UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended June 30, 1995
Commission File Number: 0-13775
KEYSTONE HERITAGE GROUP, INC.
(Registrant)
PENNSYLVANIA 23-2219740
(State of incorporation) (I.R.S. Employer
Identification No.)
555 WILLOW STREET, LEBANON, PENNSYLVANIA 17046
(Address of principal executive offices) (Zip Code)
717-274-6800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 4, 1995
Common Stock ($5.00 par value) 3,050,224 shares
<PAGE>
KEYSTONE HERITAGE GROUP, INC.
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Consolidated Balance Sheets as of
June 30, 1995 and December 31, 1994 (Unaudited) ....................3
Consolidated Statements of Income for the
Three and Six Months ended June 30, 1995 and
1994 (Unaudited) ...................................................4
Consolidated Statements of Stockholders' Equity
for the Six Months ended June 30, 1995 and
1994 (Unaudited) ...................................................5
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1995 and 1994 (Unaudited) ................6
Notes to Consolidated Financial Statements .........................7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations .....................8
PART II - OTHER INFORMATION
Item 4 - Submission of Matters To A Vote of Security Holders ...............16
Signature Page .............................................................18
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<PAGE>
KEYSTONE HERITAGE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
June 30 December 31
1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks $ 18,254 $ 23,568
Interest bearing deposits with banks 150 150
Federal funds sold 0 1,300
Investment securities available for sale 54,850 55,664
Investment securities held to maturity
(fair value of $99,021 and $70,037
for 1995 and 1994, respectively) 98,739 72,704
Loans, net of unearned income of
$3,734 for 1995 and $5,088 for 1994 379,703 383,154
Allowance for possible loan losses (8,062) (8,140)
---------- ----------
Loans, net 371,641 375,014
Premises and equipment, net 7,951 8,082
Accrued interest receivable 3,176 3,185
Other real estate owned 1,448 1,969
Deferred tax asset, net 3,451 4,031
Other assets 3,054 2,527
---------- ---------
Total assets $ 562,714 $ 548,194
========== =========
LIABILITIES
Non-interest bearing deposits $ 62,366 $ 64,063
Interest bearing deposits 416,445 404,677
---------- ---------
Total deposits 478,811 468,740
Short-term borrowings 10,318 12,087
Other borrowings 11,664 9,926
Accrued interest payable 3,949 3,068
Other liabilities 2,173 2,271
---------- ---------
Total liabilities 506,915 496,092
STOCKHOLDERS' EQUITY
Common stock - $5 par value;
Authorized 10,000,000 shares;
Outstanding 3,050,224 shares at
June 30, 1995 and 3,046,213 shares
at December 31, 1994 15,251 15,231
Capital surplus 30,136 30,053
Retained earnings 10,490 8,269
Net unrealized loss on investment securities
available for sale, net of taxes (78) (1,451)
---------- ----------
Total stockholders' equity 55,799 52,102
Total liabilities and stockholders'
equity $ 562,714 $ 548,194
========== ==========
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
KEYSTONE HERITAGE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
------- ------- ------- ------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 8,743 $ 7,481 $17,224 $14,516
Interest on investment securities
available for sale:
Taxable investment securities 650 773 1,312 1,614
Equity investments 47 40 90 78
Interest on investment securities held to maturity:
Taxable investment securities 1,180 695 2,036 1,329
Non-taxable investment securities 113 145 229
-------- -------- -------- -------
Total interest on investment
securities 1,990 1,653 3,667 3,321
Interest on money market investments 113 12 247 30
-------- -------- -------- -------
Total interest income 10,846 9,146 21,138 17,867
INTEREST EXPENSE
Interest on deposits 4,496 3,124 8,452 6,266
Interest on short-term borrowings 112 135 243 255
Interest on other borrowings 222 146 404 302
-------- -------- -------- -------
Total interest expense 4,830 3,405 9,099 6,823
Net interest income 6,016 5,741 12,039 11,044
Provision for possible loan losses 0 100 0 300
-------- -------- -------- -------
Net interest income after provision
for possible loan losses 6,016 5,641 12,039 10,744
OTHER OPERATING INCOME
Trust income 322 329 637 660
Service charges on deposits 328 310 639 613
Net realized (loss) gain on investment
securities available for sale 65 (65) 58 (51)
Net gain on sale of loans 38 68 78 180
Other income 527 492 1,008 966
-------- -------- -------- -------
Total other operating income 1,280 1,134 2,420 2,368
OTHER OPERATING EXPENSE
Salaries and employee benefits 2,308 2,224 4,745 4,436
Occupancy expense, net 326 309 643 613
Equipment expense 495 474 961 897
Deposit insurance expense 259 256 518 512
Other expense 1,197 1,162 2,338 2,158
-------- -------- -------- -------
Total other operating expense 4,585 4,425 9,205 8,616
Income before income taxes 2,711 2,350 5,254 4,496
Income taxes 847 795 1,633 1,466
-------- -------- -------- -------
Net income $ 1,864 $ 1,555 $ 3,621 $ 3,030
======== ======== ======== =======
PER COMMON SHARE
Net income $ .61 $ .51 $ 1.19 $ 1.00
======== ======== ======== =======
Cash dividends paid $ .24 $ .21 $ .46 $ .42
</TABLE>
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<PAGE>
KEYSTONE HERITAGE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended June 30
(Dollars in thousands)
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss) on
Investment
Securities
Available for
Common Capital Retained Sale, Net
Stock Surplus Earnings of Taxes Total
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $12,185 $30,053 $ 7,120 $ 468 $49,826
Net Income -0- -0- 3,030 -0- 3,030
Cash dividends ($.42 per share) -0- -0- (1,267) -0- (1,267)
Change in unrealized gain (loss) on
investment securities available
for sale, net of taxes -0- -0- -0- (1,262) (1,262)
------- ------- ------- -------- --------
Balance, June 30, 1994 $12,185 $30,053 $ 8,883 ($ 794) $50,327
======= ======= ======= ======== =======
Balance, December 31, 1994 $15,231 $30,053 $ 8,269 ($1,451) $52,102
Net income 3,621 3,621
Cash dividends ($.46 per share) -0- -0- (1,400) -0- (1,400)
Stock issued under dividend
reinvestment plan 20 83 -0- -0- 103
Change in unrealized gain (loss) on
investment securities available for
sale, net of taxes -0- -0- -0- 1,373 1,373
------- ------- -------- -------- -------
Balance, June 30, 1995 $15,251 $30,136 $10,490 $ (78) $55,799
======= ======= ======== ======== =======
</TABLE>
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<PAGE>
KEYSTONE HERITAGE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1995 1994
------- ------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 3,621 $ 3,030
Adjustments to reconcile net income to cash:
Capitalized interest on deposits 3,184 3,168
Provision for possible loan losses 0 300
Depreciation and amortization 697 666
Deferred income taxes (37) 214
Decrease (increase) in
accrued interest receivable 9 (168)
Increase (decrease) in
accrued interest payable 881 (501)
Net gain on sale of loans (78) (180)
Net realized (gain) loss on investment
securities available for sale (58) 51
Other, net (554) (1,202)
--------- ---------
Net cash provided by operating activities 7,665 5,378
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in money market investments 1,300 574
Maturities of investment securities
held to maturity 32,127 16,721
Maturities of investment securities
available for sale 3,230 31,055
Sale of investment securities available for sale 401 15,915
Funds invested in investment securities
held to maturity (58,437) (23,123)
Funds invested in investment securities
available for sale (616) (29,087)
Net decrease (increase) in loans
made to customers 6,186 (9,750)
Originations of residential mortgage loans sold (6,298) (7,930)
Proceeds from sale of residential mortgage loans 3,610 8,406
Net expenditures for premises and equipment (566) (465)
Proceeds from sale of other real estate owned 524 1,529
--------- ---------
Net cash (used by) provided from investing (18,539) 3,845
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 6,887 (12,220)
Net (decrease) increase in short-term borrowings (1,769) 2,401
Net (decrease) increase in other borrowings 1,739 (192)
Proceeds from issuance of common stock 103 0
Cash dividends paid (1,400) (1,267)
--------- ---------
Net cash provided from (used by)
financing activities 5,560 (11,278)
Net increase (decrease) in cash and due from banks (5,314) (2,055)
Cash and due from banks at beginning of period 23,568 19,176
Cash and due from banks at end of period $ 18,254 $ 17,121
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 5,034 $ 4,169
Income taxes paid 1,900 1,839
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Loans charged-off 314 604
</TABLE>
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<PAGE>
KEYSTONE HERITAGE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements of Keystone Heritage
Group, Inc. have not been reviewed by independent certified public
accountants. However, in management's opinion, the statements reflect all
adjustments and disclosures necessary for a fair presentation of the
consolidated balance sheet of the Company as of June 30, 1995 and December
31, 1994, the consolidated statements of income for the three and six month
periods ended June 30, 1995 and 1994 and the consolidated statements of
cash flows for the six months ended June 30, 1995. The accounting policies
followed in the presentation of interim financial results are the same as
those followed on an annual basis, with the exception of the accounting
policies related to impaired loans which have been included in the March
31, 1995 10-Q report filed with the Securities and Exchange Commission and
the accounting policies related to mortgage servicing rights which are
discussed further in Note 2. The consolidated financial statements of
Keystone Heritage Group, Inc. and subsidiaries include the accounts of the
Company and its wholly owned subsidiaries, Lebanon Valley National Bank and
Keystone Heritage Life Insurance Company. All significant intercompany
balances and transactions have been eliminated in the consolidated
financial statements. For purposes of comparability, certain prior year
amounts have been reclassified.
2. In May 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights, an amendment of FASB Statement No. 65" (SFAS
122). SFAS 122 amends Statement 65 to require an institution to recognize
as separate assets the rights to service mortgage loans for others when a
mortgage loan is sold or securitized and servicing rights retained. SFAS
122 also requires an entity to measure the impairment of servicing rights
based on the difference between the carrying amount of the servicing rights
and their current fair value. SFAS 122 is to be applied prospectively in
fiscal years beginning after December 15, 1995.
Presently, the Company does not sell or securitize mortgage loans with
servicing rights retained. Accordingly, the Company will not be impacted by
the provisions of SFAS 122.
3. Earnings per common share are based upon the weighted average number of
shares outstanding. The weighted average number of shares outstanding was
3,048,505 and 3,046,213 for the three month periods ended June 30, 1995 and
1994, respectively, and 3,047,365 and 3,046,213 for the six months ended
June 30, 1995 and 1994, respectively. All prior period per share data has
been restated to give effect for the 5-for-4 stock split that was effective
for November 10, 1994.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Keystone Heritage Group, Inc. (the "Company") is a bank holding company
organized under the laws of Pennsylvania and registered under the Federal Bank
Holding Company Act of 1956. The Company's principal subsidiary is Lebanon
Valley National Bank (the "Bank").
Results of Operations
Net income for the Company for the three months ended June 30, 1995 was
$1.864 million or $.61 per share, compared to $1.555 million or $.51 per share
for the three months ended June 30, 1994. Return on average stockholders' equity
and return on average assets for the 1995 period were 13.73 percent and 1.35
percent, respectively.
Net income for the six months ended June 30, 1995 was $3.621 million or
$1.19 per share, compared to net income of $3.030 million or $1.00 per share for
1994. Return on average stockholders' equity and return on average assets for
the 1995 period were 13.63 percent and 1.33 percent, respectively.
Net Interest Income
Net interest income is the primary source of income for the Company. Net
interest income is the difference between interest earned on loans and
investments and interest paid on deposits and other funding sources. Deposits
are the primary source of funds for the Company. The factors which influence net
interest income include changes in interest rates and changes in asset and
liability balances.
For purposes of this discussion, interest income and the average yield
earned on loans and investments are presented on a taxable equivalent basis.
This provides a basis for comparison of tax exempt loans and investments with
taxable loans and investments by giving effect to interest earned on tax exempt
loans and investments by an amount equivalent to federal income taxes which
would have been paid on the assumption that the interest earned on those assets
was taxable at the Company's statutory tax rate of 34 percent.
The tables presented on pages 14 and 15 are comparative statements of
average balances of interest earning assets and interest bearing liabilities,
interest income and interest expense, and interest rates for the three months
ended June 30, 1995 and 1994, and for the six months ended June 30, 1995 and
1994.
Net interest income for the three months ended June 30, 1995 was $6.2
million, a $281 thousand or 4.8 percent increase from the same period of 1994.
The net interest margin for the second quarter of 1995 was 4.67 percent compared
to 4.72 percent for the same period of 1994. Average earning assets for the
three month period ended June 30, 1995 were $527.9 million, a $28.9 million or a
5.8 percent increase from the same period of 1994.
For the three month comparative periods, net interest income increased in
1995 as a result of the increase in average earning assets and an increase in
the yield on earning assets by 88 basis points from the same period of 1994.
These increases partially offset by an increase in total interest-bearing
deposits of $20.3 million which resulted from the increase in average deposit
rates during 1995. Time deposit volumes increased by $48.1 million while average
transaction and savings deposits decreased by $27.8 million. The increase in
average earning assets and the shift in deposit volumes and increasing rates had
the effect of slightly reducing the net interest margin for the three months
ended June 30, 1995 compared to the same period of 1994.
Net interest income for the six months ended June 30, 1995 was $12.3
million, a $1.0 million or 8.9 percent increase from the same period of 1994.
The net interest margin for the six months ended June 30, 1995 was 4.75 percent
compared to 4.57 percent for the same period of 1994. Average earning assets for
the six month period ended June 30, 1995 were $522.2 million, a $23.1 million or
a 4.6 percent increase from the same period of 1994.
For the six month comparative periods, net interest income also increased
in 1995 as a result of increases in average earning asset volumes, a shift in
the deposit mix and increases in average rates. Several prime rate increases
which occurred during 1994 contributed to the $1.1 million increase in net
interest income and an increase in the net interest margin of 18 basis points
for the 1995
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<PAGE>
period. Average loans increased by $16.2 million or 4.5% from 1994. As was seen
in the three month comparative periods, average interest-bearing deposit volumes
increased by $14.5 million for the six months ended June 30, 1995 compared to
the same period of 1994.
Provision and Allowance for Possible Loan Losses
There was no provision for possible loan losses charged to net income
during the six month period ended June 30, 1995. The provision for possible loan
losses for the three months ended June 30, 1994 was $100 thousand and was $300
thousand for the six months ended June 30, 1994.
Net charge-offs of $89 thousand were recorded for the three months ended
June 30, 1995 compared to net recoveries of $78 thousand for the same period of
1994. For the six month comparative period the Company recorded net charge-offs
of $78 thousand and $295 thousand for the 1995 and 1994 periods, respectively.
The allowance for possible loan losses was $8.1 million or 2.12 percent of
total loans outstanding at June 30, 1995 and December 31, 1994. The allowance
for possible loan losses is a reserve for estimated potential loan losses in the
loan portfolio. Losses occur primarily from the loan portfolio, but may also be
derived from commitments to extend credit and standby letters of credit. Loan
losses and recoveries of previously charged-off loans are charged or credited
directly to the allowance for possible loan losses. The allowance for possible
loan losses is an amount which, in management's judgement, is considered
adequate to absorb potential losses inherent in the loan portfolio. Management
performs a quarterly assessment of the Bank's loan portfolio to determine the
appropriate level of the allowance for possible loan losses. The factors
considered in this evaluation include, but are not necessarily limited to,
estimated loan losses identified through the review of loans by the Company's
personnel; general economic conditions; deterioration in loan concentrations or
pledged collateral; historic loss experience; and trends in portfolio volume,
composition, delinquencies, and non-accruals. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for possible loan losses.
-9-
<PAGE>
The following is a summary of the activity in the allowance for possible
loan losses for the three and six month periods ended June 30, 1995 and 1994:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
<S> <C> <C> <C> <C>
(Dollars in thousands) 1995 1994 1995 1994
Allowance for possible loan losses
at beginning of period $ 8,151 $ 8,313 $ 8,140 $ 8,486
Loans charged-off:
Commercial 98 83 113 454
Agriculture 0 0 0 0
Real estate construction 0 0 0 0
Loans to individuals 79 49 201 150
Real estate - residential mortgage 0 0 0 0
------- ------- ------- -------
Total loans charged-off 177 132 314 604
Recoveries of loans previously charged-off:
Commercial 57 167 183 250
Agriculture 0 0 0 0
Real estate construction 22 39 31 49
Loans to individuals 9 4 22 10
Real estate - residential mortgage 0 0 0 0
------- ------- ------- -------
Total recoveries of loans previously
charged-off 88 210 236 309
Net loans charged-off 89 (78) 78 295
Current period's provision for
possible loan losses 0 100 0 300
------- ------- ------- -------
Allowance for possible loan
losses at end of period $ 8,062 $ 8,491 $ 8,062 $ 8,491
======= ======= ======= =======
</TABLE>
Other Operating Income and Expense
Other operating income was $1.3 million for the three months ended June 30,
1995 and $1.1 million for the three months ended June 30, 1994. Other operating
income for the six months ended June 30, 1995 and 1994 was $2.4 million,
respectively.
The increases in other operating income for the three and six month periods
of 1995 as compared to 1994 were primarily attributable to the recognition of
net realized gains on sales of investment securities during 1995. These
increases were somewhat offset as a result of lower income from mortgage loan
sales. The volume of loans that were originated and sold during the six month
period of 1995 was $3.6 million or 57 percent below the 1994 level.
Other operating expense for the three months ended June 30, 1995 was $4.6
million, a 3.6 percent increase over the $4.4 million reported for the same
period of 1994. For the six months ended June 30, 1995 and 1994, other operating
expense was $9.2 million and $8.6 million, respectively, a 6.8 percent increase.
Salaries and benefits expense increased by $84 thousand or 3.8 percent for
the three months ended June 30, 1995 compared to the same period of 1994. For
the six months ended June 30, 1995, salaries and benefits increased by $309
thousand or 7.0 percent, compared to the same period of 1994. The increase in
salary and benefit expenses primarily related to the opening of the Company's
eighteenth and nineteenth branch sites during the mid and latter part of 1994.
Occupancy and equipment expenses increased by $38 thousand and $94 thousand
compared to the three and six month periods of 1994, which resulted from the
aforementioned new branch openings in 1994. Other expenses increased by $180
thousand for the six month period ended June 30, 1995 compared to the same
period for 1994 as a result of increased expenditures related to marketing and
advertising, bank card processing and outside professional services.
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<PAGE>
Non-Performing Assets
Loans, other than consumer loans not secured by real estate, are typically
classified as non-accrual at the time they reach 90 days past due as to
principal or interest. Loans may also be placed on non-accrual status when, in
management's opinion, the collectability of principal or interest is doubtful,
or should management believe that circumstances warrant such action. Consumer
loans not secured by residential real estate are charged-off when they become
120 days past due.
Non-performing loans at June 30, 1995 totalled $1.8 million or .48 percent
of total loans outstanding, compared to $1.3 million or .35 percent of loans at
December 31, 1994 and $5.3 million or 1.43 percent of loans at June 30, 1994.
Non-performing assets at June 30, 1995 were $3.3 million or .85 percent of loans
plus other real estate owned compared to $3.3 million or .86 percent of loans
plus other real estate owned at December 31, 1994 and $7.7 million or 2.07
percent of loans plus other real estate owned at June 30, 1994. The improvement
in non-performing assets at June 30, 1995 as compared to June 30, 1994 was a
result of decreased levels of non-accrual loans and other real estate owned.
During 1994, disposals of non-performing assets consisted of third-party
transactions amounting to $4.5 million, charge-offs or writedowns amounting to
$1.6 million and reclassifications to performing assets amounting to $900
thousand.
The following is a presentation of non-performing assets as of June 30,
1995, December 31, 1994, and June 30, 1994:
June 30 December 31 June 30
(Dollars in thousands) 1995 1994 1994
Non-performing loans $1,806 $1,346 $5,309
Other real estate owned, net 1,448 1,969 2,412
------ ------ ------
Total non-performing assets $3,254 $3,315 $7,720
====== ====== ======
Loans past due 90 days or more as to
principal or interest $ 384 $ 647 $ 15
Non-performing loans as a
percent of loans outstanding .48% .35% 1.43%
Non-performing assets as a
percent of loans outstanding
plus other real estate owned .85% .86% 2.07%
Interest income of approximately $43 thousand and $84 thousand would have
been recognized during the three and six month periods ended June 30, 1995, had
these loans been current in accordance with their original terms and been
outstanding through the period or since origination. Interest income on these
loans of $34 thousand and $38 thousand was recognized during the three and six
months ended June 30, 1995.
Group concentrations of credit are considered to exist if a number of
counterparties are engaged in similar activities and have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions.
Agriculture-related borrowings at June 30, 1995 totalled $87 million or 22.8
percent of total loans outstanding. These loans may be impacted by adverse
climate or economic conditions not common to other industries. The Company's
exposure to possible loss in the event of nonperformance by these borrowers is
represented by the contractual amount of those instruments. The Company's policy
is to require supporting collateral for these loans which is generally in the
form of agriculture real estate, livestock, and farm equipment. At June 30, 1995
there were no significant agriculture related borrowings which were classified
as non-performing assets and there were no charge-offs of agriculture related
loans during the three or six months ended June 30, 1995.
Financial Position
Total assets at June 30, 1995 were $563 million compared to $548 million at
December 31, 1994. Total loans outstanding at June 30, 1995 were $380 million
compared to $383 million at December 31, 1994. Total deposits at June 30, 1995
were $479 million compared to $469 million at December 31, 1994.
-11-
<PAGE>
Capital Adequacy
The Company's stockholders' equity was $55.8 million at June 30, 1995 and
$52.1 million at December 31, 1994. Total stockholders' equity increased by 7.1
percent from December 31, 1994 which was the net effect of the recognition of
$3.6 million in net income for the six month period, cash dividend payments to
stockholders of $1.4 million and a favorable change in net unrealized gains or
losses on investment securities available for sale of $1.4 million. Net
unrealized losses on investment securities available for sale of $78 thousand
and $1.4 million were included as a component of stockholders' equity at June
30, 1995 and December 31, 1994, respectively.
The maintenance of an appropriate level of capital is a priority of the
Company's management. The Company's capital adequacy and dividend policy are
closely monitored by management and are reviewed regularly by the Board of
Directors of the Company. The Company intends to provide an adequate return to
its stockholders while retaining a sufficient capital base to provide for future
growth and to comply with regulatory standards.
Banking regulators' risk-based capital guidelines address the capital
adequacy of banking organizations. These guidelines include a definition of
capital and a framework for calculating risk-weighted assets by assigning assets
and off-balance sheet items to broad risk categories, as well as minimum ratios
to be maintained by banking organizations. The risk-based capital ratios are
calculated by dividing qualifying capital by risk-weighted assets.
Under the risk-based capital guidelines, Total Capital is defined as the
sum of core or "Tier 1" Capital and "Tier 2" Capital. As the guidelines apply to
Keystone Heritage Group, Inc., Tier 1 Capital is total stockholders' equity and
Tier 2 Capital includes a portion of the allowance for possible loan losses. The
rules require that banking organizations must have ratios of 4.00 percent and
8.00 percent for Tier 1 and Total Capital, respectively. At June 30, 1995 the
Company's Tier 1 and Total Capital ratios were 13.40 percent and 14.75 percent,
respectively. Tier 1 and Total Capital ratios were 12.77 percent and 14.12
percent respectively, at December 31, 1994. In addition to the risk-based
capital ratio, a bank is also required to maintain a "Leverage ratio" of Tier 1
capital to average total assets of 3 percent or higher. At June 30, 1995, the
Company's Leverage ratio was 9.99 percent and was 9.89 percent at December 31,
1994.
Off-Balance Sheet Items
The Company's loan portfolio consists of loans to businesses and
individuals primarily in its five-county market area of Lebanon, Lancaster,
Berks, Dauphin, and Schuylkill counties.
In the ordinary course of business, the Company enters into agreements with
customers, such as commitments to extend credit and standby letters of credit
which involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts presented in the balance sheet. The Company's exposure to
possible loss in the event of nonperformance by the other party to the financial
instruments for commitments to extend credit and financial guarantees written is
represented by the contractual amount of those instruments. The Company may not
be obligated to advance funds if the customer's financial condition deteriorates
or if the customer fails to meet certain terms.
Commitments and conditional obligations generally have fixed expiration
dates or termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being used, the total commitment
amounts do not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case-by-case basis, applying the
same credit standards used in the lending process, through periodic
reassessments of the customer's creditworthiness and through ongoing credit
reviews. The amount of collateral obtained, if deemed necessary by the Company
upon extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties.
The Bank has entered into interest rate swap contracts, and interest rate
cap and interest rate collar contracts as part of its asset-liability management
activities. These contracts are effected primarily to hedge against certain
assets or liabilities in order to minimize mismatches in the Bank's interest
rate sensitivity and interest rate risk positions.
Interest rate contracts generally involve the exchange of fixed and
floating-rate interest payment obligations without the exchange of the
underlying principal amounts. Entering into interest rate contracts involves not
only the risk of dealing with counterparties and their ability to meet the terms
of the contracts but also the interest rate risk associated with unmatched
positions. Notional principal amounts often are used to express the volume of
these transactions, but the amounts potentially subject to credit risk are much
smaller.
-12-
<PAGE>
The interest income or interest expense differential from interest rate
swap contracts is recognized as interest income or interest expense over the
life of the contract. The interest income or interest expense resulting from the
cap and collar contracts would be recognized when the national prime rate moves
below or above a predetermined interest rate level. Gains or losses from early
termination of swap contracts are deferred and amortized over the remaining term
of the underlying assets or liabilities.
The Company entered into an interest rate cap/collar contract on November
5, 1993 with a notional amount of $10 million. The contract states that the
Company would receive a spread between the national prime rate and 6.00 percent
should the prime rate fall below 6.00 percent. The Company would pay an interest
rate spread between the national prime and 7.00 percent should the prime rate
exceed 7.00 percent. The contract expires on February 5, 1996.
During the third quarter of 1994, the Company entered into an interest rate
swap with a notional amount of $10 million and a termination date of July 25,
1995. Under the terms of this agreement, the Company will receive a fixed
interest rate of 8.00 percent and pay a floating prime rate based on the
national prime rate. The Company does not obtain collateral or other security to
support financial instruments subject to credit risk but monitors the credit
standing of counterparties. The counterparties of the aforementioned interest
rate contracts are commercial banks having a rating of A1 from Moody's Investor
Service.
Both the interest rate swap and the interest rate cap/collar contract were
entered into to hedge the Company's interest rate risk in a declining or stable
interest rate environment. Specifically, these contracts hedge the Company's
risk from negative movements in its prime rate based asset portfolio which would
not be perfectly matched by repricing liabilities.
The following is the amount of financial instruments with off-balance sheet
risk not reflected in the consolidated balance sheets at June 30, 1995 and
December 31, 1994:
Contractual Amounts
June 30 December 31
(Dollars in thousands) 1995 1994
Financial instruments whose
contractual amounts represent
credit risk: $89,722 $84,398
Commitments to extend credit 9,010 7,983
Standby letters of credit
Contractual amounts of off-balance
sheet financial instruments
not constituting credit risk:
Interest rate swap, contractual
value 10,000 10,000
Interest rate cap/collar,
contractual value 10,000 10,000
Supervision and Regulation
The Bank is a national bank, chartered under the National Bank Act, and is
subject to the primary supervision of, and is examined by, the Comptroller of
the Currency. As a member of the Federal Reserve System, the Bank is subject to
provisions of the Federal Reserve Act, which restricts the ability of a bank to
extend credit to its parent holding company or to certain of the parent's
subsidiaries, or to invest in the Company's common stock or to take such stock
as collateral for loans to any borrower. The operations of the Bank are also
subject to regulation by the FDIC.
The Company is affected by the monetary and credit policies of the Federal
Reserve System. The Federal Reserve System regulates the national supply of bank
credit through open market operations in U. S. Government securities, changes in
the discount rate charged for bank borrowing, and changes in reserve
requirements on bank deposits.
New Accounting Standards
In May 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65" (SFAS 122). SFAS 122
amends Statement 65 to require an institution to recognize as separate assets
the rights to service mortgage loans for others when a mortgage loan is sold or
securitized and servicing rights retained. SFAS 122 also requires an entity to
measure the impairment of servicing rights based on the difference between the
carrying amount of the servicing rights and their current fair value. SFAS 122
is to be applied prospectively in fiscal years beginning after December 15,
1995.
Presently, the Company does not sell or securitize mortgage loans with
servicing rights retained. Accordingly, the Company will not be impacted by the
provisions of SFAS 122.
-13-
<PAGE>
AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30, 1995 Three Months Ended June 30, 1994
Average Average Average Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans $ 378,365 $ 8,809 9.34% $ 366,096 $ 7,534 8.25%
Money market investments 7,436 113 6.10 1,199 12 4.01
Investment securities:
Taxable 130,830 1,860 5.70 118,767 1,509 5.10
Non-taxable 11,247 198 7.06 12,891 219 6.81
------ --- ---- ------ --- ----
Total investment securities 142,077 2,058 5.81 131,658 1,728 5.26
Total earning assets 527,878 $ 10,980 8.34% 498,953 $ 9,274 7.46%
========= ==== ========= ====
Other assets 26,476 31,453
------ ------
Total assets $ 554,354 $ 530,406
========= =========
Liabilities and stockholders' equity
Interest bearing deposits:
Now accounts $ 54,638 $ 197 1.45% $ 65,458 $ 235 1.44%
Savings and money market 119,171 917 3.09 136,144 826 2.43
Time 238,735 3,382 5.68 190,618 2,063 4.34
------- ----- ---- ------- ----- ----
Total interest bearing deposits 412,544 4,496 4.37 392,220 3,124 3.19
Short-term borrowings 11,207 112 4.01 17,085 135 3.17
Long-term debt 13,364 222 6.67 11,063 146 5.29
------ --- ---- ------ --- ----
Total interest bearing liabilities 437,115 $ 4,830 4.43% 420,368 $ 3,405 3.25%
========= ==== ========= ====
Non-interest bearing deposits 56,958 55,782
Other liabilities 5,845 3,697
Stockholders' equity 54,436 50,559
------ ------
Total liabilities and
stockholders' equity $ 554,354 $ 530,406
========= =========
Net interest income $ 6,150 $ 5,869
Total yield on earning assets 8.34% 7.46%
Rate on supporting liabilities 3.67% 2.74%
---- ----
Net interest margin 4.67% 4.72%
==== ====
</TABLE>
Interest and average interest rates are presented on a fully taxable equivalent
basis, using an effective tax rate of 34%. For purposes of calculating loan
yields, average loan balances include non-accrual loans. Loan fees are included
in interest income.
-14-
<PAGE>
AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30, 1995 Six Months Ended June 30, 1994
Average Average Average Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans $ 380,081 $ 17,356 9.21% $ 363,847 $ 14,618 8.10%
Money market investments 8,337 247 5.97 1,740 30 3.48
Investment securities:
Taxable 122,455 3,406 5.61 120,377 3,021 5.06
Non-taxable 11,285 396 7.08 13,129 454 6.97
--------- --------- ---- --------- --------- ----
Total investment securities 133,740 3,802 5.73 133,506 3,475 5.25
Total earning assets 522,158 $ 21,405 8.27% 499,093 $ 18,123 7.32%
========= ==== ========= ====
Other assets 26,331 31,728
------ ------
Total assets $ 548,489 $ 530,821
========= =========
Liabilities and stockholders' equity
Interest bearing deposits:
Now accounts $ 55,926 $ 399 1.44% $ 66,733 $ 480 1.45%
Savings and money market 119,066 1,711 2.90 136,637 1,648 2.43
Time 233,954 6,342 5.47 191,123 4,138 4.37
--------- --------- ---- --------- --------- ----
Total interest bearing deposits 408,946 8,452 4.17 394,493 6,266 3.20
Short-term borrowings 12,167 243 4.03 17,192 255 2.99
Long-term debt 12,503 404 6.52 11,111 302 5.48
--------- --------- ---- --------- --------- ----
Total interest bearing liabilities 433,616 $ 9,099 4.23% 422,796 $ 6,823 3.25%
========= ==== ========= ====
Non-interest bearing deposits 55,757 53,645
Other liabilities 5,545 3,981
Stockholders' equity 53,571 50,399
------ ------
Total liabilities and
stockholders' equity $ 548,489 $ 530,821
========= =========
Net interest income $ 12,306 $ 11,300
Total yield on earning assets 8.27% 7.32%
Rate on supporting liabilities 3.52% 2.75%
---- ----
Net interest margin 4.75% 4.57%
==== ====
</TABLE>
Interest and average interest rates are presented on a fully taxable equivalent
basis, using an effective tax rate of 34%. For purposes of calculating loan
yields, average loan balances include non-accrual loans. Loan fees are included
in interest income.
-15-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
1995 Annual Stockholders' Meeting
The 1995 Annual Meeting of Stockholders' for the Company was held on April
18, 1995. Stockholders' of the Company voted on the following issues: Election
of Directors Lance M. Frehafer, Charles V. Henry, III, Bruce A. Johnson and John
E. Wengert; a proposal to Approve an amendment to the Company's Articles of
Incorporation to increase the authorized shares from 5,000,000 common shares of
$5.00 par value to 10,000,000 common shares of $5.00 par value; and a proposal
to ratify the selection of KPMG Peat Marwick LLP as the Company's independent
public accountants for the fiscal year ending December 31, 1995. Eighty percent
of the 3,046,213 shares eligible to vote were voted in either proxy form or in
person at the meeting.
All matters subject to a vote at the Annual Meeting were approved as a
result of the votes cast at the Annual Meeting. The following is a presentation
of the voting results from the April 18, 1995 Annual Stockholders' Meeting:
Election of Directors For Withheld Total
Lance M. Frehafer 2,275,092 170,734 2,445,826
Charles V. Henry, III 2,278,530 167,296 2,445,826
Bruce A. Johnson 2,271,904 173,922 2,445,826
John E. Wengert 2,278,444 167,382 2,445,826
The term of the Directors elected at the annual meeting expires in 1998.
The following Directors remain on the Company's Board of Directors until the
expiration of their terms in 1996 and 1997:
Directors Term Expiring in 1996:
Harry J. Gensemer
Albert B. Murry
Thomas I. Siegel
Brett H. Tennis
Earnest D. Williams, Jr.
Directors Term Expiring in 1997:
Raymond M. Dorsch, Jr.
Wendie DiMatteo Holsinger
Donald W. Lesher, Jr.
Mark Randolph Tice
The amendment to the Company's Articles of Incorporation to increase the
authorized shares from 5,000,000 common shares of $5.00 par value to 10,000,000
common shares of $5.00 par value was voted as follows:
FOR AGAINST ABSTAIN
2,288,224 149,645 7,957
-16-
<PAGE>
The proposal to ratify the selection of KPMG Peat Marwick LLP as the
Company's independent public accountants for the fiscal year ending December 31,
1995 was voted as follows:
FOR AGAINST ABSTAIN
2,375,257 57,843 12,726
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) None.
(b.) The Company did not file any reports on Form 8-K during the quarter ended
June 30, 1995.
-17-
<PAGE>
KEYSTONE HERITAGE GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Keystone Heritage Group, Inc.
(Registrant)
Date August 4, 1995 By /s/ Kurt A. Phillips
Kurt A. Phillips
Chief Financial and Accounting Officer
-18-
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000715366
<NAME> KEYSTONE HERITAGE GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 18,254
<INT-BEARING-DEPOSITS> 150
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 54,850
<INVESTMENTS-CARRYING> 98,739
<INVESTMENTS-MARKET> 99,021
<LOANS> 379,703
<ALLOWANCE> 8,062
<TOTAL-ASSETS> 562,714
<DEPOSITS> 478,811
<SHORT-TERM> 10,318
<LIABILITIES-OTHER> 6,122
<LONG-TERM> 11,664
<COMMON> 15,251
0
0
<OTHER-SE> 40,548
<TOTAL-LIABILITIES-AND-EQUITY> 562,714
<INTEREST-LOAN> 17,224
<INTEREST-INVEST> 3,667
<INTEREST-OTHER> 247
<INTEREST-TOTAL> 21,138
<INTEREST-DEPOSIT> 8,452
<INTEREST-EXPENSE> 9,099
<INTEREST-INCOME-NET> 12,039
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 58
<EXPENSE-OTHER> 9,205
<INCOME-PRETAX> 5,254
<INCOME-PRE-EXTRAORDINARY> 5,254
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,621
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.19
<YIELD-ACTUAL> 4.75
<LOANS-NON> 1,806
<LOANS-PAST> 384
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 575
<ALLOWANCE-OPEN> 8,140
<CHARGE-OFFS> 314
<RECOVERIES> 236
<ALLOWANCE-CLOSE> 8,062
<ALLOWANCE-DOMESTIC> 8,062
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,279
</TABLE>
