EXHIBIT 13.1

Selected Financial Data

<TABLE>
<CAPTION>

(in thousands except per share data)                Year Ended December 31,
                                            1998       1997         1996         1995       1994
---------------------------------------------------------------------------------------------------
Operations:
---------------------------------------------------------------------------------------------------
<S>                                    <C>        <C>           <C>         <C>        <C>
Interest income                        $  517,649 $   510,738   $  473,420  $  446,786 $  386,894
Interest expense                          240,684     232,494      211,301     200,775    152,463
---------------------------------------------------------------------------------------------------
Net interest income                       276,965     278,244      262,119     246,011    234,431
Provision for credit losses                17,150      15,316       10,713       8,568     10,324
Noninterest income                        108,813      89,932       71,525      58,137     51,921
Noninterest expense                       223,189     225,990*     196,245     182,130    182,333
Income tax expense                         45,692      38,953       37,180      34,001     25,907
---------------------------------------------------------------------------------------------------
Net Income                             $   99,747 $    87,917*  $   89,506  $   79,449  $  67,788
---------------------------------------------------------------------------------------------------
Pre-tax security gains, included above $  11,018  $     6,071   $      871  $    1,789  $     978
---------------------------------------------------------------------------------------------------

Net interest spread                       3.71%        3.87%         3.87%      3.90%       4.11%
Impact of noninterest funds                .71          .72           .74        .71         .57
---------------------------------------------------------------------------------------------------
Net interest margin                       4.42%        4.59%         4.61%      4.61%       4.68%
---------------------------------------------------------------------------------------------------

Per Share:
-----------------------------------------------------------------------------------------------------
Net income:
     Basic                                $1.94       $1.70*        $1.72      $1.60        $1.38
     Diluted                               1.92        1.68*         1.70       1.59         1.37
Dividends                                  1.13        1.06          0.98       0.93         0.86
Dividend payout ratio                     58.25%      63.65%        56.98%     58.13%       54.85%
Average shares outstanding             51,446,436  51,692,534   52,118,819   49,557,082  49,188,961
-----------------------------------------------------------------------------------------------------
Balances at December 31:
-----------------------------------------------------------------------------------------------------
Loans & leases                       $  4,459,783 $ 4,712,566  $ 4,336,470  $ 4,096,866 $ 3,900,900
Allowance for credit losses               (60,274)    (65,091)     (56,256)     (55,415)    (53,708)
Total assets                            6,968,227   6,841,337    6,450,579    6,213,222   5,796,576
Deposits                                5,231,718   5,233,165    5,059,721    4,993,608   4,726,842
FHLB borrowings & long-term debt          557,266     349,943      226,776      168,564     155,752
Shareholders' equity                      661,665     685,485      660,406      621,766     533,643

Ratios:
-----------------------------------------------------------------------------------------------------
Return on average assets                   1.45%       1.33%         1.44%      1.35%        1.23%
Return on average equity                  14.63       13.27         14.09      14.00        12.90
Equity to assets, average                  9.92        9.99         10.19       9.66         9.53
Risk adjusted capital ratios:
 Leverage ratio                            8.66%       9.15%        10.03%     10.12%        9.59%
 "Tier 1"                                 12.59       12.50         14.43      14.48        13.75
 "Total" capital                          13.84       13.75         15.66      15.67        15.00


Loans to deposits, year-end               85.25%      90.05%        85.71%     82.04%       82.53%
Allowance for credit losses to loans       1.35        1.38          1.30       1.35         1.38

Nonperforming assets to loans              0.65%       0.55%         0.65%      0.72%        0.87%
Loans 90 days past due                     0.64        0.70          0.46       0.41         0.25
-----------------------------------------------------------------------------------------------------
Total risk elements to loans               1.29%       1.25%         1.11%      1.13%        1.12%
---------------------------------------------------------------------------------------------------
*Merger-related  special  charges in 1997  reduced net income by $8.6 million or
$0.17 per share and increased noninterest expenses by $11.4 million.
</TABLE>

                                       20
<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).  The review will include comparisons of financial performance
for 1998,  1997,  and 1996.  Results for 1997 were  influenced  by the impact of
special charges  incurred in connection with a merger that was completed in that
year. Unless otherwise indicated, all year-to-year comparisons will be presented
exclusive of these special charges.  Throughout this review, net interest income
and the yield on earning assets are presented on a fully-tax  equivalent  basis.
Additionally,   balances  represent  average  daily  balances  unless  otherwise
indicated.

1998 Summary

Performance Results

Keystone's 1998 performance, like that of many financial institutions, reflected
underlying  strength  despite forces which  constrained  the rate of performance
improvement.   Results  were   influenced   by  both  changes  in  national  and
international  economic  conditions and by Keystone's  strategic  evolution as a
diversified  financial  services company.  On the economic front, low inflation,
reduced interest rates, higher consumer confidence, and strong consumer spending
all contributed to a continuation  of our national  economic  expansion.  On the
other  hand,  the  third  quarter  stock  market  correction,   rising  consumer
delinquencies,  the fallout from the Asian  crisis,  and the  possibility  of an
inverted yield curve all combined to increase the  possibility  of  recessionary
pressures beyond 1998.

In much the same  way,  Keystone's  1998  performance  was  influenced  by these
contrasting  conditions.  Net income reached $99.7 million during 1998, a modest
3.4% improvement over core 1997 performance results of $96.5 million.  Likewise,
EPS rose to $1.94 versus core EPS of $1.87,  or 3.7% growth.  Keystone's ROA and
ROE were 1.45% and 14.63%,  respectively,  compared to 1.46% and 14.54% in 1997.
Comparable  peer group ratios for Keefe,  Bruyette,  and Woods,  Inc.  financial
institutions with assets between and $5 and $10 billion were 1.33% and 14.43%.

The three  major  essentials  of  improved  profit  performance  for a financial
institution are increased  revenues,  management of credit quality,  and control
over operating expenses. Keystone's revenue base expanded during 1998, including
the  impact  of strong  growth  in  noninterest  revenue  sources  such as asset
management,  mortgage  banking,  and electronic  banking.  Conversely,  Keystone
experienced  a slight  decline in its largest  source of revenue,  net  interest
income.  Low  interest  rates,  which helped  create  conditions  wherein  asset
management and mortgage banking  activities have  flourished,  also created more
competitive  conditions that reduced the spread between earning asset yields and
funding costs,  and compressed net interest  income.  Similarly,  while consumer
spending and lower rates spurred  increases in the  consumption  of credit,  the
number of consumer defaults also increased, raising Keystone's charge-off levels
and loan loss provision.  Finally,  management's efforts in controlling overhead
expenses  combined  with the  successful  integration  of 1997  merger  partners
resulted in only modest growth in operating expenses and contributed to improved
overall performance in 1998.

Strategic Evolution

Keystone's desire for improved performance,  combined with its ongoing evolution
into a diversified  provider of financial  services  within the  communities  it
serves,  was the catalyst for the decision to combine its seven separate banking
charters at the end of 1998. Effective December 31, 1998, Keystone's seven banks
operate under one name: Keystone Financial Bank, N.A. This change will represent
a significant  adjustment  within  Keystone's  internal  operations.  Customers,
however, will continue to be served under the banner of "Relationship  Banking",
with a corporate culture  emphasizing  community banking and localized  service.
Externally,  the change will provide  Keystone with a common platform from which
to  serve  customers   throughout  its  markets,   expanding   delivery  channel
capabilities while linking product lines through a common branding strategy.

                                       21
<PAGE>

Internally,  the changes  will  increase the focus on customer  needs,  and will
simplify and standardize work processes for Keystone associates.

External Issues and Economic Conditions

The U.S.  economy  began  1998  under the cloud of  potential  fallout  from the
collapse of the Asian  economy.  Though the conditions in Asia had little direct
effect on Keystone or the customers it serves, the ripple effect on the national
economy  effected some erosion of consumer  confidence and raised  concerns over
the ability to sustain the largest expansion in U.S. history.

Throughout 1998,  interest rates exhibited a steady decline,  which had a direct
impact  on  financial  institutions.  Since  rates  began  the year at what were
thought to be historically low levels, further declines in interest rates during
1998 had a multi-faceted influence on bank performance. The declines reduced the
amount of interest that financial  institutions could pay to depositors,  making
growth  in  traditional  funding  sources  difficult.  Furthermore,   meaningful
reductions  in  deposit  rates as a means  to  lower  funding  costs  were  less
practicable  given the already low rates being paid. The steady decline in rates
also became a catalyst for  businesses and consumers to refinance or renegotiate
existing debt, which reduced asset yields and increased  competitive  pressures.
Finally,  the rate decline was  accompanied  by a flattening of the yield curve,
creating little opportunity to increase asset yields by extending maturities. In
summary,  the trends in interest  rates during 1998 served to create  conditions
which,  over  the  course  of the  year,  compressed  net  interest  margin  and
constrained growth in net interest income.

Interest rate trends were more conducive to  improvements  in revenues from both
asset management activities and mortgage banking.  Asset management provides fee
income from investment  management  services,  personal trust,  employee benefit
plan management,  mutual funds, annuities, and employee benefits record keeping.
Employee  benefit plan sponsors,  as well as individual  consumers of investment
products,  were  proactive  in seeking  higher  returns  through  these  product
offerings  during  the low  interest  rate  environment.  The  proliferation  of
employer-sponsored  plans and Keystone's  proven ability to provide  competitive
services through specialized  subsidiaries such as Martindale Andres (investment
services) and MMC&P  (benefits  administration  and  consulting)  contributed to
revenue  growth.  Keystone also provided  competitive  and convenient  access to
consumer investment product offerings that included brokerage  services,  mutual
funds, annuities, and other programs.  Similarly,  interest rate trends played a
key  role  in the  expansion  of  revenues  from  mortgage  banking  activities.
Keystone's  success in this area has been  historically  driven by the purchased
money mortgage business,  with less dependence on the refinancing segment of the
market. Like many mortgage banking companies, Keystone was favorably affected by
the influence of lower rates on home purchases and refinancing  activity,  which
contributed to the highest level of mortgage loan volume in its history.

External  issues and  economic  conditions  went beyond the trend  toward  lower
interest rates. During the third quarter, concerns over the unprecedented growth
in stock market valuations led to a significant market correction.  Concern over
the third quarter  correction,  accompanied  by the threat of a protracted  bear
market,  was allayed  somewhat by the fourth  quarter  revival in stock  prices.
Nonetheless,  consumer  confidence  was shaken by the  potential  for  increased
recessionary risk.

Adding to the  complexity  of economic  trends was the  looming  Year 2000 (Y2K)
deadline.  During 1998,  Keystone  completed  the vast  majority of  programming
changes  necessary to achieve Y2K  readiness,  with final testing  scheduled for
completion in mid 1999.  Keystone has incurred  substantial  costs to ensure Y2K
readiness.  Despite these incremental costs,  overhead levels were controlled by
effective   management  of  the  workforce,   success  with  merger  integration
initiatives, and low inflation. At the same time, Keystone continued to make the
appropriate investment in technology necessary for revenue expansion,  including
the electronic banking network and process improvement initiatives.

                                       22
<PAGE>

Outlook for 1999

External  issues  and  economic  conditions  will  continue  to  be  factors  in
Keystone's 1999  performance  results.  These factors,  combined with Keystone's
efforts to evolve its seven banks into a single financial services company, will
provide substantial challenges. In connection therewith,  Keystone has announced
a first quarter 1999,  restructuring charge of approximately $15 million,  which
will help to facilitate its reorganization  under the single bank charter.  This
change,  together with the commitment of Keystone's  capable team of associates,
will allow  Keystone to simplify,  standardize,  and improve the  efficiency  of
internal  processes.  More  importantly,  these  changes  will set the stage for
Keystone's  continuing  emergence as the premier  financial  institution  in its
market  place.   This   emergence   will  manifest   itself   through   focused,
highly-trained,  financial  consultants and associates  capable of understanding
customer needs,  making  recommendations,  delivering  solutions,  and deepening
relationships with businesses and consumers.  It will emanate from the continued
development and expansion of Keystone's  product mix including both conventional
banking  products,  as well as new and  improved  offerings  such as  Keystone's
proprietary mutual funds, now known as the "Governor Funds". Finally, Keystone's
emergence  will be revealed in its ongoing  commitment to  relationship  banking
with  a  local,  community-based  emphasis.  The  year  will  bring  significant
challenges  and  unprecedented   opportunities   that  will  allow  Keystone  to
successfully  position  itself  closer  to its goal of  becoming  the  financial
institution of choice in the Mid-Atlantic region.

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
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.

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 74%
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.

                                       23
<PAGE>

The  following  table  compares  net  interest  income and net  interest  margin
components between 1998 and 1997 (in thousands):

<TABLE>
<CAPTION>

                                   1998                 1997                Change
                                       Yield/                Yield/               Yield/
                             Amount     Rate       Amount     Rate     Amount      Rate
-------------------------- ---------- --------- ----------- -------- ----------- --------
<S>                          <C>          <C>      <C>         <C>        <C>      <C>
Interest income              $526,218     8.15%    $519,598    8.32%     $6,620   (0.17)
Interest expense              240,684     4.44      232,494    4.45      (8,190)   0.01
-------------------------- ---------- --------- ----------- -------- ----------- --------
Net interest income          $285,534              $287,104             $(1,570)
-------------------------- ---------- --------- ----------- -------- ----------- --------
Interest spread                           3.71%                3.87%              (0.16)
Impact of noninterest                     0.71                 0.72               (0.01)
funds

-------------------------- ---------- --------- ----------- -------- ----------- --------
Net interest margin                       4.42%                4.59%              (0.17)
-------------------------- ---------- --------- ----------- -------- ----------- --------
*The change in net interest  income  consisted of unfavorable  volume  variances
totaling $961,000 and unfavorable rate variances totaling $609,000.
</TABLE>

Interest Rates

While  efforts to  improve  net  interest  margin  and net  interest  income are
influenced by pricing,  product mix and customer preferences,  the general level
of  interest  rates  and the shape of the  overall  yield  curve are also  major
factors.  By the end of 1997, it was the general  consensus  that rates were not
likely to experience dramatic easing, though some downward pressure was expected
if the economy cooled and inflation  remained under control.  In fact,  economic
growth did slow during 1998 and  inflation  remained  largely in check.  Overall
interest rates,  however,  declined more significantly than most observers would
have  predicted  at the  beginning  of the year.  The decline  was  particularly
notable given the more dramatic drop in longer term interest rates, which served
to flatten the slope of the U.S.  Treasury yield curve.  The average  difference
between the most  extreme  points on the curve,  the 3-month  T-bill and 30-year
bond rates,  was 142 basis  points in 1997,  and  dropped to 67 basis  points in
1998.  This trend,  if it were to  continue,  would reduce the  opportunity  for
financial institutions to improve their net interest margins.

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 extent of rate declines and the  corresponding
change in the yield curve between 1998 and 1997.

<TABLE>
<CAPTION>
         Three      Six       One       Two      Three     Five       Ten     Thirty
        Months    Months     Year      Years     Years     Years     Years     Years
------ --------- --------- --------- --------- --------- --------- --------- ---------
<C>        <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
1998       4.91%     5.02%     5.05%     5.13%     5.14%     5.15%     5.26%     5.58%
1997       5.18%     5.37%     5.60%     5.96%     6.07%     6.21%     6.34%     6.60%
</TABLE>

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.

                                       24
<PAGE>
Interest Income/Earning Assets

Interest  income grew  slightly  during the year from $519.6  million in 1997 to
$526.2  million in 1998,  an  increase of 1.3%.  Pricing  trends and product mix
played  significant roles in the  determination of interest income  performance.
Businesses  and consumers,  sensitized to the steady decline in interest  rates,
exhibited a higher propensity to renegotiate or refinance  existing  borrowings.
Consequently, asset yields and interest income came under measurable pressure.

While  Keystone  exhibited  growth  in its core  "Relationship  Banking"  credit
activities,  absolute  growth in the loan portfolio was mitigated by a number of
factors. As announced late in 1997,  Keystone undertook a strategic  curtailment
of its indirect lending  activities to reduce funding pressures and increase the
capacity  for  more  relationship-oriented   lending.  While  commercial  loans,
commercial  real estate loans,  and consumer  credits  exhibited  stable growth,
aggregate  loan growth  abated in the later  stages of 1998.  The run-off of the
remaining portfolio of indirect automobile loans and leases began to outpace the
growth in  relationship-based  credit  activities.  Likewise,  the  ongoing  and
successful  execution  of  Keystone's  mortgage  banking  operation,  which  has
resulted  in a  substantial  volume  of  fixed-rate  loans  that are sold in the
secondary  market,  has served to accelerate the run-off of the existing balance
sheet portfolio of  variable-rate  mortgage  loans.  On a combined basis,  these
factors  served to  moderate  both  absolute  growth in loan  volumes as well as
increases in interest income.

Reduced  aggregate  loan volumes  also  influenced  the yield on the  investment
portfolio.  During  the  course of the year,  the loan to  deposit  ratio  eased
somewhat  resulting in a higher  relative  level of  investments.  Interest rate
trends,  including the impact of both steadily  declining  rates and the flatter
yield  curve,  provided  less  opportunity  to price  these  higher  volumes  of
investments at more favorable rates.

Improvement  in earning  asset yields  during 1998  presented  many  challenges.
During  1998,  the earning  asset yield was 8.15%,  a decline of 17 basis points
from the yield of 8.32% recorded in 1997. Keystone will continue to focus on its
relationship  banking  approach,  balancing  customer  needs with an appropriate
value-added pricing strategy.

Interest Expense/Funding Sources

Improvement in net interest income is achieved by maximizing interest income and
minimizing  interest expense,  while  simultaneously  moderating the exposure to
interest rate risk factors. Like most financial institutions, Keystone's ability
to both attract  funding  through  deposit  vehicles and calibrate the impact of
lower rates with customer desire for higher returns,  made substantial increases
in the deposit funding base difficult.  Keystone  achieved deposit growth in its
more competitive product offerings such as free checking, the index money market
account (IMMA), and variable rate certificates of deposit.  Consumer preferences
for products which meet the dual objectives of responsiveness to liquidity needs
and competitive  returns sustained growth in these funding sources. As expected,
these same consumer  preferences  contributed to a decline in more  conventional
core deposit vehicles,  such as savings deposits,  mitigating the overall growth
in deposit  funding.  While the lower rate  environment  contributed  to reduced
yield on earning assets, funding costs were virtually unchanged.  This trend was
driven  by two  primary  factors.  First,  the  reduced  mix of lower  cost core
deposits,  accompanied by the migration into higher priced  competitive  deposit
vehicles such as IMMAs and variable rate CDs, exerted upward pressure on funding
costs.   Though both IMMAs  and variable rate CDs  reflected lower rates than in

                                       25
<PAGE>

1997, the increased mix of these deposit sources, combined with the lower mix of
less expensive core deposits,  mitigated the potential for more  measurable cost
reductions. Secondly, Keystone experienced a slightly higher dependency on other
funding  sources such as FHLB  advances  and  medium-term  notes.  Consequently,
funding costs decreased only slightly, from 4.45% in 1997 to 4.44% in 1998.

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  rate
indices,  and product 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 1998,  Keystone  experienced a  compression  in interest rate spread due to a
more competitive loan pricing environment, and the impact of higher cost funding
sources.  Interest  spread  declined from 3.87% in 1997 to 3.71% in 1998.  Lower
interest rates reduced the impact of noninterest funding sources one basis point
from .72% in 1997 to .71% in 1998.  Consequently,  net interest  margin  dropped
from 4.59% to 4.42%.

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 1998 and
1997 (in thousands):

                                                   1998
                                 Fourth      Third      Second     First
                                 Quarter    Quarter    Quarter    Quarter
------------------------------ ----------- ---------- ---------- ----------
Asset yield                          7.93%      8.14%      8.24%      8.22%
Funding cost                         4.29       4.47       4.48       4.52
------------------------------ ----------- ---------- ---------- ----------
 Interest spread                     3.64%      3.67%      3.76%      3.70%
------------------------------ ----------- ---------- ---------- ----------
 Net interest margin                 4.33%      4.39%      4.48%      4.43%
------------------------------ ----------- ---------- ---------- ----------
Net interest income                $70,258    $71,584    $72,377    $71,315
------------------------------ ----------- ---------- ---------- ----------
                                                   1997
                                  Fourth      Third      Second     First
                                 Quarter     Quarter    Quarter    Quarter
------------------------------ ----------- ---------- ---------- ----------
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
------------------------------ ----------- ---------- ---------- ----------

The steady  decline in rates  during 1998 had less  dramatic  impact on reducing
quarterly  funding costs, but influenced a more measurable drop in earning asset
yields.  This  trend,  combined  with  the  influence  of rapid  run-off  of the
curtailed  commodity-based  indirect  loan  and  lease  products,   reduced  the
potential  for  growth  in net  interest  income,  particularly  since mid year.
Keystone's  strategic  focus on expanding and deepening  customer  relationships
through   delivery  of  more   value-added   products  is  expected  to  provide
opportunities to mitigate the impact of these trends during 1999.

PROVISION FOR CREDIT LOSSES

The provision for credit losses grew in 1998 to $17.2 million from $15.3 million
in 1997, an increase of 12%. The conditions which influenced the level of credit
quality erosion were linked to the residual effect of the late 1997  curtailment
of indirect  lending  activities  combined with the higher level of defaults and
personal bankruptcies within the consumer sector. These factors culminated in an
increased provision and associated  charge-offs which occurred during the second
quarter.  While  erosion  of credit  quality  in the  consumer  sector  has been
influenced by unfavorable national trends, no similar trends have emerged within
the commercial  sector.  In fact, the credit quality trends and standards within
Keystone's overall commercial  portfolio have remained stable. The allowance for
credit losses expressed as a percentage of loans, was 1.35% at December 31, 1998
versus 1.38% one year earlier. The coverage of nonperforming credits provided by
the allowance was 242% compared to the prior year ratio of 310%.  Credit quality
has always been a cornerstone of Keystone's  performance  and remains one of its
highest priorities.  See the allowance for credit loss and asset quality section
of this review for additional information.

NONINTEREST INCOME

At the end of 1993,  noninterest  income (exclusive of security gains) comprised
17% of Keystone's  total revenue  stream.  By the end of 1998,  the  noninterest
income  component of revenues grew to almost 26%. The evolution of Keystone into
a diversified  provider of financial  services has  dramatically  influenced the
growth potential of the service and fee income component of revenues.  From 1997
to 1998, aggregate noninterest revenues (exclusive of security gains) grew 16.6%
from $83.9 million to $97.8 million. This followed 18.7% growth in 1997.

Efforts  to  expand  and  deepen   customer   relationships   by   developing  a
comprehensive  slate of  financial  products  has enhanced the rate of growth in
revenues from asset  management  activities,  mortgage  banking,  and electronic
banking.  These  changes  have  included  the  expansion of the menu of services
combined with strategic  delivery channel advances that have been designed to be
more responsive to customer's preferences.

Asset Management

Keystone's asset management activities provide an effective  illustration of the
adaptive  strategies  that  have  fueled  the  growth in  noninterest  revenues.
Keystone  banks  historically  provided  personal  and  employee  benefit  trust
services.  In 1995,  Keystone  acquired  Martindale  Andres to both expand asset
management  capabilities and leverage  recognized  investment advisory expertise
throughout  Keystone.  Similar advances  occurred with the 1997  introduction of
proprietary  mutual  funds,  now  known  as  "Governor  Funds",  as  well as the
acquisition of MMC&P, a retirement benefit consulting firm. Furthermore,  it was
during these periods that Keystone also added  enhanced  brokerage  services and
annuity  sales  and   introduced,   on  a  limited  basis  in  1998,   insurance
capabilities. These strategies have all influenced the related expansion in fees
and made Keystone one of a limited  number of  institutions  in its  marketplace
with the competence to deliver a diverse menu of asset management services.  The
growth in the individual fee income categories  included an 8% increase in trust
fees,  44% increase in  investment  management,  a more than doubling of benefit
services,  and an overall increase of 22% in total trust and investment advisory
fees. Total fees grew from $21.3 million in 1997 to $25.9 million in 1998.

Mortgage Banking

Similar to the experience in asset management,  Keystone's  successful expansion
of mortgage  banking  activities  combined  the benefits of  innovative  product
development, rapid customer turnaround processes, and the convenience of

                                       26
<PAGE>

Keystone's  extensive network of community offices.  Keystone's mortgage banking
unit completed its most successful year in 1998, originating nearly $500 million
of mortgage loans,  including  approximately $333 million which were sold in the
secondary  market.  Keystone  now  services  $1.7  billion  of  loans,  of which
approximately $957 million is "serviced for others". Following a 31% increase in
mortgage banking fees in 1997,  Keystone  produced a 29% increase during 1998 as
mortgage  banking  revenues grew to $12.4 million or 12.7% of total  noninterest
revenues.  Growth  in  this  area  of  the  business  has  been  generated  by a
consistently  innovative approach during a period of unprecedented  opportunity.
The low interest rate  environment and the  consistently  strong consumer demand
for housing has expanded  opportunities,  and Keystone has been responsive.  For
example,  Keystone  became a recognized  specialist in the area of  construction
lending  and has  also  carved  a niche in the  self-build  log  home  financing
business.  Additionally,  Keystone gained access to another consistent source of
increased volume and high quality loans through its correspondent network.

In summary,  Keystone successfully managed the business opportunities  presented
to its mortgage banking unit by understanding customer needs and preferences and
meeting  these  needs  through  innovative  and  responsive  product  design and
delivery.

Electronic Banking

Electronic  banking  has also had a major  strategic  impact  on the  growth  in
noninterest revenues. Keystone's electronic banking network includes traditional
and advanced function ATMs and is composed of both internal ATM sites as well as
those sites available through  Keystone's  alliance with major convenience store
chains.  Keystone's  electronic banking strategy has been responsive to changing
consumer  preferences for convenient and  strategically  located sites to obtain
cash, conduct transactions, and access payment systems.

With nearly 500 ATMs  throughout its network,  Keystone now has the 45th largest
network of  automatic  teller  machines  in the United  States.  Overall  access
through  electronic  means includes  conventional  ATM  transactions,  advanced-
function ATM capability,  point of sale services utilizing Keystone's Visa Check
Card  services,  and  telephone  banking which is now fully  operational  within
Keystone's Telephone Banking Center.  Keystone continuously evaluates its entire
electronic  banking  network  in  order to  minimize  unproductive  services  or
locations and emphasize  redeployment  of electronic  services into markets with
higher transaction and fee potential.  Keystone also has enhanced its electronic
network  through  new  and  innovative   products  and  services  including  its
electronic  checking  account  services and  preferred  provider  status for ATM
placements within colleges or universities located within its markets.

During 1998,  Keystone achieved a 25% increase in the aggregate ATM and point of
service activity including nearly a 60% increase in its Keystone Visa Check Card
transactions. Keystone's usage rate for its Visa Check Card exceeds the national
average based upon number of transactions per card. Additionally,  the Telephone
Banking Center calls increased nearly  three-fold from the activity levels as of
the end of 1997. In total,  electronic  banking fees  increased 57% including an
approximately $2 million increase from the impact of surcharging.

Service Charges and Other

Fees  from  service  charges  on  deposits  have  historically  been a major and
important source of noninterest revenues. Such revenues grew 6% to $18.4 million
in 1998 from $17.4 million in 1997 and were  reflective of both fee  adjustments
and the expansion of customer  services.  Other income increased by $1.2 million
in 1998 as income from  bank-owned life insurance and the gain on the sale of an
insignificant  subsidiary  exceeded branch sale gains recognized in 1997. During
1998,  Keystone  realized  approximately  $11  million in  security  gains,  the
majority  of which  related to the  disposition  of its  minority  interest in a
financial institution that was acquired by another company.

                                       27
<PAGE>

Noninterest Expenses

Core  noninterest  expenses,  exclusive of the charges  associated with the 1997
merger,  rose 4.0% from $214.6  million to $223.2  million,  an increase of $8.5
million.  For the most part, core expense growth was negligible,  as most of the
1998  increase  reflected  the first  full  year  impact  of the  mid-year  1997
purchases of MMC&P and a Maryland-based thrift.  Additionally,  expenses in 1998
included the current year impact of  incremental  expenses  necessary to achieve
Y2K  readiness.  Growth  in  controllable  expenses  reflected  ongoing  efforts
associated with expense management. Keystone's decision to unify its banks under
a  single  charter  should  accelerate  expense  reduction   opportunities.   We
anticipate that this unification will reduce operating expenses by 10% beginning
with  the  Year  2000.  Expense  management  efforts,  however,  also  reflected
investment in those areas of the business which demonstrate  superior  potential
for revenue  expansion and in  technological  initiatives  which achieved a more
efficient leverage of Keystone's human capital.

Salaries and Benefits

Effective and efficient  delivery of a broad menu of financial  services  begins
with attracting and retaining a motivated,  experienced and well-trained team of
associates.  Over the past several years,  Keystone has embarked on a structured
program to attract  and retain a skilled  workforce  and to provide a  financial
reward  system  linked  to  execution  of  revenue-enhancing  activities.  These
programs  include  Keystone's  "targeted  selection"  initiative,  which  is  an
interview  process for prospective  associates  designed to identify and attract
candidates  with  demonstrated  potential to succeed in a  consultative  selling
environment. Additional programs include the variable compensation program which
is linked to preestablished  "pay-for-performance"  criteria. Such programs have
been designed to increase the amount of compensation  for those  associates more
directly responsible for customer responsiveness and revenue growth. While these
programs tend to elevate the "at risk" component of employee compensation,  they
also provide  associates  with greater  incentive and  opportunity  for personal
financial  reward.  Most of these  programs  are in the  second or third year of
implementation and have now become an integral part of Keystone's reward system.
Keystone will continue to prospectively adjust and adapt compensation systems to
ensure that these programs provide the most effective link between  reward-based
compensation and meeting customers' financial needs.

In 1998,  salary  expense grew 5.1% from $92.6  million to $97.4  million.  This
growth related  primarily to the first full year of activity for businesses that
had been  acquired  in  1997,  and,  to a lesser  extent,  merit  increases  and
increased  variable  compensation.  The increase was mitigated by the offsetting
influence of a reduced workforce.  Efficiency gains, some of which relate to the
benefits of  technology,  were linked to the  reduction in full-time  equivalent
employees from 3,114 at the end of 1997 to 2,965 at the end of 1998.

Benefits  expense levels have also stabilized,  due to the favorable  impacts of
both a reduced workforce and effective  management of Keystone's  benefit costs,
primarily  its employee  health care plan.  Benefit  expenses rose only slightly
from $17.3  million  in 1997 to $17.5  million  in 1998.  Keystone's  efforts to
provide high  quality  health care  through its  company-sponsored  managed care
program  has   mitigated   increases   in  this  vital   component  of  employee
compensation.  More recent national trends portend possible increases in benefit
costs  after  1998  as  the  health  care  industry   continues  to  evolve  and
consolidate.  Keystone's  effort to manage its  workforce  levels is expected to
offset the potential for meaningful increases in these projected expenses.

Occupancy and Equipment Expenses

Changing customer needs and  preferences continue to be the primary stimulus for
the  evolution  and  enhancement  of Keystone's  customer  delivery  systems and
related  internal  processes.   While  these  initiatives  have  increased  both
occupancy and
                                       28
<PAGE>

equipment  expense in the near term,  such expenses are critically  evaluated to
ensure appropriate leverage of Keystone's skilled team of financial consultants.
Investments  included the costs associated with the Telephone Banking Center, an
ever-expanding   network  of  ATM  and  electronic  banking  enhancements,   and
infrastructure  improvements to internal processes.  In 1998, occupancy expenses
rose 5.5% to $17.3 million while equipment  expenses rose 9.8% to $20.6 million.
Results  for 1997  included  comparable  expenses  of $16.4 and  $18.7  million,
respectively.

At the same time,  Keystone has constantly and consistently worked to revamp and
revitalize  its network of  community  offices.  Late in 1998 and early in 1999,
Keystone finalized its planning efforts to enhance the community office delivery
system.  Such efforts will include more precise  assessments of market potential
and ongoing  evaluations of optimum service levels within  Keystone's  community
office systems.  The results of these efforts,  which were an integral component
of Keystone's reorganization strategy, will begin to be reflected in early 1999.

Other Expenses

Other  expenses,  which include items such as  marketing,  insurance,  audit and
legal  fees,  consulting  expenses,   bank  shares  tax,  and  postage  expenses
aggregated  $70.3  million in 1998 and $69.5  million in 1997.  This increase of
1.2% is reflective of Keystone's  ongoing effort to achieve  efficiencies in its
expense  structure.   Notably,   Keystone  achieved  substantial  reductions  in
categories such as marketing,  recruiting,  professional  fees, and problem loan
expense,  which served to overcome  increased expenses in areas more affected by
corresponding  improvement  in fee  income,  such as  reinsurance  and  merchant
interchange activities.

Income Taxes

Income tax expense was $45.7 million in 1998 versus $38.9  million in 1997.  The
increase  in taxes was  reflective  of higher  levels of  taxable  income as the
effective tax rate was approximately 31% in both years.

Year 2000

There are few  individual  topics which have  engendered as much  discussion and
wide-spread  media  attention as the issue of Year 2000 (Y2K)  readiness and its
many associated concerns.  Given its potentially  significant impact on business
in general and financial  institutions  in particular,  Y2K readiness has been a
subject of intense  management  focus.  The level of awareness and attention has
been  particularly  acute within the financial  services  industry with its many
layers of regulatory  oversight  and perceived  influence on the overall flow of
commerce.  The  fundamental  issue  associated with Y2K readiness stems from the
fact that  historically,  most  computer  systems  were  written with two digits
rather than four digits to designate the  applicable  year.  Accordingly,  it is
anticipated  that  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.

Keystone's  computer  systems are  managed by its  information  technology  (IT)
division,  which has the primary  responsibility to meet information  processing
needs through the  acquisition,  operation,  and  customization  of software and
hardware  acquired from major  providers.  A limited  portion of data processing
needs,  estimated at  approximately  15%, is met by various  third party service
providers. Keystone's formal plan to resolve issues attendant to the approach of
the Y2K consists of four major phases: inventory; assessment;  distribution; and
implementation.  The four phases of the plan are primarily being performed using
internal resources.

     The  initial or  inventory  phase of  Keystone's  Y2K Plan  identified  all
     information technology and significant non-IT components.  The inventory of
     components, which was identified during this phase, serves as the

                                       29
     <PAGE>

     foundation  for  assessment  of all  potential  Y2K  issues.  Keystone  has
     completed  this  step.  However,  we  recognize  that  as a part  of  doing
     business,  new items  will be added to the  inventory  as needed  and these
     items will be exposed to the process.

     The  second,  or  assessment  phase  of the  plan  evaluated  the  need for
     modification,  upgrade  or  replacement  of either  internally  managed  or
     service-based  systems  to meet  Y2K  readiness  standards.  Ten  corporate
     critical IT systems were  identified  to be the highest  level of execution
     risk if not adequately  safeguarded for failure or malfunction.  Assessment
     of all identified components is complete. In the process of completing this
     phase, Keystone has determined it has no significant exposure due to non-IT
     components with embedded technology.

     During the third, or distribution  phase,  decisions were made about how to
     remedy Y2K problems detected by the assessment. Decisions were made for all
     components to either  retire,  replace,  update or convert each software or
     hardware item that is not year 2000 compliant.

     The final, or implementation  phase includes  installation,  system testing
     and transition to a production  environment.  Of the ten corporate critical
     systems, three systems are in production with testing complete; six systems
     are in production and require only minor additional testing;  the remaining
     system is  scheduled  for  production  by the end of the second  quarter of
     1999.

It has been determined  that all identified  corporate  critical  replacement or
updated  systems  meet  the  standards  necessary  for Y2K  readiness.  The risk
associated  with Y2K  readiness,  therefore,  is primarily  associated  with the
implementation of these systems and can be remedied, if necessary,  via standard
vendor  support  channels or by  redirecting  internal  or  external  resources.
Management's  current risk assessment is that should difficulties be encountered
with implementation,  only minor delays in transaction processing or information
availability  will  occur.  If  delays  in  either  transaction   processing  or
information availability would occur for extended periods for corporate critical
systems,  or if timely  modification  could not be made, Y2K issues could have a
material effect on both customers and on the operations of Keystone.  In a worst
case scenario,  which management does not consider to be likely, Keystone may be
unable  to  clear  checks,   process   payments,   or  obtain  customer  account
information.  In addition,  customers' access to funds could be delayed. Failure
to achieve Y2K  readiness  could also subject  Keystone or its  subsidiaries  to
potential sanctions or directives from various regulatory  agencies  responsible
for supervisory oversight of financial institutions.

The impact of Year 2000 issues on  Keystone  will depend not only on steps taken
by Keystone to address and prevent potential Y2K problems but also on the way in
which Y2K issues are addressed by  governmental  agencies,  businesses and other
third  parties  that  provide  services or data to, or receive  services or data
from,  Keystone,  or whose  financial  condition or  operational  capability  is
important to Keystone.  Keystone is engaged in an effort to survey the readiness
of such  third  party  suppliers,  vendors,  and major  customers,  and to date,
Keystone is not aware of any third party problems which would materially  impact
Keystone's  results of  operations,  liquidity  or capital  resources.  However,
Keystone has no means to determine with absolute assurance that external parties
will by Y2K ready, or that such parties failure to be Y2K ready would not have a
material impact on Keystone.

Expenditures since the inception of the project have aggregated $5.6 million, of
which $3 million were  capitalized.  During 1999,  Keystone  expects to spend an
additional $2 million,  of which $.5 million will be  capitalized  and amortized
over a three- to  five-year  period.  All  expenditures  will be funded  through
operating cash flows. 

                                       30
<PAGE>

Keystone's   estimate  of  costs  and  the  time   required   to  complete   Y2K
modifications,  as well as the  assessment of readiness to deal with Y2K issues,
are based on  forward-looking  information  and are dependent  upon  assumptions
regarding  future  events.  There can be no guarantee that estimates of costs or
completion  dates  will be  achieved  or that all  risk  has been  appropriately
identified and assessed.  Specific factors that might cause differences include,
but are not limited to, the availability and cost of personnel, satisfactory Y2K
upgrade   execution,   the   ability  to  identify   all  issues,   and  similar
uncertainties.

BALANCE SHEET OVERVIEW

Keystone's  total  assets  reached  $6.97  billion at the end of 1998,  a slight
increase over the total of $6.84 billion reported at the end of 1997. Growth was
constrained  by a number of factors  including  the run-off of curtailed  credit
products,  such as indirect loans and leases, and the securitization of mortgage
products.  Period end loan balances  declined as growth in  relationship-  based
product  offerings  was not  sufficient  to offset this  run-off.  In  addition,
balance sheet expansion was also constrained by sluggish deposit growth.

LOANS

During 1998,  Keystone  experienced  less than robust  growth in aggregate  loan
balances  despite  strong  increases in  relationship-based  activities.  Growth
trends within Keystone's loan portfolio  resulted directly from the execution of
its core business strategy, meeting customer needs through relationship banking.
First,  Keystone  seeks to preserve  precious  funding  sources to ensure credit
availability for creditworthy  customers that exhibit demonstrated potential and
desire for more expanded  relationships.  At the same time,  Keystone also seeks
ways to more  appropriately meet credit needs through the delivery of commodity-
based  products  that have the  potential to create  opportunities  for expanded
relationships.  A prime example of this effort is mortgage  banking,  which also
combines balance sheet risk management  strategies and  accessability to funding
through the secondary market.  Finally,  Keystone has curtailed those activities
which tend to absorb funding with little or no opportunity to profitably  expand
relationships, such as indirect lending and leasing.

The following  summary  reflects the impact of these strategies on specific loan
balances through 1998 and 1997 (in thousands):

<TABLE>
<CAPTION>

                                 1998                 1997                Change
------------------------ --------------------- ------------------- --------------------
                            Amount        %       Amount      %      Amount       %
------------------------ ------------- ------- ------------ ------ ----------- --------
<S>                           <C>          <C>     <C>         <C>     <C>          <C>
Commercial                    $663,415     14%     $622,569    14%    $40,846      7 %
Floor plan financing           171,872      4       186,737     4     (14,865)    (8)
Commercial-real estate
 secured                     1,496,526     33     1,294,933    28     201,593     16
Consumer mortgages             774,388     17       944,731    21    (170,343)   (18)
Direct consumer                919,952     20       856,225    19      63,727      7
Indirect consumer              248,942      5       293,013     6     (44,071)   (15)
Lease financing                314,749      7       374,421     8     (59,672)   (16)
------------------------ ------------- ------- ------------ ------ ----------- --------
                            $4,589,844    100%   $4,572,629   100%     $17,215   --- %
------------------------ ------------- ------- ------------ ------ ----------- --------
</TABLE>
Though  declines in  commodity-based  indirect  loan and lease  categories  were
anticipated,  the  actual  pace  of runoff exceeded  expectations and offset the

                                       31
<PAGE>

growth that was achieved in relationship-based  categories. Growth in commercial
real estate  (16%),  commercial  loan (7%) and direct  consumer  credit (7%) was
strong,   however,  and  reflected  Keystone's  stated  commitment  to  maximize
relationship banking opportunities.

The changes in Keystone's  organizational  structure  announced  near the end of
1998 were designed to build on this  foundation  and identify  service  delivery
enhancements  through an intense and skillful  focus  through a line of business
approach.  Coincident  with  the  implementation  of  its  proprietary  business
analysis  tools,  Keystone has divided its commercial  business into three broad
segments:  commercial banking,  business banking, and emerging business banking.
Pursuant to this  stratification,  Keystone  examined and identified more common
financial needs and attributes of customers  included therein,  and will seek to
tailor its approach to meeting individual  financial needs through its financial
consultancy model. For example, Keystone has a demonstrated familiarity with the
nuances of automobile  dealer floor plan financing and has constantly  evaluated
and improved  service  delivery  features to this  important  business  segment.
Despite this focus on floor plan financing, outstanding balances declined during
1998 due to the mid-year strike of a major auto manufacturer.

Likewise,  the formal  restructuring  of Keystone  under one  charter,  with its
regional  focus and local market  teams,  has been designed to ensure high touch
delivery  and local  market  knowledge  combined  with the  benefits  of focused
business  line  management.   This  restructuring  is  a  logical  evolution  of
Keystone's  relationship  banking culture. The growing demand for direct lending
coupled with the  strategic  effort to make  Keystone the premier  lender in its
community  markets,  are expected to accelerate both lending and other financial
service delivery opportunities within the retail sector.

ALLOWANCE FOR CREDIT LOSSES AND ASSET QUALITY

Keystone's  ratio of the  allowance  for  credit  losses  to loans  was 1.35% at
December 31, 1998,  versus 1.38% at the end of 1997.  The absolute  level of the
allowance  was $60.3 million at the end of 1998 compared to $65.1 million at the
end of the previous year.  This reduction was directly  attributed to lower loan
balances and risk exposure for commodity and securitized loan products.

<PAGE>

The following  table sets forth five years of activity  within the allowance for
loan losses beginning January 1, 1994 (in thousands):

<TABLE>
<CAPTION>


                                            1998       1997      1996      1995       1994
----------------------------------------- --------- -------------------- --------- ----------
<S>                <C>                      <C>        <C>       <C>       <C>        <C>
Balance at January 1,                      $65,091    $56,256   $55,415   $53,708    $51,084
Loans charged off:
 Commercial                                 (2,326)    (1,930)   (1,936)     (874)    (4,417)
 Real estate-secured:
  Commercial                                (2,543)    (1,234)   (1,646)   (1,971)    (4,265)
  Consumer                                    (885)    (1,116)     (651)     (708)      (638)
 Consumer                                  (14,442)   (10,010)   (6,702)   (5,498)    (2,932)
 Lease financing                            (3,862)    (2,987)   (1,330)     (786)      (198)
----------------------------------------- --------- -------------------- --------- ----------
Total loans charged off                    (24,058)   (17,277)  (12,265)   (9,837)   (12,450)
----------------------------------------- --------- -------------------- --------- ----------
Recoveries:
 Commercial                                    303        501       461       281        528
 Real estate-secured:
  Commercial                                   675        410       465       538        849
  Consumer                                     444        219       152       164        280
 Consumer                                    1,302      1,104     1,138       900        968
 Lease financing                               244        251       177       158         29
----------------------------------------- --------- -------------------- --------- ----------
Total recoveries                             2,968      2,485     2,393     2,041      2,654
----------------------------------------- --------- -------------------- --------- ----------
Net loans charged off                      (21,090)   (14,792)   (9,872)   (7,796)    (9,796)
Provision charged to operations             17,150     15,316    10,713     8,568     10,324
Other                                         (877)     8,311      ----       935      2,096
----------------------------------------- --------- -------------------- --------- ----------
Balance at December 31,                    $60,274    $65,091   $56,256   $55,415    $53,708
----------------------------------------- --------- -------------------- --------- ----------
Ratio of allowance to year-end loans          1.35%      1.38%     1.30%     1.35%      1.38%
Ratio to Average Loans:
 Provision                                     .37%       .33%      .26%      .21%       .29%
 Net charge-offs                               .46%       .32%      .24%      .20%       .27%
----------------------------------------- --------- -------------------- --------- ----------
</TABLE>

The most  significant  credit risk issue affecting  Keystone during 1998 was the
impact of rising consumer delinquencies,  consumer bankruptcies, and related net
charge-off activity. Keystone's most substantial credit exposures involved those
loans that had been originated  through indirect  automobile lending and leasing
activities.  Although  Keystone  curtailed this line of business near the end of
1997,  absolute levels of problem credits associated with these loans and leases
grew  during  the first  half of 1998.  Approximately  20% of the $14.4  million
consumer  charge-offs  incurred  during  1998  and  all of the  lease  financing
charge-offs related to the indirect business.

<PAGE>

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  nonperforming
assets (NPA's)and loans past due more than 90 days. 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 1998
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>

                                    1998      1997      1996       1995       1994
--------------------------------- --------- --------- --------- ---------- ----------
<S>                                 <C>       <C>       <C>        <C>        <C>
Nonaccrual loans                    $24,675   $20,520   $19,350    $19,142    $26,701
Restructurings                          264       489       393        503        144
--------------------------------- --------- --------- --------- ---------- ----------
Nonperforming loans                  24,939    21,009    19,743     19,645     26,845
Other real estate                     3,982     5,028     8,305      9,777      7,028
--------------------------------- --------- --------- --------- ---------- ----------
Nonperforming assets                 28,921    26,037    28,048     29,422     33,873
Loans past due 90 days or more       28,549    33,062    20,141     16,798     10,062
--------------------------------- --------- --------- --------- ---------- ----------
Total risk elements                 $57,470   $59,099   $48,189    $46,220    $43,935
--------------------------------- --------- --------- --------- ---------- ----------
</TABLE>

Substantially all of the loans in the nonaccrual  category at December 31, 1998,
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>

                                               1998    1997    1996    1995    1994
-------------------------------------------   ------- ------- ------- ------- -------
<S>                                             <C>     <C>     <C>     <C>     <C>
Ratio to Year-End Loans:
 Nonperforming assets                           0.65%   0.55%   0.65%   0.72%   0.87%
 90 days past due                               0.64    0.70    0.46    0.41    0.25
-------------------------------------------   ------- ------- ------- ------- -------
 Total risk elements                            1.29%   1.25%   1.11%   1.13%   1.12%
-------------------------------------------   ------- ------- ------- ------- -------
Coverage Ratios:
   Ending allowance to nonperforming loans      242%    310%    285%    282%    200%
   Ending allowance to risk elements*           113%    120%    141%    152%    146%
   Ending allowance to net charge-offs          2.9x    4.4x    5.7x    7.1x    5.5x
-------------------------------------------   ------- ------- ------- ------- -------

* Excludes ORE.
</TABLE>

The relative level of  nonperforming  assets continues to moderate within rather
narrow  boundaries and has been influenced by the ebb and flow of broad economic
trends. Total risk elements expressed as a percentage of loans grew only

<PAGE>

slightly  during  the year from  1.25% at the end of 1997 to 1.29% at the end of
1999.  The migration of a single large  commercial  credit from the 90-days past
due category at the end of 1997 into nonaccrual status during 1998 increased the
ratio of  nonperforming  assets to loans while  decreasing  the ratio of 90-days
past due to loans.  During this period,  Keystone's credit risk exposure has not
been  substantially  influenced by any systemic  deterioration  in commercial or
commercial  real  estate  categories  but more by the broad  trends  within  the
consumer  sector.  As the  relative  mix of  indirect  credit  is  reduced,  the
proclivity for more relationship-based lending is expected to introduce a higher
density of loans with more favorable credit attributes.

Management has identified  approximately  $12.2 million of loans  outstanding at
December  31,  1998  were  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 1998.  Such loans totaled $8.3 million at
the end of 1997.

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>

-------------------------------- ---------------------------------------------------
                                    1998      1997      1996      1995       1994
-------------------------------- ---------- --------- --------- --------- ----------
<S>                                 <C>        <C>       <C>       <C>        <C>
Commercial                          $10,066    $4,550    $4,340    $4,833     $5,651
Commercial real estate:
 Construction and development         1,941       220       764     1,951      5,690
 Permanent                            8,640    11,960    12,196    10,919     10,597
Residential real estate                 960     1,465     1,014     1,173      4,486
Consumer                              3,332     2,814     1,429       769        421
-------------------------------- ---------- --------- --------- --------- ----------
Nonperforming loans                  24,939    21,009    19,743    19,645     26,845
Other real estate                     3,982     5,028     8,305     9,777      7,028
-------------------------------- ---------- --------- --------- --------- ----------
 Total nonperforming assets         $28,921   $26,037   $28,048   $29,422    $33,873
-------------------------------- ---------- --------- --------- --------- ----------
</TABLE>

Keystone also reviews trends with respect to less severe  categories of past due
loans, including loans which are 30 to 90 days past due.

The following is a comparative  summary of past due loans at the end of 1998 and
1997 (in thousands):

                               % of Total                % of Total
                      1998       Loans        1997         Loans
------------------ ---------- ------------ ----------- --------------
30-59 days            $47,899         1.1%    $53,320           1.1%
60-89 days             12,451         0.3      15,807           0.4
Over 90 days           28,549         0.6      33,062           0.7
------------------ ---------- ------------ ----------- --------------
                      $88,899         2.0%   $102,189           2.2%
------------------ ---------- ------------ ----------- --------------
The level of past due loans expressed as a percentage of total loans at December
31, 1998 was consistent with the same period in 1997.

<PAGE>

Allocation of Allowance

In determining the adequacy of the allowance for loan losses,  management  makes
allocations to specific  problem  commercial loans based on the present value of
expected  future cash flows or the fair value of the  underlying  collateral for
impaired  loans and to pools of other  commercial  loans based on various credit
risk  factors.  Allocations  to loan pools are developed by internal risk rating
and are based on  management's  judgment  concerning  historical loss trends and
other relevant  factors.  Installment and residential  mortgage loan allocations
are made at a total portfolio level based on historical loss experience adjusted
for portfolio  activity and current  conditions.  While  allocations are made to
specific  loans and pools of loans,  the  allowance  is  available  for all loan
losses.

The following table summarizes the allocation of the allowance for credit losses
at December 31, for each of the past five years (in thousands):

<TABLE>
<CAPTION>
                             1998        1997        1996        1995       1994
------------------------ ------------ ----------- ----------- ----------- ---------
<S>                           <C>         <C>          <C>        <C>       <C>
Commercial                    $13,436     $11,266      $9,944     $11,450   $11,168
Real Estate secured:
  Commercial                    8,813      12,630      11,922      11,969    12,104
  Consumer                      2,064       1,849       2,324       2,251     2,563
Consumer                       15,574      16,844      12,693       7,724     7,036
General Risk                   20,387      22,502      19,373      22,021    20,837
------------------------ ------------ ----------- ----------- ----------- ---------
                              $60,274     $65,091     $56,256     $55,415   $53,708
------------------------ ------------ ----------- ----------- ----------- ---------
</TABLE>

During 1998, the portion of the allowance  specifically  allocated to commercial
loans  increased,  while  conversely,  the portion  allocated to commercial real
estate  decreased  to reflect  changes in  management's  risk  ratings for these
categories of loans.  Similarly,  the level of  nonperforming  commercial  loans
increased  during 1998 while the level of  nonperforming  commercial real estate
decreased.

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,  local
market  conditions,  various  estimates,  and other  information  that  requires
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, 1998 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,

<PAGE>

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, 1998, Keystone's investments  represented 25.7% of total assets.
The following is a summary of the carrying values of investments at December 31,
1998 and 1997 (in thousands):

<TABLE> 
<CAPTION>
                                         1998                        1997
------------------------------ ------------------------- ----------------------------
                                Available     Held to       Available      Held to
                                 for Sale     Maturity      for Sale       Maturity
------------------------------ ------------ ------------ --------------- ------------
<S>                                <C>            <C>           <C>            <C>
Negotiable money market
  investments                      $290,975       $-----        $178,404       $-----
U.S. Treasury securities            123,388        -----         194,120        -----
U.S. Government agency
  obligations                       548,572      500,418         503,078      366,238
Obligations of states and
 political subdivisions              57,692      146,018          74,171      143,910
Corporate and other                 109,126       13,100         141,627       18,240
------------------------------ ------------ ------------ --------------- ------------
                                 $1,129,753     $659,536      $1,091,400     $528,388
============================== ============ ============ =============== ============
</TABLE>

The weighted  average  duration of Keystone's  fixed rate  investments  was 2.33
years at December  31,  1998.  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 1998,  the  portion of all state and  municipal  holdings
rated  "AAA" was 89.8% and the  portion  of all  corporate  issues  rated "A" or
better was 98.2%.  The  relationship  of market value to the  amortized  cost of
investments  at December 31, 1998,  was 101.1%  compared to 101.4% at the end of
1997. At December 31, 1998, investments "held-to-maturity", which are carried at
amortized cost, contained gross unrealized gains and losses of $11.7 million and
$0.3 million, respectively. Unrealized gains and losses included in the carrying
value of the "available-for-sale" investments of $11.5 million and $1.8 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.

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 but has
made 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  to reduce the market risk  associated  with interest rate
fluctuations  in  fixed  consumer   mortgages.   Further  disclosures  of  these
activities are included in the footnotes to the financial statements.

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

<PAGE>

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
Agency holdings.

In June of 1998, the Financial  Accounting  Standards Board issued Statement No.
133,  "Accounting  for  Derivative  Instruments  and Hedging  Activities".  This
statement  provides new accounting  treatment for derivatives  transactions  and
hedging  activities.  The standard will be effective  for Keystone  beginning on
January 1, 2000.  Adoption of the standard is not expected to have a significant
impact on Keystone's financial condition or results of operations.

DEPOSITS

Financial  institutions  continue  to rely  heavily on deposit  balances  as the
primary  source of funding for credit  activities.  Customer  desires for higher
returns,  the lure of increased  stock market  valuations,  higher consumer risk
tolerance, and more accessible investment distribution channels, such as on-line
investing,  have all served as impediments  to growth in this important  funding
source.  Despite  these  trends,  Keystone has been able to preserve its funding
base through product development  initiatives designed to meet these competitive
challenges.  Though aggregate  deposit funding remained  relatively  static from
1997 to 1998, the mix of deposits reflect the influence of competitive pressures
and Keystone's  proactive strategy to meet customers' needs. Deposit composition
consisted of the following for 1998 and 1997:(in thousands):
<TABLE>
<CAPTION>
                                                                            Change
                                                                          -----------
                                               1998         1997        Amount       %
------------------------------------------ ------------ ------------ ------------ -------
<S>                                            <C>          <C>            <C>         <C>
Noninterest-bearing demand                     $637,533     $606,907       30,626      5%
NOW                                             309,238      330,514     (21,276)     (6)
Savings                                         514,226      600,759     (86,533)    (14)
Money market                                    740,086      650,082       90,004     14
Variable-rate CD                                719,165      575,025      144,140     25
Other time deposits less than $100,000        1,958,919    2,114,231    (155,312)     (7)
Time deposits $100,000 or more                  310,137      278,181       31,956     11
------------------------------------------ ------------ ------------ ------------ -------
                                             $5,189,304   $5,155,699       33,605      1%
------------------------------------------ ------------ ------------ ------------ -------
</TABLE>

Keystone's deposit mix was most  significantly  affected by initiatives in three
major areas. First,  Keystone's earlier  introduction and continued promotion of
its free-checking and electronic  checking  products,  combined with a corporate
cash management product,  contributed to 5% growth in noninterest-bearing demand
deposit balances.  Secondly,  Keystone  developed and expanded its indexed money
market  account  (IMMA)  in  order  to  provide  customers  with  a  competitive
alternative  to retail  products  now  available  through a variety of financial
intermediaries. The rate provided on this account has been indexed to short-term
Treasury rates rather than to administered  rates,  providing added assurance to
Keystone  customers that they are achieving  competitive  returns  combined with
convenient access.  Finally, the variable rate certificate of deposit,  with its
indexed  rate  and  flexible  liquidity  options,  has  been  a  formidable  and
competitive  product  offering.  Each of these  products has been  successful in
blending the security of deposit insurance with competitive features in pricing.

<PAGE>

Keystone's  preemptive  approach to providing  its  customers  with  competitive
product  offerings  has  facilitated  some  internal  disintermediation  of more
established deposit products such as savings and NOW accounts. More importantly,
Keystone believes that this approach provides  consumers with assurance that, in
its role as a financial  services  provider,  the foremost  objective is to meet
customer needs.

BORROWED FUNDS

While  deposits  continue to be the  primary  source of  funding,  Keystone  has
augmented its funding  needs through other sources based on its overall  funding
strategy.  The composition of other borrowed funds is presented in the following
table (in thousands):

                                     Change
                                1998        1997        Amount         %
---------------------------- ----------- ----------- ------------- ----------
  Short-term borrowings         $375,131    $371,645        $3,486         1%
  FHLB borrowings                372,097     240,533       131,564        55
  Long-term debt                 119,313      64,016        55,297        86
---------------------------- ----------- ----------- ------------- ----------
                                $866,541    $676,194      $190,347        28%
---------------------------- ----------- ----------- ------------- ----------

Strategic  leverage  efforts,   including   investment   initiatives  and  share
repurchase  programs,  have  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
customers. FHLB borrowings, which are collateralized by residential mortgages or
other qualified  securities,  reflect a variety of credit products  available to
Keystone  through its  membership in the Federal Home Loan Bank. In May of 1998,
Keystone  issued  $30  million  of  senior   medium-term  notes  under  a  shelf
registration  executed in 1997, at a coupon rate of 6.50% and a maturity date of
2008.  The proceeds  were used to fund the common stock  repurchase  program and
other general funding needs.  Remaining  aggregate  funding available under this
registration  was $270  million.  Keystone  will continue to access this funding
source for general corporate purposes on an as needed basis.

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 1998,  shareholders'  equity  was $662  million  versus  $685  million at
December 31, 1997, resulting in an equity to assets ratio of 9.50%.

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  1998  equated to an 8.6%
payout on  year-end  1997 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

<PAGE>

base. Two capital management  strategies  contributing to the equity contraction
experienced in 1998 included the acquisition of treasury stock and the increased
annual  dividend  to  shareholders.  In  formulating  these  capital  management
initiatives,   a  multitude  of  additional  external  factors  are  considered,
including    regulatory    implications    and   the    desire    to    preserve
pooling-of-interests accounting.

In November 1998,  the Board of Directors  approved a share  repurchase  program
which authorized the repurchase from that date of up to 3,000,000 common shares.
Under the  program,  the shares are to be  repurchased  from time to time in the
open  market  or  through  negotiated   transactions.   Under  a  separate  1997
authorization,  one million common shares were  repurchased in the first half of
1998 and retired.  The 1 million shares held at December 31, 1998, were acquired
under the  November,  1998,  authorization  and are expected to be reissued over
time in  connection  with  employee  stock  purchase,  401(k),  stock option and
dividend reinvestment plans as well as other corporate purposes.

Banking industry  regulators have set forth capital adequacy guidelines based on
capital ratios for bank holding companies and their banking subsidiaries.  Based
on risk-adjusted capital rules and definitions prescribed by the regulators, the
regulatory  guidelines  establish  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 Currency,  operate
under a risk-based  supervisory  approach designed to encourage management focus
on the most  effective  use of  capital  commensurate  with its risk  profile in
generating a return to stockholders,  while serving depositors,  creditors,  and
regulatory needs.

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 1998 and a comparison to the various regulatory capital requirements.

                                             "Well          Minimum
                            Keystone     Capitalized"    Requirements
------------------------- ------------- --------------- ---------------
Leverage ratio                    8.66%           5.00%           4.00%
"Tier 1" capital ratio           12.59%           6.00%           4.00%
"Total" capital ratio            13.84%          10.00%           8.00%
------------------------- ------------- --------------- ---------------

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 $62 million at
December 31, 1998 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 through the prudent control of market risk, liquidity, interest

<PAGE>

rate risk, and capital. Two important barometers of performance 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 governed by the Board of  Directors  (the  Board).  The Board  delegates  the
responsibility of  asset/liability  management to the corporate  Asset/Liability
Management Committee (ALCO) whose representation  includes both bank and holding
company personnel.  ALCO sets forth strategic  directives which guide day-to-day
asset/liability  management  initiatives.  ALCO also  reviews and  approves  all
significant market risk, liquidity, long-term funding opportunities, and capital
management programs.

Interest Rate Risk

Interest  rate risk 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 ALCO policy sets forth guidelines that
limit the level of interest rate risk within specified tolerance ranges.

Keystone  utilizes 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 of 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.  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, 1998 for the
ensuing  twelve month and  twenty-four  month  periods have  measured  potential
reductions in net interest income of approximately 3% and 2%, respectively, well
within Keystone's defined tolerance levels.  Comparable  measures as of December
31, 1997 were 1% for the  twelve-month  period and 2% for the twenty-four  month
period.  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,   cash  flows,  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, 1998.

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

<PAGE>

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, has several  limitations  including:  the intrinsic value of
assets,  liabilities  and  off-balance  sheet  instruments  does not necessarily
represent the fair value of the financial  instruments since it does not include
credit risk and  liquidity;  estimated  cash flows are required for  nonmaturity
financial instruments; and the future structure of Keystone's balance sheet does
not include  ongoing loan and deposit  activities  from core business within the
present value assessment.

The following table provides an analysis of Keystone's interest rate sensitivity
as  measured  under GAP at  December  31,  1998  compared  to 1997  (dollars  in
thousands): 
<TABLE> 
<CAPTION>
                                               December 31, 1998                December 31,1997
                                1 month    3 months     6 months     1 year        1 year
------------------------------------------------------------------ ----------------------------
<S>                            <C>          <C>         <C>         <C>              <C>
Assets                        $1,383,118   $1,704,278  $2,029,396  $2,567,125       $3,017,875
Liabilities                    1,703,836    2,592,327   2,996,943   3,514,717        3,313,948
Cumulative GAP                  (320,718)    (888,049)   (967,547)   (947,592)        (296,073)
As a percent of total assets      (4.60%)     (12.74%)    (13.89%)    (13.60%)           (4.33)%
Gap ratio                          0.81         0.66        0.68        0.73              0.91
------------------------------------------------------------------ ----------------------------
</TABLE>

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.

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. Failure to meet the
prescribed minimum standards for these ratios requires that management  identify
tactics which will ensure compliance with policy  guidelines.  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,  medium term notes, or
other forms of term borrowings. For example, Keystone had $270 million available

<PAGE>

for the issuance of senior or subordinated  debt securities at December 31, 1998
under an existing  shelf  registration  filed with the  Securities  and Exchange
Commission  (SEC).   Keystone's  ability  to  access  the  capital  markets  was
demonstrated  in 1998 through the issuance of $30 million in senior  medium-term
notes near mid-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.  The parent  company  relies  primarily  on the bank  subsidiary  to
provide  funding for dividends to its  shareholders  and  unallocated  corporate
expenses.  The  amount  of  dividends  from the bank to the  parent  company  is
constrained  by  federal  regulations,   which  have  not  historically  limited
Keystone's  practices.  Periodically,  the parent  company may also access other
forms of funding to facilitate strategic corporate  initiatives.  Based upon the
inherent  strength and  profitability  of its bank  subsidiary,  holding company
liquidity is deemed adequate.

REGULATORY MATTERS

Keystone and its affiliates are subject to periodic  examinations by one or more
of the various regulatory agencies.  During 1998, examinations were conducted at
the holding company and at Keystone's 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.
Reviews  specifically  designed to assess the status of Keystone's Y2K readiness
were also conducted on a regular basis during the year by regulatory  examiners.
No comments were received from the various  regulatory bodies which would have a
material  adverse  effect  on  Keystone's  liquidity,   capital  resources,   or
operations.

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 pressures over the last several years have been
modest,  although  the  potential  for future  inflationary  pressure  is always
present  given  changing  trends in the  economy.  Management  will  continue to
monitor the impact of these  trends on the pricing of its  products and services
and on the control of overhead expenses.

SEGMENT REPORTING

Keystone's business segments are community banking,  mortgage banking, and asset
management  services.  These segments are managed  separately because they offer
distinctly  different products  distributed through different delivery channels.
No customer  of Keystone  individually  represents  10% or more of  consolidated
revenue and revenues  from  foreign  customers  are  negligible.  The  community
banking segment constituted over 90% of Keystone's  revenue,  profit, and assets
for the years ended December 31, 1998, 1997 and 1996 and was the only reportable
segment.  As such,  financial  information  for  this  segment  does not  differ
materially  from  the  information   provided  in  the  consolidated   financial
statements.

<PAGE>

1997 vs 1996

Summary

Performance  during  1997  was  significantly  influenced  by the  expansion  of
Keystone's  franchise during the year. The merger of Financial Trust Corp. (FTC)
added another  strategic  partner in  Keystone's  expanding  financial  services
marketplace  while the acquisition of First  Financial Corp of Western  Maryland
(FFWM) added important market share to Keystone's existing franchise in Maryland
and West Virginia. The merger of FTC was accounted for as a pooling of interests
and all prior periods were 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.

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  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) 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.

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 earning  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.

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 the  allowance to loans of 1.38% at December 31, 1997 compared
with 1.30% at the end of 1996.

Operating  expenses were influenced by 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.


Interest Income

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. Interest income was influenced by expanded middle market businesses and
retail customers, and included growth in commercial real estate loans and direct
consumer credits of 23% and 27%, respectively.

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

<PAGE>

Interest Expense

Improvement  in net interest  income must include  increased  levels of interest
income combined with prudent management of both funding cost and capacity. While
competitive pressures constrained 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 points  increase which was equal to the improvement in asset
yields.

Net Interest Income

Combining the impact of yield on earning assets with the cost of funding sources
results in interest spread.  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.  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.

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%.

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 markets in which it operates. This focus has manifested itself in
an  increasing  higher  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.

Trust and investment  advisory services,  the largest single source of fee-based
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.  and the
expansion of revenue sources through the acquisition of MMC&P.

Keystone has been equally successful in enhancing its mortgage banking strategy.
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.

Deposit account service charges in 1997 were flat as compared to the prior year.
In late 1996,  Keystone had introduced its free checking option.  This strategic
initiative,   which  provided  Keystone  with  a  competitive  position  in  its
marketplace, constrained the rate of growth in deposit fee income.

Similar to the  strategies  employed  within both asset  management and mortgage
banking,   Keystone  has   successfully   leveraged   its   electronic   banking
configuration to improve related fee income growth. Growing demand for access to
funds and

<PAGE>

technological  innovations  contributed  to a $2.3  million  increase in ATM and
debit card fees. Surcharge fees also enabled Keystone to charge noncustomers who
access their banks through  Keystone's ATM network.  These  factors,  along with
other  fee-based  initiatives,  resulted  in growth to  aggregate  fee income of
26.5%.

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% 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.

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.  Other  factors  influencing  the
increase included average salary increases approximating 4% and Keystone's sales
compensation  program. This program was designed to provide additional incentive
opportunities  and manage  compensation  expenses  at levels  commensurate  with
revenue improvement.

The cost control features of managed care have constrained the growth in benefit
expenses while providing  high-quality health care services.  Keystone's ability
to  efficiently  and  effectively   absorb  employees  through  its  merger  and
acquisition strategies has also enabled it to leverage its health care structure
over a more substantial employee base.

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
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.

Other expenses grew to $69.5 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  communications-related  costs,  each of which were  influenced by
revenue-related  activities or expansions of customer-focused product or service
capabilities.

Income Taxes

Income tax expense reached $39 million in 1997, reflecting an effective tax rate
of 30.7% versus 29.3% in 1996.


                  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, 1998 and 1997, 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,
1998.  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 net interest income constituting 20% of the related consolidated totals.
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 and the report of other auditors provide a reasonable
basis for our opinion.

In our opinion, based on our audits and, for 1996, 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, 1998 and 1997,  and the  consolidated  results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 1998,  in  conformity  with  generally  accepted  accounting
principles.



Pittsburgh, Pennsylvania

January 29, 1999

<PAGE>
<TABLE>
<CAPTION>

Consolidated Statements of Condition                      December 31,
(in thousands, except share data)                      1998           1997
------------------------------------------------- -------------- --------------
ASSETS
------------------------------------------------- -------------- --------------
<S>                                                     <C>            <C>
Cash and due from banks                                 $190,622       $206,223
Federal funds sold                                       141,700         25,300
Interest-bearing deposits with banks                       5,978          1,928
Investment securities available for sale               1,129,753      1,091,400
Investment securities held to maturity
 (fair values 1998 - $670,934; 1997- $538,218)           659,536        528,388
Loans held for resale                                     76,423         43,055

Loans and leases                                       4,459,783      4,712,566
Allowance for credit losses                              (60,274)       (65,091)
------------------------------------------------- -------------- --------------
Net loans                                              4,399,509      4,647,475

Premises and equipment                                   124,080        116,615
Other assets                                             240,626        180,953
------------------------------------------------- -------------- --------------
TOTAL ASSETS                                          $6,968,227     $6,841,337
------------------------------------------------- -------------- --------------
LIABILITIES
------------------------------------------------- -------------- --------------
Noninterest-bearing deposits                            $710,161       $637,164
Interest-bearing deposits                              4,521,557      4,596,001
------------------------------------------------- -------------- --------------
Total deposits                                         5,231,718      5,233,165

Federal funds purchased and security repurchase
 agreements                                              363,739        399,730
Other short-term borrowings                               11,306         26,160
------------------------------------------------- -------------- --------------
Total short-term borrowings                              375,045        425,890

Federal Home Loan Bank Borrowings                        427,027        248,150
Long-term debt                                           130,239        101,793
Other liabilities                                        142,533        146,854
------------------------------------------------- -------------- --------------
TOTAL LIABILITIES                                      6,306,562      6,155,852
------------------------------------------------- -------------- --------------
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 51,448,335 - 1998 and 52,029,017 - 1997   102,897        104,058
Surplus                                                  162,350        155,430
Retained earnings                                        424,873        418,605
Deferred KSOP benefit expense                              (553)        (1,150)
Treasury stock: 1,013,600 shares at cost - 1998         (34,186)          -----
Accumulated other comprehensive income                     6,284          8,542
------------------------------------------------- -------------- --------------
TOTAL SHAREHOLDERS' EQUITY                               661,665        685,485
------------------------------------------------- -------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY            $6,968,227     $6,841,337
------------------------------------------------- -------------- --------------
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

Consolidated Statements of Income
                             Year Ended December 31,
(in thousands except per share data)             1998        1997        1996
--------------------------------------------- ----------- ----------- ----------
INTEREST INCOME
--------------------------------------------- ----------- ----------- ----------
<S>                                              <C>         <C>        <C>
 Loans and fees on loans                         $401,949    $404,096   $370,364
 Investments - taxable                             93,955      82,664     79,977
 Investments - tax-exempt                          11,366      12,230     12,723
 Federal funds sold and other                       4,820       5,340      5,668
 Loans held for resale                              5,559       6,408      4,688
--------------------------------------------- ----------- ----------- ----------                             
                                                  517,649     510,738    473,420
INTEREST EXPENSE
--------------------------------------------- ----------- ----------- ----------
 Deposits                                         193,087     194,898    186,257
 Short-term borrowings                             17,486      18,134     14,506
 FHLB borrowings                                   21,507      14,677     10,175
 Long-term debt                                     8,604       4,785        363
--------------------------------------------- ----------- ----------- ----------
                                                  240,684     232,494    211,301
--------------------------------------------- ----------- ----------- ----------
NET INTEREST INCOME                               276,965     278,244    262,119
 Provision for credit losses                       17,150      15,316     10,713
--------------------------------------------- ----------- ----------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES                                 259,815     262,928    251,406
--------------------------------------------- ----------- ----------- ----------
NONINTEREST INCOME
--------------------------------------------- ----------- ----------- ----------
 Trust and investment advisory fees                25,906      21,291     17,597
 Service charges on deposit accounts               18,443      17,356     17,234
 Fee income                                        24,548      20,029     15,840
 Mortgage banking income                           12,412       9,633      7,334
 Reinsurance income                                 3,167       3,512      2,864
 Other income                                      13,319      12,040      9,785
 Net gains - equity securities                     10,306       5,754        529
 Net gains - debt securities                          712         317        342
--------------------------------------------- ----------- ----------- ----------
                                                  108,813      89,932     71,525
--------------------------------------------- ----------- ----------- ----------
NONINTEREST EXPENSE
--------------------------------------------- ----------- ----------- ----------
 Salaries                                          97,443      92,650     81,894
 Employee benefits                                 17,535      17,311     16,508
 Occupancy expense, net                            17,302      16,407     15,916
 Furniture and equipment expense                   20,567      18,732     16,156
 Special charges                                    -----      11,410      -----
 Other expense                                     70,342      69,480     65,771
--------------------------------------------- ----------- ----------- ----------
                                                  223,189     225,990    196,245
--------------------------------------------- ----------- ----------- ----------
Income before income taxes                        145,439     126,870    126,686
Income tax expense                                 45,692      38,953     37,180
--------------------------------------------- ----------- ----------- ----------
NET INCOME                                        $99,747     $87,917    $89,506
--------------------------------------------- ----------- ----------- ----------
PER SHARE DATA
--------------------------------------------- ----------- ----------- ----------
Net income:
 Basic                                              $1.94       $1.70      $1.72
 Diluted                                             1.92        1.68       1.70
Dividends                                            1.13       $1.06      $0.98
--------------------------------------------- ----------- ----------- ----------
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
</TABLE>

<TABLE>
<CAPTION>

Consolidated Statements of Changes in Shareholders' Equity
-----------------------------------------------------------------------------------------------------------------------------------
                                     Issued and                                  Deferred
                                    Outstanding                                     KSOP                Net Unrealized
(in thousands)                        Common      Common                Retained  Benefit   Treasury     Securities   Shareholders'
                                      Shares      Stock      Surplus    Earnings  Expense     Stock        Gains         Equity
-----------------------------------------------------------------------------------------------------------------------------------
<S>     <C>                           <C>        <C>        <C>         <C>       <C>        <C>          <C>            <C>
BALANCES AT
JANUARY 1, 1996                       38,069     $76,139    $139,886    $401,448  ($1,750)   $   ---      $6,043         $621,766

Net income                               ---         ---         ---      89,506      ---        ---         ---           89,506
Change in unrealized gain on
   available-for-sale securities         ---         ---         ---         ---      ---        ---      (1,847)         (1,847)
                                                                                                                          -------
Comprehensive income                                                                                                      87,659
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
-----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1996                     51,986    $104,640    $139,213    $422,018  ($1,249)   ($8,412)     $4,196        $660,406
Net income                               ---         ---         ---      87,917      ---        ---         ---          87,917
Change in unrealized gain on
   available-for-sale securities         ---         ---         ---         ---      ---        ---       4,346           4,346
                                                                                                                          -------
Comprehensive income                                                                                                      92,263
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
-----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1997                     52,029    $104,058    $155,430    $418,605  ($1,150)   $   ---      $8,542        $685,485
Net income                               ---         ---         ---      99,747      ---        ---         ---          99,747
Change in unrealized gain on
   available-for-sale securities         ---         ---         ---         ---      ---        ---      (2,258)         (2,258)
                                                                                                                          -------
Comprehensive income                                                                                                      97,489
Dividends                                ---         ---         ---     (58,195)     ---        ---         ---         (58,195)
Stock issued:
  Benefit plans                          255         511       4,570         ---      ---        ---         ---           5,081
  KSOP                                    20          40         637         ---      ---        ---         ---             677
  Dividend reinvestment                  144         288       4,840         ---      ---        ---         ---           5,128
Deferred KSOP benefit expense            ---         ---         ---         ---      597        ---         ---             597
Acquisition of treasury stock         (2,014)        ---         ---         ---      ---    (74,597)        ---         (74,597)
Retirement of  treasury stock            ---      (2,000)     (3,127)    (35,284)     ---     40,411         ---             ---
-----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1998                     50,434    $102,897    $162,350    $424,873    ($553)  ($34,186)     $6,284        $661,665
-----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
                                                         Year Ended December 31,
(in thousands)                                        1998         1997         1996
------------------------------------------------ -------------- ----------- ------------
<S>                                                     <C>         <C>          <C>
OPERATING ACTIVITIES:
Net income                                             $99,747     $87,917      $89,506
Adjustments to reconcile net income to net  
cash provided by operating activities:

 Provision for credit losses                            17,150      15,316       10,713
 Provision for depreciation and amortization            21,653      18,062       15,840
 Deferred income taxes                                   4,770      14,537       14,880
 Sale of loans held for resale                         244,103     203,887      441,716
 Origination of loans held for resale                 (285,974)   (240,325)    (365,209)
 (Increase) decrease in interest receivable              4,437      (4,459)      (3,964)
 Increase (decrease) in interest payable                   125        (567)          (1)
 Other                                                 (31,669)     20,660       (6,391)
------------------------------------------------ -------------- ----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES               74,342     115,028      197,090
------------------------------------------------ -------------- ----------- ------------
INVESTING ACTIVITIES:
Net cash received in bank acquisitions                   -----      35,646       -----
Net increase in interest-bearing deposits w/ banks      (4,050)    (25,363)      (3,121)
Available for sale securities:
 Sales                                                 224,089     176,606       98,724
 Maturities                                          1,174,685     855,464    1,208,804
 Purchases                                          (1,423,334)   (891,694)  (1,368,734)
Held to maturity securities:
 Maturities                                            177,096      91,370      108,438
 Purchases                                            (308,589)   (192,900)    (103,268)
Net (increase) decrease in loans                       238,686    (343,350)    (367,093)
Proceeds from sales of loans                            12,372     302,840       52,013
Purchases of loans                                     (12,666)    (11,947)      (1,986)
Purchases of bank-owned life insurance                 (50,230)       -----        -----
Purchases of premises and equipment                    (24,366)    (23,641)     (16,870)
Other                                                  (10,959)     (6,404)      (1,025)
------------------------------------------------ -------------- ----------- ------------
NET CASH USED IN INVESTING ACTIVITIES                  ( 7,266)    (33,373)    (394,118)
------------------------------------------------ -------------- ----------- ------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits                     (1,447)    (99,242)      66,113
Net increase (decrease) in short-term borrowings       (50,845)     27,926       64,593
Proceeds from FHLB borrowings                          273,000     242,313      420,892
Repayments of FHLB borrowings                          (94,122)   (253,418)    (360,715)
Issuance of long-term debt                              30,000     100,000         ----
Repayment of long-term debt                             (1,554)       (780)      (1,962)
Acquisition of treasury stock                          (74,597)    (72,586)      (9,915)
Cash dividends                                         (58,195)    (55,964)     (46,998)
Other                                                   11,483      10,147        7,894
------------------------------------------------ -------------- ----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES     33,723    (101,604)     139,902
------------------------------------------------ -------------- ----------- ------------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS         100,799     (19,949)     (57,126)
Cash and cash equivalents at beginning of year         231,523     251,472      308,598
------------------------------------------------ -------------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR              $332,322    $231,523     $251,472
------------------------------------------------ -------------- ----------- ------------
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
</TABLE>

<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.

Nature of Operations:  Keystone provides a wide range of financial services to a
diverse client base through its bank and nonbank  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, 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 various 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
differences 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  subsidiary,  Keystone  Financial Bank, N.A., and its subsidiaries,  ATB
Real  Estate  Investment  Trust,  Inc.,  Keystone  Brokerage,   Inc,  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  Retirement  Benefit
Services, Inc. and two community development corporations. On December 31, 1998,
Keystone  combined  its  former  seven  separate  banks  into a single  charter,
Keystone  Financial  Bank, N.A. The seven former banks were American Trust Bank,
N.A.;  Financial Trust Company;  Keystone Bank,  N.A.,  Keystone  National Bank;
Mid-State  Bank and Trust  Company;  Northern  Central  Bank;  and  Pennsylvania
National Bank and Trust Company. 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.

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).

<PAGE>

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.  Amounts  capitalized are amortized in
proportion  to, and over the period  of,  estimated  net  servicing  income.  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.

<PAGE>

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
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

<PAGE>

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,  had been 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.  New lease activity
since the beginning of 1998 has been limited  pursuant to the curtailment of the
indirect  automobile  leasing  program  and the sale of the  business  equipment
leasing operation.

Allowance for Loan Losses:

The allowance for loan losses is established  through provisions charged against
income.  Loans deemed to be uncollectible  are charged against the allowance and
recoveries of previously charged-off loans are credited to the allowance.

Management's determination of the adequacy of the allowance is based on periodic
evaluations of the loan portfolio and other relevant factors. This evaluation is
inherently  subjective as it requires  material  estimates,  including,  but not
limited to, the  amounts  and timing of  expected  future cash flows or the fair
value of collateral  on impaired  loans,  estimated  losses on  installment  and
residential  mortgage loans, and general amounts for historical loss experience,
economic  conditions,  known  deterioration  in  certain  classes  of  loans  or
collateral,  trends in delinquencies,  uncertainties in estimating  losses,  and
inherent risks in the various  portions of the loan portfolio,  all of which may
be susceptible to significant change.

In determining the adequacy of the allowance for loan losses,  management  makes
allocations to specific  problem  commercial loans based on the present value of
expected  future cash flows or the fair value of the  underlying  collateral for
impaired  loans and to pools of other  commercial  loans based on various credit
risk  factors.  Allocations  to loan pools are developed by internal risk rating
and are based on  management's  judgment  concerning  historical loss trends and
other relevant  factors.  Installment and residential  mortgage loan allocations
are made at a total portfolio level based on historical loss experience adjusted
for portfolio  activity and current  conditions.  While  allocations are made to
specific  loans and pools of loans,  the  allowance  is  available  for all loan
losses.

While the Company's  allowance  methodology strives to reflect all risk factors,
there  continues to be a certain  element of risk arising in part from,  but not
limited  to,   potential  for  estimation  or  judgmental   errors,   charge-off
volatility,  rapid  declines in the credit  quality of assets  arising from such
factors as fraud,  portfolio  management  risks,  or sudden economic or industry
shifts.  Unallocated  amounts of the allowance  provide coverage for such risks.
The level of total  allowance  is  evaluated  based on the facts known about the
individual components and certain asset quality coverage ratios.

Financial Derivatives and other Hedging Activity:

Interest  rate swap  contracts  are  utilized to hedge  specific  credit  and/or
funding  activities,  and the  differential  of  interest  paid or  received  is
reflected in the

<PAGE>

interest  income or expense of the hedged  item.  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,  and other  hedging  vehicles  have been used to
reduce the market risk associated with interest rate fluctuations,  most notably
in connection  with the hedge of the pipeline of fixed rate consumer  mortgages.
Changes in the market value of the forward mortgage commitments,  are recognized
in income when the related  changes in the fair values of the loans being hedged
are recognized.

In June of 1998, the Financial  Accounting  Standards Board issued Statement No.
133,  "Accounting  for  Derivative  Instruments  and Hedging  Activities".  This
statement  provides new accounting  treatment for derivatives  transactions  and
hedging  activities.  The standard  will be effective for Keystone on January 1,
2000.  Adoption of the standard is not expected to have a significant  impact on
Keystone's financial condition or results of operations.

Transfers and Servicing of Financial Assets and  Extinguishment  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  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.

On January 1, 1998, Keystone adopted Statement of Position 98-1, "Accounting for
the Costs of Computer  Software  Developed or Obtained for Internal  Use".  This
statement  requires  the  capitalization  of  certain  computer  software  costs
incurred during the application  development stage of internal use software. The
adoption  of this  statement  did  not  have a  material  impact  on  Keystone's
financial condition or results of operations.

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.
Intangible assets are reviewed periodically for impairment.

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.

<PAGE>

Pensions:  In  1998,  Keystone  adopted  Financial  Accounting  Standards  Board
Statement  No.  132,  "Employers'  Disclosures  about  Pensions  and Other Post-
retirement Benefits".  This statement requires revised disclosures about pension
and other  post-retirement  benefit plans but does not impact the measurement or
recognition of those plans.  As such,  adoption of this statement did not impact
Keystone's  financial  condition or results of operations.  Disclosures for 1997
and 1996 were restated in accordance with this new statement.

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:  During  1998,  Keystone  adopted  Financial  Accounting
Standards Board Statement 130, "Reporting  Comprehensive Income", which required
reclassification  of  financial  statements  for  earlier  periods.  Sources  of
comprehensive  income not included in net income are limited to unrealized gains
and losses on certain investments in debt and equity securities.

Reclassifications:  Certain amounts reported in the 1997 annual report have been
reclassified to conform with the 1998 presentation.  These reclassifications did
not impact Keystone's financial condition or results of operations.

Per Share  Information:  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 1998,  Keystone adopted Financial  Accounting  Standards
Board  Statement  No. 131,  "Disclosures  about  Segments of an  Enterprise  and
Related  Information".   This  statement  established  standards  for  reporting
information about operating segments and related  disclosures about products and
services,  geographic  areas,  and major  customers.  The  adoption  of this new
standard did not affect Keystone's financial condition or results of operations.

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  $240,888,000,  $233,061,000,  and $211,302,000,  in 1998,
1997,  and 1996,  respectively.  Cash  payments  for income  taxes  approximated
$39,830,000,   $19,253,000,   and   $23,898,000   for  1998,   1997,  and  1996,
respectively.

<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>
                                                             1998
                                                        Available-for-Sale
-------------------------------------- ------------------------------------------------
                                        Amortized         Unrealized
                                           Cost        Gains     Losses     Fair Value
-------------------------------------- ------------ ---------------------- ------------
<S>                                        <C>          <C>            <C>     <C>
Negotiable money market investments        $290,954     $  103         $82     $290,975
U.S. Treasury securities                    122,155      1,234           1      123,388
U.S. Government agency obligations          546,452      3,737       1,617      548,572
Obligations of states and political
 subdivisions                                55,991      1,703           2       57,692
Corporate and other securities              104,533      4,712         119      109,126
-------------------------------------- ------------ ---------- ----------- ------------
Total                                    $1,120,085    $11,489      $1,821   $1,129,753
-------------------------------------- ------------ ---------- ----------- ------------
                                                             1998
                                                         Held-to-Maturity
-------------------------------------- ------------------------------------------------
                                        Amortized         Unrealized
                                           Cost          Gains   Losses     Fair Value
-------------------------------------- ------------ ---------------------- ------------
U.S. Government agency obligations         $500,418     $5,936        $135     $506,219
Obligations of states and political
 subdivisions                               146,018      5,333         158      151,193
Corporate and other securities               13,100        422         ---       13,522
-------------------------------------- ------------ ---------- ----------- ------------
Total                                      $659,536    $11,691        $293     $670,934
-------------------------------------- ------------ ---------- ----------- ------------
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                                           1997
                                                     Available-for-Sale
-------------------------------------- ----------------------------------------------
                                         Amortized        Unrealized
                                            Cost        Gains   Losses    Fair Value
--------------------------------------- ------------ ------------------- ------------
<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           72,487     1,688         4       74,171
 subdivisions
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
                                            Cost       Gains    Losses    Fair Value
--------------------------------------- ------------ ------------------- ------------
U.S. Government agency obligations          $366,238    $4,928      $150     $371,016
Obligations of states and political          143,910     4,845         5      148,750
 subdivisions
Corporate and other securities                18,240       230        18       18,452
--------------------------------------- ------------ --------- --------- ------------
     Total                                  $528,388   $10,003      $173     $538,218
--------------------------------------- ------------ --------- --------- ------------
</TABLE>

<TABLE>
<CAPTION>
                                                             1996
                                                        Available-for-Sale
-------------------------------------- ------------------------------------------------
                                        Amortized          Unrealized
                                           Cost          Gains    Losses    Fair Value
-------------------------------------- ------------- --------------------- ------------
<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          101,992       1,669       141      103,520
   subdivisions
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
                                           Cost         Gains      Losses   Fair Value
-------------------------------------- ------------- --------------------- ------------
U.S. Government agency obligations          $230,402      $1,997    $1,680     $230,719
Obligations of states and political          134,194       3,308       135      137,367
   subdivisions
Corporate and other securities                15,362         156        78       15,440
-------------------------------------- ------------- ----------- --------- ------------
Total                                       $379,958      $5,461    $1,893     $383,526
-------------------------------------- ------------- ----------- --------- ------------
</TABLE>

Investment  securities  having a carrying value of  $893,097,000 at December 31,
1998,  were pledged to secure public and trust  deposits,  treasury tax and loan
activity,   discount  window  and  FHLB  borrowings,   and  security  repurchase
agreements.

<PAGE>

Pre-tax  security  gains and losses  included  in  operating  results  from 1996
through 1998 were as follows (in thousands):

                          1998            1997           1996
-------------------- --------------- -------------- ---------------
Gains                       $11,148         $6,847            $980
Losses                         (130)          (776)           (109)
-------------------- --------------- -------------- ---------------
         Net                $11,018         $6,071            $871
-------------------- --------------- -------------- ---------------

<PAGE>

The following  tables display at December 31, 1998, the contractual  maturities,
amortized  costs,  related fair values,  and the  weighted  average  yield (tax-
equivalent basis) available thereon, of investment securities (in thousands):
<TABLE>
<CAPTION>
                                                                       Available for Sale
--------------------------------------------------------------------------------------------------------------
                                                                                          After One,
                                                            Within One Year           But Within Five Years
                                                    Amortized    Fair            Amortized      Fair
                                                      Cost       Value     Yield     Cost       Value    Yield
--------------------------------------------------------------------------------------------------------------
<S>                                                  <C>        <C>        <C>     <C>
Negotiable money market investments                  $290,954   $290,975   4.99%   $    ---   $    ---    ---%
U.S. Treasury securities                               54,577     54,821   6.25      67,578     68,567   5.67
Government agency obligations                          31,191     31,349   6.44     312,514    313,773   5.82
Obligations of states and political subdivisions        4,612      4,676   5.54      23,557     24,185   4.92
Corporate and other securities                          6,769      6,831   6.45      14,760     14,929   6.31
--------------------------------------------------------------------------------------------------------------
Total                                                $388,103   $388,652   5.32%   $418,409   $421,454   5.77%
--------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                       Held to Maturity
--------------------------------------------------------------------------------------------------------------
                                                                                          After One,
                                                            Within One Year           But Within Five Years
                                                    Amortized    Fair            Amortized      Fair
                                                      Cost       Value     Yield     Cost       Value    Yield
--------------------------------------------------------------------------------------------------------------
<S>                                                  <C>        <C>        <C>     <C>        <C>        <C>
Government agency obligations                        $  2,086   $  2,106   6.23%   $191,297   $193,698   6.37%
Obligations of states and political subdivisions        8,015      8,137   5.68      14,275     14,868   5.61
Corporate and other securities                            -          -       -       12,964     13,386   6.63
--------------------------------------------------------------------------------------------------------------
Total                                                $ 10,101   $ 10,243   5.79%   $218,536   $221,952   6.34%
--------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                                                                       Available for Sale
---------------------------------------------------------------------------------------------------------------
                                                            After Five,
                                                        But Within Ten Years            After Ten Years
                                                    Amortized      Fair            Amortized   Fair
                                                     Cost         Value   Yield      Cost     Value     Yield
---------------------------------------------------------------------------------------------------------------
<S>                                                    <C>        <C>      <C>      <C>        <C>       <C>
Negotiable money market investments                  $    ---   $    ---    ---%   $    ---   $    ---    ---%
U.S. Treasury securities                                  ---        ---    ---         ---        ---    ---
Government agency obligations                          36,305     36,505   6.37     166,442    166,945   6.39
Obligations of states and political subdivisions       18,306     19,007   5.18       9,516      9,824   5.34
Corporate and other securities                            250        250   7.54      82,754     87,116   6.68
--------------------------------------------------------------------------------------------------------------
Total                                                $ 54,861   $ 55,762   5.97%   $258,712   $263,885   6.45%
--------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>

                                                                     Held to Maturity
--------------------------------------------------------------------------------------------------------------
                                                          After Five,
                                                      But Within Ten Years               After Ten Years
                                                    Amortized    Fair               Amortized     Fair
                                                     Cost       Value     Yield     Cost        Value   Yield
--------------------------------------------------------------------------------------------------------------
<S>                                                  <C>        <C>        <C>     <C>        <C>        <C>
Government agency obligations                        $123,659   $125,438   6.50%   $183,376   $184,977   6.47%
Obligations of states and political subdivisions       15,714     16,423   5.50     108,014    111,765   5.33
Corporate and other securities                            136        136   9.00         ---        ---    ---
--------------------------------------------------------------------------------------------------------------
Total                                                $139,509   $141,997   6.39%   $291,390   $296,742   6.05%
--------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>

Loans and Leases

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

                                                                1998             1997
----------------------------------------------------------- ------------ --- ------------
Consumer financings:
----------------------------------------------------------- ------------ --- ------------
<S>                                                             <C>              <C>
 Direct loans                                                   $904,178         $884,226
 Indirect loans                                                  187,818          334,504
 Net investment in direct lease financing receivables            235,884          335,017
----------------------------------------------------------- ------------ --- ------------
                                                               1,327,880        1,553,747
Loans secured by real estate:
 Consumer                                                        754,280          862,227
 Commercial                                                    1,530,449        1,384,923
----------------------------------------------------------- ------------ --- ------------
                                                               2,284,729        2,247,150
Commercial                                                       679,412          708,480
Floor plan financing                                             167,762          203,189
----------------------------------------------------------- ------------ --- ------------
Total                                                         $4,459,783       $4,712,566
----------------------------------------------------------- ------------ --- ------------
</TABLE>

At December  31,  1998,  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 concentrations exist.

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

                                                 1998         1997         1996
--------------------------------------------- ---------- - ---------- - ----------
<S>                <C>                           <C>          <C>           <C>
Balance at January 1                            $65,091      $56,256       $55,415
Recoveries on loans previously charged off        2,968        2,485         2,393
Loans charged off                               (24,058)     (17,277)      (12,265)
Net loans charged off                           (21,090)     (14,792)       (9,872)
Provision charged to operations                  17,150       15,316        10,713
Other                                              (877)       8,311         -----
--------------------------------------------- ---------- - ---------- - -----------
Balance at December 31                          $60,274      $65,091       $56,256
--------------------------------------------- ---------- - ---------- - -----------
</TABLE>

<PAGE>

Total nonaccrual and restructured loan balances and related annual interest data
were as follows (in thousands):
<TABLE>
<CAPTION>
                                          1998            1997            1996
--------------------------------------- --------- --- ------------ --- ----------
<S>                                       <C>              <C>            <C>
Nonaccrual                                $24,675          $20,520        $19,350
Restructured                                  264              489            393
--------------------------------------- --------- --- ------------ --- ----------
Total                                     $24,939          $21,009        $19,743
--------------------------------------- --------- --- ------------ --- ----------
Interest computed at original terms        $2,385           $2,144         $1,896
Interest recognized                           361              473            598
--------------------------------------- --------- --- ------------ --- ----------
</TABLE>

At December 31, 1998,  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:

------------------------------------------------------------- --------- --------
At December 31,                                       1998     1997      1996
------------------------------------------------------------- --------- --------
  Recorded investment in impaired loans               $20,647  $16,730   $17,300
  Impaired loans for which an allowance exists          5,091   12,805     7,375
  Amount of allowance specifically
   allocated to impaired loans                          3,131    1,540     1,560


For the years ended December 31,                      1998     1997      1996
------------------------------------------------------------- -------- ---------
  Average recorded investment in impaired loans       $18,689  $17,015   $17,501
------------------------------------------------------------- -------- ---------

Certain directors and executive  officers of Keystone and its subsidiaries,  and
their associates, were indebted to the bank subsidiaries during 1998. Such loans
were made in the  ordinary  course of  business  and on  customary  terms.  Loan
activity during 1998 with these related parties was as follows (in thousands):

  Beginning Balance       Additions         Repayments      Ending Balance
--------------------- ------------------ ----------------- -----------------
      $179,377             $201,889          $202,529          $178,737

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  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.

In managing net interest income, Keystone uses interest rate swaps to offset the
difference or mismatch in repricing  indices of core banking  assets and related
funding.  The risk associated  with potential  reductions in net interest income
attributable  to this mismatch is broadly  defined as "basis risk".  At December
31, 1998, interest rate swaps totaling $250,000,000  (notional amount) were used
to manage this component of risk to net interest income performance.

<PAGE>

Another form of interest rate risk managed through  specific hedging activity at
December 31, 1998, related to outstanding  forward mortgage  commitments and put
options  related  to the  mortgage  banking  pipeline.  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, 1998,  Keystone had entered
into commitments to deliver approximately $95,064,000 of mortgage loans for sale
into the secondary  market.  The fair value of these commitments at December 31,
1998, was $826,000 and was considered in the lower of cost or market  evaluation
of loans held for sale. The delivery dates for these  commitments are short-term
in nature and will expire at various dates in the first half of 1999.

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
counter party 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 counter
party.

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.

Outstanding  commitments for loans and standby letters of credit were as follows
as December 31 (in thousands):

                                1998         1997
--------------------------- ------------ ------------
Loan commitments              $1,091,657   $1,027,782
Standby letters of credit         73,843       75,574
--------------------------- ------------ ------------

<PAGE>

Premises and Equipment

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


                                                  1998         1997
---------------------------------------------- ----------- ------------
Land                                               $12,562      $12,801
Buildings                                           99,702       97,298
Equipment                                          120,564      108,169
Leasehold improvements                              15,544       15,741
---------------------------------------------- ----------- ------------
                                                   248,372      234,009
Accumulated depreciation and amortization         (124,292)    (117,394)
---------------------------------------------- ----------- ------------
Total                                             $124,080     $116,615
---------------------------------------------- ----------- ------------

Depreciation and amortization expense related to premises and equipment amounted
to $16,056,000 in 1998, $14,554,000 in 1997, and $13,058,000 in 1996.

Keystone and its  subsidiaries  lease  various  equipment  and  buildings  under
operating lease agreements. In 1998, 1997, and 1996, total rent expense amounted
to $8,203,000,  $7,377,000, and $7,956,000,  respectively. Future annual minimum
lease payments do not significantly exceed historic levels.

Federal Home Loan Bank Borrowings

Keystone  Financial  Bank, N.A. is a member of the Federal Home Loan Bank (FHLB)
of Pittsburgh and, as such, can take advantage of the FHLB program for overnight
and term  advances  at  published  daily  rates.  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, 1998,  Keystone's  member bank could borrow an
additional   $826,684,000  based  on  qualifying  collateral.   Such  additional
borrowing  would require that the bank increase its  investment in FHLB stock by
approximately  $90,000,000.  Outstanding  borrowings  from the Federal Home Loan
Bank are summarized as follows (in thousands):

                                             December 31,
                                          1998          1997
------------------------------------ -------------- ------------
Due 1998, 5.45% to 7.71%                    $------      $57,957
Due 1999, 4.75% to 6.51%                     64,268       49,286
Due 2000, 4.77% to 6.51%                     80,831       70,830
Due 2001, 4.73% to 6.80%                     67,000        6,000
Due 2002, 5.25% to 6.08%                     60,550       60,550
Due 2003, 5.71% to 7.23%                      7,768        2,893
After 2003, 1.00% to 7.20%                  146,610          634
------------------------------------ -------------- ------------
                                           $427,027     $248,150
------------------------------------ -------------- ------------

<PAGE>

Of the December 31, 1998 outstanding balance, $307,400,000 was either adjustable
or subject to conversion. Of this amount, $10,000,000 was adjustable with LIBOR.
The  remaining  $297,400,000  are advances  which are subject to  conversion  to
adjustable rates at the option of the FHLB at various dates in 2001 and 2003. 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):


                                                      1998        1997
--------------------------------------------------- --------- ------------
Senior medium-term notes:
   Interest at 7.3%, mature 2004                      $99,812      $99,777
   Interest at 6.5%, mature 2008                       29,876          ---
Other                                                     551        2,016
-------------------------------------------------- ---------- ------------
Total                                                $130,239     $101,793
-------------------------------------------------- ---------- ------------


Keystone Financial Mid-Atlantic Funding Corp., a wholly-owned funding subsidiary
of  Keystone,  issued  $100  million of senior  medium term notes in 1997 and an
additional  $30  million  in  1998  under  a  $400  million  shelf  registration
statement.  The notes provide for semi-annual  interest payments at a fixed rate
and are unconditionally  guaranteed by Keystone.  The proceeds from the issuance
of the notes were used primarily for general corporate purposes.

Contingencies

Keystone and its  subsidiaries  are subject to various  legal  proceedings  that
arise in the ordinary  course of business.  In late 1997, an investment  advisor
not  affiliated  with  Keystone  ("investment   advisor")  was  accused  by  the
Securities  and  Exchange  Commission  of  defrauding  its  clients,  which were
primarily  school districts and  municipalities,  resulting in losses alleged to
approximate $70 million.  A Keystone  subsidiary had been previously  engaged to
maintain custody of certain funds and investments of the unaffiliated investment
advisor.  In an effort to recover the alleged  losses,  legal  proceedings  were
subsequently initiated by the court-appointed trustee for the investment advisor
and by its clients.  These  proceedings  included  individual  and class actions
against  Keystone,  its  subsidiaries,  and some of its employees  alleging that
these entities or individuals  were  responsible  for, and  contributed  to, the
loss.  Management is vigorously  contesting these actions.  The loss, if any, to
Keystone or its  subsidiaries  resulting  from the actions  cannot be reasonably
estimated  at this  time.  Because of the  complexity  of these  actions,  it is
expected  that final  resolution of these matters will not occur for a number of
years.

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

<PAGE>

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 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  2,572,000 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.


                               Weighted
                               Average
                               Exercise      Common
                                Price        Shares
---------------------------- ------------ ------------
January 1, 1996                    $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
---------------------------- ------------ ------------
  Granted                          $40.03     244,651
  Exercised                         15.66    (221,845)
  Terminated                        33.23     (27,552)
---------------------------- ------------ ------------
December 31, 1998                  $22.62   1,840,012
---------------------------- ------------ ------------

<PAGE>

The following table summarizes  information  about stock options  outstanding at
December 31, 1998:



            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         159,252    2.58          $8.71      159,252     $8.71
  $11.13 - $16.74         187,703    2.49         $14.71      177,567    $14.63
  $18.03 - $24.75         991,268    5.26         $21.53      991,225    $21.52
  $25.00 - $29.87         272,114    8.02         $25.40       22,576    $25.00
  $34.44 - $41.06         229,675    8.66         $40.13        9,823    $37.82
-------------------------------------------------------------------------------
   $4.95 - $41.06       1,840,012    5.58         $22.62    1,360,443    $19.30
-------------------------------------------------------------------------------
Options  exercisable  at the end of 1997 and 1996 were  1,192,657 and 1,333,422,
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. Keystone has reserved 750,000 shares of
common stock, of which 459,000 remain available for future purchases. The amount
of common  shares  issued  under this  program in 1998,  1997,  and 1996 were as
follows:

                                        Price       Shares
                                    Per Share       Issued
-------------------------- ------------------ ------------
1998                                   $26.24       99,980
1997                                   $19.20       94,195
1996                                   $15.79       97,196

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.

<PAGE>
<TABLE>
<CAPTION>
                                                          1998       1997       1996
------------------------------ ------------------------ --------- ---------- ----------
<S>                                                       <C>        <C>        <C>
Net Income (in thousands):     As reported                $99,747    $87,917    $89,506
                               Pro forma                   97,773     86,457     88,348

Diluted earnings per share:    As reported                  $1.92      $1.68      $1.70
                               Pro forma                     1.88       1.65       1.68
------------------------------ ------------------------ --------- ---------- ----------
</TABLE>
Information  regarding  the  weighted-average  grant-date  fair values for stock
options and purchase rights granted in 1998, 1997, and 1996 were as follows:

                                                        Assumptions
                                           -------------------------------------
                                Grant Date
                                Fair Value
                               (Per Option  Dividend   Expected  Interest
                                  /Share)     Yield    Volatility   Rates  Life
------------------------------ -------------------------------------------------
Stock option plans:
     1998                          $7.95      2.8%         15%    5.63%    7yrs
     1997                          $4.20      4.2%         15%    6.37%    7yrs
     1996                          $3.01      4.6%         15%    5.50%    7yrs
Employee stock purchase plan:
     1998                          $7.62      3.5%         15%    5.63%    1yr
     1997                          $6.30      4.5%         15%    5.63%    1yr
     1996                          $4.28      4.1%         12%    5.75%    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
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.  At December 31,
1998 and 1997, the amount executives  participating in the Program owed Keystone
for financed purchases totaled $2,064,000 and $1,709,000, respectively.

<PAGE>

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  192,000 shares remain
unissued. The following number of shares of Keystone common stock were purchased
pursuant to this plan: 144,000 in 1998, 130,000 in 1997, and 98,000 in 1996.

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.

The following  table  summarizes  the activity in the pension plan for the years
ended December 31, (in thousands):

                                                            1998        1997
-------------------------------------------------------- ----------- -----------
Projected benefit obligation, beginning of year             $84,890     $75,060
Service cost                                                  3,268       2,907
Interest cost                                                 5,780       5,458
Benefits paid                                                (4,028)     (4,243)
Change in assumptions                                         1,309       4,500
Amendments                                                     (566)        (97)
Experience loss                                                 717       1,305
-------------------------------------------------------- ----------- -----------
Projected benefit obligation, end of year                   $91,370     $84,890
-------------------------------------------------------- ----------- -----------
Fair value of plan assets at beginning of year             $106,239     $89,560
Actual return on assets                                      (2,766)     20,922
Benefits paid                                                (4,028)     (4,243)
-------------------------------------------------------- ----------- -----------
Fair value of plan assets at end of year                    $99,445    $106,239
-------------------------------------------------------- ----------- -----------
Funded status at end of year                                 $8,075     $21,349
Unrecognized net assets at transition                        (2,510)     (3,137)
Unrecognized net gain                                          (111)    (12,839)
Unrecognized prior service cost                              (1,702)     (1,497)
-------------------------------------------------------- ----------- -----------
Prepaid benefit expense at end of year                       $3,752      $3,876
-------------------------------------------------------- ----------- -----------
<PAGE>
<TABLE>
<CAPTION>

                                                      1998       1997       1996
-------------------------------------------------- ---------- ---------- -----------
<S>                                                    <C>        <C>         <C>
Service cost benefits earned during the period        $3,268     $2,907      $2,793
Interest cost on projected benefit obligation          5,780      5,458       5,166
Expected return on plan assets                        (7,692)    (7,120)     (6,666)
Net amortization:
  Net transition asset                                  (627)      (725)       (668)
  Prior service cost                                    (181)      (137)       (115)
  Net (gain) loss                                       (424)       ---          24
-------------------------------------------------- ---------- ---------- -----------
Pension expense                                         $124       $383        $534
-------------------------------------------------- ---------- ---------- -----------
</TABLE>

Actuarial  assumptions  used  in  the  determination  of the  projected  benefit
obligation were as follows:
<TABLE>
<CAPTION>

                                                      1998       1997       1996
--------------------------------------------------- --------- ---------- ----------
<S>                                                     <C>        <C>        <C>
Rate of increase in future compensation levels          5.00%      5.50%      5.50%
Expected long-term rate of return on plan assets        8.00       8.50       8.50
Weighted average discount rate                          6.75       7.00       7.50
--------------------------------------------------- --------- ---------- ----------
</TABLE>

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  employees 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.  Expense  recognized for the
employer  contributions  was $  1,984,000  in 1998,  $  1,580,000  in 1997,  and
$1,303,000 in 1996.

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):

<PAGE>

                                                December 31,
Deferred tax assets:                          1998         1997
----------------------------------------- ------------ ------------
  Allowance for credit losses                 $19,598      $20,717
  Deferred liabilities                          1,850        1,879
  Compensation accruals                         4,259        3,229
Deferred tax liabilities:
----------------------------------------- ------------ ------------
  Lease financing activities                  (47,742)     (47,672)
  Net unrealized gains on securities
   available-for-sale                          (3,383)      (4,600)
  Premises and equipment                       (3,088)      (3,862)
  Intangible assets                            (4,668)      (4,044)
  Other                                        (2,961)         287
----------------------------------------- ------------ ------------
Net deferred tax liability                   ($36,135)    ($34,066)
----------------------------------------- ------------ ------------

The  provision  for income  taxes  consisted  of the  following  components  (in
thousands):
                                    1998            1997            1996
--------------------------------- --------- ---- ----------- --- ----------

Deferred provision                   $4,770         $14,537         $14,880
Current provision:
 Federal taxes                       39,642          23,229          21,441
 State taxes                          1,280           1,187             859
--------------------------------- --------- ---- ----------- --- ----------
Total                               $45,692         $38,953         $37,180
--------------------------------- --------- ---- ---------- ---- ----------

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

                                        1998            1997            1996
------------------------------------ ---------- ---- ---------- ---- ----------
Provision on pre-tax income at
  statutory rates                      $50,904         $44,405         $44,340
Tax exempt interest income              (5,448)         (5,089)         (6,212)
Other                                      236            (363)           (948)
------------------------------------ ---------- ---- ----------- --- ----------
Total                                  $45,692         $38,953         $37,180
------------------------------------ ---------- ---- ---------- ---- ----------
Effective Rate                           31.4%           30.7%           29.3%
------------------------------------ ---------- ---- ---------- ---- ----------

Income taxes attributable to investment  security gains were $3,856,000 in 1998,
$2,125,000 in 1997, and $305,000 in 1996.

Comprehensive Income

During 1998,  Keystone adopted  Financial  Accounting  Standards Board Statement
130,  "Reporting  Comprehensive  Income",  which  required  reclassification  of
financial  statements for earlier periods.  Sources of comprehensive  income not
included  in net income are  limited to  unrealized  gains and losses on certain
investments  in debt and equity  securities.  The  disclosure  of  comprehensive
income is as follows (in thousands):

<PAGE>
<TABLE>
<CAPTION>

                                                 Year Ended December 31,
----------------------------- -------------------------------------------------------------
                                     1998                 1997                 1996
----------------------------- ------------------- -------------------- --------------------
                               Before    Net of     Before    Net of    Before     Net of
                                 Tax       Tax       Tax        Tax       Tax       Tax
----------------------------- --------- --------- ---------- --------- --------- ----------
<S>                            <C>       <C>       <C>        <C>     <C>        <C>
Net Income                               $99,747              $87,917             $89,506
Unrealized gains(losses)
 on securities:
  Unrealized holding gains
   (losses) arising during
   the period                    7,544     4,904     12,757     8,292   (1,971)    (1,281)
  Less: Reclassification
   adjustment for gains
   included in net income       11,018     7,162      6,071     3,946      871        566
----------------------------- --------- --------- ---------- --------- --------- ----------
                                (3,474)   (2,258)     6,686     4,346   (2,842)    (1,847)
----------------------------- --------- --------- ---------- --------- --------- ----------
Comprehensive Income                     $97,489              $92,263             $87,659
============================= ========= ========= ========== ========= ========= ==========
</TABLE>

Earnings Per Share

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):
<TABLE>
<CAPTION>

                                                 1998           1997            1996
------------------------------------------- -------------- --------------- ---------------
<S>                                              <C>             <C>             <C>
Numerator - Net Income                             $99,747         $87,917         $89,506

Denominators:

  Average Basic shares outstanding                  51,446          51,693          52,119
  Average Dilutive option effect                       596             627             362
------------------------------------------- -------------- --------------- ---------------
  Average Dilutive shares outstanding               52,042          52,320          52,481
------------------------------------------- -------------- --------------- ---------------
EPS:

  Basic                                              $1.94           $1.70           $1.72
  Diluted                                            $1.92           $1.68           $1.70
------------------------------------------- -------------- --------------- ---------------
</TABLE>

Segment Reporting

In June of 1997, the Financial  Accounting  Standards Board issued Statement No.
131,  "Disclosures  about  Segments of an Enterprise  and Related  Information",
which was effective for fiscal years  beginning  after December 15, 1997.  Under
the terms of this new  statement,  a segment is  defined as a revenue  producing
component of the enterprise for which separate financial information is produced
internally and is subject to evaluation by the chief operating decision maker in
deciding  how to allocate  resources  to  segments.  Operating  segments  with a
reported measure of revenue,  profit or loss, or assets,  that is 10% or more of
combined  revenue,  profit or loss,  or assets,  respectively  of all  operating
segments  must be reported  separately.  Keystone  considered  the nature of its
products  and  services  offered to  customers in order to identify its business
segments,  which are community banking,  mortgage banking,  and asset management
services.  These segments are managed  separately  because they offer distinctly
different products distributed through different delivery channels.  No customer
of Keystone  individually  represents  10% or more of  consolidated  revenue and
revenues  with  customers  of foreign  countries  are  minimal.  The  segment of
community banking constituted over 90% of Keystone's revenue, profit, and assets

<PAGE>

for the  years  ended  December  31,  1998,  1997,  and  1996  and was the  only
reportable  segment.  As such,  financial  information for this segment does not
differ  materially from the information  provided in the consolidated  financial
statements.

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 consolidated risk-based capital position
at the end of 1998 and 1997 and a comparison to the various  regulatory  capital
requirements (in thousands):

<TABLE>
<CAPTION>

                                1998                  1997             Well-
                                ----                  ----          Capitalized    Minimum
                          Amount     Ratio      Amount     Ratio       Ratio        Ratio
----------------------- ---------- ---------- ---------- --------- ------------- -----------
<S>                       <C>         <C>      <C>         <C>             <C>          <C>
Total capital
 (to risk-weighted
  assets)                 $653,664     13.84%   $675,575    13.75%           10%          8%
Tier 1 capital
 (to risk-weighted
  assets)                  594,623     12.59%    614,172    12.50%            6%          4%
Tier 1 capital (to
average assets)            594,623      8.66%    614,172     9.15%            5%          4%
----------------------- ---------- ---------- ---------- --------- ------------- -----------
</TABLE>

At December 31, 1998, Keystone Financial Bank, N.A. 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, 1998, each predecessor
bank to Keystone Financial Bank, N.A. has been categorized as "well-capitalized"
by its primary regulator at its most recent examination.

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, 1998,  Keystone's  bank  subsidiary  maintained
average reserve balances of approximately $56,033,000.

Dividends  that may be paid to  Keystone by its  subsidiary  bank are limited by
state and  federal  regulations.  The related  amount  available  for  dividends
aggregated  $87,226,000 at December 31, 1998.  Federal Reserve  regulations also
limit the subsidiary bank as to the amount it may loan its affiliates, including
Keystone.  At December  31,  1998,  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

<PAGE>

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

<TABLE>
<CAPTION>
                                           1998                     1997
                                   ----------------------- -----------------------
                                   Carrying    Estimated    Carrying   Estimated
                                    Amount     Fair Value    Amount    Fair Value
--------------------------------------------- ------------------------------------
<S>                                  <C>          <C>         <C>         <C>
Financial Assets:
Cash and due from banks              $190,622     $190,622    $206,223    $206,223
Federal funds sold and other          147,678      147,678      27,228      27,228
Investment securities
  available for sale                1,129,753    1,129,753   1,091,400   1,091,400
Investment securities held
  to maturity                         659,536      670,934     528,388     538,218
Loans held for resale                  76,423       76,423      43,055      43,055
Loans, net of allowance for
  credit losses                     4,163,938    4,313,572   4,275,218   4,447,413
Leases                                235,571      243,242     372,257     380,855
--------------------------------------------- ------------------------------------
Financial Liabilities:
Time deposits                      $2,923,751   $2,952,578  $3,023,702  $3,048,175
Other deposits                      2,307,967    2,307,967   2,209,463   2,209,463
Short-term borrowings                 375,045      375,045     425,890     425,890
FHLB borrowings                       427,027      431,470     248,150     249,629
Long-term debt                        130,239      136,707     101,793     101,793
--------------------------------------------- ------------------------------------
Off-Balance Sheet Instruments:
Lending commitments and
  letters of credit                    $-----       $(800)      $-----      $(684)
All other                              $-----        $596       $-----      $(217)
--------------------------------------------- ------------------------------------
</TABLE>

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

<PAGE>

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
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.

The results of operations of Financial Trust were combined with Keystone for the
year ended December 31, 1996 as follows (in thousands):

                                                      Financial    Consolidated
                                           Keystone      Trust        Keystone
--------------------------------------- ------------ ------------ --------------
  Net interest income                      $209,763      $52,356       $262,119
  Net income                                 69,475       20,031         89,506
--------------------------------------- ------------ ------------ --------------
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,  1997,  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

<PAGE>

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 are being 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.

<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,
                                                    1998         1997
----------------------------------------------- ------------ ------------
Assets:
   Cash                                                 $271       $1,489
   Investment securities                              14,876       65,024
   Investments in:
     Subsidiary banks                                585,189      630,102
     Other subsidiaries                               88,723      115,624
   Other assets                                          726          889
----------------------------------------------- ------------ ------------
TOTAL ASSETS                                        $689,785     $813,128
----------------------------------------------- ------------ ------------
Liabilities:
   Long-term debt                                     $3,556     $100,106
   Other liabilities                                  24,564       27,537
----------------------------------------------- ------------ ------------
TOTAL LIABILITIES                                     28,120      127,643
Shareholders' Equity                                 661,665      685,485
----------------------------------------------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          $689,785     $813,128
----------------------------------------------- ------------ ------------

                             Statements of Income
                                                  Year Ended December 31,
                                                1998       1997        1996
-------------------------------------------- ---------- ----------- -----------
Income:
 Dividends from subsidiaries:
   Bank subsidiaries                           $60,068     $67,305     $71,891
   Other subsidiaries                           21,997        ----         134
 Net securities gains                            9,301        ----        ----
-------------------------------------------- ---------- ----------- -----------
Expenses:
 Net interest expense(income)                    6,981       2,144        (299)
 Operating expense                               2,759       9,483       3,233
-------------------------------------------- ---------- ----------- -----------
Income before taxes and undistributed           81,626      55,678      69,091
earnings of subsidiaries
Income taxes (benefit)                          (1,506)     (3,712)       (799)
Equity in undistributed earnings
 of subsidiaries                                16,615      28,527      19,616
-------------------------------------------- ---------- ----------- -----------
NET INCOME                                     $99,747     $87,917     $89,506
-------------------------------------------- ---------- ----------- -----------

<PAGE>

                           Statements of Cash Flows
                                                 Year Ended December 31,
                                              1998        1997        1996
------------------------------------------ ----------- ----------- -----------
OPERATING ACTIVITIES:
 Net income                                   $99,747     $87,917     $89,506
 Equity in undistributed earnings             (16,615)    (28,527)    (19,616)
 Other                                         (2,810)      14,729      1,042
------------------------------------------ ----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
  ACTIVITIES                                   80,322      74,119      70,932
------------------------------------------ ----------- ----------- -----------
INVESTING ACTIVITIES:
 Net (increase) decrease in investments        50,148     (38,529)    (13,030)
 (Investments in) distributions from
   subsidiaries                                88,429     (24,459)     (8,451)
------------------------------------------ ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
 INVESTING ACTIVITIES                         138,577     (62,988)    (21,481)
------------------------------------------ ----------- ----------- -----------
FINANCING ACTIVITIES:
 Cash dividends declared                      (58,195)    (55,964)    (46,998)
 KSOP activity:
   Common stock proceeds                          677         819         302
   Payment of debt                               (597)       (523)       (569)
 Proceeds of long-term debt                    30,928      98,960         ---
 Repayment of long-term debt                 (125,735)        ---         ---
 Acquisition of treasury stock                (74,597)    (72,586)     (9,915)
 Proceeds from issuance of common stock
   under benefits plans                        10,211      12,908       7,190
 Other                                         (2,809)      5,717          34
------------------------------------------ ----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES        (220,117)    (10,669)    (49,956)
------------------------------------------ ----------- ----------- -----------
Increase (decrease) in cash                    (1,218)        462        (505)
Cash at beginning of year                       1,489       1,027       1,532
------------------------------------------ ----------- ----------- -----------
CASH AT END OF YEAR                              $271      $1,489      $1,027
------------------------------------------ ----------- ----------- -----------


<PAGE>

Supplemental Financial Information

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, 1998 (in thousands):

                                                            1998
-------------------------------------------------------------------------------
                                                Average                Yield/
(in thousands)                                  Balance    Interest     Rate
-------------------------------------------------------------------------------
ASSETS
Federal funds sold and other                    $89,247      $4,820    5.40%
Investment securities:
    Negotiable money market investments         160,214       8,713    5.44
    Taxable investment securities             1,338,147      85,399    6.38
    Nontaxable investment securities(1)         209,119      16,692    7.98
Loans held for resale                            68,926       5,559    8.07
Consumer loans (2) (3)                        1,483,643     135,934    9.16
Real estate loans (1) (2) (3)                 2,270,914     196,516    8.65
Commercial loans (1) (2) (3)                    835,287      72,585    8.69
-------------------------------------------------------------------------------
Total earning assets                         $6,455,497    $526,218    8.15%
Allowance for credit losses                     (63,600)
Other assets                                    482,419
-------------------------------------------------------------------------------
Total Assets                                 $6,874,316

LIABILITIES AND SHAREHOLDERS' EQUITY
NOW/Savings deposits                           $823,463     $12,737    1.55%
Money market deposits                           740,086      20,649    2.79
Time deposits                                 2,988,222     159,702    5.34
Short-term borrowings                           375,131      17,486    4.66
FHLB borrowings                                 372,097      21,506    5.78
Long-term debt                                  119,313       8,604    7.21
-------------------------------------------------------------------------------
Total interest-bearing liabilities           $5,418,312    $240,684    4.44%
Demand deposits                                 637,533
Other liabilities                               136,659
Shareholders' equity                            681,812
-------------------------------------------------------------------------------
Total Liabilities and Equity                 $6,874,316

Interest rate spread                                                   3.71%
Net interest income and net interest margin                $285,534    4.42%
Tax-equivalent adjustment                                    (8,569)
-------------------------------------------------------------------------------
Net interest income                                        $276,965
-------------------------------------------------------------------------------
                                                           1997
-------------------------------------------------------------------------------
(in thousands)                                 Average                Yield/
                                               Balance    Interest     Rate
-------------------------------------------------------------------------------
ASSETS
Federal funds sold and other                    $84,032      $5,340    6.35%
Investment securities:
    Negotiable money market investments         108,278       6,155    5.68
    Taxable investment securities             1,174,674      77,034    6.56
    Nontaxable investment securities(1)         225,384      17,557    7.79
Loans held for resale                            77,330       6,408    8.29
Consumer loans (2) (3)                        1,523,659     136,257    8.94
Real estate loans (1) (2) (3)                 2,239,664     196,964    8.79
Commercial loans (1) (2) (3)                    809,306      73,883    9.13
-------------------------------------------------------------------------------
Total earning assets                         $6,242,327    $519,598    8.32%
Allowance for credit losses                     (61,800)
Other assets                                    449,475
-------------------------------------------------------------------------------
Total Assets                                 $6,630,002

LIABILITIES AND SHAREHOLDERS' EQUITY
NOW/Savings deposits                           $931,273     $15,930    1.71%
Money market deposits                           650,082      16,306    2.51
Time deposits                                 2,967,437     162,662    5.48
Short-term borrowings                           371,645      18,134    4.88
FHLB borrowings                                 240,533      14,677    6.10
Long-term debt                                   64,016       4,785    7.47
--------------------------------------------------------------------------------
Total interest-bearing liabilities           $5,224,986    $232,494    4.45%
Demand deposits                                 606,907
Other liabilities                               135,789
Shareholders' equity                            662,320
-------------------------------------------------------------------------------
Total Liabilities and Equity                 $6,630,002

Interest rate spread                                                   3.87%
Net interest income and net interest margin                $287,104    4.59%
Tax-equivalent adjustment                                    (8,860)
-------------------------------------------------------------------------------
Net interest income                                        $278,244
-------------------------------------------------------------------------------

                                                             1996
-------------------------------------------------------------------------------
(in thousands)                                 Average                Yield/
                                               Balance      Interest   Rate
-------------------------------------------------------------------------------
ASSETS
Federal funds sold and other                   $106,374      $5,668    5.33%
Investment securities:
    Negotiable money market investments         153,631       8,583    5.59
    Taxable investment securities             1,143,073      71,458    6.25
    Nontaxable investment securities(1)         235,731      18,953    8.04
Loans held for resale                            53,656       4,688    8.74
Consumer loans (2) (3)                        1,271,662     113,377    8.92
Real estate loans (1) (2) (3)                 2,209,179     196,152    8.88
Commercial loans (1) (2) (3)                    708,328      63,514    8.97
-------------------------------------------------------------------------------
Total earning assets                         $5,881,634    $482,393    8.20%
-------------------------------------------------------------------------------
Allowance for credit losses                     (56,211)
Other assets                                    407,225
-------------------------------------------------------------------------------
Total Assets                                 $6,232,648

LIABILITIES AND SHAREHOLDERS' EQUITY
NOW/Savings deposits                         $1,102,294     $20,404    1.85%
Money market deposits                           536,237      12,732    2.37
Time deposits                                 2,759,973     153,121    5.55
Short-term borrowings                           323,938      14,506    4.48
FHLB borrowings                                 159,503      10,175    6.38
Long-term debt                                    3,569         363   10.17
-------------------------------------------------------------------------------
Total interest-bearing liabilities           $4,885,514    $211,301    4.33%
Demand deposits                                 604,536
Other liabilities                               107,247
Shareholders' equity                            635,351
-------------------------------------------------------------------------------
Total Liabilities and Equity                 $6,232,648

Interest rate spread                                                   3.87%
Net interest income and net interest margin                $271,092    4.61%
Tax-equivalent adjustment                                    (8,973)
-------------------------------------------------------------------------------
Net interest income                                        $262,119
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                             1998 change from 1997             1997 change from 1996
                                                             ---------------------             ---------------------

                                                             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              ($520)  ($1,160)     $640      ($328)  ($1,400)   $1,072
                    Investment securities(1)                 10,060    12,643    (2,583)     1,752      (156)    1,908
                    Loans held for resale                      (849)     (681)     (168)     1,720     1,973      (253)
                    Loans and leases (1)(2)(3)               (2,071)    4,881    (6,952)    34,061    39,782    (5,721)
-----------------------------------------------------------------------------------------------------------------------------
                                                              6,620    15,683    (9,063)    37,205    40,199    (2,994)

Interest expense on: NOW deposits                               265       316       (51)     3,024     2,973        51
                     Savings deposits                         2,928     1,480     1,448      1,450      (652)    2,102
                     Money market deposits                   (4,344)   (4,526)      182     (3,574)   (3,968)      394
                     Time deposits                            2,961    (2,110)    5,071     (9,541)   (2,623)   (6,918)
                     Short-term borrowings                      648      (169)      817     (3,628)   (2,255)   (1,373)
                     FHLB borrowings                         (6,829)   (7,641)      812     (4,502)   (4,962)      460
                     Long-term debt                          (3,819)   (3,993)      174     (4,422)   (4,543)      121
-----------------------------------------------------------------------------------------------------------------------------
                                                             (8,190)  (16,643)    8,453    (21,193)  (16,030)   (5,163)
-----------------------------------------------------------------------------------------------------------------------------
Net Interest Income Change - Tax Equivalent                 ($1,570)    ($960)    ($610)   $16,012   $24,169   ($8,157)
-----------------------------------------------------------------------------------------------------------------------------

(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 $7,056,000 in 1998, $6,523,000
     in 1997, and $5,954,000 in 1996.
(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.
</TABLE>
<PAGE>

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, 1998,  into rate sensitive  periods
based on the repricing or maturity dates of the various cash-flow streams.
<TABLE>
<CAPTION>

                                                                     Rate Sensitive Period

As of December 31, 1998(in thousands)       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>
ASSETS
   Federal funds sold and other             $147,678           -            -            -            -      $147,678
   Investment securities                     346,933      51,133       57,806      136,218    1,197,199     1,789,289
   Loans held for resale                      76,423           -            -            -            -        76,423
   Consumer loans                            332,093     110,750      200,839      307,972      376,226     1,327,880
   Consumer mortgages                        176,690     106,730      162,319      179,040      129,501       754,280
   Commercial real estate loans              172,183      38,571       77,717      114,482    1,127,496     1,530,449
   Commercial loans                          452,277      17,935       39,048       71,524      266,390       847,174
---------------------------------------------------------------------------------------------------------------------
       Total earning assets                1,704,277     325,119      537,729      809,236    3,096,812     6,473,173
   Other assets                                    -           -            -            -      495,054       495,054
---------------------------------------------------------------------------------------------------------------------
        TOTAL ASSETS                      $1,704,277    $325,119     $537,729     $809,236   $3,591,866    $6,968,227
---------------------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
   NOW deposits                             $236,270           -            -            -     $402,298      $638,568
   Savings deposits                           57,768           -            -            -      141,431       199,199
   Money market deposits                     537,448           -            -            -      220,609       758,057
   Time deposits                           1,375,483     378,114      489,810      401,578      280,748     2,925,733
   Short-term borrowings                     374,418         313          314            -            -       375,045
   FHLB borrowings                            10,790      26,041       27,602       81,005      281,589       427,027
   Long-term debt                                149         149           48           96      129,797       130,239
---------------------------------------------------------------------------------------------------------------------
       Total interest-bearing liabilities  2,592,326     404,617      517,774      482,679    1,456,472     5,453,868
   Demand deposits                                 -           -            -            -      710,161       710,161
   Other liabilities                               -           -            -            -      142,533       142,533
   Shareholders' equity                            -           -            -            -      661,665       661,665
---------------------------------------------------------------------------------------------------------------------
       TOTAL LIABILITIES AND
           SHAREHOLDERS' EQUITY           $2,592,326    $404,617     $517,774     $482,679   $2,970,831    $6,968,227
---------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity                  ($888,049)   ($79,498)     $19,955     $326,557     $621,035
Cumulative GAP                             ($888,049)  ($967,547)   ($947,592)   ($621,035)
---------------------------------------------------------------------------------------------------------------------
<PAGE>
</TABLE>

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
53% 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, 1998(in thousands): 
<TABLE> 
<CAPTION>

                                       After
                                      One But      Within
                                       Within       Five      After Five
                                      One Year     Years        Years         Total
------------------------------------ ----------- ---------- ------------- ------------
<S>                                     <C>        <C>           <C>          <C>
Commercial                              $464,622   $198,857      $183,695     $847,174
Commercial real estate                   307,400    376,642       846,407    1,530,449
------------------------------------ ----------- ---------- ------------- ------------
                                        $772,022   $575,499    $1,030,102   $2,377,623
------------------------------------ ----------- ---------- ------------- ------------
Loans maturing after one year with: 
Fixed interest rates:
 Commercial                                        $124,143       $77,676
 Commercial real estate                             240,241       606,192
Variable interest rates:
 Commercial                                          74,714       106,019
 Commercial real estate                             136,401       240,215
------------------------------------ ----------- ---------- ------------- ------------
Total                                              $575,499    $1,030,102
==================================== =========== ========== ============= ============
</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, 1998 (in thousands):

                                     Certificates of       Other Time
                                        Deposit of        Deposits of
                                     $100,000 or more   $100,000 or more
----------------------------------- ------------------ ------------------
3 months or less                              $193,455             $5,899
Over 3 months through 6 months                  65,952              4,666
Over 6 months through 12 months                 93,563              5,374
Over 12 months                                  44,668             22,640
----------------------------------- ------------------ ------------------
Total                                         $397,638            $38,579
=================================== ================== ==================

<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>
                                                      1998        1997        1996
-------------------------------------------------- ---------- ------------ -----------
<S>                                                 <C>          <C>         <C>
Balance at December 31,                              $363,739     $399,730    $368,886
Weighted average interest rate at year end              4.67%        4.75%       4.75%
Maximum amount outstanding at any month end          $395,635     $405,268    $377,727
Average amount outstanding during the year           $357,090     $367,102    $307,225
Weighted average interest rate during the year          4.62%        4.78%       4.58%
-------------------------------------------------- ---------- ------------ -----------
</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 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 financial  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 bank  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 counter party and sets an aggregate
limit on the notional value of interest rate swaps as a percentage 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  desegregated  into groupings
which more  accurately  define the extent of mortgage  extension  or  prepayment
risk,

<PAGE>

and include PAC's (planned  amortization class), SEQ PAY (sequential pay class),
VADM's (very accurately defined maturity),  TAC's (targeted  amortization class)
and others. Other more volatile forms of CMO's include interest-only, principal-
only,  inverse  floating  bonds,  and residuals,  all of which are  specifically
designated as prohibited investments under Keystone's investment policy.

At December  31, 1998,  Keystone had  $156,844,000  in  collateralized  mortgage
obligations,  compared to  $61,477,000  at December 31, 1997. The CMO securities
held by Keystone are primarily shorter-maturity class bonds that were structured
to have more  predictable  cash flows,  by being less  sensitive to  prepayments
during  periods of changing  interest rates than other  longer-term  class bonds
similarly available. Substantially all of the CMO's held by Keystone were issued
or backed by Federal Agencies.

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 $9,972,000 at the end of 1998.

<PAGE>

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, 1998
-------------------------------------- ----------------------------------------
                                         Amortized      Market     Unrealized
                                           Cost         Value      Gain/(Loss)
-------------------------------------- ------------- ------------ -------------
U.S. Government Agency Obligations:
 Conventional                               $561,198     $565,846        $4,648
 Mortgage-backed                             318,856      322,186         3,330
 CMO's:
     PAC's1                                  102,777      102,443         (334)
     Seq Pay's2                               25,374       25,231         (143)
     VADM's3                                   6,254        6,293            39
     TAC's4                                    2,494        2,495             1
     Other                                    19,945       20,184           239
 Structured notes                              9,972       10,113           141
-------------------------------------- ------------- ------------ -------------
 Subtotal                                  1,046,870    1,054,791         7,921
-------------------------------------- ------------- ------------ -------------
Negotiable money market instruments          290,954      290,975            21
U.S. Treasury securities                     122,155      123,388         1,233
State and political subdivision
 obligations                                 202,009      208,885         6,876
Corporate and other                          117,633      122,648         5,015
-------------------------------------- ------------- ------------ -------------
     Total                                $1,779,621   $1,800,687       $21,066
-------------------------------------- ------------- ------------ -------------
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 SEQ PAY (sequential pay class) allocates  collateral  principal  payments
     sequentially  to  a  series  of  bonds.  Principal  payments  are  directed
     initially  only to the first tranche until it is completely  retired.  Once
     the first  tranche is retired,  the  principal  payments are applied to the
     second tranche until it is retired, and so on.
3.   A VADM(very  accurately  defined  maturity) has a stated final payment date
     which provides protection from mortgage payment extension risk.
4.   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.

<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 that determines adherence to
credit  policies,   assesses  the  effectiveness  of  the  credit  process,  and
objectively  evaluates 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):

<TABLE>
<CAPTION>

                                1998         1997          1996         1995         1994
--------------------------- ------------ ------------- ------------ ------------ -------------
<S>                           <C>           <C>          <C>          <C>           <C>
Commercial:
Commercial and industrial      $615,925      $637,617     $547,153     $487,843      $426,434
Floor plan financing            167,762       203,189      172,248      167,504       150,066
Obligations of political
 subdivisions                    63,487        70,863       73,749       64,677        60,160
--------------------------- ------------ ------------- ------------ ------------ -------------
                                847,174       911,669      793,150      720,024       636,660
--------------------------- ------------ ------------- ------------ ------------ -------------
Commercial Real  Estate:
Commercial and industrial     1,299,052     1,080,776      843,746      828,508       840,910
Multi-family residential         76,752       130,148       99,074       92,544        84,548
Obligations of political
 subdivisions                    47,493        40,930       29,686       33,010        31,023
Construction and land
 development                     95,279       117,503       91,755       86,983        68,652
Agricultural                     11,873        15,566       12,756       13,363        14,364
--------------------------- ------------ ------------- ------------ ------------ -------------
                              1,530,449     1,384,923    1,077,017    1,054,408     1,039,497
--------------------------- ------------ ------------- ------------ ------------ -------------
Consumer:
Real estate                     754,280       862,227    1,186,663    1,206,547     1,184,346
Installment                     543,513       704,242      626,573      631,584       655,163
Home equity                     508,729       473,365      311,086      256,505       227,110
Personal lines of credit         39,754        41,123       40,498       43,244        46,392
Leases                          235,884       335,017      301,483      184,554       111,732
--------------------------- ------------ ------------- ------------ ------------ -------------
                              2,082,160     2,415,974    2,466,303    2,322,434     2,224,743
--------------------------- ------------ ------------- ------------ ------------ -------------
Total                        $4,459,783    $4,712,566   $4,336,470   $4,096,866    $3,900,900
--------------------------- ------------ ------------- ------------ ------------ -------------
</TABLE>

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.


<PAGE>

o  The largest group of customers in a single industry to whom Keystone provides
   credit  extensions  is  automobile  dealers.  At  December  31,  1998  credit
   extensions  totaling  $191,392,000 were  outstanding,  and consisted of floor
   plan and related commercial loans and mortgages.

o  Keystone  has no  dependence  on a single  customer.  The ten largest  credit
   relationships  account for only 3% of the total loans  outstanding at the end
   of 1998.

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  monitors its exposure to commercial and commercial  real estate loans.
This includes 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, 1998
                                Balance
                              Relationship       Average
----------------------------- ------------ -- --------------
Commercial loans                  $847,174
Commercial real estate           1,530,449
----------------------------- ------------ -- --------------
                                $2,377,623              $150
----------------------------- ------------ -- --------------

At December 31, 1998, approximately 23% 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
$93,304,000 and $83,757,000, respectively.

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.

<PAGE>

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):


                             1998       1997      1996       1995       1994
-------------------------- --------- ---------- --------- ---------- ----------
Commercial                   $13,436    $11,266    $9,944    $11,450    $11,168
Real estate secured:
  Commercial                   8,813     12,630    11,922     11,969     12,104
  Consumer                     2,064      1,849     2,324      2,251      2,563
Consumer                      15,574     16,844    12,693      7,724      7,036
General risk                  20,387     22,502    19,373     22,021     20,837
-------------------------- --------- ---------- --------- ---------- ----------
                             $60,274    $65,091   $56,256    $55,415    $53,708
-------------------------- --------- ---------- --------- ---------- ----------

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.  The percentage allocation of allowance to any given category of
loans may change  disproportionately  to the  percentage  of total loans in that
category  due  primarily  to changes in  internal  risk  ratings of the  various
categories. At December 31, the following comparison is provided:

<TABLE>
<CAPTION>
                                  1998       1997      1996       1995      1994
------------------------------ ---------- ---------- --------- ---------- ---------
<S>                                   <C>        <C>       <C>        <C>       <C>
Commercial:
% of Total loans                      19%        19%       18%        18%       16%
% Allocation of allowance             22%        17%       18%        21%       21%
Commercial real estate:
% of Total loans                      33%        29%       25%        26%       27%
% Allocation of allowance             15%        19%       21%        22%       23%
Consumer real estate:
% of Total loans                      18%        18%       27%        29%       30%
% Allocation of allowance              3%         3%        4%         4%        5%
Consumer:
% of Total loans                      30%        34%       30%        27%       27%
% Allocation of allowance             26%        26%       23%        14%       13%
General Risk:
% Allocation of allowance             34%        35%       34%        39%       38%
------------------------------ ---------- ---------- --------- ---------- ---------
Total loans                          100%       100%      100%       100%      100%
------------------------------ ---------- ---------- --------- ---------- ---------
Allocation of allowance              100%       100%      100%       100%      100%
------------------------------ ---------- ---------- --------- ---------- ---------
</TABLE>

<PAGE>

Quarterly Information

Income Performance
<TABLE>
<CAPTION>
                                                                    1998
------------------------------------------- -----------------------------------------------------
                                               Fourth       Third         Second        First
 (in thousands, except per share data)        Quarter      Quarter       Quarter       Quarter
------------------------------------------- ------------ ------------ -------------- ------------
<S>                                             <C>          <C>            <C>          <C>
Interest income                                 $126,957     $130,808       $130,825     $129,059
Interest expense                                  58,748       61,402         60,629       59,905
------------------------------------------- ------------ ------------ -------------- ------------
Net interest income                               68,209       69,406         70,196       69,154
Provision for credit losses                        3,633        3,081          6,679        3,757
------------------------------------------- ------------ ------------ -------------- ------------
Net interest income after provision               64,576       66,325         63,517       65,397
Noninterest income                                26,830       24,310         23,979       22,676
Security transactions                                661        3,444          5,382        1,531
Noninterest expense                               55,484       56,130         55,468       56,107
------------------------------------------- ------------ ------------ -------------- ------------
Income before income taxes                        36,583       37,949         37,410       33,497
Income taxes                                      11,834       12,368         12,129        9,361
------------------------------------------- ------------ ------------ -------------- ------------
Net income                                       $24,749      $25,581        $25,281      $24,136
------------------------------------------- ------------ ------------ -------------- ------------
Tax effect of security transactions                 $231       $1,205         $1,884         $536
------------------------------------------- ------------ ------------ -------------- ------------
Earnings per share:
 Basic                                             $0.48        $0.50          $0.49        $0.47
 Diluted                                           $0.48         0.50           0.48         0.46
Dividends per share                                $0.29        $0.28          $0.28         0.28
Average shares outstanding                    51,169,117   51,368,296     51,429,023   51,827,402

------------------------------------------- ------------ ------------ -------------- ------------
</TABLE>
<TABLE>
<CAPTION>
                                                                    1997
------------------------------------------- -----------------------------------------------------
                                               Fourth       Third         Second        First
(in thousands, except per share data)         Quarter      Quarter       Quarter       Quarter
------------------------------------------- ------------ ------------ -------------- ------------
<S>                                             <C>          <C>            <C>          <C>
Interest income                                 $131,273     $132,215       $126,804     $120,446
Interest expense                                  60,650       60,446         57,341       54,057
------------------------------------------- ------------ ------------ -------------- ------------
Net interest expense                              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
------------------------------------------- ------------ ------------ -------------- ------------
</TABLE>
<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 29, 1999, there were approximately 15,027 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
1998
-------------------- ------------ ------------ ------------
I                          $42.00       $36.00        $0.28
II                          41.53        34.00         0.28
III                         37.13        27.88         0.28
IV                          37.00        25.72         0.29
-------------------- ------------ ------------ ------------
                                                      $1.13
-------------------- ------------ ------------ ------------
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
-------------------- ------------ ------------ ------------

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.


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