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 September 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 November 8, 1995
Common Stock ($5.00 par value) 3,053,762 shares
<PAGE>
KEYSTONE HERITAGE GROUP, INC.
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Consolidated Balance Sheets as of
September 30, 1995 and December 31, 1994 (Unaudited) 3
Consolidated Statements of Income for the
Three and Nine Months ended September 30, 1995 and
1994 (Unaudited) 4
Consolidated Statements of Stockholders' Equity
for the Nine Months ended September 30, 1995 and
1994 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Nine Months ended September 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
Signature Page 18
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<PAGE>
KEYSTONE HERITAGE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
September 30 December 31
1995 1994
--------- --------
<S> <C> <C>
ASSETS
Cash and due from banks $ 15,834 $ 23,568
Interest bearing deposits with banks 3,560 150
Federal funds sold 900 1,300
Investment securities available for sale 56,724 55,664
Investment securities held to maturity
(fair value of $91,415 and $70,037
for 1995 and 1994, respectively) 91,130 72,704
Loans, net of unearned income of
$3,220 for 1995 and $5,088 for 1994 384,011 383,154
Allowance for possible loan losses (8,125) (8,140)
----------- -----------
Loans, net 375,886 375,014
Premises and equipment, net 8,044 8,082
Accrued interest receivable 3,533 3,185
Other real estate owned 1,059 1,969
Deferred tax asset, net 3,447 4,031
Other assets 2,518 2,527
----------- -----------
Total assets $ 562,635 $ 548,194
=========== ===========
LIABILITIES
Non-interest bearing deposits $ 57,764 $ 64,063
Interest bearing deposits 418,325 404,677
----------- -----------
Total deposits 476,089 468,740
Short-term borrowings 10,815 12,087
Other borrowings 11,580 9,926
Accrued interest payable 4,440 3,068
Other liabilities 2,661 2,271
----------- -----------
Total liabilities 505,585 496,092
STOCKHOLDERS' EQUITY
Common stock - $5 par value; Authorized
10,000,000 shares; Outstanding
3,053,762 shares at September 30,
1995 and 3,046,213 shares at
December 31, 1994 15,269 15,231
Capital surplus 30,214 30,053
Retained earnings 11,678 8,269
Net unrealized loss on investment securities
available for sale, net of taxes (111) (1,451)
----------- -----------
Total stockholders' equity 57,050 52,102
Total liabilities and stockholders'
equity $ 562,635 $ 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 Nine Months Ended
September 30 September 30
1995 1994 1995 1994
------- ------- ------- ------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 8,856 $ 7,926 $ 26,080 $ 22,442
Interest on investment securities
available for sale:
Taxable investment securities 671 726 1,982 2,341
Equity investments 52 39 142 117
Interest on investment securities
held to maturity:
Taxable investment securities 1,170 814 3,207 2,142
Non-taxable investment securities 111 133 340 433
--------- --------- --------- ---------
Total interest on investment
securities 2,004 1,712 5,671 5,033
Interest on money market investments 175 53 422 83
--------- --------- --------- ---------
Total interest income 11,035 9,691 32,173 27,558
INTEREST EXPENSE
Interest on deposits 4,674 3,374 13,126 9,640
Interest on short-term borrowings 118 167 362 422
Interest on other borrowings 178 172 581 474
--------- --------- --------- ---------
Total interest expense 4,970 3,713 14,069 10,536
Net interest income 6,065 5,978 18,104 17,022
Provision for possible loan losses 0 0 0 300
--------- --------- --------- ---------
Net interest income after provision
for possible loan losses 6,065 5,978 18,104 16,722
OTHER OPERATING INCOME
Trust income 324 330 961 990
Service charges on deposits 333 299 972 912
Net realized gain (loss) on investment
securities available for sale 51 22 109 (29)
Net gain on sale of loans 78 64 156 244
Other income 517 602 1,525 1,568
--------- --------- --------- ---------
Total other operating income 1,303 1,317 3,723 3,685
OTHER OPERATING EXPENSE
Salaries and employee benefits 2,510 2,190 7,255 6,626
Occupancy expense, net 331 319 974 932
Equipment expense 452 465 1,413 1,362
Deposit insurance expense (26) 252 492 764
Other expense 1,323 1,307 3,661 3,465
--------- --------- --------- ---------
Total other operating expense 4,590 4,533 13,795 13,149
Income before income taxes 2,778 2,762 8,032 7,258
Income taxes 857 899 2,490 2,365
--------- --------- --------- ---------
Net income $ 1,921 $ 1,863 $ 5,542 $ 4,893
========= ========= ========= =========
PER COMMON SHARE
Net income $ .63 $ .61 $ 1.82 $ 1.61
========= ========= ========= =========
Cash dividends paid $ .24 $ .21 $ .70 $ .62
</TABLE>
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<PAGE>
KEYSTONE HERITAGE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 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- 4,893 -0- 4,893
Cash dividends ($.62 per share) -0- -0- (1,901) -0- (1,901)
Change in unrealized gain (loss) on
investment securities available
for sale, net of taxes -0- -0- -0- (1,441) (1,441)
--------- --------- --------- --------- ---------
Balance, September 30, 1994 $ 12,185 $ 30,053 $ 10,112 ($ 973) $ 51,377
========= ========= ========= ========= =========
Balance, December 31, 1994 $ 15,231 $ 30,053 $ 8,269 ($ 1,451) $ 52,102
Net income 5,542 5,542
Cash dividends ($.70 per share) -0- -0- (2,133) -0- (2,133)
Stock issued under dividend
reinvestment plan 38 161 -0- -0- 199
Change in unrealized gain (loss) on
investment securities available for
sale, net of taxes -0- -0- -0- 1,340 1,340
--------- --------- --------- --------- ---------
Balance, September 30, 1995 $ 15,269 $ 30,214 $ 11,678 $ (111) $ 57,050
========= ========= ========= ========= =========
</TABLE>
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<PAGE>
KEYSTONE HERITAGE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1995 1994
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 5,542 $ 4,893
Adjustments to reconcile net income to cash:
Capitalized interest on deposits 4,918 4,449
Provision for possible loan losses 0 300
Depreciation and amortization 1,054 1,009
Deferred income taxes (96) (565)
Increase in accrued interest receivable (348) (546)
Increase (decrease) in
accrued interest payable 1,372 (218)
Net gain on sale of loans (156) (244)
Net realized (gain) loss on investment
securities available for sale (109) 29
Other, net 561 (707)
--------- ---------
Net cash provided by operating activities 12,738 8,400
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase)decrease in money market investments (3,010) 574
Maturities of investment securities
held to maturity 55,284 20,319
Maturities of investment securities
available for sale 3,358 35,649
Sale of investment securities available for sale 542 20,760
Funds invested in investment securities
held to maturity (73,893) (28,895)
Funds invested in investment securities
available for sale (2,818) (38,893)
Net decrease (increase) in loans
made to customers 1,865 (20,734)
Originations of residential mortgage loans sold (10,046) (10,447)
Proceeds from sale of residential mortgage loans 7,481 10,651
Net expenditures for premises and equipment (1,008) (907)
Proceeds from sale of other real estate owned 894 1,529
--------- ---------
Net cash used by investing activities (21,351) (10,394)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 2,431 (4,333)
Net (decrease) increase in short-term borrowings (1,272) 10,114
Net increase (decrease) in other borrowings 1,654 (2,678)
Proceeds from issuance of common stock 199 0
Cash dividends paid (2,133) (1,901)
--------- ---------
Net cash provided from financing activities 879 1,202
Net decrease in cash and due from banks (7,734) (792)
Cash and due from banks at beginning of period 23,568 19,176
Cash and due from banks at end of period $ 15,834 $ 18,384
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 7,779 $ 6,324
Income taxes paid 2,800 2,469
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Loans charged-off 385 769
</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 September 30, 1995 and
December 31, 1994, the consolidated statements of income for the three and
nine month periods ended September 30, 1995 and 1994 and the consolidated
statements of cash flows for the nine months ended September 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. 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. In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 establishes a new method of accounting
for stock-based compensation arrangements with employees. The new method is
a fair value based method rather than the intrinsic value based method that
is currently utilized. However, SFAS 123 does not require an entity to
adopt the new fair value based method for purposes of preparing basic
financial statements. If an entity chooses not to adopt the fair value
based method, SFAS 123 requires an entity to display in the footnotes pro
forma net income and earnings per share information as if the fair value
based method had been adopted.
Currently, the Company has not determined whether it will adopt the fair
value based method and accordingly, cannot estimate the impact on the basic
financial statements that SFAS 123 will have upon adoption.
SFAS 123 is effective for financial statements for fiscal years beginning
after December 15, 1995.
4. Earnings per common share are based upon the weighted average number of
shares outstanding. The weighted average number of shares outstanding was
3,052,224 and 3,046,213 for the three month periods ended September 30,
1995 and 1994, respectively, and 3,049,003 and 3,046,213 for the nine
months ended September 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.
-7-
<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 September 30, 1995
was $1.921 million or $.63 per share, compared to $1.863 million or $.61 per
share for the three months ended September 30, 1994. Return on average
stockholders' equity and return on average assets for the 1995 period were 13.53
percent and 1.35 percent, respectively.
Net income for the nine months ended September 30, 1995 was $5.542 million
or $1.82 per share, compared to net income of $4.893 million or $1.61 per share
for 1994. Return on average stockholders' equity and return on average assets
for the 1995 period were 13.60 percent and 1.34 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 15 and 16 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 September 30, 1995 and 1994, and for the nine months ended September 30,
1995 and 1994.
Net interest income for the three months ended September 30, 1995 was $6.2
million, a $77 thousand or 1.3 percent increase from the same period of 1994.
The net interest margin for the third quarter of 1995 was 4.57 percent compared
to 4.76 percent for the same period of 1994. Average earning assets for the
three month period ended September 30, 1995 were $536.2 million, a $26.8 million
or a 5.3 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 60 basis points from the same period of 1994.
These increases were partially offset by an increase in total interest-bearing
deposits of $23.4 million and from increases in average deposit rates during
1995. Average time deposits increased by $37.3 million while average transaction
and savings deposits decreased by $11.3 million. The increase in average earning
assets and the shift in deposit volumes and increasing rates had the effect of
reducing the net interest margin for the three months ended September 30, 1995
compared to the same period of 1994.
Net interest income for the nine months ended September 30, 1995 was $18.5
million, a $1.1 million or 6.3 percent increase from the same period of 1994.
The net interest margin for the nine months ended September 30, 1995 was 4.70
percent compared to 4.64 percent for the same period of 1994. Average earning
assets for the nine month period ended September 30, 1995 were $526.9 million, a
$23.1 million or a 4.8 percent increase from the same period of 1994.
-8-
<PAGE>
For the nine month comparative periods, net interest income also increased
in 1995 as a result of increases in average earning asset balances, 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 the increase in the net interest margin for the 1995 period.
Average loans increased by $13.6 million or 3.7% from 1994. Average
interest-bearing deposit balances increased by $17.5 million for the nine months
ended September 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 nine month period ended September 30, 1995. The provision for
possible loan losses for the nine month period ended September 30, 1994 was $300
thousand.
Net recoveries of $63 thousand were recorded for the three months ended
September 30, 1995 compared to net charge-offs of $52 thousand for the same
period of 1994. For the nine month comparative period the Company recorded net
charge-offs of $15 thousand and $397 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 September 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 nine month periods ended September 30, 1995 and
1994:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- --------------
(Dollars in thousands) 1995 1994 1995 1994
------- ------- ------ -----
<S> <C> <C> <C> <C>
Allowance for possible loan losses
at beginning of period $ 8,062 $ 8,491 $ 8,140 $ 8,486
Loans charged-off:
Commercial 0 89 113 543
Agriculture 0 0 0 0
Real estate construction 0 0 0 0
Loans to individuals 71 76 272 226
Real estate - residential mortgage 0 0 0 0
------- ------- ------- -------
Total loans charged-off 71 165 385 769
Recoveries of loans previously charged-off:
Commercial 123 96 306 346
Agriculture 0 0 0 0
Real estate construction 7 9 38 58
Loans to individuals 4 8 26 18
Real estate - residential mortgage 0 0 0 0
------- ------- ------- -------
Total recoveries of loans previously
charged-off 134 113 370 422
Net loans charged-off (63) 52 15 397
Current period's provision for
possible loan losses 0 0 0 300
------- ------- ------- -------
Allowance for possible loan
losses at end of period $ 8,125 $ 8,439 $ 8,125 $ 8,439
======= ======= ======= =======
</TABLE>
Other Operating Income and Expense
Other operating income was $1.3 million for the three months ended
September 30, 1995 and 1994. Other operating income was $3.7 million for the
nine months ended September 30, 1995 and 1994.
Other operating income included the recognition of net realized gains on
the sales of investment securities available for sale of $109 thousand during
the nine month period ended September 30, 1995 compared to net realized losses
of $29 thousand for the same period of 1994. Lower income from mortgage loan
sales resulted during the nine month period ended September 30, 1995 compared to
1994 as the volume of loans that were originated and sold during the period
decreased from $10.7 million in 1994 to $7.5 million in 1995, a decrease of 30
percent from the 1994 level.
Other operating expense for the three months ended September 30, 1995 was
$4.6 million, a 1.3 percent increase over the $4.5 million reported for the same
period of 1994. For the nine months ended September 30, 1995 and 1994, other
operating expense was $13.8 million and $13.1 million, respectively, a 4.9
percent increase.
Salaries and benefits expense increased by $320 thousand or 14.6 percent
for the three months ended September 30, 1995 compared to the same period of
1994. For the nine months ended September 30, 1995, salaries and benefits
increased by $629 thousand or 9.5 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 and employee bonuses recorded during the third quarter of 1995. The
Company recognized a credit of $26 thousand for FDIC insurance premiums charged
during the third quarter of 1995 compared to an expense of $252 thousand
recognized during the third quarter of 1994. The FDIC insurance expense
recognized for the nine months ended September 30, 1995 compared to the same
period of 1994 was $492 thousand and $764 thousand, respectively. The decrease
in FDIC insurance was attributable to a decrease in the assessment rate charged
by the Federal Deposit Insurance Corporation. The assessment rate charged to the
Bank on deposit accounts decreased from $23 cents per $100 of deposits to $4
cents per $100 of deposits. This reduction in premium resulted from a refund of
a portion of the FDIC insurance assessments that were previously paid by the
Company. This refund was received during the third quarter of 1995 and amounted
to $290 thousand. Based on the Company's current deposit volumes and current
FDIC assessment rate, the Company's FDIC expense should approximate $50 thousand
per quarter in future periods. The $4 cents per $100 of deposits is in effect
for the current quarter and is the lowest assessment rate charged to "Well
Capitalized" institutions. Occupancy and equipment expenses increased by $93
thousand from the nine month comparative periods ended September 30, 1994 to
September 30,
-10-
<PAGE>
1995, which resulted from the aforementioned new branch openings in 1994. Other
expenses increased by $196 thousand for the nine month period ended September
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.
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 September 30, 1995 totalled $1.7 million or .43
percent of total loans outstanding, compared to $1.3 million or .35 percent of
loans at December 31, 1994 and $4.0 million or 1.06 percent of loans at
September 30, 1994. Non-performing assets at September 30, 1995 were $2.7
million or .71 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 $6.6 million or 1.73 percent of loans plus other real estate owned at
September 30, 1994. The improvement in non-performing assets at September 30,
1995 as compared to September 30, 1994 was a result of decreased levels of
non-accrual loans and other real estate owned. During 1995, disposals of
non-performing assets consisted of third-party transactions amounting to $1.5
million.
The following is a presentation of non-performing assets as of September
30, 1995, December 31, 1994, and September 30, 1994:
<TABLE>
<CAPTION>
Sept. 30 Dec. 31 Sept. 30
(Dollars in thousands) 1995 1994 1994
-------- ------- ------
<S> <C> <C> <C>
Non-performing loans $1,665 $1,346 $4,028
Other real estate owned, net 1,059 1,969 2,621
------ ------ ------
Total non-performing assets $2,724 $3,315 $6,649
====== ====== ======
Loans past due 90 days or more
as to principal or interest $1,235 $ 647 $ 175
Non-performing loans as a
percent of loans outstanding .43% .35% 1.06%
Non-performing assets as a
percent of loans outstanding
plus other real estate owned .71% .86% 2.73%
</TABLE>
Interest income of approximately $41 thousand and $118 thousand would have
been recognized during the three and nine month periods ended September 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 $13 thousand and $40 thousand was recognized during the three and
nine months ended September 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 September 30, 1995 totalled $87 million or
22.7 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 September 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 nine months ended September 30, 1995.
Financial Position
Total assets at September 30, 1995 were $563 million compared to $548
million at December 31, 1994. Total loans outstanding at September 30, 1995 were
$384 million compared to $383 million at December 31, 1994. Total deposits at
September 30, 1995 were $476 million compared to $469 million at December 31,
1994.
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<PAGE>
Capital Adequacy
The Company's stockholders' equity was $57.1 million at September 30, 1995
and $52.1 million at December 31, 1994. Total stockholders' equity increased by
9.5 percent from December 31, 1994 which was the net effect of the recognition
of $5.5 million in net income for the nine month period, cash dividend payments
to stockholders of $2.1 million and a favorable change in net unrealized gains
or losses on investment securities available for sale of $1.3 million. Net
unrealized losses on investment securities available for sale of $111 thousand
and $1.4 million were included as a component of stockholders' equity at
September 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 September 30, 1995
the Company's Tier 1 and Total Capital ratios were 13.55 percent and 14.90
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 September 30, 1995,
the Company's Leverage ratio was 10.07 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 used primarily for the purpose of managing
interest rate risk against specific assets and liabilities in order to minimize
mismatches in the Bank's interest rate sensitivity and interest rate risk
positions.
-12-
<PAGE>
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.
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 is not exposed to credit
risk in terms the notional amounts of these contracts, however, the receipt of
payments representing the interest differential is based on the creditworthiness
of the counterparty to each contract.
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 1995 the Company entered into three interest
rate swap contracts. On July 7, 1995 the Company entered into an interest rate
swap contract with a notional amount of $10 million. The contract states that
the Company would receive a fixed rate of 8.41 percent and pay a floating prime
rate based on the national prime rate. The contract expires on July 7, 1998. The
Company entered into an interest rate swap contract on July 28, 1995 with a
notional amount of $10 million. This contract states that the Company would
receive a fixed rate of 8.65 percent and pay a floating prime rate based on the
national prime rate. This contract expires on July 28, 1997. The Company entered
into another interest rate swap contract on August 15, 1995 with a notional
amount of $10 million. This contract states that the Company would receive a
fixed rate of 8.75 percent and pay a floating prime rate based on the national
prime rate. This contract expires on August 15, 1997.
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.
The interest rate swap contracts and the interest rate cap/collar contract
were entered into to protect the Company's interest rate risk in a declining or
stable interest rate environment. Specifically, these contracts protect 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 September 30, 1995 and
December 31, 1994:
<TABLE>
<CAPTION>
Contractual Amounts
September 30 December 31
(Dollars in thousands) 1995 1994
------------ --------
<S> <C> <C>
Financial instruments whose
contractual
amounts represent credit risk:
Commitments to extend credit $86,065 $84,398
Standby letters of credit 9,151 7,983
Contractual amounts of off-balance
sheet financial instruments not
constituting credit risk:
Interest rate swap, notional
value 30,000 10,000
Interest rate cap/collar,
notional value 10,000 10,000
</TABLE>
-13-
<PAGE>
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.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 establishes a new method of accounting for
stock-based compensation arrangements with employees. The new method is a fair
value based method rather than the intrinsic value based method that is
currently utilized. However, SFAS 123 does not require an entity to adopt the
new fair value based method for purposes of preparing basic financial
statements. If an entity chooses not to adopt the fair value based method, SFAS
123 requires an entity to display in the footnotes pro forma net income and
earnings per share information as if the fair value based method had been
adopted.
Currently, the Company has not determined whether it will adopt the fair
value based method and accordingly, cannot estimate the impact on the basic
financial statements that SFAS 123 will have upon adoption.
SFAS 123 is effective for financial statements with fiscal years beginning
after December 15, 1995.
-14-
<PAGE>
AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, 1995 Three Months Ended Sept. 30, 1994
Average Average Average Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans $ 382,460 $ 8,908 9.24% $ 373,998 $ 7,981 8.47%
Money market investments 12,101 175 5.74 4,656 53 4.52
Investment securities:
Taxable 130,597 1,875 5.70 118,149 1,572 5.28
Non-taxable 11,001 194 7.00 12,509 212 6.72
--------- --------- ---- --------- --------- ----
Total investment securities 141,598 2,069 5.80 130,658 1,784 5.42
Total earning assets 536,159 $ 11,152 8.25% 509,312 $ 9,818 7.65%
========= ==== ========= ====
Other assets 28,164 28,756
------ ------
Total assets $ 564,323 $ 538,068
========= =========
Liabilities and stockholders' equity Interest
bearing deposits:
Now accounts $ 55,746 $ 202 1.44% $ 62,262 $ 225 1.43%
Savings and money market 123,734 956 3.07 131,064 818 2.48
Time 240,402 3,516 5.80 203,140 2,331 4.55
--------- --------- ---- --------- --------- ----
Total interest bearing deposits 419,882 4,674 4.42 396,466 3,374 3.38
Short-term borrowings 11,664 118 4.01 19,018 167 3.48
Long-term debt 11,949 178 5.91 11,843 172 5.76
--------- --------- ---- --------- --------- ----
Total interest bearing liabilities 443,495 $ 4,970 4.45% 427,327 $ 3,713 3.45%
========= ==== ========= ====
Non-interest bearing deposits 57,427 54,888
Other liabilities 7,085 4,963
Stockholders' equity 56,316 50,890
------ ------
Total liabilities and
stockholders' equity $ 564,323 $ 538,068
========= =========
Net interest income $ 6,182 $ 6,105
Total yield on earning assets 8.25% 7.65%
Rate on supporting liabilities 3.68% 2.89%
---- ----
Net interest margin 4.57% 4.76%
==== ====
</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>
AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30, 1995 Nine Months Ended Sept. 30, 1994
Average Average Average Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans $ 380,883 $ 26,283 9.23% $ 367,268 $ 22,599 8.23%
Money market investments 9,605 422 5.87 2,723 83 4.08
Investment securities:
Taxable 125,198 5,282 5.13 119,626 4,592 5.06
Non-taxable 11,190 590 6.90 12,920 667 6.97
--------- --------- ---- --------- --------- ----
Total investment securities 136,388 5,872 5.30 132,546 5,259 5.25
Total earning assets 526,876 $ 32,577 7.43% 502,537 $ 27,941 7.32%
========= ==== ========= ====
Other assets 26,949 30,726
------ ------
Total assets $ 553,825 $ 533,263
========= =========
Liabilities and stockholders' equity
Interest bearing deposits:
Now accounts $ 55,866 $ 601 1.45% $ 65,226 $ 705 1.45%
Savings and money market 120,639 2,666 2.45 134,759 2,465 2.43
Time 236,125 9,859 4.43 195,172 6,470 4.37
--------- --------- ---- --------- --------- ----
Total interest bearing deposits 412,630 13,126 3.26 395,157 9,640 3.20
Short-term borrowings 11,998 362 3.17 17,808 422 2.99
Long-term debt 11,684 581 5.89 10,768 474 5.48
--------- --------- ---- --------- --------- ----
Total interest bearing liabilities 436,312 $ 14,069 3.32% 423,733 $ 10,536 3.25%
========= ==== ========= ====
Non-interest bearing deposits 56,320 54,064
Other liabilities 6,697 4,902
Stockholders' equity 54,496 50,564
------ ------
Total liabilities and
stockholders' equity $ 553,825 $ 533,263
========= =========
Net interest income $ 18,508 $ 17,405
Total yield on earning assets 8.27% 7.43%
Rate on supporting liabilities 3.57% 2.79%
---- ----
Net interest margin 4.70% 4.64%
==== ====
</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.
-16-
<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
None.
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
September 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 November 8, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 15,834
<INT-BEARING-DEPOSITS> 3,560
<FED-FUNDS-SOLD> 900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 56,724
<INVESTMENTS-CARRYING> 91,130
<INVESTMENTS-MARKET> 91,415
<LOANS> 384,011
<ALLOWANCE> 8,125
<TOTAL-ASSETS> 562,635
<DEPOSITS> 476,089
<SHORT-TERM> 10,815
<LIABILITIES-OTHER> 7,101
<LONG-TERM> 11,580
<COMMON> 15,269
0
0
<OTHER-SE> 41,781
<TOTAL-LIABILITIES-AND-EQUITY> 562,635
<INTEREST-LOAN> 26,080
<INTEREST-INVEST> 5,671
<INTEREST-OTHER> 422
<INTEREST-TOTAL> 32,173
<INTEREST-DEPOSIT> 13,126
<INTEREST-EXPENSE> 14,069
<INTEREST-INCOME-NET> 18,104
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 109
<EXPENSE-OTHER> 13,795
<INCOME-PRETAX> 8,032
<INCOME-PRE-EXTRAORDINARY> 8,032
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,542
<EPS-PRIMARY> 1.82
<EPS-DILUTED> 1.82
<YIELD-ACTUAL> 4.57
<LOANS-NON> 1,665
<LOANS-PAST> 1,235
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,140
<CHARGE-OFFS> 385
<RECOVERIES> 317
<ALLOWANCE-CLOSE> 8,125
<ALLOWANCE-DOMESTIC> 8,125
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
