystone's  risk-based capital position at the end
of 1997 and a comparison to the various regulatory capital requirements.

<TABLE>
<CAPTION>
                                             "Well          Minimum
                            Keystone     Capitalized"    Requirements
------------------------- ------------- --------------- ---------------
<S>                         <C>             <C>             <C>
Leverage ratio                 9.15%           5.00%           4.00%
"Tier 1" capital ratio        12.50%           6.00%           4.00%
"Total" capital ratio         13.75%          10.00%           8.00%
------------------------- ------------- --------------- ---------------
</TABLE>

Failure  to meet  any one of the  minimum  capital  ratios  would  result  in an
institution   being   classified   as   "undercapitalized"   or   "significantly
undercapitalized".   Such  classifications  could  disrupt  dividends,   capital
distributions,  or affiliate  management fees. In addition,  other restrictions,
prohibitions, and related supervisory actions would be likely depending upon the
overall  level of  capital.  Keystone  anticipates  no  significant  problems in
meeting the current or future capital standards.  Intangible assets,  consisting
primarily  of core  deposit  intangibles  and  goodwill,  totaled $63 million at
December 31, 1997 or 10% of "Tier 1" capital.

ASSET/LIABILITY MANAGEMENT AND MARKET RISK

The process by which  financial  institutions  manage earning assets and funding
sources under different  interest rate  environments  is called  asset/liability
management.  The primary goal of  asset/liability  management is to increase net
interest  income  within an  acceptable  range of overall  risk  tolerance.  Two
important  performance  barometers are net interest  margin and  liquidity.  Net
interest  margin is increased  by widening  interest  spread  while  controlling
interest  rate  sensitivity.  The  adequacy of liquidity  is  determined  by the
ability to meet the cash flow  requirements  of both  depositors  and  customers
requesting  bank  credit.  Asset/liability  management  within  Keystone  is the
primary responsibility of the Asset/Liability  Management Committee (ALCO) whose
representation includes both bank and holding company personnel.

Interest Rate Risk

Interest  rate risk,  which is the single  most  significant  market risk within
Keystone,  can be  quantified  by measuring  the change in net  interest  margin
relative to changes in market  interest  rates.  Risk is identified by reviewing
repricing   characteristics  of  interest-earning  assets  and  interest-bearing
liabilities.  Keystone's asset/liability management policy sets forth guidelines
that limit the level of interest rate risk within  specified  tolerance  ranges.
Keystone and its subsidiary banks utilize a variety of techniques to measure and
monitor interest rate risk, including the use of simulation  analysis.  In order
to quantify  the impact of changes in  interest  rates on net  interest  income,
Keystone conducts  quarterly  interest rate shock simulations which quantify the
impact of interest rate changes over periods up to two years.  These simulations
are used to determine whether  corrective action may be warranted or required in
order to adjust the overall interest rate risk profile of Keystone or its banks.
Keystone's  asset/liability management policy limits interest rate risk exposure
to 5% of net interest income for the succeeding  twelve-month  period and 8% for
the succeeding twenty-four-month period. Simulations prepared as of December 31,

                                      21

<PAGE>

1997 for the ensuing  twelve month and  twenty-four  month periods have measured
potential  reductions  in net  interest  income  of  approximately  1%  and  2%,
respectively,   well  within  Keystone's   defined  tolerance  levels.   Current
simulations are prepared under the assumption that rates will increase 200 basis
points  or  decrease  100  basis  points  over a three  month  period  and  then
stabilize.  Simulation  results  are  influenced  by a number of  estimates  and
assumptions  with  regard to embedded  options,  prepayment  behaviors,  pricing
strategies, cashflows, and others. Such assumptions and estimates are inherently
uncertain and, as a  consequence,  results will neither  precisely  estimate net
interest  income nor  precisely  measure the impact of higher or lower  interest
rates on net interest income.  The results of these  simulations are reported to
Keystone's  Board of Directors on a quarterly  basis.  Management has determined
that   Keystone   maintained   a  level  of   interest   rate  risk  within  its
asset/liability management policy limits at December 31, 1997.

Management  augments rate shock  simulations  with GAP interest rate sensitivity
analysis and with market value of portfolio equity (MVPE)  computations.  GAP is
defined as the volume  difference  between  interest  rate-sensitive  assets and
liabilities.  GAP is used by management  to assist in evaluating  the results of
rate shock  simulations,  to identify areas that may warrant  corrective action,
and to identify  interest  rate risk  exposure for periods  beyond one year.  By
utilizing GAP to monitor  longer term interest rate risk,  Keystone  attempts to
minimize  fluctuations in net interest margin and thereby achieve consistent net
interest income growth during periods of changing interest rates. MVPE is a more
comprehensive measure that attempts to quantify the impact of aggregate interest
rate risk  exposure on the  intrinsic  value of financial  institutions,  and is
particularly useful in quantifying the impact of changing interest rates on that
intrinsic  value.  Analyses  similar to those  conducted for interest rate shock
simulations are conducted for MVPE  computations,  with policy guidelines on the
acceptable  reduction in Keystone's  intrinsic value under defined interest rate
conditions.  Under current  guidelines,  intrinsic value must exceed  regulatory
capital  requirements  for  "well  capitalized"  institutions.  Computations  of
Keystone's MVPE yielded  intrinsic values well in excess of these limits,  under
both a 200  basis  points  increase  or 100 basis  points  decrease  in  overall
interest rates.  This measurement tool, while valuable as a gauge of longer-term
interest rate risk, is less useful as a tool to provide  strategic  solutions to
the management of that risk.

The following table provides an analysis of Keystone's interest rate sensitivity
as  measured  under GAP at  December  31,  1997  compared  to 1996  (dollars  in
thousands):

                                                                    December 31,
                          December 31, 1997                             1996
--------------------------------------------------------------------------------
                  1 month     3 months     6 months      1 year        1 year
--------------------------------------------------------------------------------
Assets            $1,684,979   $1,978,390   $2,342,271   $3,017,875  $2,988,260
Liabilities        1,408,717    2,398,355    2,794,965    3,313,948   2,996,283
Cumulative GAP       276,262     (419,965)    (452,694)    (296,073)     (8,023)
As a percent of
  total assets         4.04%      (6.14)%      (6.62)%      (4.33)%      (0.12)%
Gap ratio              1.20        0.82         0.84         0.91         1.00
--------------------------------------------------------------------------------

While  rate shock  simulations,  GAP  analysis,  and MVPE  computations  provide
measures of interest rate risk, such presentations cannot accurately reflect all
actual  repricing  opportunities  which  will  occur  within  loan  and  deposit
categories.  The information provided by these analyses,  however, provides some
indication  of  the  potential  for  interest  rate  adjustment,  but  does  not
necessarily  mean that the rate  adjustment will occur, or that it will occur in
accordance with the assumptions.

Despite these  inherent  limitations,  Keystone  believes that the tools used to
manage its level of interest rate risk provide an appropriate  measure of market
risk exposure.

                                      22

<PAGE>

Liquidity

Liquidity is defined as  Keystone's  ability to meet  maturing  obligations  and
customers'  demand for funds on a  continuous  basis.  Liquidity is sustained by
stable  core  deposits,   a  diversified  mix  of  liabilities,   strong  credit
perception, and the maintenance of sufficient assets convertible to cash without
material loss or disruption of normal  operations.  Keystone monitors  liquidity
through  regular  computations  of  prescribed  liquidity  ratios at each of the
affiliate banks.  Banks which fail to meet the prescribed  minimum standards for
these ratios must set forth  tactics to promptly  comply with policy  guidelines
and provide  mandatory  progress  reports to  Keystone's  ALCO and to Keystone's
Board of Directors.  Keystone  actively manages liquidity within a defined range
and has developed  reasonable  liquidity  contingency plans,  including ensuring
availability of alternate funding sources to maintain adequate liquidity under a
variety of business conditions.

Keystone's  primary sources of liquidity are funds derived through  earnings and
deposit  balances.  Liquidity is also provided by scheduled  maturities of loans
and  investment  securities,  as well  as the  early  payoff  of  customer  loan
balances.  Liquidity  may  also  be  influenced  by the  volume  and  timing  of
securitizations,  particularly  mortgage  loans.  Consideration  is given to the
maturity of assets and  expected  future  growth/funding  needs when  developing
investment  strategies.  These liquidity  sources may also be augmented by other
forms of liability liquidity,  such as FHLB borrowings.  Various funding sources
have been used to support increases in overall earning asset balances during the
year.  Keystone's operating,  investing,  and financing activities are conducted
within the overall constraints of Keystone's liquidity management policy.

Parent  company  liquidity  represents  another  important  aspect of  liquidity
management.   Within  Keystone,   the  parent  company  relies  on  the  banking
subsidiaries to provide  funding for dividends to  shareholders  and unallocated
corporate expenses. The amount of dividends from bank subsidiaries to the parent
company is  constrained  by both state and federal  regulations,  which have not
historically limited Keystone's practices.  Periodically, the parent company may
also  access  other forms of funding  such as  medium-term  notes to  facilitate
strategic   corporate   initiatives.   Based  upon  the  inherent  strength  and
profitability  of the  Keystone  banks,  holding  company  liquidity  is  deemed
adequate.

REGULATORY MATTERS

Keystone and its banking affiliates are subject to periodic  examinations by one
or more of the various  regulatory  agencies.  During  1997,  examinations  were
conducted  at  the  holding  company  and  at  Keystone's  various  banking  and
nonbanking  subsidiaries.  These examinations included, but were not limited to,
procedures  designed to review lending  practices,  credit  quality,  liquidity,
compliance,  and capital adequacy of Keystone and its subsidiaries.  No comments
were  received  from the various  regulatory  bodies which would have a material
effect on Keystone's liquidity, capital resources, or operations.

The Federal Deposit Insurance Corporation Improvement Act (FDICIA),  established
a new framework for the relationship between insured depository institutions and
the various  regulatory  bodies.  FDICIA  regulations,  which addressed  capital
adequacy,  brokered deposits,  annual audits, expanded regulatory  requirements,
audit  committee  composition,   and  truth  in  savings  provisions  have  been
implemented throughout Keystone.

INFLATION

Keystone's ability to cope with the impact of inflation is best determined by an
analysis  of its  ability  to  respond  to  changing  interest  rates and manage
noninterest income and expense. As discussed in the  asset/liability  management
section of this  review,  Keystone  manages the mix of  interest  rate-sensitive
assets and  liabilities in order to limit the impact of changing  interest rates
on net interest income. Inflation also has a direct impact on noninterest income
and  expense,  such as service  fees,  salary  expense and  benefits,  and other
overhead  expenses.  Inflationary  pressure over the last several years has been
modest,  although concern exists over the sustained  strength of the economy and
the  potential  impact on  inflationary  pressure.  Management  will continue to
monitor  the  impact of these  pressures  on the  pricing  of its  products  and
services and on the control of overhead expenses.

                                      23

<PAGE>



SEGMENT REPORTING

In 1997, the FASB issued a new accounting pronouncement,  Statement of Financial
Accounting  Standards No. 131,  "Disclosure  about Segments of an Enterprise and
Related  Information".  This new Standard  will be  effective  for 1998 and will
require  disclosure of financial  information on the basis of operating segments
used by management for  decision-making and performance  assessment.  Keystone's
super community banking operating structure and relationship  banking philosophy
will  influence  the manner in which  Keystone  defines it  operating  segments.
Keystone currently provides  traditional  commercial and retail banking services
to both middle  market  business and retail  customers.  Keystone  also provides
substantial  asset  management and mortgage banking  services,  as well as other
related  financial  services to its customer base.  Keystone will consider these
factors in assessing the impact of the new  accounting  Standard and will comply
with the reporting requirements for the year ended December 31, 1998.

                                      24

<PAGE>

1996 VS 1995

Summary

Keystone's financial performance for 1996 reflected continued improvement as net
income reached a record high of $89.5 million, a 12.6% improvement over 1995 net
income of $79.4 million.  Basic earnings per share also grew to $1.72 in 1996, a
7.5% improvement over the 1995  performance of $1.60.  Keystone  recorded strong
performance  in both ROA and ROE, which were 1.44% and 14.09%,  respectively  in
1996, a slight  improvement over the comparable  measures of 1.35% and 14.00% in
1995.

During  the  fourth  quarter  of  1995,   Keystone   completed  mergers  of  two
Pennsylvania  bank holding  companies,  Shawnee Financial  Services  Corporation
(Shawnee) and National American Bancorp (NAB); and the acquisition of Martindale
Andres  &  Company,  a  Philadelphia-based   asset  management  firm.  The  bank
subsidiaries  of both  Shawnee  and  NAB  were  merged  into  existing  Keystone
affiliated    banks   and   the   mergers   were   accounted   for   under   the
pooling-of-interests  method of accounting. Due to the immaterial impact of both
transactions to Keystone's  financial  position and results of operation,  prior
periods were not restated.  Consolidated  results of Keystone included Shawnee's
and NAB's results of operations from the consummation dates of October 10, 1995,
and December  29, 1995,  respectively.  Total assets added  through  these three
transactions approximated $230 million.

Revenue   expansion   efforts  were  the  primary  focus  of  Keystone's  profit
improvement  initiatives  during 1996.  Total  revenues,  consisting of both net
interest income and noninterest income,  grew 9% from 1995 to 1996,  including a
6%  increase  in  net  interest  income  and  a 23%  increase  in  revenue  from
noninterest sources. Net interest income growth was stimulated primarily by loan
growth,  including  loans added in the late 1995 bank  mergers,  as net interest
margin was constant from 1995 to 1996. Under the direction of Martindale  Andres
& Company, assets under management continued to grow, translating to improvement
in trust and investment  advisory fees.  Keystone's ratio of noninterest expense
to revenues of 57.42% for 1996  reflected  improvement  over the ratio of 58.44%
for 1995, as growth in  noninterest  expenses was 8%.  Additional  expense added
from the late 1995  mergers was  partially  offset by the benefit of a full-year
reduction in the FDIC insurance premium.  Finally, Keystone continued to sustain
solid asset quality in its investment and loan portfolios, including a low level
of nonperforming loans.

Interest Income

Interest income reached $482 million in 1996,  compared to $456 million in 1995,
an increase of 6%. The improvement was driven by loan growth of 5%, as the total
yield on earning assets actually  declined slightly from 8.23% for 1995 to 8.20%
for 1996. The most notable loan growth occurred in the categories of commercial,
direct   consumer  and  leases.   The  5%  growth  was   achieved   despite  the
securitization  and sale of indirect loans and fixed rate consumer  mortgages in
the secondary market.

Interest Expense

While  the  overall  cost of funds  remained  stable at 4.33% for 1995 and 1996,
interest expense increased 5% from $201 million in 1995 to $211 million in 1996.
This  increase was driven by a 5% increase in deposits,  including the impact of
deposits acquired in acquisitions.

Net Interest Income

Net interest  income grew $16 million or 6% to reach $271 million for 1996. Both
the yield on earning assets and cost of funds were relatively  constant  between
1996 and 1995,  resulting  in little  change in interest  spread.  Net  interest
margin also remained stable at 4.61% for both years.

Provision for Credit Losses

The  provision for credit  losses  increased  from $8.6 million in 1995 to $10.7
million in 1996, as a direct response to increased charge-offs and a decrease in
the allowance  for loan losses  expressed as a percentage of loans from 1.35% at
the end of 1995 to 1.30% at December 31, 1996.

                                      25

<PAGE>

Noninterest Income

Keystone's total noninterest revenue increased $13 million or 23% in 1996. Areas
of continued focus and strength  included trust and investment  management fees,
service  charges on  deposits,  electronic  banking  fees,  and income from loan
servicing.

Trust and investment  management fees increased 19% in 1996, and were benefitted
by the late 1995  acquisition  of  Martindale  Andres & Company  and an  overall
increase  in assets  under  management.  Revenues  from  these  activities  were
positively  influenced  by  both  expanded  product  offerings  and  intensified
marketing  efforts to customers,  including the introduction of KeyPremier funds
late in the year.

Service charges on deposits and fee income consisting primarily of ATM and debit
card fees and revenue from merchant  banking  activities  increased 11% and 16%,
respectively,  from 1995 to 1996, and were benefitted by late 1995 acquisitions.
In addition, towards the later part of 1996, Keystone significantly expanded its
ATM network through contracts with convenience  stores to provide ATM's at their
locations.

During  1996,  Keystone  became  more active in the  securitization  and sale of
indirect loans and consumer  mortgages in the secondary  market as a strategy to
provide liquidity for  "relationship  banking"  activities.  As a result of this
increased  sale and servicing  activity,  mortgage  banking and other  secondary
market income increased by $3 million or 39% in 1996.

As  a  result  of  Keystone's  1996  acquisition  of  KeyInvestor   Services,  a
distributor of investment products, revenue from annuity sales increased notably
in 1996.  This  improvement,  together with a gain recognized on the sale of its
credit card portfolio, led to a $4 million increase in other income from 1995.

Noninterest Expense

Noninterest  expenses  increased  from $182  million in 1995 to $196  million in
1996, an increase of 8%. While overhead expenses were impacted  favorably by the
full-year reduction in FDIC insurance  premiums,  the late 1995 bank mergers and
acquisitions of Martindale  Andres and KeyInvestor  resulted in increases in the
various other categories of noninterest expense.

Salary and benefit expenses increased a total of $10 million,  or 11%, from 1995
to 1996.  Merger and  acquisition  activity  drove a 5%  increase in the average
number  of  full-time  equivalent  employees.   This  increase,   combined  with
Keystone's  emphasis  on  performance-based  incentive  programs  and an overall
average merit increase of 5%, led to higher salary and benefit expenses.

Office  reconfiguration,  including  the  expansion  of  delivery  channels  and
continued technological investments,  attributed to growth in occupancy expenses
of 7% and furniture and equipment  expenses of 13% in 1996. Efforts included the
expansion of the ATM network into convenience stores and the start-up of KeyCall
telephone center.

During the third quarter of 1995,  the FDIC  announced  that the Bank  Insurance
Fund reached its recapitalization  level, and enacted a significant reduction to
insurance  premiums,  particularly  for  "well-capitalized"  institutions.  As a
result,  Keystone's  deposit  insurance  expense  decreased  $5 million in 1996.
Conversely,  in 1996,  a one-time  premium was levied on thrifts and banks which
had acquired thrift deposits to boost the  undercapitalized  Savings Association
Insurance  Fund.  This  one-time  charge  resulted  in an  increase of nearly $2
million to the "other"  category of  noninterest  expense in 1996. The remaining
increase of approximately  $4.5 million was related to the late 1995 mergers and
acquisitions as well as expenses associated with revenue expansion activities.

Income Taxes

Keystone's  recorded tax expense reached $37 million for 1996 versus $34 million
in 1995.  Expressed as a percentage of income  before  taxes,  the effective tax
rate decreased slightly from 30.0% in 1995 to 29.3% in 1996.

                                      26

<PAGE>

                Report of Ernst & Young LLP, Independent Auditors


Shareholders and Board of Directors
Keystone Financial, Inc.

We have  audited  the  accompanying  consolidated  statements  of  condition  of
Keystone Financial,  Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated  statements of income, changes in shareholders' equity,
and cash flows for each of the three  years in the  period  ended  December  31,
1997.  These financial  statements are the  responsibility  of the management of
Keystone  Financial,  Inc. Our  responsibility is to express an opinion on these
financial  statements  based on our audits.  We did not audit the 1996 financial
statements of Financial Trust Corp, a wholly owned subsidiary,  which statements
reflect total assets  constituting 19% as of December 31, 1996, and net interest
income  constituting 20% of the related  consolidated  totals for the year ended
December 31, 1996.  Those statements were audited by other auditors whose report
has been  furnished  to us,  and our  opinion,  insofar  as it  relates  to data
included for  Financial  Trust Corp,  is based solely on the report of the other
auditors.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our  opinion,  based on our  audits  and the  report of other  auditors,  the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Keystone Financial, Inc. and subsidiaries
at December 31, 1997 and 1996, and the consolidated  results of their operations
and their cash flows for each of the three  years in the period  ended  December
31, 1997, in conformity with generally accepted accounting principles.



                                        /s/ Ernst & Young, LLP
                                        ----------------------

Pittsburgh, Pennsylvania
January 30, 1998


                                      27

<PAGE>


Consolidated Statements of Condition                     December 31,
(in thousands, except share data)                     1997          1996
------------------------------------------------ -------------- -------------
ASSETS
------------------------------------------------ -------------- -------------
Cash and due from banks                                $206,223      $206,972
Federal funds sold                                       25,300        44,500
Interest-bearing deposits with banks                      1,928        36,913
Investment securities available for sale              1,091,400     1,210,094
Investment securities held to maturity
 (market values 1997 - $538,218; 1996 - $383,526)       528,388       379,958
Loans held for resale                                    43,055        51,225

Loans and leases                                      4,712,566     4,336,470
Allowance for credit losses                             (65,091)      (56,256)
------------------------------------------------ -------------- -------------
Net loans                                             4,647,475     4,280,214

Premises and equipment                                  116,615        97,932
Other assets                                            180,953       142,771
------------------------------------------------ -------------- -------------
TOTAL ASSETS                                         $6,841,337    $6,450,579
------------------------------------------------ -------------- -------------
LIABILITIES
------------------------------------------------ -------------- -------------
Noninterest-bearing deposits                           $637,164      $625,536
Interest-bearing deposits                             4,596,001     4,434,185
------------------------------------------------ -------------- -------------
Total deposits                                        5,233,165     5,059,721

Federal funds purchased and security repurchase
agreements                                              399,730       368,886
Other short-term borrowings                              26,160        29,078
------------------------------------------------ -------------- -------------
Total short-term borrowings                             425,890       397,964

FHLB borrowings                                         248,150       224,203
Long-term debt                                          101,793         2,573
Other liabilities                                       146,854       105,712
------------------------------------------------ -------------- -------------
TOTAL LIABILITIES                                     6,155,852     5,790,173
------------------------------------------------ -------------- -------------
SHAREHOLDERS' EQUITY
------------------------------------------------ -------------- -------------
Preferred stock; $1.00 par value, authorized
8,000,000 shares; none issued or outstanding              -----         -----
Common stock: $2.00 par value, authorized
100,000,000 shares; issued 52,029,017 - 1997
and 52,320,142 - 1996                                   104,058       104,640
Surplus                                                 155,430       139,213
Retained earnings                                       418,605       422,018
Deferred KSOP benefit expense                            (1,150)       (1,249)
Treasury stock; 1996 - 333,966 shares at cost             -----        (8,412)
Net unrealized securities gains, net of tax               8,542         4,196
------------------------------------------------ -------------- -------------
TOTAL SHAREHOLDERS' EQUITY                              685,485       660,406
------------------------------------------------ -------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY           $6,841,337    $6,450,579
------------------------------------------------ -------------- -------------
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                      28

<PAGE>

Consolidated Statements of Income
<TABLE>
<CAPTION>

                                                Year Ended December 31,
(in thousands except per share data)        1997          1996         1995
--------------------------------------- ------------- ------------ -------------
INTEREST INCOME
--------------------------------------- ------------- ------------ -------------
<S>                                          <C>          <C>           <C>
 Loans and fees on loans                     $404,096     $370,364      $353,025
 Investments - taxable                         82,664       79,977        69,957
 Investments - tax-exempt                      12,230       12,723        13,105
 Federal funds sold and other                   5,340        5,668         9,063
 Loans held for resale                          6,408        4,688         1,636
--------------------------------------- ------------- ------------ -------------
                                              510,738      473,420       446,786
--------------------------------------- ------------- ------------ -------------
INTEREST EXPENSE
--------------------------------------- ------------- ------------ -------------
 Deposits                                     194,898      186,257       176,571
 Short-term borrowings                         18,134       14,506        12,747
 FHLB borrowings                               14,677       10,175        10,955
 Long-term debt                                 4,785          363           502
--------------------------------------- ------------- ------------ -------------
                                              232,494      211,301       200,775
--------------------------------------- ------------- ------------ -------------
NET INTEREST INCOME                           278,244      262,119       246,011
 Provision for credit losses                   15,316       10,713         8,568
--------------------------------------- ------------- ------------ -------------
NET INTEREST INCOME AFTER PROVISION
 FOR CREDIT LOSSES                            262,928      251,406       237,443
--------------------------------------- ------------- ------------ -------------
NONINTEREST INCOME
--------------------------------------- ------------- ------------ -------------
 Trust and investment advisory fees            21,291       17,597        14,843
 Service charges on deposit accounts           17,356       17,234        15,497
 Fee income                                    20,029       15,840        13,651
 Mortgage banking income                        9,633        7,334         6,130
 Other secondary market income                  2,477        3,607         1,728
 Reinsurance income                             3,512        2,864         2,577
 Other income                                   9,563        6,178         1,922
 Net gains - equity securities                  5,754          529           755
 Net gains - debt securities                      317          342         1,034
--------------------------------------- ------------- ------------ -------------
                                               89,932       71,525        58,137
--------------------------------------- ------------- ------------ -------------
NONINTEREST EXPENSE
--------------------------------------- ------------- ------------ -------------
 Salaries                                      92,650       81,894        73,852
 Employee benefits                             17,311       16,508        14,683
 Occupancy expense, net                        16,407       15,916        14,894
 Furniture and equipment expense               18,732       16,156        14,324
 Special charges                               11,410        -----         -----
 Deposit insurance                                778        1,014         6,195
 Other expense                                 68,702       64,757        58,182
--------------------------------------- ------------- ------------ -------------
                                              225,990      196,245       182,130
--------------------------------------- ------------- ------------ -------------
Income before income taxes                    126,870      126,686       113,450
Income tax expense                             38,953       37,180        34,001
--------------------------------------- ------------- ------------ -------------
NET INCOME                                    $87,917      $89,506       $79,449
--------------------------------------- ------------- ------------ -------------
PER SHARE DATA
--------------------------------------- ------------- ------------ -------------
Net income:
 Basic                                          $1.70        $1.72         $1.60
 Diluted                                         1.68         1.70          1.59
--------------------------------------- ------------- ------------ -------------
Dividends                                       $1.06        $0.98         $0.93
--------------------------------------- ------------- ------------ -------------

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
</TABLE>

                                      29

<PAGE>
<TABLE>
<CAPTION>

Consolidated Statements of Changes in Shareholders' Equity

                              Issued and                                   Deferred             Net Unrealized
                              Outstanding                                    KSOP                 Securities
(in thousands)                  Common     Common               Retained   Benefit    Treasury   Gains(Losses),  Shareholders'
                                Shares     Stock     Surplus    Earnings   Expense     Stock      Net of Tax        Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>     <C>                      <C>        <C>       <C>        <C>         <C>        <C>          <C>           <C>
JANUARY 1, 1995                  36,175     $73,730   $153,558   $344,487   ($2,250)   ($20,576)   ($15,306)      $533,643
------------------------------------------------------------------------------------------------------------------------------------

1995 Net Income                  -          -          -           79,449     -          -           -              79,449
Dividends                        -          -          -          (39,875)    -          -           -             (39,875)
Stock issued:
  Benefit plans                     276         552      4,686    -           -          -           -               5,238
  KSOP                               21          42        571    -           -          -           -                 613
  Dividend reinvestment              89         176      2,480    -           -          -           -               2,656
Deferred KSOP benefit expense    -          -          -          -             500      -           -                 500
Acquisition of treasury stock      (229)    -          -          -           -          (6,649)     -              (6,649)
Reissuance of treasury stock         17     -              (29)   -           -             286      -                 257
Shares issued in acquisitions     1,721       1,640    (21,372)    17,387    -           26,939      -              24,594
Other                                (1)         (1)        (8)   -           -          -           -                  (9)
Change in unrealized gain on
  available-for-sale securities  -          -          -          -           -          -           21,349         21,349
------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1995                38,069     $76,139   $139,886   $401,448   ($1,750)    $-           $6,043       $621,766
------------------------------------------------------------------------------------------------------------------------------------

1996 Net Income                  -          -          -           89,506     -          -           -              89,506
Dividends                        -          -          -          (46,998)    -          -           -             (46,998)
Stock issued:
  Stock split/dividend           14,004      28,009     (6,170)   (21,938)    -          -           -                 (99)
  Benefit plans                     137         273      2,561    -           -          -           -               2,834
  KSOP                               12          24        278    -           -          -           -                 302
  Dividend reinvestment              98         195      2,696    -           -          -           -               2,891
Deferred KSOP benefit expense    -          -          -          -             501      -           -                 501
Acquisition of treasury stock      (424)    -          -          -           -          (9,915)     -              (9,915)
Reissuance of treasury stock         90     -              (38)   -           -           1,503      -               1,465
Change in unrealized gain on
  available-for-sale securities  -          -          -          -           -          -           (1,847)        (1,847)
------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1996                51,986    $104,640   $139,213   $422,018   ($1,249)    ($8,412)     $4,196       $660,406
------------------------------------------------------------------------------------------------------------------------------------
1997 Net Income                  -          -          -           87,917    -           -           -              87,917
Dividends                        -          -          -          (55,964)   -           -           -             (55,964)
Stock issued:
  Benefit plans                     524       1,048     8,178     -           -          -           -               9,226
  KSOP                               28          56       763     -           -          -           -                 819
  Dividend reinvestment             130         260     3,422     -           -          -           -               3,682
Deferred KSOP benefit expense    -          -          -          -             523      -           -                 523
Acquisition of treasury stock    (2,318)    -          -          -           -         (72,586)     -             (72,586)
Reissuance of treasury stock          7     -          -          -           -             182      -                 182
Retirement of  treasury stock    -           (2,290)   (3,312)   (35,366)    -           40,931      -                 (37)
Shares issued in acquisitions     1,672         344     7,166     -            (424)     39,885      -              46,971
Change in unrealized gain on
  available-for-sale securities  -          -          -          -           -          -            4,346          4,346
------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1997                52,029    $104,058  $155,430   $418,605    ($1,150)    $-            $8,542      $685,485
====================================================================================================================================
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
</TABLE>

                                      30

<PAGE>

Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

                                                        Year Ended December 31,
(in thousands)                                        1997         1996        1995
------------------------------------------------ -------------- ----------- ----------
<S>                                                     <C>         <C>        <C>
OPERATING ACTIVITIES:
Net income                                              $87,917     $89,506    $79,449
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:

 Provision for credit losses                             15,316      10,713      8,568
 Provision for depreciation and amortization             18,062      15,840     14,830
 Deferred income taxes                                   14,537      14,880     11,219
 Sale of loans held for resale                          203,887     441,716    157,803
 Origination of loans held for resale                  (385,458)   (466,469)  (162,678)
 Increase in interest receivable                         (4,459)     (3,964)    (1,690)
 Increase (decrease) in interest payable                   (567)         (1)     3,299
 Other                                                   20,660      (6,391)   (25,987)
------------------------------------------------ -------------- ----------- ----------
NET CASH PROVIDED BY(USED IN) OPERATING ACTIVITIES      (30,105)     95,830     84,813
------------------------------------------------ -------------- ----------- ----------
INVESTING ACTIVITIES:
Net cash received in bank acquisitions                   35,646       -----     49,639
Net increase in interest-earning deposits               (25,363)     (3,121)    (6,922)
Available for sale securities:
 Sales                                                  176,606      98,724    116,880
 Maturities                                             855,464   1,208,804    701,267
 Purchases                                             (891,694) (1,368,734)  (847,228)
Held to maturity securities:
 Maturities                                              91,370     108,438    103,343
 Purchases                                             (192,900)   (103,268)   (55,258)
Net increase in loans                                  (198,217)   (265,833)  (145,153)
Proceeds from sales of loans                            302,840      52,013     34,305
Purchases of loans                                      (11,947)     (1,986)   (15,869)
Purchases of premises and equipment                     (23,641)    (16,870)   (19,050)
Other                                                    (6,404)     (1,025)    (1,619)
------------------------------------------------ -------------- ----------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES     111,760    (292,858)   (85,665)
------------------------------------------------ -------------- ----------- ----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits                     (99,242)     66,113     74,606
Net increase in short-term borrowings                    27,926      64,593     23,499
Proceeds from FHLB borrowings                           242,313     420,892    138,352
Repayments of FHLB borrowings                          (253,418)   (360,715)  (129,973)
Issuance of long-term debt                              100,000        ----       ----
Repayment of long-term debt                                (780)     (1,962)    (2,068)
Acquisition of treasury stock                           (72,586)     (9,915)    (6,649)
Cash dividends                                          (55,964)    (46,998)   (39,875)
Other                                                    10,147       7,894      8,755
------------------------------------------------ -------------- ----------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES    (101,604)    139,902     66,647
------------------------------------------------ -------------- ----------- ----------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS          (19,949)    (57,126)    65,795
Cash and cash equivalents at beginning of year          251,472     308,598    242,803
------------------------------------------------ -------------- ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR               $231,523    $251,472   $308,598
------------------------------------------------ -------------- ----------- ----------
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
</TABLE>

                                      31

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summarized Accounting Policies

The accounting  policies  discussed below are followed  consistently by Keystone
Financial,  Inc.,  and  its  subsidiaries  (Keystone).  These  policies  are  in
accordance with generally accepted  accounting  principles and conform to common
practices in the banking industry.

On May 30,  1997,  Keystone  acquired  Financial  Trust  Corp  in a  transaction
accounted for under the pooling of interests method of accounting.  As such, all
periods presented include the consolidated accounts of Financial Trust Corp.

Nature of Operations:  Keystone provides a wide range of financial services to a
diverse client base through its banking  subsidiaries.  The client base includes
individual,  business,  public, and institutional customers primarily located in
Pennsylvania,  Maryland, and West Virginia. Lending services include secured and
unsecured commercial loans,  residential and commercial  mortgages,  installment
loans, revolving consumer loans and lease financing.  Deposit services include a
variety of checking,  savings,  time,  money market,  and individual  retirement
accounts. Money management services are available to customers through a variety
of  techniques,  all of  which  are  designed  to  improve  cash  flow,  control
disbursements, and increase return on investments.

A full  spectrum  of  asset  management  services  is  offered  by  specialists,
including   administration  of  trusts  and  estates,   investment   management,
administration  of retirement and employee  benefit plans,  and other  fiduciary
responsibilities.

Keystone's  nonbanking   subsidiaries  perform  specialized  services  including
mortgage banking,  small-ticket equipment leasing,  discount brokerage services,
investment advisor services, and reinsurance.

Keystone is subject to the regulations of certain federal and state agencies and
undergoes periodic examinations by certain regulatory authorities.

Use of Estimates:  The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying  notes.  Actual results could differ from the  estimates,  and such
difference may be material to the financial statements.

Principles of Consolidation:  The consolidated  financial statements include the
accounts of:  Keystone  Financial,  Inc., the parent company;  its  wholly-owned
banking  subsidiaries   consisting  of:  American  Trust  Bank,  N.A.,  and  its
subsidiaries,  ATB Real Estate Investment Trust, Inc., Keystone Brokerage, Inc.,
and Key Investor Services,  Inc.; Financial Trust Company;  Keystone Bank, N.A.,
and its subsidiary,  Keystone Financial Leasing  Corporation;  Keystone National
Bank and its subsidiary, Keystone Financial Mortgage Corporation; Mid-State Bank
and Trust Company;  Northern Central Bank;  Pennsylvania National Bank and Trust
Company;  and other nonbanking  subsidiaries of Keystone consisting of Financial
Trust Services  Company,  Key Trust  Company,  Keystone  Financial  Mid-Atlantic
Funding Corp., Keystone Financial Unlimited, Inc., Keystone Investment Services,
Inc.,  Keystone Life Insurance  Company,  Martindale Andres & Co., MMC&P and two
community development  corporations.  All significant intercompany accounts have
been eliminated in consolidation.

Trading Account Assets: Securities classified as trading account assets are held
for resale in  anticipation  of short-term  market  movements and are carried at
fair value with market  adjustments  recorded against income.  Keystone has made
limited use of trading account portfolios.


                                      32

<PAGE>

Investments:  Keystone classifies its securities as either "held-to-maturity" or
"available-for-sale"  at the time of purchase. Debt securities are classified as
held-to-maturity  based upon  management's  positive  ability and intent to hold
such  securities to maturity.  Held-to-maturity  securities  are stated at cost,
adjusted  for  amortization  of premiums and  accretion of discounts  (amortized
cost).

Debt  securities  not classified as trading or  held-to-maturity  and marketable
equity    securities    not    classified   as   trading   are   classified   as
available-for-sale. Available-for-sale securities are stated at fair value, with
unrealized  gains  and  losses,   net  of  tax,   reported  as  a  component  of
shareholders' equity.

The cost of debt securities classified as held-to-maturity or available-for-sale
is adjusted for amortization of premiums and accretion of discounts to maturity,
or in the case of a  mortgage-backed  security,  over the estimated  life of the
security.  Such  amortization/accretion,  as well as interest and dividends,  is
included in  interest  income from  investments.  Realized  gains and losses and
declines  in value  judged  to be  other  than  temporary  are  included  in net
securities gains (losses).  The cost of securities sold is based on the specific
identification method, and sales are reported as of the trade date.

Loans Held for Resale: Loans held for resale, primarily consisting of fixed-rate
consumer mortgages, are valued at the lower of cost or market,  determined on an
aggregate basis.

Mortgage  Servicing Rights: An asset is recognized for mortgage servicing rights
acquired  through  purchase  or  origination.  If  mortgage  loans  are  sold or
securitized  with  servicing  retained,  the total cost of the mortgage loans is
allocated to the loans and the  servicing  rights based on their  relative  fair
values.  Keystone performs a periodic review for impairment in the fair value of
recorded mortgage servicing rights.

Interest and Fees on Loans:  Interest  income on loans is accrued based upon the
principal  amount  outstanding  using methods that produce  level  yields.  Loan
origination  fees and certain direct loan  origination  costs have been deferred
and the net amount amortized as an adjustment of the related loan yield over the
estimated contractual life of the related loans.

Keystone  places loans and leases on nonaccrual  when collection of principal is
in doubt,  or when interest is 90 days past due, unless the loan is well-secured
and in the process of collection. Classification of a loan as nonaccrual is also
considered  when  the  financial  condition  of the  borrower  is in a state  of
significant deterioration.  When loans are placed on nonaccrual, including those
identified as impaired, loan interest receivable is reversed.  Interest payments
received on these loans and leases are applied as a reduction  of the  principal
balance when  concern  exists as to the ultimate  collectability  of  principal;
otherwise such payments are recognized as interest income.  Loans and leases are
removed from  nonaccrual  when they have  performed in accordance  with contract
terms for a reasonable  period of time and when  concern no longer  exists as to
their collectability.

Impaired  Loans:  Impaired  loans  are  defined  as those  loans for which it is
probable that contractual  amounts due will not be received.  Impaired loans are
reported  at the present  value of  expected  future cash flows using the loan's
effective interest rate, or as a practical  expedient,  at the loan's observable
market  price or the  fair  value of the  collateral  if the loan is  collateral
dependent.   The  determination  of  impairment   requires  judgement  including
estimates of the amount and timing of cash flows.  Loans  included as components
of risk  elements  are not  deemed  to be  impaired  when  it is  probable  that
contractual amounts due will be received through the normal collection process.

Identification  of  impaired  loans  is the  primary  obligation  of the  credit
extension  function and is augmented by the normal loan review process.  Factors
which are considered in the  identification  of impaired loans include,  but are
not limited to: classification into nonaccrual or workout status; a history of

                                      33

<PAGE>

payment delinquency;  adverse industry trends; and a general  understanding of a
customer's  financial status. An insignificant delay or payment shortfall,  such
as those attributable to seasonal payment waivers, would not necessarily require
treatment  as an  impaired  loan  when  other  factors  make  it  probable  that
contractual  amounts  will be  received.  The  majority of loans  classified  as
impaired  on an  individual  basis are  commercial  loans and  commercial  loans
secured  by real  estate.  Other  loans,  such as  residential  real  estate and
consumer loans and leases are aggregated for the purpose of measuring impairment
due to  their  homogeneous  risk  characteristics  and  their  predilection  for
statistically valid historical  analysis.  Loans,  including impaired loans, are
charged-off when they are deemed to be substantially uncollectible.

Direct  Lease  Financing:  Financing of  equipment,  principally  consisting  of
automobiles  and  business  equipment,  is  provided  to  customers  under lease
arrangements accounted for as direct financing leases. These leases are reported
in the  consolidated  statements  of  condition  under the loan caption as a net
amount,  consisting of the aggregate of lease payments  receivable and estimated
residual values,  less unearned  income.  Income is recognized in a manner which
results in an approximate level yield over the lease term.

Allowance for Credit Losses:  The allowance for credit losses is maintained at a
level believed adequate by management to absorb potential loan and lease losses.
Management's determination of the adequacy of the allowance is based on periodic
evaluation  of the risk  characteristics  of the loans and  leases,  credit loss
experience, economic conditions, appraisals, valuation estimates, and such other
relevant  factors which, in management's  judgment,  deserve  recognition.  This
evaluation is inherently  subjective as it requires material estimates including
the amount and timing of expected  future cash flows on  impaired  loans,  which
might be susceptible to significant change.

Financial  Derivatives and other Hedging Activity:  Interest rate swap contracts
have been utilized to hedge specific credit and/or funding  activities,  and the
differential  of interest paid or received is reflected on the accrual method in
interest  income or expense.  The fair values of these swap  contracts have been
appropriately disclosed in a footnote to these financial statements and have not
been recognized in the financial statements.

Forward  mortgage  commitments,  as well as put  options and short sales of U.S.
Treasury  securities,  have been used to reduce the market risk  associated with
interest rate  fluctuations  of fixed-rate  consumer  mortgages and the indirect
automobile  loans  held for sale.  Changes in the  market  value of the  forward
mortgage  commitments,  as well as the securities underlying the put options and
short  sales,  are  recognized  in income when the  related  changes in the fair
values of the loans being hedged are recognized.

Transfers and Servicing of Financial Assets and  Extinguishments of Liabilities:
In June 1996, the Financial Accounting Standards Board issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of Liabilities".  This statement provided new accounting and reporting standards
for sales,  securitizations,  and servicing of receivables  and other  financial
assets,  for certain  secured  borrowing and  collateral  transactions,  and for
extinguishment  of  liabilities.  Provisions  of  this  standard,  which  became
effective in 1997 or will become  effective in 1998,  have not had a significant
impact on Keystone's financial condition or results of operations.

Premises and  Equipment:  Bank premises and  equipment are stated at cost,  less
accumulated depreciation and amortization. Depreciation is computed generally on
the straight-line method over the estimated useful lives of the related assets.

Intangible Assets:  Intangible assets, consisting primarily of goodwill and core
deposit  intangibles,   are  stated  at  cost,  less  accumulated  amortization.
Amortization  of goodwill is generally  recognized on the  straight-line  method
over periods ranging from 15-25 years.  Amortization of core deposit intangibles
is recognized on an accelerated basis, generally over a ten-year period.

                                      34

<PAGE>

Other Real Estate: Other real estate is comprised of property acquired through a
foreclosure  proceeding  or an  acceptance  of a deed in  lieu  of  foreclosure.
Balances are carried at the lower of the related loan balance or estimated  fair
value less estimated  disposition costs. Any losses realized upon disposition of
the property, and holding costs prior thereto, are charged against income.

Trust Assets and Income:  Assets held in a fiduciary capacity are not assets of
the company and are therefore not included in the consolidated financial
statements.

Stock Based  Compensation:  Stock  options and shares  issued under the Employee
Stock Purchase Plan are accounted for under Accounting  Principles Board Opinion
(APB) No. 25.  Stock  options are  granted at exercise  prices not less than the
fair  value  of the  common  stock  on the  date of  grant.  Under  APB  25,  no
compensation  expense is recognized related to these plans. The pro forma impact
to net income and  earnings per share that would occur if  compensation  expense
was  recognized  based on the  estimated  fair value of the options and purchase
rights on the date of the grant is  disclosed  in the notes to the  consolidated
financial statements.

Pensions: The provision for pension expense was actuarially determined using the
projected unit credit actuarial cost method. The funding policy is to contribute
an amount  sufficient  to meet the  requirements  of ERISA,  subject to Internal
Revenue Code contribution limitations.

Income  Taxes:  The  provision  for  income  taxes is based  on the  results  of
operations and the impact of tax rate changes on the carrying amount of deferred
tax assets and  liabilities.  In  computing  the tax  liability,  the results of
operations are adjusted principally for the tax effect of tax-exempt income.

Comprehensive  Income: In June of 1997, the Financial Accounting Standards Board
(FASB) issued Statement 130,  "Reporting  Comprehensive  Income",  which will be
effective for fiscal years  beginning  after December 15, 1997, and will require
reclassification  of financial  statements for earlier  periods.  This Statement
sets  forth   guidance   regarding  the  reporting  and  prominent   display  of
comprehensive  income  and  its  components  in the  financial  statements.  The
adoption  of this  statement  is not  expected to have a  significant  impact on
Keystone's financial statements.

Per Share  Information:  During 1997, the Financial  Accounting  Standards Board
issued Statement No. 128, "Earnings per Share", which requires dual presentation
of basic and diluted earnings per share.  This statement was adopted in 1997 and
required restatement of all prior-period earnings per share data. Basic earnings
per share is calculated by dividing net income by the weighted average number of
shares of common  stock  outstanding  during each period.  Diluted  earnings per
share is calculated by increasing the denominator for the assumed  conversion of
all potentially dilutive securities.  Keystone's dilutive securities are limited
to stock options granted under various incentive plans.

Historical  shares  outstanding and per share data have been restated to reflect
the 1996 three-for-two stock split.

Treasury  Stock:  The  acquisition  of treasury stock is recorded under the cost
method.  The  subsequent  disposition  or sale of the treasury stock is recorded
using the average cost inventory method.

Segment Reporting: In June 1997, the Financial Accounting Standards Board issued
Statement No. 131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information",  which is effective for years  beginning  after December 15, 1997.
This statement establishes standards for reporting information about operating

                                      35

<PAGE>

segments and related disclosures about products and services,  geographic areas,
and major customers. Keystone will adopt the new requirements beginning with its
annual report for the year ended December 31, 1998.

Cash Flow  Information:  Keystone  considers cash and due from banks and federal
funds sold as cash and cash  equivalents.  Interest  paid on deposits  and other
borrowings  aggregated  $233,061,000,  $211,302,000,  and  $196,293,000 in 1997,
1996,  and 1995,  respectively.  Cash  payments  for income  taxes  approximated
$19,253,000,   $23,898,000,   and   $22,983,000   for  1997,   1996,  and  1995,
respectively.

                                      36
<PAGE>

Investments

The amortized  cost,  related fair value,  and  unrealized  gains and losses for
investment  securities classified as available-for-sale or held-to-maturity were
as follows at December 31 (in thousands):

<TABLE>
<CAPTION>
-------------------------------------- ------------ ---------------------- ------------
                                                            1997
                                                     Available-for-Sale
-------------------------------------- ------------ ---------------------- ------------
                                        Amortized         Unrealized        Fair Value
                                           Cost       Gains      Losses
-------------------------------------- ------------ ---------------------- ------------
<S>                                        <C>             <C>         <C>     <C>
Negotiable money market investments        $178,455        $18         $69     $178,404
U.S. Treasury securities                    193,099      1,063          42      194,120
U.S. Government agency obligations          502,483      2,363       1,768      503,078
Obligations of states and political
 subdivisions                                72,487      1,688           4       74,171
Corporate and other securities              131,735      9,918          26      141,627
-------------------------------------- ------------ ---------------------- ------------
Total                                    $1,078,259    $15,050      $1,909   $1,091,400
-------------------------------------- ------------ ---------- ----------- ------------
                                                            1997
                                                      Held-to-Maturity
-------------------------------------- ------------------------------------------------
                                        Amortized         Unrealized        Fair Value
                                           Cost       Gains      Losses
-------------------------------------- ------------ ---------------------- ------------
U.S. Government agency obligations         $366,238     $4,928        $150     $371,016
Obligations of states and political
 subdivisions                               143,910      4,845           5      148,750
Corporate and other securities               18,240        230          18       18,452
-------------------------------------- ------------ ---------------------- ------------
Total                                      $528,388    $10,003        $173     $538,218
-------------------------------------- ------------ ---------- ----------- ------------
</TABLE>


                                      37

<PAGE>
<TABLE>
<CAPTION>
--------------------------------------- ------------- --------------------------------
                                                            1996
                                                      Available-for-Sale
--------------------------------------- ------------- --------------------------------
                                          Amortized        Unrealized      Fair Value
                                            Cost       Gains      Losses
--------------------------------------- ------------- --------------------------------
<S>                                          <C>            <C>        <C>    <C>
Negotiable money market investments          $194,566       $15        $15    $194,566
U.S. Treasury securities                      244,010     1,083        551     244,542
U.S. Government agency obligations            561,245     2,817      4,624     559,438
Obligations of states and political
 subdivisions                                 101,992     1,669        141     103,520
Corporate and other securities                101,846     6,324        142     108,028
--------------------------------------- ------------- --------------------------------
Total                                      $1,203,659   $11,908     $5,473  $1,210,094
--------------------------------------- ------------- --------- ----------------------
                                                            1996
                                                       Held-to-Maturity
--------------------------------------- ----------------------------------------------
                                          Amortized        Unrealized      Fair Value
                                            Cost       Gains      Losses
--------------------------------------- ------------- --------------------------------
U.S. Government agency obligations           $230,402    $1,997     $1,680    $230,719
Obligations of states and political
 subdivisions                                 134,194     3,308        135     137,367
Corporate and other securities                 15,362       156         78      15,440
--------------------------------------- ------------- --------------------------------
Total                                        $379,958    $5,461     $1,893    $383,526
--------------------------------------- ------------- --------- ----------------------
                                                            1995
                                                      Available-for-Sale
--------------------------------------- ------------- --------------------------------
                                         Amortized        Unrealized        Fair Value
                                           Cost       Gains      Losses
-------------------------------------- ------------- --------------------- ------------
Negotiable money market investments         $237,107         $11       $16     $237,102
U.S. Treasury securities                     327,338       2,137       434      329,041
U.S. Government agency obligations           380,533       2,199     1,236      381,496
Obligations of states and political          107,723       1,763       190      109,296
   subdivisions
Corporate and other securities                92,890       5,565       651       97,804
--------------------------------------- ------------- --------------------------------
Total                                     $1,145,591     $11,675    $2,527   $1,154,739
-------------------------------------- ------------- ----------- --------- ------------
                                                            1995
                                                       Held-to-Maturity
-------------------------------------- ------------------------------------------------
                                         Amortized        Unrealized        Fair Value
                                           Cost       Gains      Losses
-------------------------------------- ------------- --------------------- ------------
U.S. Government agency obligations          $237,122      $4,423      $338     $241,207
Obligations of states and political
   subdivisions                              132,541       4,242       102      136,681
Corporate and other securities                15,599         367        19       15,947
--------------------------------------- ------------- --------------------------------
Total                                       $385,262      $9,032      $459     $393,835
-------------------------------------- ------------- ----------- --------- ------------
</TABLE>

Investment  securities  having a carrying value of  $717,785,000 at December 31,
1997,  were pledged to secure public and trust deposits and security  repurchase
agreements.

                                      38

<PAGE>

Security gains and losses  included in operating  results from 1995 through 1997
were as follows (in thousands):
<TABLE>
<CAPTION>
                          1997            1996           1995
-------------------- --------------- -------------- ---------------
<S>                          <C>              <C>           <C>
Gains                        $6,847           $980          $1,800
Losses                         (776)          (109)            (11)
-------------------- --------------- -------------- ---------------
      Net                    $6,071           $871          $1,789
-------------------- --------------- -------------- ---------------
</TABLE>

                                      39

<PAGE>

The following tables display at December 31, 1997, the amortized cost, related
fair values, and the weighted average yield (tax-equivalent basis) available
thereon of investment securities maturing at various intervals (in thousands):

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                         Available for Sale
-----------------------------------------------------------------------------------------------------------------------------------
                                                            After One,                 After Five,
                                     Within One Year   But Within Five Years       But Within Ten Years          After Ten Years
-----------------------------------------------------------------------------------------------------------------------------------
                                Amortized   Fair          Amortized  Fair          Amortized  Fair         Amortized  Fair
                                  Cost      Value   Yield   Cost     Value  Yield    Cost     Value  Yield   Cost     Value  Yield
-----------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>       <C>          <C>    <C>       <C>              <C>       <C>              <C>     <C>
Negotiable money market
   investments                  $ 178,455 $178,404  5.54%  $-       $-        -   % $ -      $-        -   % $-      $-        -  %
U.S. Treasury securities          125,202  125,442  5.96     67,897   68,678  6.37    -       -        -      -       -        -
Government agency obligations      56,919   56,935  5.70    346,198  345,840  6.28    81,389   82,171  7.42   17,978   18,132 7.28
Obligations of states and
   political subdivisions           3,675    3,704  5.47     28,399   28,957  4.90    28,899   29,679  5.06   11,514   11,832 5.38
Corporate and other securities      8,664    8,677  6.63     54,753   54,976  6.46       400      400  7.68   67,918   77,573 8.12
-----------------------------------------------------------------------------------------------------------------------------------
Total                           $ 372,915 $373,162  5.68%  $497,247 $498,451  5.94% $110,688 $112,250  5.46% $97,410 $107,537 7.08%
-----------------------------------------------------------------------------------------------------------------------------------

                                                                           Held to Maturity
 -----------------------------------------------------------------------------------------------------------------------------------
                                                            After One,               After Five,
                                     Within One Year   But Within Five Years      But Within Ten Years     After Ten Years
-----------------------------------------------------------------------------------------------------------------------------------
                               Amortized Fair           Amortized  Fair        Amortized  Fair          Amortized  Fair
                                  Cost   Value   Yield     Cost    Value Yield   Cost     Value   Yield   Cost     Value  Yield
-----------------------------------------------------------------------------------------------------------------------------------
Government agency obligations   $ 2,172 $ 2,170  3.58%  $109,589 $110,813 6.67% $135,956  $137,211 6.97% $118,521 $120,822 7.07%
Obligations of states and
  political subdivisions          9,060   9,209  6.53     20,675   21,524 5.87    14,496    15,067 5.46    99,679  102,950 5.52
Corporate and other securities    -       -      -        16,964   17,148 6.53     1,276     1,304 7.27   -            -   -
-----------------------------------------------------------------------------------------------------------------------------------
Total                           $11,232 $11,379  5.96%  $147,228 $149,485 6.54% $151,728  $153,582 6.83% $218,200 $223,772 6.36%
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       40

<PAGE>

Loans and Leases

The  composition  of loans  and  leases  was as  follows  at  December  31,  (in
thousands):

<TABLE>
<CAPTION>

                                                      1997           1996
------------------------------------------------- ------------ - ------------
<S>                                                  <C>            <C>
Consumer financings:
 Consumer loans                                     $1,218,730       $978,157
 Net investment in direct lease financing
  receivables                                          335,017        301,483
------------------------------------------------- ------------ - ------------
                                                     1,553,747      1,279,640

Loans secured by real estate:
 Consumer                                              862,227      1,186,663
 Commercial                                          1,384,923      1,077,017
------------------------------------------------- ------------ - ------------
                                                     2,247,150      2,263,680
Commercial                                             911,669        793,150
------------------------------------------------- ------------ - ------------
Total                                               $4,712,566     $4,336,470
================================================= ============ = ============
</TABLE>

At December  31,  1997,  substantially  all of the  consumer  real estate  loans
outstanding  were  pledged  under  blanket   collateral   agreements  to  secure
outstanding   Federal   Home   Loan   Bank   borrowings.   No   industry-related
concentrations are deemed to exist.

Activity  within the allowance  for credit losses was  summarized as follows (in
thousands):

<TABLE>
<CAPTION>
                                              1997         1996         1995
======================================== =========== = ========= = ===========
<S>                                         <C>         <C>          <C>
Balance at January 1                         $56,256     $55,415      $53,708
Allowance obtained through acquisitions        8,311       -----          935

Recoveries on loans previously charged off     2,485       2,393        2,041
Loans charged off                            (17,277)    (12,265)      (9,837)
------------------------------------------------- ------------ - ------------
Net loans charged off                        (14,792)     (9,872)      (7,796)
Provision charged to operations               15,316      10,713        8,568
------------------------------------------------- ------------ - ------------
Balance at December 31                       $65,091     $56,256      $55,415
========================================= ========== = ========== = ==========
</TABLE>
                                      41

<PAGE>

Total nonaccrual and restructured loan balances and related annual interest data
were as follows (in thousands):
<TABLE>
<CAPTION>

                                         1997        1996         1995
------------------------------------- ---------- - --------- - ----------
<S>                                      <C>         <C>          <C>
Nonaccrual                               $20,520     $19,350      $19,142
Restructured                                 489         393          503
------------------------------------- ---------- - --------- - ----------
Total                                    $21,009     $19,743      $19,645
------------------------------------- ---------- - --------- - ----------
Interest computed at original
 terms                                    $2,144      $1,896       $2,045
Interest recognized                          473         598          623
------------------------------------- ---------- - --------- - ----------
</TABLE>

At December 31, 1997,  there were no significant  commitments to lend additional
funds on these loans.

The  following  is a summary  presentation  of loans that are  considered  to be
impaired as defined under FASB Statement No. 114:

<TABLE>
<CAPTION>

---------------------------------------------------------------------- ---------
At December 31,                                       1997     1996
---------------------------------------------------------------------- ---------
<S>                                                    <C>       <C>      <C>
  Recorded investment in impaired loans               $12,805   $7,375
  Amount of allowance for loan losses
    specifically allocated to impaired loans            1,540    1,560
---------------------------------------------------------------------- ---------
For the years ended December 31,                      1997     1996      1995
---------------------------------------------------------------------- ---------
  Average recorded investment in impaired loans        13,305    9,212    10,414
  Interest income recognized on impaired loans            153      326       361
---------------------------------------------------------------------- ---------
</TABLE>

Certain directors and executive  officers of Keystone and its subsidiaries,  and
their associates, were indebted to the bank subsidiaries during 1997. Such loans
were made in the  ordinary  course of  business  and on  customary  terms.  Loan
activity during 1997 with these related parties was as follows (in thousands):


  Beginning Balance       Additions         Repayments      Ending Balance
--------------------- ------------------ ----------------- -----------------
      $116,066             $102,287           $93,504          $124,849

Financial Derivatives, Hedging Activity, and Commitments

Keystone  engages in activities  associated  with the use of  off-balance  sheet
derivative financial instruments (derivatives) and hedges to manage its exposure
to changes in interest  rates.  Activities have included  limited  interest rate
swap activity,  forward  commitments for mortgage banking inventory  management,
the  use of  short  sales  and  put  options  to  hedge  against  the  potential
deterioration  in the value of  indirect  auto  financings  held for sale,  loan
commitments  and standby  letters of credit made in the  ordinary  course of its
banking business.

At  December  31,  1997,  outstanding  hedging  activity  was limited to forward
mortgage  commitments  related to management of its mortgage banking  inventory.
Under the terms of these  commitments,  Keystone  agreed to deliver a  specified
volume of  mortgage  loans with a  specified  portfolio  yield,  and  received a
pre-established  price  commitment  pursuant to timely  delivery of the mortgage
loans.  The  purpose of these  arrangements  is to manage the effect of interest
rate changes on these loans between the date of the original loan commitment and
the date of delivery for sale into the secondary market. At December 31, 1997,

                                      42

<PAGE>

Keystone had entered into  commitments to deliver  approximately  $44,721,000 of
mortgage loans for sale into the secondary market.  The delivery dates for these
commitments  are  short-term  in nature and will expire at various  dates in the
first half of 1998.

Keystone is a party to financial instruments with off-balance sheet risk used in
the normal  course of business  to meet the  financing  needs of its  customers.
These  financial  instruments  include loan  commitments  and standby letters of
credit.  These instruments  involve, to varying degrees,  elements of credit and
interest  rate  risk  in  excess  of the  amount  recognized  in  the  financial
statements.

Keystone's maximum exposure to credit loss in the event of nonperformance by the
counterparty  to the financial  instrument for the loan  commitments and standby
letters of credit is the  contractual or notional  amount of those  instruments.
Keystone  uses  the  same  policies  in  making   commitments   and  conditional
obligations as it does for on-balance sheet instruments.

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require payment of a fee. Since many  commitments are expected to expire without
being drawn upon,  the total  commitment  amounts do not  necessarily  represent
future  cash  requirements.  The amount and nature of  collateral  obtained,  if
deemed necessary, is based on management's credit evaluation of the couterparty.

Standby letters of credit are agreements used by Keystone's customers as a means
of  improving  their  credit  standings  in dealing  with  others.  Under  these
agreements, Keystone guarantees certain financial commitments of its customers.

At December 31, 1997,  outstanding  commitments for loans and standby letters of
credit were as follows (in thousands):

          Loan commitments                 $75,574
          --------------------------- ------------
          Standby letters of credit     $1,027,782
          --------------------------- ------------

Premises and Equipment

The following summarizes premises and equipment at December 31, (in thousands):

                                                    1997         1996
---------------------------------------------- ----------- ------------
Land                                               $12,801      $12,333
Buildings                                           97,298       84,085
Equipment                                          108,169       99,000
Leasehold improvements                              15,741       14,676
---------------------------------------------- ----------- ------------
                                                   234,009      210,094
Accumulated depreciation and amortization         (117,394)    (112,162)
---------------------------------------------- ----------- ------------
Total                                             $116,615      $97,932
---------------------------------------------- ----------- ------------

Depreciation  and   amortization   expense  amounted  to  $14,554,000  in  1997,
$13,058,000 in 1996, and $11,616,000 in 1995.

Keystone and its  subsidiaries  lease  various  equipment  and  buildings  under
operating lease agreements. In 1997, 1996, and 1995, total rent expense amounted
to $7,377,000,  $7,956,000, and $7,715,000,  respectively. Future annual minimum
lease payments do not significantly exceed historic levels.


                                      43

<PAGE>

Federal Home Loan Bank Borrowings

The subsidiary  banks of Keystone are members of a Federal Home Loan Bank (FHLB)
and, as such,  can take  advantage  of the FHLB program for  overnight  and term
advances at published daily rates, which are advantageous to members as compared
to issuing notes directly in the market. Under the terms of a blanket collateral
agreement, advances from the FHLB are collateralized by first mortgage loans and
securities. Advances available under this agreement are limited by available and
qualifying  collateral  and the amount of FHLB stock  held by the  borrower.  At
December 31, 1997, Keystone member banks could borrow an additional $836,265,000
based on qualifying collateral. Such additional borrowing would require that the
banks  increase  their  investment  in FHLB  stock by  $83,941,200.  Outstanding
borrowings  from the  Federal  Home  Loan Bank are  summarized  as  follows  (in
thousands):


---------------------------------------------------------------
                                            December 31,
                                           1997         1996
----------------------------------------------------------------
Due 1997, 5.48% to 7.04%                    $------      $67,420
Due 1998, 5.45% to 7.71%                     57,957       48,848
Due 1999, 4.75% to 6.51%                     49,286       30,786
Due 2000, 5.54% to 6.51%                     70,830        2,500
Due 2001, 4.92% to 6.80%                      6,000       71,000
Due 2002, 5.25% to 6.08%                     60,550       ------
Due After 2002, 4.75% to 7.23%                3,527        3,649
------------------------------------ -------------- -----------
                                           $248,150     $224,203
------------------------------------ -------------- ------------

Of  the  December  31,  1997  outstanding   balance,   $164,900,000  was  either
adjustable, variable, or subject to conversion. Of the $164,900,000, $10,000,000
was variable with Prime and $13,500,000 was adjustable with LIBOR. The remaining
$141,400,000 are advances which are subject to conversion to adjustable rates at
the option of the FHLB at various  dates in 1998 and 1999. In the event the FHLB
elects to convert these advances to adjustable rates, Keystone has the option to
prepay the borrowings without penalty.

Long-term Debt

Long-term debt at December 31 consisted of the following (in thousands):


                                                   1997        1996
----------------------------------------------- ----------- -----------
Medium-term notes, interest at 7.3%                 $99,777      $-----
Other                                                 2,016       2,573
----------------------------------------------- ----------- -----------
Total                                              $101,793      $2,573
----------------------------------------------- ----------- -----------

On May 15, 1997, Keystone Financial  Mid-Atlantic  Funding Corp., a wholly-owned
funding subsidiary of Keystone,  issued $100 million of senior medium term notes
under a $400 million shelf  registration  statement.  The notes, which mature on
May 15, 2004, provide for semi-annual interest payments at a fixed rate of 7.3%,
and are unconditionally  guaranteed by Keystone.  The proceeds from the issuance
of the notes were used primarily to finance the  acquisition of First  Financial
of Western Maryland (see Mergers and Acquisitions footnote).

                                      44

<PAGE>

Shareholders' Equity

Series A Junior Participating Preferred Stock (Preferred Stock) (par value $1.00
per share,  with voting powers and dividends  and  liquidation  rights per share
equal to 187.5 times that of the current  common stock) has been  established in
connection with the adoption of a Shareholders' Rights Plan (Rights Plan). Under
the Rights Plan,  200,000 shares of Preferred Stock are reserved for issuance on
the exercise of rights attached to the outstanding  common stock. The rights are
exercisable only if a person or group acquires or announces a tender or exchange
offer to acquire 20% or more of Keystone's  common stock.  In the event a person
or group  acquires a 20%  position,  each right not owned by the person or group
will entitle its holder to purchase at the exercise price of $70.00, a number of
shares of common stock, 5.333 one-thousandths (0.005333) of a share of Preferred
Stock,  or other  securities  or assets  of  Keystone  or  common  shares of the
acquiring  company having a market value equal to twice the exercise  price.  At
any time after a person or group acquires 20% or more (but less than 50%) of the
outstanding common stock, the Board of Directors may exchange part or all of the
rights  (other than the rights held by the person or group) for shares of common
or 5.333  one-thousandths  of a share of Preferred Stock on a one-for-one basis.
The Board of Directors is entitled to redeem the rights at any time before a 20%
position has been acquired.  Unless extended, the rights will expire on February
8, 2000.

Stock-based Compensation

Keystone provides eligible employees and directors with various stock option and
stock  purchasing  plans  which are more fully  described  below.  Keystone  has
adopted the disclosure  only  provisions of FASB Statement No. 123,  "Accounting
for Stock-Based  Compensation",  and  accordingly,  continues to account for its
plans in  accordance  with APB Opinion No. 25 and  related  interpretations.  As
such, no compensation expense has been recognized for its stock option plans and
employee stock purchase plan.

Keystone has an employee "Stock  Incentive  Plan" and a "Nonemployee  Directors'
Stock Option  Plan."  Under the terms of these plans,  Keystone has reserved for
issuance a total of 2,875,000  shares of common stock for  qualifying  employees
and nonemployee  directors,  of which approximately  2,836,000 are available for
future grants.  The plans provide for the issuance of nonqualified  options and,
under the employee  plan,  incentive  stock  options.  Options are granted at an
exercise  price not less than the fair market value of Keystone  common stock on
the date of grant,  vest in two years, and expire  approximately ten years after
the grant date.  Keystone also has outstanding  options  pursuant to predecessor
plans and plans of acquired banks.

The following table provides a summary of options  outstanding  under the "Stock
Incentive  Plan," the  "Nonemployee  Directors'  Stock Option  Plan",  and other
predecessor or acquired plans.

                                      45

<PAGE>

                               Weighted
                               Average
                               Exercise      Common
                                Price        Shares
---------------------------- ------------ ------------
January 1, 1995                    $16.63    1,954,121
  Granted                          $20.70      201,645
  Exercised                         $9.59     (279,300)
  Terminated                       $20.08      (50,830)
---------------------------- ------------ ------------
December 31, 1995                  $17.92    1,825,636
---------------------------- ------------ ------------
  Granted                          $21.09      312,636
  Exercised                        $10.60      (83,966)
  Terminated                       $20.88      (51,146)
---------------------------- ------------ ------------
December 31, 1996                  $18.62    2,003,160
---------------------------- ------------ ------------
  Granted                          $25.40      307,339
  Exercised                        $16.30     (443,815)
  Terminated                       $23.16      (21,926)
---------------------------- ------------ ------------
December 31, 1997                  $19.61    1,844,758
---------------------------- ------------ ------------

The following table summarizes  information  about stock options  outstanding at
December 31, 1997:

-------------------------------------------------------    ---------------------
                       Options Outstanding                  Options Exercisable
-------------------------------------------------------    ---------------------
                                Weighted-
                                 Average       Weighted-              Weighted-
    Range of                    Remaining       Average                Average
    Exercise        Number     Contractual     Exercise    Number     Exercise
    Prices       Outstanding   Life (years)     Price    Exercisable   Price
---------------------------------------------- ---------------------------------
  $4.95 - $10.50       226,944    3.03          $8.95      226,944     $8.95
 $11.13 - $15.98       225,007    3.35         $14.42      218,245    $14.39
 $16.46 - $20.92       478,224    6.83         $19.79      244,590    $19.53
 $21.08 - $26.31       912,763    6.81         $23.41      502,878    $22.22
 $36.00 - $39.94         1,820    4.80         $37.73        -----     -----
--------------------------------------------------------------------------------
  $4.95 - $39.94     1,844,758    5.93         $19.61    1,192,657    $17.71
--------------------------------------------------------------------------------
Options  exercisable  at the end of 1996 and 1995 were  1,333,422  and  883,029,
respectively.

Under the "Employee  Stock Purchase  Plan",  eligible  employees are provided an
opportunity to purchase  Keystone  common stock at a discount from market price.
The Plan  provides for the purchase of stock  through  payroll  deductions  at a
price which is the lesser of 85% of the fair market value of the common stock as
of the first or last day of the annual  purchase  period.  The  purchase  period
commences on July 1 and ends on June 30. Through  modifications made to the plan
in 1995,  Keystone  reserved  750,000  shares of common stock,  of which 559,000
remain available for future purchases.  The amount of common shares issued under
this program in 1997, 1996, and 1995 were as follows:

                                      46

<PAGE>

                            Price Per     Shares
                              Share       Issued
-------------------------- ----------- ----------
1997                            $19.20     94,195
1996                            $15.79     97,196
1995                            $15.90     74,249

The following  pro forma amounts  indicate the net income and earnings per share
that would have resulted if compensation  expense for the stock option plans and
employee stock purchase plan was determined under the recognition  provisions of
Statement No. 123 using the fair value of the awards at the grant date.


                                          1997          1996         1995
----------------------- ------------- ------------- ------------ -------------
Net Income              As reported        $87,917      $89,506       $79,449
 (in thousands)         Pro forma           86,457       88,348        78,876

Diluted earnings per    As reported          $1.68        $1.70         $1.59
   share                Pro forma             1.65         1.68          1.58

The pro forma effect is not fully  reflected in 1995 since  Statement No. 123 is
applicable  only to  options  granted  subsequent  to  December  31,  1994,  and
Keystone's options have a two-year vesting period.

Information  regarding  the  weighted-average  grant-date  fair values for stock
options and purchase rights granted in 1997, 1996, and 1995 were as follows:


                                                       Assumptions
                                           ------------------------------------
                                Grant Date  Dividend   Expected  Interest
                                Fair Value   Yield    Volatility   Rate    Life
                               (Per Option
                                 /Share)
------------------------------ -------------------------------------------------
Stock option plans:
     1997                             $4.20      4.2%         15%    6.37%  7yrs
     1996                             $3.01      4.6%         15%    5.50%  7yrs
     1995                             $3.34      4.3%         15%    7.88%  7yrs
Employee stock purchase plan:
     1997                             $6.30      4.5%         15%    5.63%  1yr
     1996                             $4.28      4.1%         12%    5.75%  1yr
     1995                             $3.50      4.8%         13%    5.64%  1yr
------------------------------ -------------------------------------------------

The fair values were  estimated  using the  Black-Scholes  model.  This model is
predominantly  used to  value  traded  options,  which  differ  from  Keystone's
options,  and  requires  the use of  numerous  assumptions,  many of  which  are
subjective  in nature.  Therefore,  the pro forma  results are  estimates of the
impact to operations if  compensation  expense had been recognized for all stock
based compensation plans and are not indicative of the impact on future periods.

Keystone also has a Management Stock Ownership  Program (the "Program") which is
intended, among other things, to promote alignment of management and shareholder
interests and to encourage management to focus on value creation.  To accomplish
these purposes,  the Program establishes stock ownership goals for executive and
senior  officers of the Corporation to be achieved over a five-year  period.  In
order to assist the officers in attaining their stock ownership goals, a related
plan provides for nonrecourse, noninterest-bearing loans, in amounts not to

                                      47

<PAGE>



exceed 50% of the officer's  stock ownership goal, to be used to purchase shares
of  Keystone  common  stock at fair  market  value.  The  loans are  secured  by
collateral  having an initial value of 120% of the loan amount and consisting of
the shares of Keystone stock purchased with the loan plus  additional  shares of
stock or other  acceptable  collateral  owned by the  executive.  The  aggregate
number of shares which may be issued and sold pursuant to the Program is limited
to 750,000 shares of Common Stock,  subject to  proportionate  adjustment in the
event of stock splits and similar  events.  At December 31, 1997,  approximately
650,000  shares remain  available for future  issuances.  During 1997,  1996 and
1995,  6,000,  19,000 and 72,000  shares,  respectively,  were issued  under the
Program.  At December 31, 1997 and 1996, the amount executives  participating in
the  Program  owed  Keystone  for  financed  purchases  totaled  $1,709,000  and
$1,786,000, respectively.

Keystone  has  a  dividend   reinvestment  plan  for  shareholders  under  which
additional shares of Keystone common stock may be purchased at market value with
reinvested dividends and voluntary cash payments.  Keystone has reserved 900,000
shares of common stock for this Plan,  and  approximately  336,000 shares remain
unissued. The following number of shares of Keystone common stock were purchased
pursuant to this plan: 130,000 in 1997, 98,000 in 1996, and 89,000 in 1995.

Employee Benefit Plans

Keystone  provides a  noncontributory  defined  benefit  pension  plan  covering
substantially  all  full-time  employees.  Plan  benefits  are based on years of
service and  qualifying  compensation  during the final years of  employment.  A
summary of the components of net periodic pension expense for Keystone's defined
benefit plan was as follows for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>

                                                      1997       1996       1995
-------------------------------------------------- ---------- ---------- -----------
<S>                                                    <C>        <C>         <C>
Service cost benefits earned during the period         $2,907     $2,793      $2,648
Interest cost on projected benefit obligation           5,458      5,166       4,547
Actual return on plan assets                          (20,922)    (9,802)    (13,590)
Net amortization and deferral                          12,940      2,377       7,189
-------------------------------------------------- ---------- ---------- -----------
Pension expense                                          $383       $534        $794
================================================== ========== ========== ===========
</TABLE>

The  following  table sets forth the funded  status and  amounts  recognized  in
Keystone's   consolidated   statement  of  condition  as  of  December  31,  (in
thousands):

                                                            1997        1996
--------------------------------------------------------  ---------- -----------
Actuarial present value of the accumulated benefit
   obligation, including vested benefits of $66,042
   in 1997 and $59,432 in 1996                              $66,789     $59,964
-------------------------------------------------------- ----------- -----------
Actuarial present value of projected benefit
obligation for service rendered to date                     (84,890)   $(75,060)
Fair value of plan assets                                   106,239      89,560
-------------------------------------------------------- ----------- -----------
Plan assets in excess of projected benefit obligation        21,349      14,500
Unrecognized net assets at transition                        (3,137)     (3,862)
Unrecognized net gain                                       (12,839)     (5,181)
Unrecognized prior service cost                              (1,497)     (1,501)
--------------------------------------------------------  ---------- -----------
Prepaid pension expense, included in other assets            $3,876      $3,956
======================================================== =========== ===========

                                      48

<PAGE>

Actuarial  assumptions  used  in  the  determination  of the  projected  benefit
obligation were as follows:

                                                      1997     1996    1995
--------------------------------------------------- -------- -------- -------
Rate of increase in future compensation levels         5.50%   5.50%    5.50%
Expected long-term rate of return on plan assets       8.50    8.50     8.00
Weighted average discount rate                         7.00    7.50     7.50
--------------------------------------------------- -------- -------- -------

The  unrecognized  net assets at transition and the  unrecognized  prior service
costs are being amortized over the expected service lives of eligible employees,
which  approximate 15 years.  Trusteed pension plan assets consist  primarily of
equity and fixed income securities and short-term investments.

A 401(k) deferred savings plan covers eligible  employees of Keystone.  The plan
provides  for a  matching  employer  contribution  equal to 60% of the  employee
contribution.  While  empolyees can contribute up to 15% of their  compensation,
the  employer  match  is  limited  to  5%  of  employee  compensation.  Matching
contributions are paid entirely in Keystone stock.

In July 1992, Keystone  established a leveraged KSOP and borrowed $3,500,000 for
the purpose of acquiring  186,000 shares of Keystone stock. The shares purchased
by the KSOP are used to meet matching  contribution  requirements  of the 401(k)
plan.  Dividends  received  on shares  held by the KSOP are used to service  the
principal and interest payments on the borrowing.  Debt service is also provided
by matching cash contributions  required under the original 401(k) plan. Benefit
expense  is  recognized  based on a  percentage  of total debt  service  for the
current year to total debt service over the life of the borrowing.

Group-based incentive plans include both long-term and annual incentive programs
designed  to  focus  management  and  employee  efforts  on  profit  performance
objectives  and  revenue  growth  targets.  Employees  earn  awards  under these
programs based on the  profitability  of their operating unit and/or Keystone or
based on  achievement of  revenue-driven  sales  objectives.  Expenses for these
plans, a predecessor  profit sharing plan, and the  above-mentioned  401(k) plan
totaled $9,160,000 in 1997, $6,640,000 in 1996, and $6,467,000 in 1995.

                                      49

<PAGE>

Income Taxes

Deferred  income taxes reflect the tax effect of temporary  differences  between
the carrying amounts of assets and liabilities for financial  reporting purposes
and the amounts used for income tax purposes. Significant components of deferred
tax assets and liabilities are as follows (in thousands):

                                                December 31,
----------------------------------------- -------------------------
Deferred tax assets:                          1997         1996
----------------------------------------- ------------ ------------
  Allowance for credit losses                 $20,717      $16,388
  Deferred liabilities                          1,879          945
  Compensation accruals                         3,229        2,599
----------------------------------------- ------------ ------------
Deferred tax liabilities:
----------------------------------------- ------------ ------------
  Lease financing activities                  (47,672)     (33,950)
  Net unrealized gains on securities
   available-for-sale                          (4,600)      (2,465)
  Premises and equipment                       (3,862)      (2,542)
  Intangible assets                            (4,044)      (1,494)
  Other                                           287       (1,086)
----------------------------------------- ------------ ------------
Net deferred tax liability                   ($34,066)    $(21,605)
----------------------------------------- ------------ ------------

The  provision  for income  taxes  consisted  of the  following  components  (in
thousands):

                                    1997            1996            1995
--------------------------------- --------- ---- ----------- --- ----------

Deferred provision                  $14,537         $14,880         $11,219
Current provision:
 Federal taxes                       23,229          21,441          22,217
 State taxes                          1,187             859             565
--------------------------------- --------- ---- ----------- --- ----------
Total                               $38,953         $37,180         $34,001
--------------------------------- --------- ---- ---------- ---- ----------

A  reconciliation  of income tax expense  and the amounts  which would have been
recorded based upon statutory rates (35%) was as follows (in thousands):

                                        1997            1996            1995
------------------------------------ ---------- ---- ---------- ---- ----------
Provision on pre-tax income at
 statutory rates                       $44,405         $44,340         $39,708
Tax exempt interest income              (5,089)         (6,212)         (6,863)
Other                                     (363)           (948)          1,156
----------------------------------- ---------- ---- ---------- ---- -----------
Total                                  $38,953         $37,180         $34,001
------------------------------------ ---------- ---- ---------- ---- ----------
Effective Rate                            30.7%           29.3%           30.0%
==================================== ========== ==== ========== ==== ==========
Income taxes attributable to investment  security gains were $2,125,000 in 1997,
$305,000 in 1996, and $626,000 in 1995.


                                      50

<PAGE>

Earnings Per Share

Effective December 31, 1997, Keystone adopted Statement of Financial  Accounting
Standards  No.128,  "Earnings  Per  Share."  This  statement  requires  the dual
presentation  of  basic  and  diluted  earnings  per  share,  and  requires  the
restatement of all prior period  earnings per share amounts.  The following is a
reconciliation  of the  numerators  and  denominators  of the basic and  diluted
earnings per share computations (in thousands, except per share data):

                                       1997           1996           1995
-------------------------------- --------------- -------------- --------------
Numerator                                $87,917        $89,506        $79,449

Denominators:

  Basic shares outstanding                51,693         52,119         49,557
  Dilutive option effect                     627            362            289
-------------------------------- --------------- -------------- --------------
  Dilutive shares outstanding             52,320         52,481         49,846
-------------------------------- --------------- -------------- --------------
EPS:

  Basic                                    $1.70          $1.72          $1.60
  Diluted                                  $1.68          $1.70          $1.59
-------------------------------- --------------- -------------- --------------

Regulatory Capital Requirements

Bank  regulators  have set forth  requirements  for  risk-based  capital,  which
resulted in the establishment of international capital standards for banks.

The following table provides  Keystone's  risk-based capital position at the end
of 1997 and 1996 and a comparison to the various regulatory capital requirements
(in thousands):

<TABLE>
<CAPTION>

                              1997            1996            Well-
                              ----            ----         Capitalized   Minimum
                        Amount  Ratio   Amount     Ratio      Ratio       Ratio
--------------------- -------- ------- --------- -------- ------------- --------
<S>                   <C>       <C>     <C>        <C>             <C>       <C>
Total capital
 (to risk-weighted
 assets)              $675,575  13.75%  $688,794   15.66%          10%        8%
Tier 1 capital
 (to risk-weighted
 assets)               614,172  12.50    634,590   14.43            6         4
Tier 1 capital
 (to average
 assets)               614,172   9.15    634,590   10.03            5         4
--------------------- -------- -------- --------- -------- ------------ --------
</TABLE>

At December  31, 1997 and 1996,  each  significant  subsidiary  of Keystone  had
capital at or above the "well-capitalized" level for each of the three ratios.

Failure  to meet  any one of the  minimum  capital  ratios  would  result  in an
institution   being   classified   as   "undercapitalized"   or   "significantly
undercapitalized".   Such  classifications  could  disrupt  dividends,   capital
distributions,  or affiliate  management fees. In addition,  other restrictions,
prohibitions, and related supervisory actions would be likely depending upon the
overall  level of  capital.  Keystone  anticipates  no  problems  in meeting the
current or future capital  standards.  As of December 31, 1997,  each subsidiary
bank had been categorized as  "well-capitalized" by its primary regulator at its
most recent examination.

                                      51

<PAGE>

Restrictions

Under  Federal  Reserve  regulations,   depository  institutions  must  maintain
reserves in the form of cash or amounts on deposit with Federal  Reserve  Banks.
For the year ended December 31, 1997,  Keystone's bank  subsidiaries  maintained
average reserve balances of approximately $53,252,000 in compliance therewith.

Dividends  that may be paid to Keystone by the  subsidiary  banks are limited by
state and  federal  regulations.  The related  amount  available  for  dividends
aggregated  $222,000,000 at December 31, 1997. Federal Reserve  regulations also
limit  each  subsidiary  bank  as to the  amount  it may  loan  its  affiliates,
including Keystone. At December 31, 1997, the maximum amount available for loans
to affiliates approximated 10% of consolidated net assets.

Fair Value of Financial Instruments

FASB  Statement  No. 107 requires  disclosure  of fair value  information  about
financial instruments, whether or not recognized in the balance sheet, for which
it is  practicable  to estimate that value.  In cases where quoted market prices
are not available, fair value is based on estimates using present value or other
valuation  techniques.  These  techniques  are  significantly  affected  by  the
assumptions  used,  including  the  discount  rate and  estimates of future cash
flows. In that regard,  the derived fair value estimates cannot be substantiated
by  comparison  with  independent  markets,  and,  in many  cases,  could not be
realized in immediate  settlement of the instrument.  Statement No. 107 excludes
certain  financial  instruments  and  all  nonfinancial   instruments  from  its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of Keystone Financial, Inc.

                                      52

<PAGE>

The following  schedule displays at December 31, the carrying values and related
estimated fair values for financial instruments (in thousands):

                                         1997                     1996
 ------------------------------------------- -----------------------------------

                                 Carrying    Estimated    Carrying   Estimated
                                  Amount     Fair Value    Amount    Fair Value
------------------------------------------- ------------------------------------
Financial Assets:
Cash and due from banks           $206,223     $206,223    $206,972    $206,972
Federal funds sold and other        27,228       27,228      81,413      81,413
Investment securities
  available for sale             1,091,400    1,091,400   1,210,094   1,210,094
Investment securities held
  to maturity                      528,388      538,218     379,958     383,526
Loans held for resale               43,055       43,055      51,225      51,225
Loans, net of allowance for
  credit losses                  4,275,218    4,447,413   3,948,949   3,996,601
Leases                             372,257      380,855     331,265     336,101
------------------------------------------- ------------------------------------
Financial Liabilities:
Time deposits                   $3,023,702   $3,048,175  $2,842,032  $2,848,996
Other deposits                   2,209,463    2,209,463   2,217,689   2,217,689
Short-term borrowings              425,890      425,890     397,964     397,964
FHLB borrowings                    248,150      249,629     224,203     222,349
Long-term debt                     101,793      101,793       2,573       2,573
------------------------------------------- ------------------------------------
Off-Balance Sheet Instruments:
Lending commitments and
  letters of credit                 $-----        $(684)      $-----    $(2,625)
All other                           $-----        $(217)      $-----       $(79)
------------------------------------------- ------------------------------------


The following  methods and  assumptions  were used to estimate fair market value
disclosures for financial instruments:

Cash and short-term  instruments:  The carrying  amounts reported in the balance
sheet for cash and short-term instruments approximate those assets' fair values.

Investment securities (including  mortgage-backed  securities):  Fair values for
investment  securities are based on quoted market prices,  where  available.  If
quoted market prices are not  available,  fair values are based on quoted market
prices of comparable instruments.

Loans receivable:  For variable-rate  loans that reprice  frequently and have no
significant  changes in credit risk,  fair values are based on carrying  values.
The fair  values  for  other  loans are  estimated  using  discounted  cash flow
analyses,  using interest rates  currently  being offered for loans with similar
terms to borrowers of comparable credit quality.  The carrying amount of accrued
interest approximates its fair value.

Deposit  liabilities:  The fair  values  disclosed  for demand  deposits  (e.g.,
interest and noninterest  checking,  savings,  and certain types of money market
accounts)  are reported at a value equal to the amount  payable on demand at the
reporting date. The carrying amounts for variable-rate,  fixed-term money market
accounts and certificates of deposit  approximate their fair market value at the
reporting date. Fair values for fixed-rate certificates of deposit are estimated

                                      53

<PAGE>

using a discounted cash flow  calculation  that applies interest rates currently
being  offered on  certificates  to a schedule of  aggregated  expected  monthly
maturities.

Short-term  borrowings:   The  carrying  amounts  of  federal  funds  purchased,
borrowings  under  repurchase   agreements,   and  other  short-term  borrowings
approximate their fair values.

FHLB and long-term borrowings:  The fair values of Keystone's FHLB and long-term
borrowings  are  estimated  using  discounted  cash  flow  analyses,   based  on
Keystone's current incremental borrowing rates for similar types of borrowings.

Unfunded lending  commitments and letters of credit:  Fair values for Keystone's
unfunded  lending  commitments and letters of credit are based on fees currently
charged to enter into  similar  agreements,  taking into  account the  remaining
terms of the agreements and the counterparties' credit standings.

Other  off-balance  sheet   instruments:   Fair  values  for  off-balance  sheet
instruments  including interest rate swaps,  forward mortgage  commitments,  and
securities underlying put options and short sales are based on dealer quotes and
current trading  prices.  The fair values  represent the estimated  amounts that
Keystone  would receive or pay to terminate the  contracts,  taking into account
current interest rates.

Mergers and Acquisitions

On May 30, 1997 Keystone completed the merger of Financial Trust Corp (Financial
Trust),  a financial  institution  with $1.2 billion of assets  headquartered in
Carlisle,  Pennsylvania.  Under the terms of the agreement, each Financial Trust
shareholder  received  Keystone  common stock at a fixed  exchange ratio of 1.65
shares for each Financial Trust share, resulting in the issuance of 14.2 million
shares  of   Keystone   stock.   The   merger  was   accounted   for  under  the
pooling-of-interests  method of  accounting,  and,  as such,  all  prior  period
information has been restated.

During  the second  quarter  of 1997,  Keystone  recorded  previously  announced
special charges  associated with the merger of Financial  Trust.  These charges,
which totaled $11.4 million,  included the estimated  expenses for  professional
services, employment matters, system conversions and occupancy and equipment.

The  following  summarizes  the  activity  in the  special  charge  accrual  (in
thousands):


                                                   Paid         Balance at
                                 Initial          During        December 31,
                                 Accrual           1997            1997
---------------------------- -------------- ---------------- --------------
Professional                         $2,400           $2,197           $203
Employment matters                    1,700            1,002            698
Integration and conversion            2,785            2,646            139
Net occupancy and equipment           2,575            1,114          1,461
Other                                 1,950            1,145            805
---------------------------- -------------- ---------------- --------------
                                    $11,410           $8,104         $3,306
---------------------------- -------------- ---------------- --------------
The majority of the remaining expenses will be paid during 1998.

                                      54

<PAGE>

The results of  operations  and  financial  condition  of  Financial  Trust were
combined with Keystone as follows (in thousands):


                                                 Financial       Consolidated
For the year ended:             Keystone           Trust           Keystone
---------------------------- --------------- ----------------- ----------------
1996:
  Net interest income              $209,763           $52,356         $262,119
  Net income                         69,475            20,031           89,506
1995:
  Net interest income              $197,352           $48,659         $246,011
  Net income                         61,314            18,135           79,449
---------------------------- --------------- ----------------- ----------------

December 31, 1996:
---------------------------- --------------- ----------------- ----------------
Assets                           $5,231,268        $1,219,311       $6,450,579
Liabilities                       4,723,961         1,066,212        5,790,173
Shareholders' equity                507,307           153,099          660,406
---------------------------- --------------- ----------------- ----------------

Financial  data for Keystone and  Financial  Trust from the beginning of 1997 to
the date of consummation, May 30, 1997, is presented below:

                                                Financial        Consolidated
                              Keystone            Trust            Keystone
------------------------ ----------------- ------------------ ----------------
  Net interest income              $89,411            $22,623         $112,034
  Net income                        28,773              9,225           37,998
  Dividends declared                23,120              4,796           27,916
------------------------ ----------------- ------------------ ----------------

On May 29, Keystone completed the acquisition of First Financial  Corporation of
Western Maryland (FFWM), a thrift holding company with assets approximating $355
million based in  Cumberland,  Maryland.  Under the terms of the agreement  with
FFWM,  each  of its  shareholders  received  Keystone  common  stock  at a fixed
exchange  ratio of 1.29 shares of Keystone  for each FFWM  share,  or cash.  The
issuance  of  1.6  million   Keystone  shares  amounted  to  60%  of  the  total
consideration of $76 million and, accordingly, the transaction was accounted for
as a purchase.  The transaction resulted in the recognition of goodwill and core
deposit  intangibles   totaling   approximately  $34  million  and  $6  million,
respectively,  which will be amortized over 25 and 10-year periods.  The results
of FFWM have been included herein from the consummation date of May 29, 1997.

Pro forma  results of  operations as though FFWM had been combined with Keystone
at the  beginning  of  the  periods  presented  do not  differ  materially  from
consolidated results presented herein.

During  1995,  Keystone  completed  mergers  of two  Pennsylvania  bank  holding
companies,   Shawnee  Financial  Services  Corporation  (Shawnee)  and  National
American  Bancorp  (NAB);  and the  acquisition  of Martindale  Andres & Company
(Martindale),  a  Philadelphia-based  asset management firm. The Shawnee and NAB
mergers resulted in the issuance of 501,000 and 1,158,000 shares,  respectively,
of Keystone  stock in exchange for 80,200 and 579,000 shares of Shawnee and NAB,
respectively.  The bank  subsidiaries  of both  Shawnee and NAB were merged into
existing Keystone  affiliated banks and the mergers were accounted for under the
pooling of interests method of accounting. Due to the immaterial impact of both

                                      55

<PAGE>

transactions to Keystone's  financial  position and results of operation,  prior
periods were not restated.  Consolidated  results of Keystone include  Shawnee's
and NAB's results of operations from the consummation  dates of October 10, 1995
and December 29, 1995, respectively.

The  acquisition of Martindale  Andres,  which occurred on November 30, 1995 was
accounted for under the purchase  method of  accounting  and,  accordingly,  the
results of  Martindale's  operations  were included in  Keystone's  consolidated
results beginning  December 1, 1995. Pro forma results of operations of Keystone
as though Martindale had been acquired as of January 1 of the respective periods
would not have been materially different from the consolidated results presented
herein.  The  purchase  price,  consisting  of both cash and shares of  Keystone
common stock, was not significant to Keystone's financial condition.

                                      56

<PAGE>

Parent Company Financial Statements

The  following  parent  company  condensed   statements  reflect  the  financial
condition and results of operations of Keystone (in thousands):

                        Statements of Condition
                                                      December 31,
                                                    1997         1996
----------------------------------------------- ------------ ------------
Assets:
   Cash                                               $1,489       $1,027
   Investment securities                              65,024       22,383
   Investments in:
     Subsidiary banks                                630,102      591,786
     Other subsidiaries                              115,624       54,362
   Other assets                                          889        9,911
----------------------------------------------- ------------ ------------
TOTAL ASSETS                                        $813,128     $679,469
----------------------------------------------- ------------ ------------
Liabilities:
   Long-term debt                                   $100,106       $1,669
   Other liabilities                                  27,537       17,394
----------------------------------------------- ------------ ------------
TOTAL LIABILITIES                                    127,643       19,063
Shareholders' Equity                                 685,485      660,406
----------------------------------------------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          $813,128     $679,469
----------------------------------------------- ------------ ------------

                             Statements of Income
                                                 Year Ended December 31,
                                                1997       1996        1995
-------------------------------------------- ---------- ----------- -----------
Income:
 Dividends from subsidiaries:
  Bank subsidiaries                             $67,305     $71,891     $48,363
  Other subsidiaries                               ----         134          30
Expenses                                         11,627       2,934       6,889
-------------------------------------------- ---------- ----------- -----------
Income before taxes and undistributed
 earnings of subsidiaries                        55,678      69,091      41,504
Income taxes (benefit)                           (3,712)       (799)     (2,630)
Equity in undistributed earnings
 of subsidiaries                                 28,527      19,616      35,315
--------------------------------------------- ---------- ----------- ----------
NET INCOME                                      $87,917     $89,506     $79,449
-------------------------------------------- ---------- ----------- -----------

                                      57

<PAGE>


                           Statements of Cash Flows
                                                Year Ended December 31,
                                             1997          1996       1995
------------------------------------------ ----------- ----------- -----------
OPERATING ACTIVITIES:
 Net income                                    $87,917     $89,506     $79,449
 Equity in undistributed earnings              (28,527)    (19,616)    (35,315)
 Other                                          14,729       1,042     (10,842)
------------------------------------------ ----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
  ACTIVITIES                                    74,119      70,932      33,292
------------------------------------------ ----------- ----------- -----------
INVESTING ACTIVITIES:
 Net (increase) decrease in investments        (38,529)    (13,030)      9,147
 Investments in subsidiaries                   (24,459)     (8,451)     (4,042)
------------------------------------------ ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
 INVESTING ACTIVITIES                          (62,988)    (21,481)      5,105
------------------------------------------ ----------- ----------- -----------
FINANCING ACTIVITIES:
 Cash dividends declared                       (55,964)    (46,998)    (39,875)
 KSOP activity:
   Common stock proceeds                           819         302         613
   Payment of debt                                (523)       (569)       (562)
 Proceeds of long-term debt                     98,960         ---         ---
 Acquisition of treasury stock                 (72,586)     (9,915)     (6,649)
 Proceeds from issuance of common stock
   under benefits plans                         12,908       7,190       8,151
 Other                                           5,717          34         573
------------------------------------------ ----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES          (10,669)    (49,956)    (37,749)
------------------------------------------ ----------- ----------- -----------
Increase (decrease) in cash                        462        (505)        648
Cash at beginning of year                        1,027       1,532         884
------------------------------------------ ----------- ----------- -----------
CASH AT END OF YEAR                             $1,489      $1,027      $1,532
------------------------------------------ ----------- ----------- -----------

                                      58

<PAGE>
Net Interest Income

Keystone's  largest  source of  revenue  is net  interest  income,  which is the
difference  between  interest on earning assets and interest expense on deposits
and other borrowed funds. The following table provides a summary of net interest
income performance for the three years ended December 31, 1997:

<TABLE>
<CAPTION>


                                                        1997                         1996                        1995
                                          ---------------------------    ---------------------------   --------------------------
(in thousands)                             Average               Yield/    Average              Yield/   Average             Yield/
                                           Balance     Interest   Rate     Balance   Interest   Rate     Balance   Interest   Rate
----------------------------------------- ----------   --------   -----   ---------  --------   -----   ---------  --------   ----
ASSETS
<S>                                          <C>         <C>      <C>      <C>         <C>      <C>      <C>         <C>      <C>
Federal funds sold and other                 $84,032     $5,340   6.35%    $106,374    $5,668   5.33%     $153,528   $9,063   5.90%
Investment securities:
    Negotiable money market investments      108,278      6,155   5.68      153,631     8,583   5.59       98,541     5,773   5.86
    Taxable investment securities          1,174,674     77,034   6.56    1,143,073    71,458   6.25    1,060,838    64,230   6.05
    Nontaxable investment securities(1)      225,384     17,557   7.79      235,731    18,953   8.04      223,046    19,525   8.75
Loans held for resale                         77,330      6,408   8.29       53,656     4,688   8.74       21,378     1,636   7.65
Consumer loans (2) (3)                     1,523,659    136,257   8.94    1,271,662   113,377   8.92    1,159,363   103,071   8.89
Real estate loans (1) (2) (3)              2,239,664    196,964   8.79    2,209,179   196,152   8.88    2,187,063   193,349   8.84
Commercial loans (1) (2) (3)                 809,306     73,883   9.13      708,328    63,514   8.97      640,408    59,457   9.28
----------------------------------------- ----------   --------   -----   ---------  --------   -----   ---------  --------   ----
Total earning assets                       6,242,327   $519,598   8.32%   5,881,634  $482,393   8.20%   5,544,165  $456,104   8.23%
----------------------------------------- ----------   --------   -----   ---------  --------   -----   ---------  --------   ----
Allowance for credit losses                  (61,800)                       (56,211)                      (55,324)
Other assets                                 449,475                        407,225                       382,395
----------------------------------------- ----------   --------   -----   ---------  --------   -----   ---------  --------   ----
Total Assets                              $6,630,002                     $6,232,648                    $5,871,236
----------------------------------------- ----------   --------   -----   ---------  --------   -----   ---------  --------   ----
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW deposits                                $330,514     $4,865   1.47%    $532,480    $7,889   1.48%    $586,576   $10,614   1.81%
Savings deposits                             600,759     11,065   1.84      569,814    12,515   2.20      603,918    13,826   2.29
Money market deposits                        650,082     16,306   2.51      536,237    12,732   2.37      501,709    12,929   2.58
Time deposits                              2,967,437    162,662   5.48    2,759,973   153,121   5.55    2,501,740   139,202   5.56
Short-term borrowings                        371,645     18,134   4.88      323,938    14,506   4.48      257,113    12,747   4.96
FHLB borrowings                              240,533     14,677   6.10      159,503    10,175   6.38      178,791    10,955   6.13
Long-term debt                                64,016      4,785   7.47        3,569       363  10.17        5,574       502   9.01
----------------------------------------- ----------   --------   -----   ---------  --------   -----   ---------  --------   ----
Total interest-bearing liabilities         5,224,986   $232,494   4.59%   4,885,514  $211,301   4.33%   4,635,421  $200,775   4.33%
----------------------------------------- ----------   --------   -----   ---------  --------   -----   ---------  --------   ----
Demand deposits                              606,907                        604,536                       576,445
Other liabilities                            135,789                        107,247                        92,008
Shareholders' equity                         662,320                        635,351                       567,362
----------------------------------------- ----------   --------   -----   ---------  --------   -----   ---------  --------   ----
Total Liabilities and Equity              $6,630,002                     $6,232,648                    $5,871,236
----------------------------------------- ----------   --------   -----   ---------  --------   -----   ---------  --------   ----
Interest rate spread                                              3.87%                         3.87%                         3.90%
----------------------------------------- ----------   --------   -----   ---------  --------   -----   ---------  --------   ----
Net interest income and net
  interest margin                                      $287,104   4.59%              $271,092   4.61%              $255,329   4.61%
Tax-equivalent adjustment                                (8,860)                       (8,973)                       (9,318)
----------------------------------------- ----------   --------   -----   ---------  --------   -----   ---------  --------   ----
Net interest income                                    $278,244                      $262,119                      $246,011
----------------------------------------- ----------   --------   -----   ---------  --------   -----   ---------  --------   ----
</TABLE>
                                       59
<PAGE>

The  following  table  sets  forth for the  periods  indicated  a summary of the
changes in interest  earned and interest paid  resulting  from changes in volume
and changes in rates (in thousands):

<TABLE>
<CAPTION>


                                                    1997 change from 1996            1996 change from 1995
                                                 ---------------------------      --------------------------
                                                 Total     Change due to(4)       Total     Change due to(4)
                                                 Change    Volume      Rate       Change    Volume      Rate
                                                 ------    ------      ----       ------    ------      ----

<S>                                               <C>       <C>        <C>        <C>        <C>        <C>
Interest income on: Federal funds sold and other   ($328)    ($1,400)   $1,072     ($3,395)   ($2,606)   ($789)
                    Investment securities(1)       1,752        (156)    1,908       9,466      9,697     (231)
                    Loans held for resale          1,720       1,973      (253)      3,052      2,790      262
                    Loans and leases (1)(2)(3)    34,061      39,782    (5,721)     17,166     17,844     (678)
---------------------------------------------------------------------------------------------------------------
                                                  37,205      40,199    (2,994)     26,289     27,725   (1,436)
---------------------------------------------------------------------------------------------------------------
Interest expense on: NOW deposits                  3,024       2,973        51       2,725        919    1,806
                     Savings deposits              1,450        (652)    2,102       1,311        762      549
                     Money market deposits        (3,574)     (3,968)      394         197     (1,641)   1,838
                     Time deposits                (9,541)     (2,623)   (6,918)    (13,919)   (13,452)    (467)
                     Short-term borrowings        (3,628)     (2,255)   (1,373)     (1,759)    (3,079)   1,320
                     FHLB borrowings              (4,502)     (4,962)      460         780      1,217     (437)
                     Long-term debt               (4,422)     (4,543)      121         139        198      (59)
---------------------------------------------------------------------------------------------------------------
                                                 (21,193)    (16,030)   (5,163)    (10,526)   (15,076)   4,550
---------------------------------------------------------------------------------------------------------------
Net Interest Income Change - Tax Equivalent      $16,012     $24,169   ($8,157)    $15,763    $12,649   $3,114
---------------------------------------------------------------------------------------------------------------

(1)  Interest income and yields are adjusted to a fully taxable-equivalent basis
     using a 35% tax rate.
(2)  Non-performing loans are included in the average balances.
(3)  Interest on loans includes fees on loans of $6,523,000 in 1997, $5,954,000
     in 1996, and $3,696,000 in 1995.
(4)  The change in interest due to both rate and volume has been allocated to
     the volume and rate changes in proportion to the absolute dollar amounts of
     each change.
                                       60
<PAGE>
</TABLE>

GAP

Interest rate sensitivity is evidenced by the changes in net interest income and
net interest margin relative to changes in market interest rates.  One indicator
of interest  rate  sensitivity  is GAP,  which  measures  the volume  difference
between  interest rate sensitive  assets and  liabilities.  The following  table
apportions the balance sheet at December 31, 1997,  into rate sensitive  periods
based on the repricing or maturity  dates of the various  cash-flow  streams (in
thousands).


                                      61

<PAGE>

<TABLE>
<CAPTION>
                                                                        Rate-Sensitive
---------------------------------------------------------------------------------------------------------------------
                                              1 to 90    91 to 180    181 to 360   1 to 2      Beyond
                                               Days         Days         Days      Years       2 Years       Total
---------------------------------------------------------------------------------------------------------------------
<S>                                         <C>          <C>         <C>         <C>          <C>          <C>
       Federal funds sold and other         $   27,228   $       -   $        -  $        -   $        -   $   27,228
       Investment securities                   300,189      50,838      132,199     159,565      976,997    1,619,788
       Loans held for resale                    16,134       3,193       21,833       1,895            -       43,055
       Consumer loans                          360,682     119,823      220,418     350,150      502,674    1,553,747
       Consumer mortgages                      112,868     110,925      162,332      72,512      403,590      862,227
       Commercial real estate loans            507,991      57,788      116,623     142,936      559,585    1,384,923
       Commercial loans                        653,298      21,314       22,199      34,920      179,938      911,669
---------------------------------------------------------------------------------------------------------------------
           Total earning assets              1,978,390     363,881      675,604     761,978    2,622,784    6,402,637
---------------------------------------------------------------------------------------------------------------------
       Other assets                                  -           -            -           -      438,700      438,700
---------------------------------------------------------------------------------------------------------------------
            TOTAL ASSETS                    $1,978,390   $ 363,881   $  675,604  $  761,978   $3,061,484   $6,841,337
---------------------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
       NOW deposits                         $  226,385   $       -   $        -  $        -   $  385,465   $  611,850
       Savings deposits                         69,230           -            -           -      169,492      238,722
       Money market deposits                   366,772       9,839        9,839           -      335,277      721,727
       Time deposits                         1,218,939     359,177      465,119     603,034      377,433    3,023,702
       Short-term borrowings                   404,915         200          100      20,675            -      425,890
       FHLB borrowings                         110,142      27,350       43,925      43,689       23,044      248,150
       Long-term debt                            1,972          44            -           -       99,777      101,793
---------------------------------------------------------------------------------------------------------------------
         Total interest-bearing liabilities  2,398,355     396,610      518,983     667,398    1,390,488    5,371,834
---------------------------------------------------------------------------------------------------------------------
       Demand deposits                               -           -            -           -      637,164      637,164
       Other liabilities                             -           -            -           -      146,854      146,854
       Shareholders' equity                          -           -            -           -      685,485      685,485
---------------------------------------------------------------------------------------------------------------------
           TOTAL LIABILITIES AND
               SHAREHOLDERS' EQUITY         $2,398,355   $ 396,610   $  518,983  $  667,398   $2,859,991   $6,841,337
---------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity                   $ (419,965)  $ (32,729)  $  156,621  $   94,580   $  201,493
Cumulative GAP                              $ (419,965)  $(452,694)  $ (296,073) $ (201,493)
---------------------------------------------------------------------------------------------------------------------
</TABLE>



                                      62

<PAGE>


Other Liquidity Elements

The  predominant  source of income from earning  assets is derived from the loan
portfolio. Commercial loans and commercial loans secured by real estate comprise
49% of total  loans and are  closely  monitored  in terms of the volume of loans
which are sensitive to changes in interest rates.  The following table shows the
maturity of commercial  loans and commercial  loans secured by real estate as of
December 31, 1997(in thousands):
<TABLE>
<CAPTION>

                                                    After
                                                   One But
                                                   Within      After
                                       Within       Five       Five
                                      One Year      Years      Years       Total
------------------------------------ ----------- ---------- ----------- ------------
<S>                                     <C>        <C>         <C>          <C>
Commercial                              $485,357   $265,354    $160,958     $911,669
Commercial real estate                   273,842    431,993     679,088    1,384,923
------------------------------------ ----------- ---------- ----------- ------------
                                        $759,199   $697,347    $840,046   $2,296,592
------------------------------------ ----------- ---------- ----------- ------------
Loans maturing after one year with:
Fixed interest rates:
 Commercial                                        $137,266     $69,143
 Commercial real estate                             208,622     347,346
Variable interest rates:
 Commercial                                         128,088      91,815
 Commercial real estate                             223,371     331,742
------------------------------------ ----------- ---------- ----------- ------------
Total                                              $697,347    $840,046
------------------------------------ ----------- ---------- ----------- ------------
</TABLE>

Deposits with balances  exceeding  $100,000 and  short-term  borrowings  are not
considered core funding sources because they are generally  short-term in nature
and are subject to  competitive  bids.  The  following is a maturity  summary of
deposits of $100,000 or more at December 31, 1997 (in thousands):

                                     Certificates of       Other Time
                                        Deposit of        Deposits of
                                     $100,000 or more   $100,000 or more
----------------------------------- ------------------ ------------------
3 months or less                              $139,618             $4,473
Over 3 months through 6 months                  57,530              3,881
Over 6 months through 12 months                 45,997              5,969
Over 12 months                                  83,824             24,109
----------------------------------- ------------------ ------------------
Total                                         $326,969            $38,432
----------------------------------- ------------------ ------------------

                                      63

<PAGE>

The following  table  presents the amounts and interest  rates for federal funds
purchased and security  repurchase  agreements  for each of the last three years
(in thousands):
<TABLE>
<CAPTION>

                                                   1997        1996         1995
---------------------------------------------- ------------ ----------- ------------
<S>                 <C>                            <C>         <C>          <C>
Balance at December 31,                            $399,730    $368,886     $312,494
Weighted average interest rate at year end            4.75%       4.75%        4.52%
Maximum amount outstanding at any month end        $405,268    $377,727     $322,256
Average amount outstanding during the year         $367,102    $307,225     $246,357
Weighted average interest rate during the
  year                                                4.78%       4.58%        5.00%
---------------------------------------------- ------------ ----------- ------------
</TABLE>

Investment Portfolio Analysis

Keystone's  investment policy specifically  addresses the use of derivatives and
other hedging activities and provides for specific  restrictions on the type and
extent of Keystone's exposure.

A  narrow  definition  of  financial   derivatives  includes  off-balance  sheet
instruments such as futures,  forwards, swaps, and options which are designed to
manage various types of business risks.  Keystone has historically  made limited
use of the  off-balance  sheet  derivatives  known as "interest rate swaps" as a
means to manage the income  exposure  associated with changes in interest rates,
as well as forward commitments,  put options, and short sales to manage exposure
to market risk.

A broader definition of derivatives would include any financial instrument which
derives its value, or contractually  required cash flows, from the price of some
other  security  or  index.  Keystone's  investment  in this  form of  financial
derivatives  is  limited to some forms of  collateralized  mortgage  obligations
(CMO's) and structured  notes. The following is a brief description of both "on"
and  "off"-balance  sheet  derivatives  and other hedging  activity  utilized by
Keystone.

Interest Rate Swaps

Interest rate swaps are  "off"-balance  sheet  instruments which provide for the
exchange of interest payments on a specified  principal amount (notional amount)
for a specified  period of time.  Investment  policy  requires that Keystone may
execute a swap contract only as a hedge of an interest rate position and not for
the purpose of  speculation or trading.  That policy further  requires that swap
contracts  must be approved in advance by the  affiliate  banks'  president  and
parent company  executives,  and that swap  counterparties  must be reviewed for
credit-worthiness on at least an annual basis. Keystone's policy also sets forth
specific  limitations on exposure to a single counterparty and sets an aggregate
limit on the notional value of interest rate swaps at 50% of capital.

Other Hedging Activity

Forward  mortgage  commitments,  as well as put  options and short sales of U.S.
Treasury securities,  have been used to reduce the market risk,  associated with
interest  rate  fluctuations,  of  fixed-rate  consumer  mortgages  and indirect
automobile  loans held for sale. In accordance with  Keystone's  written policy,
such  transactions  must be ratified by the Board of  Directors  and can only be
executed  as a hedge of market risk and not for the  purpose of  speculation  or
trading. Such activity is self-limited by the level of loan production.

CMO's

Purchases of CMO's are  restricted  principally to U.S.  Government  issues that
have passed various regulatory  standards  associated with mortgage extension or
prepayment risk. All Keystone CMO holdings can be  disaggregated  into groupings
which more  accurately  define the extent of mortgage  extension  or  prepayment
risk, and include PAC's (planned  amortization  class),  VADM's (very accurately


                                      64

<PAGE>

defined maturity), TAC's (targeted amortization class) and others. All CMO's are
subject to at least annual  examination  to ensure  compliance  with  regulatory
standards.  CMO's which fail to meet these  standards are disclosed to the Board
of Directors and are subjected to special review and monitoring procedures.

Other more volatile forms of CMO's include  interest-only,  principal-only,  and
inverse  floating  bonds,  which are subject to even more  stringent  limits set
forth in Keystone's  investment policy. At December 31, 1997,  Keystone had none
of  these  volatile  forms  of  CMO's  in  its  investment  portfolio.  An  even
higher-risk form of CMO's, known as CMO residuals,  are specifically  designated
as prohibited investments under Keystone's investment policy.

Structured Notes

A structured note is a debt security whose cash flow characteristics,  including
coupon rate,  redemption  amount or  redemption  rate may be dependent on one or
more indices or future cash flow adjustment.  Keystone's  activity in structured
notes has been  limited  to U.S.  Government  Agency  index  amortization  notes
(IANs),  whereby the principal balance amortizes according to the prepayments on
a specific collateral pool of mortgage-backed securities.  Keystone's investment
in  structured  notes  is also  limited  by  investment  policy  guidelines  and
aggregated $9,968,000 at the end of 1997.

The  following   presentation   provides  an  analysis  of  the  composition  of
investments  included in both  investments  available-for-sale  and  investments
held-to-maturity. This comparison includes a detailed presentation of derivative
financial  instruments  included  in the U.S.  Government  agency  category  (in
thousands):


                                                  December 31, 1997
-------------------------------------- ----------------------------------------
                                         Amortized      Market     Unrealized
                                           Cost         Value      Gain/(Loss)
-------------------------------------- ------------- ------------ -------------
U.S. Government Agency Obligations:
 Conventional                               $671,826     $674,358       $2,532
 Mortgage-backed                             125,450      127,693        2,243
 CMO's:
     PAC's(1)                                 21,611       21,610           (1)
     VADM's (2)                               10,966       11,023           57
     TAC's (3)                                 6,190        6,179          (11)
     Other                                    22,710       23,131          421
 Structured notes                              9,968       10,100          132
-------------------------------------- ------------- ------------ -------------
 Subtotal                                    868,721      874,094        5,373
-------------------------------------- ------------- ------------ -------------
Negotiable money market instruments          178,455      178,404          (51)
U.S. Treasury securities                     193,099      194,120        1,021
State and political subdivision
 obligations                                 216,397      222,921        6,524
Corporate and other                          149,975      160,079       10,104
-------------------------------------- ------------- ------------ -------------
     Total                                $1,606,647   $1,629,618      $22,971
-------------------------------------- ------------- ------------ -------------

(1)  A PAC(planned  amortization class) has a principal payment schedule that is
     guaranteed within a predetermined  range of mortgage prepayment rates, i.e.
     has built-in call protection,  lower prepayment risk and lower average life
     variability.
(2)  A VADM(very  accurately  defined  maturity) has a stated final payment date
     which provides protection from mortgage payment extension risk.
(3)  A TAC(targeted  amortization class) has a payment schedule that offers some
     call  protection  if  mortgage  prepayments  increase,  but  little  to  no
     extension protection if prepayments slow down.


                                      65

<PAGE>

Credit Risk and Loan Portfolio Analysis

Keystone's  objective as a lending  institution is to profitably meet the credit
needs of customers within the communities in which it operates.  Credit risk and
lending  practices are governed by written  policies and  procedures  which have
been  designed  to  provide  for an  acceptable  level of risk and  compensating
return. These policies have also established requirements for lending authority,
underwriting practices, collateral standards, lending concentrations, geographic
limits, and other important elements of the credit process. Significant policies
are reviewed, at a minimum, on an annual basis.

Keystone  maintains a corporate loan review function which is independent of the
underwriting and administrative process. Loan review performs continuous reviews
to  determine  adherence to credit  policies,  assess the  effectiveness  of the
credit process, and objectively  evaluate the quality of the loan portfolio.  In
connection with these reviews, adversely classified credits within the portfolio
are  identified and included on a classified  loan report,  which is reviewed by
management on a monthly basis.

Loan Composition

Keystone maintains a diverse loan portfolio.  The composition of Keystone's loan
portfolio is illustrated in the following comparison of loan balances at the end
of each of the last five years (in thousands):


                      1997      1996          1995         1994         1993
---------------- ----------- ----------- ------------ ------------ -------------
Commercial:
Commercial and
  industrial        $637,617    $547,153     $487,843     $426,434      $404,171
Floor plan
  financing          203,189     172,248      167,504      150,066       118,362
Obligations of
  political
  subdivisions        70,863      73,749       64,677       60,160        58,915
---------------- ----------- ----------- ------------ ------------ -------------
                     911,669     793,150      720,024      636,660       581,448
---------------- ----------- ----------- ------------ ------------ -------------
Commercial Real
Estate:
Commercial and
  industrial       1,080,776     843,746      828,508      840,910       799,614
Multi-family
  residential        130,148      99,074       92,544       84,548        91,288
Obligations of
  political
  subdivisions        40,930      29,686       33,010       31,023        27,037
Construction
  and land
  development        117,503      91,755       86,983       68,652        63,074
Agricultural          15,566      12,756       13,363       14,364        14,424
---------------- ----------- ----------- ------------ ------------ -------------
                   1,384,923   1,077,017    1,054,408    1,039,497       995,437
---------------- ----------- ----------- ------------ ------------ -------------
Consumer:
Real estate          862,227   1,186,663    1,206,547    1,184,346     1,042,375
Installment          704,242     626,573      631,584      655,163       550,152
Home equity          473,365     311,086      256,505      227,110       185,083
Personal lines
  of credit           41,123      40,498       43,244       46,392        30,645
Leases               335,017     301,483      184,554      111,732        55,070
---------------- ----------- ----------- ------------ ------------ -------------
                   2,415,974   2,466,303    2,322,434    2,224,743     1,863,325
---------------- ----------- ----------- ------------ ------------ -------------
Total             $4,712,566  $4,336,470   $4,096,866   $3,900,900    $3,440,210
---------------- ----------- ----------- ------------ ------------ -------------

                                      66

<PAGE>

Concentration Risk

The diversity of Keystone's loan portfolio is directly  influenced by Keystone's
efforts to manage credit risk. Keystone's credit policy has established specific
limits on the level of credit to a borrower or single group of borrowers,  which
serve to reduce  concentration  risk. This diversity is evidenced by the absence
of industry and customer concentrations.

o  The largest group of customers in a single industry to whom Keystone provides
   credit  extensions  is  automobile  dealers.  At  December  31,  1997  credit
   extensions  totaling  $258,547,000 were  outstanding,  and consisted of floor
   plan and related commercial loans and mortgages.

o  Keystone  has  no  dependence  on a  single  customer.  The  top  ten  credit
   relationships  account for only 4% of the total loans  outstanding at the end
   of 1997.

Geographic Risk

In addition to industry or customer concentrations, credit risk is also affected
by the geographic characteristics of the loan portfolio. The credit risk profile
of  Keystone's  portfolio  is  enhanced by the stable  economic  climate and the
industry diversification of Keystone's-defined market.

o  The  overwhelming  majority of Keystone's  lending  activities  are conducted
   within its own defined market.

o  Keystone has no loan exposure in foreign countries.

Categories of Exposure

Keystone's  loan  portfolio can be evaluated in terms of its exposure to certain
types of loans  which are  presumed to exhibit a higher  degree of credit  risk.
Examples   include  credit   extensions  for  highly   leveraged   transactions,
speculative real estate ventures, or certain commercial real estate loans. These
types of loans  may  subject a lender  to a higher  level of loss from  economic
downturns, dramatic changes in interest rates, or depressed real estate markets.
The  following  comments  provide  insight into this aspect of  Keystone's  loan
profile.

o  Keystone has not been active in the organization, syndication, or purchase of
   highly leveraged transactions.

o  Keystone's  commercial real estate lending practice requires an evaluation of
   the  borrower's  ability  to repay  debt  from  cash  flow  provided  through
   operations.  The  underlying  value of real  estate is viewed as a  secondary
   source of repayment.  In addition,  Keystone's  lending  practices  generally
   require guarantees,  endorsements,  and other forms of recourse which provide
   additional security for such credits.

Keystone  has examined its exposure to  commercial  and  commercial  real estate
loans. This examination included a review of all customer account  relationships
and classification of credits into risk-related categories.  The following table
summarizes the commercial and commercial  real estate  segments of the portfolio
(in thousands):

                                    December 31, 1997
-----------------------------------------------------------
                                                Average
                                Balance       Relationship
----------------------------- ------------ - --------------
Commercial loans                  $911,669
Commercial real estate           1,384,923
----------------------------- ------------ - --------------
                                $2,296,592             $121
----------------------------- ------------ - --------------

At December 31, 1997, approximately 37% of the balance of commercial real estate
was nonowner occupied.  Individual  categories of nonowner-occupied in excess of
$75 million  were office  buildings  and  apartment/rental  units which  totaled
$123,356,000 and $129,773,000, respectively.

                                      67

<PAGE>

Secondary Market Activity

Keystone  sells  a  significant  portion  of its  fixed  consumer  mortgages  to
secondary  market  investors.  Keystone  recognizes  an income  stream  from the
servicing of these loans subsequent to the sale. The sale of these loans enables
mortgage loans to be self-funding.

Allocation of Allowance

The allowance  for credit  losses is  maintained  at a level  adequate to absorb
losses  associated  with  credit  risk.  Management  exercises  its  judgment to
allocate the  allowance to specific  categories of loans.  The  following  table
summarizes the allocation of the allowance for credit losses at December 31, (in
thousands):


                             1997       1996      1995       1994       1993
-------------------------- --------- ---------- --------- ---------- ----------
Commercial                   $11,266     $9,944   $11,450    $11,168    $11,564
Real estate secured:
  Commercial                  12,630     11,922    11,969     12,104     13,338
  Consumer                     1,849      2,324     2,251      2,563      2,957
Consumer                      16,844     12,693     7,724      7,036      6,854
General risk                  22,502     19,373    22,021     20,837     16,371
-------------------------- --------- ---------- --------- ---------- ----------
                             $65,091    $56,256   $55,415    $53,708    $51,084
-------------------------- --------- ---------- --------- ---------- ----------

While management has apportioned the allowance to the different loan categories,
the  allowance is general in nature and is available  for the loan  portfolio in
its entirety.

Keystone  assesses the  reasonableness  of the  allocation  of the  allowance by
preparing a percentage-based comparison of the allocated allowance to the actual
loan portfolio. At December 31, the following comparison is provided:

                                1997       1996      1995       1994      1993
---------------------------- ---------- ---------- --------- ---------- --------
Commercial:
% of Total loans                   19%        18%       18%        16%       17%
% Allocation of allowance          17%        18%       21%        21%       23%
Commercial real estate:
% of Total loans                   29%        25%       26%        27%       29%
% Allocation of allowance          19%        21%       22%        23%       26%
Consumer real estate:
% of Total loans                   18%        27%       29%        30%       30%
% Allocation of allowance           3%         4%        4%         5%        6%
Consumer:
% of Total loans                   34%        30%       27%        27%       24%
% Allocation of allowance          26%        23%       14%        13%       13%
General Risk:
% Allocation of allowance          35%        34%       39%        38%       32%
---------------------------- ---------- ---------- --------- ---------- --------
Total loans                       100%       100%      100%       100%      100%
---------------------------- ---------- ---------- --------- ---------- --------
Allocation of allowance           100%       100%      100%       100%      100%
---------------------------- ---------- ---------- --------- ---------- --------

                                      68

<PAGE>
                             Quarterly Information
Income Performance

                                                 1997
--------------------------------------------------------------------------------
  (in thousands, except per  Fourth         Third        Second       First
   share data                Quarter        Quarter      Quarter      Quarter
------------------------- -------------- ------------- ------------ ------------
Interest income                $131,273      $132,215     $126,804     $120,446
Interest expense                 60,650        60,446       57,341       54,057
------------------------- -------------- ------------- ------------ ------------
Net interest income              70,623        71,769       69,463       66,389
Provision for credit
losses                            3,544         4,319        3,659        3,794
------------------------ -------------- ------------- ------------- ------------
Net interest income after
 provision                       67,079        67,450       65,804       62,595
Noninterest income               21,681        20,825       20,429       20,926
Security transactions             2,842         3,524         (444)         149
Noninterest expense              55,329        55,531       63,768       51,362
------------------------ -------------- ------------- ------------- ------------
Income before income taxes       36,273        36,268       22,021       32,308
Income taxes                     10,709        11,668        7,039        9,537
------------------------ -------------- ------------- ------------- ------------
Net income                      $25,564       $24,600      $14,982      $22,771
------------------------ -------------- ------------- ------------- ------------
Tax effect of security
   transactions                    $995        $1,233        ($155)         $52
------------------------ -------------- ------------- ------------- ------------
Earnings per share:
 Basic                            $0.49         $0.48        $0.29        $0.44
 Diluted                           0.49          0.47         0.29         0.43
Dividends per share               $0.28         $0.26        $0.26        $0.26
Average shares outstanding   51,979,519    51,834,406   51,320,373   51,630,443
------------------------ -------------- ------------- ------------- ------------

                                                  1996
--------------------------------------------------------------------------------
(in thousands, except per    Fourth         Third        Second       First
    share data)              Quarter        Quarter      Quarter      Quarter
------------------------ -------------- ------------- ------------- ------------
Interest income                $120,864      $119,070     $116,634     $116,852
Interest expense                 54,470        53,955       51,139       51,737
------------------------ -------------- ------------- ------------- ------------
Net interest expense             66,394        65,115       65,495       65,115
Provision for credit
   losses                         3,778         2,494        2,307        2,134
------------------------ -------------- ------------- ------------- ------------
Net interest income after
   provision                     62,616        62,621       63,188       62,981
Noninterest income               18,727        17,861       16,814       17,252
Security transactions                (2)           29          314          530
Noninterest expense              49,475        49,716       47,650       49,404
------------------------ -------------- ------------- ------------- ------------
Income before income taxes       31,866        30,795       32,666       31,359
Income Taxes                      9,077         8,508        9,897        9,698
------------------------ -------------- ------------- ------------- ------------
Net income                      $22,789       $22,287      $22,769      $21,661
------------------------ -------------- ------------- ------------- ------------
Tax effect of security
   transactions                    $(1)           $10         $110         $186
------------------------ -------------- ------------- ------------- ------------
Earnings per share:
 Basic                            $0.44         $0.43        $0.43        $0.42
 Diluted                           0.44          0.42         0.43         0.41
Dividends per share              $ 0.26         $0.24        $0.24        $0.24
Average shares outstanding   52,134,311    52,243,456   52,116,068   52,041,141
------------------------ -------------- ------------- ------------- ------------

                                      69

<PAGE>

STOCK INFORMATION

Market Prices and Dividends

The common stock of Keystone Financial, Inc. trades on The Nasdaq Stock MarketSM
under the symbol KSTN. The Nasdaq Stock MarketSM, which began operation in 1971,
is the world's first electronic  securities market and the fastest growing stock
market in the U.S. Nasdaq utilizes  today's  information  technologies-computers
and  telecommunications-to  unite its participants in a screen-based,  floorless
market. This competitive marketplace,  along with the many products and services
available  to issuers  and their  shareholders,  attracts  today's  largest  and
fastest growing companies to Nasdaq. More domestic and foreign companies list on
Nasdaq than on all other U.S. stock markets  combined.  At the close of business
on January 30, 1998, there were approximately 15,056 shareholders of record.

The table below sets forth the  quarterly  range of high and low  closing  sales
prices for Keystone  common stock as reported by NASDAQ and  dividends  declared
per common share.

                         Quarterly Closing      Dividends
                         Sales Price Range      Declared
-------------------- ------------ ------------ ------------
                         High         Low
-------------------- ------------ ------------ ------------
1997
-------------------- ------------ ------------ ------------
I                          $28.00       $24.88        $0.26
II                          33.25        24.50         0.26
III                         38.88        30.56         0.26
IV                          41.00        34.00         0.28
-------------------- ------------ ------------ ------------
                                                      $1.06
==================== ============ ============ ============
1996
-------------------- ------------ ------------ ------------
I                          $22.83       $19.83        $0.24
II                          22.75        20.75         0.24
III                         25.33        21.67         0.24
IV                          27.75        24.50         0.26
-------------------- ------------ ------------ ------------
                                                      $0.98
==================== ============ ============ ============

While  Keystone is not obligated to pay cash  dividends,  the Board of Directors
presently intends to continue the policy of paying quarterly  dividends.  Future
dividends  will depend,  in part,  upon the earnings and financial  condition of
Keystone.

The payment of dividends is subject to applicable regulatory rules and policies.
See the dividend  and loan  restriction  information  listed in the notes to the
consolidated financial statements.

                                      70

<PAGE>