<TABLE>
<CAPTION>

Selected Financial Data                             Year Ended December 31
(in thousands except per share data)
------------------------------------------------------------------------------------------------
                               1999*         1998          1997*         1996          1995
------------------------------------------------------------------------------------------------
Operations:
------------------------------------------------------------------------------------------------
<S>                            <C>            <C>           <C>           <C>          <C>
Interest income                $486,031       $517,649      $510,738      $473,420     $446,786
Interest expense                228,658        240,684       232,494       211,301      200,775
------------------------------------------------------------------------------------------------
Net interest income             257,373        276,965       278,244       262,119      246,011
Provision for credit losses      23,376         17,150        15,316        10,713        8,568
Noninterest income              104,345        108,813        89,932        71,525       58,137
Noninterest expense             289,674        223,189       225,990       196,245      182,130
Income tax expense               11,592         45,692        38,953        37,180       34,001
-------------------------------------------------------------------------------------------------
Net income                      $37,076        $99,747       $87,917       $89,506      $79,449
-------------------------------------------------------------------------------------------------
Pre-tax security gains
  (losses), included above        $(338)       $11,018        $6,071          $871       $1,789
-------------------------------------------------------------------------------------------------
Net interest spread                3.57%         3.71%         3.87%         3.87%        3.90%
Impact of noninterest funds         .64           .71            .72          .74           .71
-------------------------------------------------------------------------------------------------
Net interest margin                4.21%         4.42%         4.59%         4.61%        4.61%
-------------------------------------------------------------------------------------------------
Per Share:
-------------------------------------------------------------------------------------------------
Net income:
     Basic                        $0.76         $1.94         $1.70         $1.72        $1.60
     Diluted                       0.75          1.92          1.68          1.70         1.59
Dividends                          1.16          1.13          1.06          0.98         0.93
Dividend payout ratio            152.6%         58.25%        63.65%        56.98%       58.13%
Average shares outstanding     48,856,092     51,446,436    51,692,534    52,118,819   49,557,082

Balances at December 31:
-------------------------------------------------------------------------------------------------
Loans & leases                 $4,459,546    $4,459,783    $4,712,566    $4,336,470   $4,096,866
Allowance for credit losses       (59,975)      (60,274)      (65,091)      (56,256)     (55,415)
Total assets                    6,887,508     6,968,227     6,841,337     6,450,579    6,213,222
Deposits                        4,960,334     5,231,718     5,233,165     5,059,721    4,993,608
FHLB borrowings &
  long-term debt                  858,696       557,266       349,943       226,776      168,564
Shareholders' equity              550,025       661,665       685,485       660,406      621,766

Ratios:
-----------------------------------------------------------------------------------------------
Return on average assets            0.55%         1.45%         1.33%         1.44%        1.35%
Return on average equity            6.33         14.63         13.27         14.09        14.00
Equity to assets, average           8.64          9.92          9.99         10.19         9.66
Risk adjusted capital ratios:
 Leverage ratio                     7.48%         8.66%         9.15%        10.03%       10.12%
 Tier 1                            10.54         12.59         12.50         14.43        14.48
 Total capital                     11.78         13.84         13.75         15.66        15.67
Loans to deposits, year-end        89.90%        85.25%        90.05%        85.71%       82.04%
Allowance for credit losses
  to loans                          1.35          1.35          1.38          1.30         1.35
Nonperforming assets to loans       0.70%         0.65%         0.55%         0.65%        0.72%
Loans 90-days past due to loans     0.50          0.64          0.70          0.46         0.41
------------------------------------------------------------------------------------------------
Total risk elements to loans        1.20%         1.29%         1.25%         1.11%        1.13%
------------------------------------------------------------------------------------------------
* School districts' settlement expense and restructuring-related charges in 1999
reduced net income by $46.6 million or $0.95 per share and increased noninterest
expense by $70.6  million.  Merger-related  special  charges in 1997 reduced net
income by $8.6 million or $0.17 per share and increased  noninterest  expense by
$11.4 million.

</TABLE>

<PAGE>

Financial Review

This review has been provided to present  information needed to fully understand
the financial  condition  and the results of  operations of Keystone  Financial,
Inc. (Keystone).  The review includes  comparisons of financial  performance for
1999, 1998, and 1997. Results for 1999 were affected by the expenses  associated
with the settlement of significant  litigation and by the restructuring expenses
incurred to  accommodate  the  unification  of Keystone's  seven bank  charters.
Expense levels in 1997 included expenses associated with merger-related  special
charges.  Unless  otherwise  indicated,  all  year-to-year  comparisons  will be
presented  exclusive of these  special  charges.  Throughout  this  review,  net
interest  income  and the  yield on  earning  assets  are  presented  on a fully
tax-equivalent  basis.  Additionally,  balances represent average daily balances
unless otherwise indicated.

1999 Summary

Performance Results

During 1999,  Keystone sought to  aggressively  address the  organizational  and
structural  changes necessary to more efficiently and effectively meet the needs
of its customers. Throughout the year, Keystone incurred expenses totaling $26.9
million to accommodate the unification of its seven separate banks into a single
national bank charter. These expenses included severance and job placement costs
for  displaced  employees,  costs to effect the  centralization  of  facilities,
requisite professional fees, and marketing fees associated with the introduction
of the "Keystone Financial" brand. With the finalization of the restructuring in
the  fourth  quarter  of 1999,  Keystone  is poised to begin a new era as a more
streamlined and efficient financial services provider.

During the fourth quarter of 1999,  Keystone  announced a $51 million settlement
of  litigation  that had  arisen out of  investment  losses  suffered  by school
districts  throughout  Pennsylvania  (hereafter  referred  to  as   the  "school
districts'  settlement").  Although the investment manager responsible for these
losses,  who later  pleaded  guilty  to  federal  charges  in this  matter,  was
unrelated to Keystone, the school districts' settlement was reached to avoid the
uncertainty  of  protracted  litigation  and the negative  publicity  associated
therewith.

Exclusive of the expenses  associated with both the restructuring and the school
districts'  settlement,  Keystone's earnings per diluted share were $1.70 versus
$1.92 in 1998.  Such results  reflected a return on average assets and return on
average  equity of 1.23% and 13.72% in 1999,  compared with 1.45% and 14.63% for
1998. The decline in core operating  performance was largely  influenced by a $6
million  increase in the 1999 loan loss  provision,  attributed  primarily  to a
single  commercial  credit that was  charged off in the fourth  quarter of 1999.
Performance  was also influenced by a narrowing net interest margin and improved
levels of noninterest  revenue  including  asset  management,  ATM, and sales of
financial products. Substantial improvement in the level of Keystone's operating
expenses was achieved as a consequence of the  restructuring,  with the majority
of this improvement to be realized in the year 2000 and beyond.

Despite  the  effect  of the  school  districts'  settlement  and  restructuring
expenses, Keystone's capital base remained in excess of the regulatory threshold
required to be  classified as a  "well-capitalized"  financial  institution  and
continued to provide competitive  dividend payouts to its shareholders.  Similar
to much of the  industry,  Keystone  experienced  a decline  of 43% in its share
price  during  1999,  causing  its market  capitalization  to decline  from $1.9
billion at December 31, 1998 to $1.0 billion at December 31, 1999.

External Issues and the Economy

One of the primary factors affecting the intermediation  business of a financial
institution  is the  interest  rate  environment.  In the latter half of 1999, a
measurable  trend of  interest  rate  increases  began to  emerge.  The  Federal
Reserve, seeing the potential for inflationary pressures, began to incrementally

                                        2

<PAGE>

raise interest rates. Furthermore, the Federal Reserve has continued to increase
interest  rates in early 2000 in order to forestall the influence of tight labor
markets and the inflationary  pressure of the U.S.  economy.  These changes have
had the immediate  impact of both  increasing  funding costs and compressing net
interest  margin.  Effective  management  of the effect of these rate changes on
both  earning  asset  yields and  funding  cost  remains a  critical  management
responsibility.

Local Economy

The  economies  in  Keystone's  core market  should be  expected  to  experience
moderate  growth.  Growth in the service sectors are expected to lead in overall
job growth,  including strong construction employment trends. While some housing
markets in the region are likely to cool following a banner  performance in 1998
and the first half of 1999,  any  decline in housing  construction  is likely to
fall back into a more sustainable long-term range.  Manufacturing  employment is
expected to rebound slightly.  The economy in much of Keystone's market exhibits
more  diversification  and,  thus,  a more  stable  environment.  As an example,
Pennsylvania  now ranks eighth  nationwide  in technology  employment,  due to a
recent emphasis on technology-oriented  growth. Another favorable trend involves
Pennsylvania's  personal  bankruptcy rates, which remain well below the national
trends.

In summary,  while the economies within Keystone's  geographic footprint are not
ordinarily  considered   high-growth  markets,   these  markets  have  exhibited
diversification,  stability, and resiliency, as such markets are playing a vital
role in the area's  migration  from a  production  to a service  economy and are
actively participating in technology-oriented growth.

Outlook for 2000

The  completion  of plans  and  processes  undertaken  in 1999  have  positioned
Keystone to be more  competitive in the  marketplace.  The major events of 1999,
the restructuring and reorganization of Keystone,  the settlement of potentially
harmful litigation, and the diligent preparation for Y2K, have paved the way for
a  successful  year 2000.  While  Keystone's  asset  quality  has shown signs of
improvement,  Keystone  must remain  vigilant in its mandate to continue to make
asset quality  nonnegotiable.  Keystone must continue to sustain positive growth
trends  in  noninterest  revenue  and its quest to be a  full-service  financial
services  company.  Finally,  while great strides were made in  controlling  the
level of future  cost  increases,  cost  control  is a  never-ending  process as
associates must continually  search for ways to more efficiently and effectively
service Keystone's customer base.

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;
unforeseen  changes in the general  interest rate  environment;  the actions and
policy  directives  of the Federal  Reserve  Board;  competitive  factors in the
marketplace,  and business  risk  associated  with the  management of the credit
extension function and fiduciary activities.  Each of these factors could affect
estimates,  assumptions,  uncertainties, and risks considered in the development
of  forward-looking  information,  and  could  cause  actual  results  to differ
materially from management's expectations regarding future performance.

NET INTEREST INCOME

Keystone  derives revenue from both  intermediation  activities,  the results of
which are  reflected  in net  interest  income,  and from fee and  service-based
income, which make up noninterest income. Net interest income continues to be

                                        3

<PAGE>

the most  significant  component  of  revenue,  comprising  nearly  72% of total
revenues.

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

                                        4

<PAGE>

The  following  table  compares  net  interest  income and net  interest  margin
components between 1999 and 1998 (in thousands):

<TABLE>

----------------------------------------------------------------------------------------
                                      1999               1998              Change
----------------------------------------------------------------------------------------
                                           Yield/             Yield/             Yield/
                                Amount     Rate      Amount    Rate     Amount     Rate
---------------------------- ----------- -------- ---------- ------- ---------- ---------
<S>                            <C>         <C>     <C>        <C>     <C>          <C>
Interest income                $494,688    7.83%   $526,218   8.15%   $(31,530)    (0.32)
Interest expense                228,658    4.26     240,684   4.44      12,026      0.18
---------------------------- ----------- -------- ---------- ------- ---------- ---------
Net interest income            $266,030            $285,534           $(19,504)*
---------------------------- ----------- -------- ---------- ------- ---------- ---------
Interest spread                            3.57%              3.71%                (0.14)
Impact of noninterest funds                0.64               0.71                 (0.07)
---------------------------- ----------- -------- ---------- ------- ---------- ---------
Net interest margin                        4.21%              4.42%                (0.21)
---------------------------- ----------- -------- ---------- ------- ---------- ---------
*The change in net interest  income  consisted of unfavorable  volume  variances
totaling $9.6 million and unfavorable rate variances totaling $9.9 million.

</TABLE>

Interest Rates and Changing Trends

For  several  years  prior  to 1999,  interest  rates  had been in a  continuous
decline.  During 1999,  this trend began to reverse,  particularly in the second
half of the year.  Such increases,  however,  were not yet sufficient to produce
higher  earning  asset  yields  or  higher  overall  funding  costs  than  those
experienced  in  1998.  The  reversal  of the  trend of  continuously  declining
interest rates has had an initial impact of compressing  the difference  between
earning asset yields and funding costs, thus compressing net interest margin.

In order to illustrate  the change in interest  rates between 1998 and 1999, the
following  comparison  of the  average  yield  curve for the U.S.  Treasury  for
specific intervals between three months and thirty years is provided.

                                        5

<PAGE>

       Three    Six       One    Two     Three    Five      Ten     Thirty
       Months  Months    Year   Years    Years    Years    Years     Years
--------------------------------------------------------------------------------
1999    4.78%   4.95%    5.08%  5.43%    5.49%    5.55%      5.65%    5.87%

1998    4.91%   5.02%    5.05%  5.13%    5.14%    5.15%      5.26%    5.58%

While  interest  rates  played an important  role in the  absolute  level of net
interest  income  in 1999,  performance  was also  influenced  by other  factors
including  the volume and mix of both earning  assets and funding  sources.  For
example,  Keystone's  exit from indirect  lending  activity in late 1997 had the
impact of steadily  amortizing loan balances over the past two years without the
benefit of  offsetting  replacement  volumes.  Another  factor  which  served to
depress  earning asset growth  trends  related to  Keystone's  share  repurchase
activity. The absolute volume of earning assets declined from the end of 1998 as
Keystone  aggressively  executed on its share repurchase  program as approved by
its  Board of  Directors.  While  such  plans  have  favorably  influenced  both
operating  earnings per share and return on equity  performance,  utilization of
asset  liquidity  to effect share  repurchase  has had the  immediate  impact of
reducing the earning  asset base. On the funding  side,  financial  institutions
have been challenged to more effectively manage their funding base. Mix changes,

                                        6

<PAGE>

including  the level of  dependence  on sources such as FHLB  advances to offset
core deposit declines,  have influenced funding costs. While no single factor is
responsible for  compression of net interest margin from 1998 to 1999,  interest
rates as well as volume and mix  changes  in both  earning  assets  and  funding
sources have all influenced changes in this important revenue stream.

Interest Income/Earning Assets

The  characterization  of 1999 as a  transitional  year for Keystone was readily
apparent in most aspects of performance,  including the level of interest income
derived from Keystone's  earning asset base.  Interest income actually  declined
from 1998,  aggregating  $495 million compared with $526 million in the previous
year.  Performance  was  influenced  by lower earning asset volumes and by lower
yields.  Earning  asset  volumes  declined  from $6.46  billion in 1998 to $6.31
billion  in 1999,  a decline  of over $141  million  or 2%.  Major  items  which
influenced the decline in earning assets included the  aforementioned  runoff in
commodity-based  indirect loan and lease  products,  the sale of the  commercial
lease  portfolio in late 1998,  and  investment  in bank-owned  life  insurance.
Furthermore, the purchase of Keystone common stock pursuant to its share buyback
plan in late 1998 and early 1999  served to reduce  earning  asset  levels  and,
therefore, overall interest income.

Interest income performance was also influenced by the decline in interest rates
during the first half of 1999.  Overall asset yields declined from 8.15% in 1998
to 7.83% in 1999, a reduction of 32 basis points.  While such declines  could be
expected during a period of declining  short-term  interest rates, the reduction
of 32 basis points in earning  asset yields  exceeded the  reduction of 18 basis
points in funding costs.  Consequently,  a decline in net interest  spread,  and
therefore net interest income, was experienced.

Asset yields were not only  influenced  by changes in the absolute  volume,  but
also the relative mix of earning assets.  These dynamics were especially notable
within the loan portfolio mix. The amortization of approximately $185 million of
the remaining  indirect loan and lease  balances and the sale of the  commercial
lease  business,  which  accounted for an  additional  reduction of $33 million,
caused  higher-yielding loan balances to decline.  These declines were partially
recovered  through  favorable  volume trends in commercial and  commercial  real
estate loans which were originated at lower yields than the loans they replaced.
While Keystone  experienced some growth in retail lending  activity,  efforts to
capture  an  increased   market  share  during  1999  fell  short  of  corporate
objectives.  Such  trends  were  influenced,  in  part,  by  the  disruption  in
Keystone's  distribution  network as a consequence of the restructuring  effort.
This trend  began to reverse in the latter  half of 1999,  though not at a level
adequate to offset the unfavorable trends in the first half of the year.

Interest Expense/Funding Sources

While management of the trends affecting earning asset components of the balance
sheet presented significant challenges,  the management of the funding component
represented  an equally  daunting task.  This  challenge was  exacerbated in the
second half of the year as interest rates began to climb and were accompanied by
increases in the cost of funds.  This rise in funding costs  included the impact
of both  competitively-priced  product  offerings and changing  customer prefer-
ences. At the same time, the ever-changing  investment  opportunities now avail-
able to commercial, retail, and other traditional users of bank deposit products
has posed a considerable challenge to absolute growth in deposit volumes.

Notwithstanding  the challenges  associated with  maintaining or growing certain
deposit  products,  Keystone has been proactive in identifying  ways in which to
access  funding  sources.  For example,  Keystone has promoted  both its indexed
money market product and variable rate CD product.  The key distinction in these
product lines is that they provide  customers with a market-based  indexed rate,
while  simultaneously  providing  customers  more flexible  access to liquidity.
Likewise,  Keystone continues to be innovative in monitoring customer trends and
preferences  in  transitional   certificate  of  deposit  categories  to  ensure
competitive  profit  offerings  as to term,  rate,  and  withdrawal  privileges.
Keystone has also experienced  growth in its demand deposit  categories due to a
variety of product offerings customized to meet the needs of different

                                        7

<PAGE>

demographic  strata  including  senior  citizen  accounts,  electronic  delivery
channel users, and other focused product offerings.

In order to augment deposit sources of funding, Keystone has also made strategic
use of FHLB advances.  These  advances,  which are  collaterialized  by mortgage
receivables,  have been an important auxiliary source of liquidity for Keystone.
Keystone  maintains  appropriate  levels of borrowing capacity with the FHLB, as
well as its  national CD program and its  medium-term  note  borrowings,  all of
which are accessed on an as-needed basis.

As with earning assets, the cost of funds during 1999 was influenced not only by
overall rate trends but also by the relative mix of funding  sources.  While the
1999 cost of funds of 4.26% was below the 4.44%  recorded in 1998, the reduction
did not keep pace with the  reduction  of earning  asset  yields,  resulting  in
margin compression.

Net Interest Spread and Net Interest Margin

Combining the impact of yield on earning assets with the cost of funding sources
results in net interest spread, a measure of a financial  institution's  ability
to effectively  blend the impact of changing rates,  shifting rate indices,  and
product mix changes with evolving  consumer needs.  Net interest margin combines
the impact of interest  spread with both the investment of  noninterest  funding
sources  and the  level of  nonearning  assets.  In 1999,  Keystone  experienced
compression in interest rate spread due to the dynamics of interest rate changes
and the relative  impact of these  changes on funding  sources and earning asset
yields.  Interest  spread  declined  from 3.71% in 1998 to 3.57% in 1999.  Lower
short-term interest rates reduced the impact of noninterest funding sources from
 .71% in 1998 to .64% in 1999.  Consequently,  net interest  margin  dropped from
4.42% to 4.21%.

<TABLE>
<CAPTION>

Quarterly Performance

The  following  table  provides a  comparative  summary of earning asset yields,
funding costs,  and other  information for each of the four quarters of 1999 and
1998 (in thousands):

                                                1999

------------------------------------------------------------------------------
                          Fourth          Third         Second          First
                          Quarter        Quarter        Quarter        Quarter
------------------------------------------------------------------------------
<S>                        <C>            <C>            <C>            <C>
Asset yield                7.91%          7.83%          7.83%          7.77%
Funding cost               4.46           4.20           4.13           4.22
-------------------------------------------------------------------------------
Interest spread            3.45%          3.63%          3.70%          3.55%
-------------------------------------------------------------------------------
Net interest margin        4.08%          4.26%          4.31%          4.22%
-------------------------------------------------------------------------------
Net interest income      $65,047        $67,359        $66,924        $66,700
-------------------------------------------------------------------------------
                                               1998

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

While  interest rates did decline during the first half of 1999, the second half
exhibited  upward  interest-rate  pressures.  Throughout  the year, net interest
spread and net  interest  margin  narrowed.  In the first  half,  the  narrowing
resulted  more from the  decline  in earning  asset  levels as a result of share
repurchase and commodity loan amortization. Conversely, second half performance

                                        8

<PAGE>

was influenced more by the impact of upward  pressures on funding costs relative
to the inability to immediately  reprice earning assets.  Keystone's  ability to
manage  the  impact of rates and  trends is  influenced  by its  asset/liability
management initiatives.

PROVISION FOR CREDIT LOSSES

The provision for credit losses in 1999 grew to $23.3 million from $17.2 million
in 1998. The increase from 1998 performance was substantially  attributable to a
single  commercial  credit which was charged off in the fourth  quarter of 1999.
Keystone continuously  monitored both the commercial and consumer credit sectors
to assess  the  emergence  of any  major  credit  quality  trends.  Despite  the
unfavorable  impact of  isolated  charge-offs,  there  appears to be no emerging
unfavorable  credit quality trends.  While the ratio of nonperforming  assets to
loans  increased  slightly  to .70% from  .65% at the end of 1998,  the level of
loans that were 90 days past due to total loans was reduced to .50% from .64% at
the end of the prior year. Keystone remains committed to a corporate  philosophy
of credit quality as  "non-negotiable".  See the allowance for credit losses and
asset quality sections of this review for additional information.

NONINTEREST INCOME

The  diversification  of  Keystone's  revenue  stream  has been an  evolutionary
process that has increased the  noninterest  income  portion of total revenue to
28.2% in 1999 versus 18.1% five years earlier.  Growth in noninterest sources of
revenue  is deemed  critical  to profit  performance  improvement.  Conventional
wisdom suggests that these sources of revenue are less susceptible to the effect
of unfavorable changes in external factors such as the interest rate environment
or a slowdown in the overall economy.  As financial  institutions seek to become
more  complete  purveyors of financial  services,  the strategy to diversify the
revenue stream meets the dual objectives of reducing  earnings  volatility while
providing a framework for meeting the more expansive financial services needs of
customers.

Although  Keystone  has  successfully  demonstrated  its ability to grow certain
nontraditional  sources  of  revenue,  it is clear  that such  revenues  are not
totally immune to increases in interest rates or a slowdown in the economy.  For
example,  a prolonged  period of rising  interest rates or a prolonged  economic
slowdown  could  reduce  refinancing  activity  in the  mortgage  banking  area.
Likewise,  a major correction in stock market  valuations would likely influence
certain  wealth  development  fee income or bring about a reduction in brokerage
activity  and mutual  fund sales.  In  summary,  while  expansion  of  fee-based
activities   has  expanded   customer   relationships   and   improved   revenue
diversification,  such revenues are likely to continue to be affected by general
economic conditions and trends.  Keystone's challenge,  not unlike that of other
financial institutions,  is to conduct its business to ensure ongoing profitable
operations under a variety of economic conditions.

Trust and Investment Advisory Fees

The largest  single  category  of  noninterest  revenue is trust and  investment
advisory  fees  which   represent   nearly  27%  of   noninterest   revenue  and
approximately  8% of aggregate  revenue.  During  1999,  such fees grew to $27.8
million,  an increase of $1.8 million or approximately 7% over the $25.9 million
recorded in 1998.  This source of revenue  includes not only  traditional  trust
income but also  investment  management  fees,  brokerage  fees, and mutual fund
revenues.  While the  foundation of Keystone's  wealth  development  business is
linked  primarily to personal  and employee  benefit  trust  revenues,  the more
significant growth  opportunities in recent years have occurred in areas such as
brokerage fees and fees derived from services provided by Keystone's  Martindale
Andres subsidiary.  Keystone has been able to blend the opportunities  presented
through its  substantial  distribution  channel  with its  objective to meet the
expanded  financial  services  needs of its customers in the wealth  development
arena.

                                        9

<PAGE>

Service Charges

Service charges on deposits  represent  another  important source of noninterest
income in financial institutions.  Income from deposit service fees grew 4% from
$18.4 million in 1998 to $19.2 million in 1999.  While this source of revenue is
integral to a financial  institution's overall revenue stream, Keystone has been
careful to balance its needs with those of its customer  base by  attempting  to
strike a balance in achieving a price/value  equilibrium  for such services.  At
the same time,  Keystone was cognizant of its conversion to a single charter and
its impact on customer perceptions.  Accordingly, Keystone attempted to minimize
the potentially  disruptive customer impact of system conversions by not linking
these changes with substantial fee increases.

Mortgage Banking Activity

One  of  the  more  significant  and  fast  growing   components  of  Keystone's
noninterest  revenue  performance has materialized  within  Keystone's  mortgage
banking group.  Keystone has, for the last several  years,  managed its mortgage
banking activity on a centralized basis, but within the context of its expansive
community  office delivery  system.  The mortgage needs of the customers  within
Keystone's  geographic  footprint  represent  the  core of  Keystone's  mortgage
banking business. However, Keystone has embarked on a number of successful niche
specialties  to  augment  its  core  business,   including   luxury  log  homes,
construction lending, and correspondent banking relationships.  While Keystone's
mortgage  banking business has undergone  continuous  expansion and improvement,
this   business  is  directly   influenced  by  changes  in  the  interest  rate
environment.  While Keystone has not historically had significant  dependence on
the more volatile  refinancing  segment of this business,  changes in rates will
necessarily influence all mortgage activity. Keystone's mortgage banking revenue
in 1999 was $11.5 million,  a reduction from the $12.4 million recorded in 1998.
While mortgage  banking  revenues in the first half of 1999 exceeded the pace in
the first half of 1998,  upward pressure on rates in the second half of the year
depressed volumes slightly, resulting in reduced revenues.

Other Income

Revenue  from the sale of  financial  products,  which grew 27% to $6.8  million
during 1999,  reflected  another  benefit of the  diversification  of Keystone's
revenue stream and demonstrated more effective leverage of Keystone's  community
office distribution channel.  Financial products include a variety of investment
vehicles not ordinarily provided within more traditional  community offices such
as proprietary  mutual funds (Governor  Funds),  other mutual funds, and annuity
products from third-party providers.

In addition  to sales of  financial  products,  other  income is derived  from a
variety of sources,  the most  significant  of which are fees from merchant bank
card activities,  ATM and debit card revenues,  and income from  insurance-based
activities.   Keystone  has  been  proactive  in  expanding  its  fee-generation
capabilities  through  initiatives  such as housing ATM machines in  convenience
stores and  increasing  usage and  distribution  of debit  cards.  During  1999,
Keystone also recognized a $3.5 million pension curtailment gain recorded during
the  second and third  quarters,  which was  coincident  with the  departure  of
employees associated with Keystone's internal restructuring.

Noninterest Expense

Noninterest  expense levels during 1999 were significantly  impacted by both the
school districts'  settlement  and Keystone's  internal  restructuring  program
initiated  in late 1998.  Keystone  recognized  expense of $43.7  million in the
fourth quarter of 1999 for the school districts' settlement. This amount was net
of probable  insurance  recoveries  totaling $8 million.  In addition,  Keystone
incurred special charges of  $26.9 million  throughout 1999 that  were primarily
associated with the  unification  of the seven former  banks under a single bank
charter.  Keystone does  not  expect to incur  any  significant additional costs
related to the bank unification or the school districts' settlement.

                                       10

<PAGE>

The components of special charges in 1999 were as follows (in thousands):

 ----------------------------------------------------
 Employee/director separation                $10,605
 Asset disposition                             6,652
 Customer communications                       3,360
 Professional fees                             2,756
 Lease termination                             1,001
 Other                                         2,543
 ----------------------------------------------------
                                             $26,917
 ----------------------------------------------------

Substantially all amounts associated with these costs have been paid by December
31, 1999.

As a result  of the  efficiencies  gained  through  the  internal  restructuring
program,  core  operating  expenses  declined  from 1998 to 1999.  Such expenses
totaled  $219.1  million in 1999 compared with $223.2 million in 1998. The seven
bank  conversions  occurred as scheduled  from May to October of 1999.  Staffing
reductions were timed to coincide with the bank conversions.  As such, while the
restructuring  was completed in 1999, a full year impact of efficiencies  gained
will not be realized until 2000.

While core expenses  declined in 1999,  slight growth  occurred in  nonpersonnel
categories of expense as Keystone continued to make technological investments to
better serve its customers,  increased branding and other marketing efforts, and
incurred the final expenses associated with Y2K preparations.

Salaries and Benefits

Salaries expense decreased $8.3 million or 9% in 1999 compared with 1998, as the
average number of full-time  equivalent  employees  (FTEs)  declined by 14%. The
restructuring  enabled Keystone to cut back in staffing most dramatically in the
support areas.  Various  functions that had been  duplicated  under the multiple
charter  organization  were  streamlined  during  the  course of 1999.  Variable
compensation paid to mortgage originators and investment counselors increased in
1999 and was attributable to the effected  employees'  abilities to obtain a 12%
increase in originations and a 27% increase in sales of financial products.

Benefits  expense in 1999 remained at a level stable with 1998.  Most categories
of benefits expense declined due to the reduced number of FTEs. Conversely,  two
of Keystone's most significant benefit costs, pension and health care, increased
in 1999.  While  staffing  reductions  limited the  increase in the service cost
component  of  pension  expense,  increased  interest  costs  drove the  overall
increase in pension  expense in 1999. In accordance  with  Keystone's  severance
policy,  employees terminated as a result of the restructuring remained eligible
for health care coverage during their severance eligibility periods. Eligibility
periods varied based on employees' levels and lengths of service.  This extended
coverage  delayed the  benefit of reduced  health care  expenses  that  Keystone
should  realize from FTE  reductions.  Claims per FTE also increased in 1999, as
severed  employees  demonstrated  a tendency to ensure all health related issues
were addressed prior to the lapsing of their medical coverage.

Occupancy and Equipment Expenses

Expenses  related to occupancy and furniture and equipment  increased a total of
$1.4 million or 4% in 1999  compared  with 1998.  Such expenses were impacted by
Keystone's continued investment in its delivery channels as a means of enhancing
customer convenience,  and continued technological  investments in software as a
means of increasing both efficiency and customer  profiling  capabilities.  This
area of expense was also  impacted by costs to ensure all  hardware and software
were Y2K compliant.

                                       11

<PAGE>

Other Expenses

Other  expenses  increased  a total of $2.6  million  or 4% in 1999.  Reductions
attributable  to the  restructuring  were  more  than  offset  by  increases  in
marketing, processing fees, telephone costs and problem loan expense. Collection
efforts  related to a limited  number of commercial  loans drove the increase in
problem loan expense.  The increases  that occurred in the remaining  categories
were  primarily  related  to revenue  improvement  initiatives,  which  included
numerous advertising campaigns (both brand awareness and product specific),  and
expanded outbound sales calls from the telephone banking center.

Income Taxes

Keystone reported a significantly lower effective tax rate for 1999 than in 1998
(24%  compared  with 31%).  This  reduction is related to the decline in pre-tax
income in 1999 associated with litigation  resolution and  restructuring-related
special  charges.  As a result of the  reduction  in  pre-tax  income,  tax-free
sources of revenue became a larger relative portion of income before taxes. When
pre-tax  income  and tax  expense  are  adjusted  to  include  the tax impact of
tax-free  revenue,  the  effective  tax rate was 35% for both 1999 and 1998,  as
shown below.

--------------------------------------------------------------------------------
                                     1999                     1998
                             Reported    Adjusted      Reported    Adjusted
--------------------------------------------------------------------------------
Income before income taxes     $48,668    $48,668      $145,439    $145,439
Tax-equivalent adjustment         ----      8,657          ----       8,569
--------------------------------------------------------------------------------
                               $48,668    $57,325      $145,439    $154,008
--------------------------------------------------------------------------------
Income tax expense             $11,592    $11,592       $45,692     $45,692
Tax-equivalent adjustment         ----      8,657          ----       8,569
--------------------------------------------------------------------------------
                               $11,592    $20,249       $45,692     $54,261
--------------------------------------------------------------------------------
Effective tax rate                 24%        35%           31%         35%
--------------------------------------------------------------------------------

YEAR 2000

By the end of 1999,  Keystone  had  completed  all phases of its Year 2000 (Y2K)
readiness  plan. No  significant  problems were  experienced  as a result of the
changeover to the year 2000. Total expenditures associated with Y2K preparations
since  the  inception  of  Keystone's  readiness  plan  are  estimated  to  have
aggregated  $7.2  million,  of which $4  million  were  capitalized  and will be
amortized  over a five-year  period.  Management  is not aware of any  continued
exposure to Y2K problems and does not expect to incur additional  expense of any
significance associated with this issue.

BALANCE SHEET OVERVIEW

Keystone's  assets totaled $6.89 billion at the end of 1999, a decrease from the
total of $6.97  billion  reported  at the end of 1998.  Growth  was  constrained
primarily due to runoff of curtailed credit products, such as indirect loans and
leases. Loan balances declined as growth in relationship-based product offerings
was not sufficient to offset this runoff. In addition,  balance sheet growth was
also constrained by the lack of deposit balance increases.

LOANS

During 1999,  Keystone  experienced a decline in aggregate loan balances despite
measureable  increases in  relationship-based  activities.  Growth trends within
Keystone's  loan  portfolio  resulted  directly  from the  execution of its core
business strategy, meeting customer needs through relationship banking. Keystone
continues to preserve vital funding  sources to ensure credit  availability  for
creditworthy  customers that exhibit demonstrated  potential and desire for more
expanded  relationships.  A prime example of this effort is Keystone's continued
commitment to curtail those  activities which tend to absorb funding with little
or no opportunity to profitably expand  relationships,  such as indirect lending
and leasing.

                                       12

<PAGE>

The following  summary  reflects the impact of these strategies on specific loan
balances through 1999 and 1998 (in thousands):

--------------------------------------------------------------------------------
                                  1999                1998            Change
--------------------------------------------------------------------------------
                            Amount       %      Amount       %    Amount     %
--------------------------------------------------------------------------------
Commercial                  $675,280    15%     $663,415    14%   $11,865    2%
Floor plan financing         172,853     4       171,872     4        981    1
Commercial-real estate
  secured                  1,607,968    36     1,496,526    33    111,442    7
Consumer mortgages           711,159    16       774,388    17    (63,229)  (8)
Direct consumer              907,559    21       919,952    20    (12,393)  (1)
Indirect consumer            135,765     3       248,942     5   (113,177) (45)
Lease financing              209,295     5       314,749     7   (105,454) (34)
--------------------------------------------------------------------------------
                          $4,419,879   100%   $4,589,844   100% $(169,965)  (4)%
--------------------------------------------------------------------------------
Though  declines in  commodity-based  indirect  loan and lease  categories  were
anticipated,  the actual pace of runoff  offset the growth that was  achieved in
certain relationship-based  categories.  Growth in commercial lending activities
including  commercial  real estate (7%),  commercial  loan (2%) and dealer floor
plans (1%)  reflects  Keystone's  stated  commitment  to  maximize  relationship
banking opportunities.

                                       13

<PAGE>

ALLOWANCE FOR CREDIT LOSSES AND ASSET QUALITY

The following  table sets forth five years of activity  within the allowance for
credit losses beginning January 1, 1995 (in thousands):

--------------------------------------------------------------------------------
                               1999        1998       1997      1996      1995
--------------------------------------------------------------------------------
Balance at January 1           $60,274    $65,091   $56,256    $55,415  $53,708
Loans charged off:
 Commercial                     (8,114)    (2,326)   (1,930)    (1,936)    (874)
 Real estate-secured:
  Commercial                    (3,194)    (2,543)   (1,234)    (1,646)  (1,971)
  Consumer                      (2,516)      (885)   (1,116)      (651)    (708)
 Consumer                      (10,303)   (14,442)  (10,010)    (6,702)  (5,498)
 Lease financing                (1,859)    (3,862)   (2,987)    (1,330)    (786)
--------------------------------------------------------------------------------
Total loans charged off        (25,986)   (24,058)  (17,277)   (12,265)  (9,837)
--------------------------------------------------------------------------------
Recoveries:
 Commercial                        331        303       501        461      281
 Real estate-secured:
  Commercial                       488        675       410        465      538
  Consumer                         346        444       219        152      164
 Consumer                          977      1,302     1,104      1,138      900
 Lease financing                   169        244       251        177      158
--------------------------------------------------------------------------------
Total recoveries                 2,311      2,968     2,485      2,393    2,041
--------------------------------------------------------------------------------
Net loans charged off          (23,675)   (21,090)  (14,792)    (9,872)  (7,796)
Provision charged to operations 23,376     17,150    15,316     10,713    8,568
Other                              ---       (877)    8,311        ---      935
--------------------------------------------------------------------------------
Balance at December 31,        $59,975    $60,274   $65,091    $56,256  $55,415
--------------------------------------------------------------------------------
Ratio of allowance to
  year-end loans                 1.35%      1.35%     1.38%      1.30%    1.35%
Ratio to average loans:
 Provision                       0.53%      0.37%     0.33%      0.26%    0.21%
 Net charge-offs                 0.54%      0.46%     0.32%      0.24%    0.20%
--------------------------------------------------------------------------------

Net  charge-offs  increased 12% in 1999 compared with 1998.  While  increases in
1996  through  1998  were  primarily  associated  with  indirect  loan and lease
activities,  the charge-off of a single  commercial credit drove the majority of
the increase in 1999. Consumer and lease financing  charge-offs declined in 1999
as a  result  of  Keystone's  decision  to  curtail  indirect  lending  activity
beginning in late 1997.

The allowance for credit losses  expressed as a percentage of loans  remained at
1.35% at the end of 1999,  and reflected the  comparability  of Keystone's  loan
composition and risk profile to conditions that existed at December 31, 1998.

                                       14

<PAGE>

Risk Elements

As a means of  assessing  the risk profile of its loan  portfolio,  Keystone has
monitored  the level of aggregate  risk  elements  which  include  nonperforming
assets  and  loans  past due more  than 90 days.  Nonperforming  assets  include
nonaccrual loans, restructurings,  and other real estate (ORE). Nonaccrual loans
are loans for which  interest  income is not accrued  due to concerns  about the
collection  of  interest  and/or  principal.   Restructured  loans  may  involve
renegotiated   interest  rates,   repayment   terms,  or  both,   because  of  a
deterioration in the financial  condition of the borrower.  ORE activity in 1999
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):

--------------------------------------------------------------------------------
                           1999       1998       1997        1996         1995
--------------------------------------------------------------------------------
Nonaccrual loans         $27,183    $24,675    $20,520      $19,350     $19,142
Restructurings               841        264        489          393         503
--------------------------------------------------------------------------------
Nonperforming loans       28,024     24,939     21,009       19,743      19,645
Other real estate          3,170      3,982      5,028        8,305       9,777
--------------------------------------------------------------------------------
Nonperforming assets      31,194     28,921     26,037       28,048      29,422
Loans past due 90 days
  or more                 22,508     28,549     33,062       20,141      16,798
--------------------------------------------------------------------------------
Total risk elements      $53,702    $57,470    $59,099      $48,189     $46,220
--------------------------------------------------------------------------------
While  nonaccrual  loans reflected an absolute  increase from 1998 levels,  that
increase was not attributable to any underlying trend or change in risk profile.
Alternatively,  a marked  reduction  in loans 90 days or more past due served to
reduce aggregate risk elements below levels noted in 1998 and 1997.

Substantially  all of the loans in the nonaccrual  category at December 31, 1999
were contractually past due as to principal or interest.

                                       15

<PAGE>

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.

--------------------------------------------------------------------------------
                              1999        1998        1997       1996      1995
--------------------------------------------------------------------------------
Ratio to Year-End Loans:
--------------------------------------------------------------------------------
 Nonperforming assets         0.70%       0.65%      0.55%      0.65%     0.72%
 90 days past due             0.50        0.64       0.70       0.46      0.41
--------------------------------------------------------------------------------
Total risk elements           1.20%       1.29%      1.25%      1.11%     1.13%
--------------------------------------------------------------------------------
Coverage Ratios:
 Ending allowance to

  nonperforming loans         214%        242%      310%        285%       282%
 Ending allowance to

  risk elements*              119%        113%      120%        141%       152%
 Ending allowance to

  net charge-offs             2.5x        2.9x      4.4x        5.7x       7.1x
--------------------------------------------------------------------------------
*Excludes ORE.

The  relative  level of risk  elements  declined  from  1998  and  1997  levels.
Expressed as a percentage of loans,  total risk elements decreased from 1.29% at
the end of 1998 to 1.20% at the end of 1999.  The migration of a limited  number
of commercial credits from the 90 days past due category at the end of 1998 into
nonaccrual  status during 1999  increased the ratio of  nonperforming  assets to
loans while decreasing the ratio of loans 90 days past due to total loans.

Management has identified  approximately  $12.5 million of loans  outstanding at
December  31,  1999,  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 1999. Such loans totaled $12.2 million at
the end of 1998.

                                       16

<PAGE>

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):

                                1999      1998       1997       1996     1995
--------------------------------------------------------------------------------
Commercial                     $7,641    $10,066     $4,550    $4,340    $4,833
Commercial real estate:
 Construction and development   3,470      1,941        220       764     1,951
 Permanent                     11,738      8,640     11,960    12,196    10,919
Residential real estate           103        960      1,465     1,014     1,173
Consumer                        5,072      3,332      2,814     1,429       769
--------------------------------------------------------------------------------
Nonperforming loans            28,024     24,939     21,009    19,743    19,645
Other real estate               3,170      3,982      5,028     8,305     9,777
--------------------------------------------------------------------------------
 Total nonperforming assets   $31,194    $28,921    $26,037   $28,048   $29,422
--------------------------------------------------------------------------------

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

The following is a comparative  summary of past due loans at the end of 1999 and
1998 (in thousands):

------------------------------------------------------------------------------
                                % of Total                 % of Total
                      1999         Loans        1998          Loans
------------------------------------------------------------------------------
30-59 days           $41,363       0.9%        $47,899         1.1%
60-89 days            13,391       0.3          12,451         0.3
Over 90 days          22,508       0.5          28,549         0.6
------------------------------------------------------------------------------
                     $77,262       1.7%        $88,899         2.0%
------------------------------------------------------------------------------
The level of past due loans expressed as a percentage of total loans at December
31, 1999, reflected improvement from the same period in 1998.

Allocation of Allowance

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

                                       17

<PAGE>

Overall Assessment

Keystone  has  assessed  all of the above  factors in the  establishment  of the
allowance  for  credit  losses.  The  determination  as to the  adequacy  of the
allowance reflects management's judgment,  and was based upon collateral,  local
market  conditions,  various  estimates,  and other  information  that  requires
subjective analysis.  These factors, which are prone to change, are monitored by
management to evaluate their potential impact on management's  assessment of the
adequacy of the allowance.  Based on its evaluation of loan quality,  management
believes  that the allowance for credit losses at December 31, 1999 was adequate
to absorb potential losses within the loan portfolio.

INVESTMENTS

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

At December 31, 1999, Keystone's investments  represented 24.1% of total assets.
The following is a summary of the carrying values of investments at December 31,
1999 and 1998 (in thousands):

                                      1999                      1998
------------------------------------------------------------------------------
                            Available       Held to    Available      Held to
                             for Sale      Maturity     for Sale      Maturity
------------------------------------------------------------------------------
Negotiable money market
  investments                  $72,470    $  -----       $290,975      $-----
U.S. Treasury securities        80,967       -----        123,388       -----
U.S. Government agency
  obligations                  722,614     385,163        548,572     500,418
Obligations of states and
 political subdivisions         62,012     189,993         57,692     146,018
Corporate and other            135,275      13,045        109,126      13,100
------------------------------------------------------------------------------
                            $1,073,338    $588,201     $1,129,753    $659,536
------------------------------------------------------------------------------

The weighted  average  duration of Keystone's  fixed rate  investments  was 3.75
years at December  31,  1999.  Ratings for state and  municipal,  and  corporate
issues are provided by major rating agencies, principally Moody's and Standard &
Poor's.  At the end of 1999,  the  portion of all state and  municipal  holdings
rated  "AAA" was 92.4% and the  portion  of all  corporate  issues  rated "A" or
better was 98.0%.

The  relationship  of  market  value to the  amortized  cost of  investments  at
December 31, 1999 was 97.8%  compared to 101.1% at the end of 1998.  At December
31, 1999,  investments  held-to-maturity,  which are carried at amortized  cost,
contained gross unrealized gains of $2.5 million and losses of $15.3 million. On
an after-tax basis, the net unrealized loss of $12.8 million was less than 2% of
total shareholders'  equity at December 31, 1999.  Unrealized losses included in
the  carrying  value of  available-for-sale  investments  of  approximately  $25
million 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.

                                       18

<PAGE>

FASB Statement No. 119,  "Disclosures About Derivative Financial Instruments and
the  Fair  Value  of  Financial  Instruments,"  defined  two  distinct  types of
off-balance  sheet derivative  activities:  "trading"  activities and "end-user"
activities.  Keystone does not engage in derivatives  trading activities but has
made use, as an end-user,  of interest rate swaps and caps.  These  derivatives,
together  with other  strategies,  have been used to manage  Keystone's  overall
exposure to the effect of changes in interest rates.  Keystone has also made use
of  forward  mortgage  commitments  to reduce the market  risk  associated  with
interest rate fluctuations in fixed consumer mortgages and made use of floors to
reduce  market  risk  associated  with  mortgage   servicing   rights.   Further
disclosures  of these  activities are included in the footnotes to the financial
statements.

A broader definition of derivatives would include any financial instrument which
derives  its  value or  contractual  cash  flows  from the  price of some  other
security or index. Keystone's investment policy governs the nature and extent of
on-balance sheet financial  derivative  holdings,  which currently  include both
collateralized  mortgage  obligations and structured  notes.  This policy limits
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.

DEPOSITS

Financial  institutions  continue  to rely  heavily on deposit  balances  as the
primary  source of funding for credit  activities.  Customer  desires for higher
returns,  the lure of increased  stock market  valuations,  higher consumer risk
tolerance, and more accessible investment distribution channels, such as on-line
investing,  have all served as impediments  to growth in this important  funding
source.  Despite  these  trends,  Keystone has been able to preserve its funding
base through product development  initiatives designed to meet these competitive
challenges. Though aggregate deposit funding declined from 1998 to 1999, the mix
of deposits  reflected the  influence of  competitive  pressures and  Keystone's
proactive strategy to meet customers' needs.  Deposit  composition  consisted of
the following for 1999 and 1998(in thousands):

                                                               Change
--------------------------------------------------------------------------------
                                  1999      1998          Amount         %
--------------------------------------------------------------------------------
Noninterest-bearing demand     $678,218   $637,533      $40,685         6 %
NOW                             328,420    309,238       19,182         6
Savings                         464,918    514,226      (49,308)      (10)
Money market                    786,567    740,086       46,481         6
Variable-rate CD                765,321    719,165       46,156         6
Other time deposits less
  than $100,000               1,734,278  1,958,919     (224,641)      (11)
Time deposits $100,000
  or more                       295,478    310,137      (14,659)       (5)
--------------------------------------------------------------------------------
                             $5,053,200 $5,189,304    $(136,104)       (3)%
--------------------------------------------------------------------------------

Keystone's  1999  deposit  mix was  impacted by four  significant  developments.
First,  Keystone's  continued  promotion  of its  free-checking  and  electronic
checking   products,   combined  with  a  corporate  cash  management   product,
contributed  to  6%  growth  in  noninterest-bearing  demand  deposit  balances.
Secondly,  Keystone continues to promote its indexed money market account (IMMA)
in order to provide customers with a competitive  alternative to retail products
now available through a variety of financial  intermediaries.  The rate provided
on this account has been indexed to short-term  Treasury rates,  providing added
assurance to Keystone  customers  that they are  achieving  competitive  returns
combined with convenient access. Thirdly, the variable rate certificate of

                                       19

<PAGE>

deposit, with its indexed rate and flexible liquidity options, continues to be a
formidable and  competitive  product  offering.  Each of these products has been
successful  in blending  the  security  of deposit  insurance  with  competitive
features in pricing.  Keystone's  preemptive approach to providing its customers
with   competitive    product    offerings   has   facilitated   some   internal
disintermediation  of more established  deposit products such as savings and NOW
accounts.  More  importantly,  Keystone  believes  that this  approach  provides
customers with assurance that, in its role as a financial services provider, the
foremost objective is to meet customer needs.  Finally,  time deposits decreased
due to Keystone's efforts to maintain a competitive cost structure to offset the
continued  migration of customer  interest-bearing  accounts to higher  yielding
investment products.

BORROWED FUNDS

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

                                                               Change
--------------------------------------------------------------------------------
                               1999          1998         Amount       %
--------------------------------------------------------------------------------
  Short-term borrowings      $352,565      $375,131     $(22,566)     (6)%
  FHLB borrowings             515,396       372,097      143,299      39
  Long-term debt              130,024       119,313       10,711       9
--------------------------------------------------------------------------------
                             $997,985      $866,541     $131,444      15 %
--------------------------------------------------------------------------------

Strategic  leverage  efforts,   including   investment   initiatives  and  share
repurchase  programs,  have  influenced the volume and composition of nondeposit
funding  sources.  The most common  form of these  funding  sources,  short-term
borrowings,  are  obtained  to meet both the  short-term  funding  needs and the
short-term  investment  requirements  of primarily  commercial and  governmental
customers. FHLB borrowings, which are collateralized by residential mortgages or
other qualified  securities,  include a variety of credit products  available to
Keystone  through its  membership in the Federal Home Loan Bank. At December 31,
1999,  Keystone  could borrow an  additional  $654 million  based on  qualifying
collateral.  Keystone  also has $270  million  available  funding  under a shelf
registration executed in 1997 for senior medium-term notes.

SHAREHOLDERS' EQUITY

The changing nature of the financial services industry,  including the expansion
of fee-based  activities such as asset management services and mortgage banking,
requires a proactive  view of capital  management.  Maintenance  of  appropriate
levels of  capital is  subjected  to  constraints  and  restrictions  imposed by
regulatory authorities,  dividend requirements,  and acquisition  opportunities.
Keystone's capital management  policies have been designed to ensure maintenance
of appropriate levels of capital under a variety of economic conditions.  At the
end of 1999,  shareholders'  equity  was $550  million  versus  $662  million at
December 31, 1998,  resulting in an equity to assets ratio of 7.99%. The decline
was primarily attributable to share repurchase activity.

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  1999  equated to an 8.8%
payout on year-end 1998 book value.  Keystone's  1999 earnings,  as set forth in
this report, did include several nonrecurring items which curtailed the earnings
retention levels for the current year.  However,  Keystone's  capital management
practices  are based on the  long-term  sustainability  of core  earnings  which
management believes to be financially sound and secure.

                                       20

<PAGE>

Under  guidelines  set forth in its capital  management  policies,  Keystone has
proactively  sought to execute  strategies  and tactics which would moderate the
capital  growth rate relative to earning asset  levels.  Two capital  management
strategies  contributing to the equity contraction  experienced in 1999 were the
acquisition  of  treasury  stock and the annual  dividend  to  shareholders.  In
formulating  these  capital  management  initiatives,  a multitude of additional
external  factors are  considered,  including  regulatory  implications  and the
desire to preserve pooling-of-interests accounting.

In  accordance  with  share  repurchase  programs  authorized  by the  Board  of
Directors, Keystone repurchased 2.5 million shares in the open market in 1999 at
a total cost of $89 million.  These shares,  along with 1 million repurchased in
1998,  were  retired  in 1999.  Keystone's  programs  allow for the shares to be
repurchased  from  time  to  time  in the  open  market  or  through  negotiated
transactions.   Keystone  has  current  board  authorization  to  repurchase  an
additional 500,000 shares, as appropriate.

Banking industry  regulators have set forth capital  adequacy  guidelines in the
form of required  capital  ratios for bank holding  companies  and their banking
subsidiaries. Based on risk-adjusted capital rules and definitions prescribed by
the regulators, the guidelines establish ranges of capital adequacy which extend
from "significantly  undercapitalized" to "well-capitalized".  These assessments
of capital adequacy directly influence the focus of regulatory oversight and the
premium  rates charged for deposit  insurance.  Regulators,  including  both the
Federal  Reserve Board and the Office of the  Comptroller  of Currency,  operate
under a risk-based  supervisory  approach designed to encourage management focus
on the most  effective  use of  capital  commensurate  with its risk  profile in
generating a return to stockholders,  while serving depositors,  creditors,  and
regulatory needs.

With regulatory oversight  increasingly focused on capital issues,  Keystone and
other  financial   institutions  have  been  challenged  to  develop  a  capital
measurement  system that will ensure effective  management of capital levels and
associated business risk. Keystone will continue to be responsive to the need to
balance both capital adequacy levels and business risk issues.

The following table provides  Keystone's  risk-based capital position at the end
of 1999 and a comparison to the various regulatory capital requirements.

--------------------------------------------------------------------------------
                                                Well               Minimum
                          Keystone           Capitalized        Requirements
--------------------------------------------------------------------------------
Leverage ratio              7.48%              5.00%                4.00%
Tier 1 capital ratio       10.54%              6.00%                4.00%
Total capital ratio        11.78%             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 capital standards.  Intangible assets,  consisting primarily of core
deposit intangibles, mortgage servicing rights and goodwill, totaled $64 million
at December 31, 1999 or 10% of Tier 1 capital.

                                       21

<PAGE>

ASSET/LIABILITY MANAGEMENT AND MARKET RISK

The process by which  financial  institutions  manage earning assets and funding
sources under different  interest rate  environments  is called  asset/liability
management.  The primary goal of  asset/liability  management is to increase net
interest income through the prudent control of market risk, liquidity,  interest
rate risk, and capital. Two important barometers of performance are net interest
margin and  liquidity.  Net interest  margin is  increased by widening  interest
spread while controlling interest rate sensitivity. The adequacy of liquidity is
determined by the ability to meet the cash flow  requirements of both depositors
and customers requesting bank credit. Asset/liability management within Keystone
is governed by the Board of  Directors  (the  Board).  The Board  delegates  the
responsibility of  asset/liability  management to the corporate  Asset/Liability
Management Committee (ALCO) whose representation  includes both bank and holding
company personnel.  ALCO sets forth strategic  directives which guide day-to-day
asset/liability  management  initiatives.  ALCO also  reviews and  approves  all
significant market risk initiatives, liquidity, long-term funding opportunities,
and capital management programs.

Interest Rate Risk

Interest  rate risk can be  quantified  by measuring  the change in net interest
margin  relative to changes in market  interest  rates.  Risk is  identified  by
reviewing   repricing    characteristics   of   interest-earning    assets   and
interest-bearing liabilities.  Keystone's ALCO policy sets forth guidelines that
limit the level of interest rate risk within specified tolerance ranges.

Keystone  utilizes a variety of techniques to measure and monitor  interest rate
risk, including the use of simulation analysis.  In order to quantify the impact
of changes in interest rates on net interest income, Keystone conducts quarterly
interest  rate shock  simulations  which  project  the impact of  interest  rate
changes over periods of up to two years. These simulations are used to determine
whether  corrective  action may be  warranted or required in order to adjust the
overall  interest  rate risk  profile of  Keystone.  Keystone's  asset/liability
management  policy  limits  interest  rate risk  exposure to 5% of net  interest
income  for  the  succeeding  twelve-month  period  and  8% for  the  succeeding
twenty-four month period.  Simulations  prepared as of December 31, 1999 for the
ensuing  twelve-month  and  twenty-four  month periods have  measured  potential
reductions  in  net  interest  income  of  approximately  5%,  which  is  within
Keystone's defined tolerance levels. Comparable measures as of December 31, 1998
were 3% for the  twelve-month  period and 2% for the  twenty-four  month period.
Current  simulations  are prepared under the assumption that rates will increase
200 basis points or decrease 100 basis points over a three-month period and then
stabilize.  Simulation  results  are  influenced  by a number of  estimates  and
assumptions  with  regard to embedded  options,  prepayment  behaviors,  pricing
strategies,   cash  flows,  and  others.  Such  assumptions  and  estimates  are
inherently  uncertain  and, as a  consequence,  results will  neither  precisely
estimate net interest income nor precisely measure the impact of higher or lower
interest  rates on net interest  income.  The results of these  simulations  are
reported to Keystone's Board of Directors on a quarterly  basis.  Management has
determined  that  Keystone  maintained a level of interest  rate risk within its
asset/liability management policy limits at December 31, 1999.

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 or two years. By
utilizing GAP to monitor  longer term interest rate risk,  Keystone  attempts to
minimize  fluctuations in net interest margin and thereby achieve consistent net
interest income growth during periods of changing interest rates. MVPE is a more

                                       22

<PAGE>

comprehensive measure that attempts to quantify the impact of aggregate interest
rate risk  exposure on the  intrinsic  value of financial  institutions,  and is
particularly useful in quantifying the impact of changing interest rates on that
intrinsic  value.  Analyses  similar to those  conducted for interest rate shock
simulations are conducted for MVPE  computations,  with policy guidelines on the
acceptable  reduction in Keystone's  intrinsic value under defined interest rate
conditions. Under current policy, intrinsic value must exceed regulatory capital
requirements for "well  capitalized"  institutions.  Keystone's MVPE computation
yielded intrinsic values well in excess of these limits,  under both a 200 basis
point  increase or 100 basis  point  decrease in overall  interest  rates.  This
measurement  tool, while valuable as a gauge of longer-term  interest rate risk,
has several limitations  including:  the intrinsic value of assets,  liabilities
and off-balance sheet instruments does not necessarily  represent the fair value
of the  financial  instruments  since  it  does  not  include  credit  risk  and
liquidity;   estimated  cash  flows  are  required  for  nonmaturity   financial
instruments;  and the future  structure  of  Keystone's  balance  sheet does not
consider  future  loan and  deposit  activities  from core  business  within the
present value assessment.

The following table provides an analysis of Keystone's interest rate sensitivity
as  measured  under GAP at  December  31,  1999  compared  to 1998  (dollars  in
thousands):

                               December 31, 1999                December 31,1998
--------------------------------------------------------------------------------
                  1 month       3 months     6 months  1 year        1 year
--------------------------------------------------------------------------------
Assets            $988,620  $1,187,812  $1,463,880   $1,932,256     $2,567,125
Liabilities      1,676,618   2,394,671   2,738,429    3,164,414      3,514,717
Off-balance sheet
transactions       150,000     150,000     150,000        -----          -----
Cumulative GAP    (537,998) (1,056,859) (1,124,549)  (1,232,158)      (947,592)
As a percent of
  total assets       (7.81)%    (15.34)%    (16.33)%     (17.89)%       (13.60)%
GAP ratio             0.68        0.56        0.59         0.61           0.73
--------------------------------------------------------------------------------

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

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

Liquidity

Liquidity is defined as  Keystone's  ability to meet  maturing  obligations  and
customers'  demand for funds on a  continuous  basis.  Liquidity is sustained by
stable  core  deposits,   a  diversified  mix  of  liabilities,   strong  credit
perception, and the maintenance of sufficient assets convertible to cash without
material loss or disruption of normal  operations.  Keystone monitors  liquidity
through regular computations of prescribed liquidity ratios. Failure to meet the
prescribed minimum standards for these ratios requires that management  identify
tactics which will ensure compliance with policy  guidelines.  Keystone actively
manages liquidity within a defined range and has developed  reasonable liquidity
contingency plans,  including ensuring availability of alternate funding sources
to maintain adequate liquidity under a variety of business conditions.

Keystone's  sources of liquidity  include  funds  derived  through  earnings and
deposit balances. Liquidity is also provided by scheduled maturities of loans

                                       23

<PAGE>

and  investment  securities,  as well  as the  early  payoff  of  customer  loan
balances.  Liquidity  may  also  be  influenced  by the  volume  and  timing  of
securitizations,  particularly  mortgage  loans.  Consideration  is given to the
maturity of assets and  expected  future  growth/funding  needs when  developing
investment  strategies.  These liquidity  sources may also be augmented by other
forms of liability  liquidity,  such as FHLB  borrowings,  medium term notes, or
other forms of term borrowings. For example, Keystone had $270 million available
for the issuance of senior or subordinated  debt securities at December 31, 1999
under an existing  shelf  registration  filed with the  Securities  and Exchange
Commission  (SEC).   Keystone's  ability  to  access  the  capital  markets  was
demonstrated  in 1998 through the issuance of $30 million in senior  medium-term
notes near mid-year.  Keystone's operating,  investing, and financing activities
are conducted within the overall constraints of Keystone's  liquidity management
policy.

Parent  company  liquidity  represents  another  important  aspect of  liquidity
management.  The parent  company  relies  primarily  on the bank  subsidiary  to
provide  funding for dividends to its  shareholders  and  unallocated  corporate
expenses.  The  amount  of  dividends  from the bank to the  parent  company  is
constrained  by  federal  regulations,   which  have  not  historically  limited
Keystone's  practices.  Periodically,  the parent  company may also access other
forms of funding to facilitate strategic corporate  initiatives.  Based upon the
inherent  strength of its bank subsidiary,  holding company  liquidity is deemed
adequate.

REGULATORY MATTERS

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

INFLATION

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

Segment Reporting

Keystone is  organized  around,  and manages its business  through  local market
teams in the areas in which it  operates.  These  market  teams are grouped into
five geographic regions, each of which is managed by a regional president. These
regions are  aggregated  into one  operating  segment  since each region  offers
similar products and services through similar distribution channels.

Keystone  has three  major  product  and  service  lines that are offered to its
customers  through the local market  teams.  These lines  consist of  Commercial
Banking,  Retail Banking,  and Wealth  Development.  The Commercial Banking line
consists of numerous products and services provided primarily to a diverse group
of emerging and mid-size  businesses.  Products and services include secured and
unsecured loans,  Small Business  Administration  loans,  commercial  mortgages,
lines of credit, deposits and cash management services.

The Retail  Banking line  consists of various  products and services  offered to
consumers.   Products  include   residential   mortgages,   home  equity  loans,
installment  loans,  lines of credit and  automobile  loans and leases.  Deposit
offerings include interest and free checking, fixed and variable-rate CDs, and

                                       24

<PAGE>

indexed money market accounts. This product line also offers credit reinsurance,
electronic banking, and the sale of mortgages in the secondary market, both with
and without servicing retained.

Wealth  Development  products and services include  administration of trusts and
estates, discount brokerage, full-service investment management,  administration
of retirement and other employee  benefit plans, as well as financial  planning.
Customers include individuals and businesses.

The following chart demonstrates the relative  contribution of each product line
to Keystone's consolidated revenue for 1999 (in thousands):

<TABLE>
<CAPTION>

                                       Banking Division
                         ---------------------------------------
                                                                          Wealth
                              Commercial           Retail             Development           Other(2)        Total
-------------------------------------------------------------------------------------------------------------------
                                      % of               % of               % of                % of
                              $      Total       $       Total       $      Total        $      Total        $
--------------------------------------------------------------------------------------------------------------------
<S>                         <C>        <C>    <C>          <C>   <C>         <C>      <C>          <C>    <C>
 Net interest income(1)      $96,788    36%    $128,367     48%   $   -          -%    $40,875      15%    $266,030
 Noninterest income (3)       12,129    12       49,203     47      34,480      33       8,871       8      104,683
--------------------------------------------------------------------------------------------------------------------
 Total revenue(1)           $108,917    29%    $177,570     48%    $34,480       9%    $49,746      13%    $370,713
--------------------------------------------------------------------------------------------------------------------
 (1) Net interest income includes a fully taxable equivalent adjustment of $8.7 million.
 (2) The other column represents revenue not specifically allocated to products.  Nonallocated items relate
     primarily to the treasury function.
 (3) Noninterest income excludes securities gains (losses).
</TABLE>

                                       25

<PAGE>

1998 vs 1997

Summary

Net income  reached $99.7 million  during 1998, a modest 3.4%  improvement  over
core 1997  performance  results of $96.5  million.  Likewise,  EPS rose to $1.94
versus core EPS of $1.87, or 3.7% growth.  Keystone's ROA and ROE were 1.45% and
14.63%,  respectively,  compared  to 1.46% and  14.54%  in 1997.  Note that 1997
results,  as  presented  herein,  exclude  merger-related  special  charges that
totaled $11.4 million.

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

Interest Income

Interest  income grew  slightly  during the year from $519.6  million in 1997 to
$526.2  million in 1998,  an  increase of 1.3%.  Pricing  trends and product mix
played  significant  roles  in  interest  income  performance.   Businesses  and
consumers,  sensitized  to the steady  decline in  interest  rates,  exhibited a
higher proclivity to renegotiate or refinance existing borrowings.  During 1998,
the earning  asset yield was 8.15%,  a decline of 17 basis points from the yield
of 8.32% recorded in 1997.

While Keystone exhibited growth in its core credit  activities,  absolute growth
in the loan portfolio was mitigated by Keystone's strategic decisions to curtail
indirect lending activity and sell fixed-rate mortgages in the secondary market.

Reduced aggregate loan volumes resulted in a lower  loan-to-deposit  ratio. As a
consequence,  Keystone  experienced a higher relative level of investments which
yielded lower rates than loans.  Interest  rate trends,  including the impact of
both  steadily  declining  rates and the  flatter  yield  curve,  provided  less
opportunity  to price these  higher  volumes of  investments  at more  favorable
rates.

Interest Expense

Like most financial  institutions,  Keystone's  ability to both attract  funding
through  deposit  vehicles and calibrate the impact of lower rates with customer
desire for higher returns made substantial increases in the deposit funding base
difficult in 1998.  Keystone  achieved  deposit  growth in its more  competitive
product offerings such as free checking, the indexed money market account(IMMA),
and  variable-rate  certificates  of deposit.  While the lower rate  environment
contributed to reduced yield on earning assets,  the rate paid for total funding
costs was  virtually  unchanged.  This trend was driven by two primary  factors.
First, the reduced mix of lower-cost core deposits, accompanied by the migration
into higher-priced  competitive deposit vehicles such as IMMAs and variable-rate
CDs, exerted upward pressure on funding costs.  Secondly,  Keystone  experienced
greater dependency on other higher-cost  nondeposit funding sources such as FHLB
advances and  medium-term  notes.  Consequently,  the total rate paid on funding
costs decreased only slightly,  from 4.45% in 1997 to 4.44% in 1998. Despite the
slight decline in the total rate,  interest expense  increased $8 million,  from
$232.5  million in 1997,  to $240.7  million  in 1998,  due to growth in overall
funding levels.

                                       26

<PAGE>

Net Interest Income

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

Provision for Credit Losses

The provision for credit losses grew in 1998 to $17.2 million from $15.3 million
in  1997,  an  increase  of  12%.  A  higher  level  of  defaults  and  personal
bankruptcies within the consumer sector culminated in an increased provision and
associated  charge-offs.   The  allowance  for  credit  losses  expressed  as  a
percentage  of loans was  1.35% at  December  31,  1998,  versus  1.38% one year
earlier.  The coverage of  nonperforming  credits  provided by the allowance was
242% compared to the prior year ratio of 310%.

Noninterest Income

From 1997 to 1998, aggregate  noninterest revenues (exclusive of security gains)
grew 16.6% from $83.9 million to $97.8  million.  This followed  18.7% growth in
1997.

Asset  management  fees in 1998 were  improved  due to  expansion of the product
line. Growth included an 8% increase in trust fees, a 44% increase in investment
management  revenues,  a more than doubling of benefit services,  and an overall
increase of 22% in total trust and  investment  advisory  fees.  Total fees grew
from $21.3 million in 1997 to $25.9 million in 1998.

Keystone's  mortgage  banking  unit  originated  nearly $500 million of mortgage
loans in 1998,  including  approximately  $333  million  which  were sold in the
secondary  market.  The low interest rate  environment and  consistently  strong
consumer demand for housing provided  opportunities  for expansion.  Following a
31% increase in mortgage banking fees in 1997,  Keystone produced a 29% increase
during 1998 as mortgage  banking  revenues  grew to $12.4  million,  or 12.7% of
total noninterest revenues.

Electronic banking also had a major impact on the growth in noninterest revenues
in 1998. Keystone achieved a 25% increase in aggregate ATM and  point-of-service
activity  including  a nearly  60%  increase  in its  debit  card  transactions.
Additionally, Telephone Banking Center calls increased nearly threefold from the
activity  levels  as of the end of  1997.  In  total,  electronic  banking  fees
increased 57% including an  approximately $2 million increase from the impact of
surcharging.

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

Noninterest Expense

Core noninterest expenses, exclusive of charges associated with the 1997 merger,
rose 4.0% from  $214.6  million in 1997 to $223.2  million,  an increase of $8.5
million.  For the most part, core expense growth was negligible,  as most of the
1998 increase reflected the first full-year impact of the mid-year 1997 purchase
acquisitions of MMC&P and a  Maryland-based  thrift.  Additionally,  expenses in
1998  included  the impact of  incremental  expenses  necessary  to achieve  Y2K
readiness.

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

In 1998,  occupancy expenses rose 5.5% to $17.3 million while equipment expenses
rose 9.8% to $20.6  million.  Results for 1997 included  comparable  expenses of
$16.4 million and $18.7 million,  respectively. The increase was attributable to
costs  associated  with the Telephone  Banking Center,  an expanding  network of
ATMs,  electronic  banking  enhancements,  and  infrastructure  improvements  to
internal processes.

Other  expenses,  which include items such as  marketing,  insurance,  audit and
legal  fees,  consulting  expenses,  bank  shares  tax,  and  postage  expenses,
aggregated  $70.3  million  in 1998,  consistent  with 1997.  Keystone  achieved
notable  reductions in categories  such as marketing,  recruiting,  professional
fees, and problem loan expense,  which served to overcome  increased expenses in
areas  more  affected  by  corresponding  improvement  in  fee  income  such  as
reinsurance and merchant interchange activities.

Income Taxes

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

                                       27

<PAGE>

                         Report of 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, 1999 and 1998, 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,
1999.  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 auditing standards generally accepted
in the United States. 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,  1999 and  1998,  and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.

                                                /s/ Ersnt & Young LLP
                                                ----------------------


Pittsburgh, Pennsylvania

January 28, 2000



                                       28

<PAGE>

Consolidated Statements of Condition                         December 31,
--------------------------------------------------------------------------------
(in thousands, except share data)                          1999         1998
--------------------------------------------------------------------------------
ASSETS

--------------------------------------------------------------------------------
Cash and due from banks                                  $334,273     $190,622
Federal funds sold                                          -----      141,700
Interest-bearing deposits with banks                          877        5,978
Investment securities available for sale                1,073,338    1,129,753
Investment securities held to maturity
 (fair values: 1999 - $575,368; 1998 - $670,934)          588,201      659,536
Loans held for resale                                     110,203       76,423

Loans and leases                                        4,459,546    4,459,783
Allowance for credit losses                               (59,975)     (60,274)
--------------------------------------------------------------------------------
Net loans                                               4,399,571    4,399,509
Premises and equipment                                    118,762      124,080
Other assets                                              262,283      240,626
--------------------------------------------------------------------------------
TOTAL ASSETS                                           $6,887,508   $6,968,227
--------------------------------------------------------------------------------
LIABILITIES

--------------------------------------------------------------------------------
Noninterest-bearing deposits                             $652,613     $710,161
Interest-bearing deposits                               4,307,721    4,521,557
--------------------------------------------------------------------------------
Total deposits                                          4,960,334    5,231,718

Federal funds purchased and security
  repurchase agreements                                   316,130      363,739
Other short-term borrowings                                50,000       11,306
--------------------------------------------------------------------------------
Total short-term borrowings                               366,130      375,045
FHLB borrowings                                           728,776      427,027
Long-term debt                                            129,920      130,239
Other liabilities                                         152,323      142,533
--------------------------------------------------------------------------------
TOTAL LIABILITIES                                       6,337,483    6,306,562
--------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
Preferred stock: $1.00 par value,
  authorized 8,000,000 shares; none
  issued or outstanding                                    -----         -----
Common stock: $2.00 par value,
  authorized 100,000,000 shares; issued
  48,731,057 - 1999 and 51,448,335 - 1998                 97,462       102,897
Surplus                                                  167,939       162,350
Retained earnings                                        301,118       424,873
Deferred KSOP benefit expense                               (207)         (553)
Treasury stock: 1,013,600 shares at cost - 1998           ------       (34,186)
Other comprehensive income                               (16,287)        6,284
--------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY                               550,025       661,665
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY            $6,887,508    $6,968,227
--------------------------------------------------------------------------------
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       29

<PAGE>

Consolidated Statements of Income

                                               Year Ended December 31,
--------------------------------------------------------------------------------
(in thousands except per share data)       1999         1998           1997
--------------------------------------------------------------------------------
INTEREST INCOME
--------------------------------------------------------------------------------
 Loans and fees on loans                 $371,527     $401,949       $404,096
 Investments - taxable                     89,357       93,955         82,664
 Investments - tax-exempt                  12,105       11,366         12,230
 Federal funds sold and other               5,031        4,820          5,340
 Loans held for resale                      8,011        5,559          6,408
--------------------------------------------------------------------------------
                                          486,031      517,649        510,738
--------------------------------------------------------------------------------
INTEREST EXPENSE
--------------------------------------------------------------------------------
 Deposits                                 173,942      193,087        194,898
 Short-term borrowings                     15,844       17,486         18,134
 FHLB borrowings                           29,547       21,507         14,677
 Long-term debt                             9,325        8,604          4,785
--------------------------------------------------------------------------------
                                          228,658      240,684        232,494
--------------------------------------------------------------------------------
NET INTEREST INCOME                       257,373      276,965        278,244
 Provision for credit losses               23,376       17,150         15,316
--------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
  PROVISION FOR CREDIT LOSSES             233,997      259,815        262,928
--------------------------------------------------------------------------------
NONINTEREST INCOME
--------------------------------------------------------------------------------
 Trust and investment advisory fees        27,766       25,906         21,291
 Service charges on deposit accounts       19,173       18,443         17,356
 Fee income                                26,989       24,548         20,029
 Mortgage banking income                   11,461       12,412          9,633
 Reinsurance income                         3,113        3,167          3,512
 Other income                              16,181       13,319         12,040
 Net gains-equity securities                  714       10,306          5,754
 Net gains (losses)-debt securities        (1,052)         712            317
--------------------------------------------------------------------------------
                                          104,345      108,813         89,932
--------------------------------------------------------------------------------
NONINTEREST EXPENSE
--------------------------------------------------------------------------------
 Salaries                                  89,149       97,443         92,650
 Employee benefits                         17,701       17,535         17,311
 Occupancy expense, net                    18,169       17,302         16,407
 Furniture and equipment expense           21,103       20,567         18,732
 School districts' settlement expense      43,658        -----          -----
 Special charges                           26,917        -----         11,410
 Other expense                             72,977       70,342         69,480
--------------------------------------------------------------------------------
                                          289,674      223,189        225,990
--------------------------------------------------------------------------------
Income before income taxes                 48,668      145,439        126,870
Income tax expense                         11,592       45,692         38,953
--------------------------------------------------------------------------------
NET INCOME                                $37,076      $99,747        $87,917
--------------------------------------------------------------------------------
PER SHARE DATA
--------------------------------------------------------------------------------
Net income:
 Basic                                      $0.76        $1.94          $1.70
 Diluted                                     0.75         1.92           1.68
Dividends                                    1.16         1.13           1.06
--------------------------------------------------------------------------------
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       30

<PAGE>
<TABLE>
<CAPTION>

Consolidated Statements of Changes in Shareholders' Equity

                                Issued and                                  Deferred
                               Outstanding                                    KSOP                  Net Unrealized
(in thousands)                   Common      Common               Retained   Benefit     Treasury    Securities       Shareholders'
                                 Shares       Stock    Surplus    Earnings   Expense      Stock      Gains(lossses)     Equity
---------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
JANUARY 1, 1997                   51,986    $104,640    $139,213  $422,018    ($1,249)     ($8,412)    $4,196           $660,406
---------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>       <C>         <C>       <C>           <C>       <C>          <C>              <C>
Net income                        -          -            -         87,917     -            -           -                 87,917
Change in unrealized gain on
  available-for-sale securities   -          -            -         -          -            -           4,346              4,346
                                                                                                                          ------
Comprehensive income                                                                                                      92,263
Dividends                         -          -            -        (55,964)    -            -           -                (55,964)
Stock issued:
  Benefit plans                      524       1,048       8,178    -          -            -           -                  9,226
  KSOP                                28          56         763    -          -            -           -                    819
  Dividend reinvestment              130         260       3,422    -          -            -           -                  3,682
Deferred KSOP benefit expense     -          -            -         -             523       -           -                    523
Acquisition of treasury stock     (2,318)    -            -         -          -           (72,586)     -                (72,586)
Reissuance of treasury stock           7     -            -         -          -               182      -                    182
Retirement of  treasury stock     -           (2,290)     (3,312)  (35,366)    -            40,931      -                    (37)
Shares issued in acquisitions      1,672         344       7,166    -            (424)      39,885      -                 46,971
---------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1997     52,029    $104,058    $155,430  $418,605    ($1,150)          $0     $8,542           $685,485
---------------------------------------------------------------------------------------------------------------------------------
Net income                        -          -            -         99,747     -            -           -                 99,747
Change in unrealized gain
  available-for-sale securities   -          -            -         -          -            -          (2,258)            (2,258)
                                                                                                                          ------
Comprehensive income                                                                                                      97,489
Dividends                         -                       -        (58,195)    -            -           -                (58,195)
Stock issued:
  Benefit plans                      255         511       4,570    -          -            -           -                  5,081
  KSOP                                20          40         637    -          -            -           -                    677
  Dividend reinvestment              144         288       4,840    -          -            -           -                  5,128
Deferred KSOP benefit expense     -          -            -         -             597       -           -                    597
Acquisition of treasury stock     (2,014)    -            -         -          -           (74,597)     -                (74,597)
Retirement of  treasury stock     -           (2,000)     (3,127)  (35,284)    -            40,411      -               -
---------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1998     50,434    $102,897    $162,350  $424,873      ($553)    ($34,186)    $6,284           $661,665
---------------------------------------------------------------------------------------------------------------------------------
Net income                        -          -            -         37,076     -            -           -                 37,076
Change in unrealized loss on
  available-for-sale securities   -          -            -         -          -            -         (22,571)           (22,571)
                                                                                                                          ------
Comprehensive income                                                                                                      14,505
Dividends                         -                       -        (56,433)    -            -           -                (56,433)
Stock issued:
  Benefit plans                      564       1,127      11,128    -          -            -           -                 12,255
  KSOP                                51         102       1,316    -          -            -           -                  1,418
  Dividend reinvestment              168         336       4,633    -          -            -           -                  4,969
Deferred KSOP benefit expense     -          -            -         -             346       -           -                    346
Acquisition of treasury stock     (2,486)    -            -         -          -           (88,701)     -                (88,701)
Retirement of  treasury stock     -           (7,000)    (11,488) (104,398)    -           122,887      -                      1
---------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1999     48,731     $97,462    $167,939  $301,118      ($207)    $ -         ($16,287)          $550,025
---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.

</TABLE>

                                       31

<PAGE>
<TABLE>
<CAPTION>

Consolidated Statements of Cash Flows

                                                                  Year Ended December 31,
-------------------------------------------------------------------------------------------------
(in thousands)                                              1999           1998          1997
-------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S>                                                         <C>           <C>           <C>
Net income                                                  $37,076       $99,747       $87,917
Adjustments to reconcile net income to net cash
provided by operating activities:

 Provision for credit losses                                 23,376        17,150        15,316
 Provision for depreciation and amortization                 22,647        21,653        18,062
 School districts' settlement accrual                        25,735         -----         -----
 Deferred income taxes                                      (18,919)        4,770        14,537
 Sale of loans held for resale                              296,901       244,103       203,887
 Origination of loans held for resale                      (330,301)     (285,974)     (240,325)
 (Increase) decrease in interest receivable                   2,559         4,437        (4,459)
 Increase (decrease) in interest payable                       (899)          125          (567)
 Other                                                        4,950       (31,669)       20,660
-------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                    63,125        74,342       115,028
-------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:

Net cash received in bank acquisitions                        -----         -----        35,646
Net (increase) decrease in interest-bearing deposits          5,101        (4,050)      (25,363)
Available for sale securities:
 Sales                                                       70,884       224,089       176,606
 Maturities                                               1,059,385     1,174,685       855,464
 Purchases                                               (1,103,709)   (1,423,334)     (891,694)
Held to maturity securities:
 Maturities                                                 132,410       177,096        91,370
 Purchases                                                  (61,342)     (308,589)     (192,900)
Net (increase) decrease in loans                            (44,688)      238,686      (343,350)
Proceeds from sales of loans                                 26,947        12,372       302,840
Purchases of loans                                           (5,378)      (12,666)      (11,947)
Purchases of bank-owned life insurance                      (25,000)      (50,230)        -----
Purchases of premises and equipment                         (10,738)      (24,366)      (23,641)
Other                                                           (29)      (10,959)       (6,404)
-------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES          43,843       ( 7,266)      (33,373)
-------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:

Net decrease in deposits                                   (271,384)       (1,447)      (99,242)
Net increase (decrease) in short-term borrowings             (8,915)      (50,845)       27,926
Proceeds from FHLB borrowings                               438,190       273,000       242,313
Repayments of FHLB borrowings                              (136,444)      (94,122)     (253,418)
Issuance of long-term debt                                    -----        30,000       100,000
Repayment of long-term debt                                    (319)       (1,554)         (780)
Acquisition of treasury stock                               (88,701)      (74,597)      (72,586)
Cash dividends                                              (56,433)      (58,195)      (55,964)
Other                                                        18,989        11,483        10,147
-------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES        (105,017)       33,723     (101,604)
-------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS                1,951       100,799      (19,949)

Cash and cash equivalents at beginning of year              332,322       231,523      251,472
-------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                   $334,273      $332,322     $231,523
-------------------------------------------------------------------------------------------------
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

</TABLE>

                                       32

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summarized Accounting Policies

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

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

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

Keystone's  nonbanking   subsidiaries  perform  specialized  services  including
mortgage banking, discount brokerage services,  investment advisor services, and
reinsurance.

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

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

Principles of  Consolidation:   The  consolidated financial  statements  include
the accounts of: Keystone Financial,  Inc., the parent company; its wholly-owned
banking  subsidiary,  Keystone  Financial  Bank,  N.A.,  and  its  subsidiaries,
Keystone  Financial  Mortgage  Real  Estate  Investment  Trust,  Inc.,  Keystone
Brokerage,  Inc., Keystone Financial Mortgage Corporation,  and other nonbanking
subsidiaries of Keystone consisting of Keystone Financial  Mid-Atlantic  Funding
Corp., Keystone Financial Unlimited,  Inc., Keystone Investment Services,  Inc.,
Keystone Life  Insurance  Company,  Martindale  Andres & Co.,  MMC&P  Retirement
Benefit Services, Inc. and Keystone Financial Community Development Corporation.
All significant intercompany accounts have been eliminated in consolidation.

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

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

                                       33

<PAGE>

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

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

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

Mortgage  Servicing Rights: An asset is recognized for mortgage servicing rights
acquired through purchase or origination.  Amounts  capitalized are amortized in
proportion  to, and over the period  of,  estimated  net  servicing  income.  If
mortgage loans are sold or securitized with servicing  retained,  the total cost
of the mortgage  loans is allocated to the loans and the servicing  rights based
on  their  relative  fair  values.  Keystone  performs  a  periodic  review  for
impairment in the fair value of recorded  mortgage  servicing  rights.  Mortgage
servicing  rights  totaled  $9,794,000 at December 31, 1999,  and  $7,509,000 at
December 31, 1998.  Related  amortization  totaled  $1,304,000,  $1,223,000  and
$492,000 for 1999, 1998, and 1997, respectively.

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

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

Impaired  Loans:  Impaired  loans  are  defined  as those  loans for which it is
probable that contractual  amounts due will not be received.  Impaired loans are
reported  at the present  value of  expected  future cash flows using the loan's
effective interest rate or, as a practical  expedient,  at the loan's observable
market  price or the  fair  value of the  collateral  if the loan is  collateral
dependent. The determination of impairment requires judgment 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.

                                       34

<PAGE>

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  predilection  for
statistically valid historical  analysis.  Commercial loans,  including impaired
loans, are charged-off  when they are deemed to be substantially  uncollectable.
Consumer loans are charged-off when they reach 120 days past due unless they are
in the process of collection and/or adequately collaterialized.

Direct Lease Financing:  Automobile leases are accounted for as direct financing
leases and 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 Loan Losses: The allowance for loan losses is established  through
provisions charged against income.  Loans deemed to be uncollectable are charged
against  the  allowance  and  recoveries  of  previously  charged-off  loans are
credited to the allowance.

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

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

While  Keystone's  allowance  methodology  strives to reflect all risk  factors,
there  continues to be a certain  element of risk arising in part from,  but not
limited  to,   potential  for  estimation  or  judgmental   errors,   charge-off
volatility, rapid declines in the credit quality of assets arising from such

                                       35

<PAGE>

factors as fraud,  portfolio  management  risks,  or sudden economic or industry
shifts.  Unallocated  amounts of the allowance  provide coverage for such risks.
The level of total  allowance  is  evaluated  based on the facts known about the
individual components and certain asset quality coverage ratios.

Financial Derivatives and other Hedging Activity:

Interest  rate swap,  cap and floor  contracts  are  utilized to hedge  specific
credit,  funding or servicing activities,  and the differential of interest paid
or received is reflected  in the income or expense of the hedged item.  The fair
values of these  contracts  have been  appropriately  disclosed in a footnote to
these  financial  statements  and  have  not been  recognized  in the  financial
statements.

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

In June of 1998, the Financial  Accounting Standards Board issued  Statement No.
133, "Accounting  for Derivative Instruments  and  Hedging   Activities".   This
statement  provides  new accounting  treatment  for  derivative transactions and
hedging  activities.  FASB Statement No. 137 amended  Statement No. 133 to delay
the effective date until fiscal years beginning after June 15, 2000.  Thus,  the
standard will be effective for Keystone on January 1, 2001.   Management has not
yet determined what effect this statement will have on Keystone's financial con-
dition or results of operations.

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

Intangible Assets:  Intangible assets, consisting primarily of goodwill and core
deposit  intangibles,   are  stated  at  cost,  less  accumulated  amortization.
Amortization  of goodwill is generally  recognized on the  straight-line  method
over periods ranging from 15-25 years.  Amortization of core deposit intangibles
is  recognized  on an  accelerated  basis,  generally  over a  ten-year  period.
Intangible assets are reviewed  periodically for impairment.  If such impairment
is  indicated,  recoverability  of the  asset  is  assessed  based  on  expected
discounted cash flows.

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

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

Stock Based  Compensation:  Stock  options and shares  issued under the Employee
Stock Purchase Plan are accounted for under Accounting  Principles Board Opinion
(APB) No. 25.  Stock  options are  granted at exercise  prices not less than the
fair  value  of the  common  stock  on the  date of  grant.  Under  APB  25,  no


                                       36

<PAGE>

compensation  expense is recognized related to these plans. The pro forma impact
to net income and  earnings per share that would occur if  compensation  expense
was  recognized  based on the  estimated  fair value of the options and purchase
rights on the date of the grant is  disclosed  in the notes to the  consolidated
financial statements.

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

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

Comprehensive Income: Sources of comprehensive income not included in net income
are  limited to  unrealized gains and losses  on certain investments in debt and
equity securities.

Per Share  Information:  Basic  earnings per share is calculated by dividing net
income by the  weighted  average  number of shares of common  stock  outstanding
during each period.  Diluted  earnings per share is calculated by increasing the
denominator for the assumed conversion of all potentially  dilutive  securities.
Keystone's  dilutive  securities  are  limited to stock  options  granted  under
various incentive plans.

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

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

Segment  Reporting:  Keystone is  organized  around,  and  manages its  business
through,  local market teams,  which are grouped into five  geographic  regions.
These  regions are grouped into one  operating  segment since each region offers
similar products and services through similar distribution channels.

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  $229,558,000,  $240,888,000,  and $233,061,000,  in 1999,
1998,  and 1997,  respectively.  Cash  payments  for income  taxes  approximated
$31,735,000,   $39,830,000,   and   $19,253,000,   for  1999,  1998,  and  1997,
respectively.

                                       37

<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):

--------------------------------------------------------------------------------
                                                        1999
                                                 Available-for-Sale
--------------------------------------------------------------------------------
                                     Amortized        Unrealized         Fair
                                       Cost       Gains       Losses     Value
--------------------------------------------------------------------------------
Negotiable money market investments    $72,543       $ 21       $94     $72,470
U.S. Treasury securities                81,020         63       116      80,967
U.S. Government agency obligations     743,742          8    21,136     722,614
Obligations of states and political
  subdivisions                          62,314        423       725      62,012
--------------------------------------------------------------------------------
Corporate and other securities         138,777        282     3,784     135,275
--------------------------------------------------------------------------------
Total                               $1,098,396       $797   $25,855  $1,073,338
--------------------------------------------------------------------------------

                                                        1999
                                                  Held-to-Maturity
--------------------------------------------------------------------------------
                                     Amortized       Unrealized          Fair
                                       Cost       Gains       Losses    Value
--------------------------------------------------------------------------------
U.S. Government agency obligations   $385,163       $567      $8,185   $377,545
Obligations of states and political
  subdivisions                        189,993      1,908       7,043    184,858
Corporate and other securities         13,045         20         100     12,965
--------------------------------------------------------------------------------
Total                                $588,201     $2,495     $15,328   $575,368
--------------------------------------------------------------------------------

                                       38

<PAGE>

--------------------------------------------------------------------------------
                                                        1998
                                                  Available-for-Sale
--------------------------------------------------------------------------------
                                        Amortized      Unrealized       Fair
                                          Cost       Gains    Losses    Value
--------------------------------------------------------------------------------
Negotiable money market investments      $290,954     $103      $82   $290,975
U.S. Treasury securities                  122,155    1,234        1    123,388
U.S. Government agency obligations        546,452    3,737    1,617    548,572
Obligations of states and political
 subdivisions                              55,991    1,703        2     57,692
Corporate and other securities            104,533    4,712      119    109,126
--------------------------------------------------------------------------------
     Total                             $1,120,085  $11,489   $1,821  $1,129,753
--------------------------------------------------------------------------------

                                                        1998
                                                  Held-to-Maturity
--------------------------------------------------------------------------------
                                      Amortized     Unrealized           Fair
                                        Cost      Gains      Losses      Value
--------------------------------------------------------------------------------
U.S. Government agency obligations    $500,418     $5,936      $135    $506,219
Obligations of states and political
  subdivisions                         146,018      5,333       158     151,193
Corporate and other securities          13,100        422       ---      13,522
--------------------------------------------------------------------------------
     Total                            $659,536    $11,691      $293    $670,934
--------------------------------------------------------------------------------

                                                     1997
                                               Available-for-Sale
--------------------------------------------------------------------------------
                                      Amortized      Unrealized        Fair
                                         Cost     Gains     Losses     Value
--------------------------------------------------------------------------------
Negotiable money market investments   $178,455      $18       $69     $178,404
U.S. Treasury securities               193,099    1,063        42      194,120
U.S. Government agency obligations     502,483    2,363     1,768      503,078
Obligations of states and political     72,487    1,688         4       74,171
   subdivisions
Corporate and other securities         131,735    9,918        26      141,627
--------------------------------------------------------------------------------
Total                               $1,078,259  $15,050    $1,909   $1,091,400
--------------------------------------------------------------------------------

                                                    1997
                                               Held-to-Maturity
--------------------------------------------------------------------------------
                                    Amortized       Unrealized          Fair
                                      Cost        Gains       Losses   Value
--------------------------------------------------------------------------------
U.S. Government agency obligations    $366,238    $4,928    $150      $371,016
Obligations of states and political
  subdivisions                         143,910     4,845       5       148,750
Corporate and other securities          18,240       230      18        18,452
--------------------------------------------------------------------------------
Total                                 $528,388   $10,003    $173      $538,218
--------------------------------------------------------------------------------


                                       39

<PAGE>

Investment  securities  having a carrying value of  $786,005,000 at December 31,
1999,  were pledged to secure public and trust  deposits,  treasury tax and loan
activity,   discount  window  and  FHLB  borrowings,   and  security  repurchase
agreements.

Pre-tax  security  gains and losses  included  in  operating  results  from 1997
through 1999 were as follows (in thousands):

-------------------------------------------------------------------------------
                            1999             1998            1997
-------------------------------------------------------------------------------
Gains                      $1,270          $11,148          $6,847
Losses                     (1,608)            (130)           (776)
-------------------------------------------------------------------------------
      Net                  $ (338)         $11,018          $6,071
-------------------------------------------------------------------------------


                                       40

<PAGE>

The following  tables display at December 31, 1999, the contractual  maturities,
amortized costs, related fair values, and weighted average yield (tax-equivalent
basis) available thereon, of investment securities (in thousands):

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------
                                                   Available-for-Sale
-------------------------------------------------------------------------------------------
                                                                       After One,
                                           Within One Year        But Within Five Years
-------------------------------------------------------------------------------------------
                                       Amortized   Fair           Amortized   Fair
                                         Cost     Value  Yield      Cost     Value  Yield
-------------------------------------------------------------------------------------------
<S>                                    <C>       <C>       <C>     <C>       <C>    <C>
Negotiable money market investments    $ 72,543  $72,470   5.78%   $-        $-          -%
U.S. Treasury securities                 59,717   59,746   5.62      21,303   21,221  6.01
Government agency obligations            12,141   12,102   6.04     314,004  305,852  5.93
Obligations of states
  & political subdivisions                3,477    3,492   7.71      23,667   23,837  7.59
Corporate and other securities            2,814    2,811   6.36       6,446    6,392  6.33
-------------------------------------------------------------------------------------------
Total                                  $150,692 $150,621   5.79%   $365,420 $357,302  6.05%
-------------------------------------------------------------------------------------------
                                              After Five,
                                        But Within Ten Years         After Ten Years
-------------------------------------------------------------------------------------------
                                      Amortized    Fair           Amortized   Fair
                                        Cost      Value  Yield      Cost     Value Yield
-------------------------------------------------------------------------------------------
Government agency obligations          $152,036 $148,705  6.96%    $265,561 $255,955  6.45%
Obligations of states
  & political subdivisions               14,031   14,187  7.99       21,139   20,496  8.24
Corporate and other securities              150      150  7.37      129,367  125,922  7.94
--------------------------------------------------------------------------------------------
                                       $166,217 $163,042  7.05%    $416,067 $402,373  7.01%
--------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>

                                                Held-to-Maturity
----------------------------------------------------------------------------------------------
                                                                          After One,
                                           Within One Year          But Within Five Years
----------------------------------------------------------------------------------------------
                                     Amortized   Fair              Amortized   Fair
                                       Cost     Value    Yield       Cost     Value    Yield
------------------------------------------------------------------------------------------------
<S>                                      <C>      <C>       <C>    <C>      <C>        <C>
Governnment agency obligations          $     7  $    7    8.79%  $166,155  $163,063   6.30%
Obligations of states
  & political subdivisions                5,669   5,706    8.97     10,010    10,257   8.65
Corporate and other securities               -        -       -     12,976    12,896   6.63
------------------------------------------------------------------------------------------------
Total                                   $ 5,676  $5,713    8.97%  $189,141  $186,216   6.45%
------------------------------------------------------------------------------------------------
                                             After Five,
                                        But Within Ten Years               After Ten Years
------------------------------------------------------------------------------------------------
                                        Amortized   Fair           Amortized  Fair
                                          Cost     Value   Yield    Cost      Value    Yield
------------------------------------------------------------------------------------------------
 Government agency obligations         $92,364  $90,329    6.49%  $126,637  $124,146   6.36 %
 Obligations of states                  19,655   19,861    8.43    154,659   149,034   7.90
   & political subdivisions
 Corporate and other securities             69       69    9.00          -         -      -
 -----------------------------------------------------------------------------------------------
 Total                                $112,088  $110,259   6.83%  $281,296  $273,180   7.20 %
 ---------------------------------------------------------------------------------------------
</TABLE>

                                       41

<PAGE>

Loans and Leases

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

--------------------------------------------------------------------------------
                                            1999                  1998
--------------------------------------------------------------------------------
Consumer financings:
 Direct loans                               $939,661              $904,178
 Indirect loans                               86,119               187,818
 Net investment in direct
   lease financing receivables               199,029               235,884
--------------------------------------------------------------------------------
                                           1,224,809             1,327,880
Loans secured by real estate:

 Consumer                                    739,198               754,280
 Commercial                                1,640,301             1,530,449
--------------------------------------------------------------------------------
                                           2,379,499             2,284,729

Commercial                                   671,881               679,412
Floor plan financing                         183,357               167,762
--------------------------------------------------------------------------------
Total                                     $4,459,546            $4,459,783
--------------------------------------------------------------------------------

At December  31,  1999,  substantially  all of the  consumer  real estate  loans
outstanding  were  pledged  under  blanket   collateral   agreements  to  secure
outstanding Federal Home Loan Bank borrowings. No industry concentrations exist.

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

--------------------------------------------------------------------------------
                                              1999          1998       1997
--------------------------------------------------------------------------------
Balance at January 1                          $60,274      $65,091     $56,256
Recoveries on loans previously charged off      2,311        2,968       2,485
Loans charged off                             (25,986)     (24,058)    (17,277)
--------------------------------------------------------------------------------
Net loans charged off                         (23,675)     (21,090)    (14,792)
Provision charged to operations                23,376       17,150      15,316
Other                                           -----         (877)      8,311
--------------------------------------------------------------------------------
Balance at December 31                        $59,975      $60,274     $65,091
--------------------------------------------------------------------------------


                                       42

<PAGE>

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

--------------------------------------------------------------------------------
                                           1999        1998          1997
--------------------------------------------------------------------------------
Nonaccrual                               $27,183      $24,675      $20,520
Restructured                                 841          264          489
--------------------------------------------------------------------------------
Total                                    $28,024      $24,939      $21,009
--------------------------------------------------------------------------------
Interest computed at original terms       $2,817       $2,385       $2,144
Interest recognized                        1,326          361          473
--------------------------------------------------------------------------------

At December 31, 1999,  there were no significant  commitments to lend additional
funds on these loans.

The  following  is a summary  presentation  of loans that are  considered  to be
impaired:

--------------------------------------------------------------------------------
At December 31                                    1999          1998     1997
--------------------------------------------------------------------------------
  Recorded investment in impaired loans             $22,849    $20,647  $16,730
  Impaired loans for which an allowance exists       11,236      5,091   12,805
  Amount of allowance specifically
    allocated to impaired loans                       5,254      3,131    1,540
--------------------------------------------------------------------------------
For the years ended December 31                   1999          1998     1997
--------------------------------------------------------------------------------
  Average recorded investment in impaired loans     $21,748    $18,689  $17,015
--------------------------------------------------------------------------------
Certain directors and executive  officers of Keystone and its subsidiaries,  and
their associates, were indebted to the bank during 1999. Such loans were made in
the ordinary  course of business and on customary  terms.  Loan activity  during
1999 with these related parties was as follows (in thousands):

--------------------------------------------------------------------------------
 Beginning Balance        Additions        Repayments       Ending Balance
--------------------------------------------------------------------------------
      $78,415             $128,970          $111,104            $96,281

Financial Derivatives, Hedging Activity, and Commitments

Keystone  engages in activities  associated  with the use of  off-balance  sheet
derivative financial instruments (derivatives) and hedges to manage its exposure
to changes in interest rates.  Activities have included  interest rate swap, cap
and  floor  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,
as well as, loan  commitments and standby letters of credit made in the ordinary
course of its banking business.

                                       43

<PAGE>

In managing net interest  income,  Keystone  uses  interest  rate swap,  cap and
floors to offset the  difference,  or  mismatch,  in  repricing  indices of core
banking  assets and related  funding.  The major source of interest rate risk is
the  difference  in the  repricing  characteristics  of core banking  assets and
liabilities - loans and deposits. This difference, or mismatch, is a risk to net
interest income.  In managing net interest  income,  Keystone uses interest rate
swaps and caps to offset the  general  liability  sensitivity  of the core bank.
Additionally,  the  corporation  uses  interest rate swaps to offset basis risk,
including the specific exposure to changes in the 91-day Treasury Bill.

A second source of interest rate risk is the  sensitivity of the  organization's
mortgage  servicing rights to prepayments.  The mortgage borrower has the option
to prepay the mortgage loan at any time.  When mortgage  interest rates decline,
borrowers have a greater incentive to prepay mortgage loans through refinancing.
To mitigate the risk of declining long-term interest rates, higher-than-expected
mortgage  prepayments,  and the potential  impairment  of the servicing  rights,
Keystone has purchased interest rate floors.

The  following  table  presents the notional  amount and fair value of financial
hedging instruments at December 31 (in thousands):

--------------------------------------------------------------------------------
                                                    1999               1998
--------------------------------------------------------------------------------
                                               Notional   Fair  Notional  Fair
                                                Amount    Value  Amount   Value
--------------------------------------------------------------------------------
Interest Rate Risk Management Instruments:
   Pay-fixed/receive-variable swaps             $150,000   $437     $---  $---
   Basis Swaps                                   250,000    280  250,000  (229)
   Interest Rate Cap                              60,000    109      ---   ---
Mortgage Banking Risk Management Instruments:
   Interest Rate Floor                           100,000     49      ---   ---
--------------------------------------------------------------------------------
Total Risk Management Instruments               $560,000   $875 $250,000  (229)
--------------------------------------------------------------------------------

Another form of interest rate risk managed through  specific hedging activity at
December 31, 1999, related to outstanding  forward mortgage  commitments and put
options  related  to the  mortgage  banking  pipeline.  Under the terms of these
commitments,  Keystone  agreed to deliver a specified  volume of mortgage  loans
with  a  specified  portfolio  yield,  and  received  a  pre-established   price
commitment  pursuant to timely  delivery of the mortgage  loans.  The purpose of
these  arrangements  is to manage the effect of interest  rate  changes on these
loans between the date of the original loan  commitment and the date of delivery
for sale into the secondary market.  At December 31, 1999,  Keystone had entered
into commitments to deliver approximately $56,118,000 of mortgage loans for sale
into the secondary  market.  The fair value of these commitments at December 31,
1999, was $704,000 and was considered in the lower of cost or market  evaluation
of loans held for sale. The delivery dates for these  commitments are short-term
in nature and will expire at various dates in the first half of 2000.

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

                                       44

<PAGE>

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

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

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

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

--------------------------------------------------------------------------------
                                                   1999             1998
--------------------------------------------------------------------------------
Loan commitments                                $1,023,712       $1,091,657
--------------------------------------------------------------------------------
Standby letters of credit                           69,939           73,843
--------------------------------------------------------------------------------

Premises and Equipment

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

--------------------------------------------------------------------------------
                                                       1999           1998
--------------------------------------------------------------------------------
Land                                                  $12,548        $12,562
Buildings                                              98,849         99,702
Equipment                                             116,755        120,564
Leasehold improvements                                 18,475         15,544
--------------------------------------------------------------------------------
                                                      246,627        248,372
Accumulated depreciation and amortization            (127,865)      (124,292)
--------------------------------------------------------------------------------
Total                                                $118,762       $124,080
--------------------------------------------------------------------------------

Depreciation and amortization expense related to premises and equipment amounted
to $16,537,000 in 1999, $16,056,000 in 1998, and $14,554,000 in 1997.

                                       45

<PAGE>

Keystone and its  subsidiaries  lease  various  equipment  and  buildings  under
operating lease agreements. In 1999, 1998, and 1997, total rent expense amounted
to $8,424,000,  $8,203,000, and $7,377,000,  respectively. Future annual minimum
lease payments do not significantly exceed historic levels.

Deposits

At December 31, 1999, time deposits  individually in excess of $100,000  totaled
$427,342,000.

Federal Funds Purchased and Security Repurchase Agreements

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):

                                                   1999       1998      1997
-------------------------------------------------------------------------------
Balance at December 31                            $316,130  $363,739  $399,730
-------------------------------------------------------------------------------
Weighted average interest rate at year end           5.17%     4.67%     4.75%
Maximum amount outstanding at any month end       $354,266  $395,635  $405,268
Average amount outstanding during the year        $319,776  $357,090  $367,102
Weighted average interest rate during the year       4.45%     4.62%     4.78%
-------------------------------------------------------------------------------

Federal Home Loan Bank Borrowings

Keystone  Financial  Bank, N.A. is a member of the Federal Home Loan Bank (FHLB)
of  Pittsburgh.  As such,  the bank 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, 1999,  Keystone  Financial  Bank,  N.A.  could
borrow  an  additional   $654,062,000  based  on  qualifying  collateral.   Such
additional borrowing would require that the bank increase its investment in FHLB
stock by approximately $7,214,400.  Outstanding borrowings from the Federal Home
Loan Bank are summarized as follows at December 31(in thousands):

----------------------------------------------------------
                                 1999          1998
----------------------------------------------------------
Due 1999, 4.75% to 6.51%              $-----     $ 64,268
Due 2000, 4.77% to 6.51%             143,331       80,831
Due 2001, 4.73% to 6.80%              71,000       67,000
Due 2002, 5.25% to 6.10%              80,000       60,550
Due 2003, 5.42% to 7.23%              88,636        7,768
Due 2004, 5.40% to 6.62%             130,000        -----
Due after 2004, 1.00% to 7.20%       215,809      146,610
----------------------------------------------------------
                                    $728,776     $427,027
----------------------------------------------------------


                                       46

<PAGE>

Of the December 31, 1999 outstanding balance, $525,300,000 was either adjustable
or subject to conversion. Of this amount, $35,000,000 was adjustable with LIBOR.
The remaining $490,300,000 are convertible select advances, which are subject to
conversion  to  adjustable  rates at the  option  of the FHLB at  various  dates
through  2004.  In the event the FHLB elects to convert the  convertible  select
borrowings to adjustable rates, Keystone has the option to prepay the borrowings
without penalty.

Long-Term Debt

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

----------------------------------------------------------------
                                            1999          1998
----------------------------------------------------------------
Senior medium-term notes:
   Interest at 7.3%, mature 2004          $99,848       $99,812
   Interest at 6.5%, mature 2008           29,889        29,876
Other                                         183           551
----------------------------------------------------------------
Total                                    $129,920      $130,239
----------------------------------------------------------------

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

Contingencies

During  1999,  Keystone  entered  into an  agreement  in  principle  to settle a
class-action  lawsuit  filed in 1998  against its former  subsidiary,  Mid-State
Bank.  Under  the  terms  of  the  agreement,  Keystone  will  pay  a  total  of
approximately $30 million to the members of the class-action suit by a tentative
date of March 16, 2000.  Keystone  recorded an additional loss of $21 million in
1999,  which  represented  the  anticipated  payment in the event the additional
plaintiffs,  that had excluded  themselves from the class-action suit, agreed to
settle on terms  proportionate  to those of the class-action  settlement.  Those
additional plaintiffs  subsequently did agree to proportionate terms. Of the $21
million Keystone paid to those plaintiffs,  approximately $17.9 million was paid
out by December 31,  1999,  and the balance was paid out in January,  2000.  The
payouts totaling $51 million were reduced for probable  insurance  recoveries to
result in net expense of $43.7 million  recorded in 1999. The agreement  reached
with the members of the class-action  suit was approved by the court, subject to
appeal. There is continuing  litigation by the plaintiffs against other parties,
in which Keystone may be required to participate, however, Keystone believes the
settlement resolves its financial exposure related to this matter.

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) had been  established in
connection with the adoption of a Shareholders' Rights Plan (Rights Plan). Under
the Rights Plan, 200,000 shares of Preferred Stock were reserved for issuance on
the exercise of rights attached to the outstanding common stock. The rights were

                                       47

<PAGE>

exercisable only if a person or group acquired or announced a tender or exchange
offer to acquired 20% or more of Keystone's  common stock. In the event a person
or group  acquired a 20%  position,  each right not owned by the person or group
entitled  its holder to purchase at the  exercise  price of $70.00,  a number of
shares of common stock, 5.333 one-thousandths (0.005333) of a share of Preferred
Stock,  or other  securities  or assets  of  Keystone  or  common  shares of the
acquiring  company having a market value equal to twice the exercise  price.  At
any time after a person or group acquired 20% or more (but less than 50%) of the
outstanding  common stock, the Board of Directors were entitled to 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 was entitled to redeem the rights at
any time  before a 20%  position  had been  acquired.  These  rights  expired on
February 8, 2000.

Stock-Based Compensation

Keystone provides eligible employees and directors with various stock option and
stock purchasing plans which are more fully described below.

Keystone has an employee "Stock  Incentive  Plan" and a "Nonemployee  Directors'
Stock Option  Plan."  Under the terms of these plans,  Keystone has reserved for
issuance a total of 2,875,000  shares of common stock for  qualifying  employees
and nonemployee  directors,  of which approximately  1,747,000 are available for
future grants.  The plans provide for the issuance of nonqualified  options and,
under the employee  plan,  incentive  stock  options.  Options are granted at an
exercise  price not less than the fair market value of Keystone  common stock on
the date of grant,  vest in two years, and expire  approximately ten years after
the grant date.  Keystone also has outstanding  options  pursuant to predecessor
plans and plans of acquired banks.

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

------------------------------------------------------
                        Weighted Average
                         Exercise Price  Common Shares
------------------------------------------------------
January 1, 1997             $18.62         2,003,160
------------------------------------------------------
  Granted                    25.40           307,339
  Exercised                  16.30          (443,815)
  Terminated                 23.16           (21,926)
------------------------------------------------------
December 31, 1997           $19.61         1,844,758
------------------------------------------------------
  Granted                    40.03           244,651
  Exercised                  15.66          (221,845)
  Terminated                 33.23           (27,552)
------------------------------------------------------
December 31, 1998           $22.62         1,840,012
------------------------------------------------------
  Granted                    37.99           866,654
  Exercised                  18.50          (353,526)
  Terminated                 36.82           (49,499)
------------------------------------------------------
December 31, 1999           $28.71         2,303,641
------------------------------------------------------


                                       48

<PAGE>

The following table summarizes  information  about stock options  outstanding at
December 31, 1999:

---------------------------------------------------------- ---------------------
                          Options Outstanding               Options Exercisable
---------------------------------------------------------- ---------------------
                              Weighted-Average  Weighted-              Weighted-
     Range of                   Remaining       Average                Average
     Exercise       Number     Contractual     Exercisable   Number    Exercise
     Prices       Outstanding  Life (years)     Price      Exercisable Price
---------------------------------------------------------- ---------------------
   $7.26 - $12.07     122,706       1.64         $8.53       122,706      $8.53
  $13.89 - $18.03      97,550       2.09        $15.75        94,176     $15.71
  $19.58 - $24.00     813,836       4.29        $21.59       808,548     $21.60
  $24.75 - $30.31     224,922       7.01        $25.41       224,912     $25.41
  $32.91 - $36.00      76,634       8.63        $35.27         9,634     $35.75
  $36.41 - $41.06     967,993       8.84        $38.80         4,073     $39.60
---------------------------------------------------------- ---------------------
   $7.26 - $41.06   2,303,641       6.37        $28.71     1,264,049     $20.74
---------------------------------------------------------- ---------------------

Options  exercisable  at the end of 1998 and 1997 were  1,360,000 and 1,193,000,
respectively.

Under the "Employee  Stock Purchase  Plan",  eligible  employees are provided an
opportunity to purchase  Keystone  common stock at a discount from market price.
The Plan  provides for the purchase of stock  through  payroll  deductions  at a
price which is the lesser of 85% of the fair market value of the common stock as
of the first or last day of the annual  purchase  period.  The  purchase  period
commences on July 1 and ends on June 30. Keystone has reserved 750,000 shares of
common stock, of which 355,000 remain available for future purchases. The amount
of common  shares  issued  under this  program in 1999,  1998,  and 1997 were as
follows:

--------------------------------------------------------------------------------
                                       1999             1998             1997
--------------------------------------------------------------------------------
Price per Share                       $25.50           $26.24           $19.20
Shares Issued                        103,712           99,980           94,195
--------------------------------------------------------------------------------

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.

-------------------------------------------------------------------------
                                        1999          1998        1997
-------------------------------------------------------------------------
Net income (in thousands):
   As reported                         $37,076       $99,747     $87,917
   Pro forma                            33,198        97,773      86,457
-------------------------------------------------------------------------
Diluted earnings per share:
   As reported                           $0.75         $1.92       $1.68
   Pro forma                              0.67          1.88        1.65
-------------------------------------------------------------------------


                                       49

<PAGE>

Information  regarding  the  weighted-average  grant-date  fair values for stock
options and purchase rights granted in 1999, 1998, and 1997 was as follows:

--------------------------------------------------------------------------------
                                                  Assumptions
                                 -----------------------------------------------
                     Grant Date
                     Fair Value
                     (Per Option   Dividend       Expected   Interest
                       /Share)      Yield        Volatility    Rate     Life
--------------------------------------------------------------------------------
Stock option plans:

       1999            $7.90         3.1%           23%        4.68%     7yrs
       1998             7.95         2.8            15         5.63      7yrs
       1997             4.20         4.2            15         6.37      7yrs

Employee stock purchase plan:

       1999            $8.69         3.9%           23%        5.06%     1yr
       1998             7.62         3.5            15         5.63      1yr
       1997             6.30         4.5            15         5.63      1yr
--------------------------------------------------------------------------------

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

Keystone also has a Management Stock Ownership  Program (the "Program") which is
intended, among other things, to promote alignment of management and shareholder
interests and to encourage management to focus on value creation.  To accomplish
these purposes,  the Program establishes stock ownership goals for executive and
senior  officers of the Corporation to be achieved over a five-year  period.  In
order to assist the officers in attaining their stock ownership goals, a related
plan  provides for  nonrecourse,  noninterest-bearing  loans,  in amounts not to
exceed 50% of the officer's  stock ownership goal, to be used to purchase shares
of  Keystone  common  stock at fair  market  value.  The  loans are  secured  by
collateral  having an initial value of 120% of the loan amount and consisting of
the shares of Keystone stock purchased with the loan plus  additional  shares of
stock or other  acceptable  collateral  owned by the executive.  At December 31,
1999 and 1998, the amount executives  participating in the Program owed Keystone
for financed purchases totaled $5,014,000 and $2,064,000, 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 1.4
million shares of common stock for this Plan, and  approximately  402,000 shares
remain  unissued.  The following  number of shares of Keystone common stock were
purchased  pursuant to this plan:  168,000 in 1999, 144,000 in 1998, and 130,000
in 1997.

                                       50

<PAGE>

Employee Benefit Plans

Keystone  provides a  noncontributory  defined  benefit  pension  plan  covering
substantially  all  full-time  employees.  Plan  benefits  are based on years of
service and qualifying compensation during the final years of employment.

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

--------------------------------------------------------------------------------
                                                         1999        1998
--------------------------------------------------------------------------------
Projected benefit obligation, beginning of year         $91,370    $84,890
Service cost                                              3,302      3,268
Interest cost                                             6,155      5,780
Benefits paid                                            (4,320)    (4,028)
Change in assumptions                                   (10,350)     1,309
Change due to curtailment                                (3,227)     -----
Amendments                                                -----       (566)
Experience loss                                           5,095        717
--------------------------------------------------------------------------------
Projected benefit obligation, end of year               $88,025    $91,370
--------------------------------------------------------------------------------
Fair value of plan assets, beginning of year            $99,445   $106,239
Actual return on assets                                  16,086     (2,766)
Benefits paid                                            (4,320)    (4,028)
--------------------------------------------------------------------------------
Fair value of plan assets, end of year                 $111,211    $99,445
--------------------------------------------------------------------------------
Funded status, end of year                              $23,186     $8,075
Unrecognized net assets at transition                    (1,882)    (2,510)
Unrecognized net gain                                   (13,555)      (111)
Unrecognized prior service cost                          (1,313)    (1,702)
--------------------------------------------------------------------------------
Prepaid benefit expense, end of year                     $6,436     $3,752
--------------------------------------------------------------------------------
                                                  1999       1998       1997
--------------------------------------------------------------------------------
Service cost benefits earned during the period   $3,302     $3,268     $2,907
Interest cost on projected benefit obligation     6,155      5,780      5,458
Expected return on plan assets                   (7,898)    (8,116)    (7,120)
Net amortization:
  Net transition asset                             (627)      (627)      (725)
  Prior service cost                               (162)      (181)      (137)
--------------------------------------------------------------------------------
Pension expense                                    $770       $124       $383
--------------------------------------------------------------------------------

                                       51

<PAGE>

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

--------------------------------------------------------------------------------
                                                         1999    1998    1997
--------------------------------------------------------------------------------
Rate of increase in future compensation levels           5.00%    5.00%  5.50%
Expected long-term rate of return on plan assets         8.00     8.00   8.50
Weighted average discount rate                           7.25     6.75   7.00
-------------------------------------------------------------------------------

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

A 401(k) deferred savings plan covers eligible  employees of Keystone.  The plan
provides  for a  matching  employer  contribution  equal to 60% of the  employee
contribution.  While  employees can contribute up to 15% of their  compensation,
the  employer  match  is  limited  to  5%  of  employee  compensation.  Matching
contributions  are paid entirely in Keystone stock.  Expense  recognized for the
employer   contributions  was  $1,936,000  in  1999,  $1,984,000  in  1998,  and
$1,580,000 in 1997.

Special Charges

During  1999,  Keystone  incurred  special  charges of $26.9  million  that were
primarily  associated  with the  unification  of its seven  former banks under a
single  charter.  These charges  consisted of employee and director  termination
costs, asset disposition  losses,  professional  fees, and contract  termination
costs. Substantially all accrued amounts had been paid by December 31, 1999.

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 at December 31 were as follows (in thousands):

-------------------------------------------------------------
                                      December 31,
-------------------------------------------------------------
                                    1999             1998
-------------------------------------------------------------
Deferred tax assets:
  Allowance for credit losses      $19,508         $19,598
  Deferred liabilities              13,863           1,850
  Compensation accruals              3,955           4,259
  Unrealized securities losses       8,770          ------
Deferred tax liabilities:
  Lease financing activities       (39,682)        (47,742)
  Unrealized securities gains         ----          (3,383)
  Premises and equipment            (3,935)         (3,088)
  Intangible assets                 (5,033)         (4,668)
  Other                             (3,229)         (2,961)
-------------------------------------------------------------
 Net deferred tax liability        ($5,783)       ($36,135)
-------------------------------------------------------------

                                       52

<PAGE>

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

-------------------------------------------------------------
                         1999        1998       1997
-------------------------------------------------------------
Deferred provision    $(18,199)      $4,770   $14,537
Current provision       29,791       40,922    24,416
-------------------------------------------------------------
Total                  $11,592      $45,692   $38,953
-------------------------------------------------------------

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

--------------------------------------------------------------------------------
                                                     1999      1998       1997
--------------------------------------------------------------------------------
Provision on pre-tax income at  statutory rates    $17,034   $50,904   $44,405
Tax exempt interest income                          (5,535)   (5,448)   (5,089)
Other                                                   93       236      (363)
--------------------------------------------------------------------------------
Total                                              $11,592   $45,692   $38,953
--------------------------------------------------------------------------------
Effective Rate                                       23.8%     31.4%     30.7%
--------------------------------------------------------------------------------

Income taxes attributable to investment  security gains (losses) were $(118,000)
in 1999, $3,856,000 in 1998, and $2,125,000 in 1997.

Comprehensive Income

Sources of  comprehensive  income  not  included  in net  income are  limited to
unrealized  gains  and  losses  on  certain   investments  in  debt  and  equity
securities. The disclosure of comprehensive income is as follows (in thousands):

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------
                                                                Year Ended December 31
---------------------------------------------------------------------------------------------------------------
                                                1999                    1998                     1997
---------------------------------------------------------------------------------------------------------------
                                       Before Tax  Net of Tax  Before Tax  Net of Tax   Before Tax  Net of Tax
---------------------------------------------------------------------------------------------------------------
<S>                                    <C>           <C>        <C>         <C>         <C>           <C>
Net Income                                           $37,076                $99,747                   $87,917
Unrealized securities gains (losses)
arising during the period                (35,063)    (22,791)    7,544        4,904       12,757        8,292
Less: Reclassification adjustment for
securities gains (losses) included in
net income                                  (338)       (220)   11,018        7,162        6,071        3,946
---------------------------------------------------------------------------------------------------------------
                                         (34,725)    (22,571)   (3,474)      (2,258)       6,686        4,346
---------------------------------------------------------------------------------------------------------------
Comprehensive Income                                 $14,505                $97,489                   $92,263
---------------------------------------------------------------------------------------------------------------
</TABLE>

                                       53

<PAGE>

Earnings Per Share

The following is a  reconciliation  of the  numerators and  denominators  of the
basic and diluted  earnings per share  computations  (in  thousands,  except per
share data):

--------------------------------------------------------------------------------
                                            1999           1998          1997
--------------------------------------------------------------------------------
Numerator - Net Income                     $37,076         $99,747      $87,917
Denominators:
  Average basic shares outstanding          48,856          51,446       51,693
  Average dilutive option effect               330             596          627
--------------------------------------------------------------------------------
  Average dilutive shares outstanding       49,186          52,042       52,320
--------------------------------------------------------------------------------
EPS:
  Basic                                      $0.76           $1.94        $1.70
  Diluted                                    $0.75           $1.92        $1.68
--------------------------------------------------------------------------------

Segment Reporting

Keystone is  organized  around,  and manages its business  through  twenty local
market teams in the areas in which it  operates.  These market teams are grouped
into five geographic regions,  each of which is managed by a regional president.
These regions are aggregated into one operating segment since each region offers
similar products and services through similar distribution channels. No customer
of Keystone  individually  represents 10% or more of  consolidated  revenues and
revenues with customers of foreign countries are minimal.

Keystone  has three  major  product  and  service  lines that are offered to its
customers  through the local market  teams.  These lines  consist of  Commercial
Banking,  Retail Banking,  and Wealth  Development.  The Commercial Banking line
consists of numerous products and services provided primarily to a diverse group
of emerging and mid-size  businesses.  Products and services include secured and
unsecured loans,  Small Business  Administration  loans,  commercial  mortgages,
lines of credit, deposits and cash management services.

The Retail  Banking line  consists of various  products and services  offered to
consumers.   Products  include   residential   mortgages,   home  equity  loans,
installment  loans,  lines of credit and  automobile  loans and leases.  Deposit
offerings include interest and free checking,  fixed and variable-rate  CDs, and
indexed money market accounts. This product line also offers credit reinsurance,
electronic banking, and the sale of mortgages in the secondary market, both with
and without servicing retained.

Wealth  Development  products and services include  administration of trusts and
estates, discount brokerage, full-service investment management,  administration
of retirement and other employee  benefit plans, as well as financial  planning.
Customers include individuals and businesses.

Revenue for each product line is provided below for 1999. It is not  practicable
to  provide  product  line  information  for  periods  prior  to  1999  as  such
information was not available.

                                       54

<PAGE>

--------------------------------------------------------------------------------
                                     Banking Division               Wealth
 (in thousands)                  Commercial        Retail         Development
--------------------------------------------------------------------------------
 Net interest income(1)           $ 96,788        $128,367        $   ----
 Noninterest income                 12,129          49,203          34,480
--------------------------------------------------------------------------------
    Total revenue                 $108,917        $177,570        $ 34,480
--------------------------------------------------------------------------------
(1) Net interest income includes a fully taxable  equivalent  adjustment of $8.7
million.

Various  estimates and allocation  methodologies  are used in the preparation of
product line financial  information.  The net interest income  contribution  for
each product line includes a funding credit or expense allocated through the use
of a funds transfer pricing (FTP) system. The FTP system matches the duration of
the  funding  related to each  product  line to the  duration  of the assets and
liabilities allocated to the product line.

Regulatory Capital Requirements

The following table provides Keystone's consolidated risk-based capital position
at the end of 1999 and 1998 and a comparison to the various  regulatory  capital
requirements (in thousands):

--------------------------------------------------------------------------------
                                                               Well-
                                  1999             1998     Capitalized  Minimum
                            Amount    Ratio   Amount   Ratio   Ratio      Ratio
--------------------------------------------------------------------------------
Total capital

 (to risk-weighted assets) $570,742   11.78%  $653,664  13.84%    10%       8%
Tier 1 capital

 (to risk-weighted assets)  510,767   10.54%   594,623  12.59%     6%       4%
Tier 1 capital (to average
  assets                    510,767    7.48%   594,623   8.66%     5%       4%
--------------------------------------------------------------------------------

At December 31, 1999, Keystone Financial Bank, N.A. maintained capital levels at
or above the "well-capitalized"  level for each of the three ratios and had been
categorized as  "well-capitalized"  by its primary  regulator at its most recent
examination.

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.

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, 1999,  Keystone's  bank  subsidiary  maintained
average reserve balances of approximately $70,849,000.

Dividends  that may be paid to  Keystone by its  subsidiary  bank are limited by
state and  federal  regulations.  The related  amount  available  for  dividends
aggregated  $51,283,000 at December 31, 1999.  Federal Reserve  regulations also
limit the subsidiary bank as to the amount it may loan its affiliates, including
Keystone.  At December  31,  1999,  the maximum  amount  available  for loans to
affiliates approximated 10% of consolidated net assets.

                                       55

<PAGE>

Fair Value of Financial Instruments

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

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

                                        1999                      1998
--------------------------------------------------------------------------------
                              Carrying  Estimated Fair  Carrying  Estimated Fair
                               Amount      Value          Amount      Value
--------------------------------------------------------------------------------
Financial Assets:
Cash and due from banks          $334,273     $334,273      $190,622   $190,622
Federal funds sold and other          877          877       147,678    147,678
Investment securities

  available for sale            1,073,338    1,073,338     1,129,753  1,129,753
Investment securities held

  to maturity                     588,201      575,368       659,536    670,934
Loans held for resale             110,203      110,203        76,423     76,423
Loans, net of allowance for
  credit losses                 4,200,799    4,242,438     4,163,938  4,313,572
Leases                            198,772      208,238       235,571    243,242
--------------------------------------------------------------------------------
Financial Liabilities:
Time deposits                  $2,774,765   $2,768,268    $2,923,751 $2,952,578
Other deposits                  2,185,569    2,185,569     2,307,967  2,307,967
Short-term borrowings             366,130      366,130       375,045    375,045
FHLB borrowings                   728,776      727,510       427,027    431,470
Long-term debt                    129,920      125,578       130,239    136,707
--------------------------------------------------------------------------------
Off-Balance Sheet Instruments:
Lending commitments and
   letters of credit               $-----   $    ( 530)    $   -----     $(800)
All other                          $-----   $      875     $   -----    $ (229)
--------------------------------------------------------------------------------

                                       56

<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 have no
significant  changes in credit risk,  fair values are based on carrying  values.
The fair  values  for  other  loans are  estimated  using  discounted  cash flow
analyses,  using interest rates  currently  being offered for loans with similar
terms to borrowers of comparable credit quality.  The carrying amount of accrued
interest approximates its fair value.

Deposit  liabilities:  The fair  values  disclosed  for demand  deposits  (e.g.,
interest and noninterest  checking,  savings,  and certain types of money market
accounts)  are reported at a value equal to the amount  payable on demand at the
reporting date. The carrying amounts for variable-rate,  fixed-term money market
accounts and certificates of deposit  approximate their fair market value at the
reporting date. Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow  calculation  that applies interest rates currently
being  offered on  certificates  to a schedule of  aggregated  expected  monthly
maturities.

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

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

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

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

Mergers and Acquisitions

On May  30,  1997  Keystone  completed  the  merger  of  Financial  Trust  Corp.
(Financial  Trust),  a  financial   institution  with  $1.2  billion  of  assets
headquartered in Carlisle,  Pennsylvania. The merger was accounted for under the
pooling-of-interests  method of  accounting,  and,  as such,  all  prior  period
information has been restated.

                                       57

<PAGE>

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

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

On  May  29,  1997,  Keystone  completed  the  acquisition  of  First  Financial
Corporation of Western  Maryland  (FFWM),  a thrift holding  company with assets
approximating  $355 million based in Cumberland,  Maryland.  The transaction was
accounted for as a purchase and resulted in the recognition of goodwill and core
deposit  intangibles   totaling   approximately  $34  million  and  $6  million,
respectively, which are being amortized over 25 and 10-year periods. The results
of FFWM have been included herein from the consummation date of May 29, 1997.

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

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
-------------------------------------------------------------------------------
                                                    1999              1998
-------------------------------------------------------------------------------
Assets:
   Cash                                                $1,006             $271
   Investment securities                                4,099           14,876
Investments in:
     Subsidiary banks                                 558,472          585,189
     Other subsidiaries                                70,598           88,723
Other assets                                            5,595              726
-------------------------------------------------------------------------------
TOTAL ASSETS                                         $639,770         $689,785
-------------------------------------------------------------------------------
Liabilities:
   Long-term debt                                     $67,480           $3,556
   Other liabilities                                   22,265           24,564
-------------------------------------------------------------------------------
TOTAL LIABILITIES                                      89,745           28,120
Shareholders' Equity                                  550,025          661,665
-------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY           $639,770         $689,785
-------------------------------------------------------------------------------


                                       58

<PAGE>

                              Statements of Income

                                           Year Ended December 31
-------------------------------------------------------------------------------
                                    1999           1998            1997
-------------------------------------------------------------------------------
Income:
 Dividends from subsidiaries:
   Bank subsidiaries                 $71,575      $60,068         $67,305
   Other subsidiaries                   ----       21,997            ----
Other income                           3,459           74               4
Net securities gains                     319        9,301            ----
-------------------------------------------------------------------------------
Expenses:
 Net interest expense                  5,308        6,981           2,144
 Operating expense                     4,082        2,833           9,487
-------------------------------------------------------------------------------
Income before taxes and undistributed
  earnings of subsidiaries            65,963       81,626          55,678
Income taxes benefit                  (2,004)      (1,506)         (3,712)
Equity in undistributed earnings
 of subsidiaries                     (30,891)      16,615          28,527
-------------------------------------------------------------------------------
NET INCOME                           $37,076      $99,747         $87,917
-------------------------------------------------------------------------------


                                       59

<PAGE>

                            Statements of Cash Flows

                                                Year Ended December 31
--------------------------------------------------------------------------------
1999              1998           1997
--------------------------------------------------------------------------------
OPERATING ACTIVITIES:
 Net income                               $37,076         $99,747      $87,917
 Equity in undistributed earnings          27,432         (16,615)     (28,527)
 Other                                     (7,168)         (2,810)      14,729
--------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING
  ACTIVITIES                               57,340          80,322       74,119
--------------------------------------------------------------------------------
INVESTING ACTIVITIES:
 Net (increase) decrease in investments    10,777          50,148      (38,529)
(Investments in) distributions from
    subsidiaries                           (5,161)         88,429      (24,459)
--------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
 INVESTING ACTIVITIES                       5,616         138,577      (62,988)
--------------------------------------------------------------------------------
FINANCING ACTIVITIES:
 Cash dividends declared                  (56,433)        (58,195)     (55,964)
 KSOP activity:
   Common stock proceeds                    1,418             677          819
   Payment of debt                           (346)           (597)        (523)
 Proceeds of long-term debt                96,527          30,928       98,960
 Repayment of long-term debt              (32,257)       (125,735)        ----
 Acquisition of treasury stock            (88,701)        (74,597)     (72,586)
 Proceeds from issuance of common stock
  under benefits plans                     17,224          10,211       12,908
 Other                                        347          (2,809)       5,717
--------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES     (62,221)       (220,117)     (10,669)
--------------------------------------------------------------------------------
Increase (decrease) in cash                   735          (1,218)         462
Cash at beginning of year                     271           1,489        1,027
--------------------------------------------------------------------------------
CASH AT END OF YEAR                        $1,006            $271       $1,489
--------------------------------------------------------------------------------

                                       60

<PAGE>

Net Interest Income

Keystone's  largest  source of  revenue  is net  interest  income,  which is the
difference  between  interest  income 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  (in
thousands):


                                                      1999
--------------------------------------------------------------------------------
                                            Average                 Yield/
                                            Balance      Interest    Rate
--------------------------------------------------------------------------------
ASSETS
--------------------------------------------------------------------------------
Federal funds sold and other                $97,721        $5,031     5.15%
Investment securities:
    Negotiable money market investments     127,474         6,277     4.92
    Taxable investment securities         1,341,586        83,283     6.21
    Nontaxable investment securities(1)     231,396        17,802     7.69
Loans held for resale                        95,930         8,011     8.35
Consumer loans (2) (3)                    1,251,467       113,610     9.08
Real estate loans (1) (2) (3)             2,319,127       190,971     8.23
Commercial loans (1) (2) (3)                849,286        69,703     8.21
--------------------------------------------------------------------------------
Total earning assets                     $6,313,987      $494,688     7.83%
Allowance for credit losses                 (60,208)
Other assets                                533,401
--------------------------------------------------------------------------------
Total Assets                             $6,787,180
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
NOW/Savings deposits                       $793,337       $11,318     1.43%
Money market deposits                       786,567        22,974     2.92
Time deposits                             2,795,077       139,650     5.00
Short-term borrowings                       352,565        15,844     4.49
FHLB borrowings                             515,396        29,547     5.73
Long-term debt                              130,024         9,325     7.17
--------------------------------------------------------------------------------
Total interest-bearing liabilities       $5,372,966      $228,658     4.26%
Demand deposits                             678,218
Other liabilities                           149,901
Shareholders' equity                        586,095
--------------------------------------------------------------------------------
Total Liabilities and Equity             $6,787,180
--------------------------------------------------------------------------------
Interest rate spread                                                  3.57%
Net interest income and net
  interest margin                                        $266,030     4.21%
Tax-equivalent adjustment                                  (8,657)
--------------------------------------------------------------------------------
Net interest income                                      $257,373
--------------------------------------------------------------------------------
<PAGE>
                                                      1998
--------------------------------------------------------------------------------
                                            Average                  Yield/
                                            Balance      Interest     Rate
--------------------------------------------------------------------------------
ASSETS
--------------------------------------------------------------------------------
Federal funds sold and other                $89,247        $4,820     5.40%
Investment securities:
    Negotiable money market investments     160,214         8,713     5.44
    Taxable investment securities         1,338,147        85,399     6.38
    Nontaxable investment securities (1)    209,119        16,692     7.98
Loans held for resale                        68,926         5,559     8.07
Consumer loans (2) (3)                    1,483,643       135,934     9.16
Real estate loans (1) (2) (3)             2,270,914       196,516     8.65
Commercial loans (1) (2) (3)                835,287        72,585     8.69
--------------------------------------------------------------------------------
Total earning assets                     $6,455,497      $526,218     8.15%
Allowance for credit losses                 (63,600)
Other assets                                482,419
--------------------------------------------------------------------------------
Total Assets                             $6,874,316
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
NOW/Savings deposits                       $823,463       $12,737     1.55%
Money market deposits                       740,086        20,649     2.79
Time deposits                             2,988,222       159,702     5.34
Short-term borrowings                       375,131        17,486     4.66
FHLB borrowings                             372,097        21,506     5.78
Long-term debt                              119,313         8,604     7.21
--------------------------------------------------------------------------------
Total interest-bearing liabilities       $5,418,312      $240,684     4.44%
Demand deposits                             637,533
Other liabilities                           136,659
Shareholders' equity                        681,812
--------------------------------------------------------------------------------
 Total Liabilities and Equity            $6,874,316
--------------------------------------------------------------------------------
Interest rate spread

Net interest income and net                                           3.71%
  interest margin                                        $285,534     4.42%
Tax-equivalent adjustment                                  (8,569)
--------------------------------------------------------------------------------
Net interest income                                      $276,965
--------------------------------------------------------------------------------
<PAGE>
                                                         1997
--------------------------------------------------------------------------------
                                            Average                  Yield/
                                            Balance    Interest       Rate
--------------------------------------------------------------------------------
ASSETS
--------------------------------------------------------------------------------
Federal funds sold and other                $84,032      $5,340       6.35%
Investment securities:
    Negotiable money market investments     108,278       6,155       5.68
    Taxable investment securities         1,174,674      77,034       6.56
    Nontaxable investment securities(1)     225,384      17,557       7.79
Loans held for resale                        77,330       6,408       8.29
Consumer loans (2) (3)                    1,523,659     136,257       8.94
Real estate loans (1) (2) (3)             2,239,664     196,964       8.79
Commercial loans (1) (2) (3)                809,306      73,883       9.13
--------------------------------------------------------------------------------
Total earning assets                     $6,242,327    $519,598       8.32%
Allowance for credit losses                 (61,800)
Other assets                                449,475
--------------------------------------------------------------------------------
Total Assets                             $6,630,002
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
NOW/Savings deposits                       $931,273     $15,930       1.71%
Money market deposits                       650,082      16,306       2.51
Time deposits                             2,967,437     162,662       5.48
Short-term borrowings                       371,645      18,134       4.88
FHLB borrowings                             240,533      14,677       6.10
Long-term debt                               64,016       4,785       7.47
--------------------------------------------------------------------------------
Total interest-bearing liabilities       $5,224,986    $232,494       4.45%
Demand deposits                             606,907
Other liabilities                           135,789
Shareholders' equity                        662,320
--------------------------------------------------------------------------------
 Total Liabilities and Equity            $6,630,002
--------------------------------------------------------------------------------
Interest rate spread

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

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 rates (in thousands):
<PAGE>
<TABLE>
<CAPTION>
                                        1999 Change from 1998           1998 Change from 1997
--------------------------------------------------------------------------------------------------------
                                      Total      Change due to (4)   Total        Change due to (4)
                                      Change     Volume       Rate   Change       Volume       Rate
--------------------------------------------------------------------------------------------------------
Interest income on:
<S>                                <C>        <C>           <C>      <C>        <C>           <C>
  Federal funds sold and other          $211      $443      $(232)   $(520)     $(1,160)      $640
  Investment securities (1)           (3,442)     (454)    (2,988)  10,060       12,643     (2,583)
  Loans held for resale                2,452     2,248        204     (849)        (681)      (168)
  Loans and leases (1)(2)(3)         (30,751)  (14,708)   (16,043)  (2,071)       4,881     (6,952)
--------------------------------------------------------------------------------------------------------
                                     (31,530)  (12,471)   (19,059)   6,620       15,683     (9,063)
Interest expense on:

  NOW/savings deposits                 1,419     1,332         87    3,193        1,796      1,397
  Money market deposits               (2,325)   (1,332)      (993)  (4,344)      (4,526)       182
  Time deposits                       20,052    10,011     10,041    2,961       (2,110)     5,071
  Short-term borrowings                1,642     1,028        614      648         (169)       817
  FHLB borrowings                     (8,041)   (7,532)      (509)  (6,829)      (7,641)       812
  Long-term debt                        (721)     (596)      (125)  (3,819)      (3,993)       174
-------------------------------------------------------------------------------------------------------
                                      12,026     2,911      9,115   (8,190)     (16,643)     8,453
-------------------------------------------------------------------------------------------------------
Net Interest Income Change

 - Tax Equivalent                   $(19,504) $(9,560)    $(9,944) $(1,570)       $(960)     $(610)
-------------------------------------------------------------------------------------------------------
(1) Interest income and yields are adjusted to a fully  taxable-equivalent basis
    using a 35% tax rate.

(2) Nonperforming loans are included in the average balances.
(3) Interest on loans includes fees on loans of $5,122,000 in 1999, $7,056,000
    in 1998, and $6,523,000 in 1997.
(4) The change in interest due to both rate and volume has been allocated to the
    volume and rate changes in proportion to the absolute dollar amounts of each
    change.

</TABLE>

<PAGE>

GAP

Interest rate sensitivity is evidenced by the changes in net interest income and
net interest margin relative to changes in market interest rates.  One indicator
of interest  rate  sensitivity  is GAP,  which  measures  the volume  difference
between  interest rate sensitive  assets and  liabilities.  The following  table
apportions  the balance sheet at December 31, 1999 into rate  sensitive  periods
based on the repricing or maturity dates of the various cash-flow streams.

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------
                                       1-90    91-180     181-360    1-2        Beyond
                                       Days     Days       Days      Years      2 Years      Total
----------------------------------------------------------------------------------------------------------
Assets
----------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>      <C>        <C>           <C>
Federal funds sold and other             $877      $---        $---        $---         $---         $877
Investment securities                 159,211     20,034     34,140     114,645    1,333,509    1,661,539
Loans held for sale                    31,767     23,738     47,868       6,830            0      110,203
Consumer loans                        269,514    106,325    189,914     325,352      333,704    1,224,809
Consumer mortgages                     52,781     50,192     96,004     150,445      389,776      739,198
Commercial real estate loans          147,195     50,124     60,729     123,192    1,259,061    1,640,301
Commercial loans                      526,467     25,655     39,721      66,470      196,925      855,238
----------------------------------------------------------------------------------------------------------
   Total earning assets            $1,187,812   $276,068   $468,376    $786,934   $3,512,975   $6,232,165
----------------------------------------------------------------------------------------------------------
Other assets                             ---         ---        ---         ---      655,343      655,343
----------------------------------------------------------------------------------------------------------
   TOTAL ASSETS                    $1,187,812   $276,068   $468,376    $786,934   $4,168,318   $6,887,508
----------------------------------------------------------------------------------------------------------
Liabilities and Shareholders'
  equity
----------------------------------------------------------------------------------------------------------
NOW deposits                        $222,350         ---        ---         ---     $378,856     $601,206
Savings deposits                      43,733         ---        ---         ---      107,455      151,188
Money market deposits                577,306         ---        ---         ---      201,000      778,306
Time deposits                      1,177,707     310,265    322,375     613,460      353,214    2,777,021
Short-term borrowings                366,022         108        ---         ---          ---      366,130
FHLB borrowings                        7,553      33,385    103,610      71,231      512,997      728,776
Long-term debt                           ---         ---        ---         ---      129,920      129,920
----------------------------------------------------------------------------------------------------------
   Total interest-bearing

    liabilities                   $2,394,671    $343,758   $425,985    $684,691   $1,683,442   $5,532,547
----------------------------------------------------------------------------------------------------------
Demand Deposits                          ---         ---        ---         ---      652,613      652,613
Other liabilities                        ---         ---        ---         ---      152,323      152,323
Shareholders' equity                     ---         ---        ---         ---      550,025      550,025
----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY              $2,394,671    $343,758   $425,985    $684,691   $3,038,403   $6,887,508
----------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET TRANSACTIONS      $150,000         ---  ($150,000)        ---          ---          ---
----------------------------------------------------------------------------------------------------------
Interest rate sensitivity        ($1,056,859)   ($67,690) ($107,609)   $102,243   $1,129,915
----------------------------------------------------------------------------------------------------------
Cumulative GAP                   ($1,056,859)($1,124,549)(1,232,158)($1,129,915)
----------------------------------------------------------------------------------------------------------
</TABLE>

<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
56% 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, 1999 (in thousands):

                             Within    After One
                              One      But Within    After Five
                              Year     Five Years      Years            Total
--------------------------------------------------------------------------------
Commercial                   $540,071   $144,378      $170,789         $855,238
Commercial real estate        181,990    265,111     1,193,200        1,640,301
--------------------------------------------------------------------------------
                             $722,061   $409,489    $1,363,989       $2,495,539
--------------------------------------------------------------------------------
Loans maturing after one year with:

Fixed interest rates:

 Commercial                              $97,940       $99,445
 Commercial real estate                  139,249       749,732

Variable interest rates:

 Commercial                               46,438        71,344
 Commercial real estate                  125,862       443,468
--------------------------------------------------------------------------------
Total                                   $409,489    $1,363,989
--------------------------------------------------------------------------------

Investment Portfolio Analysis

Keystone's  asset  liability  management  policy  (ALM)  addresses  the  use  of
derivatives and other hedging activities and provides for specific  restrictions
on the type and extent of Keystone's exposure.

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

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

Interest Rate Swaps

Interest rate swaps are off-balance  sheet financial  instruments  which provide
for the exchange of interest payments on a specified  principal amount (notional
amount) for a specified  period of time.  ALM 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

<PAGE>

contracts  must be approved in advance by the bank  president and parent company
executives,  and that swap counterparties must be reviewed for credit-worthiness
on at  least an  annual  basis.  Keystone's  policy  also  sets  forth  specific
limitations on exposure to a single counter party and sets an aggregate limit on
the notional value of interest rate swaps as a percentage of capital.

Other Hedging Activity

Keystone has  purchased  interest  rate floors to mitigate the risk of declining
long-term  interest rates and higher than expected mortgage  prepayments,  which
could potentially  impair the value of its mortgage  servicing  rights.  Forward
mortgage  commitments,  as well as put options and short sales of U.S.  Treasury
securities,  have been used to reduce the market risk  associated  with interest
rate fluctuations of fixed-rate consumer mortgages and indirect automobile loans
held for sale. In accordance with Keystone's  written policy,  such transactions
must be ratified by the Board of  Directors  and can only be executed as a hedge
of market risk and not for the purpose of speculation or trading.  Such activity
is self-limited by the level of loan production.

CMOs

All  Keystone   collateralized   mortgage   obligation  (CMO)  holdings  can  be
desegregated  into groupings which more accurately define the extent of mortgage
extension or prepayment risk, and include PACs (planned amortization class), SEQ
PAY  (sequential pay class),  TACs (targeted  amortization  class),  and others.
Other  more  volatile  forms of CMOs  including  interest-only,  principal-only,
inverse floating bonds, and residuals are specifically  designated as prohibited
investments under Keystone's investment policy.

At December 31, 1999, Keystone had $194,393,000 in collateralized mortgage obli-
gations,  compared to $156,844,000 at December 31, 1998. The CMO securities held
by Keystone are primarily  shorter-maturity  class bonds that were structured to
have more predictable cash flows, by being less sensitive to prepayments  during
periods of changing  interest rates than other longer-term class bonds similarly
available.  All of the CMOs held by  Keystone  were  issued or backed by Federal
Agencies.

Structured Notes

A structured note is a debt security whose cash flow characteristics,  including
coupon rate,  redemption  amount or  redemption  rate may be dependent on one or
more indices or future cash flow adjustment.  Keystone's  activity in structured
notes has been  limited  to U.S.  Government  Agency  index  amortization  notes
(IANs),  whereby the principal balance amortizes according to the prepayments on
a specific collateral pool of mortgage-backed securities.  Keystone's investment
in  structured  notes,   which  is  limited  by  investment  policy  guidelines,
aggregated $2,185,000 at the end of 1999.

<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, 1999
--------------------------------------------------------------------------------
                                        Amortized       Market      Unrealized
                                           Cost         Value       Gain/(Loss)
--------------------------------------------------------------------------------
U.S. Government Agency Obligations:
 Conventional                              $600,899     $586,579     $ (14,320)
 Mortgage-backed                            331,428      321,266       (10,162)
 CMOs:
     PACs1                                  105,503      102,822        (2,681)
     SEQ PAY2                                71,155       69,463        (1,692)
     TACs3                                    1,444        1,419           (25)
     Other                                   16,291       16,429           138
 Structured notes                             2,185        2,181            (4)
--------------------------------------------------------------------------------
 Subtotal                                 1,128,905    1,100,159       (28,746)
--------------------------------------------------------------------------------
Negotiable money market instruments          72,543       72,470           (73)
U.S. Treasury securities                     81,020       80,967           (53)
State and political subdivision
 obligations                                252,307      246,870        (5,437)
Corporate and other                         151,822      148,240        (3,582)
--------------------------------------------------------------------------------
Total                                    $1,686,597   $1,648,706      $(37,891)
--------------------------------------------------------------------------------
1. A PAC (planned  amortization  class) has a principal payment schedule that is
guaranteed within a predetermined  range of mortgage  prepayment rates, i.e. has
built-in  call  protection,   lower  prepayment  risk  and  lower  average  life
variability.

2. A SEQ PAY  (sequential pay class)  allocates  collateral  principal  payments
sequentially  to a series of bonds.  Principal  payments are directed  initially
only to the first tranche until it is completely retired. Once the first tranche
is retired, the principal payments are applied to the second tranche until it is
retired, and so on.

3. TAC(targeted amortization class) has a payment schedule that offers some call
protection if mortgage prepayments increase, but little to no extension protect-
ion if prepayments slow down.

<PAGE>

Credit Risk and Loan Portfolio Analysis

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

Keystone maintains a corporate loan review function that determines adherence to
credit  policies,   assesses  the  effectiveness  of  the  credit  process,  and
objectively  evaluates the quality of the loan  portfolio.  In  connection  with
these reviews,  adversely classified credits within the portfolio are identified
and included on a classified  loan report,  which is reviewed by management on a
monthly basis and presented to the Board of Directors quarterly.

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):

--------------------------------------------------------------------------------
                             1999       1998      1997       1996      1995
--------------------------------------------------------------------------------
Commercial:
Commercial and industrial  $609,708   $615,925   $637,617   $547,153    $487,843
Floor plan financing        183,357    167,762    203,189    172,248     167,504
Obligations of political
  subdivisions               62,173     63,487     70,863     73,749      64,677
--------------------------------------------------------------------------------
                            855,238    847,174    911,669    793,150     720,024
--------------------------------------------------------------------------------
Commercial Real  Estate:
Commercial and industrial 1,379,520  1,299,052  1,080,776    843,746     828,508
Multi-family residential     83,725     76,752    130,148     99,074      92,544
Obligations of political
  subdivisions               46,037     47,493     40,930     29,686      33,010
Construction and land
  development               116,139     95,279    117,503     91,755      86,983
Agricultural                 14,880     11,873     15,566     12,756      13,363
--------------------------------------------------------------------------------
                          1,640,301  1,530,449  1,384,923  1,077,017   1,054,408
--------------------------------------------------------------------------------
Consumer:
Real estate                 739,198    754,280    862,227  1,186,663   1,206,547
Installment                 403,580    543,513    704,242    626,573     631,584
Home equity                 580,195    508,729    473,365    311,086     256,505
Personal lines of credit     42,005     39,754     41,123     40,498      43,244
Leases                      199,029    235,884    335,017    301,483     184,554
--------------------------------------------------------------------------------
                          1,964,007  2,082,160  2,415,974  2,466,303   2,322,434
--------------------------------------------------------------------------------
Total                    $4,459,546 $4,459,783 $4,712,566 $4,336,470  $4,096,866
--------------------------------------------------------------------------------

<PAGE>

Concentration Risk

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

o    The  largest  group of  customers  in a single  industry  to whom  Keystone
     provides  credit  extensions  is automobile  dealers.  At December 31, 1999
     credit extensions totaling $197,618,000 were outstanding,  and consisted of
     floor plan and related commercial loans and mortgages.

o    Keystone has no dependence  on a single  customer.  The ten largest  credit
     relationships account for only 4% of the total loans outstanding at the end
     of 1999.

Geographic Risk

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

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

o Keystone has no loan exposure in foreign countries.

Categories of Exposure

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

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

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

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

                                                       December 31, 1999
--------------------------------------------------------------------------------
                                                                      Average
                                                  Balance           Relationship
--------------------------------------------------------------------------------
 Commercial loans                              $  855,238
 Commercial real estate                         1,640,301
--------------------------------------------------------------------------------
                                               $2,495,539             $163
--------------------------------------------------------------------------------
<PAGE>

At December 31, 1999, approximately 24% of the balance of commercial real estate
was nonowner occupied.  Individual  categories of nonowner-occupied in excess of
$75 million  were office  buildings  and  apartment/rental  units which  totaled
$83,090,000 and $102,372,000, respectively.

Secondary Market Activity

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

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):

--------------------------------------------------------------------------------
                                 1999      1998     1997        1996      1995
--------------------------------------------------------------------------------
Commercial                      $12,519  $13,436   $11,266     $9,944    $11,450
Real estate secured:
  Commercial                     12,030    8,813    12,630     11,922     11,969
  Consumer                        3,491    2,064     1,849      2,324      2,251
Consumer                         15,222   15,574    16,844     12,693      7,724
General risk                     16,713   20,387    22,502     19,373     22,021
--------------------------------------------------------------------------------
                                $59,975  $60,274   $65,091    $56,256    $55,415
--------------------------------------------------------------------------------
While management has apportioned the allowance to the different loan categories,
the  allowance is general in nature and is available  for the loan  portfolio in
its entirety.

Keystone  assesses the  reasonableness  of the  allocation  of the  allowance by
preparing a percentage-based comparison of the allocated allowance to the actual
loan portfolio.  The percentage allocation of allowance to any given category of
loans may change  disproportionately  to the  percentage  of total loans in that
category  due  primarily  to changes in  internal  risk  ratings of the  various
categories. At December 31, the following comparison is provided:

<PAGE>

--------------------------------------------------------------------------------
                            1999      1998         1997       1996     1995
--------------------------------------------------------------------------------
Commercial:
% of Total loans             19%        19%         19%        18%      18%
% Allocation of allowance    21         22          17         18       21
Commercial real estate:
% of Total loans             37         33          29         25       26
% Allocation of allowance    20         15          19         21       22
Consumer real estate:
% of Total loans             17         18          18         27       29
% Allocation of allowance     6          3           3          4        4
Consumer:
% of Total loans             27         30          34         30       27
% Allocation of allowance    25         26          26         23       14
General Risk:
% Allocation of allowance    28         34          35         34       39
--------------------------------------------------------------------------------
Total loans                 100%       100%        100%       100%     100%
--------------------------------------------------------------------------------
Allocation of allowance     100%       100%        100%       100%     100%
--------------------------------------------------------------------------------

<PAGE>

Income Performance

                                                       1999
--------------------------------------------------------------------------------
(in thousands,                        Fourth        Third      Second    First
except per share data)                Quarter       Quarter    Quarter   Quarter
--------------------------------------------------------------------------------
Interest income                      $124,087    $121,957   $119,410    $120,577
Interest expense                       61,319      56,726     54,666      55,947
--------------------------------------------------------------------------------
Net interest income                    62,768      65,231     64,744      64,630
Provision for credit losses            13,473       3,290      3,950       2,663
--------------------------------------------------------------------------------
Net interest income after provision    49,295      61,941     60,794      61,967
Noninterest income                     24,170      26,202     28,655      25,656
Security transactions                  (1,512)        729         20         425
Noninterest expense                   102,192      56,602     54,046      76,834
--------------------------------------------------------------------------------
Income before income taxes            (30,239)     32,270     35,423      11,214
Income taxes                          (12,324)      9,798     11,219       2,899
--------------------------------------------------------------------------------
Net income                           $(17,915)    $22,472    $24,204      $8,315
--------------------------------------------------------------------------------
Tax effect of security transactions     $(529)       $255        $ 7        $149
--------------------------------------------------------------------------------
Earnings per share:
 Basic                                 $(0.36)      $0.46      $0.49       $0.17
 Diluted                               $(0.37)      $0.46      $0.49       $0.17
Dividends per share                     $0.29       $0.29      $0.29       $0.29
Average shares outstanding          48,699,788 48,583,087 48,558,993  49,595,340
--------------------------------------------------------------------------------

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

<PAGE>

STOCK INFORMATION

Market Prices and Dividends

The common stock of Keystone Financial, Inc. trades on The Nasdaq Stock MarketSM
under the symbol KSTN. At the close of business on February 4, 2000,  there were
approximately 14,641 shareholders of record.

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

--------------------------------------------------------------------------------
                          Quarterly Closing                Dividends
                           Sales Price Range               Declared
--------------------------------------------------------------------------------
                         High              Low
--------------------------------------------------------------------------------
1999
--------------------------------------------------------------------------------
  I                      $37.19            $32.25            $0.29
 II                       33.06             29.50             0.29
III                       29.56             23.75             0.29
 IV                       25.34             20.00             0.29
--------------------------------------------------------------------------------
                                                                           $1.16
--------------------------------------------------------------------------------
1998
--------------------------------------------------------------------------------
  I                      $42.00            $36.00            $0.28
 II                       41.53             34.00             0.28
III                       37.13             27.88             0.28
 IV                       37.00             25.72             0.29
--------------------------------------------------------------------------------
                                                                           $1.13
--------------------------------------------------------------------------------

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.