<TABLE>
<CAPTION>

Selected Financial Data

(in thousands except per
  share data)                                   Year Ended December 31,
--------------------------------------------------------------------------------------
                               1996       1995        1994        1993        1992
--------------------------- ---------- ----------- ----------- ----------- -----------
Operations:
--------------------------- ---------- ----------- ----------- ----------- -----------
<S>                          <C>         <C>         <C>         <C>         <C>
Interest income               $384,521    $363,931    $313,202    $307,755    $330,645
Interest expense               174,758     166,579     124,784     125,245     152,718
--------------------------- ---------- ----------- ----------- ----------- -----------
Net interest income            209,763     197,352     188,418     182,510     177,927
Provision for credit losses      9,858       7,859       9,484       7,940      16,053
Noninterest income              62,673      50,321      44,629      45,819      39,276
Noninterest expense            162,559     150,634     151,723     148,003     138,840
Income tax expense              30,544      27,866      20,481      21,037      16,568
--------------------------- ---------- ----------- ----------- ----------- -----------
Net Income                     $69,475     $61,314     $51,359     $51,349     $45,742
--------------------------- ---------- ----------- ----------- ----------- -----------
Pre-tax security gains,
 included above                   $556      $1,317        $834      $1,669      $1,750

Net interest spread              3.75%       3.77%       4.04%       4.07%       4.02%
Impact of noninterest funds       .74         .72         .59         .56         .65
--------------------------- ---------- ----------- ----------- ----------- -----------
Net interest margin              4.49%       4.49%       4.63%       4.63%       4.67%
--------------------------- ---------- ----------- ----------- ----------- -----------

Per Share:
--------------------------- ---------- ----------- ----------- ----------- -----------
Net income                      $1.83       $1.73       $1.46       $1.47       $1.33
Dividends                        0.98        0.93        0.86        0.79        0.73
Dividend payout ratio           53.55%      53.28%      59.22%      54.01%      55.27%
Average shares outstanding  38,045,585  35,462,358  35,093,138  34,956,927  34,475,862

Balances at December 31:
--------------------------- ---------- ----------- ----------- ----------- -----------
Loans & leases              $3,553,662  $3,365,716  $3,193,405  $2,775,198  $2,785,335
Allowance for credit losses     45,016      44,377      42,440      40,181      38,940
Total assets                 5,231,268   5,074,785   4,706,000   4,419,726   4,311,779
Deposits                     4,097,111   4,061,888   3,827,983   3,582,688   3,655,261
Shareholders' equity           507,307     480,694     407,774     412,880     378,314

Ratios:
--------------------------- ---------- ----------- ----------- ----------- -----------
Return on average assets         1.37%       1.29%       1.16%       1.19%       1.08%
Return on average equity        14.11       14.06       12.71       12.98       12.58
Equity to assets, average        9.74        9.16        9.09        9.13        8.62

Risk adjusted capital ratios:
 Leverage ratio                  9.64%       9.28%       8.84%       9.18%       8.66%
 "Tier 1"                       13.54       13.65       12.96       14.05       13.06
 "Total" capital                14.77       14.83       14.21       15.30       14.26

Loans to deposits, year end     86.74%      82.86%      83.42%      77.46%      76.20%
Allowance for credit losses to
 loans                           1.27        1.32        1.33        1.45        1.40

Nonperforming assets to loans    0.75%       0.78%       0.95%       1.32%       1.66%
Loans 90 days past due           0.50        0.44        0.24        0.14        0.22
--------------------------- ---------- ----------- ----------- ----------- -----------
Total risk elements to loans     1.25%       1.22%       1.19%       1.46%       1.88%
--------------------------- ---------- ----------- ----------- ----------- -----------
</TABLE>
                                       22
<PAGE>

FINANCIAL REVIEW

The purpose of this review is to provide  additional  information  necessary  to
fully understand the consolidated  financial condition and results of operations
of Keystone  Financial,  Inc.  (Keystone).  Throughout this review, net interest
income and the yield on earning assets are stated on a fully  taxable-equivalent
basis. In addition,  balances represent daily average balances, unless otherwise
indicated.  Per share  information  has been adjusted to reflect a three-for-two
stock split, in the form of a 50% stock dividend,  declared in the third quarter
of 1996.

1996 SUMMARY

Performance Results
-------------------

Keystone's financial performance for 1996 reflected continued improvement as net
income reached a record high of $69,475,000,  a 13.3%  improvement over 1995 net
income of  $61,314,000.  Earnings  per share also grew to $1.83 in 1996,  a 5.8%
improvement  over  the 1995  performance  of  $1.73.  Keystone  recorded  strong
performance  in both return on average assets (ROA) and return on average equity
(ROE). These traditional measures of financial institution performance provide a
relative  basis for  comparison to Keystone's  peer group.  ROA and ROE for 1996
were 1.37% and 14.11%,  respectively,  a slight  improvement over the comparable
measures of 1.29% and 14.06% in 1995.

Revenue expansion efforts continued to be the primary focus of Keystone's profit
improvement  initiatives  during 1996.  Total  revenues,  consisting of both net
interest income and noninterest income, grew 9.5% from 1995 to 1996, including a
5.8%  increase  in net  interest  income and a 24.5%  increase  in revenue  from
noninterest sources. Net interest income growth was stimulated primarily by loan
growth,  including  loans added in the late 1995 bank  mergers,  as net interest
margin was  constant  from 1995 to 1996.  Average  loans  increased by more than
$165,000,000  or 5.1%. In addition,  Keystone  originated and sold an additional
$282,000,000  of  consumer  mortgages  and  indirect   automobile  loans.  These
secondary  market  activities  helped  to fuel  the  increase  in  revenue  from
noninterest income as mortgages and indirect loans serviced for others increased
to  $576,000,000  and  $174,000,000,  respectively.  Likewise,  as assets  under
management grew,  Keystone  experienced growth in trust and investment  advisory
fees,  which  helped to  further  advance a  strategic  objective  to  deliver a
complete line of financial service products to its customer base.

Keystone's ratio of noninterest expense to revenues of 58.73% for 1996 reflected
improvement over the ratio of 59.78% for 1995, as growth in noninterest expenses
was 7.9%.  Increases in salary and benefit costs were influenced by the addition
of employees from late 1995 bank mergers,  the acquisition of Martindale  Andres
(specialized  investment  advisory  services)  and the  purchase of Key Investor
(retail  annuity  products).  Noninterest  expenses  benefited  from a full-year
reduction in the FDIC insurance  premium.  Excluding the influence of prior year
acquisitions,  total  noninterest  expenses grew  approximately  3.4%.  Finally,
Keystone  continued to sustain  solid asset quality in its  investment  and loan
portfolios, including a low level of nonperforming loans.

Operating Philosophy
--------------------

Keystone's  stated  objective is to become the "financial  services  provider of
choice" in the markets in which it operates. In order to achieve this objective,
Keystone has adopted an  operating  philosophy  it  describes  as  "relationship
banking". Under "relationship banking",  Keystone strives to develop an intimate
understanding  of its customers'  financial  needs and formulate  solutions that

                                       23
<PAGE>

meet  those  needs.  By  cultivating  and  deepening   customer   relationships,
Keystone's  operating  philosophy will enable it to both enhance performance and
sustain profitability momentum over time.

Performance enhancement in the financial services industry depends significantly
on two fundamental objectives: expansion of the revenue base through delivery of
essential  products and  services and the creation of an efficient  delivery and
revenue support structure. Keystone's performance enhancement efforts start with
revenue   expansion,   which  is  derived  from  three  major   activities:   an
understanding of customer needs,  the development of new and improved  products,
and  increased   market   penetration.   Keystone  has  placed  an  emphasis  on
understanding  its  customers,  as  illustrated  by its  "relationship  banking"
approach.  During 1996,  Keystone began to organize and operate in "relationship
banking" teams that have been positioned to better  identify  customer needs and
to tailor  Keystone's  menu of products  and services to meet those local needs.
Keystone's  product  menu now  includes a full array of  intermediation  banking
products,  as well as trust,  investment  management,  brokerage,  annuity,  and
insurance  services.  Finally,  increased  market  penetration  must result from
identification  of new ways to meet customer  needs and from the  development of
convenient  access  channels to financial  products and  services.  Expansion of
Keystone's   electronic  delivery  channels  included  its  partnership  in  the
convenience store ATM network,  advanced  function ATMs, and telephone  banking.
Each of these initiatives is an example of increased market penetration built on
a  foundation  of customer  convenience.  Keystone's  adherence  to an operating
philosophy  designed to understand  customer needs,  develop products,  and grow
markets will enhance revenue generation  capacity through delivery of a complete
range of financial services.

The second fundamental  objective of Keystone's  operating philosophy is focused
on the creation of an efficient operating structure.  Continuous  improvement in
the efficiency of an operating  structure is achieved  through  enhancements  to
both  service  delivery  channels and support  operations.  Keystone has made an
effort to redefine its delivery channels by constant evaluation of facilities on
the  basis  of  their  ability  to  generate  revenues,   meet  the  convenience
requirements of customers,  and moderate expense growth.  During 1996, sustained
efforts   were  made  to  improve  the  office   delivery   system  by  closing,
consolidating,  or  redesigning  facilities  to  tailor  them  to  local  needs.
Keystone's current office network will continue to be an important ingredient in
its delivery  system by emphasizing  personal  interaction  and the  value-added
features  of  traditional  full-service  offices.  At the  same  time,  Keystone
continues  to make  investments  to expand and  redefine  other  elements of the
system which place more emphasis on the convenience of ATMs,  telephone banking,
and other electronic delivery channels. These efforts, combined with initiatives
to further  consolidate,  centralize,  and refine business  processes in support
operations, form the foundation of Keystone's efficient operating structure.

In order to sustain profitability  momentum,  management must foster a customer-
focused  environment  that will result in increased  market  share,  appropriate
leverage of the  infrastructure  investment,  and profitable  growth.  Together,
Keystone's  revenue  expansion and  efficient  operating  structure  initiatives
provide  the   underpinnings   for   performance   enhancement   and   sustained
profitability  momentum.  This  corporate  focus  will  enhance  the  quality of
earnings from both the revenue and expense  components of performance.  Keystone
will continue to manage this delicate  balance between  current  performance and
longer-term  investment in order to solidify its position as a premier  provider
of financial services in its trade area.

                                       24
<PAGE>

Economic and Industry Trends
----------------------------

Financial  institution  performance  has always been  influenced  by the flow of
economic tides, and 1996 was no exception.  Economic  conditions during the year
included both  favorable and  unfavorable  trends which  affected the demand for
both commercial and consumer financial  services.  Interest rates were generally
lower than that  experienced  during  1995,  though the average  treasury  yield
curve,  an indicator of overall  interest  rate trends,  did steepen  during the
year. Uncommonly low levels of unemployment  continued to suggest the specter of
inflation and the possible need to tighten  interest rates to moderate  economic
growth. Rates,  however,  remained at relatively low levels during the year. Low
interest  rates,  low  unemployment,  and  relatively  low  levels of  inflation
continued  to buoy  optimism  in the stock  market  as the Dow Jones  industrial
average rose from 5117 at the end of 1995 to 6448 by December 31, 1996. Concerns
still exist regarding  potential  overvaluation  in the market and the potential
for some degree of market adjustment.

While these factors translated into a rather stable economic picture, commercial
and  retail  customer  preferences  continued  to affect  financial  institution
performance.   Commercial  customers  continued  to  express  a  preference  for
fixed-rate credit  facilities to lock in the cost of funding.  Retail customers,
ever  mindful of the higher  investment  returns  accessible  through  the stock
market,  continued  to  show a  predilection  for  competitively-priced  deposit
products and for investment  products which provide the  opportunity  for higher
returns  commensurate  with higher risk.  Both  commercial and retail  customers
continue to demand  products  and  services  designed  to meet their  individual
financial  needs and provide added value in terms of convenience,  service,  and
price.

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.


                                       25
<PAGE>

NET INTEREST INCOME

The  primary  source  of  Keystone's  revenue  is  net  interest  income,  which
represents  the  difference  between  interest  on earning  assets and  interest
expense  on  deposits  and other  borrowed  funds.  Net  interest  margin is net
interest  income  expressed  as a  percentage  of average  earning  assets.  Net
interest  income and net  interest  margin are  affected  by changes in interest
rates,  changes in the  relationship  between  rates,  and by  variations in the
volume and mix of asset and liability  balances.  The following table summarizes
changes in net interest income and margin during 1996 (in thousands):
<TABLE>
<CAPTION>
                               1996                  1995                Change
--------------------------------------------------------------------------------------
                                    Yield/               Yield/                Yield/
                         Amount      Rate      Amount     Rate       Amount     Rate
======================= ========== ========= ========== ========= =========== ========
<S>                       <C>          <C>     <C>          <C>       <C>       <C>
Interest income           $389,413     8.15%   $369,549     8.19%     $19,864   (0.04)
Interest expense           174,758     4.40     166,579     4.42        8,179    0.02
----------------------- ---------- --------- ---------- --------- ----------- --------
Net interest income       $214,655             $202,970               $11,685*
======================= ========== ========= ========== ========= =========== ========
Interest spread                        3.75%                3.77%               (0.02)
Impact of
 noninterest funds                     0.74                 0.72                 0.02
----------------------- ---------- --------- ---------- --------- ----------- --------
Net interest margin                    4.49%                4.49%                ----
======================= ========== ========= ========== ========= =========== ========
 * The change in net  interest  income was  almost  entirely  the result of a
   favorable volume variance.
</TABLE>

Interest Rates and Economic Trends
----------------------------------

As the primary source of revenue for financial institutions, net interest income
generation requires effective management of products and services subject to the
constraints  of overall  economic  conditions,  competitive  pressures,  and the
relative pace of changes in the interest  rate  climate.  The period of economic
expansion  which began in 1992 exhibited no immediate  sign of abatement  during
1996 as the economy was  characterized by an unprecedented  rise in the value of
equity markets,  low interest rates, low inflation,  low levels of unemployment,
and generally  favorable  economic  conditions.  This combination of factors has
sustained a climate of economic stability  favorable to the financial  condition
of both consumer and commercial customers.

While the state of the economy affected net interest income performance,  so too
did the influence of the overall interest rate environment. In summary, the 1996
average interest rate environment was remarkably similar to that of 1995. At the
beginning of 1995,  interest  rates were high by comparison to those in place at
the end of 1996.  During 1995, rates began a steady descent only to begin rising
slightly  toward the end of that year.  Rates  continued  to  increase  slightly
throughout  1996,  though average  interest rates during the year remained below
the average  for 1995.  Furthermore,  the slope of the yield curve was  slightly
steeper during 1996,  suggesting an opportunity to benefit from the extension of
asset maturities.

                                       26
<PAGE>

The  following  is a  comparison  of the average  yield curve for U.S.  Treasury
instruments for specific  intervals between three months and thirty years, which
serves as an  illustration  of the relative  comparison  of interest rate trends
between 1996 and 1995.

           Three     Six     One    Two     Three    Five     Ten     Thirty
           Months   Months   Year   Years   Years    Years    Years   Years
-----------------------------------------------------------------------------
1996        5.14%   5.28%   5.49%   5.83%   5.97%    6.17%    6.43%    5.70%
1995        5.63%   5.80%   5.92%   6.12%   6.22%    6.36%    6.55%    6.86%

The  similarity  of average  interest  rates  between the two years yielded only
minor  variations  in the  yield  on  earning  assets  and  cost of  funds.  The
similarity of performance  in net interest  margin belies the fact that Keystone
has continued to actively  manage product  development,  product  delivery,  and
product  pricing in  response  to changes in  customer  preferences.  Keystone's
relationship   banking  focus,   securitization   strategies,   deposit  product
innovations, and development of alternative investment product opportunities are
among the factors that influenced earning asset and funding mix changes. Despite
the  impact  of these  shifts,  Keystone  was able to  actively  manage  its net
interest margin and net interest income performance.

Interest Income/Earning Assets
------------------------------

Interest income reached  $389,413,000 in 1996, compared to $369,549,000 in 1995,
an increase  of 5.4%.  The  improvement  in  interest  income was driven  almost
exclusively by increases in the volume of earning assets,  and more particularly
loans,  which grew 5.1%.  The increase  was  especially  noteworthy  in light of
Keystone's  securitization and loan sales strategy, which limited loan growth in
fixed-rate  consumer  mortgages and indirect  loans.  These loan categories have
become an  increasingly  smaller  portion of Keystone's  overall loan mix due to
this strategy.

The successful execution of Keystone's  "relationship banking" initiatives had a
significant  influence on the composition of its earning asset base. Under these
initiatives,  financial  needs are  identified by  organizing  the customer base
according to  demographic  data,  a process  commonly  described  as  life-cycle
segmentation.  An  important  element of this  effort is the  delivery of credit
products  which  enhance and deepen a  relationship-oriented  product line. As a
consequence of this effort, overall loans grew by $165,617,000 from 1995. On the
commercial  side,  commercial  loans  and  real  estate  secured  loans  grew by
$44,141,000  and  $27,440,000,  respectively.  Heavy emphasis was placed on the
delivery of relationship products to the consumer market, and included growth of
$92,943,000 in direct loans and $91,722,000 in auto leases.

Included in Keystone's relationship-oriented product line is a full complement
of mortgage loan products.  Keystone's unique approach to the delivery of

                                       27
<PAGE>

mortgage  services has been designed to complement  the menu of other  financial
products  and  services  available  throughout  Keystone,  thus  preserving  and
enhancing customer affinity. While a significant portion of originated loans are
sold into the secondary  market,  the sale and  servicing  expertise of Keystone
Financial Mortgage Corporation has provided a significant  competitive advantage
in attracting and retaining customers.

While Keystone executed its initiatives related to the profitable  management of
its  relationship-based  product lines, attention was also focused on commodity-
based  financial  services,  primarily  indirect  automobile  loans.  Keystone's
securitization  and sales strategy,  which calls for the  securitization of non-
relationship  credit  products,  accommodated  the credit  needs of this  market
segment and provided a steady  stream of  servicing  income for  Keystone.  This
strategy,  along with its mortgage  banking  approach,  has allowed  Keystone to
preserve  precious deposit funding sources to execute its  relationship-oriented
consumer and commercial product lines. The result of these strategic initiatives
was a relatively  constant  yield on earning assets of 8.15% in 1996 compared to
8.19% in 1995, despite the drop in overall interest rates.

Interest Expense/Funding Sources
--------------------------------

Perhaps the most  significant  challenge  facing  financial  institutions is the
continuing  need  to  generate  a  sufficient   volume  of  funding  sources  to
accommodate the intermediation process. Successful management of this process is
a prerequisite  for sustained or improved net interest  income  performance.  As
more investment  options become available to depositors,  Keystone has continued
to  emphasize  the  development  of  innovative,  competitively-priced  products
designed to be responsive to consumer  preferences.  The  continuing  success of
Keystone's  "Variable-Rate CD" as well as the introduction of the "Indexed Money
Market  Account" are two examples of the successful  execution of this strategy.
Additionally,   Keystone  will  continue  to  emphasize  the   convenience   and
responsiveness  of its life cycle  packages which have been designed to meet the
needs of customers in each life-cycle  segment,  including  convenient access to
savings and investment products.

In 1996,  total  deposits  rose 4.8% while the cost of  interest-bearing  funds,
which  included  both  interest-bearing   deposits  and  other  interest-bearing
liabilities, declined slightly from 4.42% to 4.40%. Customer preferences for the
convenience and the rate of return advantages provided by both the Indexed Money
Market Account and the Variable Rate CD, when contrasted  with more  traditional
core- deposit categories,  fueled this growth.  Given the lower overall level of
interest  rates,  Keystone was also able to sustain,  and in some cases increase
the volume of  funding  from  large  certificates  of  deposits  and  short-term
borrowings.

Net Interest Spread and Net Interest Margin
-------------------------------------------

Keystone's  two  primary  sources  of revenue  are net  interest  income,  which
comprised over 77% of revenues,  and noninterest income which is just below 23%.
Comparable levels of net interest income and noninterest income during 1995 were
80% and 20%, respectively.  While revenue from noninterest sources has become an
increasingly important component of Keystone's overall revenue mix, net interest
income  continues to provide the largest source of revenue.  Net interest margin
includes the effect of interest spread, the investment of noninterest funds, and
the level of nonearning  assets.  In 1996,  interest spread remained  relatively
constant with 1995 as the difference  between  earning asset yields and the cost
of funding  sources  declined only slightly from 3.77% in 1995 to 3.75% in 1996.
The influence of noninterest funds, which included the impact of a higher level

                                       28
<PAGE>

of demand deposits,  increased slightly from 72 basis points in 1995 to 74 basis
points in 1996. As a consequence, net interest margin remained constant at 4.49%
in both 1996 and 1995.

Quarterly Performance
---------------------

The  following  tables  provide a  comparative  summary of earning asset yields,
funding costs,  and other  information for each of the four quarters of 1996 and
1995 (in thousands):
                                                   1996
---------------------------------------------------------------------------
                                 Fourth      Third      Second     First
                                 Quarter    Quarter    Quarter    Quarter
============================== =========== ========== ========== ==========
Asset yield                          8.12%      8.05%      8.16%      8.21%
Funding cost                         4.45       4.43       4.34       4.38
------------------------------ ----------- ---------- ---------- ----------
 Interest spread                     3.67%      3.62%      3.82%      3.83%
------------------------------ ----------- ---------- ---------- ----------
 Net interest margin                 4.42%      4.37%      4.56%      4.57%
------------------------------ ----------- ---------- ---------- ----------
Net interest income                $54,101    $53,095    $53,669    $53,790
============================== =========== ========== ========== ==========

                                                   1995
---------------------------------------------------------------------------
                                 Fourth       Third     Second      First
                                 Quarter     Quarter    Quarter    Quarter
============================== =========== ========== ========== ==========
Asset yield                          8.18%      8.14%      8.24%      8.19%
Funding cost                         4.48       4.50       4.45       4.23
------------------------------ ----------- ---------- ---------- ----------
 Interest spread                     3.70%      3.64%      3.79%      3.96%
------------------------------ ----------- ---------- ---------- ----------
 Net interest margin                 4.45%      4.37%      4.51%      4.63%
------------------------------ ----------- ---------- ---------- ----------
Net interest income                $51,719    $49,844    $50,212    $51,195
============================== =========== ========== ========== ==========

Quarterly  performance  reflects the  similarity  of the overall  interest  rate
environment  between 1995 and 1996.  Both  earning  asset yields and the overall
cost of funds  were  virtually  constant  from  year to year.  During  the third
quarter of 1996,  compression of net interest margin was attributed primarily to
a  higher  relative  cost  of  funds  and  slightly  lower  asset  yields.  This
compression  was  influenced  by both  competitive  pressures,  and by  consumer
preference for higher cost deposit  products,  including the "Variable Rate CD".
These same competitive  pressures will continue to require management  attention
in order to maintain or improve margin  performance.  Despite this  compression,
Keystone  achieved a higher level of net interest income during 1996,  primarily
due to volume increases.

PROVISION FOR CREDIT LOSSES

The provision for credit losses  increased from $7,859,000 in 1995 to $9,858,000
in 1996, an increase of $1,999,000. The increase in the provision was responsive
to both loan growth and the higher overall level of charge-offs during the year.
At the same time, other important asset quality  performance  measures,  such as
the  relationship  of the  allowance for credit losses to loans and the ratio of
total risk elements to year-end loans,  remained  stable.  See the Allowance for
Credit  Losses  and  Asset  Quality   section  of  this  review  for  additional
information.
                                       29
<PAGE>

NONINTEREST INCOME

The most significant  improvement in Keystone's 1996 performance occurred in the
level  of  noninterest  income,   which  grew  nearly  25%  and  now  represents
approximately 23% of Keystone's revenue.  Over the last several years,  Keystone
has sought to enhance  and  diversify  its  noninterest  revenue  stream both by
offering an expanded  array of financial  service  products and by  intensifying
efforts to deliver  existing  financial  services.  Continued  strength in trust
income,  deposit service charges, and fee income was augmented by the successful
expansion of Keystone's investment advisory services, mortgage banking activity,
and fees from the servicing of indirect loans. The resulting improvement,  which
also  included  a  $2,000,000  gain from the sale of the credit  card  portfolio
during the first quarter of 1996,  reflected  growth in  noninterest  revenue of
$12,352,000 to  $62,673,000.  The generation of increased  noninterest  revenues
will remain a key component of Keystone's overall revenue expansion efforts.

The largest  single source of noninterest  income within  Keystone was trust and
investment  advisory fees.  Revenues from these  activities have been positively
influenced by both expanded product offerings and intensified  marketing efforts
to customers. At the end of 1995, Keystone acquired Martindale Andres & Company,
a highly  successful  investment  advisory services firm specializing in serving
return-oriented  institutional customers and high net- worth individuals. At the
same time,  Keystone  continued to develop its more established  trust services,
including  employee benefit and personal trust accounts.  Aggregate assets under
management  at December 31, 1996  totaled  $2,793,416,000,  a 16% increase  from
1995.

Late in 1996,  Keystone  began the process of converting  its common trust funds
into a family of mutual funds under its "KeyPremier"  label.  Under  legislation
passed in the second half of 1996, this type of conversion was permitted without
tax consequences to existing common fund shareholders.  The "KeyPremier"  family
of funds will make the investment  advisory  capabilities  of Martindale  Andres
more readily accessible to a broader base of corporate and retail customers. The
introduction of these funds provides another  ingredient in the establishment of
a more complete mix of financial  products and services,  an important source of
fee  income,  and  an  appropriate  leverage  of  the  investment  expertise  of
Martindale Andres. Fees from these expanded activities are expected to influence
the pace of income growth as it relates to asset management activities.

Secondary  market  activities  are  becoming  an  ever-increasing  component  of
Keystone's  noninterest  income  and  consist  principally  of the fees from the
origination  and sale of  mortgage  and  indirect  automobile  loans.  Aggregate
revenues  from  these  activities  totaled   $11,038,000  in  1996  compared  to
$7,807,000 in 1995, an increase of 41.4% and represented nearly 18% of the total
noninterest  revenue  stream.  As of the end of  1996,  Keystone  was  servicing
approximately  $576,000,000  of  mortgage  loans and  $174,000,000  of  indirect
automobile loans for secondary market investors.

Since 1993,  Keystone's  mortgage banking activities have been conducted through
Keystone Financial  Mortgage  Corporation  (KFMC), a wholly-owned  subsidiary of
Keystone.  The  centralization of mortgage  activities  through KFMC has allowed
Keystone to  leverage  market  opportunities  available  through  its  expansive
community office network.  Similarly,  Keystone  established its Keystone Dealer
Finance  Center  (KDFC),  a  centralized  operating  unit  designed to provide a
consistent  source of  automobile  financing  to customers  serviced  throughout
Keystone's  network  of  automobile  dealers.  Securitization  and  sale of both
mortgage  and  indirect  automobile  loans has  enabled the  financing  of these
activities  to be  self-funding,  thus  preserving  core  sources of funding for
"relationship-banking"  activities.  At the same time, Keystone has been able to
generate  significant  levels of  noninterest  income  attributable  to the fees
earned for the servicing of these loans to investors in the secondary market.

                                       30
<PAGE>

Revenue from deposit service charges continued to remain a critical component of
Keystone's fee generation  activities.  Service  charges on deposits grew 11% to
$14,611,000,  a $1,406,000 increase from 1995. In late 1996, Keystone introduced
"KeyFree",  its new  free-checking  option  which  offers  yet  another  product
developed to attract new  customers  and  introduce  them to other  products and
services  available through  Keystone's  delivery  channels.  This initiative is
expected to favorably influence both net interest income and other fee income as
customers  become  acquainted  with Keystone's  offerings of credit  facilities,
deposit  services,  and  alternative  investment  products.  At the  same  time,
successful  implementation of this initiative has the potential to constrain the
level of growth in deposit service fee income in future years.

The delivery of financial services through  electronic  delivery channels is now
providing an expanding  source of revenue  generation  for Keystone.  This trend
provided a steady increase in ATM-related  revenues  including  surcharging from
foreign  users of ATM services  and fees from  Keystone's  KeyCheck  debit card.
Total revenues of $3,338,000,  nearly 24% of fees included in other income, were
derived from these electronic delivery channels,  a 31% increase from 1995. Each
of these fee-generating activities is based on providing improved and convenient
delivery  of  financial  services  to  customers.  In  yet  another  significant
initiative  in the  generation  of fee  income,  Keystone  acquired  KeyInvestor
Services,  a distributor  of investment  products.  Prior to the  acquisition of
KeyInvestor in August,  1996,  Keystone was providing such services  through its
relationship  with the Laughlin  Group.  The purchase of this company now allows
Keystone   to   make   this   product   line  a  more   integral   part  of  its
internally-managed menu of products and services.

NONINTEREST EXPENSE

Noninterest  expenses for 1996 increased to  $162,559,000,  a 7.9% increase over
1995  expenses  of  $150,634,000.  Keystone's  ratio of  noninterest  expense to
revenues of 58.73%, a common measure of expense management efficiency, reflected
an  improvement  over the ratio of  59.78%  for 1995.  Increases  in salary  and
benefit costs were  influenced  by the addition of employees  from the late 1995
bank  mergers,  the  acquisition  of  Martindale  Andres,  and the  purchase  of
KeyInvestor  during 1996. The overall growth rate of overhead  expenses was also
affected by the costs  associated  with  increased  activity  levels,  including
merchant  banking services and ATM-related  expenditures.  At the same time, the
overall  rate of  expense  growth  was  favorably  influenced  by the  full-year
reduction in Federal Deposit Insurance  Corporation  (FDIC) insurance  premiums.
Excluding the influence of acquisitions,  total  noninterest  expenses grew at a
rate of approximately 3.4%.

Salary expenses,  the largest single component of Keystone's overhead structure,
grew to  $69,270,000,  an 11.5% increase over the 1995 expenses of  $62,115,000.
The average number of full-time  equivalent  employees grew nearly 6% from 2,315
in 1995 to 2,445 in 1996.  Nearly all of this  increase  was  attributed  to the
various  mergers and  acquisitions  which incurred in late 1995.  Excluding such
increases,  salary  expenses  rose 5.5%, a majority of which  related to overall
average merit increase of 5.0%. During 1996, Keystone  aggressively  pursued the
development of an integrated  compensation  program  designed to support its key
business  strategies.  This  development  has  included  the  reconstruction  of
existing  incentive programs and the creation of new programs designed to reward
employee efforts toward achievement of greater revenue and profitability growth.

                                       31
<PAGE>

As a consequence,  future increases in compensation  costs are likely to be even
more closely tied to the achievement of desired performance levels.

Benefit expenses,  which consist  principally of costs associated with providing
employee  health  care,  were  $12,562,000  in 1996, a 15.3%  increase  from the
$10,898,000  reflected in 1995. Keystone's health care coverage is managed under
a "point-of-service" program which mandates the use of "primary care physicians"
and  "hospital  providers"  who meet  pre-established  standards for delivery of
quality and cost-effective health care. Such costs are largely influenced by the
level of health care needs and usage by the Keystone employee base. During 1995,
Keystone was advantaged by favorable claims  experience,  while 1996 reflected a
return to more  normalized  trends.  Despite this increase,  the adoption of the
"point-of-service"  program continues to favorably  influence employee access to
quality cost-effective health care systems.

The cost of office  reconfiguration  and technology  investments has influenced,
and  will  continue  to  affect  the  rate of  growth  in  occupancy  and,  more
significantly, equipment-related expenses. In 1996, Keystone continued to expand
its network of ATMs, including the phase-in of selectively located, full-service
ATMs and the partnership  with Sheetz,  Inc., a major  convenience  store chain.
Under  agreement  with Sheetz,  Keystone has installed ATMs in nearly 150 Sheetz
store locations,  increasing  Keystone's  aggregate ATM network to approximately
325. Office  configurations  and technology  investment have been  strategically
executed to provide  convenient  customer  access to banking  services.  Similar
initiatives,  which include the evolution of the KeyCall  telephone call center,
continue to be  developed  and will result in equipment  expense  growth that is
likely to continue to outpace the growth in aggregate overhead expenses. Largely
due to the expanded ATM network,  the level of customer activity associated with
access to electronic delivery channels has expanded dramatically,  including 13%
growth in overall ATM activity.  The expense  growth  associated  with increased
availability  and uses of these  channels  must be evaluated  with the growth in
associated fee revenues.  Keystone has also  introduced and expanded  electronic
access  by  commercial  customers  through  KeyCash  Manager,  a  PC-based  cash
management system.

Occupancy  expenses have grown at a slower pace than  equipment  and  technology
costs. During 1996,  Keystone completed a comprehensive  review of its community
office network.  The objective of this review, which was conducted with the help
of a nationally-recognized consulting firm specializing in such analyses, was to
maximize Keystone's office locations as "financial centers" within their defined
markets. This includes effective utilization and integration of these offices as
product  distribution points for both intermediation and alternative  investment
financial  products.  A majority of the changes to the community office network,
which included  initiatives to consolidate,  upgrade or close specific  offices,
were initiated in the second half of 1996, will be completed by the end of 1997,
and are expected to limit the rate of growth in occupancy expenses.

The most significant  reduction in noninterest expenses occurred in FDIC premium
expenses  which  declined  from  $4,957,000  in 1995 to $778,000 in 1996. In the
third quarter of 1995,  the FDIC  announced  that the Bank  Insurance Fund (BIF)
reached its  recapitalization  level, thus effecting a dramatic reduction in BIF
insurance  premiums,  particularly for those  institutions  classified as "well-
capitalized".  At the same time, the Savings Association  Insurance Fund (SAIF),
which provides insurance for the thrift industry,  remained undercapitalized and
faced an impending  funding shortfall on the bonds that had been issued to shore
up the fund.  During the third  quarter,  a  one-time  premium  was levied  upon
thrifts and those banks which had acquired thrift deposits. This new legislation
averted a potential  crisis and allowed for a phase-in of premium  reductions on


                                       32
<PAGE>

thrift deposits until such time that the SAIF fund is recapitalized. At the same
time, this  legislation  included  provisions  which may result in the merger of
bank and thrift charters, thus eliminating an outdated and ineffective structure
in favor of a modernized approach consistent with the evolution of the financial
services industry.

The final  category of  noninterest  expense,  other  expenses,  grew 10.4% from
$47,579,000 in 1995 to $52,538,000 in 1996.  Absent the influence of the mergers
and  acquisitions,   these  expenses   reflected  a  growth  rate  of  7.5%,  or
approximately  $3,600,000.  Nearly one third of this increase was  attributed to
the  aforementioned  one-time SAIF insurance  assessment on thrift deposits that
had been  acquired in  previous  years.  Another  significant  component  of the
increase  related  to the  rise in  merchant  card  volumes  and  the  increased
processing  expense  associated  with  merchant card  activities.  As previously
noted,  these increased costs are directly related to the increase in fee income
associated  with these  activities.  Other  increases  in expenses  included the
impact of legal fees incurred as a result of the  introduction of the KeyPremier
funds,  losses  on  dispositions  of office  facilities,  and  expenses  for the
write-off of obsolete forms and supplies due to mergers.

Income Taxes

Keystone  recorded  tax  expense  of  $30,544,000  in  1996,  an  increase  from
$27,866,000  recorded in 1995. The increase was  influenced  primarily by higher
levels of taxable  income as the effective tax rate reached 30.5% in 1996 versus
31.2% in 1995.

BALANCE SHEET OVERVIEW
----------------------

Period end assets reached  $5,231,268,000  at December 31, 1996, a 3.1% increase
over the assets of  $5,074,785,000  as of the end of 1995. The average volume of
assets grew 6.1% from  $4,763,336,000  in 1995 to  $5,054,658,000 in 1996. Asset
growth,  particularly  loan  growth,  was  affected  by both  the  execution  of
Keystone's securitization and sale strategy and by competitive issues associated
with the generation of deposit funding. Average loans grew to $3,432,131,000,  a
5.1% growth rate, while deposits reached  $4,047,151,000 a 5.0% increase, as the
majority  of growth  occurred  as a result  of the  impact of the late 1995 bank
mergers.

                                       33
<PAGE>

LOANS

Keystone's "Relationship Banking" strategy continues to influence the volume and
mix of its loan portfolio.  Aggregate loans comprised  nearly 72% of its overall
earning asset base. A breakdown of Keystone's loan categories was as follows (in
thousands):
<TABLE>
<CAPTION>

                                 1996                  1995              Change
------------------------ --------------------- ------------------- -------------------
                            Amount        %       Amount      %       Amount      %
======================== ============= ======= ============ ====== ============ ======
<S>                          <C>          <C>     <C>         <C>      <C>        <C>
Commercial                    $474,501     14%     $430,360    13%      $44,141    10%
Floor plan financing           150,052      4       147,002     5         3,050     2
Commercial-real estate
 secured                       896,688     26       869,248    27        27,440     3
Consumer mortgages             766,787     22       785,410    24       (18,623)   (2)
Direct consumer                548,224     16       455,281    14        92,943    20
Indirect consumer              330,463     10       405,519    12       (75,056)  (19)
Lease financing                265,416      8       173,694     5        91,722    53
------------------------ ------------- ------- ------------ ------ ------------ ------
                            $3,432,131    100%   $3,266,514   100%     $165,617     5%
======================== ============= ======= ============ ====== ============ ======
</TABLE>

The  focus  of  Keystone's  "Relationship  Banking"  concept  is on  gaining  an
understanding of customers'  financial needs and identifying the appropriate mix
of products and  services  which will meet those  needs.  This  concept  applies
equally to both consumer and commercial  customers and has affected  trends with
respect to the composition of Keystone's loan  portfolio.  The most  significant
growth has occurred in commercial loans,  direct consumer credit, and leases. At
the same time,  overall  growth  patterns  have been offset by the  influence of
Keystone's  securitization  strategy on consumer mortgages and indirect consumer
loans.

Keystone's   commercial  loan  trade  area  is  dominated  by   moderately-sized
businesses with traditional forms of commercial credit needs including  business
term loans,  lines of credit,  and  certain  tax-advantaged  loans to  political
subdivisions.   During  1996,   commercial   credit  volume  increased  by  10%.
Approximately half of this increase was due to loans added in late 1995 mergers.
Other   categories  of  commercial  loans  include  floor  plan  financings  and
commercial loans secured by real estate, which grew slightly from 1995 levels.

Both consumer  mortgages and indirect  consumer loans reflected  declines during
the year,  primarily as a result of the  secondary  marketing  activity in these
categories.  While certain segments of the consumer  mortgage market,  primarily
adjustable-rate   mortgages,   remained  a  key  component  of  Keystone's  loan
portfolio, most fixed-rate consumer mortgages were sold in the secondary market.
Similarly,  indirect  automobile loans,  which are originated through Keystone's
network of automobile dealers,  actually declined by 19% from 1995 levels as the
vast  majority of new loans since the second half of 1995 have been  securitized
and sold in the secondary market. As a consequence,  the overall growth of loans
has been  reduced.  At the end of 1996,  Keystone  was  servicing  approximately
$576,000,000 of mortgage loans and  $174,000,000 of indirect loans for secondary
market investors.

                                       34
<PAGE>

The  cornerstone of Keystone's  retail lending  strategy,  and the loan category
most closely associated with its consumer  "relationship  banking" strategy,  is
direct consumer loans.  These loans include  substantial  levels of home equity,
installment,  and personal  lines of credit.  These credit  vehicles,  which are
closely identified with Keystone's life cycle segmentation strategy, grew 20% to
$548,224,000  and  comprised  16% of Keystone's  overall loan  portfolio.  Given
Keystone's  focus on its  retail  customer  base,  it is  anticipated  that such
balances  will  continue to become a more  significant  component of the overall
lending mix.

An increasingly  important growth component of Keystone's loan portfolio related
to the  popularity of leasing as a credit  vehicle for  automobile  acquisition.
Total automobile lease financings grew to $265,416,000,  and now represent 8% of
the total loan portfolio.

                                       35
<PAGE>

ALLOWANCE FOR CREDIT LOSSES AND ASSET QUALITY

Keystone's allowance for credit losses at December 31, 1996, was $45,016,000 and
reflected a relationship of the allowance to loans of 1.27%. Comparable measures
at the end of 1995 were  $44,377,000  and 1.32%.  The following table sets forth
summarized  activity  within the  allowance  for credit losses for the past five
years (in thousands):
<TABLE>
<CAPTION>

                                 1996        1995       1994       1993       1992
=============================  =========== ========== ========== ========== ===========

<S>                              <C>        <C>        <C>        <C>         <C>
Balance at January 1,             $44,377    $42,440    $40,181    $38,940     $35,770
Allowance obtained through
 mergers/acquisitions               -----      1,750      2,096      -----       -----
Allowance transferred out           -----       (815)     -----      -----       -----
Loans charged off:
 Commercial                        (1,785)      (788)    (4,322)    (2,704)     (7,422)
 Real estate-secured:
  Commercial                       (1,434)    (1,504)    (4,076)    (2,834)     (2,286)
  Consumer                           (572)      (442)      (414)      (385)       (630)
 Consumer                          (6,331)    (5,238)    (2,722)    (3,370)     (4,540)
 Lease financing                   (1,330)      (786)      (198)      (238)       (283)
-----------------------------  ----------- ---------- ---------- ---------- -----------
Total loans charged off           (11,452)    (8,758)   (11,732)    (9,531)    (15,161)
-----------------------------  ----------- ---------- ---------- ---------- -----------
Recoveries:
 Commercial                           442        266        494      1,539         789
 Real estate-secured:
  Commercial                          430        538        849        359         373
  Consumer                            132        133        200         58         182
 Consumer                           1,052        806        839        832         887
 Lease financing                      177        158         29         44          47
-----------------------------  ----------- ---------- ---------- ---------- -----------
Total recoveries                    2,233      1,901      2,411      2,832       2,278
-----------------------------  ----------- ---------- ---------- ---------- -----------
Net loans charged off              (9,219)    (6,857)    (9,321)    (6,699)    (12,883)
Provision charged to
 operations                         9,858      7,859      9,484      7,940      16,053
-----------------------------  ----------- ---------- ---------- ---------- -----------
Balance at December 31,           $45,016    $44,377    $42,440    $40,181     $38,940
=============================  =========== ========== ========== ========== ===========
Ratio of allowance to
year-end loans                      1.27%      1.32%      1.33%      1.45%       1.40%
=============================  =========== ========== ========== ========== ===========
</TABLE>

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

                                    1996    1995     1994    1993     1992
--------------------------------- -------- ------- -------- ------- --------
Ratio to Average Loans:
 Provision                           0.28%   0.24%    0.33%   0.29%    0.57%
 Net charge-offs                     0.27%   0.21%    0.32%   0.24%    0.46%

                                        36
<PAGE>

Although  net  charge-offs  as a  percentage  of  average  loans  have not grown
significantly,  the composition of the types of loans that have been charged-off
has  changed.   Current  trends  reflect  increases  in  consumer   charge-offs,
consistent with national trends. At the same time, net charge-offs of commercial
credits have moderated.  Although management does not anticipate net charge-offs
to increase in excess of current levels,  adverse changes in economic conditions
could result in less favorable credit quality trends.

Risk Elements
-------------

The overall level of risk elements is an important  component in the  evaluation
of the adequacy of the allowance for credit  losses.  Risk elements are composed
of both  nonperforming  assets  (NPA)  and loans  past due 90 days or more.  The
relative  level of these risk  elements  provides an  indication of the level of
credit risk within the loan portfolio.  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 1996  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>

                                1996       1995       1994       1993       1992
----------------------------- --------- ---------- ---------- ---------- ----------
<S>                             <C>        <C>        <C>        <C>        <C>
Nonaccrual loans                $18,913    $16,740    $24,403    $23,661    $29,385
Restructurings                      393        503        144      5,066      5,941
----------------------------- --------- ---------- ---------- ---------- ----------
Nonperforming loans              19,306     17,243     24,547     28,727     35,326
Other real estate                 7,414      8,984      5,870      8,097     10,835
----------------------------- --------- ---------- ---------- ---------- ----------
Nonperforming assets             26,720     26,227     30,417     36,824     46,161
Loans past due 90 days
 or more                         17,649     14,995      7,744      3,977      6,256
----------------------------- --------- ---------- ---------- ---------- ----------
Total risk elements             $44,369    $41,222    $38,161    $40,801    $52,417
----------------------------- --------- ---------- ---------- ---------- ----------
</TABLE>

Substantially all of the loans in the nonaccrual  category at December 31, 1996,
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.

                                       37
<PAGE>
<TABLE>
<CAPTION>

                                             1996    1995    1994    1993    1992
------------------------------------------- ------- ------- ------- ------- -------
<S>                                           <C>     <C>     <C>     <C>     <C>
Ratio to Year-End Loans:

 Nonperforming assets                         0.75%   0.78%   0.95%   1.32%   1.66%
 90 days past due                             0.50    0.44    0.24    0.14    0.22
------------------------------------------- ------- ------- ------- ------- -------
 Total risk elements                          1.25%   1.22%   1.19%   1.46%   1.88%
------------------------------------------- ------- ------- ------- ------- -------
Coverage Ratios:
 Ending allowance to nonperforming loans       233%    257%    173%    140%    110%
 Ending allowance to risk elements*            122%    138%    131%    123%     94%
 Ending allowance to net charge-offs           4.9x    6.5x    4.6x    6.0x    3.0x
------------------------------------------- ------- ------- ------- ------- -------
* Excludes ORE.
</TABLE>

While Keystone  experienced  some  reduction in specific asset quality  measures
from  1995,  virtually  all  measures  were  consistent  with,  or better  than,
historical  trends.  One exception was in the volume of loans in the category of
90 days or more past due. Credits included in this category,  and in less severe
past-due   categories,   have  the   potential   to  migrate  into  more  severe
classifications.  Keystone continues to reflect favorable coverage ratios, which
provide an  indication of  Keystone's  ability to absorb the  potential  adverse
impact of deterioration. Keystone will continue to apply vigorous monitoring and
collection efforts to manage the level of adversely classified assets.

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>

------------------------------- ---------- --------- ---------- --------- ---------
                                   1996      1995       1994      1993      1992
------------------------------- ---------- --------- ---------- --------- ---------
<S>                                <C>       <C>        <C>       <C>      <C>
Commercial                          $4,306    $4,213     $5,233    $8,198   $10,841
Commercial real estate:
 Construction and
  development                          764     1,260      4,535     3,797     5,067
 Permanent                          11,889    10,389      9,999    12,429    13,681
Residential real estate                918       612      4,359     3,316     4,719
Consumer                             1,429       769        421       987     1,018
------------------------------- ---------- --------- ---------- --------- ---------
Nonperforming loans                 19,306    17,243     24,547    28,727    35,326
Other real estate                    7,414     8,984      5,870     8,097    10,835
------------------------------- ---------- --------- ---------- --------- ---------
 Total nonperforming assets        $26,720   $26,227    $30,417   $36,824   $46,161
------------------------------- ---------- --------- ---------- --------- ---------
</TABLE>

                                       38
<PAGE>

Management  also closely  monitors the level of credits  included in less severe
past-due categories.  The following is a comparative summary of these categories
at the end of 1996 and 1995 (in thousands):

                      1996     % of Total      1995      % of Total
                                  Loans                    Loans
------------------ ---------- ------------- ---------- --------------
30-59 days            $44,637     1.3%         $42,930      1.3%
60-89 days             14,453     0.4           15,591      0.5
Over 90 days           17,649     0.5           14,995      0.4
------------------ ---------- ------------- ---------- --------------
                      $76,739     2.2%         $73,516      2.2%
------------------ ---------- ------------- ---------- --------------

As previously  discussed,  the level of past due credits in the 90-days past due
category  increased since the end of 1995.  Economic  lethargy and stress on the
consumers'  credit  condition  caused  by high  debt  levels,  appear  to be the
principal contributing factors. Collections centralization,  which was finalized
during 1996,  has allowed for improved  monitoring of the portfolio and enhanced
collection techniques through state-of-the-art technology.

Management has identified  approximately  $9,074,000 of loans  outstanding where
concern  exists as to the  potential for future  classification  into one of the
risk element  categories.  Substantially  all of these loans were current at the
end of 1996.

Overall Assessment
------------------

Keystone  has  assessed  all of the above  factors in the  establishment  of the
allowance  for  credit  losses.  The  determination  as to the  adequacy  of the
allowance  reflects  management's  judgment,  and  was  based  upon  appraisals,
estimates,  local market  conditions,  and other such  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 was adequate to absorb the credit
risk within the loan portfolio.

INVESTMENTS

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

                                       39
<PAGE>

At December 31, 1996, Keystone's investments  represented 23.6% of total assets.
The following is a summary of the carrying values of investments at December 31,
1996 and 1995 (in thousands):
<TABLE>
<CAPTION>

                                              1996                     1995
----------------------------------- ------------------------ ------------------------
                                     Available     Held to    Available     Held to
                                      for Sale    Maturity     for Sale    Maturity
----------------------------------- ------------ ----------- ------------ -----------
<S>                                      <C>         <C>          <C>         <C>
Negotiable money market
 investments                            $194,566     $ -----     $237,102    $  -----
U.S. Treasury securities                 198,376       -----      255,357       -----
U.S. Government agency
 obligations                             380,462     230,402      273,396     237,122
Obligations of states and
 political subdivisions                    -----     134,194          872     132,541
Corporate and other                       82,976      15,362       71,183      15,599
----------------------------------- ------------ ----------- ------------ -----------
                                        $856,380    $379,958     $837,910    $385,262
=================================== ============ =========== ============ ===========
</TABLE>

In 1994, the Financial  Accounting  Standards Board (FASB) issued  Statement No.
119,  "Disclosures About Derivative Financial  Instruments and the Fair Value of
Financial  Instruments".  This accounting standard defined two distinct types of
off-balance  sheet derivative  activities:  "trading"  activities and "end-user"
activities.  Keystone does not engage in derivatives  trading activities and has
made only  limited  use, as an end-user,  of interest  rate swaps.  These swaps,
together  with other  strategies,  have been used to manage  Keystone's  overall
exposure to the effect of changes in interest rates.  Keystone has also made use
of forward  mortgage  commitments as well as put options and short sales of U.S.
Treasury  securities.  These instruments were executed to reduce the market risk
associated with interest rate  fluctuations in fixed consumer  mortgages and the
indirect automobile loans held for sale. Further disclosures of these activities
are included in the footnotes of the financial statements. The FASB continues to
study the  impact of  derivatives  on  financial  performance  and is  currently
considering a comprehensive change to the application of accounting  principles,
including possible income statement  recognition for interest rate swaps used to
hedge  interest  rate risk.  Such  changes  are not  expected to have a material
impact on future financial statement presentations and will be closely monitored
by Keystone.

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

The weighted average life of Keystone's fixed rate investments was 3.08 years at
December  31,  1996.  Ratings for state & municipal,  and  corporate  issues are
provided by major rating agencies, principally Moody's and Standard & Poor's. At
the end of 1996,  the portion of all state & municipal  holdings rated "AAA" was
93.7% and the portion of all corporate issues rated "A" or better was 98.5%.

                                       40
<PAGE>

The  relationship  of  market  value to the  amortized  cost of  investments  at
December 31, 1996, was 100.2% compared to 100.8% at the end of 1995. At December
31, 1996,  investments "held-to-maturity",  which are carried at amortized cost,
contained  gross  unrealized  gains and  losses of  $5,461,000  and  $1,893,000,
respectively.  Unrealized gains and losses included in the carrying value of the
"available-for-sale"  investments of $2,935,000  and  $4,628,000,  respectively,
were reflected, on a net of tax basis, as an adjustment to shareholders' equity.
Keystone holds no concentration of corporate or municipal investment  securities
of any single issuer which exceeds 10% of shareholders' equity.

DEPOSITS
--------

Customer  deposits  remain  Keystone's  major source of funding.  The  following
presentation provides a summary of changes in Keystone's deposit funding sources
from 1995 to 1996 (in thousands):
                                                                     Change
                                                                   ==========
                                      1996         1995        Amount       %
================================= ============ ============ ============= ======
Noninterest-bearing demand            $497,260     $474,571       $22,689     5%
NOW                                    426,312      431,387       (5,075)    (1)
Savings                                391,692      419,721      (28,029)    (7)
Indexed money market                    44,644        2,953        41,691   100+
Other money market                     359,241      420,273      (61,032)   (14)
Time deposits less than
 $100,000                            2,082,963    1,882,702       200,261    11
Time deposits $100,000 or more         245,039      222,842        22,197    10
--------------------------------- ------------ ------------ ------------- ------
                                    $4,047,151   $3,854,449      $192,702     5%
================================= ============ ============ ============= ======

Perhaps the most significant challenge facing financial institutions is the need
to sustain and increase  cost-effective  funding sources.  During 1996, Keystone
realized  deposit  growth of 5%, the majority of which related to deposits added
in the late 1995 mergers.  As in 1995, the most significant  trend in Keystone's
deposit  activity  related  to the  migration  of funds  from  more  traditional
savings,  NOW, and money market  accounts  into  deposit  vehicles  more closely
aligned with consumer  preferences  for  liquidity,  flexibility,  and a rate of
return commensurate with alternate investment offerings.  While overall interest
rates remained  comparable to 1995,  consumers  continued to seek higher returns
than those offered on more traditional deposit products,  resulting in growth in
both "Indexed Money Market Accounts", and the "Variable Rate CD". These products
now represent  $460,454,000 or 11.4% of Keystone's  overall deposit funding mix,
compared  to 5.9% in 1995.  Each of these  products,  whose  returns are tied to
externally  administered interest rate indices, have provided customers with the
flexibility and convenience necessary in a changing interest rate environment.

The increased  need to generate  funding  sources to support loan and investment
activity is a critical component of Keystone's  "Relationship Banking" strategy.
Product packages for consumer  life-cycle segments have been designed to include
deposit and investment  products  commensurate  with the life-cycle needs of its
customer base. The desire to provide product packages  responsive to these needs
has led to the development of KeyFree,  a fee-free  checking product designed to
meet the needs of certain segments of Keystone's consumer base. This product

                                       41
<PAGE>

offering  is  expected  to increase  the level of demand  deposit  balances  and
provide new Keystone customers with an introduction to the more complete menu of
financial services available through Keystone's product offerings.

Certificates  of deposit of $100,000 or more are considered less stable relative
to other core deposit  funding sources because they are short-term in nature and
generally  subject to competitive bid.  Keystone's  dependence on this source of
funds, when measured as a percent of total deposits,  rose slightly from 5.8% in
1995 to 6.1% in 1996. This increase was principally driven by the need to secure
funding  that  would  support  loan  demand.  Keystone's  use of  other  funding
management  tools,  including  loan  securitization  strategies,  is expected to
further reduce Keystone's limited reliance on this funding source.

OTHER BORROWED FUNDS

Keystone has selectively accessed sources of funding other than traditional core
deposits. The following table provides a summary of the change in other borrowed
funds from 1995 to 1996 (in thousands):

                                                              Change
============================ =========== =========== ========================
                                1996        1995        Amount         %
============================ =========== =========== ============= ==========
  Short-term borrowings         $265,527    $210,025      $55,502         26%
  FHLB borrowings                151,924     176,636      (24,712)       (14)
  Long-term debt                   3,117       5,055       (1,938)       (38)
---------------------------- ----------- ----------- ------------- ----------
                                $420,568    $391,716      $28,852          7%
============================ =========== =========== ============= ==========

Keystone  will  also  selectively   access  these  funding  sources  to  provide
short-term  liquidity,  to meet  funding  requirements,  or to support  specific
business mix changes.  Keystone is currently  considering  the issuance of other
forms of funding  such as  commercial  paper and  medium-term  notes,  which are
expected  to  provide  Keystone  with  funding  for  strategic  holding  company
activities.  Each of the Keystone banks is a member of a Federal Home Loan Bank,
and as such,  can  access a number of credit  products  which  are  utilized  to
provide  various forms of funding.  Keystone has primarily  accessed  fixed-rate
borrowings with maturities of between one and three years.

SHAREHOLDERS' EQUITY

Shareholders'   equity  at  December  31,  1996  reached   $507,307,000   versus
$480,694,000  at the end of 1995 and  resulted  in an equity to assets  ratio of
9.70%.  The management of capital as the  foundation of asset and  profitability
growth represents a challenge  critical to the long range viability of financial
institutions.  Maintenance  of  appropriate  levels of capital is subjected to a
myriad of  constraints  and  restrictions  imposed  by  regulatory  authorities,
dividend requirements,  acquisition opportunities,  and other factors which must
be  balanced  against  the need for capital  levels  adequate  to sustain  vital
business  activities.  Keystone's capital management policies have been designed
to ensure  maintenance  of  appropriate  levels of  capital  under a variety  of
economic conditions.

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 1996 equated to a 7.7% payout

                                       42
<PAGE>

on year-end 1995 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,  which would serve to improve the leverage
of its capital base. The  acquisition of treasury stock and the annual  dividend
to shareholders  were both executed  pursuant to Keystone's  capital  management
strategies.  Despite  these  efforts,  the  ability  to  manage  capital  levels
continues to be  constrained  by external  factors.  Among these factors are the
desire to preserve  pooling-of-interest  accounting  treatment for future merger
opportunities  as well as  Keystone's  objective to preserve  "well-capitalized"
ratings for its member banks.

Bank  regulators  have set forth  requirements  for  risk-based  capital,  which
resulted in the  establishment  of  international  capital  standards for banks.
These  requirements set forth minimum  "leverage",  "Tier 1" and "Total" capital
ratios and provide a measure of capital  adequacy  that is more risk  responsive
than previous regulatory  guidelines.  Risk-based capital standards included the
establishment  of ranges of capital  adequacy  which extend from  "significantly
undercapitalized"  to "well capitalized".  These assessments of capital adequacy
directly  influence  the focus of  regulatory  oversight,  including the premium
rates  charged for deposit  insurance.  Regulators,  including  both the Federal
Reserve Board and the Office of the  Comptroller of the Currency,  have recently
finalized a new risk-based supervisory approach designed to encourage management
focus on the most  effective  use of limited  capital and the  generation of the
highest  possible  returns  with the least  amount of  associated  risk.  As the
regulatory  oversight  process becomes  increasingly  focused on capital issues,
Keystone  and other  financial  institutions  will be  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 1996 and a comparison to the various regulatory capital requirements.

                                             "Well          Minimum
                            Keystone     Capitalized"    Requirements
========================= ============= =============== ===============
Leverage ratio                    9.64%      5.00%           4.00%
"Tier 1" capital ratio           13.54%      6.00%           4.00%
"Total" capital ratio            14.77%     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  $13,711,000  at
December 31, 1996 or 2.8% of "Tier 1" capital.

ASSET/LIABILITY MANAGEMENT

The process by which  financial  institutions  manage earning assets and funding
sources under different interest rate environments is called asset/liability

                                       43
<PAGE>

management.  The primary goal of  asset/liability  management is to increase net
interest  income  within an  acceptable  range of overall  risk  tolerance.  Two
important  performance  barometers are net interest  margin and  liquidity.  Net
interest  margin is increased  by widening  interest  spread  while  controlling
interest  rate  sensitivity.  The  adequacy of liquidity  is  determined  by the
ability to meet the cash flow  requirements  of both  depositors  and  customers
requesting  bank  credit.  Asset/liability  management  occurs  at  each  of the
subsidiary banks, with overall coordination and support provided by the Keystone
Asset/Liability Management Committee (ALCO).

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 asset/liability management policy sets
forth  guidelines  that limit the level of interest  rate risk within  specified
tolerance  ranges.  Keystone  and its  subsidiary  banks  utilize a  variety  of
techniques  to measure  and monitor  interest  rate risk,  including  the use of
simulation  analysis.  In order to  quantify  the impact of changes in  interest
rates on net interest income,  Keystone conducts  quarterly  interest rate shock
simulations.  These simulations are used to determine whether  corrective action
may be warranted or required in order to adjust the overall  interest  rate risk
profile.  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. 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 consistent
with its asset/liability management policy limits at December 31, 1996.

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 manage 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. This measurement tool, while valuable as a gauge of longer-term
interest rate risk, is less useful as a tool to provide  strategic  solutions to
the management of that risk.

                                   44
<PAGE>
The following table provides an analysis of Keystone's interest rate sensitivity
as measured under GAP at December 31, 1996 compared to 1995:
<TABLE>
<CAPTION>
                                                                           December
                                   December 31, 1996                       31, 1995
-------------------- ------------ ------------ ------------ ------------ -------------
                       1 month      3 months     6 months      1 year       1 year
-------------------- ------------ ------------ ------------ ------------ -------------
<S>                    <C>         <C>          <C>          <C>           <C>
Assets                 $1,414,460  $1,682,142   $1,938,113   $2,414,260     $2,803,095
Liabilities             1,097,518   1,810,735    2,160,635    2,540,283      2,316,327
Off balance sheet           -----        -----        -----        -----         7,000
Cumulative GAP            316,942    (128,593)    (222,522)    (126,023)       493,768
As a percent of
  total assets              6.06%      (2.46%)      (4.25%)      (2.41%)         9.73%
Gap ratio                   1.29         .93          .90          .95           1.22
==================== ============ ============ ============ ============ =============
</TABLE>

Recent  trends  suggest that certain  segments of the customer  base and certain
core products are more  sensitive to changing  interest  rates than reflected in
historical GAP presentations. During 1996, Keystone enhanced its GAP analysis by
modifying the treatment of certain  categories of loans and deposits,  primarily
more refined loan prepayment  assumptions,  to more accurately reflect potential
repricing opportunities.

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  reflection  of
interest rate 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 at each of the
affiliate banks.  Banks which fail to meet the prescribed  minimum standards for
these ratios must set forth  tactics to promptly  comply with policy  guidelines
and provide  mandatory  progress  reports to  Keystone's  ALCO and to Keystone's
Board of Directors.  Keystone  actively manages liquidity within a defined range
and has developed  reasonable  liquidity  contingency plans,  including ensuring
availability of alternate funding sources to maintain adequate liquidity under a
variety of business conditions.

Keystone's  primary sources of liquidity are funds derived through  earnings and
deposit  balances.  Liquidity is also provided by scheduled  maturities of loans
and  investment  securities,  as well  as the  early  payoff  of  customer  loan
balances.  Liquidity  may  also  be  influenced  by the  volume  and  timing  of
securitization  activity  for both  mortgages  and  indirect  automobile  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.  These  various  sources of funding  have been used to support
increases  in  overall  earning  asset  balances  during  the  year.  Keystone's
operating,  investing, and financing activities are conducted within the overall
constraints of Keystone's liquidity management policy.

Parent  company  liquidity  represents  another  important  aspect of  liquidity
management.   Within  Keystone,   the  parent  company  relies  on  the  banking
subsidiaries to provide  funding for dividends to  shareholders  and unallocated
corporate expenses. The amount of dividends from bank subsidiaries to the parent
company is  constrained  by both state and federal  regulations,  which have not
historically limited Keystone's practices. Based upon the inherent strength and
profitability of the Keystone banks, holding company liquidity is deemed
adequate.

                                       45
<PAGE>

REGULATORY MATTERS

Keystone and its banking affiliates are subject to periodic  examinations by one
or more of the various  regulatory  agencies.  During  1996,  examinations  were
conducted  at  the  holding  company  and  at  Keystone's  various  banking  and
nonbanking  subsidiaries.  These examinations included, but were not limited to,
procedures  designed to review lending  practices,  credit  quality,  liquidity,
compliance,  and capital adequacy of Keystone and its subsidiaries.  No comments
were  received  from the various  regulatory  bodies which would have a material
effect on Keystone's liquidity, capital resources, or operations.

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

As previously discussed, the evolution of the regulatory process has resulted in
a new and different  emphasis on  understanding  and evaluating  risk management
processes within financial institutions.  As an alternative to the risk analysis
of discrete bank activities such as lending, investments,  operations, etc., the
new approach entails  measurement and evaluation of risk on an  institution-wide
basis.  Compliance  with  this  shift  in  emphasis  has  obvious  implications,
including the development of a more systemic view of risk management, the design
of the entire range of bank and alternative product offerings,  and the need for
risk diversification.  Keystone and its subsidiary banks are mindful of the risk
factors  defined  by the  regulators  and their  responsibility  to  effectively
measure and manage these risks.  Keystone has closely  monitored its  compliance
with  banking  regulations  and will  continue to monitor and evolve with future
regulations as set forth by the various bank regulatory bodies.

INFLATION

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

1995 VS 1994

Summary

Keystone's 1995 net income was $61,314,000 compared to $51,359,000,  an increase
of 19.4%.  Likewise,  earnings per share grew to $1.73 versus $1.46 in 1994,  an
increase of 18.5%.  Results in 1994 had  included a  $7,000,000  pre-tax  charge
related to both the  acquisition  of Frankford Bank and a  restructuring  charge
associated  with the  consolidation  of  certain  back-office  loan and  deposit
activities.  Even after adjusting for the impact of the special charges in 1994,
earnings  per share  improved  approximately  7.5% in 1995.  ROA and ROE reached
1.29% and 14.06%,  respectively,  in 1995 and compared favorably with the ROA of
1.27% and ROE of 13.87% in 1994, as adjusted for the aforementioned charges.

The improvement in core profitability achieved in 1995 was attributed to several
factors.  Net interest income,  which is Keystone's largest revenue source, grew
4.2% despite the effect of higher average interest rates on funding costs, which
grew at a pace  faster than the growth in asset  yields.  Strong loan demand was
also  an  essential  ingredient  to  improved  levels  of net  interest  income.
Keystone's  continued  strength in overall  asset  quality,  including a reduced
level of net  charge-offs,  resulted  in a lower  provision  for credit  losses.
Significant growth occurred in the area of noninterest revenue,  particularly in
secondary market  activities.  Increases  included fees from the origination and
servicing of mortgage loans as well as gains from the securitization and sale of
both  mortgages and indirect  automobile  loans.  Net of security  transactions,
noninterest revenues rose nearly 12%. Expenses in 1995 were favorably influenced
by the  reduction in the FDIC  insurance  premium,  while 1994 expenses had been
affected by the aforementioned  charges.  Excluding the impact of these items in
both 1995 and 1994, noninterest expenses grew about 6%.
                                   46
<PAGE>

Interest Income

Interest income rose to $369,549,000 in 1995, and reflected a 15.6%  improvement
from  1994.   Excluding  the  impact  of  merger  and  acquisition  activity  on
year-to-year  performance,  the  increase in  interest  income  attributable  to
internal growth was 13.1%.  Earning asset yields reached 8.19% compared to 7.59%
in 1994.  The increase in earning  asset  yields,  while  partially  driven by a
pattern of higher rates, was also influenced by absolute increases in the volume
of earning  assets,  and by the  favorable  effect of an improved mix of earning
assets.  In fact, the growth in interest income was equally  attributable to the
improvement in the volume of earning  assets,  including a higher mix of loans,
and the increase in interest rates.  Loan totals included an increased  emphasis
on   higher-yielding   consumer  leases  and  credit  lines  which   contributed
significantly  to the improvement in yields.  Growth also occurred in commercial
real estate lending and in the volume of consumer adjustable-rate mortgages. The
overall   growth  in  loan   balances  was   achieved   despite  the  impact  of
securitization and sale of both fixed-rate  mortgage loans and indirect consumer
automobile loans.

Interest Expense

The cost of funds rose to 4.42% for 1995  compared to 3.55% in 1994, an increase
of 87 basis points, while the yield on earning assets rose only 60 basis points.
The  increase in funding  costs was also  influenced  by changes in deposit mix.
Consumer impatience with the low relative rates offered on both money market and
traditional  savings  deposits,  motivated  customers to take  opportunities  to
improve  returns by extending  maturities  and to take  advantage of new product
offerings  that were more  responsive  to changes in  interest  rates.  The most
significant  growth occurred in certificates of deposit in maturities of between
18-47 months, which grew over $220 million, or 55.7%. Additionally, the variable

                                       47
<PAGE>

rate CD, which was introduced in 1994,  rose over $120 million,  or 118%.  These
growth trends were driven by the  reductions in NOW,  money market,  and savings
deposits.  Keystone also  experienced  growth in large  certificates of deposit,
IRAs, and FHLB borrowings.

Net Interest Income

As a result  of these  trends on  interest  income  and  interest  expense,  net
interest  income  reached  $202,970,000,  an increase of  $8,248,000  over 1994.
Interest spread compressed by 27 basis points as the difference  between earning
asset  yields and the cost of fund  sources  went from 4.04% in 1994 to 3.77% in
1995. The increase in  noninterest-bearing  funds,  which was influenced by both
higher reinvestment rates and increased demand deposit balances,  contributed 72
basis points to net interest  margin versus 59 basis points in 1994. This served
to partially offset the compression of net interest spread.  The effect of these
changes was a reduction in net interest margin of 14 basis points, from 4.63% in
1994 to 4.49% in 1995.

Provision for Credit Losses

The provision for credit losses  declined from  $9,484,000 in 1994 to $7,859,000
in 1995, a reduction of $1,625,000. The reduction in the loan loss provision was
responsive  to an  overall  reduction  in net  charge-offs,  which  declined  by
$2,464,000 from 1994 to 1995.

Noninterest Income

Keystone's evolution into a full-service financial services company dramatically
influenced  the  rate of  growth  in  noninterest  revenues.  Keystone  steadily
expanded its focus on  financial  services,  including  the  establishment  of a
separate  specialized  mortgage banking  company.  Strategies which commenced in
1995 included  Keystone's entry into the  securitization of indirect  automobile
loans.  Primarily  as a  consequence  of these  efforts,  noninterest  revenues,
excluding  security gains, grew 11.9% from 1994 to 1995 and represented 19.3% of
total combined net interest income and noninterest  revenues,  compared to 18.3%
in 1994.

Results in 1995 were reflective of Keystone's  successful  implementation of its
focused mortgage banking strategy as related revenues  increased from $3,557,000
in 1994 to  $6,111,000  in 1995.  Keystone's  efforts to develop this  important
customer  service were aided by reductions in long-term  interest  rates,  which
served to spur demand for mortgage products. As of the end of 1995, Keystone was
servicing a total of $520,809,000 of loans which have been sold in the secondary
market.  The  growth in other  secondary  market  activities  included a gain of
$900,000  from the  securitization  of  approximately  $66,000,000  of  indirect
automobile loans.

Trust and asset management  revenues are generated primarily from personal trust
and employee benefit management  services.  In 1994, Keystone sold the corporate
trust  segment of its trust  business,  which  consisted  primarily  of services
associated  with municipal bond issues.  Although annual revenues from corporate
trust  services  comprised  only a small  portion  of  overall  trust  services,
revenues  during  1995  represented  the first  full-year  impact of the loss of
revenue from this business  segment.  After  adjusting  1994 revenues to exclude
fees from corporate trust  activities,  trust income reflected a 10% growth from
1994 to 1995, as trust income grew to $12,557,000. This growth can be attributed
to an increase in assets  under  management,  including  those added in the late
1995 acquisition of Martindale Andres.

                                       48
<PAGE>

Service  charges  on  deposit  accounts,  which  remain  the  largest  source of
noninterest revenues, grew 4.8% from $12,606,000 in 1994 to $13,205,000 in 1995.

Excluding secondary market revenue, the largest increase in noninterest revenues
occurred in fee income which includes revenue from credit card activities,  fees
from electronic banking services,  and brokerage fees. Fee income grew about 24%
from  $9,762,000  in 1994 to  $12,135,000  in  1995.  During  1995,  growth  was
particularly  strong in credit card  activities,  primarily  the  generation  of
merchant income, and in fees generated from consumer use of electronic  services
such as ATMs and debit cards.

Other income  declined from $3,383,000 in 1994 to $1,253,000 in 1995, a decrease
of $2,130,000. Results in 1994 had been influenced primarily by the gain of $1.2
million attributable to the aforementioned sale of the corporate trust business.

Noninterest Expense

Noninterest  expenses  remained  constant  in 1995 at  $150,634,000  compared to
$151,723,000 in 1994. While 1995 expenses were favorably affected by a reduction
in the premium  from FDIC  insurance,  performance  in 1994 had been  negatively
impacted by merger expenses and by a restructuring  charge. In 1995,  changes to
the  assessment  methodology  for FDIC  premiums were mandated by FDICIA and the
realization of a  fully-funded  bank insurance fund resulted in a premium refund
in the third quarter followed by a reduced assessment in the fourth quarter.  In
1994,  pre-tax charges  associated with mergers were  approximately  $4,500,000,
while expenses associated with restructuring certain loan and deposit activities
totaled $2,500,000.  Absent the effect of these items, "core" operating expenses
rose 6.2%.

The  following  summary  provides  a  comparison  of 1995 and  1994  noninterest
expenses by excluding the favorable  impact of reduced FDIC premiums in 1995 and
the unfavorable effect of the merger and restructuring charges in 1994.

                                                                  Change
                                                                  ------
                                     1995         1994       Amount       %
-------------------------------- ------------ ------------ ---------- ---------
Total noninterest expenses           $150,634    $151,723    $(1,089)    (0.7)%
FDIC savings                            3,082        -----     3,082
Merger and restructuring                -----      (7,000)     7,000
-------------------------------- ------------ ------------ ---------- ---------
Adjusted noninterest expenses        $153,716    $144,723     $8,993      6.2%
-------------------------------- ------------ ------------ ---------- ---------

The  adjusted  1995  growth  rate of  "core"  operating  expenses  of  6.2%  was
influenced by the impact of the mergers in late 1995, and by the  acquisition of
American Savings Bank in late 1994. The incremental noninterest expense increase
attributable to the mergers and  acquisitions  accounted for  approximately  one
third of the 6.2% increase in expenses.  The remaining  increase  related to the
effect of Keystone's  continuing  investment in human resources,  technology and
infrastructure.

                                       49
<PAGE>

The  following is a  comparison  of the  individual  components  of  noninterest
expenses, in total, and as adjusted for the merger and restructuring expenses in
1994, and the reduced FDIC premium expense in 1995.

<TABLE>
<CAPTION>

                        Actual Noninterest              Adjusted Noninterest
                            Expenses                          Expenses
------------------------------------------------ ---------------------------------
                  1995       1994       Change      1995       1994       Change
-------------- ---------- ----------- ---------- ---------- ----------- ----------
<S>               <C>         <C>         <C>       <C>         <C>         <C>
Salaries          $62,115     $62,327     $(212)    $62,115     $58,627     $3,488
Benefits           10,898      11,908    (1,010)     10,898      11,658       (760)
Occupancy          12,650      12,134       516      12,650      12,134        516
Furniture &
 Equipment         12,435      11,257     1,178      12,435      11,257      1,178
Deposit
 Insurance          4,957       8,039    (3,082)      8,039       8,039      -----
Other              47,579      46,058     1,521      47,579      43,008      4,571
-------------- ---------- ----------- ---------- ---------- ----------- ----------
                 $150,634    $151,723   $(1,089)   $153,716    $144,723     $8,993
-------------- ---------- ----------- ---------- ---------- ----------- ----------
</TABLE>

Adjusted  salary  expenses rose  $3,488,000 or 5.9%.  The primary  driver of the
increase in core salary expenses was an average overall merit increase of 4.5%.

Expenses  associated  with  providing  employee  health care  comprise  the most
significant  component  of  employee  benefit  expense.  Keystone's  health care
program  alternatives  have had a dramatic  influence  on the cost of  providing
health care  benefits  both to  pre-existing  employees as well as employees who
have  joined  Keystone  as a  consequence  of merger and  acquisition  activity.
Keystone has also been advantaged by the effect of favorable claims experience.

The most  significant  relative  increase in  noninterest  expenses  occurred in
furniture and equipment  expense,  which rose 10.5% from  $11,257,000 in 1994 to
$12,435,000 in 1995.  Keystone's overall strategic plan includes a commitment to
focus  on the  customer,  which  will  be  fulfilled  by a  willingness  to make
appropriate investment in technology, training, and infrastructure. The increase
in  this  component  of  overhead  had  its  origin  in a  number  of  strategic
initiatives  occurring  both  prior to,  and  during,  1995.  These  initiatives
included the expansion of multi-function ATMs and further  implementation of the
"Keystone   Visionary  Office"  concept.   Occupancy  expenses  grew  4.2%  from
$12,134,000 in 1994 to $12,650,000 in 1995.

The  most  significant   reduction  in  noninterest  expense  occurred  in  FDIC
insurance, which declined by $3,082,000 from $8,039,000 in 1994 to $4,957,000 in
1995.  The  reduction  was  primarily  due to the  aforementioned  third quarter
refund. Additionally,  fourth quarter premiums were reduced to $0.04 per $100 of
deposits and contributed to the overall reduction in FDIC premium expense.

The final category of noninterest expenses, other expenses, grew $1,521,000 from
$46,058,000 in 1994, to $47,579,000 in 1995.  After  adjusting for the impact of
merger  expenses in 1994,  core expenses grew  $4,571,000 or 10.6% in 1995. This
growth in core expenses was  attributed,  in part,  to the increases  associated
with revenue enhancement  opportunities.  For example, credit card expenses rose
$1,349,000, or nearly 30% of the increase in core expenses, but were accompanied
by a 35% rise in credit card and related merchant income. Likewise, marketing

                                       50
<PAGE>

expenses, which were linked to a number of revenue enhancement initiatives, rose
$843,000 during 1995. Other significant increases occurred in telephone expense,
which rose $655,000,  and problem loan expense, which grew by $550,000 from 1994
to 1995.

Income Taxes

Keystone   recorded  tax  expense  of  $27,866,000  in  1995  an  increase  from
$20,481,000  recorded in 1994. The increase was  influenced  primarily by higher
levels of  taxable  income and by the  national  tax  policy  changes  generally
unfavorable to financial institutions.  Likewise, the effective tax rate rose to
31.2% in 1995 versus 28.5% in 1994.

                                       51
<PAGE>

                  Report of Ernst & Young LLP, Independent Auditors


Shareholders and Board of Directors
Keystone Financial, Inc.

We have  audited  the  accompanying  consolidated  statements  of  condition  of
Keystone Financial,  Inc. and subsidiaries as of December 31, 1996 and 1995, 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,
1996.  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  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  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,  1996 and  1995,  and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity  with generally
accepted accounting principles.


                                        






Pittsburgh, Pennsylvania
January 31, 1997

                                             

                                       52
<PAGE>

Consolidated Statements of Condition                     December 31,
-----------------------------------------------------------------------------
(in thousands, except share data)                     1996          1995
------------------------------------------------ -------------- -------------
ASSETS
------------------------------------------------ -------------- -------------
Cash and due from banks                               $167,403      $182,459
Federal funds sold and other                            78,354       109,422
Investment securities available for sale               856,380       837,910
Investment securities held to maturity
 (market values 1996 - $383,526; 1995-$393,835)        379,958       385,262
Loans held for resale                                   51,225        57,454

Loans and leases                                     3,553,662     3,365,716
Allowance for credit losses                            (45,016)      (44,377)
------------------------------------------------ -------------- -------------
Net loans                                            3,508,646     3,321,339


Premises and equipment                                  74,407        70,888
Other assets                                           114,895       110,051
------------------------------------------------ -------------- -------------
TOTAL ASSETS                                        $5,231,268    $5,074,785
------------------------------------------------ -------------- -------------
LIABILITIES
------------------------------------------------ -------------- -------------
Noninterest-bearing deposits                          $511,931      $532,663
Interest-bearing deposits                            3,585,180     3,529,225
------------------------------------------------ -------------- -------------
Total deposits                                       4,097,111     4,061,888

Federal funds purchased and security repurchase
agreements                                             299,895       260,543
Other short-term borrowings                             26,175        19,298
------------------------------------------------ -------------- -------------
Total short-term borrowings                            326,070       279,841

FHLB borrowings                                        205,929       163,771
Long-term debt                                           2,154         4,048
Other liabilities                                       92,697        84,543
------------------------------------------------ -------------- -------------
TOTAL LIABILITIES                                    4,723,961     4,594,091
------------------------------------------------ -------------- -------------
SHAREHOLDERS' EQUITY
------------------------------------------------ -------------- -------------
Preferred stock; $1.00 par value, authorized
8,000,000 shares; none issued or outstanding             -----         -----
Common stock: $2.00 par value, authorized
75,000,000; issued 38,228,160 - 1996 and
25,256,369 - 1995                                       76,456        50,512
Surplus                                                 73,201        93,177
Retained earnings                                      368,172       337,557
Deferred KSOP benefit expense                           (1,249)       (1,750)
Treasury stock; 1996 - 320,000 shares at cost           (8,186)        -----
Net unrealized securities gains (losses),
 net of tax                                             (1,087)        1,198
------------------------------------------------ -------------- -------------
TOTAL SHAREHOLDERS' EQUITY                             507,307       480,694
------------------------------------------------ -------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          $5,231,268    $5,074,785
================================================ ============== =============
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.


                                       53
<PAGE>


Consolidated Statements of Income

                                                Year Ended December 31,
--------------------------------------------------------------------------------
(in thousands except per share data)        1996          1995         1994
--------------------------------------- ------------- ------------ -------------
INTEREST INCOME
--------------------------------------- ------------- ------------ -------------
 Loans and fees on loans                     $301,856     $288,122      $240,387
 Investments - taxable                         65,057       57,462        58,589
 Investments - tax-exempt                       7,517        8,402         9,222
 Federal funds sold and other                   5,403        8,309         3,840
 Loans held for resale                          4,688        1,636         1,164
--------------------------------------- ------------- ------------ -------------
                                              384,521      363,931       313,202
--------------------------------------- ------------- ------------ -------------
INTEREST EXPENSE
--------------------------------------- ------------- ------------ -------------
 Deposits                                     153,132      145,090       111,171
 Short-term borrowings                         11,524       10,195         6,671
 FHLB borrowings                                9,767       10,827         6,446
 Long-term debt                                   335          467           496
--------------------------------------- ------------- ------------ -------------
                                              174,758      166,579       124,784
--------------------------------------- ------------- ------------ -------------
NET INTEREST INCOME                           209,763      197,352       188,418
 Provision for credit losses                    9,858        7,859         9,484
--------------------------------------- ------------- ------------ -------------
NET INTEREST INCOME AFTER PROVISION
 FOR CREDIT LOSSES                            199,905      189,493       178,934
--------------------------------------- ------------- ------------ -------------
NONINTEREST INCOME
--------------------------------------- ------------- ------------ -------------
 Trust and investment advisory fees            15,201       12,557        11,808
 Service charges on deposit accounts           14,611       13,205        12,606
 Fee income                                    14,086       12,135         9,762
 Mortgage banking income                        7,467        6,111         3,557
 Other secondary market income                  3,571        1,696           311
 Reinsurance income                             2,266        2,047         2,368
 Other income                                   4,915        1,253         3,383
 Net gains - equity securities                    204          293           546
 Net gains - debt securities                      352        1,024           288
--------------------------------------- ------------- ------------ -------------
                                               62,673       50,321        44,629
--------------------------------------- ------------- ------------ -------------
NONINTEREST EXPENSE
--------------------------------------- ------------- ------------ -------------
 Salaries                                      69,270       62,115        62,327
 Employee benefits                             12,562       10,898        11,908
 Occupancy expense, net                        13,348       12,650        12,134
 Furniture and equipment expense               14,063       12,435        11,257
 Deposit insurance                                778        4,957         8,039
 Other expense                                 52,538       47,579        46,058
--------------------------------------- ------------- ------------ -------------
                                              162,559      150,634       151,723
--------------------------------------- ------------- ------------ -------------
Income before income taxes                    100,019       89,180        71,840
Income tax expense                             30,544       27,866        20,481
--------------------------------------- ------------- ------------ -------------
NET INCOME                                    $69,475      $61,314       $51,359
--------------------------------------- ------------- ------------ -------------
PER SHARE DATA
--------------------------------------- ------------- ------------ -------------
Net income                                      $1.83        $1.73         $1.46
Dividends                                       $0.98        $0.93         $0.86
Average number of shares outstanding       38,045,585   35,462,358    35,093,138
--------------------------------------- ------------- ------------ -------------
The accompanying notes are an integral part of the consolidated financial
statements.

                                       54
<PAGE>

Consolidated  Statements  of  Changes  in  Shareholders'  Equity

<TABLE>
<CAPTION>
                                                                                    Deferred             Net Unrealized
                                    Issued and                                        KSOP                 Securities      Share-
                                    Outstanding     Common              Retained     Benefit   Treasury   Gains(Losses),  Holders'
                                    Common Shares   Stock     Surplus   Earnings     Expense    Stock       Net of Tax     Equity
-----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except share data)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>          <C>       <C>         <C>         <C>      <C>           <C>             <C>
BALANCE AT JANUARY 1, 1994             23,390,863  $46,782    $93,052    $271,574    ($2,750)     ($13)       $4,235     $412,880
-----------------------------------------------------------------------------------------------------------------------------------
 1994 Net income                                -        -          -      51,359          -         -             -       51,359
 Dividends ($0.86/share)                        -        -          -     (30,985)         -         -             -      (30,985)
 Stock issued:
    Benefit plans                         211,464      422      2,985           -          -         -             -        3,407
    KSOP Plan                              17,545       35        460           -          -         -             -          495
    Dividend reinvestment                  83,575      168      2,265           -          -         -             -        2,433
  Deferred KSOP benefit expense                 -        -          -           -        500         -             -          500
  Acquisition of treasury stock          (690,000)       -          -           -          -   (20,563)            -      (20,563)
  Retirement of treasury shares              (228)      (1)        (1)          -          -         -             -           (2)
  Issuance of stock for acquisitions      317,403      635      8,113           -          -         -             -        8,748
  Net unrealized loss on available
   for sale securities                          -        -          -           -          -         -       (20,497)     (20,497)
  Other                                    30,455       61        (62)          -          -         -             -           (1)
-----------------------------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 1994           23,361,077   48,102    106,812     291,948     (2,250)  (20,576)      (16,262)   407,774
-----------------------------------------------------------------------------------------------------------------------------------

1995 Net income                                 -        -          -      61,314          -         -          -        61,314
 Dividends ($0.93/share)                        -        -          -     (33,092)         -         -          -       (33,092)
 Stock issued:
    Benefit plans                         276,056      552      4,686           -          -         -          -         5,238
    KSOP Plan                              20,821       42        571           -          -         -          -           613
    Dividend reinvestment                  88,508      176      2,480           -          -         -          -         2,656
  Deferred KSOP benefit expense                 -        -          -           -        500         -          -           500
  Acquisition of treasury stock          (211,625)       -          -           -          -    (6,363)         -        (6,363)
  Mergers and acquisitions              1,721,532    1,640    (21,372)     17,387          -    26,939          -        24,594
  Net unrealized gain on available
   for sale securities                          -        -          -           -          -         -     17,460        17,460
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995           25,256,369   50,512     93,177     337,557     (1,750)        -      1,198       480,694
-----------------------------------------------------------------------------------------------------------------------------------
1996 Net income                                 -        -           -      69,475         -         -          -        69,475
 Dividends ($0.98/share)                        -        -           -     (38,860)        -         -          -       (38,860)
 Stock issued:
    Stock split                        12,725,360   25,451     (25,510)         -          -         -          -           (59)
    Benefit plans                         136,687      273       2,561          -          -         -          -         2,834
    KSOP Plan                              11,940       24         278          -          -         -          -           302
    Dividend reinvestment                  97,804      196       2,695          -          -         -          -         2,891
  Deferred KSOP benefit expense                 -        -           -          -        501         -          -           501
  Acquisition of treasury stock          (320,000)       -           -          -          -    (8,186)         -        (8,186)
  Net unrealized loss on available
   for sale securities                          -        -           -          -          -         -     (2,285)       (2,285)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996           37,908,160  $76,456     $73,201    $368,172   ($1,249)  ($8,186)   ($1,087)     $507,307
-----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                       55
<PAGE>

Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

                                                        Year Ended December 31,
--------------------------------------------------------------------------------------
(in thousands)                                        1996         1995       1994
------------------------------------------------ -------------- ---------- -----------
<S>                                                    <C>        <C>         <C>
OPERATING ACTIVITIES:
Net income                                             $69,475    $61,314     $51,359
Adjustments to reconcile net income to net
 cash provided by operating activities:

 Provision for credit losses                             9,858      7,859       9,484
 Provision for depreciation and amortization            13,190     12,423       9,749
 Deferred income taxes                                  13,395      9,288         996
 Sale of loans held for resale                         441,716    157,803     107,193
 Origination of loans held for resale                 (466,469)  (162,678)   (119,808)
 Increase in interest receivable                        (3,395)    (1,129)     (3,800)
 Increase (decrease) in interest payable                  (100)     2,638       4,132
 Other                                                  (6,752)   (24,915)     18,710
------------------------------------------------ -------------- ---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES               70,918     62,603      78,015
------------------------------------------------ -------------- ---------- -----------
INVESTING ACTIVITIES:

Cash received in bank mergers                            -----     49,639      67,923
Net (increase) decrease in interest-earning deposits    (3,332)    (6,589)     19,078
Available for sale securities:
 Sales                                                  76,825    113,317      75,722
 Maturities                                          1,104,599    609,111     582,789
 Purchases                                          (1,205,881)  (747,817)   (612,283)
Held to maturity securities:
 Maturities                                            108,438    103,343      83,807
 Purchases                                            (103,268)   (55,258)    (78,637)
Net increase in loans                                 (208,560)  (119,270)   (324,554)
Proceeds from sales of loans                            47,051     33,016      41,289
Purchases of loans                                      (1,986)   (15,869)    (42,647)
Purchases of premises and equipment                    (15,043)   (14,622)     (9,344)
Other                                                     (357)      (876)       (215)
------------------------------------------------ -------------- ---------- -----------
NET CASH USED BY INVESTING ACTIVITIES                 (201,514)   (51,875)   (197,072)
------------------------------------------------ -------------- ---------- -----------
FINANCING ACTIVITIES:

Net increase in deposits                                35,223     41,745      89,597
Net increase in short-term borrowings                   46,229     25,813      18,549
Proceeds from FHLB borrowings                          402,867    138,352      38,371
Repayments of FHLB borrowings                         (360,708)  (129,967)    (19,484)
Net increase (decrease) in long-term debt               (1,894)    (2,006)         64
Acquisition of treasury stock                           (8,186)    (6,363)    (20,563)
Cash dividends                                         (38,860)   (33,092)    (30,985)
Other                                                    6,469      8,507       6,832
------------------------------------------------ -------------- ---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES               81,140     42,989      82,381
------------------------------------------------ -------------- ---------- -----------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS         (49,456)    53,717     (36,676)
------------------------------------------------ -------------- ---------- -----------
Cash and cash equivalents at beginning of year         258,659    204,942     241,618
------------------------------------------------ -------------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR              $209,203   $258,659    $204,942
------------------------------------------------ -------------- ---------- -----------
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
</TABLE>

                                       56
<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 commercial and consumer
banking  and  financial  services to a diverse  client base  through its banking
subsidiaries.  The  client  base  includes  individual,  business,  public,  and
institutional  customers primarily located in Pennsylvania,  Maryland,  and West
Virginia.  Lending  services  include  secured and unsecured  commercial  loans,
residential and commercial  mortgages,  installment  loans,  revolving  consumer
loans and lease  financing.  Deposit  services  include a variety  of  checking,
savings,   time,  money  market,  and  individual  retirement  accounts.   Money
management  services are available to customers through a variety of techniques,
all of which are  designed  to improve  cash flow,  control  disbursements,  and
increase return on investments.

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

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

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

Use of Estimates:  The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying  notes.  Actual results could differ from the  estimates,  and such
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  subsidiaries  consisting of Mid-State Bank and Trust Company;  Northern
Central Bank; Pennsylvania National Bank and Trust Company; American Trust Bank,
N.A., and its subsidiaries,  Keystone Brokerage, Inc., LBCMD Corporation and Key
Investor  Services,  Inc.;  Frankford Bank,  N.A., and its subsidiary,  Keystone
Financial  Leasing  Corporation;  Keystone  National  Bank  and its  subsidiary,
Keystone Financial  Mortgage  Corporation;  and the parent company's  nonbanking
subsidiaries  consisting  of  Keystone  Financial  Unlimited,   Key  Trust  Co.,
Martindale Andres & Co.; Keystone Life Insurance  Company;  Keystone  Investment
Services,  Inc.; and two community  development  corporations.  All  significant
intercompany accounts have been eliminated in consolidation.
Trading Account Assets: Securities classified as trading account assets are held
for resale in  anticipation  of short-term  market  movements and are carried at
fair value with market  adjustments  recorded against income.  Keystone has made
limited use of trading account portfolios.

                                       57
<PAGE>

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

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

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

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

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

Interest and Fees on Loans:  Interest  income on loans is accrued based upon the
principal  amount  outstanding.  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 under FASB Statement No. 114, 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
collection 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.

                                       58
<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 loans' 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,
subsequent disposition of collateral, etc.

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
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  predisposition  of
statistically valid historical  analysis.  Loans,  including impaired loans, are
charged-off when they are deemed to be substantially  uncollectible.  Keystone's
adoption of the  accounting  standards  for  impaired  loans has had no material
impact on the  comparability  of the  results  of  operations  or  statement  of
condition before and after the date of adoption.

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

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

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.

Other Real Estate: Other real estate is comprised of property acquired through a
foreclosure  proceeding,  an acceptance of a deed in lieu of foreclosure,  or an
in-substance 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 by the subsidiary
banks  are not  assets  of the  banks  and are  therefore  not  included  in the
consolidated financial statements.

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

Stock Options: Stock options 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

                                       59
<PAGE>

compensation  expense is recognized related to Keystone's stock option plans. In
January,  1996,  Keystone adopted the disclosure  requirements of FASB Statement
No. 123, "Accounting for Stock-Based  Compensation." As permitted under this new
standard, Keystone disclosed 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 on the date of the grant.

Transfers and Servicing of Financial Assets and  Extinguishments of Liabilities:
In June 1996, the Financial  Accounting  Standards Board (FASB) issued Statement
No. 125,  "Accounting  for  Transfers  and  Servicing  of  Financial  Assets and
Extinguishments  of  Liabilities".  This  statement  provides 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 extinguishments of liabilities.  Various provisions of the
standard will become  effective for  transactions  occurring  after December 31,
1996, and all other provisions will become effective for transactions  occurring
after December 31, 1997.  Adoption of the new standard is not expected to have a
significant impact on Keystone's financial condition or results of operations.

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.

Per Share Information: Net income per share is calculated by dividing net income
by the weighted average number of shares of common stock outstanding during each
period.  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 later  disposition  or sale of the treasury stock is recorded using
the average cost inventory method.

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 interest  income or
expense. The fair value of these swap contracts is appropriately  disclosed in a
footnote to these  financial  statements  and is not recognized in the financial
statements.

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

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  $174,858,000,  $163,120,000,  and  $120,652,000 in 1996,
1995,  and 1994,  respectively.  Cash  payments  for income  taxes  approximated
$17,150,000,   $17,050,000,   and   $24,854,000   for  1996,   1995,  and  1994,
respectively.

Reclassifications:  Certain amounts reported in the 1995 annual report have been
reclassified to conform with the 1996 presentation.  These reclassifications did
not impact Keystone's financial condition or results of operations.

                                       60
<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>

-------------------------------------------------------------------------------------
                                                            1996
                                                     Available for Sale
-------------------------------------------------------------------------------------
                                         Amortized        Unrealized          Fair
                                            Cost       Gains     Losses       Value
--------------------------------------- ------------ --------------------- ----------
<S>                                        <C>            <C>        <C>    <C>
Negotiable money market investments         $194,566       $15        $15    $194,566
U.S. Treasury securities                     198,099       798        521     198,376
U.S. Government agency obligations           383,150     1,316      4,004     380,462
Corporate and other securities                82,258       806         88      82,976
--------------------------------------- ------------ --------- ----------- ----------
Total                                       $858,073    $2,935     $4,628    $856,380
--------------------------------------- ------------ --------- ----------- ----------
                                                            1996
                                                      Held to Maturity
-------------------------------------------------------------------------------------
                                         Amortized        Unrealized          Fair
                                            Cost         Gains Losses        Value
--------------------------------------- ------------ --------------------- ----------
U.S. Government agency obligations          $230,402    $1,997      $1,680   $230,719
Obligations of states and political
 subdivisions                                134,194     3,308         135    137,367
Corporate and other securities                15,362       156          78     15,440
--------------------------------------- ------------ --------- ----------- ----------
Total                                       $379,958    $5,461      $1,893   $383,526
--------------------------------------- ------------ --------- ----------- ----------
</TABLE>
                                       61
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
                                                             1995
                                                      Available for Sale
-------------------------------------------------------------------------------------
                                           Amortized       Unrealized         Fair
                                             Cost         Gains Losses       Value
----------------------------------------- ----------- -------------------- ----------
<S>                                         <C>            <C>        <C>  <C>
Negotiable money market investments          $237,107       $11        $16   $237,102
U.S. Treasury securities                      254,483     1,254        380    255,357
U.S. Government agency obligations            272,934     1,306        844    273,396
Obligations of states and political
 subdivisions                                     847        25        ---        872
Corporate and other securities                 70,844       947        608     71,183
----------------------------------------- ----------- --------- ---------- ----------
Total                                        $836,215    $3,543     $1,848   $837,910
----------------------------------------- ----------- --------- ---------- ----------
                                                             1995
                                                       Held to Maturity
-------------------------------------------------------------------------------------
                                           Amortized       Unrealized         Fair
                                             Cost         Gains Losses       Value
----------------------------------------- ----------- -------------------- ----------
U.S. Government agency obligations           $237,122    $4,423       $338   $241,207
Obligations of states and political
 subdivisions                                 132,541     4,242        102    136,681
Corporate and other securities                 15,599       367         19     15,947
----------------------------------------- ----------- --------- ---------- ----------
Total                                        $385,262    $9,032       $459   $393,835
----------------------------------------- ----------- --------- ---------- ----------
</TABLE>
                                       62
<PAGE>
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------
                                                             1994
                                                      Available for Sale
-------------------------------------------------------------------------------------
                                          Amortized        Unrealized         Fair
                                             Cost         Gains Losses       Value
---------------------------------------- ------------ -------------------- ----------
<S>                                         <C>             <C>       <C>  <C>
Negotiable money market investments          $140,015        $1        $29   $139,987
U.S. Treasury securities                      370,625       141     11,053    359,713
U.S. Government agency obligations            234,495        72     13,249    221,318
Corporate and other securities                 35,674        26        923     34,777
---------------------------------------- ------------ --------- ---------- ----------
Total                                        $780,809      $240    $25,254   $755,795
---------------------------------------- ------------ --------- ---------- ----------
                                                             1994
                                                       Held to Maturity
---------------------------------------- --------------------------------------------
                                          Amortized        Unrealized         Fair
                                             Cost         Gains Losses       Value
---------------------------------------- ------------ -------------------- ----------
U.S. Treasury securities                       $5,905      $---       $100     $5,805
U.S. Government agency obligations            258,568       199     13,584    245,183
Obligations of states and political
 subdivisions                                 135,934     2,554      3,583    134,905
Corporate and other securities                 17,995        65        990     17,070
---------------------------------------- ------------ --------- ---------- ----------
Total                                        $418,402    $2,818    $18,257   $402,963
---------------------------------------- ------------ --------- ---------- ----------
</TABLE>

Net  securities  gains  recognized in 1996 of $556,000  included  gross gains of
$583,000 and gross losses of $27,000.  During 1995, securities with a total book
value of $4,871,000 and a total market value of $5,158,000 were transferred from
held-to-maturity  to  available-for-sale  pursuant to the  Financial  Accounting
Standards  Board staff's  special report on FASB  Statement No. 115.  Investment
securities  having a carrying value of  $483,125,000  at December 31, 1996, were
pledged to secure public and trust deposits and security repurchase agreements.
                                       63
<PAGE>

The following  tables display at December 31, 1996, the amortized cost,  related
fair values,  and the weighted  average yield (tax equivalent  basis)  available
thereon of maturing investment securities (in thousands):

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                     Available for Sale
-----------------------------------------------------------------------------------------------------------------------------------
                                                                  After One,              After Five,
                                     Within One Year        But Within Five Years    But Within Ten Years         After Ten Years
--------------------------------------------------------- ------------------------- ------------------------ ----------------------
                               Amortized   Fair           Amortized  Fair           Amortized    Fair        Amortized  Fair
                                 Cost      Value   Yield   Cost      Value   Yield   Cost       Value  Yield   Cost     Value Yield
--------------------------------------------------------- ------------------------- ------------------------ ----------------------
<S>                            <C>       <C>       <C>   <C>       <C>       <C>    <C>      <C>     <C>     <C>      <C>     <C>
Negotiable money market
 investments                    $194,566  $194,566  5.32% $      -  $      -     -%  $     -  $     -     -% $     -  $     -     -%
U.S. Treasury securities          44,089    44,079  5.55   154,010   154,297  5.97         -        -     -        -        -     -
Government agency obligations     16,993    16,974  5.89   338,766   336,344  6.11    14,871   14,820  5.97   12,520   12,324  5.69
Corporate and other securities    10,626    10,658  6.39    32,174    32,192  6.40       375      375  7.50   39,083   39,751  8.12
--------------------------------------------------------- ------------------------- ------------------------ ----------------------
Total                           $266,274  $266,277  5.44% $524,950  $522,833  6.09%  $15,246  $15,195  6.01% $51,603  $52,075  7.54%
--------------------------------------------------------- ------------------------- ------------------------ ----------------------
</TABLE>

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------
                                                                                    Held to Maturity
-----------------------------------------------------------------------------------------------------------------------------------
                                                                  After One,               After Five,
                                     Within One Year         But Within Five Years    But Within Ten Years        After Ten Years
--------------------------------------------------------- ------------------------- ------------------------ ----------------------
                               Amortized   Fair           Amortized  Fair            Amortized Fair          Amortized Fair
                                 Cost      Value   Yield     Cost    Value   Yield     Cost    Value  Yield    Cost    Value  Yield
--------------------------------------------------------- ------------------------- ------------------------ ----------------------
<S>                            <C>      <C>       <C>    <C>      <C>       <C>    <C>      <C>      <C>   <C>      <C>       <C>

Government agency obligations   $  825   $  822    7.79%  $34,054  $34,217   6.39%  $101,250 $101,275  7.08% $ 94,273 $ 94,405 7.24%
Obligations of states and
  political subdivisions         8,323    8,398    8.53    23,384   24,341   8.77    18,556    19,149  7.93    83,931   85,479 8.07
Corporate and other securities       -        -       -     9,963    9,925   6.00     5,399     5,515  7.37         -       -    -
--------------------------------------------------------- ------------------------- ------------------------ ----------------------
Total                           $9,148   $9,220    8.46%  $67,401  $68,483   7.16%  $125,205 $125,939  7.22% $178,204 $179,884 7.63%
--------------------------------------------------------- ------------------------- ------------------------ ----------------------
</TABLE>
                                       64
<PAGE>

Loans and Leases

The  composition  of loans  and  leases  was as  follows  at  December  31,  (in
thousands):
<TABLE>
<CAPTION>
                                                           1996           1995
----------------------------------------------------------------------------------
<S>                                                       <C>            <C>
Consumer financings:
 Consumer loans                                            $883,467       $841,560
 Net investment in direct lease financing
  receivables                                               301,483        184,554
----------------------------------------------------------------------------------
                                                          1,184,950      1,026,114
Loans secured by real estate:
 Consumer                                                   794,010        828,059
 Commercial                                                 870,578        868,314
----------------------------------------------------------------------------------
                                                          1,664,588      1,696,373
Commercial                                                  704,124        643,229
----------------------------------------------------------------------------------
Total                                                    $3,553,662     $3,365,716
==================================================================================
</TABLE>

At December 31, 1996,  all of the  outstanding  consumer  real estate loans were
pledged under blanket collateral  agreements to secure outstanding  Federal Home
Loan Bank borrowings.  No industry-related concentrations are deemed to exist.

Activity  within the allowance  for credit losses was  summarized as follows (in
thousands):
<TABLE>
<CAPTION>
                                                   1996         1995         1994
----------------------------------------------- ------------------------------------
<S>                <C>                            <C>          <C>          <C>
Balance at January 1                              $44,377      $42,440      $40,181
Allowance obtained through acquisitions/
 mergers                                            -----        1,750        2,096
Allowance transferred out                           -----        (815)        -----

Recoveries on loans previously charged off          2,233        1,901        2,411
Loans charged off                                (11,452)      (8,758)     (11,732)
----------------------------------------------- ------------------------------------
Net loans charged off                             (9,219)      (6,857)      (9,321)
Provision charged to operations                     9,858        7,859        9,484
----------------------------------------------- ------------------------------------
Balance at December 31                            $45,016      $44,377      $42,440
=============================================== ====================================
</TABLE>

                                       65
<PAGE>

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

                                         1996        1995         1994
------------------------------------- ----------  ----------   ----------
Nonaccrual                               $18,913     $16,740     $24,403
Restructured                                 393         503         144
------------------------------------- ----------  ----------   ----------
Total                                    $19,306     $17,243     $24,547
------------------------------------- ----------  ----------   ----------
Interest computed at original
 terms                                    $1,850      $1,794      $2,454
Interest recognized                          580         571         615
------------------------------------- ----------  ----------   ----------

At December 31, 1996,  there were no significant  commitments to lend additional
funds on these loans.

The  recorded  investment  in  impaired  loans  at  December  31,  1996  totaled
$6,938,000, with a related allowance for credit losses of $1,476,000. Comparable
amounts at the end of 1995 totaled $8,271,000 and $2,034,000, respectively.

Certain directors and executive  officers of Keystone and its subsidiaries,  and
their associates, were indebted to the bank subsidiaries during 1996. Such loans
were made in the  ordinary  course of  business  and on  customary  terms.  Loan
activity during 1996 with these related parties was as follows (in thousands):

 Beginning Balance        Additions       Repayments      Ending Balance
--------------------- ---------------- ----------------- ----------------
    $158,874              $79,209          $92,060           $146,023

Financial Derivatives and Other Hedging Activity

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  include  limited  interest rate swap
activity, forward commitments for mortgage banking inventory management, the use
of short sales and put options to hedge against the potential  deterioration  in
the value of indirect auto  financings  held for sale, and loan  commitments and
standby letters of credit made in the ordinary course of its banking business.

At December 31,  1996,  Keystone had one  interest  rate swap  contract  with an
original notional amount of $7,000,000, maturing in January, 1997. This contract
is a "receive  floating"/"pay  fixed"  swap,  with the receive rate at six-month
LIBOR and the pay rate at 8.31%. This contract,  which is currently in a net pay
position, hedges a fixed-rate loan funded by short-term certificates of deposit.
The credit condition of Keystone's  counterparties  met Keystone's credit policy
standards. This contract had a current valuation of $(79,000),  which represents
the estimated costs to terminate the swap contract. Keystone utilizes derivative
instruments to hedge balance sheet amounts and unrealized gains/(losses) are not
recognized in the financial statements.

                                       66
<PAGE>

Keystone has entered into forward mortgage  commitments related to management of
its mortgage banking inventory.  Under the terms of these commitments,  Keystone
agreed to  deliver  a  specified  volume  of  mortgage  loans  with a  specified
portfolio yield,  and received a  pre-established  price commitment  pursuant to
timely delivery of the mortgage loans.  The purpose of these  arrangements is to
manage the effect of interest  rate  changes on these loans  between the date of
the  original  loan  commitment  and the  date of  delivery  for  sale  into the
secondary market. At December 31, 1996, Keystone had entered into commitments to
deliver approximately  $21,341,000 of mortgage loans for sale into the secondary
market.  The delivery dates for these  commitments  are short-term in nature and
will expire at various dates in the first half of 1997.

Keystone  has made use of both put  options  and  short  sales of U.S.  Treasury
securities  to hedge  against  declines in market  value,  due to interest  rate
fluctuations, of indirect automobile loans awaiting securitization.  At December
31, 1996 Keystone had outstanding  short-sales totaling $31,000,000.  The market
value at December  31, 1996 of the U.S.  Treasury  securities  needed to fulfill
these commitments approximated the agreed-upon sales prices. Thus, there were no
significant gains or losses inherent in the transactions.

Loan  commitments and standby  letters of credit have credit risk  substantially
the same as involved in  extending  loans to  customers.  At December  31, 1996,
outstanding  commitments for loans and standby letters of credit were as follows
(in thousands):

               Loan commitments                $831,387
               --------------------------- ------------
               Standby letters of credit        $62,923
               --------------------------- ------------

Premises and Equipment

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

                                                  1996        1995
---------------------------------------------- ----------- -----------
Land                                               $9,236      $8,129
Buildings                                          61,888      59,987
Equipment                                          83,967      75,999
Leasehold improvements                             13,371      10,091
---------------------------------------------- ----------- -----------
                                                  168,462     154,206
Accumulated depreciation and amortization         (94,055)   ( 83,318)
---------------------------------------------- ----------- -----------
Total                                             $74,407     $70,888
============================================== =========== ===========

Depreciation  and   amortization   expense  amounted  to  $11,146,000  in  1996,
$9,946,000 in 1995, and $8,909,000 in 1994.

Keystone and its subsidiaries  lease various  equipment and buildings.  In 1996,
1995,  and 1994,  total rent expense  amounted to  $6,687,000,  $5,775,000,  and
$5,794,000,   respectively.   Future  annual   minimum  lease  payments  do  not
significantly exceed historic levels.

                                       67
<PAGE>

Federal Home Loan Bank Borrowings

The subsidiary  banks of Keystone are members of a Federal Home Loan Bank (FHLB)
and, as such,  can take  advantage  of the FHLB program for  overnight  and term
advances at published daily rates, which are advantageous to members as compared
to issuing notes directly in the market. Under the terms of a blanket collateral
agreement, advances from the FHLB are collateralized by first mortgage loans and
securities. Advances available under this agreement are limited by available and
qualifying  collateral  and the amount of FHLB stock  held by the  borrower.  At
December 31, 1996, Keystone member banks could borrow an additional $859,947,000
based on qualifying collateral. Such additional borrowing would require that the
banks  increase  their  investment  in FHLB stock by  $101,147,000.  Outstanding
borrowings  from the  Federal  Home  Loan Bank are  summarized  as  follows  (in
thousands):
                                            December 31,
---------------------------------------------------------------
                                          1996          1995
------------------------------------ ------------- ------------
Due 1996, 4.68% to 6.89%                    $-----      $67,956
Due 1997, 5.48% to 7.04%                    60,095       63,916
Due 1998, 5.45% to 7.71%                    48,848       21,229
Due 1999, 4.75% to 6.51%                    26,086            5
Due 2000, 5.54% to 6.28%                     2,500        2,505
Due 2001, 4.92% to 6.80%                    66,000        6,000
After 2001, 5.50% to 7.23%                   2,400        2,160
------------------------------------ ------------- ------------
                                          $205,929     $163,771
------------------------------------ ------------- ------------

Of the  December  31,  1996  outstanding  balance,  $80,000,000  is  subject  to
conversion  to  adjustable  rates at the option of the FHLB at various  dates in
1997.  In the event the FHLB  elects to convert  the  borrowings  to  adjustable
rates, Keystone has the option to pre-pay the borrowings without penalty.

                                       68
<PAGE>

Long-term Debt

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

                                                   1996        1995
----------------------------------------------- ----------- -----------
Parent:
  KSOP Note payable, interest at prime
   plus 0.25%, 8.5% at December 31, 1996             $1,249      $1,750

Subsidiaries:
  Note payable                                          131       1,341
  Bank note payable, interest at 67.5% of
   prime, 4.95% at December 31, 1996                    666         833
  Various mortgages payable                             108         124
----------------------------------------------- ----------- -----------
Total                                                $2,154      $4,048
=============================================== =========== ===========

The KSOP note payable reflects the amortized balance of a $3,500,000  borrowing,
the  proceeds  of which  were used to  purchase  186,000  shares  of  previously
authorized but unissued Keystone common stock on July 1, 1992. The original note
is payable in 84 equal monthly  installments  ending on July 31, 1999.  The loan
bears interest at the prime rate plus 0.25% and requires monthly amortization of
principal and interest. The loan is subject to various debt covenants, including
reporting  requirements,  and  other  customary  conditions.  See  the  note  on
"Employee Benefit Plans" for additional information.

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 the 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 $56.00,  a number of
shares of common stock, 5.333 one-thousandths (0.005333) of a share of Preferred
Stock,  or other  securities  or assets  of  Keystone  or  common  shares of the
acquiring  company having a market value equal to twice the exercise  price.  At
any time after a person or group acquires 20% or more (but less than 50%) of the
outstanding common stock, the Board of Directors may exchange part or all of the
rights  (other than the rights held by the person or group) for shares of common
or 5.333  one-thousandths  of a share of Preferred Stock on a one-for-one basis.
The Board of  Directors  is entitled to redeem the rights for one cent per right
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.  Effective  January
1, 1996, Keystone adopted the disclosure provisions of FASB Statement No. 123,


                                       69
<PAGE>

"Accounting for Stock-Based Compensation". As permitted under this new standard,
Keystone  continues to account for its plans in accordance  with APB Opinion No.
25 and  related  interpretations.  As such,  no  compensation  expense  has been
recognized for its stock option plans and employee stock purchase plan.


Keystone has an employee "Stock  Incentive  Plan" and a "Nonemployee  Directors'
Stock Option  Plan."  Under the terms of these plans,  Keystone has reserved for
issuance a total of 2,250,000  shares of common stock for  qualifying  employees
and nonemployee  directors,  of which approximately  1,124,000 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 a predecessor
plan 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.



                                       70
<PAGE>
                               Weighted
                                Average
                               Exercise      Common
                                Price        Shares
---------------------------- ------------ ------------
                             
---------------------------- ------------ ------------
January 1, 1994                    $13.58   1,622,156
  Granted                          $22.27     547,500
  Exercised                        $ 9.41    (241,818)
  Terminated                       $15.76     (38,422)
---------------------------- ------------ ------------
December 31, 1994                  $16.41   1,889,416
---------------------------- ------------ ------------
  Granted                          $19.83     157,489
  Exercised                        $ 9.59    (279,300)
  Terminated                       $20.08     (50,829)
---------------------------- ------------ ------------
December 31, 1995                  $17.59   1,716,776
---------------------------- ------------ ------------
  Granted                          $20.36     262,351
  Exercised                        $10.57     (83,725)
  Terminated                       $20.62     (48,355)
---------------------------- ------------ ------------
December 31, 1996                  $18.20   1,847,047
---------------------------- ------------ ------------

The following table summarizes  information  about stock options  outstanding at
December 31, 1996:
<TABLE>
<CAPTION>

----------------------------------------------------------- -------------------------
             Options Outstanding                            Options Exercisable
----------------------------------------------------------- -------------------------
                                 Weighted-
                                  Average      Weighted-                   Weighted-
    Range of                     Remaining      Average                     Average
    Exercise        Number      Contractual     Exercise       Number      Exercise
     Prices       Outstanding      Life          Price       Exercisable     Price
---------------- ------------- ------------- -------------- ------------- -----------
<S>                 <C>             <C>           <C>          <C>          <C>
$4.95-$6.98             31,108          0.77          $5.48        31,108       $5.48
$7.26-$10.88           279,688          3.67          $9.15       279,688       $9.15
$11.13-$15.67          281,026          4.56         $14.03       276,676      $14.06
$19.25-$24.75        1,255,225          7.24         $21.47       732,518      $21.65
------------------------------ ------------- -------------- ------------- -----------
$4.95-$24.75         1,847,047          6.18         $18.20     1,319,990      $17.03
------------------------------ ------------- -------------- ------------- -----------
</TABLE>
                                       71
<PAGE>

Under the "Employee  Stock Purchase  Plan",  eligible  employees are provided an
opportunity to purchase  Keystone  common stock at a discount from market price.
The Plan  provides for the purchase of stock  through  payroll  deductions  at a
price which is the lesser of 85% of the fair market value of the common stock as
of the first or last day of the annual  purchase  period.  The  purchase  period
commences on July 1 and ends on June 30. Through  modifications made to the plan
in 1995,  Keystone  reserved  750,000  shares of common stock,  of which 653,000
remain available for future purchases.  The amount of common shares issued under
this program in 1996, 1995, and 1994 were as follows:

                                        Price Per        Shares
                                          Share          Issued
          -------------------------- --------------- --------------
          1996                            $15.79         97,196
          1995                            $15.90         74,249
          1994                            $17.78         59,848

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.

--------------------------------------------------------------------------
                                                    1996            1995
--------------------------------------------------------------------------
Net Income               As reported               $69,475         $61,314
 (in thousands)          Pro forma                  68,448          60,838

Earnings per share       As reported                 $1.83           $1.73
                         Pro forma                    1.80            1.72
--------------------------------------------------------------------------

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

The  weighted-average  grant-date fair values of options granted during 1996 and
1995 under the stock  option plan were $2.69 and $3.05,  respectively.  The fair
value of each  option  grant was  estimated  on the date of the grant  using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions  used in the  option  pricing  model  for  grants  in 1996 and 1995,
respectively:  dividend yield of 4.6% and 4.3%;  expected  volatility of 15% for
both years; risk-free interest rates of 5.50% and 7.88%; and expected lives of 7
years for both the 1996 and 1995 Plan options.

Pro forma compensation  expense for the employees' purchase rights was estimated
using the Black-Scholes model with the following  assumptions for 1996 and 1995,
respectively:  dividend  yield of 4.1% and 4.8%;  an expected life of 1 year for
both years; expected volatility of 12% and 13%; and risk-free interest rates of
5.75% and  5.64%.  The  weighted-average  fair  value of those  purchase  rights
granted in 1996 and 1995 was $7.03 and $5.77, respectively.

The  Black-Scholes  model is  predominantly  used to value traded  options which
differ  from  Keystone's  options.  This  model  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.

On March  30,  1995,  the  Board of  Directors  approved  the  Management  Stock
Ownership Program (the "Program").  The Program 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.  The aggregate  number of shares
which may be issued and sold  pursuant to the Plan is limited to 750,000  shares
of Common  Stock,  subject  to  proportionate  adjustment  in the event of stock
splits and  similar  events.  During  1996 and 1995,  19,000 and 72,000  shares,
respectively,  were issued under the Plan.  At December  31, 1996 and 1995,  the
amount  executives  participating  in the Program  owed  Keystone  for  financed
purchases totaled $1,786,000 and $1,384,000, respectively.

Keystone  has  a  dividend   reinvestment  plan  for  shareholders  under  which
additional shares of Keystone common stock may be purchased at market value with
reinvested dividends and voluntary cash payments.  Keystone has reserved 900,000
shares of common stock for this Plan,  and  approximately  466,000 shares remain
unissued. The following number of shares of Keystone common stock were purchased
pursuant to this plan: 132,000 in 1996, 133,000 in 1995, and 125,000 in 1994.

                                       72
<PAGE>


Employee Benefit Plans

Keystone provides a noncontributory  defined benefit plan covering substantially
all  full-time  employees.  Plan  benefits  are  based on years of  service  and
qualifying  compensation during the final years of employment.  A summary of the
components of net periodic  pension expense for Keystone's  defined benefit plan
was as follows for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
                                                      1996       1995       1994
-------------------------------------------------- ---------- ---------- -----------
<S>                                                    <C>        <C>         <C>
Service cost benefits earned during the period        $2,214     $2,213      $2,170
Interest cost on projected benefit obligation          4,334      3,795       3,644
Actual return on plan assets                          (8,353)   (11,397)        791
Net amortization and deferral                          2,108      6,010      (5,959)
-------------------------------------------------- ---------- ---------- -----------
Pension expense                                         $303       $621        $646
================================================== ========== ========== ===========
</TABLE>

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

                                                            1996        1995
-------------------------------------------------------- ----------- -----------
Actuarial present value of the accumulated benefit
   obligation, including vested benefits of $50,029
   in 1996 and $47,154 in 1995                              $50,421     $47,544
-------------------------------------------------------- ----------- -----------
Actuarial present value of projected benefit
   obligation for service rendered to date                 $(62,348)   $(59,227)
Fair value of plan assets                                    75,705      70,377
-------------------------------------------------------- ----------- -----------
Plan assets in excess of projected benefit obligation        13,357      11,150
Unrecognized net assets at transition                        (3,386)     (4,054)
Unrecognized net gain                                        (5,848)     (2,539)
Unrecognized prior service cost                              (1,256)     (1,487)
-------------------------------------------------------- ----------- -----------
Prepaid pension expense, included in other assets            $2,867      $3,070
======================================================== =========== ===========

Actual assumptions used in the determination of the projected benefit obligation
were as follows:
                                                      1996     1995    1994
--------------------------------------------------- -------- -------- -------
Rate of increase in future compensation levels        5.50%    5.50%    5.50%
Expected long-term rate of return on plan assets      8.50     8.00     8.00
Weighted average discount rate                        7.50     7.50     7.75
=================================================== ======== ======== =======

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, limited to 5% of employee compensation. Matching contributions are
paid entirely in Keystone stock.

                                       73
<PAGE>

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

Group-based annual incentive plans include the Long-Term  Incentive Plan (LTIP),
Management Incentive Compensation Program (MICP) and Profit Enhancement Requires
Quality   (PERQ).   Employees  earn  awards  under  these  plans  based  on  the
profitability of their operating unit and/or  Keystone.  Expenses for the 401(k)
plan,  LTIP,  MICP,  and PERQ were  $5,303,000 in 1996,  $5,213,000 in 1995, and
$3,699,000 in 1994.

Income Taxes

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

                                                 December 31,
----------------------------------------- -------------------------
Deferred tax assets:                          1996         1995
----------------------------------------- ------------ ------------
  Allowance for credit losses                 $14,402      $13,954
  Unrealized losses on securities
   available-for-sale                             585        -----
  Deferred expenses                               945        1,849
  Deferred loan fees                               13        1,040
  Deferred compensation                         2,227        1,745
----------------------------------------- ------------ ------------
Deferred tax liabilities:
----------------------------------------- ------------ ------------
  Lease financing activities                  (33,950)     (20,526)
  Unrealized gains on securities
   available-for-sale                            -----        (645)
  Tax over book depreciation                     (937)        (306)
  Core deposit amortization                    (1,494)      (1,685)
  Other                                          (953)      (1,043)
----------------------------------------- ------------ ------------
Net deferred tax liability                   $(19,162)     $(5,617)
========================================= ============ ============

                                       74
<PAGE>

The  provision  for income  taxes  consisted  of the  following  components  (in
thousands):
--------------------------------------------------------------------
                                      1996         1995        1994
---------------------------------  ---------    ---------  ---------

Deferred provision                   $14,775      $11,104       $996
Current provision:
 Federal taxes                        15,093       16,283     19,199
 State taxes                             676          479        286
---------------------------------  ---------    ---------  ---------
Total                                $30,544      $27,866    $20,481
=================================  =========    =========  =========

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

                                        1996       1995        1994
------------------------------------ ----------  ---------- ----------
Provision on pre-tax income at
 statutory rates                       $35,007     $31,213    $25,144
Tax exempt interest income              (3,522)     (4,273)    (4,556)
Other                                     (941)        926       (107)
------------------------------------ ----------  ---------- ---------- 
Total                                  $30,544     $27,866    $20,481
------------------------------------ ----------  ---------- ----------
Effective Rate                            30.5%       31.2%      28.5%
==================================== ==========  ========== ==========

Regulatory Capital Requirements

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


                                       75
<PAGE>

The following table provides  Keystone's  risk-based capital position at the end
of 1996 and 1995 and a comparison to the various regulatory capital requirements
(in thousands):
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------
                                                                     Well
                              1996                  1995          Capitalized    Minimum
                        Amount     Ratio      Amount     Ratio       Ratio        Ratio
--------------------- ---------- ---------- ----------- -------- -------------- ---------
<S>                     <C>          <C>       <C>        <C>               <C>        <C>
Total capital
 (to risk-weighted
 assets)                $539,699     14.77%    $504,620   14.83%            10%        8%
Tier 1 capital
 (to risk-weighted
 assets)                $494,683     13.54%    $464,456   13.65%             6%        4%
Tier 1 capital
 (to average
 assets)                $494,683      9.64%    $464,456    9.28%             5%        4%
--------------------- ---------- ---------- ----------- -------- -------------- ---------
</TABLE>

At December  31, 1996 and 1995,  each  significant  subsidiary  of Keystone  had
capital at or above the well capitalized level for each of the three ratios.

Failure  to meet  any one of the  minimum  capital  ratios  would  result  in an
institution   being   classified   as   "undercapitalized"   or   "significantly
undercapitalized".   Such  classifications  could  disrupt  dividends,   capital
distributions,  or affiliate  management fees. In addition,  other restrictions,
prohibitions, and related supervisory actions would be likely depending upon the
overall  level of  capital.  Keystone  anticipates  no  problems  in meeting the
current or future capital  standards.  As of December 31, 1996,  each subsidiary
bank had 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, 1996,  Keystone's bank  subsidiaries  maintained
average reserve balances of approximately $64,000,000 in compliance therewith.

Dividends  that may be paid to Keystone by the  subsidiary  banks are limited by
state and  federal  regulations.  The related  amount  available  for  dividends
aggregated  $146,373,000 at December 31, 1996. Federal Reserve  regulations also
limit  each  subsidiary  bank  as to the  amount  it may  loan  its  affiliates,
including Keystone. At December 31, 1996, 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

                                       76
<PAGE>

comparison with independent  markets,  and, in many cases, could not be realized
in immediate  settlement of the instrument.  Statement No. 107 excludes  certain
financial  instruments  and all  nonfinancial  instruments  from its  disclosure
requirements.  Accordingly,  the aggregate  fair value amounts  presented do not
represent the underlying value of Keystone Financial, Inc.

                                       77
<PAGE>

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

                                            1996                      1995
-------------------------------------------------------------------------------------
                                    Carrying    Estimated     Carrying    Estimated
                                     Amount     Fair Value     Amount     Fair Value
--------------------------------- ------------ ------------ ------------ ------------
<S>                                   <C>          <C>          <C>          <C>
Financial Assets:
Cash and due from banks               $167,403     $167,403     $182,459     $182,459
Federal funds sold and other            78,354       78,354      109,422      109,422
Investment securities
 available for sale                    856,380      856,380      837,910      837,910
Investment securities held
 to maturity                           379,958      383,526      385,262      393,835
Loans held for resale                   51,225       51,225       57,454       57,454
Loans, net of allowance for
 credit losses                       3,177,381    3,211,254    3,136,785    3,169,901
--------------------------------- ------------ ------------ ------------ ------------
Total Financial Assets              $4,710,701   $4,748,142   $4,709,292   $4,750,981
--------------------------------- ------------ ------------ ------------ ------------
Leases                                 331,265                   184,554
Premises and equipment                  74,407                    70,888
Other assets                           114,895                   110,051
--------------------------------- ------------ ------------ ------------ ------------
Total Assets                        $5,231,268                $5,074,785
--------------------------------- ------------ ------------ ------------ ------------
Financial Liabilities:
Time deposits                       $2,414,979   $2,423,504   $2,267,296   $2,292,161
Other deposits                       1,682,132    1,682,132    1,794,592    1,794,592
Short-term borrowings                  326,070      326,070      279,841      279,841
FHLB borrowings                        205,929      203,443      163,771      164,601
Long-term debt                           2,154        2,154        4,048        4,048
--------------------------------- ------------ ------------ ------------ ------------
Total Financial Liabilities         $4,631,264   $4,637,303   $4,509,548   $4,535,243
--------------------------------- ------------ ------------ ------------ ------------
Other liabilities                       92,697                    84,543
--------------------------------- ------------ ------------ ------------ ------------
 Total Liabilities                  $4,723,961                $4,594,091
--------------------------------- ------------ ------------ ------------ ------------
Off-Balance Sheet Instruments:
--------------------------------- ------------ ------------ ------------ ------------
Lending commitments and
 letters of credit                      $-----     $(2,625)       $-----       $(574)
--------------------------------- ------------ ------------ ------------ ------------
All other                               $-----        $(79)       $-----       $(402)
================================= ============ ============ ============ ============
</TABLE>
                                       78
<PAGE>

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 don't have
significant  changes in credit risk,  fair values are based on carrying  values.
The fair  values  for  other  loans are  estimated  using  discounted  cash flow
analyses,  using interest rates  currently  being offered for loans with similar
terms to borrowers of comparable credit quality.  The carrying amount of accrued
interest approximates its fair value.

Deposit  liabilities:  The fair  values  disclosed  for demand  deposits  (e.g.,
interest and noninterest  checking,  savings,  and certain types of money market
accounts)  are reported at a value equal to the amount  payable on demand at the
reporting date. The carrying amounts for variable-rate,  fixed-term money market
accounts and certificates of deposit  approximate their fair market value at the
reporting date. Fair values for fixed-rate certificates of deposit are estimated
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 counter parties' 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.
                                       79
<PAGE>

Mergers and Acquisitions

During  the  fourth  quarter  of  1996,  Keystone  announced  the  signing  of a
definitive  agreement  to merge  with  Financial  Trust  Corporation  (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 will receive Keystone common stock at a fixed exchange ratio of 1.65
shares for each Financial  Trust share.  The  transaction  will be accounted for
under the pooling of interests method of accounting.

The following table provides a summary of the consolidated operating results and
financial  condition on a pro forma basis as of and for the year ended  December
31, 1996 (in thousands):

                              Keystone       Financial       Keystone
                           (As reported)       Trust        Pro forma
------------------------ --------------- --------------- ---------------
Net Interest Income             $209,763         $52,356        $262,119
Net Income                        69,475          20,031          89,506
Assets                         5,231,268       1,219,311       6,450,579
Liabilities                    4,723,961       1,066,212       5,790,173
Shareholders' Equity             507,307         153,099         660,406
------------------------ --------------- --------------- ---------------

During the fourth  quarter of 1996,  Keystone  also  announced  the signing of a
definitive agreement to acquire First Financial Corporation (First Financial), a
thrift  holding  company  with  assets  of $361  million  based  in  Cumberland,
Maryland.  Under the terms of the agreement  with First  Financial,  each of its
shareholders  will receive  Keystone  common stock at a fixed  exchange ratio of
1.29 shares for each First Financial share, or an equivalent amount of cash. The
stock  issuance  will amount to between 55% and 60% of the total  consideration,
and as such, the transaction will be accounted for as a purchase.

Both the  Financial  Trust and  First  Financial  acquisitions  are  subject  to
regulatory and  shareholder  approval and are expected to be consummated  during
the first half of 1997.

During  the  fourth  quarter  of  1995,   Keystone   completed  mergers  of  two
Pennsylvania  bank holding  companies,  Shawnee Financial  Services  Corporation
(Shawnee) and National American Bancorp (NAB); and the acquisition of Martindale
Andres & Company (Martindale),  a Philadelphia-based  asset management firm. The
Shawnee and NAB  mergers  resulted  in the  issuance  of 501,000  and  1,158,000
shares,  respectively,  of  Keystone  stock in  exchange  for 80,200 and 579,000
shares of Shawnee and NAB,  respectively.  The bank subsidiaries of both Shawnee
and NAB were merged into existing Keystone affiliated banks and the mergers were
accounted for under the  pooling-of-interests  method of accounting.  Due to the
immaterial  impact of both  transactions  to Keystone's  financial  position and
results of operation,  prior periods were not restated.  Consolidated results of
Keystone include Shawnee's and NAB's results of operations from the consummation
dates of October 10, 1995 and December 29, 1995,  respectively.  

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

                                       80
<PAGE>

On November 1, 1994,  Keystone  completed the purchase of American  Savings Bank
(American),   a  state-chartered  savings  bank  with  assets  of  approximately
$135,000,000,  which was merged into an affiliate bank.  Former  shareholders of
American  received  cash, in the  approximate  amount of $5,774,000  and 317,000
shares  of  Keystone   common  stock,   with  total   consideration   valued  at
approximately $14,522,000.  The transaction was accounted for under the purchase
method of  accounting  and  resulted in the  recognition  of  intangible  assets
totaling  approximately  $8,539,000.  The intangible assets consist primarily of
core deposit  intangibles which will be amortized on an accelerated basis over a
period of ten years.

                                       81
<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,
-------------------------------------------------------------------------
                                                    1996         1995
----------------------------------------------- ------------ ------------
Assets:
   Cash                                                 $423       $1,274
   Investment securities                              22,076        9,176
   Investments in:
     Subsidiary banks                                450,587      442,890
     Other subsidiaries                               50,775       23,976
   Other assets                                          119       21,298
----------------------------------------------- ------------ ------------
TOTAL ASSETS                                        $523,980     $498,614
----------------------------------------------- ------------ ------------
Liabilities:
   Long-term debt                                     $1,250       $1,750
   Other liabilities                                  15,423       16,170
----------------------------------------------- ------------ ------------
TOTAL LIABILITIES                                     16,673       17,920
Shareholders' Equity                                 507,307      480,694
----------------------------------------------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          $523,980     $498,614
=============================================== ============ ============

                             Statements of Income
                                                   Year Ended December 31,
-------------------------------------------- -----------------------------------
                                                1996       1995        1994
-------------------------------------------- ---------- ----------- -----------
Income:
 Dividends from subsidiaries:
  Bank subsidiaries                             $63,365     $38,910     $59,335
  Other subsidiaries                              -----       -----       -----
Expenses                                          2,331       6,837       7,210
-------------------------------------------- ---------- ----------- -----------
Income before taxes and undistributed
 earnings of subsidiaries                        61,034      32,073      52,125
Income taxes (benefit)                            (333)     (2,539)     (3,430)
Equity in undistributed earnings of
 subsidiaries                                     8,108      26,702     (4,196)
-------------------------------------------- ---------- ----------- -----------
NET INCOME                                      $69,475     $61,314     $51,359
============================================ ========== =========== ===========
                                       82
<PAGE>

                           Statements of Cash Flows

                                                 Year Ended December 31,
------------------------------------------ -----------------------------------
                                              1996        1995        1994
------------------------------------------ ----------- ----------- -----------
OPERATING ACTIVITIES:
 Net income                                   $69,475     $61,314     $51,359
 Equity in undistributed (earnings)
   losses                                      (8,108)    (26,702)      4,196
 Other                                            712     (10,514)      5,637
------------------------------------------ ----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
 ACTIVITIES                                    62,079      24,098      61,192
------------------------------------------ ----------- ----------- -----------
INVESTING ACTIVITIES:
 Net (increase) decrease in investments       (12,900)      9,160      (9,490)
 Investments in subsidiaries                   (8,451)     (1,842)     (7,270)
------------------------------------------ ----------- ----------- -----------
NET CASH PROVIDED BY (USED BY) INVESTING
 ACTIVITIES                                   (21,351)      7,318     (16,760)
------------------------------------------ ----------- ----------- -----------
FINANCING ACTIVITIES:
 Cash dividends declared                      (38,860)    (33,092)    (30,985)
 KSOP activity:
   Common stock proceeds                          302         613         495
   Payment of debt                               (501)       (500)       (500)
 Acquisition of treasury stock                 (8,186)     (6,363)    (20,563)
 Proceeds from issuance of common stock
  under benefits plans                          5,725       7,894       6,340
 Other                                            (59)        500          (2)
------------------------------------------ ----------- ----------- -----------
NET CASH USED BY FINANCING ACTIVITIES         (41,579)    (30,948)    (45,215)
------------------------------------------ ----------- ----------- -----------
Increase (decrease) in cash                      (851)        468        (783)
Cash at beginning of year                       1,274         806       1,589
------------------------------------------ ----------- ----------- -----------
CASH AT END OF YEAR                              $423      $1,274        $806
========================================== =========== =========== ===========

                                       83
<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, 1996:

                                                             1996      
-------------------------------------------------------------------------------
(in thousands)                                 Average                  Yield/
                                               Balance     Interest      Rate
-------------------------------------------------------------------------------
ASSETS
-------------------------------------------------------------------------------
Federal funds sold and other                   $101,505      $5,403      5.32%
Investment securities:
    Negotiable money market investments         153,631       8,583      5.59
    Taxable investment securities               909,854      56,538      6.21
    Nontaxable investment securities(1)         128,736      10,944      8.50
Loans held for resale                            53,656       4,688      8.74
Consumer loans (2) (3)                        1,144,103     101,214      8.85
Real estate loans (1) (2) (3)                 1,663,475     146,681      8.82
Commercial loans (1) (2) (3)                    624,553      55,362      8.86
-------------------------------------------------------------------------------
Total earning assets                          4,779,513    $389,413      8.15%
-------------------------------------------------------------------------------
Allowance for credit losses                     (44,978) 
Other assets                                    320,123
-------------------------------------------------------------------------------
Total Assets                                 $5,054,658
-------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------
NOW                                            $426,312      $5,773      1.35%
Savings                                         391,692       7,735      1.97
Money market                                    403,885       9,500      2.35
Time deposits                                 2,328,002     130,124      5.59
Short-term borrowings                           265,527      11,524      4.34
FHLB borrowings                                 151,924       9,767      6.43
Long-term debt                                    3,117         335      9.01
-------------------------------------------------------------------------------
Total interest-bearing liabilities            3,970,459    $174,758      4.40%
-------------------------------------------------------------------------------
Demand deposits                                 497,260
Other liabilities                                94,609
Shareholders' equity                            492,330
-------------------------------------------------------------------------------

Total Liabilities and Equity                 $5,054,658
-------------------------------------------------------------------------------

Interest rate spread                                                     3.75%
-------------------------------------------------------------------------------
Net interest income and net interest margin                $214,655      4.49%
Tax-equivalent adjustment                                    (4,892)
-------------------------------------------------------------------------------
Net interest income                                        $209,763
-------------------------------------------------------------------------------
                                      84
<PAGE>

                                                             1995        
-------------------------------------------------------------------------------
(in thousands)                                 Average                  Yield/
                                               Balance     Interest      Rate  
-------------------------------------------------------------------------------
ASSETS
-------------------------------------------------------------------------------
Federal funds sold and other                   $140,723    $  8,309      5.90%
Investment securities:
    Negotiable money market investments          98,541       5,773      5.86
    Taxable investment securities               853,024      51,735      6.06
    Nontaxable investment securities(1)         130,178      12,290      9.44
Loans held for resale                            21,378       1,636      7.65
Consumer loans (2) (3)                        1,034,494      91,537      8.85
Real estate loans (1) (2) (3)                 1,654,658     145,782      8.81
Commercial loans (1) (2) (3)                    577,362      52,487      9.09
-------------------------------------------------------------------------------
Total earning assets                          4,510,358    $369,549      8.19%
-------------------------------------------------------------------------------
Allowance for credit losses                     (44,040) 
Other assets                                    297,018
-------------------------------------------------------------------------------
Total Assets                                 $4,763,336
-------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------
NOW                                            $431,387    $  7,306      1.69%
Savings                                         419,721       8,641      2.06
Money market                                    423,226      10,601      2.50
Time deposits                                 2,105,544     118,542      5.63
Short-term borrowings                           210,025      10,195      4.85
FHLB borrowings                                 176,636      10,827      6.13
Long-term debt                                    5,055         467      9.24
-------------------------------------------------------------------------------
Total interest-bearing liabilities            3,771,594    $166,579      4.42%
-------------------------------------------------------------------------------
Demand deposits                                 474,571
Other liabilities                                81,085
Shareholders' equity                            436,086
-------------------------------------------------------------------------------

Total Liabilities and Equity                 $4,763,336
-------------------------------------------------------------------------------

Interest rate spread                                                     3.77%
-------------------------------------------------------------------------------
Net interest income and net interest margin                $202,970      4.49%
Tax-equivalent adjustment                                    (5,618)
-------------------------------------------------------------------------------
Net interest income                                        $197,352
-------------------------------------------------------------------------------
                                       85                                  
<PAGE>                                       
-------------------------------------------------------------------------------
                                                            1994            
-------------------------------------------------------------------------------
(in thousands)                                 Average                  Yield/
                                               Balance     Interest      Rate
-------------------------------------------------------------------------------
ASSETS
-------------------------------------------------------------------------------
Federal funds sold and other                    $88,855    $  3,840      4.32%
Investment securities:
    Negotiable money market investments          86,977       3,703      4.26
    Taxable investment securities               962,001      54,984      5.72
    Nontaxable investment securities(1)         138,949      13,556      9.76
Loans held for resale                            15,624       1,164      7.45
Consumer loans (2) (3)                          830,669      72,168      8.69
Real estate loans (1) (2) (3)                 1,534,542     124,682      8.13
Commercial loans (1) (2) (3)                    556,471      45,409      8.16
-------------------------------------------------------------------------------
Total earning assets                          4,214,088    $319,506      7.59%
-------------------------------------------------------------------------------
Allowance for credit losses                     (40,939)
Other assets                                    272,283
-------------------------------------------------------------------------------
Total Assets                                 $4,445,432
-------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------
NOW                                            $449,330    $  7,261      1.62%
Savings                                         457,065       9,278      2.03
Money market                                    506,229      11,126      2.20
Time deposits                                 1,776,172      83,507      4.70
Short-term borrowings                           188,662       6,671      3.54
FHLB borrowings                                 130,264       6,446      4.95
Long-term debt                                    6,676         495      7.41
-------------------------------------------------------------------------------
Total interest-bearing liabilities            3,514,398    $124,784      3.55%
-------------------------------------------------------------------------------
Demand deposits                                 462,414
Other liabilities                                64,628
Shareholders' equity                            403,992
-------------------------------------------------------------------------------

Total Liabilities and Equity                 $4,445,432
-------------------------------------------------------------------------------

Interest rate spread                                                     4.04%
-------------------------------------------------------------------------------
Net interest income and net interest margin                $194,722      4.63%
Tax-equivalent adjustment                                    (6,304)
-------------------------------------------------------------------------------
Net interest income                                        $188,418
-------------------------------------------------------------------------------
                                        86
<PAGE>                    
            
The  following  table  sets  forth for the  periods  indicated  a summary of the
changes in interest  earned and interest paid  resulting  from changes in volume
and changes in rates (in thousands):

                                          1996 change from 1995

                                       Total               Change due to(4)
                                      Change           Volume             Rate
-------------------------------------------------------------------------------
Interest income on: 
 Federal funds sold and other       ($2,906)          ($2,172)         ($  734)
 Investment securities(1)             6,267             6,778             (511)
 Loans held for resale                3,052             2,790              262
 Loans and leases (1)(2)(3)          13,451            14,750           (1,299)
-------------------------------------------------------------------------------
                                     19,864            22,146           (2,282)
                                  
Interest expense on:
 NOW                                  1,533                85            1,448
 Savings                                906               562              344
 Money market                         1,101              (412)           1,513
 Time deposits                      (11,582)          (11,548)             (34)
 Short-term borrowings               (1,329)           (2,490)           1,161
 FHLB borrowings                      1,060             1,570             (510)
 Long-term debt                         132               200              (68)
-------------------------------------------------------------------------------
                                     (8,179)          (12,033)           3,854
-------------------------------------------------------------------------------
Net Interest Income Change - 
 Tax Equivalent                     $11,685           $10,113           $1,572
-------------------------------------------------------------------------------
                                         1995 change from 1994
 
                                      Total                Change due to(4)
                                      Change            Volume           Rate
-------------------------------------------------------------------------------
Interest income on: 
 Federal funds sold and other       $ 4,469           $ 2,745           $1,724
 Investment securities(1)           ( 2,445)          ( 6,536)           4,091
 Loans held for resale                  472               440               32
 Loans and leases (1)(2)(3)          47,547            28,849           18,698
-------------------------------------------------------------------------------
                                     50,043            25,498           24,545

Interest expense on: 
 NOW                                    (45)              296             (341)
 Savings                                637               767             (130)
 Money market                           525             2,092           (1,567)
 Time deposits                      (35,035)          (18,066)         (16,969)
 Short-term borrowings               (3,524)             (821)          (2,703)
 FHLB borrowings                     (4,381)           (2,623)          (1,758)
 Long-term debt                          28               135             (107)
-------------------------------------------------------------------------------
                                    (41,795)          (18,220)         (23,575)
-------------------------------------------------------------------------------
Net Interest Income Change 
 - Tax Equivalent                    $8,248           $ 7,278             $970
-------------------------------------------------------------------------------
(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 $3,876,000 in 1996, $2,300,000 
     in 1995, and $3,616,000 in 1994.
(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.
                                        87
<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
provides a detailed  analysis of Keystone's  GAP position at the end of 1996 (in
thousands):
<TABLE>
<CAPTION>

                                                                 Rate Sensitive
--------------------------------------------------------------------------------------------------------------------
                                        1 to 90       91 to 180    181 to 360      1 to 2       Beyond                   
                                         Days            Days         Days         Years        2 Years      Total    
--------------------------------------------------------------------------------------------------------------------
ASSETS                                                                                                                     
--------------------------------------------------------------------------------------------------------------------
 <S>                                 <C>              <C>           <C>         <C>        <C>           <C>
  Federal funds sold and other        $   78,354      $       -      $      -    $      -   $       -     $   78,354
  Investment securities                  263,590         33,021        71,689     270,647      597,391     1,236,338
  Loans held for resale                   51,225              -             -           -            -        51,225
  Consumer loans                         273,012         82,230       153,102     252,048      424,558     1,184,950
  Consumer mortgages                     111,596         84,469       165,022      54,030      378,893       794,010
  Commercial real estate loans           376,794         42,738        67,385      64,378      319,283       870,578
  Commercial loans                       527,571         13,513        18,949      28,836      115,255       704,124
--------------------------------------------------------------------------------------------------------------------
      Total earning assets             1,682,142        255,971       476,147     669,939    1,835,380     4,919,579
--------------------------------------------------------------------------------------------------------------------
       Other assets                            -              -             -           -      311,689       311,689
--------------------------------------------------------------------------------------------------------------------
                                                                                                                    
            TOTAL ASSETS              $1,682,142      $ 255,971      $476,147    $669,939   $2,147,069    $5,231,268
====================================================================================================================
                                                                                                                   
LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                
--------------------------------------------------------------------------------------------------------------------
  NOW                                 $  153,615      $       -      $      -    $      -   $   261,561   $  415,176
  Savings                                106,220              -             -           -       260,055      366,275
  Money market                           200,632          3,382         3,382           -       181,353      388,749
  Time deposits                        1,013,271        302,083       331,790     419,723       348,113    2,414,980
  Short-term borrowings                  323,290          1,570         1,210           -             -      326,070
  FHLB borrowings                         11,597         42,821        43,266      29,176        79,069      205,929
  Long-term debt                           2,110             44             -           -             -        2,154
--------------------------------------------------------------------------------------------------------------------
   Total interest-bearing                                                        
    liabilities                        1,810,735        349,900       379,648     448,899     1,130,151    4,119,333
--------------------------------------------------------------------------------------------------------------------
  Demand deposits                              -              -             -           -       511,931      511,931
  Other liabilities                            -              -             -           -        92,697       92,697
  Shareholders' equity                         -              -             -           -       507,307      507,307
--------------------------------------------------------------------------------------------------------------------
      TOTAL LIABILITIES AND                                                                                                 
          SHAREHOLDERS' EQUITY        $1,810,735      $ 349,900     $ 379,648    $448,899    $2,242,086   $5,231,268
====================================================================================================================
Interest Rate Sensitivity             $ (128,593)     $ (93,929)    $  96,499    $221,040    $  (95,017)            
--------------------------------------------------------------------------------------------------------------------
Cumulative GAP                        $ (128,593)     $(222,522)    $(126,023)   $ 95,017                                
--------------------------------------------------------------------------------------------------------------------
</TABLE>
                                        88
<PAGE>

Other Liquidity Elements

The  predominant  source of income from earning  assets is derived from the loan
portfolio. Commercial loans and commercial loans secured by real estate comprise
44% 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,  1996,  classified  according  to the  sensitivity  to  changes in
interest rates within various time intervals (in thousands):
<TABLE>
<CAPTION>
                                                    After
                                                   One But
                                                   Within      After
                                       Within       Five       Five
                                      One Year      Years      Years       Total
------------------------------------ ----------- ---------- ----------- ------------
<S>                                     <C>        <C>         <C>          <C>     
Commercial                              $374,975   $201,318    $127,831     $704,124
Commercial real estate                   174,860    326,154     369,564      870,578
------------------------------------ ----------- ---------- ----------- ------------
                                        $549,835   $527,472    $497,395   $1,574,702
------------------------------------ ----------- ---------- ----------- ------------
Loans maturing after one year with: 
Fixed interest rates:
 Commercial                                         $79,460     $35,287
 Commercial real estate                             150,165     205,982
Variable interest rates:
 Commercial                                         121,858      92,544
 Commercial real estate                             175,989     163,582
------------------------------------ ----------- ---------- ----------- ------------
Total                                              $527,472    $497,395
==================================== =========== ========== =========== ============
</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, 1996 (in thousands):


                                     Certificates of       Other Time
                                        Deposit of        Deposits of
                                     $100,000 or more   $100,000 or more
----------------------------------- ------------------ ------------------
3 months or less                              $122,460             $6,102
Over 3 months through 6 months                  33,213              3,237
Over 6 months through 12 months                 41,163              4,297
Over 12 months                                  60,109             18,175
----------------------------------- ------------------ ------------------
Total                                         $256,945            $31,811
=================================== ================== ==================

                                       89
<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>

                                                   1996        1995         1994
---------------------------------------------- ------------ ----------- ------------
<S>                                               <C>         <C>          <C>     
Balance at December 31,                            $299,895    $260,543     $239,652
Weighted average interest rate at year end            4.67%       4.34%        4.75%
Maximum amount outstanding at any month end        $299,895    $260,543     $239,652
Average amount outstanding during the year         $248,814    $197,374     $177,833
Weighted average interest rate during the
  year                                                4.45%       4.89%        3.71%
---------------------------------------------- ------------ ----------- ------------
</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 made limited use of the
off-balance  sheet  derivatives  known as  "interest  rate  swaps" as a means to
manage the income exposure associated with changes in interest rates, as well as
forward  commitments,  put options, and short sales to manage exposure to market
risk.

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

Interest Rate Swaps
-------------------

Interest rate swaps are  "off"-balance  sheet  instruments which provide for the
exchange of interest payments on a specified  principal amount (notional amount)
for a specified  period of time.  Investment  policy  requires that Keystone may
execute a swap contract only as a hedge of an interest rate position and not for
the purpose of  speculation or trading.  That policy further  requires that swap
contracts  must be approved in advance by the  affiliate  banks'  president  and
parent company  executives,  and that swap  counterparties  must be reviewed for
credit worthiness on at least an annual basis. Keystone's policy also sets forth
specific  limitations on exposure to a single counterparty and sets an aggregate
limit on the  notional  value of  interest  rate  swaps  at 50% of  capital.  At
December 31, 1996  Keystone's swap activity  aggregated  $7,000,000 in amortized
notional value.

Other Hedging Activity
----------------------

Forward  mortgage  commitments,  as well as put  options and short sales of U.S.
Treasury  securities,  are 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
     
                                       90
<PAGE>

must be ratified by the Board of  Directors  and can only be executed as a hedge
of market risk and not for the purpose of speculation or trading.  Such activity
is self-limited by the level of loan production.

CMO's
-----

Purchases of CMO's are  restricted  principally to U.S.  Government  issues that
have passed various regulatory  standards  associated with mortgage extension or
prepayment risk. All Keystone CMO holdings can be  disaggregated  into groupings
which more  accurately  define the extent of mortgage  extension  or  prepayment
risk, and include PAC's (planned  amortization  class),  VADM's (very accurately
defined maturity), TAC's (targeted amortization class) and others. All CMO's are
subject to at least annual  examination  to ensure  compliance  with  regulatory
standards.  CMO's which fail to meet these  standards are disclosed to the Board
of Directors and are subjected to special review and monitoring procedures.

Other more volatile forms of CMO's include  interest-only,  principal-only,  and
inverse  floating  bonds,  which are subject to even more  stringent  limits set
forth in Keystone's  investment policy. At December 31, 1996,  Keystone had none
of  these  volatile  forms  of  CMO's  in  its  investment  portfolio.  An  even
higher-risk form of CMO's, known as CMO residuals,  are specifically  designated
as prohibited investments under Keystone's investment policy.

Structured Notes
----------------

A structured note is a debt security whose cash flow characteristics,  including
coupon rate or redemption date 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  "step- up" notes  purchased in years prior to 1995,
which  have   specified  call  or  redemption   features,   or  are  subject  to
pre-specified coupon adjustments.  Keystone's  investment in structured notes is
also limited by investment  policy  guidelines and aggregated  $3,500,000 at the
end of 1996.

                                       91
<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, 1996
-------------------------------------- ----------------------------------------
                                         Amortized      Market     Unrealized
                                           Cost         Value      Gain/(Loss)
-------------------------------------- ------------- ------------ -------------
U.S. Government Agency Obligations:
 Conventional                               $446,397     $444,233      $(2,164)
 Mortgage-backed                             100,308      100,727           419
 CMO's:
     PAC's1                                   32,202       31,949         (253)
     VADM's2                                   5,517        5,409         (108)
     TAC's3                                   12,927       12,785         (142)
     Other                                    12,701       12,603          (98)
 Structured notes                              3,500        3,475          (25)
-------------------------------------- ------------- ------------ -------------
 Subtotal                                    613,552      611,181       (2,371)
-------------------------------------- ------------- ------------ -------------
Negotiable money market instruments          194,566      194,566         -----
U.S. Treasury securities                     198,099      198,376           277
State and political subdivision
 obligations                                 134,194      137,367         3,173
Corporate and other                           97,620       98,416           796
-------------------------------------- ------------- ------------ -------------
     Total                                $1,238,031   $1,239,906        $1,875
====================================== ============= ============ =============
1.   A PAC(planned  amortization class) has a principal payment schedule that is
     guaranteed within a predetermined  range of mortgage prepayment rates, i.e.
     has built-in call protection,  lower prepayment risk and lower average life
     variability.
2.   A VADM(very  accurately  defined  maturity) has a stated final payment date
     which provides protection from mortgage payment extension risk.
3.   A TAC(targeted  amortization class) has a payment schedule that offers some
     call  protection  if  mortgage  prepayments  increase,  but  little  to  no
     extension protection if prepayments slow down.

Credit Risk and Loan Portfolio Analysis

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

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

                                       92
<PAGE>

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>


                       1996          1995          1994         1993          1992
------------------ ------------- ------------- ------------ ------------- ------------
<S>                     <C>           <C>          <C>           <C>          <C>     
Commercial:
Commercial and
 industrial             $498,657      $448,639     $398,450      $374,790     $387,707
Floor plan
 financing               168,521       163,431      146,582       112,740      110,478
Obligations of
 political
 subdivisions             36,946        31,159       29,796        29,253       35,757
------------------ ------------- ------------- ------------ ------------- ------------
                         704,124       643,229      574,828       516,783      533,942
------------------ ------------- ------------- ------------ ------------- ------------
Commercial Real
 Estate:
Commercial and
 industrial              683,358       680,161      692,962       660,379      654,720
Multi-family
 residential              76,830        73,079       64,277        69,749       43,961
Obligations of
 political
 subdivisions             29,686        33,010       31,023        27,037       35,778
Construction
 and land
 development              72,083        73,211       57,634        52,754       58,431
Agricultural               8,621         8,853        9,563         9,896       13,605
------------------ ------------- ------------- ------------ ------------- ------------
                         870,578       868,314      855,459       819,815      806,495
------------------ ------------- ------------- ------------ ------------- ------------
Consumer:
Real estate              794,010      $828,059     $811,945      $703,543     $721,536
Installment              552,533       562,592      587,951       486,750      437,962
Home equity              294,459       239,915      209,323       166,786      178,401
Personal lines
 of credit                36,475        39,053       42,167        26,451       50,474
Leases                   301,483       184,554      111,732        55,070       56,525
------------------ ------------- ------------- ------------ ------------- ------------
                       1,978,960     1,854,173    1,763,118     1,438,600    1,444,898
------------------ ------------- ------------- ------------ ------------- ------------
Total                 $3,553,662    $3,365,716   $3,193,405    $2,775,198   $2,785,335
================== ============= ============= ============ ============= ============
</TABLE>
                                       93
<PAGE>

Concentration Risk
------------------

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

o  The largest group of customers in a single industry to whom Keystone provides
   credit  extensions  is  automobile  dealers.  At  December  31,  1996  credit
   extensions  totaling  $203,728,000 were  outstanding,  and consisted of floor
   plan and related commercial loans and mortgages.

o  Keystone  has  no  dependence  on a  single  customer.  The  top  ten  credit
   relationships account for only 4.8% of the total loans outstanding at the end
   of 1996.

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,  approximately
   97%, are conducted within its own defined market.

o  Keystone has no foreign loan exposure.

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.

                                    94   
<PAGE>

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

                                    December 31, 1996
-----------------------------------------------------------
                                               Average
                                Balance      Relationship
----------------------------- ------------  --------------
Commercial loans                  $704,124
Commercial real estate             870,578
----------------------------- ------------  --------------
                                $1,574,702          $104
----------------------------- ------------  --------------

At December 31, 1996, approximately 48% of the balance of commercial real estate
was nonowner occupied.  Individual  categories of nonowner-occupied in excess of
$50 million  were office  buildings  and  apartment/rental  units which  totaled
$127,741,000 and $104,064,000, respectively.

Secondary Market Activity
-------------------------

Keystone  sells a  significant  portion  of its  fixed  consumer  mortgages  and
securitized  indirect  automobile loans 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 and indirect  automobile
loans to be self-funding activities.

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):

                             1996       1995      1994       1993       1992
-------------------------- --------- ---------- --------- ---------- ----------
Commercial                    $9,594    $11,226   $10,501    $10,543    $10,418
Real estate secured:
  Commercial                   7,696      7,637     6,884      9,373     10,479
  Consumer                     1,541      1,322     1,615      2,106      2,443
Consumer                      12,566      7,602     6,888      6,661      7,949
General risk                  13,619     16,590    16,552     11,498      7,651
-------------------------- --------- ---------- --------- ---------- ----------
                             $45,016    $44,377   $42,440    $40,181    $38,940
========================== ========= ========== ========= ========== ==========

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

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

                                      95 
<PAGE>
<TABLE>
<CAPTION>

                                  1996       1995      1994       1993      1992
------------------------------ ---------- ---------- --------- ---------- ---------
<S>                                   <C>        <C>       <C>        <C>       <C>
Commercial:
% of Total loans                      20%        19%       18%        19%       19%
% Allocation of allowance             21%        25%       25%        26%       27%
Commercial real estate:
% of Total loans                      24%        26%       27%        30%       29%
% Allocation of allowance             17%        17%       16%        23%       27%
Consumer real estate:
% of Total loans                      22%        25%       25%        25%       26%
% Allocation of allowance              3%         3%        4%         5%        6%
Consumer:
% of Total loans                      34%        30%       30%        26%       26%
% Allocation of allowance             28%        17%       16%        17%       20%
General Risk:
% Allocation of allowance             31%        38%       39%        29%       20%
------------------------------ ---------- ---------- --------- ---------- ---------
Total loans                          100%       100%      100%       100%      100%
------------------------------ ---------- ---------- --------- ---------- ---------
Allocation of allowance              100%       100%      100%       100%      100%
------------------------------ ---------- ---------- --------- ---------- ---------
</TABLE>
                                       96
<PAGE>

QUARTERLY INFORMATION

Income Performance
<TABLE>
<CAPTION>

(in thousands, except per                              
share data)                                            1996
------------------------------ -----------------------------------------------------
                                  Fourth         Third        Second       First
                                  Quarter       Quarter      Quarter      Quarter
------------------------------ ------------- ------------- ------------ ------------
<S>                                  <C>           <C>          <C>          <C>    
Interest income                      $97,911       $96,599      $94,596      $95,415
Interest expense                      45,073        44,700       42,161       42,824
------------------------------ ------------- ------------- ------------ ------------
Net interest income                   52,838        51,899       52,435       52,591
Provision for credit losses            3,522         2,312        2,036        1,988
------------------------------ ------------- ------------- ------------ ------------
Net interest income after
 provision                            49,316        49,587       50,399       50,603
Noninterest income                    16,536        15,373       14,782       15,426
Security transactions                      3         -----          101          452
Noninterest expense                   40,762        40,781       39,519       41,497
------------------------------ ------------- ------------- ------------ ------------
Income before income taxes            25,093        24,179       25,763       24,984
Income Taxes                           7,233         7,154        8,030        8,127
------------------------------ ------------- ------------- ------------ ------------
Net income                           $17,860       $17,025      $17,733      $16,857
------------------------------ ------------- ------------- ------------ ------------
Tax effect of security
 transactions                        $     1        $-----          $35         $158
------------------------------ ------------- ------------- ------------ ------------
Earnings per share                     $0.47         $0.45        $0.47        $0.44
Dividends per share                    $0.26         $0.24        $0.24        $0.24
Average shares outstanding        38,043,623    38,164,065   38,022,920   37,950,453
------------------------------ ------------- ------------- ------------ ------------
</TABLE>            
                                        97                  
<PAGE>
<TABLE>
<CAPTION>
                       
                                                       1995
------------------------------ -----------------------------------------------------
(in thousands, except per         Fourth         Third        Second       First
  share data)                     Quarter       Quarter      Quarter      Quarter
------------------------------ ------------- ------------- ------------ ------------
<S>                                  <C>           <C>          <C>          <C>    
Interest income                      $93,646       $91,426      $90,101      $88,758
Interest expense                      43,239        42,930       41,378       39,032
------------------------------ ------------- ------------- ------------ ------------
Net interest expense                  50,407        48,496       48,723       49,726
Provision for credit losses            1,357         2,160        2,258        2,084
------------------------------ ------------- ------------- ------------ ------------
Net interest income after
 provision                            49,050        46,336       46,465       47,642
Noninterest income                    12,427        13,112       12,011       11,454
Security transactions                    925             6          354           32
Noninterest expense                   38,338        36,806       37,557       37,933
------------------------------ ------------- ------------- ------------ ------------
Income before income taxes            24,064        22,648       21,273       21,195
Income Taxes                           7,860         7,215        6,252        6,539
------------------------------ ------------- ------------- ------------ ------------
Net income                           $16,204       $15,433      $15,021      $14,656
------------------------------ ------------- ------------- ------------ ------------
Tax effect of security
 transactions                           $324            $2         $124          $11
------------------------------ ------------- ------------- ------------ ------------
Earnings per share                     $0.45         $0.43        $0.43        $0.42
Dividends per share                    $0.24         $0.23        $0.23        $0.23
Average shares outstanding        36,142,553    35,352,675   35,197,571   35,146,901
------------------------------ ------------- ------------- ------------ ------------
</TABLE>                   
                                       98
<PAGE>

STOCK INFORMATION

Market Prices and Dividends

The common stock of Keystone Financial,  Inc. is traded in the  over-the-counter
market  under the symbol  KSTN and is listed in the  National  Market  System of
NASDAQ.  At the close of business on January 31, 1997, there were  approximately
12,094 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         Cash
                         Sales Price Range      Dividends
-----------------------------------------------------------
                         High         Low
-------------------- ------------ ------------ ------------
1996
-------------------- ------------ ------------ ------------
I                          $22.83       $19.83        $0.24
II                          22.75        20.75         0.24
III                         25.33        21.67         0.24
IV                          27.75        24.50         0.26
-------------------- ------------ ------------ ------------
                                                      $0.98
==================== ============ ============ ============
1995
-------------------- ------------ ------------ ------------
I                          $20.17        17.50        $0.23
II                          19.33        18.00         0.23
III                         21.50        18.50         0.23
IV                          22.67        19.67         0.24
-------------------- ------------ ------------ ------------
                                                      $0.93
==================== ============ ============ ============

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.
                                   99

<PAGE>