UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 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)
Registrant's telephone number, including area code: (717) 274-6800
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $5.00 Par Value
(Title of Class)
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the registrant's voting stock held by its
non-affiliates on March 25, 1996 (based on the average bid and asked prices on
that date) was approximately $94,926,950. Reference is made to page 6 herein for
a statement of the assumptions upon which this calculation is based.
As of March 25, 1996, the registrant had 4,071,683 common shares of $5.00
Par Value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Parts I and II of this report are incorporated herein
by reference to the 1995 Keystone Heritage Group, Inc. Annual Report to
Stockholders; certain portions of Part III of this report are incorporated
herein by reference to the Keystone Heritage Group, Inc. definitive Proxy
Statement dated March 7, 1996.
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PART I
ITEM 1. BUSINESS
Keystone Heritage Group, Inc. (the "Company") is a bank holding company
organized in 1982 under the laws of Pennsylvania and registered under the
Federal Bank Holding Company Act of 1956, as amended. The Company's principal
subsidiary is Lebanon Valley National Bank (the "Bank"), which is the successor
to several banking institutions, the oldest of which was chartered in 1831. The
Bank engages in a general commercial and retail banking and trust business
through its branch offices which are located in the five-county market area of
Lebanon, Lancaster, Dauphin, Schuylkill and Berks Counties. The Bank is a member
of the Federal Reserve System. Its deposits are insured by the Bank Insurance
Fund (BIF) of the Federal Deposit Insurance Corporation to the extent provided
by law.
At December 31, 1995, the Company had total consolidated assets of $577.8
million, total deposits of $487.9 million, total outstanding loans of $391.0
million, and stockholders' equity of $58.9 million. At December 31, 1994, the
Company had total assets of $548.2 million, total deposits of $468.7 million,
total outstanding loans of $383.2 million, and stockholders' equity of $52.1
million.
The Bank conducts a general banking and trust business at its headquarters
office in Lebanon, Pennsylvania and through 18 other branches, eight of which
are located in Lebanon County, six in Lancaster County, one in Dauphin County,
two in Berks County and one in Schuylkill County. The Bank offers a wide range
of loan and deposit products to individual and business customers. The Bank also
provides automated teller machine (ATM) access through sixteen automated teller
machines owned and operated by the Bank which are part of the MAC(R) shared
automated ATM network, and the PLUS(R) System ATM network. Two of the Bank's
ATM's are stand-alone facilities. The Bank offers a variety of fiduciary,
investment, advisory, employee benefit, corporate agency and custodian services
to its trust customers. At December 31, 1995, total trust assets having a book
value of $210.3 million were under management or administration by the Bank's
Trust Group.
Keystone Heritage Life Insurance Company is a wholly owned non-bank
subsidiary of the Company that reinsures credit life and accident and health
policies written on consumer loans generated by Lebanon Valley National Bank. At
December 31, 1995 this subsidiary had total assets of $1.1 million.
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Competition
The Bank is subject to intense competition from other commercial banks as
well as from savings and loan associations, credit unions, brokerage firms,
money market funds, consumer finance companies, insurance companies, and others
who offer consumer and commercial credit and investment services. Many of the
Bank's competitors have substantial resources and operations which are national
in scope.
The business of the Bank and the Company is not dependent upon any one
customer relationship, and the loss of any one customer would not have a
material impact upon the financial condition of either the Bank or the Company.
The Bank does not obtain any material portion of its deposits from a single
individual, one particular business, or from local, state or federal
governments. The majority of the Bank's lending activity, as well as its
deposits, are concentrated in southcentral Pennsylvania. There is no significant
risk attendant to foreign sources and application of funds. There is not
expected to be any material effect on the capital, expenditures, earnings, or
competitive position of the Bank due to compliance with any federal, state, or
local regulations or guidelines which have been adopted relating to the
protection of the environment.
Supervision and Regulation
The Company is a Pennsylvania bank holding company registered with the
Board of Governors of the Federal Reserve System ("Federal Reserve Board") under
the Bank Holding Company Act of 1956 and is required to comply with its
reporting and approval requirements. The Act requires that the Company obtain
approval of the Federal Reserve Board before it may acquire direct or indirect
ownership or control of more than 5% of the voting shares of any bank, or to
merge or consolidate with any other bank holding company. The Act also prohibits
the Company, with certain exceptions, from acquiring ownership or control of
more than 5% of the voting shares of another company engaged in non-banking
activities and from engaging in any business other than banking, unless the
Federal Reserve Board, by order or regulation, has determined such activities to
be so closely related to banking or to managing or controlling banks as to be a
proper incident thereto.
The Bank is a national bank, chartered under the National Banking Act, and
is subject to the primary supervision of, and is examined by, the Office of the
Comptroller of the Currency. The Bank is subject to provisions of the Federal
Reserve Act, which (among other things) 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 also subject to the monetary and credit policies of the
Federal Reserve System. The Federal Reserve System regulates the national supply
of bank credit through open market transactions in U.S. Government securities
and by controlling the discount rate charged for bank borrowings and the reserve
requirements on bank deposits.
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Federal Law allows banks, beginning June 1, 1997, to expand across state
lines by acquiring existing banks or merging affiliated banks into a single
interstate bank, subject to the right of individual states to opt in early (as
Pennsylvania has done) or to opt out entirely by June 1, 1997, The same law
allows banks to create de novo branches in another state if the law of the other
state permits, as Pennsylvania's now does. Finally, federal law has permitted
since September 1995 interstate ownership by bank holding companies without
regard to state laws limiting interstate ownership by bank holding companies or
imposing conditions such as reciprocity. Interstate banking and branching
authority is subject to regulatory approval and to certain conditions and
restrictions, such as capital adequacy, Community Reinvestment Act compliance
and deposit concentration. The Company does not currently have any plans to
expand its activities outside Pennsylvania.
Although this legislation should have the impact of quickening the pace of
consolidation within the banking industry, the Company does not anticipate any
immediate impact upon its financial condition or its operations as a result of
this new law.
Employees
As of December 31, 1995, the Company employed 274 full-time employees and
49 part-time employees.
ITEM 2. PROPERTIES
The Company and the Bank own their principal executive and administrative
offices which are located at 555 Willow Street, Lebanon, Pennsylvania, at which
address the Bank also owns and operates a branch banking facility and an "ATM".
The Bank also owns its data processing operations center located at 421 East
Penn Avenue, Cleona, Pennsylvania. A branch banking facility is also located at
this address. In addition, the Bank owns eleven other branch banking buildings.
Five branch offices are leased under lease agreements which expire at various
dates through 2013. The above facilities are generally believed to be adequate
for the Company's current needs.
ITEM 3. LEGAL PROCEEDINGS
Note 17 of the "Notes to Consolidated Financial Statements" on page 24 of
the 1995 Keystone Heritage Group, Inc. Annual Report to Stockholders is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ADDITIONAL INFORMATION
The following information is furnished in Part I of this report
3
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pursuant to Instruction 3 to Item 401 (b) of Regulation S-K.
EXECUTIVE OFFICERS OF THE COMPANY AND THE BANK
The following sets forth as of March 25, 1996 information concerning the
officers of the Company and the Bank and certain other officers of the Company
and its subsidiaries. Shown are the name, age, and position or office with the
Company and its subsidiaries held by each listed person, the date since that
position or office has been held, and principal occupation during the last five
years, if other than as an employee of the Company or its subsidiaries. No
family relationships exist between any of the officers or directors. Except as
noted below, all officers hold office at the pleasure of the Board of Directors
of the Company, and there are no arrangements or understandings between any such
officer and any other person which resulted in his selection as an officer. The
Company's Board of Directors has determined that the only executive officers of
the Company are Albert B. Murry, Kurt A. Phillips and Donald W. Lesher, Jr.
Executive Officers
of the Company Age Position & Office During the Last Five Years
Albert B. Murry (1) 55 President and Chief Executive Officer of the
Company and the Bank. He has served as President
and Chief Executive Officer of the Company since
1983, and as President and Chief Executive
Officer of the Bank since 1978. Mr. Murry has
been employed by the Bank since 1978.
Kurt A. Phillips(1) 39 Treasurer and Chief Financial Officer (principal
financial and accounting officer) of the Company
since 1984, Executive Vice President of the Bank
since 1994 and Chief Financial Officer of the
Bank since 1983. Mr. Phillips has been employed
by the Bank since 1978.
Donald W. Lesher, Jr. 51 Vice President of the Company and Chairman of the
Board of the Bank (non- compensated positions)
since July 1993. Mr. Lesher is President of
Lesher Mack Sales and Services, Inc. and has been
a director of the Company since 1983.
Other Officers
Calvin L. Cassel 40 Senior Vice President of the Bank's Operations
Group since 1984. Mr. Cassel
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began his employment with the Bank in 1981.
Larry H. Eberly 53 Senior Vice President of the Bank's Trust
Department since 1984. Mr. Eberly has been
employed by the Bank since 1960.
Michael H. Firestine 45 Senior Vice President of the Bank's Agriculture
Banking Group since 1992. Mr. Firestine has been
employed by the Bank since 1976.
Neal R. Hickle 53 Senior Vice President of the Bank's Corporate
Banking Group since 1992. Mr. Hickle was
previously employed by Hamilton Bank as Vice
President in the Commercial Banking Division from
1986 to 1992.
Timothy L. Sandoe 38 Senior Vice President of the Retail Credit Group
since 1992. Vice President of Credit
Administration from 1987 to 1992. Mr. Sandoe has
been employed by the Bank since 1983.
Ellen M. Whitmoyer 44 Senior Vice President of the Consumer Banking
Group since 1992. Mrs. Whitmoyer has been
employed by the Bank since 1984.
Robert A. Talalai 63 Senior Vice President of the Special Assets
Group. Mr. Talalai has been employed by the Bank
since 1991. Mr. Talalai was previously employed
by Mellon Bank N.A. as a Vice President of the
Quality Control Division.
(1) The Bank has entered into agreements with Albert B. Murry and Kurt A.
Phillips pursuant to which they are employed as President and Chief
Executive Officer, Executive Vice President and Chief Financial Officer of
the Bank, respectively. These agreements provide for Messrs. Murry and
Phillips to be paid base salaries as determined by the Compensation
Committee of the Bank's Board of Directors, plus increases and bonuses as
are consistent with those made available to other officers of the Bank. The
Bank may terminate these agreements upon three years' notice and 30 months
notice, respectively, or the death or disability of Mr. Murry or Mr.
Phillips, respectively, or upon their conviction of a crime involving moral
turpitude, or upon being charged with a criminal offense arising out of
these employments.
5
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Assumptions Used in Calculating Market Value of Common Stock
For the purposes of calculating the aggregate market value of the shares of
common stock of the Company held by non-affiliates, as shown on the cover page
of this report, it has been assumed that all the outstanding shares at March 25,
1996 were held by non-affiliates except for the shares held by directors and
officers of the Company or the Bank. However, this should not be deemed to
constitute an admission that all such directors and officers are, in fact,
affiliates of the Company, or that there are not other persons who may be deemed
to be affiliates of the Company. Further information concerning shareholdings of
officers, directors and principal stockholders is included elsewhere herein and
in the Company's definitive proxy statement filed with the Securities and
Exchange Commission.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
"Stockholders Information" on page 48 and Footnote 18 "Dividend
Restrictions" on page 25 of the 1995 Keystone Heritage Group, Inc. Annual Report
to Stockholders are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
"Summary of Selected Financial Data" on page 31 of the 1995 Keystone
Heritage Group, Inc. Annual Report to Stockholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 32 through 47 of the 1995 Keystone Heritage Group, Inc.
Annual Report to Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements appearing on pages 10 through 13 of
the 1995 Keystone Heritage Group, Inc. Annual Report to Stockholders, along with
the accompanying notes to consolidated financial statements on pages 14 through
29, and the Independent Auditors' Report on page 30 are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
6
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PART III
The information called for by Item 10 "Directors and Executive Officers of
the Registrant" (other than the information concerning executive officers set
forth after Item 4 herein), Item 11 "Executive Compensation", Item 12 "Security
Ownership of Certain Beneficial Owners and Management" and Item 13 "Certain
Relationships and Related Transactions" is incorporated herein by reference to
the Company's definitive proxy statement for its Annual Meeting of Stockholders
scheduled to be held April 16, 1996, which definitive proxy statement was filed
with the Securities and Exchange Commission on March 7, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS:
The following consolidated financial statements of the Company are
incorporated herein by reference to the 1995 Keystone Heritage Group, Inc.
Annual Report to Stockholders.
Page Number
(in Annual
Report)
Consolidated Balance Sheets as of December 31, 1995 and 1994 10
Consolidated Statements of Income for the years ended
December 31, 1995, 1994 and 1993 11
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1994 and 1993 12
Consolidated Statements of Cash Flows
for the years ended December 31, 1995, 1994 and 1993 13
Notes to Consolidated Financial Statements 14 - 29
Independent Auditors' Report 30
(a) 2. FINANCIAL STATEMENT SCHEDULES:
All schedules applicable to the registrant are shown in the respective
financial statements or in the notes thereto.
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(a) 3. EXHIBITS:
3.1 Articles of Incorporation of Keystone Heritage Group, Inc.
3.2 Restated By-laws of Keystone Heritage Group, Inc., as amended.
4 Miscellaneous long term debt instruments and credit facility or line
of credit agreements of the Company, under each of which the
underlying authorized debt is equal to or less than 10% of the total
assets of the Company and its subsidiaries on a consolidated basis,
are not filed as exhibits to this report. The Company agrees to
furnish to the Commission, upon request, copies of any such
instruments.
10.1 Employment agreement between Lebanon Valley National Bank and Albert
B. Murry, President and Chief Executive Officer.
10.2 Employment agreement between Lebanon Valley National Bank and Kurt A.
Phillips, Executive Vice President and Chief Financial Officer.
13 1995 Keystone Heritage Group, Inc. Annual Report to Stockholders,
filed herewith. Such report, except for the portions thereof which are
expressly incorporated by reference into this Form 10-K, is furnished
solely for the information of the Commission and is not to be deemed
"filed" as part of the filing.
21 Subsidiaries of Keystone Heritage Group, Inc.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the three months ended December
31, 1995.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
by /s/ Albert B. Murry
---------------------------------------
Albert B. Murry
President and Chief Executive Officer
March 25, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
Signature Title Date
/s/ Raymond M. Dorsch, Jr. March 25, 1996
- ----------------------------
Raymond M. Dorsch, Jr. Director
/s/ Lance M. Frehafer March 25, 1996
- ----------------------------
Lance M. Frehafer Secretary and Director
/s/ Harry J. Gensemer March 25, 1996
- ----------------------------
Harry J. Gensemer Director
/s/ Charles V. Henry III March 25, 1996
- ----------------------------
Charles V. Henry III Director
s/s Wendie DiMatteo Holsinger March 25, 1996
- -----------------------------
Wendie DiMatteo Holsinger
/s/ Bruce A. Johnson March 25, 1996
- ----------------------------
Bruce A. Johnson Director
/s/ Donald W. Lesher, Jr. March 25, 1996
- ----------------------------
Donald W. Lesher, Jr. Vice President and
Director
/s/ Thomas I. Siegel March 25, 1996
- ----------------------------
Thomas I. Siegel Director
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/s/ Brett H. Tennis March 25, 1996
- ----------------------------
Brett H. Tennis Director
/s/ Mark Randolph Tice March 25, 1996
- ----------------------------
Mark Randolph Tice Director
/s/ John E. Wengert March 25, 1996
- ----------------------------
John E. Wengert Director
/s/ Earnest D. Williams, Jr. March 25, 1996
- ----------------------------
Earnest D. Williams, Jr. Director
/s/ Albert B. Murry March 25, 1996
- ----------------------------
Albert B. Murry President and Director
(Principal Executive
Officer)
/s/ Kurt A. Phillips March 25, 1996
- ----------------------------
Kurt A. Phillips Treasurer (Principal
Financial and
Accounting Officer)
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EXHIBIT INDEX
Page
Number
3.1 Articles of Incorporation of Keystone Heritage Group, Inc.
3.2 Restated By-laws of Keystone Heritage Group, Inc.
4 Miscellaneous long-term debt instruments and line of credit agreements of
the Company, under each of which the underlying authorized debt is equal to
or less than 10% of the total assets of the Company and its subsidiaries on
a consolidated basis, are not filed as exhibits of this report. The Company
agrees to furnish to the Commission, upon request, copies of any such
instruments.
10.1 Employment agreement between Lebanon Valley National Bank and Albert B.
Murry, President and Chief Executive Officer.
10.2 Employment agreement between Lebanon Valley National Bank and Kurt A.
Phillips, Executive Vice President and Chief Financial Officer.
13 1995 Keystone Heritage Group, Inc. Annual Report to Stockholders, filed
herewith. Such report, except for the portions thereof which are expressly
incorporated by reference into this Form 10-K, are furnished solely for the
information of the Commission and is not to be deemed "filed" as part of
the filing.
21 Subsidiaries of Keystone Heritage Group, Inc.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
Copies of any exhibits will be furnished to any stockholder upon written
request directed to Secretary, Keystone Heritage Group, Inc., 555 Willow Street,
P. O. Box 1285, Lebanon, Pennsylvania 17042-1285.
EXHIBIT 3.1
ARTICLES OF INCORPORATION
KEYSTONE HERITAGE GROUP, INC.
Article:
1. The name of the Corporation is Keystone Heritage Group, Inc.
2. The location and post office address of the initial registered office of
the Corporation in this Commonwealth is Ninth and Cumberland Streets,
Lebanon, Pennsylvania 17042.
3. The Corporation is incorporated under the Business Corporation Law of the
Commonwealth of Pennsylvania for the following purpose or purposes: The
purpose or purposes for which the Corporation is incorporated under the
Business Corporation Law of the Commonwealth of Pennsylvania are to have
unlimited power to engage in, and to do any lawful act concerning, any or
all lawful business for which corporations may be incorporated under said
Business Corporation Law.
4. The term for which the Corporation is to exist is perpetual.
5. The aggregate number of shares which the corporation shall have authority
to issue is 2,000,000 shares of Common Stock of the par value of $5.00 per
share.
6. The name(s) and post office address(es) of each incorporator(s) and the
number and class of shares subscribed by such incorporator(s) is (are):
Name: Lance M. Frehafer, Address: 881 South Franklin Street, Palmyra,
Pennsylvania 17078: Number and class of shares: 1 share Common Stock.
7. The shareholders of any class of capital stock of the Corporation shall not
have the right to cumulate their votes for the election of Directors of the
Corporation.
8. To the full extent permitted by law, the Board of Directors is expressly
vested with the authority to make, alter, amend and repeal such By-Laws as
it may deem necessary or desirable for the Corporation; subject to the
statutory power of the shareholders to change such action, but only upon
the affirmative vote of the holders of the outstanding capital stock of the
Corporation entitled to cast at least seventy-five percent (75%) of the
votes which all shareholders are entitled to cast thereon (considered for
the purpose of this Article 8 as one class) at a regular or special meeting
of shareholders duly convened after notice to the shareholders of that
purpose.
9. Any action which may be taken at a meeting of shareholders or of a class of
shareholders may be taken without a meeting if a consent or consents in
writing to such action, setting forth the action so taken, shall be signed
by all, but not less than all, shareholders who would be entitled to vote
at a meeting for such purpose and shall be filed with the Secretary of the
Corporation.
<PAGE>
10A. For purposes of this Article 10, the term "Acquisition Transaction"
includes any action, proposal, plan or attempt by any corporation or other
business entity or any person or group to (a) make any tender offer or
exchange offer for any equity security of the Corporation, (b) merge or
consolidate the Corporation or any subsidiary of the Corporation with or
into another corporation or entity, (c) purchase or otherwise acquire all
or substantially all of the assets of the Corporation or of any of its
subsidiaries, or (d) any transaction or series of transactions similar in
purpose, form or effect to any of the foregoing.
B. The Board of Directors may, in its sole discretion, and it is hereby
declared a proper corporate purpose for the Board of Directors to oppose,
recommend or remain neutral with respect to an Acquisition Transaction on
the basis of the Board of Directors' evaluation of what is in the best
interests of the Corporation. When considering whether to oppose, recommend
or remain neutral with respect to an Acquisition Transaction, the Board of
Directors may, but is not legally obligated to, evaluate and give such
consideration as it deems appropriate to, by way of illustration but not of
limitation, any or all of the following matters:
1. The adequacy of the consideration being offered, not only in relation
to the then current market price of the Corporation's securities, but
also in relation to (a) the historical and present operating results
or financial position of the Corporation, (b) whether equal or more
favorable consideration could be obtained currently or in the future
in a freely negotiated transaction with another party, and (c) the
future value of the Corporation as a continuing independent entity;
2. The economic or social effects that the Acquisition Transaction might
have on the employees, depositors and customers of the Corporation or
its subsidiaries and the communities they serve;
3. The reputations and business practices of an offeror and its
management and affiliates as they might affect the business of the
Corporation and its subsidiaries, the future value of the
Corporation's securities and the employees, depositors, customers, and
the communities served by the Corporation and its subsidiaries; and
4. Any antitrust or other legal, administrative or regulatory
difficulties that might be created by the Acquisition Transaction.
C. If the Board of Directors determines that an Acquisition Transaction should
be opposed, it may take any lawful action to accomplish its purpose,
including but not limited to any or all of the following: advising
shareholders not to accept the offer; litigation against the offeror;
filing complaints with governmental and regulatory authorities; causing the
Corporation to acquire its own securities; selling or otherwise issuing
authorized but unissued securities or treasury stock or granting options
with respect thereto; making an acquisition of another entity that the
Board of Directors believes in good faith to be in the best interest of the
Corporation and that also creates an antitrust or other regulatory
<PAGE>
problem for the offeror; and seeking a more favorable offer from another
individual or entity.
11A. For the purpose of this Article 11, the term "Business Combination" shall
mean any one or more of the following transactions:
1. Any merger or consolidation of the Corporation or any subsidiary (as
hereinafter defined) with or into (i) any 20% Shareholder (as
hereinafter defined) or (ii) any other corporation (whether or not
itself a 20% Shareholder) which is, or after such merger or
consolidation would be, an Affiliate (as hereinafter defined) of a 20%
Shareholder, or;
2. Any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or in a series of related
transactions) to or with any 20% Shareholder of assets whether of the
Corporation or any Subsidiary or Subsidiaries of the Corporation, or
any combination thereof, the aggregate value of which is equal to or
greater than 10% of the Corporation's consolidated stockholders'
equity; or
3. The issuance or transfer by the Corporation or by any Subsidiary (in
one transaction or in a series of related transactions) of any
securities of the Corporation or any Subsidiary to any 20% Shareholder
or Affiliate of a 20% Shareholder in exchange for cash, securities or
other property or any combination thereof, having an aggregate fair
market value equal to or greater than 10% of the Corporation's
consolidated stockholders' equity; or
4. Any reclassification of securities (including any reverse stock
split), recapitalization, reorganization, merger or consolidation of
the Corporation with any of its Subsidiaries or any similar
transaction (whether or not with, into or otherwise involving a 20%
Shareholder) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any
class of equity or convertible securities of the Corporation of any
Subsidiary, which is directly or indirectly owned by any 20%
Shareholder or any Affiliate of a 20% Shareholder; provided, however,
no transaction described in clauses 1 through 4 of this subparagraph A
of Article 11 shall constitute a Business Combination if the Board of
Directors has by resolution authorized or ratified the execution and
delivery of a written agreement in principle, memorandum of
understanding or letter of intent respecting such transaction prior to
the time the 20% Shareholder involved in such transaction acquired,
directly or indirectly, more than ten percent (10%) of the outstanding
capital stock of the Corporation which would be entitled to vote on
such transaction (considered in the purpose of this subparagraph A as
a single class of shares) ("Voting Shares").
B. Notwithstanding the fact that by law or by agreement with a national
securities exchange or otherwise no vote, or a lesser vote, of shareholders
may be specified or permitted, and except as otherwise expressly provided
in subparagraph C of this Article 11, the affirmative vote of the holders
of the outstanding capital stock of the Corporation entitled
<PAGE>
to cast at least eighty-five percent (85%) of the Voting Shares shall be
required to approve any Business Combination.
C. Notwithstanding the provisions of subparagraph B of this Article 11, a
Business Combination shall require the affirmative vote of the holders of
at least seventy-five percent (75%) of the outstanding Voting Shares if and
only if all of the following conditions shall have been satisfied:
1. The ratio of (a) the aggregate amount of cash and the fair market
value of all other consideration to be received in such Business
Combination by the Corporation, a Subsidiary, or the holders of Common
Stock of the Corporation ("Common Stock"), as the case may be, divided
by the number of shares of Common Stock issued and outstanding
immediately prior to the first public announcement relating to such
Business Combination to (b) the market price of the Common Stock per
share immediately prior to the first public announcement relating to
such Business Combination, is at least as great as the ratio of (c)
the highest per-share price (including brokerage commissions, transfer
taxes and soliciting dealers' fees) which such 20% Shareholder has
paid for any shares of Common Stock acquired by it within the
three-year period prior to the record date for determining
shareholders entitled to vote on such Business Combination to (d) the
market price of the Common Stock immediately prior to the initial
acquisition by such 20% Shareholder of any Common Stock).
2. The aggregate amount of the cash and fair market value of other
consideration to be received in such Business Combination by the
Corporation, a Subsidiary or the holders of Common Stock, as the case
may be, divided by the number of shares of Common Stock issued and
outstanding immediately prior to the first public announcement
relating to such Business Combination, is not less than the highest
per-share price (including brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by such 20% Shareholder for any block
of Common Stock owned by it;
3. The form of consideration to be received by holders of Common Stock in
such Business Combination shall be not less favorable than the
consideration paid by the 20% Shareholder in acquiring the largest
block of Common Stock already owned by it;
4. After such 20% Shareholder has acquired ownership of not less than 20%
of the then outstanding Voting Shares (a "20% Interest") and prior to
the consummation of such Business Combination:
a) The 20% Shareholder shall have taken all action necessary to
ensure that the Corporation's Board of Directors included at all
times representation by Continuing Director(s) (as hereinafter
defined) proportionate to the ratio that the Voting Shares which
from time to time are owned by persons who are not 20%
Shareholders ("Public Holders") bear to all
<PAGE>
Voting Shares outstanding at such respective times (with a
Continuing Director to occupy any resulting fractional Board
position);
b) Such 20% Shareholder shall not have acquired any newly issued
shares of stock, directly or indirectly, from the Corporation
(except upon conversion of convertible securities acquired by it
prior to obtaining a X% Interest or as a result of a pro rata
stock dividend or stock split); and
c) Such 20% Shareholder shall not have acquired any additional
shares of the Corporation's outstanding Common Stock or
securities convertible into or exchangeable for Common Stock
except as a part of the transaction which resulted in such 20%
Shareholder acquiring its 20% Interest;
5. Prior to the consummation of such Business Combination, such 20%
Shareholder shall not have (a) received the benefit, directly or
indirectly (except proportionately as a stockholder), of any loans,
advances, guarantees, pledges or other financial assistance or tax
credits provided by the Corporation, or (b) made any major change in
the Corporation's business or equity capital structure without the
unanimous approval of the whole Board; and
6. A proxy statement meeting the requirements of the Securities Exchange
Act of 1934 shall have been mailed to all holders of Voting Shares for
the purpose of soliciting shareholder approval of such Business
Combination. Such proxy statement shall contain at the front thereof,
in a prominent place, any recommendations as to the advisability (or
inadvisability) of the Business Combination which the Continuing
Directors, or any of them, may have furnished in writing and an
opinion of a reputable investment banking firm as to the fairness (or
lack of fairness) to the terms of such Business Combination, from the
point of view of the holders of Voting Shares other than any 20%
Shareholder (such investment banking firm to be selected by a majority
of the Continuing Directors, to be furnished with all information it
reasonably requests and to be paid a reasonable fee for its services
upon receipt by the Corporation of such opinion).
D. Any merger or consolidation of the Corporation or a Subsidiary with or into
another corporation, any sale, lease, exchange, mortgage, pledge, transfer
or other disposition of all or substantially all the assets of the
Corporation or of a Subsidiary, which is not a Business Combination subject
to the provisions of subparagraph B or subparagraph C of this Article 11,
shall require the affirmative vote of the holders of at least sixty-six and
two-thirds percent 662/3%) of the outstanding Voting Shares.
E. Any plan or proposal for the liquidation or dissolution of the Corporation
which would require or permit a distribution of any surplus remaining after
paying off all debts and liabilities of the Corporation to the shareholders
in accordance with their respective rights and preferences shall require
the affirmative vote of the holders of at least sixty-six and two-thirds
percent (662/3%) of the outstanding Voting Shares; provided, the
affirmative vote of the holders of at least eighty-five percent (85%) of
the outstanding Voting Shares
<PAGE>
shall be required for any such plan or proposal which would permit such
distribution to shareholders to be made other than in cash.
F. For the purposes of this Article 11:
1. A "person" shall mean any individual, group, firm, corporation or
other entity.
2. "20% Shareholder" shall mean, in respect of any Business Combination,
any person (other than the Corporation or any Subsidiary) who or
which, as of the record date for the determination of shareholders
entitled to notice of and to vote on such Business Combination, or
immediately prior to the consummation of any such transaction.
a) Is the beneficial owner, directly or indirectly, of not less than
twenty percent (20%) of the Voting Shares, or
b) Is an Affiliate of the Corporation and at anytime within two
years prior thereto was the beneficial owner, directly or
indirectly, of not less than twenty percent (20%) of the Voting
Shares, or
c) Is an assignee of or has otherwise succeeded to any Voting Shares
which were at any time within two years prior thereto
beneficially owned by any 20% Shareholder, and such assignment or
succession shall have occurred in the course of a transaction or
series of transactions not involving a public offering within the
meaning of the Securities Act of 1933.
3. A person shall be the "beneficial owner" of any Voting Shares:
a) Which such person or any of its Affiliates and Associates (as
hereinafter defined) beneficially own, directly or indirectly, or
b) Which such person or any of its Affiliates or Associates has (i)
right to acquire (whether such right is exercisable immediately
or only after the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise, or
(ii) the right to vote, pursuant to any agreement, arrangement or
understanding, or
c) Which are beneficially owned, directly or indirectly, by any
other person with which such first-mentioned person or any of its
Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or
disposing of any Voting Shares.
4. The outstanding Voting Shares shall include shares deemed owned
through application of Section 3 above but shall not include any other
Voting Shares which may be issuable pursuant to any agreement, or upon
exercise of conversion
<PAGE>
rights, warrants of options, or otherwise.
5. "Continuing Director" shall mean a person who was a member of the
Board of Directors of the Corporation elected by the Public Holders
prior to the date as of which any 20% Shareholder acquired in excess
of ten percent (10%) of the then outstanding Voting Shares, or a
person designated (before his initial election as a Director) as a
Continuing Director by a majority of the then Continuing Directors.
6. "Other consideration to be received" shall mean Common Stock of the
Corporation retained by its Public Holders in the event of a Business
Combination in which the Corporation is the surviving corporation.
7. "Affiliate" and "Associate" shall have the respective meanings given
those terms in the General Rules and Regulations under the Securities
Exchange Act of 1934.
8. "Subsidiary" means any corporation of which a majority of any class of
equity security (as defined in the General Rules and Regulations under
the Securities Exchange Act of 1934) is owned, directly or indirectly,
by the Corporation; provided, however, that for the purposes of the
definition of 20% Shareholder set forth in Section 2 of this
subparagraph F, the term "Subsidiary" shall mean only a corporation of
which a majority of each class of equity security is owned, directly
or indirectly, by the Corporation.
G. A majority of the Continuing Directors shall have the power and duty to
determine for the purposes of this Article 11, on the basis of information
known to them, (1) the number of Voting Shares beneficially owned by any
person, (2) whether a person is an Affiliate or Associate of another, (3)
whether a person has an agreement, arrangement or understanding with
another as to the matters referred to in Section 3 of subparagraph F, (4)
the fair market value of the consideration other than cash to be received
in any Business Combination, (5) whether the form of consideration to be
received by holder of Common Stock in a Business Combination is not less
favorable than the consideration paid by a 20% Shareholder in acquiring the
largest block of Common Stock owned by it, and (6) whether a 20%
Shareholder has taken all action necessary to ensure proportionate
representation by Continuing Directors on the Board of Directors or
purposes of clause 4(a) of subparagraph C of this Article 11.
H. Any amendment, alteration, change or repeal of this Article 11 or any part
hereto shall require the affirmative vote of the holders of at least
eighty-five percent (85%) of the then outstanding Voting Shares; provided
that this subparagraph H shall not apply to, and such 85% vote shall not be
required for, any amendment, alteration, change or repeal recommended to
the shareholders by 85% of the whole Board, but only if all members of the
whole Board are Continuing Directors. If such amendment, alteration, change
or repeal is recommended to the shareholders by 85% of whole Board, all
members of which are Continuing Directors, the vote required in Article 12
hereof shall apply.
<PAGE>
I. Nothing contained in this Article 11 shall be construed to relieve any 20%
Shareholder from any fiduciary obligation imposed by law.
12. Articles 8, 9, and 10 of these Articles of Incorporation, and this
Article 12, may not be amended, altered, changed or repealed without
the affirmative vote of holders of the outstanding capital stock of
the Corporation entitled to cast at least seventy-five percent (75%)
of the votes which all shareholders are entitled to cast thereon at a
regular or special meeting of shareholders duly convened after notice
of such purpose to the shareholders.
Certified to be a true and correct copy of the Articles of Incorporation of
Keystone Heritage Group, Inc. as filed with the Commonwealth of Pennsylvania on
May 24, 1982.
DATE: July 7, 1983 ___________________________
Secretary
<PAGE>
ARTICLES OF INCORPORATION
KEYSTONE HERITAGE GROUP, INC.
Article:
1. The name of the Corporation is Keystone Heritage Group, Inc.
2. The location and post office address of the initial registered office
of the Corporation in this Commonwealth is Ninth and Cumberland
Streets, Lebanon, Pennsylvania 17042.
3. The Corporation is incorporated under the Business Corporation Law of
the Commonwealth of Pennsylvania for the following purpose or
purposes: The purpose or purposes for which the Corporation is
incorporated under the Business Corporation Law of the Commonwealth of
Pennsylvania are to have unlimited power to engage in, and to do any
lawful act concerning, any or all lawful business for which
corporations may be incorporated under said Business Corporation Law.
4. The term for which the Corporation is to exist is perpetual.
5. The aggregate number of shares which the corporation shall have
authority to issue is 5,000,000 shares of Common Stock of the par
value of $5.00 per share. (Amended 3-25-86)
6. The name(s) and post office address(es) of each incorporator(s) and
the number and class of shares subscribed by such incorporator(s) is
(are): Name: Lance M. Frehafer, Address: 881 South Franklin Street,
Palmyra, Pennsylvania 17078: Number and class of shares: 1 share
Common Stock.
7. The shareholders of any class of capital stock of the Corporation
shall not have the right to cumulate their votes for the election of
Directors of the Corporation.
8. To the full extent permitted by law, the Board of Directors is
expressly vested with the authority to make, alter, amend and repeal
such By-Laws as it may deem necessary or desirable for the
Corporation; subject to the statutory power of the shareholders to
change such action, but only upon the affirmative vote of the holders
of the outstanding capital stock of the Corporation entitled to cast
at least seventy-five percent (75%) of the votes which all
shareholders are entitled to cast thereon (considered for the purpose
of this Article 8 as one class) at a regular or special meeting of
shareholders duly convened after notice to the shareholders of that
purpose.
9. Any action which may be taken at a meeting of shareholders or of a
class of shareholders may be taken without a meeting if a consent or
consents in writing to such action, setting forth the action so taken,
shall be signed by all, but not less than all, shareholders who would
be entitled to vote at a meeting for such purpose and shall be filed
with the Secretary of the Corporation.
<PAGE>
ARTICLES OF INCORPORATION
KEYSTONE HERITAGE GROUP, INC.
Article:
1. The name of the Corporation is Keystone Heritage Group, Inc.
2. The location and post office address of the initial registered office
of the Corporation in this Commonwealth is Ninth and Cumberland
Streets, Lebanon, Pennsylvania 17042.
3. The Corporation is incorporated under the Business Corporation Law of
the Commonwealth of Pennsylvania for the following purpose or
purposes: The purpose or purposes for which the Corporation is
incorporated under the Business Corporation Law of the Commonwealth of
Pennsylvania are to have unlimited power to engage in, and to do any
lawful act concerning, any or all lawful business for which
corporations may be incorporated under said Business Corporation Law.
4. The term for which the Corporation is to exist is perpetual.
5. The aggregate number of shares which the corporation shall have
authority to issue is 10,000,000 shares of Common Stock of the par
value of $5.00 per share. (Amended 4-18-95)
6. The name(s) and post office address(es) of each incorporator(s) and
the number and class of shares subscribed by such incorporator(s) is
(are): Name: Lance M. Frehafer, Address: 881 South Franklin Street,
Palmyra, Pennsylvania 17078: Number and class of shares: 1 share
Common Stock.
7. The shareholders of any class of capital stock of the Corporation
shall not have the right to cumulate their votes for the election of
Directors of the Corporation.
8. To the full extent permitted by law, the Board of Directors is
expressly vested with the authority to make, alter, amend and repeal
such By-Laws as it may deem necessary or desirable for the
Corporation; subject to the statutory power of the shareholders to
change such action, but only upon the affirmative vote of the holders
of the outstanding capital stock of the Corporation entitled to cast
at least seventy-five percent (75%) of the votes which all
shareholders are entitled to cast thereon (considered for the purpose
of this Article 8 as one class) at a regular or special meeting of
shareholders duly convened after notice to the shareholders of that
purpose.
9. Any action which may be taken at a meeting of shareholders or of a
class of shareholders may be taken without a meeting if a consent or
consents in writing to such action, setting forth the action so taken,
shall be signed by all, but not less than all, shareholders who would
be entitled to vote at a meeting for such purpose and shall be filed
with the Secretary of the Corporation.
<PAGE>
I. Nothing contained in this Article 11 shall be construed to relieve any 20%
Shareholder from any fiduciary obligation imposed by law.
12. Articles 8, 9, and 10 of these Articles of Incorporation, and this
Article 12, may not be amended, altered, changed or repealed without
the affirmative vote of holders of the outstanding capital stock of
the Corporation entitled to cast at least seventy-five percent (75%)
of the votes which all shareholders are entitled to cast thereon at a
regular or special meeting of shareholders duly convened after notice
of such purpose to the shareholders.
Certified to be a true and correct copy of the Articles of Incorporation of
Keystone Heritage Group, Inc. as filed with the Commonwealth of Pennsylvania on
May 24, 1982.
Amended: April 18, 1995
DATE: May 9, 1995 ___________________________
Secretary
EXHIBIT 3.2
BYLAWS OF
KEYSTONE HERITAGE GROUP, INC.
Lebanon, Pennsylvania
May 24, 1982
Section 1
CORPORATION OFFICE
1.1 The Corporation shall have and continuously maintain a registered office
in Pennsylvania at an address to be designated from time to time by the
Board of Directors which may, but need not, be the same as its place of
business. The Corporation may also have offices at any such other places
as the Board of Directors may from time to time designate or the
business of the Corporation may require.
Section 2
MEETING OF THE SHAREHOLDERS
2.1 The regular annual meeting of the shareholders of this Corporation for
the election of directors and for the transaction of such other business
as properly may come before the meeting, shall be held at its main
office or any other convenient place duly authorized by the Board of
Directors on the fourth Tuesday of March of each year. If no such
election is held on that day, it may be held at any regular adjournment
of that meeting or at a subsequent special meeting called for that
purpose.
Amendment: December 10, 1991
The regular annual meeting of the shareholders of this Corporation for
the election of directors and for the transaction of other business as
properly may come before the meeting, shall be held at its main office
or any other convenient place duly authorized by the Board of Directors
on the second Tuesday of April of each year. If no such election is held
on that day, it may be held at any regular adjournment of that meeting
or at a subsequent special meeting called for that purpose.
Amendment: January 25, 1994
The regular annual meeting of the shareholders of this Corporation for
the election of directors and for the transaction of other business as
properly may come before the meeting, shall be held at its main office
or any other convenient place duly authorized by the Board of Directors
on the third Tuesday of April of each year. If no such election is held
on that day, it may be held at any regular adjournment of that meeting
or at a subsequent special meeting called for that purpose.
December 26, 1995
<PAGE>
2.2 Special meetings of the shareholders may be called at any time by the
Chairman of the Board, if any, the President, a majority of the Board of
Directors or its Executive Committee, if any, or by three or more
shareholders owning, in aggregate, not less than ten percent (10%) of
the stock of this Corporation. If such request is addressed to the
Secretary, it shall be signed by the persons making the same and shall
state the purpose or purposes of the proposed meeting. Upon receipt of
any such request, it shall be the duty of the Secretary to call a
special meeting of the shareholders to be held at a time, not less than
ten or more than sixty days thereafter, as the Secretary may fix. If the
Secretary shall neglect or refuse to issue such call within five days
from the receipt of such request, the person or persons making the
request may issue the call.
2.3 Written notice of all meetings other than adjourned meetings of
shareholders stating the place, date and hour, and in the case of
special meetings of the shareholders, the purpose thereof, shall be
served upon, or mailed, postage prepaid, or telegraphed, charges
prepaid, at least ten days before such meeting, unless a greater period
of notice is required by statute, the Articles of Incorporation or these
Bylaws to each shareholder entitled to vote at the meeting at such
address as appears on the stock transfer books of the Corporation.
Section 3
VOTING BY SHAREHOLDERS
3.1 Shareholders may vote at any meeting of the shareholders by proxies duly
authorized in writing, but no director, officer, employee or attorney
for this Corporation shall act as proxy. Proxies shall be valid only for
one meeting, to be specified therein, and any adjournments of such
meeting. Proxies shall be dated and shall be filed with the records of
the meeting.
3.2 Except as may otherwise be provided by statute or by the Articles of
Incorporation, at every shareholders' meeting each shareholder entitled
to vote shall have the right to one vote for every share having voting
power standing in his name on the books of the Corporation on the record
date fixed for the meeting. The presence, in person or by proxy, of
shareholders entitled to cast at least a majority of the votes which all
shareholders are entitled to cast on the particular matter shall
constitute a quorum for purposes of considering such matter, and, unless
otherwise provided by statute, the acts of such shareholders at a duly
organized meeting shall be the acts of all the shareholders. A majority
of votes cast shall decide each matter submitted to the shareholders at
any meeting except in cases where by statute, pursuant to the Articles
of Incorporation or other provisions of these Bylaws a larger vote is
required. Cumulative voting rights shall not exist with respect to the
election of directors or for any other matter.
3.3 In the case of any meeting of the shareholders, a record shall be made
showing the names of the shareholders present and the number of shares
of stock held by each, the
December 26, 1995
<PAGE>
names of shareholders represented by proxy and the number of shares held
by each, and the names of the proxies. This record also shall show the
number of shares voted on each action taken, including the number of
shares voted for each candidate for director. This record shall be
included in the minute book of the Corporation.
Section 4
DIRECTORS
4.1 The Board of Directors shall consist of not less than five nor more than
twenty-five shareholders. The directors to be elected shall be
determined at the annual meeting of shareholders by a majority of the
votes cast by the shareholders in person or by proxy or by a similar
vote at any special meeting called for that purpose, upon due notice
having been given according to law.
4.2 The directors of the Corporation shall be classified into three classes,
each class to be elected for a term of three years. The terms of the
respective classes shall expire in successive years except as provided
in the following paragraph. Within the foregoing limits, the Board of
Directors may from time to time fix the numbers of directors and their
respective classifications. The directors shall be natural persons of
full age and shall be required to own at least one hundred shares of
common stock of the Corporation.
Amended September 24, 1985
Effective at the annual meeting in 1991, no director shall be elected or
continue to serve as director who has attained the age of seventy-two
(72) at the time of that annual meeting or any subsequent annual
meeting.
4.3 At the 1983 annual meeting of shareholders of the Corporation, the
shareholders shall elect fifteen directors as follows: five Class A
directors to serve until the 1984 annual meeting of shareholders, five
Class B directors to serve until the 1985 annual meeting of
shareholders, and five Class C directors to serve until the 1986 annual
meeting of shareholders. Each class shall be elected in a separate
election. At each annual meeting of shareholders thereafter, successors
to the class of directors whose term shall then expire shall be elected
to hold office for a term of three years so that the term of office of
one class of directors shall expire in each year.
4.4 Any vacancies occurring in the Board of Directors shall be filled by
appointment by a majority of the remaining directors. Any director so
appointed shall hold office until the expiration of the term of office
of the class of directors to which he was appointed. Nominations to the
Board of Directors other than those made by or on behalf of the existing
management of the Corporation shall be made in writing and shall be
delivered or mailed to the Secretary of the Corporation not less than
forty-five days prior to any meeting of stockholders called for the
election of directors. Nominations not made in
December 26, 1995
<PAGE>
accordance herewith shall be disregarded by the Chairman of the meeting,
and the vote tellers shall disregard all votes cast for such nominee.
4.5 Following the annual meeting of the shareholders, the Chairman or
Secretary of the meeting shall promptly notify the directors elected of
their election and they shall meet for the purpose of taking their
oaths, organizing the new Board, appointing officers and fixing salaries
for the ensuing year, and for transacting such other business as
properly may come before the meeting.
4.6 The regular meetings of the Board of Directors shall be held at the main
office of the Corporation or any other convenient place duly authorized
by the Board of Directors, at such time as a majority of the directors
may from time to time designate.
Amendment: December 26, 1995
4.7 Special meetings of the Board of Directors shall be called by the
Chairman of the Board, if any, the President of the Corporation or shall
be called at the request of three or more directors. Each member of the
Board of Directors shall be given five days notice stating the time and
place, by telegram, letter, or in person, of each such special meeting,
except the organization meeting following the election of directors.
4.8 A majority of the members of the Board of Directors shall constitute a
quorum for the transaction of business. If, at the time fixed for the
meeting, including the meeting to organize the new Board following the
annual meeting of shareholders, a quorum is not present, the directors
in attendance may adjourn the meeting from time to time until a quorum
is obtained.
Amendment: December 26, 1995
4.9 Except as otherwise provided herein, a majority of those directors
participating and voting at any meeting of the Board of Directors, shall
decide each matter considered. A director cannot vote by proxy or
otherwise act by proxy at a meeting of the Board of Directors.
Amendment: March 22, 1988:
4.10 Personal Liability of Directors - A director of this Corporation shall
not be personally liable for monetary damages as such for any action
taken, or any failure to take any action, unless:
a. The director has breached or failed to perform the duties of his
or her office in good faith, in a manner in which he or she
reasonably believes to be in the best interest of the
Corporation, and with such care, including reasonable inquiry,
skill and diligence, as a person of ordinary prudence would use
under similar
December 26, 1995
<PAGE>
circumstances; and
b. The breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness.
The provisions of this Section shall not apply to the responsibility or
liability of a director pursuant to any criminal statute; or the
liability of a director for the payment of local, state, or federal
taxes.
Section 5
OFFICERS AND EMPLOYEES
5.1 The officers of this Corporation shall be a President, one or more Vice
Presidents, a Treasurer, a Secretary, and such other officers with such
duties as may be determined by the Board of Directors. The President and
at least one of the Vice Presidents shall be members of the Board of
Directors. The President shall be the Chairman of the Board unless the
Board appoints some other director to act in that capacity. All officers
shall be appointed by the Board of Directors.
5.2 The President of the Corporation shall be the Chief Executive Officer of
the Corporation and shall be an ex officio member of all committees of
the Corporation.
5.3 Each Vice President shall have such powers and duties as may be assigned
to him by the Board of Directors. One of the Vice Presidents, who shall
be a member of the Board of Directors, shall perform the duties of the
President in his absence or his inability to act.
5.4 The Treasurer of the Corporation shall be responsible for all assets and
documents of this Corporation and shall keep proper records of all the
transactions of this Corporation.
5.5 The Secretary of the Corporation shall be responsible for the minute
book of the Corporation in which he shall maintain and preserve the
organization papers of the Corporation, the Articles of Incorporation,
the returns of elections, the Bylaws, the proceedings of regular and
special meetings of the Board of Directors and of the shareholders, and
the reports of the committees of the Board of Directors. The minutes of
each meeting shall be signed by the presiding officer and attested by
the Secretary.
5.6 Each assistant officer shall assist in the performance of the duties of
the officer to whom he is assistant and shall perform such duties in the
absence of the officer. He shall perform such additional duties as the
Board of Directors, the President or the officer to whom he is assistant
may from time to time assign him. Such officers may be given such
functional titles as the Board of Directors shall from time to time
determine.
December 26, 1995
<PAGE>
Section 6
INDEMNIFICATION OF DIRECTORS, OFFICERS, AND EMPLOYEES
6.1 The Corporation shall indemnify each person who is or was a director,
officer, or employee of the Corporation against any and all liability
and reasonable expense that may be incurred by him in connection with or
resulting from any claim, action, suit or proceeding (whether brought by
or in the right of the Corporation), civil or criminal, or in connection
with an appeal relating thereto, in which he may become involved, as a
party or otherwise, by reason of his being or having been a director,
officer, or employee of the Corporation, or by reason of any past or
future action taken or not taken in his capacity as such director,
officer, or employee, whether or not he continues to be such at the time
such liability or expense is incurred, provided such person acted, in
good faith, in what he reasonably believed to be the best interests of
the Corporation, and, in addition, in any criminal action or proceeding,
had no reasonable cause to believe that his conduct was unlawful. As
used in this Section, the terms "liability" and "expense" shall include,
but shall not be limited to, counsel fees and disbursements and amounts
of judgements, fines, or penalties against, any amounts paid in
settlement by a director, officer, or employee other than amounts paid
to the Corporation. The termination of any claim, action, suit, or
proceeding, civil or criminal, by judgement, settlement (whether with or
without court approval) or conviction or upon a plea of guilty or of
nolo contendere, or its equivalent, shall not create a presumption that
a director, officer, or employee did not meet the standards of conduct
set forth in the first sentence of this Section, except where there
shall have been a judgement rendered specifically finding that the
action or conduct of such director, officer, or employee constituted
negligence or misconduct. Any such director, officer, or employee
referred to in this Section who has been wholly successful, on the
merits or otherwise, with respect to any claim, action, suit or
proceeding of the character described herein shall be entitled to
indemnification as of right. Except as provided in the preceding
sentence, any indemnification hereunder shall be made at the discretion
of the Corporation, but only if (1) the Board, acting by a quorum
consisting of directors who are not parties to (or who have been wholly
successful with respect to) such claim, action, suit, or proceeding,
shall find that the director, officer, or employee has met the standards
of conduct set forth in the first sentence of this Section, or (2)
independent legal counsel (who may be the regular counsel for the
Corporation) shall deliver to it their written advice that, in their
opinion, such director, officer, or employee has met such standards.
Expenses incurred with respect to any such claim, action, suit or
proceeding may be advanced by the Corporation prior to the final
disposition thereof upon receipt of an undertaking by or on behalf of
the recipient to repay such amount unless it shall ultimately be
determined that he is entitled to indemnification under this Section.
The rights of indemnification provided in this Section shall be in
addition to any rights to which any person concerned may otherwise be
entitled by contract or as a matter of law, and shall inure to the
benefit of the heirs, executors and administrators of any such person.
December 26, 1995
<PAGE>
6.2 The Corporation may, upon the affirmative vote of a majority of its
Board of Directors, purchase insurance for the purpose of indemnifying
its directors, officers, and other employees to the extent that such
indemnification is allowed in the preceding paragraph. Such insurance
may, but need not, be for the benefit of all directors, officers, or
employees.
Section 7
COMMITTEES
7.1 There shall be a standing committee of this Corporation, appointed by
the Board, to be known as the Executive Committee, consisting of the
President, the Chairman of the Board, if any, and one or more members of
the Board of Directors of the Corporation as may from time to time be
designated by the Board of Directors, each to serve a twelve-month term.
This committee shall have power to direct and transact all other
business of the Corporation which properly might come before the Board
of Directors except such as the Board only, by law, is authorized to
perform. The Executive Committee shall report its actions at each
regular meeting of the Board of Directors which shall approve or
disapprove the report and record such action in the minutes of the
meeting. The Executive Committee shall be limited in its powers by the
Board of Directors. A majority of the members of the Executive Committee
shall constitute a quorum and the vote of a majority of those present
shall be required to act. The Board of Directors may appoint, from time
to time, other temporary committees, for such purposes and with such
powers as the Board may determine.
Section 8
SEAL
8.1 The following is an impression of the Seal adopted by the Board of
Directors of this Corporation.
December 26, 1995
<PAGE>
8.2 The President, each Vice President, Treasurer, Secretary, Assistant
Treasurer or Assistant Secretary shall have authority to affix the
Corporate Seal of this Corporation and to attest the same.
Section 9
SHARES OF STOCK
9.1 The share certificates of the Corporation shall be numbered and
registered in a share register as they are issued; shall bear the name
of the registered holder, the number and class of shares represented
thereby, the par value of each share or a statement that such shares are
without par value, as the case may be; shall be signed by the President
or a Vice President, and the Secretary or Treasurer, or any other person
properly authorized by the Board of Directors; and shall bear the
corporate seal, which seal may be a facsimile engraved or printed. Where
the certificate is signed by a transfer agent or a registrar, the
signature of any corporate officer on such certificate may be a
facsimile engraved or printed. In case any officer who has signed, or
whose facsimile signature has been placed upon, any share certificate
shall have ceased to be such officer because of death, resignation or
otherwise, before the certificate is issued, it may be issued by the
Corporation with the same effect as if the officer had not ceased to be
such at the date of its issue.
9.2 Upon the surrender to the Corporation of a share certificate duly
endorsed by the person named in the certificate, or by an attorney duly
appointed in writing, and accompanied, where necessary, by proper
evidence of succession, assignment or authority to transfer, a new
certificate shall be issued to the person entitled thereto, a new
certificate shall be issued to the person entitled thereto and the old
certificate canceled and the transfer recorded upon the share register
of the Corporation. No transfer shall be made inconsistent with the
provisions of Article 8 of the Pennsylvania Uniform Commercial Code as
presently existing or hereafter amended.
9.3 Where a shareholder of the Corporation alleges the loss, theft, or
destruction of one or more certificates for shares of the Corporation
and requests the issuance of a substitute certificate therefor, the
Board of Directors or its designate may direct a new certificate of the
same tenor and for the same number of shares to be issued to such person
upon such person's making of an affidavit in form satisfactory to the
Board of Directors setting forth the facts in connection therewith,
provided that prior to the receipt of such request the Corporation shall
not have either registered a transfer of such certificate or received
notice that such certificate has been acquired by a bona fide purchaser.
When authorizing such issue of a new certificate, the Board of Directors
may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed
certificate, or his heirs or legal representatives, as the case may be,
to advertise the same in such manner as it shall require and/or to give
the Corporation
December 26, 1995
<PAGE>
a bond in such form and sum and with surety or sureties, with fixed or
open penalty, as shall be satisfactory to the Board of Directors, as
indemnity for any liability or expense that it may incur by reason of
the original certificate remaining outstanding.
Section 10
EMERGENCIES
10.1 In the event of an emergency declared by the President of the United
States or the person performing his functions, the officers and
employees of this Corporation will continue to conduct the affairs of
the Corporation under such guidance from the Directors as may be
available except as to matters which by statute require specific
approval of the Board of Directors and subject to conformance with any
governmental directives during the emergency.
Section 11
CHANGE IN BYLAWS
11.1 These Bylaws may be altered, amended or repealed by the affirmative vote
of the holders of 75% of the outstanding shares of common stock at any
regular or special meeting duly convened after notice to the shareholder
of the purpose, or by a majority vote of the members of the Board of
Directors at any regular meeting duly convened after notice to the
directors of the purpose, subject always to the power of shareholders to
change such action of the Board of Directors by affirmative vote of the
holders of 75% of the outstanding shares of common stock.
EXHIBIT 10.1
KEYSTONE HERITAGE GROUP, INC.
1995 10K
EMPLOYMENT AGREEMENT
THIS AGREEMENT made this 1st day of March, 1987 effective January 1, 1987
by and between the Lebanon Valley National Bank of Lebanon, Pennsylvania
(hereinafter referred to as "Bank") and Albert B. Murry (hereinafter referred to
as "Executive")
WITNESSETH THAT:
WHEREAS, Executive has been employed by Bank and is presently serving as
its President and Chief Executive Officer; and
WHEREAS, Bank wishes to assure itself of the continued services of
Executive during the period and on the terms and conditions hereinafter set
forth; and
WHEREAS, Executive is willing to serve the Bank on a full time basis during
such period on such terms and conditions.
NOW, THEREFORE, in consideration of the promises hereinafter set forth, it
is mutually agreed as follows:
1. Except as otherwise provided in paragraph 2 below, Bank shall employ
Executive as its Chief Executive officer or in any capacities as may from time
to time be specified by the Board of Directors, provided that such duties shall
be consistent with Executive's current status as Bank's Chief Executive Officer.
Said employment shall be continuous and on a full time basis for the period
beginning January 1, 1987 and ending on December 31, 1989. On the last day of
each month this Agreement shall automatically be extended for an additional
month so that there
<PAGE>
is always a three year contract in effect. Unless sooner terminated pursuant to
paragraph 2, below, Bank may terminate this Agreement at any time by giving
Executive 36 month's written notice of the effective date of said termination.
Executive accepts such employment and agrees that during such period he will
devote his best efforts, and his full business time and attention (except for
normal vacation periods or illness) to the performance of such duties for the
Bank as may be assigned to him from time to time by the Bank.
2. Notwithstanding the provisions of paragraph 1 above, this contract shall
terminate under the following additional conditions:
a. Upon the death of Executive.
b. Mental or physical disability of Executive which prevents him from
performing his normal duties for a period in excess of six (6) months.
c. At the option of Executive by giving six (6) months written notice
to Bank of his intent to resign or retire provided, however, that in the event
that Executive gives such notice, Bank shall have the option of terminating this
Agreement by giving Executive two (2) months written notice of its intent to
accelerate the termination date.
d. At the option of Bank if Executive is convicted of a crime
involving moral turpitude involving actions not related to his employment or is
charged with a criminal offense arising out of his employment. Termination shall
become effective two (2) weeks after written notice to Executive of Bank's
intent to
<PAGE>
terminate this Agreement pursuant to this subparagraph. In the event that this
Agreement is terminated as the result of charges against Executive, it shall be
reinstated retroactively in the event that said charges are dismissed.
3. Beginning January 1, 1987 and continuing through December 31, 1987,
Bank will pay to Executive a base salary at the annual rate of One Hundred
Twenty-Two Thousand Dollars ($122,000.00) payable in bimonthly installments. No
later than January 31 of each year of the term of this Agreement, Bank shall
review and give consideration to the increase of the annual rate of Executive's
base salary effective the preceding January 1 during the period of his full time
employment. In making such a determination, Bank shall consider the Consumer
Price Index, salary increases given to other employees and officers of Bank,
salaries of chief executive officers of peer group banking institutions as well
as the net profits of Bank in the preceding year. The base salary in effect
during the preceding calendar year shall remain in effect until the termination
of this Agreement as provided herein unless increased pursuant to this
paragraph.
4. In addition to the base salary provided herein, Executive shall be
entitled to such bonuses and other benefits as are made available to the other
officers and employees of Bank other than severance pay.
5. Executive may elect to defer a portion of his annual base salary
pursuant to a deferred compensation plan between Executive and Bank adopted on
December 18, 1983.
<PAGE>
6. During the term of this Agreement or any extension thereof, or for
two years immediately following termination of this Agreement, Executive shall
not engage in the banking business as the employee or consultant of a bank or
savings and loan association or the parent company of a wholly owned subsidiary
bank or savings and loan association which has an office in the following
counties of Pennsylvania: Lebanon, Dauphin, Schuylkill, Berks and Lancaster.
7. This Agreement shall be binding upon the parties hereto, their
heirs, successors and assigns and shall not be modified except in writing signed
by all of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ATTEST: LEBANON VALLEY NATIONAL BANK
/s/ Ernestine Batdorf By: /s/ Elvin H. Spitler
- ---------------------------- ---------------------------------
Assistant Secretary Chairman of the Board
WITNESS:
/s/ Glynnis M. Kofler /s/ Albert B. Murry
- ---------------------------- ---------------------------------
Albert B. Murry
EXHIBIT 10.2
KEYSTONE HERITAGE GROUP, INC.
1995 10-K
EMPLOYMENT AGREEMENT
THIS AGREEMENT made this 30th day of June, 1995, effective July 1, 1995, by
and between the Lebanon Valley National Bank of Lebanon, Pennsylvania
(hereinafter referred to as "Bank") and Kurt A. Phillips (hereinafter referred
to as "Executive").
WITNESSETH THAT:
WHEREAS, Executive has been employed by Bank and is presently serving as
its Executive Vice- President and Chief Financial Officer; and
WHEREAS, Bank wishes to assure itself of the continued services of
Executive during the period and on the terms and conditions hereinafter set
forth; and
WHEREAS, Executive is willing to serve the Bank on a full time basis during
such period on such terms and conditions.
NOW, THEREFORE, in consideration of the promises hereinafter set forth, it
is mutually agreed as follows:
1. Except as otherwise provided in paragraph 2 below, Bank shall employ
Executive as its Executive Vice-President and Chief Financial Officer or in any
capacities as may from time to time be specified by the Board of Directors,
provided that such duties shall be consistent with Executive's current status as
Bank's Executive Vice-President and Chief Financial Officer. Said employment
shall be continuous and on a full time basis for the period beginning July 1,
1995 and ending on December 31,
<PAGE>
1997. On the last day of each month this Agreement shall automatically be
extended for an additional month so that there is always a thirty (30) month
contract in effect. Unless sooner terminated pursuant to paragraph 2, below,
Bank may terminate this Agreement at any time by giving Executive thirty (30)
month's written notice of the effective date of said termination. Executive
accepts such employment and agrees that during such period he will devote his
best efforts, and his full business time and attention, except for normal
vacation Periods and illness, to the performance of such duties for the Bank as
may be assigned to him from time to time by the Bank.
2. Notwithstanding the provisions of paragraph 1 above, this contract shall
terminate under the following additional conditions:
a. Upon the death of the Executive.
b. Mental or physical disability of Executive which prevents him from
performing his normal duties for a period in excess of six (6) months.
c. At the option of the Bank upon Executive attaining the age of sixty-five
(65) by giving such notice as is provided at that time for comparable' employees
under the personnel policy then in effect.
d. At the option of Executive by giving three (3) month's written notice to
Bank of his intent to resign or retire provided, however, that in the event that
Executive gives such
<PAGE>
notice, Bank shall have the option of terminating this Agreement at any earlier
date.
e. At the option of Bank, if Executive is convicted of a crime involving
moral turpitude involving actions not related to his employment or is charged
with a criminal offense arising out of his employment. Termination shall become
effective two (2) weeks after written notice to Executive of Bank's intent to
terminate this Agreement pursuant to this subparagraph. In the event that this
Agreement is terminated as the result of charges against Executive, it shall be
reinstated retroactively in the event that said charges are dismissed.
3. Beginning July 1, 1995, and continuing through December 31, 1995, Bank
will pay the Executive a base salary at the annual rate of Eighty-Five Thousand
Dollars ($85,000.00) payable in bimonthly installments. No later than January 31
of each year during the term of this Agreement, Bank shall review and give
consideration to the increase of the annual rate of Executive's base salary
effective the preceding January 1 during the period of his full time employment.
In making such determination, Bank shall consider the Consumer Price Index,
salary increases given to other employee and officers of the Bank, salaries of
comparable officers of peer group banking institutions as well as the net
profits of Bank in the preceding year. The base salary in effect during the
preceding calendar year shall remain in effect until the termination of this
<PAGE>
Agreement as provided herein unless increased pursuant to this paragraph.
4. In addition to the base salary provided herein, Executive shall be
entitled to such bonuses and other benefits as are made available to the other
officers and employees of Bank other than severance pay.
5. During the term of this Agreement or any extension thereof, or for two
(2) years immediately following termination of this Agreement, Executive shall
not engage in the banking business as the employee or consultant of a bank or
savings and loan association or the parent company of a wholly owned subsidiary
bank or savings and loan association which has an office in the following
counties of Pennsylvania: Lebanon, Dauphin, Schuylkill, Berks and Lancaster.
6. This Agreement shall be binding upon the parties hereto, their heirs,
successors and assigns and shall not be modified except in writing signed by all
of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ATTEST: LEBANON VALLEY NATIONAL BANK
/s/ Lance M. Frehafer By: /s/ Donald W. Lesher, Jr.
- ----------------------------- -------------------------------
Secretary Chairman of the Board
Witness:
/s/ Peggy Y. Layser /s/ Kurt A. Phillips
- ----------------------------- -------------------------------
Kurt A. Phillips
EXHIBIT 13
(December 31, 1995 and 1994)
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Assets
Cash and due from banks $ 23,766 $ 23,568
Money market investments 246 1,450
Investment securities available for sale 65,799 55,664
Investment securities held to maturity (fair value of
$88,052 and $70,037 for 1995 and 1994, respectively) 86,885 72,704
Loans 391,009 383,154
Less: Allowance for possible loan losses (8,025) (8,140)
--------- ---------
Loans, net 382,984 375,014
Other real estate owned 913 1,969
Premises and equipment, net 7,933 8,082
Deferred tax asset, net 3,100 4,031
Accrued interest receivable 3,844 3,185
Other assets 2,307 2,527
--------- ---------
Total assets $ 577,777 $ 548,194
========= =========
Liabilities
Deposits:
Non-interest bearing demand $ 65,530 $ 64,063
Interest bearing demand 57,146 61,805
Savings 128,425 125,295
Time 236,816 217,577
--------- ---------
Total deposits 487,917 468,740
Short-term borrowings 8,640 12,087
Other borrowings 14,009 9,926
Accrued interest payable 5,284 3,068
Other liabilities 3,048 2,271
--------- ---------
Total liabilities 518,898 496,092
Stockholders' Equity
Common stock, $5.00 par value;
Authorized 10,000,000 shares; Outstanding
4,071,683 shares for 1995 and 3,046,213 shares for
1994, respectively 20,358 15,231
Capital surplus 22,079 27,007
Retained earnings 16,106 11,315
Net unrealized gain (loss) on investment securities
available for sale, net of taxes 336 (1,451)
--------- ---------
Total stockholders' equity 58,879 52,102
--------- ---------
Total liabilities and stockholders' equity $ 577,777 $ 548,194
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
(Years Ended December 31, 1995, 1994 and 1993)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1995 1994 1993
<S> <C> <C> <C>
Interest Income
Interest and fees on loans $ 34,946 $ 30,822 $ 30,421
Interest on money market investments 539 127 221
Interest and dividends on investment
securities available for sale:
Taxable investment securities 2,685 3,046 0
Equity investments 195 161 223
Interest and dividends on investment securities
held to maturity:
Taxable investment securities 4,419 2,897 6,007
Non-taxable investment securities 447 558 711
-------- -------- --------
Total interest income 43,231 37,611 37,583
Interest Expense
Interest on deposits 17,836 13,277 14,608
Interest on short-term borrowings 466 562 450
Interest on other borrowings 766 608 639
-------- -------- --------
Total interest expense 19,068 14,447 15,697
-------- -------- --------
Net interest income 24,163 23,164 21,886
-------- -------- --------
Provision for possible loan losses 0 300 2,400
-------- -------- --------
Net interest income after provision
for possible loan losses 24,163 22,864 19,486
Other Operating Income
Trust income 1,277 1,289 1,209
Service charges on deposits 1,292 1,209 1,274
Net gain on sale of loans 209 290 771
Fees and other service charges 1,499 1,453 1,151
Net realized gain (loss) on
investment securities available for sale 126 (29) 56
Gain on sale of other real estate owned 410 0 0
Other income 598 607 623
-------- -------- --------
Total other operating income 5,411 4,819 5,084
Other Operating Expense
Salaries and employee benefits 9,770 8,834 8,325
Occupancy expense, net 1,256 1,237 1,132
Equipment expense 1,934 1,871 1,701
Deposit insurance expense 539 1,016 1,042
Bank card processing expense 711 662 619
Professional services 913 653 355
Expense of other real estate owned, net 79 91 870
Pennsylvania shares tax 479 457 430
Other expense 2,708 2,812 2,739
-------- -------- --------
Total other operating expense 18,389 17,633 17,213
-------- -------- --------
Income before income taxes and cumulative effect of
change in accounting for income taxes 11,185 10,050 7,357
Income taxes 3,528 3,283 2,115
Income before cumulative effect of change in
accounting for income taxes 7,657 6,767 5,242
Cumulative effect of change in accounting
for income taxes 0 0 (200)
-------- -------- --------
Net income $ 7,657 $ 6,767 $ 5,042
======== ======== ========
Per common share:
Income before cumulative effect of change in
accounting for income taxes $ 1.88 $ 1.67 $ 1.29
Cumulative effect of change in accounting
for income taxes .00 .00 (.05)
-------- -------- --------
Net income 1.88 1.67 1.24
-------- -------- --------
Cash dividends paid .705 .633 .624
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
(Years Ended December 31, 1995, 1994 and 1993)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
on
Investment
Securities
Available
Common Capital Retained for Sale,
Stock Surplus Earnings Net of Taxes Total
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $ 12,136 $ 29,811 $ 4,609 $ 0 $ 46,556
Net income 0 0 5,042 0 5,042
Stock issued under dividend
reinvestment plan 49 242 0 0 291
Cash dividends ($.624 per share) 0 0 (2,531) 0 (2,531)
Implementation of change in
accounting for marketable
debt and equity securities,
net of tax effect of $243 0 0 0 468 468
-------- -------- -------- -------- --------
Balance, December 31, 1993 $ 12,185 $ 30,053 $ 7,120 $ 468 $ 49,826
Net Income 0 0 6,767 0 6,767
Cash dividends ($.633 per share) 0 0 (2,572) 0 (2,572)
Stock split (5 for 4) 3,046 (3,046) 0 0 0
Change in net unrealized gain
(loss) on investment
securities available for
sale, net of tax effect of ($ 982) 0 0 0 (1,919) (1,919)
-------- -------- -------- -------- --------
Balance, December 31, 1994 $ 15,231 $ 27,007 $ 11,315 ($ 1,451) $ 52,102
Net income 0 0 7,657 0 7,657
Cash dividends ($.705 per share) 0 0 (2,866) 0 (2,866)
Stock issued under dividend
reinvestment plan 38 161 0 0 199
Stock split (4 for 3) 5,089 (5,089) 0 0 0
Change in net unrealized gain
(loss) on investment
securities available for
sale, net of tax effect of $909 0 0 0 1,787 1,787
-------- -------- -------- -------- --------
Balance, December 31, 1995 $ 20,358 $ 22,079 $ 16,106 $ 336 $ 58,879
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
(Years Ended December 31, 1995, 1994 and 1993)
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income $ 7,657 $ 6,767 $ 5,042
Adjustments to Reconcile Net Income to Net Cash:
Provision for possible loan losses 0 300 2,400
Depreciation and amortization 1,463 1,355 1,278
Deferred income taxes 23 366 (445)
Cumulative effect of change in accounting for income taxes 0 0 200
(Increase) Decrease in accrued interest receivable (659) (539) 347
Increase (Decrease) in accrued interest payable 2,216 468 (637)
Net gain on sale of loans (209) (290) (771)
Net realized (gains) losses on investment securities available for sale (126) 29 (56)
Net realized gain on sale of other real estate owned (410) 0 0
Provision for losses on other real estate owned 0 0 651
Other, net 1,166 (730) 1,313
-------- -------- --------
Net cash provided by operating activities 11,121 7,726 9,322
Cash Flows from Investing Activities:
Net decrease (increase) in money market investments 1,204 (726) 6,608
Maturities of investment securities held to maturity 65,006 23,917 62,183
Maturities of investment securities available for sale 10,179 44,636 0
Sales of investment securities available for sale and held for sale 609 20,760 148
Funds invested in investment securities held to maturity (79,394) (34,667) (85,249)
Funds invested in investment securities available for sale (18,143) (44,005) 0
Net (increase) decrease in loans made to customers (7,759) (22,606) 12,705
Originations of residential mortgage loans sold (10,456) (12,433) (47,364)
Proceeds from sale of residential mortgage loans 10,510 13,078 47,255
Net expenditures for premises and equipment (1,306) (590) (909)
Net cash provided from branch acquisition 0 4,815 0
Proceeds from sale of other real estate owned 1,481 2,436 1,672
-------- -------- --------
Net cash used by investing activities (28,069) (5,385) (2,951)
Cash Flows From Financing Activities:
Net increase (decrease) in customer deposits 19,177 7,250 (9,231)
Net (decrease) increase in short-term borrowings (3,447) (2,310) 130
Net increase (decrease) in other borrowings 4,083 (317) (46)
Cash dividends paid (2,866) (2,572) (2,531)
Proceeds from issuance of common stock 199 0 291
-------- -------- --------
Net cash provided from (used by) financing activities 17,146 2,051 (11,387)
-------- -------- --------
Net Increase (Decrease) in Cash and Due From Banks 198 4,392 (5,016)
Cash and Due From Banks at Beginning of Period 23,568 19,176 24,192
-------- -------- --------
Cash and Due From Banks at End of Period $ 23,766 $ 23,568 $ 19,176
======== ======== ========
Supplemental Disclosures:
Interest paid $ 10,310 $ 8,403 $ 10,167
======== ======== ========
Income taxes paid 3,653 3,124 2,065
======== ======== ========
Non-cash investing and financing activities:
Transfers from loans to other real estate owned 163 356 1,040
Loan charge-offs 583 1,197 2,593
Branch acquisition (note 2):
Fair value of purchased loans 0 1,107 0
Fair value of purchased deposits 0 6,808 0
Fair value of purchased equipment 0 396 0
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
1. Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The accounting and reporting policies of Keystone Heritage Group, Inc. (the
Company) and its subsidiaries conform to generally accepted accounting
principles and reporting practices within the banking industry. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates. The material estimate that is
particularly susceptible to significant change in the near-term relates to the
determination of the allowance for possible loan losses.
Business
Keystone Heritage Group, Inc. is a bank holding company headquartered in
Lebanon, Pennsylvania which engages in a general commercial and retail banking
and trust business through its banking subsidiary, Lebanon Valley National Bank
(the Bank). Keystone Heritage Life Insurance Company is a non-bank subsidiary
that reinsures credit life and accident and health policies written on consumer
loans generated by the Bank.
Principles of Consolidation
The consolidated financial statements of the Company 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.
Loans
Loans are generally carried at the principal amount outstanding, net of
undisbursed commitments and net of deferred loan fees. Interest income on loans
is accrued based on methods which approximate a constant yield when related to
the principal amounts outstanding. The accrual of interest on loans is
discontinued when they are past due 90 days as to either principal or interest,
or when, in management's opinion, the collectibility of principal or interest is
doubtful, except for certain consumer loans for which the period is 120 days.
Management may maintain the accrual status for a past-due loan in the event that
the loan is well secured and in the process of collection. When the accrual of
interest is discontinued, unpaid interest recognized during the current year is
reversed by a charge against interest income, and unpaid interest from the prior
year is reversed by a charge against the allowance for possible loan losses.
Interest payments received on non-accrual loans are recorded as reductions of
principal if management determines that the ultimate collectibility of principal
or interest is doubtful. Except in cases where accounting or regulatory rules
apply, loans are generally returned to accrual status when the collectibility of
both principal and interest on a timely basis is reasonably assured, all
delinquent principal and interest is brought current and the loan has been
performing as contractually agreed upon for at least six months. Net loan fees
and costs associated with originating loans are deferred and amortized to
interest income over the contractual life of the related loan. The amortization
of deferred fees and costs is discontinued on non-accrual loans.
The Company adopted the provisions of Statement of Financial Accounting
Standard No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan",
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosure" on January 1, 1995. The impact of
applying the provisions of SFAS 114, as amended by SFAS 118, did not have a
material effect on the Company's financial condition or results of operations.
Generally, all non-accrual loans are deemed to be impaired. In addition,
management, considering current information and events regarding the borrowers
ability to repay their obligations, considers a loan to be impaired when it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. In evaluating whether a loan is
impaired, management considers not only the amount that the Company expects to
collect but also the timing of the collection. Generally if payments are
consistently made, but on a delayed basis of not more than 90 days, a loan is
not deemed to be impaired.
When a loan is considered to be impaired, the amount of impairment is
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, at the loan's market price or fair value
of the collateral if the loan is collateral dependent. The majority of loans
deemed to be impaired by management are collateral dependent. Loans are
evaluated individually for impairment. The Company excludes smaller balance,
homogeneous loans (primarily consumer and residential mortgage loans) from the
evaluation of impairment. Impairment losses are included in the allowance for
possible loan losses. Impaired loans are charged-off when management believes
that the ultimate collectibility of principal and interest of a loan is not
likely. Interest income on impaired loans is generally recorded as payments are
collected.
14
<PAGE>
Certain fixed-rate residential mortgage loans are committed to be sold
without recourse at the date of origination to a third-party with servicing
released by the Company. Loans committed for sale are funded by the Company for
a short period of time until settlement with the third-party. Gains or losses on
the sale of such loans are determined using the specific identification method.
Loans held for sale are recorded at the lower of the current secondary market
value or the actual book value.
Investment Securities
The Company classifies its debt and marketable equity securities into one
of two categories; available for sale or held to maturity. Investment securities
available for sale are securities held for the purpose of maintaining a liquid
asset base and may be sold. Investment securities held to maturity are those
securities for which the Company has the ability and intent to hold the security
until maturity.
Investment securities available for sale are recorded at fair value.
Investment securities held to maturity are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts. Unrealized holding
gains and losses, net of the related tax effect, on investment securities
available for sale are excluded from earnings and are reported as a separate
component of stockholders' equity until realized.
A decline in the fair value of investment securities available for sale or
investment securities held to maturity below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of a new cost
basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related investment security held to maturity as an adjustment to yield using the
effective interest method. Dividend and interest income are recognized when
earned. Realized gains and losses from the sale of available for sale securities
are included in earnings and are determined using the specific identification
method.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed by the straight-line
method over the estimated useful lives of the assets. Maintenance and repairs
are charged to other operating expense as incurred. Gains or losses on
dispositions are reflected in current results of operations.
Allowance for Possible Loan Losses
The allowance for possible loan losses is a reserve for estimated potential
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 on 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 loan portfolio to determine
the appropriate level of the allowance. The factors considered in this
evaluation include, but are not necessarily limited to, estimated loan losses
identified through review of loans by the Company's personnel; analysis of
historical loss experience; deterioration in loan concentrations or pledged
collateral; trends in portfolio volume and composition; trends in delinquencies
and non-accruals and changes in lending policies and general economic
conditions. While management uses available information to determine the
appropriate level of allowance for possible loan losses, future changes in the
allowance may become necessary due to changes in economic conditions and other
factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for possible loan
losses. These agencies may recommend the Bank change the level of the allowance
based on their judgements of information available to them at the time of their
examination.
Other Real Estate Owned
Other real estate owned is valued at the lower of cost or fair value less
the cost to sell. These assets are written down to fair value at the date of
transfer to other real estate owned by a charge to the allowance for possible
loan losses. Subsequent to transfer, any further declines in fair value are
recorded through a valuation allowance. These properties are reviewed on a
quarterly basis and additional provisions are charged to other operating expense
as appropriate. Fair values are derived from independent appraisals at the time
of foreclosure. Subsequent appraisals are obtained as market conditions are
deemed by management to have significantly changed. Gains or losses on the sale
or disposition of other real estate owned are credited or charged to other
operating expense or against the valuation allowance. Costs of maintaining
foreclosed properties are expensed as incurred.
15
<PAGE>
Employee Benefits
Retirement plan costs for the Company's defined benefit plan are accounted
for in accordance with the requirements of Statement of Financial Accounting
Standards No. 87, "Employees' Accounting for Pensions". The projected unit
credit method is utilized for measuring net periodic pension cost over the
employee's service life. The Company funds the plan according to an actuarial
formula to provide for both current and future benefit payments, to the extent
that contributions are deductible under existing federal tax regulations.
The Company does not provide any other significant post-retirement or
post-employment benefits.
Income Taxes
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes", which requires the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that included the enactment date. The
cumulative effect of the adoption of SFAS 109, on January 1, 1993, was a $200
thousand charge to income.
Trust Assets and Income
Property held in a fiduciary or agency capacity for customers of the
Company's trust department is not included in the consolidated balance sheets
since such items are not assets of the Company or its subsidiaries. Trust income
is recognized on a cash basis which is not materially different than if it were
reported on an accrual basis.
Interest Rate Contracts
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 entered into to manage interest rate risk
exposure.
Interest rate contracts generally involve the exchange of fixed and
floating-rate interest payment obligations without the exchange of the
underlying principal amounts. Notional principal amounts often are used to
express the volume of these transactions, but the amounts potentially subject to
credit risk are much smaller.
The interest income or interest expense differential from interest rate
swap contracts is recognized on the accrual basis as a component of interest
income or interest expense over the life of the contract. Interest income or
interest expense resulting from the cap and collar contracts is recognized on
the accrual basis 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.
Earnings Per Share
Earnings per common share are based on the weighted average number of
common shares outstanding during each year and common equivalent shares using
the treasury share method. Common equivalent shares consist entirely of stock
options. Retroactive effect is given for stock dividends and stock splits. The
resulting average number of shares used in computing primary earnings per share
in 1995, 1994 and 1993 was 4,066,936, 4,061,617 and 4,054,868, respectively. The
difference between primary and fully diluted earnings per share is not
significant.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". SFAS provides guidance for recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles and goodwill related both to
assets held and used and assets to be disposed of.
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, an entity
should estimate the future cash flows expected to result from the use of the
asset and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Otherwise, an impairment loss is
not recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be based
on the fair value of the asset.
SFAS 121 requires that long lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell.
16
<PAGE>
SFAS 121 is effective for fiscal years beginning after December 15, 1995.
Management does not expect that the adoption of SFAS 121 will have a material
effect on the Company's financial condition or results of operations. The
Company plans on adopting SFAS 121 during the first quarter of 1996.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122 (SFAS 122), "Accounting for Mortgage Servicing Rights, an amendment of
FASB Statement No. 65". 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 FASB issued Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation". 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.
Upon adoption of SFAS 123, the Company will continue to measure
compensation expense for its stock-based employee compensation plans using the
methods prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and will provide pro forma disclosures of net income and earnings per
share as if the fair value-based method prescribed by SFAS 123 has been applied
in measuring compensation expense
SFAS 123 is effective for fiscal years beginning after December 15, 1995.
The Company will adopt SFAS 123 during the first quarter of 1996.
2. Branch Acquisition
On September 16, 1994, the Bank and Guaranty Bank, N.A. ("Guaranty")
completed a Purchase and Assumption Agreement (the "Agreement") for Guaranty's
New Holland branch. Pursuant to the Agreement, the Bank assumed $6,800,000 in
deposit liabilities and purchased $1,600,000 of assets consisting of home equity
and other personal loans, commercial loans, vault cash, and bank premises and
equipment. The Bank also assumed certain liabilities for contracts related to
the operation of the branch. This transaction was accounted for using purchase
accounting and resulted in the Company's recognition of intangible assets
amounting to $406,000 or 5.99 percent of deposits purchased.
3. Cash and Due from Banks
Cash and due from banks consists of cash and cash items, balances due from
correspondent banks and balances maintained with the Federal Reserve Bank. The
Company is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of those required reserve balances was
$6,643,000 and $6,935,000 at December 31, 1995 and 1994, respectively.
4. Money Market Investments
Federal funds sold are unsecured overnight investments entered into with
other financial institutions. Money market investments as of December 31, 1995
and 1994, are as follows:
(Dollars in thousands)
1995 1994
Federal funds sold $ 0 $1,300
Interest bearing deposits with banks 246 150
------ ------
Total $ 246 $1,450
====== ======
17
<PAGE>
5. Investment Securities
A summary of the amortized cost and fair values of investment securities
available for sale and investment securities held to maturity at December 31,
1995 and 1994 is as follows:
Investment Securities Available for Sale: (Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies $59,829 $ 106 $ 117 $59,818
Mortgage-backed securities 1,851 55 10 1,896
Equity securities 1,648 475 3 2,120
Other investment securities 1,965 0 0 1,965
------- ------- ------- -------
Total $65,293 $ 636 $ 130 $65,799
======= ======= ======= =======
</TABLE>
Investment Securities Held to Maturity: (Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies $37,802 $ 714 $ 157 $38,359
States and political subdivisions 12,394 105 14 12,485
Mortgage-backed securities 36,689 629 110 37,208
------- ------- ------- -------
Total $86,885 $ 1,448 $ 281 $88,052
======= ======= ======= =======
</TABLE>
Investment Securities Available for Sale: (Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies $52,461 $ 0 $ 2,390 $50,071
Mortgage-backed securities 2,453 0 33 2,420
Equity securities 1,019 290 57 1,252
Other securities 1,921 0 0 1,921
------- ------- ------- -------
Total $57,854 $ 290 $ 2,480 $55,664
======= ======= ======= =======
</TABLE>
Investment Securities Held to Maturity: (Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury and government agencies $36,837 $ 1 $ 1,221 $35,617
States and political subdivisions 11,424 60 180 11,304
Mortgage-backed securities 24,443 101 1,428 23,116
------- ------- ------- -------
Total $72,704 $ 162 $ 2,829 $70,037
======= ======= ======= =======
</TABLE>
Investment securities having a book value and a fair value of $51,206,000
and $51,769,000 respectively, at December 31, 1995 were pledged as required by
law to secure public and trust deposits, repurchase agreements, and other
borrowings.
Proceeds from sales of investment securities available for sale were
$609,000 during 1995, $20,760,000 during 1994 and $148,000 during 1993. There
were $134,000 in gross realized gains and $8,000 in gross realized losses
recorded in 1995. There were $73,000 in gross realized gains and $102,000 in
gross realized losses recorded in 1994 and $56,000 in gross realized gains in
1993 and no gross realized losses in 1993.
18
<PAGE>
At December 31, 1995, securities available for sale with net unrealized
gains of $506,000 resulted in a $336,000 after tax increase in stockholders'
equity. A $1,451,000 after tax decrease was reported at December 31, 1994 which
resulted from net unrealized losses of $2,190,000.
The amortized cost and fair value of investment securities available for
sale and investment securities held to maturity at December 31, 1995, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because certain issuers have the right to call or prepay
obligations.
Investment Securities Available for Sale: (Dollars in thousands)
December 31, 1995:
Amortized Cost Fair Value
Due in one year or less $26,074 $26,037
Due after one year through five years 33,105 33,125
Due after five years through ten years 233 238
Due after ten years 417 418
Mortgage-backed securities 1,851 1,896
Equity securities 1,648 2,120
Other securities 1,965 1,965
------- -------
Total $65,293 $65,799
======= =======
Investment Securities Held to Maturity: (Dollars in thousands)
December 31, 1995:
Amortized Cost Fair Value
Due in one year or less $15,233 $15,218
Due after one year through five years 34,298 34,920
Due after five years through ten years 665 706
Mortgage-backed securities 36,689 37,208
------- -------
Total $86,885 $88,052
======= =======
6. Loans
The carrying amounts of loans at December 31, 1995 and 1994 are as follows:
(Dollars in thousands)
1995 1994
Commercial $ 170,872 $ 158,343
Agriculture 90,971 86,687
Commercial real estate - construction 7,742 9,063
Real estate - residential mortgage 34,614 37,858
Consumer (net of unearned income of $2,830 and
$5,088 for 1995 and 1994, respectively) 87,560 92,069
Unamortized net loan fees (750) (866)
--------- ---------
Total, net $ 391,009 $ 383,154
========= =========
Included within this loan portfolio are loans on which the Company has
ceased the accrual of interest. Such loans amounted to $741,000 and $1,346,000
at December 31, 1995 and 1994, respectively. If interest income had been
recognized during 1995, 1994 and 1993 on non-accrual loans in accordance with
their original terms, interest income would have been affected as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Interest income which would have been
recognized in accordance with original terms $ 65 $ 133 $ 580
Interest income recorded during the period 45 21 327
----- ----- -----
Net effect upon interest income ($ 20) ($112) ($253)
===== ===== =====
</TABLE>
19
<PAGE>
The Company has determined that loans with a carrying value of $1,200,000
at December 31, 1995 are deemed to be impaired. Of the $1,200,000 in loans
classified as impaired, approximately $1,100,000 are loans for which there is no
specific allowance for credit losses and approximately $100,000 are loans which
have an aggregate allowance for credit losses of $100,000. The average balance
of loans classified as impaired amounted to $1,600,000 for the year ended
December 31, 1995. Interest income of approximately $45,000 was recognized
during the year ended December 31, 1995 on loans classified as impaired loans.
Certain fixed-rate residential mortgage loans are committed to be sold
without recourse to a third-party at the date of origination, with servicing
released by the Company. Loans committed for sale are funded by the Company for
a short period of time until settlement with the third-party. At December 31,
1995 and 1994 the Company had commitments to sell $2,483,000 and $1,004,000 of
such loans to a third-party, of which $378,000 and $432,000 had been funded.
Loans to officers and directors of the Company and its subsidiaries, and
corporations in which such officers or directors are beneficially interested as
stockholders, officers or directors, aggregated approximately $2,853,000 and
$2,088,000 at December 31, 1995 and 1994, respectively. These loans were made on
substantially the same basis, including interest rates and collateral, as those
prevailing for comparable transactions with other borrowers at the same time.
During 1995, approximately $1,286,000 of new loans were made, and repayments
approximated $521,000. At December 31, 1995 and 1994, none of these loans were
classified as non-accrual, impaired, past due, restructured, or potential
problem loans.
7. Allowance for Possible Loan Losses
Changes in the allowance for possible loan losses for the years ended
December 31, 1995, 1994 and 1993 are summarized as follows:
(Dollars in thousands)
1995 1994 1993
Balance, beginning of year $ 8,140 $ 8,486 $ 8,317
Provision charged to operations 0 300 2,400
Loans charged-off (583) (1,197) (2,593)
Recoveries on loans charged-off 468 551 362
------- ------- -------
Balance, end of year $ 8,025 $ 8,140 $ 8,486
======= ======= =======
8. Valuation Allowance for Other Real Estate Owned
Other real estate owned totalled $913,000 and $1,969,000 at December 31,
1995 and 1994, respectively. Changes in the valuation allowance for the years
ended December 31, 1995, 1994 and 1993 were as follows:
(Dollars in thousands)
1995 1994 1993
Balance, beginning of year $ 0 $ 696 $ 74
Additions to allowance 0 0 651
Losses and writedowns 0 (696) (29)
----- ----- -----
Balance, end of year $ 0 $ 0 $ 696
===== ===== =====
9. Premises and Equipment
Premises and equipment at December 31, 1995 and 1994 are summarized below:
(Dollars in thousands)
1995 1994
Land $ 1,245 $ 1,228
Premises 7,948 7,701
Furniture and equipment 8,070 7,224
Leasehold improvements 905 905
-------- --------
Subtotal 18,168 17,058
Less: Accumulated depreciation and amortization (10,235) (8,976)
-------- --------
Total, net $ 7,933 $ 8,082
======== ========
Depreciation and amortization amounted to $1,463,000, $1,355,000 and
$1,278,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
20
<PAGE>
10. Time Deposits
Time deposits in excess of $100,000 amounted to $18,587,000 and $20,570,000
at December 31, 1995 and 1994, respectively. Interest expense of $1,112,000,
$753,000 and $598,000 was recognized on these deposits in 1995, 1994, and 1993,
respectively.
11. Short-term Borrowings
At December 31, 1995 and 1994, short-term borrowings consisted of the
following:
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994
December Average Interest December Average Interest
31 Outstanding Expense 31 Outstanding Expense
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased $ 0 $ 112 $ 7 $ 0 $ 569 $ 23
Securities sold under
agreement to repurchase 8,640 11,397 459 12,087 16,454 539
------- ------- ------- ------- ------- -------
Total $ 8,640 $11,509 $ 466 $12,087 $17,023 $ 562
======= ======= ======= ======= ======= =======
</TABLE>
Federal funds purchased represent the Company's overnight borrowing
transactions. The weighted average interest rate on federal funds borrowing was
5.92% for 1995 and 4.04% for 1994.
Securities sold under agreement to repurchase range in maturity from one to
90 days. The weighted average interest rate was 4.03% for 1995 and 3.28% for
1994. The highest month-end outstanding balance was $14,720,000 for 1995 and
$19,102,000 for 1994. The weighted average rate paid was 4.02% on December 31,
1995 and 1994.
Unused federal funds lines of credit available to the Company for
short-term financing at December 31, 1995 totalled $94,000,000.
12. Other Borrowings
At December 31, 1995 and 1994, there were $13,570,000 and $8,951,000,
respectively, of advances outstanding from the Federal Home Loan Bank of
Pittsburgh (FHLB) with original maturities between one to five years. The FHLB
advances had a weighted average interest rate of 5.86% and 5.63% at December 31,
1995 and 1994, respectively, and a range of interest rates from 4.42% to 6.28%.
All FHLB advances are secured by the FHLB capital stock owned by the Company and
by certain investment securities having a fair value of $13,616,000 and
$10,871,000 at December 31, 1995 and 1994, respectively.
Obligations under capital leases were $439,000 and $975,000 at December 31,
1995 and 1994, respectively, and carried an imputed interest rate of 9.60%.
Scheduled lease payments include payment of imputed interest of $30,000 for
1996. Computer hardware and software systems totalling $260,000 net of
accumulated amortization of $2,249,000 at December 31, 1995, were recorded as
assets under the capital lease. Amortization expense resulting from the
amortization of these assets was $502,000 for 1995, 1994, and 1993.
The following is a summary of the maturities of FHLB advances and the
scheduled amortization of capital lease obligations as of December 31, 1995:
(Dollars in thousands)
FHLB ADVANCES
WEIGHTED CAPITAL LEASE
AMOUNT AVERAGE RATE OBLIGATIONS
1996 $10,142 5.82% $ 439
1997 3,428 5.96 -0-
------- ---- -------
Total $13,570 5.86% $ 439
======= ==== =======
21
<PAGE>
13. Federal Income Taxes
The Company adopted SFAS 109 effective January 1, 1993 on a prospective
basis, with the cumulative effect of this accounting change amounting to a
decrease in the financial statement deferred tax asset of $200,000, with a
corresponding charge to income in 1993.
Federal income taxes included in the accompanying statements of income for
the years ended December 31, 1995, 1994 and 1993 are as follows:
(Dollars in thousands)
1995 1994 1993
Current $ 3,505 $ 2,917 $ 2,560
Deferred 23 366 (445)
------- ------- -------
Total $ 3,528 $ 3,283 $ 2,115
======= ======= =======
The following is a reconciliation between the applicable income tax expense
and the amount of income taxes which would have been provided at the Federal
statutory rate of 35% for 1995 and 1994 and 34% for 1993.
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Federal tax expense at statutory rates $ 3,915 $ 3,518 $ 2,501
Increase(Reduction) in taxes resulting from:
Non-taxable investment security income (139) (191) (218)
Non-taxable loan income (189) (145) (144)
Other, net (59) 101 (24)
------- ------- -------
Total $ 3,528 $ 3,283 $ 2,115
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and December 31, 1994 are presented below:
(Dollars in thousands)
1995 1994
Deferred tax assets:
Book allowance for possible loan losses $2,729 $2,768
Deferred compensation 348 324
Unamortized net loan fees 273 315
Non-accrual loan interest 35 120
Accrued pension expense 201 103
Gross unrealized loss on investment securities
available for sale 44 843
Other 56 62
------ ------
Total $3,686 $4,535
====== ======
Deferred tax liabilities:
Depreciation $ 253 $ 332
Gross unrealized gain on investment securities
available for sale 214 104
Discount accretion 81 16
Other 38 52
------ ------
Total $ 586 504
------ ------
Deferred tax asset, net $3,100 $4,031
====== ======
22
<PAGE>
The Company has determined that it is not required to establish a valuation
reserve for the deferred tax asset since it is more likely than not that the
deferred tax asset of $3,686,000 will be realized through carrybacks to taxable
income in prior years, through future reversals of existing temporary
differences, future taxable income and implementation of tax planning
strategies. The Company reviews the tax criteria related to the recognition of
deferred tax assets on a quarterly basis.
14. Stockholders' Equity
The Board of Directors of the Company effected a 4 for 3 stock split during
January 1996 and a 5 for 4 stock split during 1994. All prior period per share
data has been restated to give effect for these stock splits. In addition,
common stock outstanding at December 31, 1995 has been adjusted to reflect
recognition of the 4 for 3 stock split effective January 1996. The weighted
average number of shares outstanding was 4,066,936 for 1995, 4,061,617 for 1994,
and 4,058,868 for 1993.
During the years ended December 31, 1995, 1994 and 1993, the Company
purchased 7,605, 11,618 and 2,950 shares of its common stock, respectively, for
delivery under its dividend reinvestment program. The Company issued 7,549, 0
and 9,688 shares of its common stock under its dividend reinvestment plan in
1995, 1994 and 1993, respectively.
15. Stock Option Plan
The Keystone Heritage Group, Inc. 1995 Stock Option Plan provides for the
granting of options or stock appreciation rights to key employees of the Company
and its subsidiaries, not to exceed 200,000 shares of Keystone Heritage Group,
Inc. common stock. The option price of any options granted may not be less than
the fair market value of the stock at the date of grant.
Options to purchase 18,667 shares of common stock at a price of $19.88 were
granted to participants in December 1994. Options to purchase 18,667 shares of
common stock at a price of $23.34 were granted to participants in December 1995.
Options granted are exercisable six months from the date of grant and expire ten
years from such date.
The following summarizes stock option transactions:
Number of Shares Exercise Price
Balance, December 31, 1993 0 0
Granted during 1994 18,667 $ 19.88
Exercised during 1994 0 0
Balance, December 31, 1994 18,667 $ 19.88
====== =========
Granted during 1995 18,667 $ 23.34
Exercised during 1995 0 0
------ ---------
Balance, December 31, 1995 37,334 $19.88-$23.34
====== =============
The stock options listed above have been restated to give effect for the 4 for 3
stock split effective January 1996.
At December 31, 1995, there were 162,666 shares available for grant.
23
<PAGE>
16. Employee Benefit Plans
Pension Plan
The Company has a non-contributory pension plan covering substantially all
employees. Pension expense of $287,000, $271,000 and $203,000 was recognized for
1995, 1994 and 1993, respectively. The following presents the plan's funded
status (using a measurement date of October 1) and amounts recognized on the
Company's balance sheets:
<TABLE>
<CAPTION>
(Dollars in thousands)
October 1,
1995 1994 1993
<S> <C> <C> <C>
Actuarial present value of accumulated
plan benefits:
Vested $ 4,071 $ 3,322 $ 3,162
Nonvested 117 100 71
------- ------- -------
Accumulated plan benefits $ 4,188 $ 3,422 $ 3,233
Effects of projected future
compensation levels $ 2,065 $ 1,820 $ 2,427
------- ------- -------
Projected benefit obligation $ 6,253 $ 5,242 $ 5,660
Plan assets at fair value 5,740 5,006 5,228
------- ------- -------
Projected benefit obligation
in excess of plan assets ($ 513) ($ 236) ($ 432)
Unrecognized net transition asset (298) (348) (397)
Unrecognized prior service cost 16 102 110
Unrecognized net gain due to past
experience from different
assumptions made 204 178 686
------- ------- -------
Accrued pension expense ($ 591) ($ 304) ($ 33)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
The net pension expense included the following:
Service cost - benefits earned during the year $ 350 $ 368 $ 336
Interest cost on the projected benefit obligation 380 357 343
Net amortization and deferral 446 (536) 43
Return on plan assets (889) 82 (519)
----- ----- -----
Net pension expense $ 287 $ 271 $ 203
===== ===== =====
</TABLE>
The discount rate used in determining the projected benefit obligation was
7.0% for 1995, 7.5% for 1994 and 7.0% for 1993. The expected long-term return on
plan assets and the projected increase in salary levels were 8.0% and 5.0% for
1995 and 1994, and 9% and 6% for 1993.
Plan assets are primarily invested in money market funds, equity common
trust funds, and U.S. Treasury and agency securities.
The Company also sponsors a defined contribution plan established during
1993 where each eligible participant's contribution is 50 percent matched by the
Company up to a maximum of the first 3 percent of the participant's compensation
and 25 percent matched by the Company for the next 3 percent of the
participant's compensation. For the years ended December 31, 1995, 1994 and
1993, the expense to the Company to provide these matching contributions
totalled $83,000, $78,000 and $58,000, respectively.
17. Commitments and Contingent Liabilities
Leases for five branch facilities provide for minimum annual rentals of
approximately $244,000 through 2001, $209,000 through 2004, $151,000 through
2008, $121,000 through 2009 and $56,000 through 2013. In addition, the Company
had operating lease arrangements for the use of various data processing
equipment which expired in 1995. Total rental expense included in operating
expense for 1995, 1994 and 1993 was $287,000, $361,000 and $324,000,
respectively.
In the normal course of business, the Company is subject to pending and
threatened legal actions and proceedings. Management does not believe the
outcome of these actions and proceedings will have a materially adverse effect
on the financial condition or results of operations of the Company.
24
<PAGE>
18. Dividend Restrictions
The Company's ability to pay dividends on its common stock is derived from
dividends from the Bank and the Company's nonbanking subsidiary. The ability of
the Company's banking subsidiary to pay dividends is subject to certain
restrictions.
National banks are subject to various legal limitations on the amount of
dividends that may be paid to their stockholders. Under the provisions of 12
U.S.C. ss.56, a national bank may not pay a dividend in an amount greater than
its net profits then on hand after deducting therefrom its losses and bad debts.
For this purpose, "bad debts" are defined to generally include the principal
amount of loans which are in arrears with respect to payment of interest for six
months or more and "net profits" has been construed by the Comptroller of the
Currency to mean retained earnings plus that portion of a bank's capital surplus
which was transferred from retained earnings. The amount of bad debts to be
deducted is limited to such amount thereof as exceeds a bank's allowance for
loan and lease losses. Under the provisions of 12 U.S.C. ss.60, the approval of
the Comptroller of the Currency is required if the total of all dividends
declared by a national bank in any calendar year exceeds such bank's net profits
(as defined) for that year, combined with its net profits for the preceding two
calendar years, less any required transfers to surplus.
At December 31, 1995, under the most restrictive of these limitations, the
Bank could declare dividends in 1996 of approximately $9.0 million, combined
with an additional amount equal to its net profits for 1996 up to the date of
any dividend declaration. In determining whether, and to what extent, to pay
dividends, the Bank must also consider the effect of applicable risk-based
capital regulations and leverage limitations.
19. Geographic Concentrations of Credit and Off-Balance Sheet Financial
Instruments
The Company's loan portfolio consists of loans primarily to businesses and
individuals in its five-county market area of Lebanon, Lancaster, Schuylkill,
Dauphin, and Berks 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 non-performance 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. The
Company applies the same credit standards in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments 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.
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. At December
31, 1995, there were $91.0 million or 23.3% of the total loan portfolio in loans
to agriculture-related borrowers. These loans consist of loans for a variety of
purposes within the industry, primarily dairy farms, poultry farms,
agri-business and swine operations. These loans may be impacted by adverse
climate, economic conditions, or other factors not common to other industries.
The Company's exposure to possible loss in the event of non-performance by these
borrowers is represented by the contractual amount of those instruments. The
Company's policy is to require supporting collateral for these loans in the form
of agricultural real estate, livestock, and farm equipment.
Most of the Company's business activity is with customers located within
the Company's defined market area. Since a significant amount of the Company's
loans which are secured by real estate are located within this market area, a
substantial portion of the Company's debtors' ability to honor their contracts,
and increases and decreases in the market value of the real estate
collateralizing such loans, may be significantly affected by the level of
economic activity in this area.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third-party. The majority of the
standby letters of credit consist of performance assurances made on behalf of
customers. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers, and the
Company applies the same credit standards used in the lending process.
25
<PAGE>
The Bank entered into an interest rate cap/collar contract on November 5,
1993 with a notional amount of $10 million. The contract states that the Bank
would receive a spread between the national prime rate and 6.00 percent should
the prime rate fall below 6.00 percent. The Bank would pay an interest rate
spread between the national prime and 7.00 percent should the prime rate exceed
7.00 percent. The contract expired on February 5, 1996.
During the third quarter of 1995 the Bank entered into three interest rate
swap contracts. On July 7, 1995 the Bank entered into an interest rate swap
contract with a notional amount of $10 million. The contract states that the
Bank 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 Bank
entered into an interest rate swap contract on July 28, 1995 with a notional
amount of $10 million. This contract states that the Bank 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 Bank entered into another
interest rate swap contract on August 15, 1995 with a notional amount of $10
million. This contract states that the Bank 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 Bank 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 Bank's interest rate risk in a declining or
stable interest rate environment. Specifically, these contracts protect the
Bank'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 December 31, 1995 and
December 31, 1994:
(Dollars in thousands)
Contractual Amounts
1995 1994
Financial instruments whose contractual amounts
represent credit risk:
Commitments to extend credit $88,242 $84,398
Standby letters of credit 8,862 7,983
Contractual amounts of off-balance sheet financial
instruments not constituting credit risk:
Interest rate swaps, notional value 30,000 10,000
Interest rate cap/collar, notional value 10,000 10,000
20. Fair Value of Financial Instruments
The Company uses various methods and assumptions in estimating fair value
disclosures for its financial instruments. Many of the Company's financial
instruments lack an available trading market and require substantial estimation
and present value calculations to determine their current fair values. The
following assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
Cash and Due from Banks: The carrying amounts reported in the balance sheet
for cash and due from banks approximate those assets' fair values.
Money Market Investments: The fair value of money market investments is
estimated to be the carrying value due to the short maturities and negligible
credit concerns.
Investment Securities: Investment securities actively traded in a secondary
market have been valued using quoted available market prices.
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1995 December 31, 1994
Amortized Cost Fair Value Amortized Cost Fair Value
<S> <C> <C> <C> <C>
Investment securities
available for sale $ 65,293 $ 65,799 $ 57,854 $ 55,664
Investment securities
held to maturity 86,885 88,052 72,704 70,037
-------- -------- -------- --------
Total $152,178 $153,851 $130,558 $125,701
======== ======== ======== ========
</TABLE>
26
<PAGE>
Loans: For variable-rate loans with no significant change in credit risk,
fair values are based on carrying values. The fair values for fixed-rate
commercial loans, commercial real estate-constructions loans, agriculture loans,
real estate- residential mortgage loans, and consumer loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. The fair value
of non-performing and classified loans is determined either through an
appropriate adjustment to the discount rate used in the discounted cash flow
analysis or from an estimation of the amount of expected recovery on individual
loans.
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1995 December 31, 1994
Carrying Value Fair Value Carrying Value Fair Value
<S> <C> <C> <C> <C>
Commercial $ 170,872 $ 170,950 $ 158,343 $ 154,989
Agriculture 90,971 91,220 86,687 85,265
Commercial real estate - construction 7,742 7,746 9,063 8,864
Real estate - residential mortgage 34,614 37,007 37,858 36,836
Consumer (net of unearned income of
$2,830 and $5,088 for 1995 and 1994,
respectively) 87,560 89,023 92,069 91,630
Unamortized net loan fees (750) 0 (866) (0)
--------- --------- --------- ---------
Total, net $ 391,009 $ 395,946 $ 383,154 $ 377,584
========= ========= ========= =========
</TABLE>
Demand and Savings Deposits: Interest bearing demand deposits and savings
deposits are, by definition, payable on demand as of the balance sheet date. The
carrying amounts reported in the balance sheet for these deposits approximate
fair values.
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1995 December 31, 1994
Carrying Value Fair Value Carrying Value Fair Value
<S> <C> <C> <C> <C>
Non-interest bearing demand $ 65,530 $ 65,530 $ 64,063 $ 64,063
Interest bearing demand 57,146 57,146 61,805 61,805
Savings 128,425 128,425 125,295 125,295
-------- -------- -------- --------
Total $251,101 $251,101 $251,163 $251,163
======== ======== ======== ========
</TABLE>
Time Deposits, Short-Term Borrowings and Other Borrowings: Fair values for
fixed-rate time certificates of deposit are estimated using a discounted cash
flow calculation that applies a discount rate equal to the cost of replacing
these deposits to a schedule of aggregated monthly maturities on time deposits.
The carrying amounts of securities sold under agreements to repurchase
approximate their fair values due to their short maturity. The fair value of the
Company's FHLB advances and capital lease obligations are estimated using
discounted cash flow analyses, based upon the current incremental borrowing
rates for similar types of borrowing.
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1995 December 31, 1994
Carrying Value Fair Value Carrying Value Fair Value
<S> <C> <C> <C> <C>
Time deposits $236,816 $240,785 $217,577 $216,398
Securities sold under agreements
to repurchase 8,640 8,640 12,087 12,087
FHLB advances 13,570 13,616 8,951 8,865
Capital lease obligations 439 439 975 972
-------- -------- -------- --------
Total $259,465 $263,480 $239,590 $238,322
======== ======== ======== ========
</TABLE>
27
<PAGE>
Off-Balance-Sheet Instruments: Fair values for the Company's loan
commitments and standby letters of credit are based on fees which have been
received but not recognized as of the balance sheet date. Fair values for
interest rate contracts are based on pricing models using current assumptions.
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1995 December 31, 1994
Contractual Fair Contractual Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Commitments to extend credit $88,242 $ 0 $84,398 $ 0
Standby letters of credit 8,862 10 7,983 15
Interest rate swaps, notional value 30,000 339 10,000 (62)
Interest rate collar contract,
notional value 10,000 10,000
6% Floor 0 0
7% Ceiling (13) (310)
</TABLE>
21. Parent Company Statements
The balance sheets, income statements, and statements of cash flows for
Keystone Heritage Group, Inc. (Parent only) are presented below:
(Dollars in thousands)
Balance Sheets
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Assets
Cash $ 61 $ 2
Investment securities available for sale 2,121 1,317
Investment in subsidiaries 56,843 50,858
Other assets 19 12
------- -------
Total assets $59,044 $52,189
======= =======
Liabilities and Stockholders' Equity
Current liabilities $ 165 $ 87
Stockholders' equity 58,879 52,102
------- -------
Total liabilities and stockholders' equity $59,044 $52,189
======= =======
</TABLE>
<TABLE>
<CAPTION>
Income Statements Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Interest and dividend income $ 69 $ 47 $ 41
Net realized gain on investment
securities available for sale 129 58 49
Dividends from bank subsidiary 3,316 2,821 2,531
Expense 213 238 48
------ ------ ------
Income before undistributed income of subsidiaries 3,301 2,688 2,573
Undistributed income of subsidiaries 4,356 4,079 2,469
------ ------ ------
Net income $7,657 $6,767 $5,042
====== ====== ======
</TABLE>
28
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 7,657 $ 6,767 $ 5,042
Equity in undistributed income of subsidiaries (4,356) (4,079) (2,469)
Other, net (138) (260) (114)
------- ------- -------
Net cash provided by operating activities 3,163 2,428 2,459
Cash Flows from Investing Activities:
Maturities and sales of investment
securities available for sale 883 679 141
Funds invested in investment securities
available for sale (1,320) (638) (382)
------- ------- -------
Net (used by) cash provided by
investing activities (437) 41 (241)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 199 0 291
Cash dividends paid (2,866) (2,572) (2,531)
------- ------- -------
Net cash used by financing activities (2,667) (2,572) (2,240)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 59 (103) (22)
Cash at beginning of period 2 105 127
------- ------- -------
Cash at end of period $ 61 $ 2 $ 105
======= ======= =======
</TABLE>
22. Summary of Quarterly Financial Information (unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1995
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Interest income $10,292 $10,846 $11,035 $11,058
Interest expense 4,269 4,830 4,970 4,999
------- ------- ------- -------
Net interest income 6,023 6,016 6,065 6,059
Provision for possible loan losses 0 0 0 0
Other operating income 1,140 1,280 1,303 1,688
Other operating expense 4,620 4,585 4,590 4,594
------- ------- ------- -------
Income before income taxes 2,543 2,711 2,778 3,153
Income taxes 786 847 857 1,038
------- ------- ------- -------
Net income $ 1,757 $ 1,864 $ 1,921 $ 2,115
======= ======= ======= =======
Per common share:
Net income $ .43 $ .46 $ .47 $ .52
======= ======= ======= =======
Cash dividends paid .165 .18 .18 .18
======= ======= ======= =======
1994
Interest income $ 8,721 $ 9,146 $ 9,691 $10,053
Interest expense 3,418 3,405 3,713 3,911
------- ------- ------- -------
Net interest income 5,303 5,741 5,978 6,142
Provision for possible loan losses 200 100 0 0
Other operating income 1,234 1,134 1,317 1,134
Other operating expense 4,191 4,425 4,533 4,484
------- ------- ------- -------
Income before income taxes 2,146 2,350 2,762 2,792
Income taxes 671 795 899 918
------- ------- ------- -------
Net income $ 1,475 $ 1,555 $ 1,863 $ 1,874
======= ======= ======= =======
Per common share:
Net income $ .37 $ .38 $ .46 $ .46
------- ------- ------- -------
Cash dividends paid .156 .156 .156 .165
======= ======= ======= =======
</TABLE>
29
<PAGE>
KPMG Peat Marwick LLP
Certified Public Accountants
225 Market Street Telephone 717 238 7131 Telefax 717 233 1101
Suite 300
P.O. Box 1190
Harrisburg, PA 17108-1190
Independent Auditors' Report
The Board of Directors
Keystone Heritage Group, Inc.
We have audited the accompanying consolidated balance sheets of Keystone
Heritage Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Keystone Heritage
Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in notes 1 and 13 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993 to adopt the
provisions of Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes".
KPMG Peat Marwick LLP
January 26, 1996
30
<PAGE>
Summary of Selected Financial Data
Dollars in thousands, except per share and nonfinancial data)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Total interest income $ 43,231 $ 37,611 $ 37,583 $ 42,248 $ 49,212
Total interest expense 19,068 14,447 15,697 20,532 28,452
----------- ----------- ----------- ----------- -----------
Net interest income 24,163 23,164 21,886 21,716 20,760
Provision for possible loan losses 0 300 2,400 3,600 3,996
Other operating income 5,411 4,819 5,084 4,366 3,705
Other operating expense 18,389 17,633 17,213 15,400 14,721
----------- ----------- ----------- ----------- -----------
Income before income taxes and
cumulative effect of change in
accounting for income taxes 11,185 10,050 7,357 7,082 5,748
Federal income tax provision 3,528 3,283 2,115 1,977 1,482
----------- ----------- ----------- ----------- -----------
Income before cumulative effect of
change in accounting for income taxes 7,657 6,767 5,242 5,105 4,266
Cumulative effect of change
in accounting for income taxes 0 0 (200) 0 0
----------- ----------- ----------- ----------- -----------
Net income $ 7,657 $ 6,767 $ 5,042 $ 5,105 $ 4,266
=========== =========== =========== =========== ===========
Common Stock Data - per share
Income before cumulative effect of
change in accounting for income taxes $ 1.88 $ 1.67 $ 1.29 $ 1.26 $ 1.06
Cumulative effect of change
in accounting for income taxes .00 .00 (.05) .00 .00
----------- ----------- ----------- ----------- -----------
Net income 1.88 1.67 1.24 1.26 1.06
=========== =========== =========== =========== ===========
Cash dividends paid .705 .633 .624 .624 .582
Book value 14.46 12.83 12.27 11.51 10.87
Weighted average number of
shares outstanding 4,066,936 4,061,617 4,058,868 4,044,545 4,032,460
At Year End
Investment securities available for sale $ 65,799 $ 55,664 $ 79,387 $ 3,579 $ 1,327
Investment securities held to maturity 86,885 72,704 61,594 114,551 117,782
Loans 391,009 383,154 360,807 376,074 381,019
Allowance for possible loan losses 8,025 8,140 8,486 8,317 6,888
Total assets 577,777 548,194 533,774 540,038 547,301
Total deposits 487,917 468,740 454,700 464,031 476,080
Other borrowings 14,009 9,926 10,325 10,371 5,483
Stockholders' equity 58,879 52,102 49,826 46,556 43,881
Trust assets, at cost $ 210,328 $ 205,860 $ 189,495 $ 177,575 $ 146,501
Ratios
Return on average assets 1.38% 1.26% .94% .95% .80%
Return on average stockholders' equity 13.85 13.29 10.57 11.32 10.05
Cash dividend payout ratio 37.43 38.01 50.21 49.42 54.92
Allowance for possible loan
losses to total loans 2.05 2.12 2.35 2.21 1.81
Average stockholders' equity
to average assets 9.93 9.51 8.91 8.41 7.92
</TABLE>
Retroactive effect is given to per share data for stock splits and stock
dividends. Return on average assets and return on average stockholders' equity
for 1993 is after cumulative effect of change in accounting for income taxes.
31
<PAGE>
The purpose of this discussion is to further detail the financial condition
and results of operations of Keystone Heritage Group, Inc.(the Company). This
discussion should be read in conjunction with the financial statements appearing
elsewhere in this report. Earnings per common share are based upon the weighted
average number of shares outstanding and have been adjusted for a 4-for-3 stock
split which was effective in January 1996 and a 5-for-4 stock split which was
effective in October 1994. All prior period per share data has been restated to
give effect for these stock splits.
The Company is a bank holding company headquartered in Lebanon,
Pennsylvania which engages in a general commercial and retail banking and trust
business through its banking subsidiary, Lebanon Valley National Bank (the
Bank). Keystone Heritage Life Insurance Company is a non-bank subsidiary that
reinsures credit life and accident and health policies written on consumer loans
generated by the Bank.
SUMMARY OF OPERATIONS
In 1995, the Company recorded net income that was the highest net income
ever reported by the Company for a calendar year. Net income of $7.7 million or
$1.88 per share for 1995 represents an increase of 13.2% compared to the $6.8
million or $1.67 per share reported for 1994. The Company's return on average
stockholders' equity for 1995 was 13.85% and the return on average assets was
1.38% compared with 13.29% and 1.26%, respectively, for 1994.
NET INTEREST INCOME
Net interest income is the primary source of operating 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. The
factors that influence net interest income include changes in interest rates and
changes in asset and liability balances. The net interest margin is calculated
by dividing tax equivalent net interest income by average earning assets and
represents the Company's net yield on its earning assets.
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 the federal income taxes which
would have been paid if the interest earned on those assets were taxable at the
statutory tax rate of 35%.
Net interest income for the year ended December 31, 1995 was $24.7 million,
a $990 thousand or 4.2% increase over 1994. Net interest income for 1993 was
$22.5 million.
In comparing net interest income for 1995 to 1994, an increase of $392
thousand was associated with volume changes in earning assets and interest
bearing liabilities, and $598 thousand was associated with changes in interest
rates earned or paid on earning assets and interest bearing liabilities.
The rate component of the increase in net interest income resulted from an
increase in the yield on earning assets of 71 basis points which added an
additional $4.0 million of interest income compared to 1994. This was partially
offset by a 95 basis point increase in the cost of interest bearing liabilities
which added $3.4 million in additional interest expense compared to 1994. A
large contributor to the rate increase in interest income was due to the $10.5
million increase in average loans outstanding, which have a higher yielding
return as compared to the investment portfolio. An increase in the average prime
rate of 180 basis points from 1994 was a major contributor to the higher yields
on earning assets. In addition, due to the increase in interest rates,
depositors shifted from transaction accounts to higher yielding time deposits.
This resulted in the cost of time deposit accounts increasing 110 basis points
from 1994. The net effect of the increase in rate on earning assets and cost of
interest bearing liabilities resulted in a 24 basis point decrease in the net
interest rate spread. The decrease in the net interest rate spread of 24 basis
points was partially offset by the increase in non-interest bearing demand
deposits of $2.1 million resulting in a 3 basis point decline in the average net
interest margin to 4.66%. Although the average net interest margin was 4.66% for
1995, the Company's average net interest margin during the fourth quarter of
1995 was 4.55%. A major component of the Company's asset-liability management
policies is to try to minimize the interest rate risk exposure caused by
changing interest rate environments. The Company utilized interest rate swap and
cap/collar contracts in an attempt to manage this interest rate risk. At
December 31, 1995 the Company had a notional value of $40 million in interest
rate contracts, described in more detail in the asset-liability management
section of this report. These contracts had the effect of reducing interest
income by $255 thousand in 1995, increasing interest income by $2 thousand in
1994 and increasing interest income by $190 thousand in 1993. These interest
rate contracts are in place to protect the Bank against falling interest rates
which will most adversely effect the Bank's net interest margin. With falling
interest rates during the last quarter of 1995 and continued declination during
1996, these contracts should increase interest income in future periods. This
will somewhat offset the reduction in income received from variable rate loan
products.
The volume component of the increase in net interest income was a result of
an increase in average earning assets of $24.9 million for 1995 over 1994, which
provided $1.7 million of additional interest income over 1994. An increase in
interest bearing liabilities outstanding of $13.1 million added $1.3 million of
additional interest expense compared to 1994. The increase in earning assets
resulted from a $10.5 million increase in average loans outstanding and an $8.0
million increase in average investments outstanding and a $6.4 million increase
in average money market investments. The increase in interest bearing
liabilities resulted primarily from an increase in average time deposits of
$36.9 million from 1994. The increase in time deposits was partially offset by a
$19.7 million reduction in average interest bearing demand and savings deposits
from 1994. The increase in average interest bearing deposit volumes resulted in
an additional $1.5 million in interest expense as compared to 1994.
32
<PAGE>
Table 1
Average Balance Sheets, Rates, and Interest Income and Expense
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
Assets
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $381,939 $ 35,225 9.22% $371,467 $ 31,046 8.36% $367,898 $ 30,664 8.33%
Money market investments:
Interest bearing deposits
with banks 2,864 165 5.76 265 12 4.53 1,459 57 3.91
Federal funds sold 6,407 374 5.83 2,608 115 4.41 5,912 164 2.77
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total money market investments 9,271 539 5.82 2,873 127 4.42 7,371 221 3.00
Investment securities:
Taxable 128,571 7,298 5.68 118,010 6,092 5.16 112,249 6,230 5.55
Non-taxable 10,022 678 6.77 12,564 864 6.88 14,357 1,077 7.50
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total investment securities 138,593 7,976 5.75 130,574 6,956 5.33 126,606 7,307 5.77
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total earning assets 529,803 $ 43,740 8.26 504,914 $ 38,129 7.55 501,875 $ 38,192 7.61%
-------- -------- ---- -------- -------- ---- -------- -------- ----
Other assets 26,990 30,234 33,489
------ ------ ------
Total assets $556,793 $535,148 $ 535,364
======== ======== ===========
Liabilities and Stockholders'
Equity Interest bearing deposits:
Demand $ 55,523 $ 798 1.44 $ 64,198 $ 927 1.44 $ 67,677 $ 1,216 1.80%
Savings 121,995 3,663 3.00 132,984 3,269 2.46 130,976 3,485 2.66
Time 236,662 13,375 5.65 199,774 9,081 4.55 208,019 9,907 4.76
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total interest bearing deposits 414,180 17,836 4.31 396,956 13,277 3.34 406,672 14,608 3.59
Short-term borrowings 11,509 466 4.05 17,023 562 3.30 15,643 450 2.88
Other borrowings 11,636 766 6.58 10,259 608 5.93 10,551 639 6.06
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total interest bearing
liabilities 437,325 $ 19,068 4.36 424,238 $ 14,447 3.41 432,866 $ 15,697 3.63%
-------- -------- ---- -------- -------- ---- -------- -------- ----
Non-interest bearing demand
deposits 57,076 54,929 49,748
Other liabilities 7,092 5,071 5,061
Stockholders' equity 55,300 50,910 47,689
------ ------ ------
Total liabilities and
stockholders' equity $556,793 $535,148 $ 535,364
======== ======== ===========
Net interest income $ 24,672 $ 23,682 $ 22,495
======== ======== ========
Net yield on earning assets
Total yield on earning assets 8.26% 7.55% 7.61%
Rate on supporting liabilities 3.60% 2.86% 3.13%
---- ---- ----
Net interest margin 4.66% 4.69% 4.48%
==== ==== ====
</TABLE>
Interest and average interest rates are presented on a fully taxable equivalent
basis, using an effective tax rate of 35%. For purposes of calculating loan
yields, average loan balances include non-accrual loans.
Loan fees of $501,000, $434,000 and $812,000 for the years 1995, 1994, and 1993,
respectively, are included in interest income.
33
<PAGE>
For 1994 as compared to 1993, an increase of $675 thousand in net interest
income was associated with changes in volumes of earning assets and supporting
liabilities, and $512 thousand was associated with changes in interest rates
earned or paid on earning assets and supporting liabilities.
The volume component of the increase in net interest income was a result of
an increase in average earning assets of $3.0 million for 1994 over 1993, which
provided $309 thousand of additional net interest income over 1993, and a change
in the mix of liabilities supporting these earning assets, which contributed
$366 thousand to net interest income compared to 1993. The change in the mix of
liabilities included an increase of $5.2 million or 10.4% in non-interest
bearing demand deposit balances and a decrease of $8.2 million in time deposits
for 1994 as compared to 1993.
The rate component of the increase in net interest income resulted from a
decrease in the average cost of interest bearing liabilities of 22 basis points
from 1993 to 1994, which provided an additional $884 thousand of net interest
income, combined with a decrease of 6 basis points in the yield on interest
earning assets, which had the effect of reducing net interest income by $372
thousand. Significant decreases in costs were realized for all deposit
classifications for 1994 as the cost of interest bearing demand deposits
decreased by 36 basis points, the cost of savings deposits decreased by 20 basis
points, and the cost of time deposits decreased by 21 basis points. The
classification which had the largest effect on the yield on earning assets was
investment securities which decreased by 44 basis points in yield compared to
1993. The effect of the Company's interest rate swaps which were outstanding
during 1994 was to decrease net interest income by $2 thousand in 1994.
A comparative statement of average balances of interest earning assets and
interest bearing liabilities, interest income and interest expense, and interest
rates for the years ended December 31, 1995, 1994, and 1993 is presented in
Table 1. A presentation of the changes in net interest income for 1995 compared
to 1994, and 1994 compared to 1993, is given in Table 2. This analysis indicates
the changes in interest income and interest expense caused by the volume and
rate components of interest earning assets and interest bearing liabilities.
OTHER OPERATING INCOME
Other operating income for 1995 was $5.4 million, a $592 thousand or 12.3%
increase from 1994. Other operating income for 1994 was $4.8 million, compared
to $5.1 million for 1993.
Other operating income increased from 1994 as a result of a $410 thousand
gain recognized on the sale of a property classified as other real estate owned
during 1995. In addition, net realized gains recorded on the sale of investment
securities available for sale amounted to $126 thousand for 1995 compared to net
realized losses of $29 thousand for 1994.
Income from service charges on deposit accounts increased by $83 thousand
or 6.9% for 1995 as compared to 1994. Income from service charges on deposit
accounts was $1.3 million, $1.2 million and $1.3 million in 1995, 1994 and 1993,
respectively.
Other operating income decreased by $265 thousand from 1993 to 1994. The
largest decrease in any component of other operating income for 1994 from 1993
was a $481 thousand decrease in income recognized from the sale of fixed-rate
residential mortgages. During 1993, a total of $47.3 million of mortgage loans
were sold as compared to approximately $13.1 million during 1994. A significant
portion of the mortgages which were originated and sold during 1993 were a
result of customers refinancing existing mortgage loans.
A summary of the components of other operating income is provided in
Table 3.
OTHER OPERATING EXPENSE
Other operating expense for 1995 was $18.4 million, a $756 thousand or 4.3%
increase over 1994. Other operating expense for 1993 was $17.2 million.
The largest component of the Company's other operating expense is salaries
and employee benefits, which increased by 10.6% from $8.8 million in 1994 to
$9.8 million in 1995. Salaries and employee benefits expense for 1993 totalled
$8.3 million. The increase for 1995 over 1994 resulted from the recognition of
$616 thousand related to employee bonuses recorded during 1995 and a 4% merit
increase that was applied on January 1, 1995 to base salaries in effect as of
that date. These increases were somewhat offset by a reduction in the full time
equivalent staff by 3% from 1994 to 1995.
The Company does not provide any significant post-retirement or
post-employment benefits.
Federal Deposit Insurance Company (FDIC) deposit insurance premiums for
1995 were $539 thousand which decreased from 1994 by $477 thousand. This was
attributable to a decrease in the assessment rate charged by the FDIC which
occurred in May 1995. Beginning in May 1995, the assessment rate charged to the
Company on deposit accounts decreased significantly from 23 cents per $100 of
deposits to a rate of 4 cents per $100 of deposits. This reduction in premium
resulted in a refund of a portion of the FDIC insurance assessments that were
previously paid by the Company. This refund amounted to $290 thousand. The rate
paid by the Company is the lowest assessment rate charged to "Well Capitalized"
institutions. The FDIC is currently studying the premium assessment rates to be
charged to member financial institutions during upcoming periods. As a result of
achieving the reserve levels in the Bank Insurance Fund which were mandated by
legislation through the Federal Deposit Insurance Corporation Act of 1991
(FDICIA), significantly lower FDIC premiums than those that were paid in the
preceding comparative periods should result. The assessment rate on deposits
charged to the Bank by the FDIC in 1994 and 1993 was 23 cents per $100 of
deposits. A minimum flat rate of $500 was charged to the Company for the first
quarter of 1996. Based on the most recent assessment paid by the Company, the
Company's FDIC expense would be approximately $2 thousand for 1996.
Expenses associated with loan collection activities and with properties
classified as other real estate owned continue to show a reduction from the
preceding two years. Expenses associated with other real estate owned amounted
to $870 thousand in 1993 and decreased to $91 thousand in 1994 and to $79
thousand in 1995.
34
<PAGE>
Table 2
Rate/Volume Analysis of Changes in Net Interest Income
(Taxable equivalent, dollars in thousands)
<TABLE>
<CAPTION>
1995 Compared to 1994 1994 Compared to 1993
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ 894 $ 3,285 $ 4,179 $ 298 $ 84 $ 382
Money market investments:
Interest bearing deposits with banks 150 3 153 (53) 8 (45)
Federal funds sold 211 48 259 (118) 69 (49)
------- ------- ------- ------- ------- -------
Total money market investments 361 51 412 (171) 77 (94)
Investment securities:
Taxable 571 635 1,206 310 (448) (138)
Non-taxable (172) (14) (186) (128) (85) (213)
------- ------- ------- ------- ------- -------
Total investment securities 399 621 1,020 182 (533) (351)
------- ------- ------- ------- ------- -------
Total interest income $ 1,654 $ 3,957 $ 5,611 $ 309 ($ 372) ($ 63)
======= ======= ======= ======= ======= =======
Interest expense:
Interest bearing deposits:
Demand ($ 125) ($ 4) ($ 129) ($ 60) ($ 229) ($ 289)
Savings (235) 629 394 53 (269) (216)
Time 1,853 2,441 4,294 (384) (442) (826)
------- ------- ------- ------- ------- -------
Total interest bearing deposits 1,493 3,066 4,559 (391) (940) (1,331)
Short-term borrowings (318) 222 (96) 42 70 112
Other borrowings 87 71 158 (17) (14) (31)
------- ------- ------- ------- ------- -------
Total interest expense 1,262 3,359 4,621 (366) (884) (1,250)
------- ------- ------- ------- ------- -------
Net interest income $ 392 $ 598 $ 990 $ 675 $ 512 $ 1,187
======= ======= ======= ======= ======= =======
</TABLE>
Interest is presented on a taxable equivalent basis, using an effective tax rate
of 35%.
Note: 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 3
Other Operating Income
<TABLE>
<CAPTION>
(Dollars in thousands) Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Fees and other service charges $ 1,499 $ 1,453 $ 1,151
Trust income 1,277 1,289 1,209
Service charges on deposits 1,292 1,209 1,274
Gain on sale of other real estate owned 410 0 0
Reinsurance subsidiary premium income 384 382 373
Net gain on sale of loans 209 290 771
Net realized (loss) gain on investment
securities available for sale 126 (29) 56
Other income 214 225 250
------- ------- -------
Total other operating income $ 5,411 $ 4,819 $ 5,084
======= ======= =======
</TABLE>
35
<PAGE>
The decrease was a direct result of the decrease in the number of properties
held in other real estate owned. The expenses for 1993 were the result of
additions to the valuation reserve in the form of writedowns of property values
totalling $651 and holding expenses of $219 thousand.
Expenses related to professional services increased by $260 thousand from
1994 to 1995 and by $298 thousand from 1993 to 1994. Increases in legal,
advisory and consulting fees were the primary reason for the increase.
A summary of the components of other operating expense is provided in
Table 4.
FEDERAL INCOME TAXES
The federal income tax provision for 1995 was $3.5 million compared to $3.3
million for 1994 and $2.1 million for 1993. Income before income taxes for 1995
was $11.2 million compared to $10.1 million for 1994 and income before income
taxes and the cumulative effect of the change in accounting for income taxes for
1993 was $7.4 million. A reconciliation of reported income taxes to the amount
of income tax which would have been provided at the federal statutory tax rate
is provided in Note 13 of the Notes to Consolidated Financial Statements.
The Company's effective tax rate for 1995, 1994 and 1993 was 32%, 33% and
29%, respectively.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes". The
cumulative effect of this accounting change amounted to a decrease in the
financial statement deferred tax asset of $200 thousand, with a corresponding
charge to income made in 1993.
ASSET-LIABILITY MANAGEMENT
Interest rate sensitivity is a function of the repricing characteristics of
the Company's assets and liabilities. Each asset and liability reprices either
at maturity or during the life of the instrument. Interest rate sensitivity
measures the difference between the volume of assets and liabilities that are
subject to repricing at a future period of time. These differences are known as
interest sensitivity gaps.
The principal objectives of asset-liability management are to manage the
funding and investment strategies necessary to maintain an appropriate balance
of the sensitivity between assets and liabilities to potential movements in
interest rates and to provide adequate liquidity while enhancing profitability
through returns from managed levels of interest rate risk. The Company actively
manages the interest rate sensitivity of its assets and liabilities. Several
techniques are used for measuring interest rate sensitivity. The traditional
maturity "gap" analysis, which reflects the volume difference between interest
rate sensitive assets and liabilities during a given time period, is reviewed
regularly by management. An interest rate risk simulation model is also used to
assess the level of interest rate risk inherent in the Company's assets and
liabilities under various interest rate scenarios. The Company recognizes the
importance of managing both assets and liabilities simultaneously for the
purpose of reducing interest rate risk, providing liquidity, and enhancing the
market value of the Company.
Managing interest rate sensitivity is an inexact science. The repricing
intervals between assets and liabilities change on a daily basis. Contractual
maturities are not always the same as actual maturities as a result of
prepayments prior to scheduled maturities. Additionally, demand deposits, NOW
accounts, and money market fund accounts may be withdrawn upon demand, and
savings deposits may be withdrawn upon a very short period of notice.
The Bank manages its interest rate sensitivity by changing mix and
repricing characteristics of its assets and liabilities through its investment
securities portfolio, its loan and deposit terms, and through the use of
off-balance sheet derivatives, primarily interest rate swaps and interest rate
cap/collar contracts. These interest rate contracts will have the effect of
decreasing net interest income in a rising rate environment and increasing net
interest income in a decreasing rate environment.
The Bank's use of these interest rate contracts is closely monitored by the
Bank's Board of Directors and is closely controlled as to levels of exposure. At
December 31, 1995, the Bank had four interest rate agreements outstanding having
a total notional amount of $40 million. These agreements consisted of three
interest rate swap agreements, each with a notional amount of $10 million and an
interest rate cap/collar contract with a notional amount of $10 million.
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 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 should the counterparties fail to perform. 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 on the accrual basis as a component of interest
income or interest expense over the life of the contract. Interest income or
interest expense resulting from the cap and collar contracts is recognized on
the accrual basis 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 Bank is not exposed to credit risk in
terms of 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 Bank entered into an interest rate cap/collar contract on November 5,
1993 with a notional amount of $10 million. The contract states that the Bank
would receive a spread between the national prime rate and 6.00 percent should
the prime rate fall below 6.00 percent. The Bank would pay an interest rate
spread between the national prime and 7.00 percent should the prime
36
<PAGE>
Table 4
Other Operating Expense
<TABLE>
<CAPTION>
(Dollars in thousands) Years ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Salaries and employee benefits $ 9,770 $ 8,834 $ 8,325
Equipment expense 1,934 1,871 1,701
Occupancy expense, net 1,256 1,237 1,132
Professional services 913 653 355
Bank card processing expense 711 662 619
Deposit insurance expense 539 1,016 1,042
Pennsylvania shares tax 479 457 430
Marketing and advertising 404 423 340
Stationery and supplies 328 304 331
Reinsurance subsidiary expense 315 332 255
Postage 305 293 308
Telephone 287 229 222
Expense of other real estate owned, net 79 91 870
Loan administration and workout expense 73 150 266
Other 996 1,081 1,017
------- ------- -------
Total other operating expense $18,389 $17,633 $17,213
======= ======= =======
</TABLE>
Table 5
Interest Rate Sensitivity
(Dollars in thousands) December 31, 1995
<TABLE>
<CAPTION>
Rate sensitive assets:
0 - 30 31 - 90 91 - 180 181 - 365
Days Days Days Days
<S> <C> <C> <C> <C>
Money market investments $ 246 $ 0 $ 0 $ 0
Investment securities available for sale
and investment securities held to maturity 9,274 9,510 3,913 25,613
Loans 170,095 10,126 14,280 20,925
--------- --------- --------- ---------
Total $ 179,615 $ 19,636 $ 18,193 $ 46,538
========= ========= ========= =========
Rate sensitive liabilities:
Deposits $ 86,794 $ 160,913 $ 39,258 $ 41,454
Short-term borrowings 8,640 0 0 0
Other borrowings 5,382 109 1,399 3,691
--------- --------- --------- ---------
Total $ 100,816 $ 161,022 $ 40,657 $ 45,145
========= ========= ========= =========
Cumulative interest sensitivity gap $ 78,799 ($ 62,587) ($ 85,051) ($ 83,658)
Cumulative interest sensitivity ratio
before effects of interest rate swap
contracts and cap/collar contract 1.78x .76x .72x .76x
Cumulative interest sensitivity ratio
after effects of interest rate swaps
contracts and cap/collar contract 1.38x .65x .62x .67x
</TABLE>
37
<PAGE>
rate exceed 7.00 percent. This contract expired 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 Company's cumulative static gap position for various time intervals is
shown in Table 5. The maturity distribution and weighted average yields of
investment securities is presented in Table 6. The maturity distribution and
interest sensitivity characteristics of the Company's loan portfolio is shown in
Table 7. The maturity distribution of time deposits of $100 thousand or more is
shown in Table 8. The data in these tables indicates that the Company is
liability sensitive up to one year, however, as a result of liability prices
changing at a different speed than asset pricing, the Company's simulations of
earnings indicate that net interest income up to one year will be positively
affected by increases in general levels of interest rates and negatively
effected by a level rate or falling rate environment. The effects of the
interest rate swap and cap/collar contracts are indicated on Table 5.
LIQUIDITY
In managing liquidity, the Company attempts to meet the demand for funds,
such as deposit withdrawals, net loan demand and other funding needs of the
Company. Liquidity may normally be obtained either through the maturity or sale
of assets or the issuance of liabilities at costs which accomplish the Company's
objectives.
The Company actively monitors its liquidity position and has a contingency
plan to provide adequate liquidity under various scenarios. The Company's
primary source of funds is its retail deposit base supported by its branch
network of 19 locations. Retail repurchase agreements entered into with certain
corporate customers are also a source of funds for the Company. The investment
portfolio is also used by the Company as a primary source of liquidity. The
liquidity of the Company is considered to be strong as a result of the
reliability of the Company's deposit sources and the maturity structure of the
investment portfolio in addition to the availability of funds to the Company
through established federal funds lines of credit, amounting to $94 million.
FUNDING
The primary source of funds for the Company is customer deposits. Customer
deposits increased approximately $19.2 million from December 31, 1994 to
December 31, 1995. The balance of securities sold under repurchase agreements at
December 31, 1995 and 1994 was $8.6 million and $12.1 million, respectively.
Another source of funding for the Company is borrowing from the Federal
Home Loan Bank of Pittsburgh (FHLB). The average balance of FHLB borrowings was
$10.9 million during 1995 and $9.0 million during 1994. The funds borrowed from
the FHLB are secured by the FHLB stock owned by the Company and by certain
investment securities. Total borrowings from the FHLB at December 31, 1995 and
1994 totalled $13.6 million and $9.0 million, respectively, and ranged in
maturity from one to five years.
Time deposits of $100 thousand or more decreased by $2.0 million from
December 31, 1994 to December 31, 1995 and increased $4.5 million from December
31, 1993 to December 31, 1994. The Company considers its "core deposits" to be
all deposits except "jumbo time deposits" which are certificates of deposit of
$100 thousand or more. These "jumbo deposits" are priced competitively by the
Company based on short and intermediate-term funding needs. In addition to the
"core deposit" base, the Company may choose to utilize the maturities in its
investment portfolio, jumbo certificates of deposit, or Federal Home Loan Bank
advances, or a combination of the three to provide a source of funds for future
loan growth should the necessity arise. In the past three years, the Company has
been less aggressive in its marketing of jumbo certificates of deposit to local
customers due to lower loan demand. Total "core" deposits at December 31, 1995
were $483.8 million compared to $460.7 million at December 31, 1994 and $454.6
million at December 31, 1993.
The Company also has a capital lease obligation outstanding which was used
to fund the Bank's acquisition of computer hardware and software operating
systems. The balance of the capital lease obligation at December 31, 1995 was
$439 thousand. The Company had no commitments to make any material capital
expenditures at December 31, 1995.
Average earning assets grew by $24.9 million from 1994. This was comprised
of growth in average loans of $10.5 million and a $14.4 million increase in
average outstanding in investment securities and money market investments. These
increases were funded by increases in interest bearing deposits of $17.2 million
and by increases in non-interest bearing deposits of $2.1 million. The average
balances and average interest rates applicable to the major classifications of
deposits and short-term borrowings for the years ended December 31, 1995, 1994
and 1993 are presented in Table 9 and Table 10. Reference is also made to the
Consolidated
38
<PAGE>
Table 6
Maturity Distribution of Investment Securities
(Dollars in thousands) December 31, 1995
<TABLE>
<CAPTION>
Over One But Over Five But
Within One Year Within Five Years Within Ten Years Over Ten Years Total
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield Cost Value Yield Cost Value Yield Cost Value Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
Securities
Available for Sale
U.S. Treasury and
government
agencies $26,074 $26,037 4.68% $33,105 $33,125 5.44% $233 $238 6.49% $417 $418 7.69% $59,829 $59,818 5.13%
Mortgage-backed
securities 1,851 1,896 7.94
Equity securities 1,648 2,120 5.32
Other investment
securities 1,965 1,965 6.59
------- ------- ---- ------- ------- ---- ---- ---- ---- ---- ---- ---- ------- ------- ----
Total $65,293 $65,799 5.39%
======= ======= ==== ======= ======= ==== ==== ==== ==== ==== ==== ==== ======= ======= ====
(Dollars in thousands) December 31, 1995
Over One But Over Five But
Within One Year Within Five Years Within Ten Years Over Ten Years Total
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield Cost Value Yield Cost Value Yield Cost Value Yield
Investment
Securities
Held to Maturity:
U.S. Treasury and
government
agencies $ 9,599 $ 9,571 5.02% $28,203 $28,788 6.46% $ 0 $ 0 00% $ 0 $ 0 .00% $37,802 $38,359 6.09%
States and
political
subdivisions 5,634 5,647 6.97 6,095 6,132 6.63 665 706 9.38 0 0 .00 12,394 12,485 6.93
------- ------- ---- ------- ------- ---- ---- ---- ---- ---- ---- ---- ------- ------- ----
$15,233 $15,218 5.74% $34,298 $34,920 6.49% $665 $706 9.38% $ 0 $ 0 .00% $50,196 $50,844 6.30%
Mortgage-backed
securities 36,689 37,208 6.47
------- ------- ---- ------- ------- ---- ---- ---- ---- ---- ---- ---- ------- ------- ----
Total $86,885 $88,052 6.37%
======= ======= ==== ======= ======= ==== ==== ==== ==== ==== ==== ==== ======= ======= ====
</TABLE>
The effective rate used to determine taxable-equivalent yields was 35%.
39
<PAGE>
Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993
which appear elsewhere in this report.
INVESTMENTS
The Company's investment portfolio is classified as either "held to
maturity" or "available for sale". Investment securities that are classified as
held to maturity are carried at amortized cost. Investment securities classified
as available for sale are carried at fair value with the unrealized holding
gains or losses, net of taxes, reported as a separate component of stockholders'
equity.
The Company has both the ability and the intent to hold the investment
securities designated as held to maturity until maturity. A total of $65.3
million and $57.9 million of investment securities, having a fair value of $65.8
million and $55.7 million were designated as available for sale by the Company
as of December 31, 1995 and 1994, respectively. A total of $86.9 million and
$72.7 million of investment securities having a fair value of $88.1 million and
$70.0 million, were designated as held to maturity by the Company as of December
31, 1995 and 1994, respectively.
As permitted by the Financial Accounting Standards Board, during the fourth
quarter of 1995, the Company had a "one-time" opportunity to transfer investment
securities from the held to maturity to the available for sale portfolio. The
Company chose not to transfer any of its investments during this "one-time"
opportunity. This was based primarily on the Company's strong liquidity position
and the short average life of the investment portfolio. Investment securities
which are classified as available for sale are done so for the purpose of
providing additional insurance that adequate levels of liquidity are available.
The composition of the Company's total investment portfolio, including
investment securities available for sale and investment securities held to
maturity, at December 31, 1995 was approximately 64.2% U. S. Treasury and agency
securities, 25.3% mortgage-backed securities, 8.1% state and political
subdivisions obligations, with the balance consisting of various other
securities. A summary of the book value of investment securities at December 31
of each of the past five years is provided in Table 11. The portfolio is
structured to provide a maximum return on investment while providing a
consistent source of liquidity and meeting strict interest and credit risk
standards.
The net unrealized gain on investment securities available for sale at
December 31, 1995 was $506 thousand or $336 thousand, net of taxes, which
consisted of gross unrealized gains of $636 thousand and gross unrealized losses
of $130 thousand. The net unrealized losses on investment securities available
for sale at December 31, 1994 was $2.2 million or $1.5 million, net of taxes,
which consisted of gross unrealized gains of $290 thousand and gross unrealized
losses of $2.5 million. The change from a net unrealized loss to a net
unrealized gain on securities available for sale resulted from the decrease in
interest rates during the second half of the year, which increased the value of
the securities held by the Company.
A total of $609 thousand of investment securities available for sale were
sold during 1995 at a net realized gain of $126 thousand.
The net unrealized gain on investment securities held to maturity at
December 31, 1995 was $1.2 million which consisted of gross unrealized gains of
$1.5 and gross unrealized losses of $300 thousand. The net unrealized loss at
December 31, 1994 was $2.7 million which consisted of gross unrealized gains of
$162 thousand and gross unrealized losses of $2.8 million. The improvement in
market values, for both the available for sale portfolio and the held to
maturity portfolio, was due to the lower interest rate environment.
LOANS
The Company's loan portfolio consists primarily of loans to individuals,
farmers, and small and medium-sized businesses which operate within the
Company's trade area, which consists of Lebanon, Lancaster, Schuylkill, Dauphin,
and Berks counties in Pennsylvania. The Company emphasizes strict underwriting
standards in managing its portfolio growth, support staff is provided to lending
personnel to assist in making credit decisions and adherence to credit standards
is monitored by the Company's senior credit management. The loan portfolio is
reviewed periodically by loan review officers to determine adherence to
established credit standards and procedures.
The Company's loans outstanding at December 31, 1995 totalled $391.0
million, a $7.9 million increase from December 31, 1994. The increase in loans
outstanding was a combination of an increase in commercial loan balances from
December 31, 1994 to December 31, 1995 of $12.5 million or 7.9%, together with
an increase of $4.3 million or 4.9% in agriculture loans, a decrease of $4.5
million or 4.9% in consumer loans and a $3.2 million or 8.6% decrease in real
estate-residential mortgage loans over the same period.
Commercial loans at December 31, 1995 totalled $170.9 million. The
Company's commercial loan business is transacted primarily with small and
medium-sized companies with known local management and financial stability.
Commercial real estate-construction loans at December 31, 1995 totalled $7.7
million or 2.0% of total loans compared to $9.1 million or 2.1% of total loans
at December 31, 1994.
Real estate-residential mortgage loans are loans secured by liens on
residential properties (other than home equity loans). At December 31, 1995
there were $34.6 million or 8.9% of total loans outstanding secured by real
estate-residential mortgages, compared to $37.9 million or 9.9% of total loans
at December 31, 1994. The outstanding balance for this type of loan has
decreased over the past several years due to a significant level of refinancing
by the Bank's existing loan customers and a significant portion of the mortgages
which the Company originated or refinanced are committed to be sold at the date
of origination and are sold to a third-party within a short period of time after
settlement. During 1995 the Company originated and sold a total of $10.5 million
of mortgages to third-parties, compared with originations of $12.4 million and
third-party sales of $13.1 million in 1994.
Consumer loans include credit card borrowings, personal lines of credit,
and installment and home equity loans to individual borrowers. These loans
include both secured and unsecured loans to individuals and are generally for
various purposes such as automobile financing, home improvements and
recreational and edu-
40
<PAGE>
Table 7
Maturities and Interest Sensitivity of Loans
<TABLE>
<CAPTION>
December 31, 1995 (Dollars in thousands)
One Year One through
or Less Five years Over Five Years Total
<S> <C> <C> <C> <C>
Commercial $ 64,520 $ 81,284 $ 25,068 $ 170,872
Agriculture 24,629 32,416 33,926 90,971
Commercial real estate - construction 2,920 3,679 1,143 7,742
Real estate - residential mortgage 3,940 9,842 20,832 34,614
Consumer, net of unearned income 23,675 60,144 3,741 87,560
--------- --------- --------- ---------
Total loans $ 119,684 $ 187,365 $ 84,710 391,759
Unamortized net loan fees (750)
--------- --------- --------- ---------
Total loans, net $ 391,009
========= ========= ========= =========
Loans with predetermined interest rates $ 50,500 $ 123,464 $ 52,869 $ 226,833
Loans with floating interest rates 69,184 63,901 31,841 164,926
--------- --------- --------- ---------
Total loans $ 119,684 $ 187,365 $ 84,710 391,759
Unamortized net loan fees (750)
--------- --------- --------- ---------
Total loans, net $ 391,009
========= ========= ========= =========
</TABLE>
Table 8
Maturity of Time Deposits of $100,000 or More
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
1995 1994 1993
<S> <C> <C> <C>
Three months or less $ 6,435 $10,174 $ 5,870
Over three through six months 2,512 4,175 3,910
Over six through twelve months 3,309 2,521 1,394
Over twelve months 6,331 3,700 4,882
------- ------- -------
Total $18,587 $20,570 $16,056
======= ======= =======
</TABLE>
Table 9
Deposits by Major Classification
<TABLE>
<CAPTION>
(Dollars in thousands) Years ended December 31,
1995 1994 1993
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand deposits $ 57,076 0.00% $ 54,929 0.00% $ 49,748 0.00%
Interest bearing demand deposits 55,523 1.44 64,198 1.44 67,677 1.80
Savings deposits 121,995 3.00 132,984 2.46 130,976 2.66
Time deposits 236,662 5.65 199,774 4.55 208,019 4.76
-------- ---- -------- ---- -------- ----
Total deposits $471,256 3.78% $451,885 2.94% $456,420 3.20%
======== ==== ======== ==== ======== ====
</TABLE>
41
<PAGE>
cational purposes. The Company continued its emphasis on marketing its direct
consumer installment loan products to consumers during 1995 which resulted in an
$5.6 million or 17% increase in installment loans outstanding to individuals.
This was offset by decreases in dealer installment loans of $6.6 million or 19%
and a $1.3 million or 9% decrease in home equity loans. A distribution of the
Company's loan portfolio according to major loan classifications is shown in
Table 12.
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. At December
31, 1995 there were $91.0 million, or 23.3% of the total loan portfolio, in
loans outstanding to agriculture-related borrowers. These loans are for a
variety of purposes within the industry, primarily dairy farms, poultry farms,
agri-business and swine operations. Dairy farms comprised 54% of such loans at
December 31, 1995, swine operations comprised 14%, beef operations comprised 9%,
loans to agriculture-related businesses were 8%, and poultry farms made up 11%
of this portfolio. These loans may be similarly impacted by adverse climate,
economic conditions, or other factors 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 these loans. The Company's
policy is to require supporting collateral for these loans in the form of
agriculture real estate, livestock, and farm equipment. At December 31, 1995
there were no agriculture-related borrowings which were included in
non-performing loans in Table 15 or which are considered as potential problem
loans.
Most of the Company's business activity is with customers located within
the Company's defined market area. Since the majority of the Company's real
estate loans are located within this area, a substantial portion of the
Company's debtors' ability to honor their contracts, and increases and decreases
in the market value of the real estate collateralizing such loans, may be
significantly affected by the level of economic activity in this area.
The Company had no loans outstanding to foreign countries and no loans
which may be classified as highly leveraged transactions at December 31, 1995.
PROVISION AND ALLOWANCE
FOR POSSIBLE LOAN LOSSES
There was no provision for loan losses charged to operations in 1995. The
provision for possible loan losses for 1994 was $300 thousand compared to $2.4
million for 1993. The Company performs a credit quality review of its loan
portfolio on a quarterly basis and through this review determined that the level
of the allowance for possible loan losses was adequate as of December 31, 1995
and no provision was needed for 1995 due to the continued improvement of credit
quality of the loan portfolio. The decrease of $2.1 million in the provision for
possible loan losses from 1993 to 1994 was a result of significant improvements
in the Company's asset quality and the significantly lower level of net
charge-offs. Total non-performing loans were $741 thousand at December 31, 1995
compared to $1.3 million and $6.3 million at December 31, 1994 and 1993,
respectively. Net charge-offs for 1995 were $115 thousand or .03% of average
loans outstanding compared with $646 thousand or .17% of average loans
outstanding for 1994 and $2.2 million or .61% of average loans outstanding for
1993. Charge-offs related to consumer loans increased by $49 thousand to $372
thousand during 1995 which related primarily to the growth in consumer
installment loans. A summary of charge-offs and recoveries of loans is presented
in Table 13.
The allowance for possible loan losses at December 31, 1995 was $8.0
million or 2.05% of total loans outstanding compared to $8.1 million or 2.12% of
total loans outstanding at December 31, 1994. The allowance for possible loan
losses is a reserve for estimated loan losses and other loan-related charges.
The allowance for possible loan losses is an amount determined by management's
evaluation of the loan portfolio, historical loss experience, the level of
non-performing and delinquent loans, assessment of economic conditions, and the
quality of any concentrations within the portfolio. Loan losses arise primarily
from the loan portfolio but could also be derived from other sources, including
commitments to extend credit and standby letters of credit. Actual loan losses,
net of recoveries, are deducted from the allowance for possible loan losses.
While management uses available information to determine the appropriate level
of the allowance for possible loan losses, the allowance may be affected in the
future based upon changes in economic conditions and other factors. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for possible loan losses. Such agencies
may recommend the Bank change the level of the allowance based on their
judgements of information available to them at the time of their examination.
The allocation of the allowance for possible loan losses among the major
loan classifications and the percentage of total loans represented by such
classifications are shown in Table 14 as of December 31 of each of the past five
years. Allocations are determined primarily from an analysis of historical
charge-offs and past-due trends, and current economic conditions as they affect
loans. In addition, although Table 14 shows specific allocations for the
allowance for loan losses, the general valuation allowance is established and is
available for the entire loan portfolio based upon economic conditions, loan
loss experience, concentrations, portfolio trends, credit policies and
procedures, and quality trends in the portfolio. With the continuing improvement
in the credit quality of the commercial loan portfolio, the Company's allowance
allocated for commercial and commercial real estate - construction decreased by
$1.5 million. The unallocated portion of the allowance for possible loan losses
increased by $1.3 million which is a direct result of the improvement in credit
quality of the Company's loan portfolio.
NON-PERFORMING ASSETS
Loans, other than consumer loans not secured by residential real estate,
are generally classified as non-accrual or charged to the allowance for possible
loan losses at the time they reach 90 days past due as to principal or interest,
or earlier if when, in management's opinion, the collectibility of principal or
interest is doubtful.
42
<PAGE>
Table 10
Short-Term Borrowings
<TABLE>
<CAPTION>
(Dollars in thousands) Years ended December 31,
1995 1994 1993
December Average Average December Average Average December Average Average
31 Balance Rate 31 Balance Rate 31 Balance Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds purchased $ 0 $ 112 5.92% $ 0 $ 569 4.04% $ 0 $ 156 3.21%
Securities sold under
agreements to repurchase 8,640 11,397 4.03 12,087 16,454 3.28 14,397 15,487 2.87
------- ------- ---- ------- ------- ---- ------- ------- ----
Total short-term borrowings $ 8,640 $11,509 4.05% $12,087 $17,023 3.30% $14,397 $15,643 2.88%
======= ======= ==== ======= ======= ==== ======= ======= ====
</TABLE>
The highest month end outstanding balance was $14,720,000, $19,102,000 and
$18,154,000 for 1995, 1994 and 1993 respectively. The weighted average rate paid
on December 31, 1995 and 1994 was 4.02% and was 2.75% for 1993.
Table 11
Investment Securities - Amortized Cost
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
Investment Securities Available for Sale:
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
U.S. Treasury and government agencies $ 59,829 $ 50,071 $ 69,050 $ 462 509
Mortgage-backed securities 1,851 2,420 7,225 0 0
Equity securities 1,648 1,252 1,165 766 215
Other investment securities 1,965 1,921 1,947 2,351 603
-------- -------- -------- -------- --------
Total $ 65,293 $ 55,664 $ 79,387 $ 3,579 $ 1,327
======== ======== ======== ======== ========
(Dollars in thousands) December 31,
Investment Securities Held to Maturity:
1995 1994 1993 1992 1991
U.S. Treasury and government agencies $ 37,802 $ 36,837 $ 25,119 $ 83,625 $ 85,868
States and political subdivisions 12,394 11,424 13,717 14,203 14,271
Mortgage-backed securities 36,689 24,443 23,118 16,723 17,643
-------- -------- -------- -------- --------
Total $ 86,885 $ 72,704 $ 61,954 $114,551 $117,782
======== ======== ======== ======== ========
</TABLE>
Table 12
Loan Portfolio
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Commercial $ 170,872 $ 158,343 $ 157,003 $ 177,270 $ 185,838
Agriculture 90,971 86,687 79,081 75,461 65,488
Commercial real estate - construction 7,742 9,063 9,612 11,338 14,372
Real estate - residential mortgage 34,614 37,858 42,465 53,754 65,781
Consumer, net of unearned income 87,560 92,069 73,530 59,400 50,911
Unamortized net loan fees (750) (866) (884) (1,149) (1,371)
--------- --------- --------- --------- ---------
Total, net $ 391,009 $ 383,154 $ 360,807 $ 376,074 $ 381,019
========= ========= ========= ========= =========
</TABLE>
43
<PAGE>
An exception to placing such loans on non-accrual status or from charging-off
such loans may be made if management determines that the principal and interest
of such a loan is well secured and in the process of collection. Other real
estate owned includes assets acquired through foreclosure.
Total non-performing assets at December 31, 1995 were $1.7 million or .42%
of loans plus other real estate owned, compared to $3.3 million or .86% of loans
plus other real estate owned at December 31, 1994. Non-accrual loans at December
31, 1995 decreased by $605 thousand from December 31, 1994 and totalled $741
thousand at December 31, 1995. Other real estate owned decreased from $2.0
million, net of the valuation allowance at December 31, 1994, to $913 thousand,
net of the valuation allowance at December 31, 1995. At December 31, 1995, the
Company also had $793 thousand in loans that were more than 90 days past due as
to interest and principal but were still classified as accruing.
During 1995, several properties classified as other real estate owned were
disposed of through third-party transactions. This resulted in a $1.1 million
reduction in the recorded asset value for other real estate owned and a gain on
the sale of one property amounting to $410 thousand. A reduction of $605
thousand in non-accruing loans resulted from $678 thousand of loans which were
returned to accruing status, $116 thousand of payments received on non-accrual
loans, and charge-offs of $211 thousand on non-accrual loans. This was partially
offset with an addition of a $400 thousand commercial loan to non-accrual
status. 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 of $900 thousand.
Potential problem loans are loans which are included as performing loans,
but for which possible credit problems cause management to have serious doubts
as to the ability of such borrower to comply with present loan repayment terms
and which may eventually result in classification as non-performing assets. At
December 31, 1995 there were no loans which were considered as potential problem
loans which were not included as non-performing assets as presented in Table 15
or not included with the amount of impaired loans discussed below.
Loans for which the accrual of interest has been ceased amounted to $741
thousand at December 31, 1995 and $1.3 million at December 31, 1994,
respectively. Interest income of $65 thousand, $133 thousand, and $580 thousand
for 1995, 1994 and 1993, respectively, would have been recognized on these loans
had they been in accordance with their original terms. Interest income of $45
thousand, $21 thousand, and $327 thousand was recognized on these loans during
1995, 1994 and 1993, respectively.
The Company adopted the provisions of Statement of Financial Accounting
Standard No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan",
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosure" on January 1, 1995. The Company has
determined that loans with a carrying value of $1.2 million at December 31, 1995
are deemed to be impaired under SFAS 114. The $1.2 million is comprised of loans
with a balance of $741 thousand which are classified as non-accruing loans and
$459 thousand of loans which have not been classified as non-performing, and
accordingly, are not included in Table 15. Of the $1.2 million in loans
classified as impaired, approximately $1.1 million are loans for which there is
no specifically allocated allowance for credit losses and approximately $100
thousand are loans which have an aggregate allowance for credit losses of $100
thousand. The $100 thousand specific reserve is included in the $8.0 million
allowance for possible loan losses. The average balance of loans classified as
impaired amounted to $1.6 million for 1995. Interest income of approximately $45
thousand was recognized during 1995 on loans classified as impaired loans.
CAPITAL RESOURCES
The Company's stockholders' equity at December 31, 1995 was $58.9 million,
a 13.0% increase over the $52.1 million at December 31, 1994. The increase in
stockholders' equity resulted primarily from net income of $7.7 million which
was offset by cash dividend payments to stockholders of $2.9 million. In
addition, the change in net unrealized gains on investment securities available
for sale was $1.8 million, net of taxes, for the year ended December 31, 1995.
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
the Company, Tier 1 Capital is total stockholders' equity excluding the effects
of SFAS 115 and intangible assets 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% and 8.00% for Tier 1 and Total Capital, respectively.
At December 31, 1995 the Company's Tier 1 and Total Capital ratios were 13.59%
and 14.93%, respectively. Tier 1 and Total Capital ratios increased from 12.77%
and 14.12% respectively, in 1994. Total risk-weighted assets increased by 3.0%.
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% or higher. At
December 31, 1995, the Company's Leverage Ratio was 10.29% and was 9.89% at
December 31, 1994.
The banking regulators have also established regulations which classify a
bank's capital position as 1) well capitalized; 2) adequately capitalized; 3)
undercapitalized; 4) significantly undercapitalized; and 5) critically
undercapitalized. The degree of oversight
44
<PAGE>
Table 13
Analysis of the Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
(Dollars in thousands) Years ended December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 8,140 $ 8,486 $ 8,317 $ 6,888 $ 5,089
Loans charged-off:
Commercial 211 874 2,478 2,479 1,019
Agriculture 0 0 0 0 1
Commercial real estate - construction 0 0 5 349 1,190
Real estate - residential mortgage 0 0 0 0 0
Consumer 372 323 110 245 231
------ ------ ------ ------ ------
Total loans charged-off 583 1,197 2,593 3,073 2,441
Recoveries on loans previously
charged-off:
Commercial 384 459 274 427 73
Agriculture 0 0 0 0 5
Commercial real estate - construction 44 67 39 324 19
Real estate - residential mortgage 0 0 0 0 0
Consumer 40 25 49 151 147
------ ------ ------ ------ ------
Total recoveries 468 551 362 902 244
------ ------ ------ ------ ------
Net charge-offs 115 646 2,231 2,171 2,197
Current period's provision for
possible loan losses 0 300 2,400 3,600 3,996
Balance, end of period $8,025 $8,140 $8,486 $8,317 $6,888
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average loans outstanding
during the period .03% .17% .61% .58% .57%
</TABLE>
Table 14
Allocation of the Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
(Dollars in thousands)
Balance at December 31, applicable to:
1995 1994 1993 1992 1991
Category Category Category Category Category
as a as a as a as a as a
Percent Percent Percent Percent Percent
of of of of of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 691 43.7% $1,911 41.1% $6,199 43.4% $6,796 47.0% $6,165 48.8%
Agriculture 309 23.2 294 22.6 798 21.9 747 20.0 325 17.2
Commercial real estate -
construction 31 2.0 331 2.4 382 2.7 489 3.0 229 3.8
Real estate -
residential mortgage 0 8.8 0 9.9 0 11.7 0 14.0 2 16.9
Consumer 641 22.3 587 24.0 184 20.3 232 16.0 152 13.3
Unallocated 6,353 -- 5,017(1) -- 923 -- 53 -- 15 --
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $8,025 100.0% $8,140 100.0% $8,486 100.0% $8,317 100.0% $6,888 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
<FN>
(1) The increase in the unallocated reserve is primarily due to a change in the
Bank's allocation methodology to adopt a process recommended by the Bank's
primary regulator, the Office of the Comptroller of the Currency. Data is
not readily available to reclassify information related to 1993, 1992 and
1991.
</FN>
</TABLE>
45
<PAGE>
and restriction by a bank's regulators is tied to its capital position. An
institution which is classified as undercapitalized, significantly
undercapitalized or critically undercapitalized is subject to additional
operating restrictions and increased regulatory oversight. A bank is considered
to be "well capitalized" if it has a ratio of Total Capital to risk-weighted
assets of 10.00% or higher; a ratio of Tier 1 Capital to risk-weighted assets of
6.00% or higher; a Leverage ratio (Tier 1 Capital to average total assets) of
5.00% or higher; and is not under a regulatory capital order or directive. At
December 31, 1995, the Bank was considered to be "well capitalized".
The Company's risk-based capital and weighted risk assets at December 31,
1995 and 1994 are shown in Table 16.
EFFECTS OF INFLATION
The majority of assets and liabilities of a financial institution, such as
the Company, are monetary in nature and, therefore, differ from those of
commercial and industrial companies. Fluctuations in interest rates and the
efforts of the Federal Reserve Board to regulate money and credit conditions
have a greater effect on the Company's profitability than do the effects of
higher costs for goods and services. Through its asset-liability management
process, the Company seeks to manage the effect of changing interest rates and
inflationary trends.
SUPERVISION AND REGULATION
During 1994, Congress passed legislation to remove geographic restrictions
on bank expansion. The Riegle-Neal Interstate Banking and Branch Efficiency Act
of 1994 will allow banks to expand across state lines to merge existing
multi-state branching operations into a single institution or to acquire new
branches in other states. Interstate banking and branching authority will be
subject to certain conditions and restrictions, such as capital adequacy,
management, CRA compliance and limits on deposit concentrations. The effective
date for this legislation will be June 1, 1997. Individual states will have the
option to opt in early or to opt out completely prior to June 1, 1997.
Although the passage of this legislation should have the impact of
quickening the pace of consolidation within the banking industry, the Company
does not anticipate any immediate impact upon its financial condition or its
operations as a result of this new law.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". SFAS provides guidance for recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles and goodwill related both to
assets held and used and assets to be disposed of.
SFAS 121 requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, an entity
should estimate the future cash flows expected to result from the use of the
asset and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Otherwise, an impairment loss is
not recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be based
on the fair value of the asset.
SFAS 121 requires that long lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell.
SFAS 121 is effective for fiscal years beginning after December 15, 1995.
Management does not expect that the adoption of SFAS 121 will have a material
effect on the Company's financial position or results of operations. The Company
plans on adopting SFAS 121 during the first quarter of 1996.
In May 1995, the 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 FASB 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 methods that are 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.
Upon adoption of SFAS 123, the Company will continue to measure
compensation expense for its stock-based employee compensation plans using the
methods prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and will provide pro forma disclosures of net income and earnings per
share as if the fair value-based method prescribed by SFAS 123 had been applied
in measuring compensation expense
SFAS 123 is effective for fiscal years beginning after December 15, 1995.
The Company will adopt SFAS 123 during the first quarter of 1996.
46
<PAGE>
Table 15
Non-Performing Assets
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Loans not accruing interest $ 741 $ 1,346 $ 6,347 $ 3,285 $ 5,735
Troubled debt restructuring 0 0 0 2,389 0
-------- -------- -------- -------- --------
Total non-performing loans 741 1,346 6,347 5,674 5,735
Other real estate owned:
Other real estate owned 913 1,969 4,621 5,253 4,659
Less: Valuation allowance 0 0 (696) (74) (450)
-------- -------- -------- -------- --------
Other real estate owned, net 913 1,969 3,925 5,179 4,209
-------- -------- -------- -------- --------
Total non-performing assets $ 1,654 $ 3,315 $ 10,272 $ 10,853 $ 9,944
======== ======== ======== ======== ========
Past due 90 days or more as to
interest or principal and still accruing $ 793 $ 647 $ 46 $ 481 $ 315
Non-performing loans as a percent of
total loans outstanding .19% .35% 1.76% 1.51% 1.51%
Non-performing assets as a percent of
total loans outstanding plus other real
estate owned .42% .86% 2.82% 2.85% 2.58%
Non-performing assets as a percent of
total assets .29% .60% 1.92% 2.01% 1.82%
</TABLE>
Table 16
Risk-Based Capital Ratios
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
1995 1994
<S> <C> <C>
Tier 1 Capital:
Stockholders' equity, excluding net
unrealized gain (loss) on investment
securities available for sale, net of
taxes, and intangible assets $ 58,188 $ 53,160
Tier 2 Capital:
Allowance for possible loan losses
allowable in Tier 2 capital 5,352 5,202
-------- --------
Total Capital $ 63,540 $ 58,362
======== ========
Total risk-weighted assets $425,511 $413,191
======== ========
Tier 1 risk-based capital ratio 13.59% 12.77%
Total risk-based capital ratio 14.93% 14.12%
Leverage ratio 10.29% 9.89%
</TABLE>
47
<PAGE>
STOCKHOLDERS INFORMATION
PRICE RANGE OF KEYSTONE HERITAGE GROUP, INC. COMMON STOCK
The following summary sets forth the range of high and low sales prices for the
common stock of Keystone Heritage Group, Inc. as well as cash dividends per
share, for the periods indicated. Per share data is restated to give effect for
the 5-for-4 stock split effective October 1994 and for the 4-for-3 stock split
effective January 1996.
Cash
Year Quarter High Low Dividends
1995 Fourth $23.91 $22.50 $ .18
Third 22.69 19.04 .18
Second 19.79 17.21 .18
First 20.25 17.63 .165
1994 Fourth $21.38 $18.00 $.165
Third 20.70 18.90 .156
Second 20.70 18.90 .156
First 21.00 18.60 .156
DIVIDEND RESTRICTIONS
Certain information concerning restrictions of the payment of dividends by
the Company is set forth in Footnote 18 of the Notes to Consolidated Financial
Statements appearing elsewhere in this Annual Report.
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Street
Cranford, NJ 07016
Telephone (800) 368-5948
COMMON STOCK
Keystone Heritage Group, Inc.'s common stock is traded nationally on the
American Stock Exchange under the ticker symbol "KHG". At February 1, 1996, the
Company had approximately 1,350 stockholders.
DIVIDEND REINVESTMENT AND STOCK PURCHASE
Stockholders of Keystone Heritage Group, Inc. may acquire additional shares
of common stock by reinvesting their cash dividends under the Dividend
Reinvestment Plan. Voluntary cash payments may also be made under this Plan. For
additional information about the Plan, contact Registrar and Transfer Company,
10 Commerce Drive, Cranford, New Jersey 07016 (Telephone 1-800-368-5948
Extension 7760).
DIRECT DEPOSIT
Cash dividends on Keystone Heritage Group, Inc. common stock may be
deposited directly into any deposit account at Lebanon Valley National Bank. The
deposit is made on the dividend payment date and a confirmation of payment is
sent to you when the dividend is deposited into your account. For additional
information about Direct Deposit of cash dividends, contact Stockholder
Relations, Lebanon Valley National Bank, 555 Willow Street, P.O. Box 1285,
Lebanon, Pennsylvania 17042 (Telephone 717-274-6844).
FORM 10-K
A copy of Keystone Heritage Group, Inc.'s Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission, will be provided to
stockholders without charge upon written request to:
Secretary
Keystone Heritage Group, Inc.
555 Willow Street
P.O. Box 1285
Lebanon, Pennsylvania 17042
ANNUAL MEETING
The Annual Meeting of the Stockholders of Keystone Heritage Group, Inc.
will be held at 10:00 A.M. on Tuesday, April 16, 1996 at the Quality Inn Lebanon
Valley, 625 Quentin Road, Lebanon, Pennsylvania.
48
EXHIBIT 21 - SUBSIDIARIES OF KEYSTONE HERITAGE GROUP, INC.
The principal investment of Keystone Heritage Group, Inc. is its 100%
ownership of the outstanding capital stock of Lebanon Valley National Bank. The
Company's other wholly-owned subsidiary is Keystone Heritage Life Insurance
Company. Both subsidiaries are included in the consolidated financial statements
of Keystone Heritage Group, Inc.
EXHIBIT 23
KPMG PEAT MARWICK LLP
Certified Public Accountants
225 Market Street Telephone 717 238 7131 Telefax 717 233 1101
Suite 300
P.O. Box 1190
Harrisburg, PA 17108-1190
Independent Auditors' Consent
The Board of Directors
Keystone Heritage Group, Inc.
We consent to incorporation by reference in the registration statement (No.
2-99022) on Form S-3 and the registration statement (No. 33-88234) on Form S-8
of Keystone Heritage Group, Inc. of our report dated January 26, 1996, relating
to the consolidated balance sheets of Keystone Heritage Group, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1995, which report is incorporated
by reference in the December 31, 1995 annual report on Form 10-K of Keystone
Heritage Group, Inc.
Our report refers to a change in the Company's method of accounting for income
taxes in 1993.
KPMG Peat Marwick LLP
Harrisburg, Pennsylvania
March 28, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000715366
<NAME> KEYSTONE HERITAGE GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 23,766
<INT-BEARING-DEPOSITS> 246
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 65,799
<INVESTMENTS-CARRYING> 86,885
<INVESTMENTS-MARKET> 88,052
<LOANS> 391,009
<ALLOWANCE> 8,025
<TOTAL-ASSETS> 577,777
<DEPOSITS> 487,917
<SHORT-TERM> 8,640
<LIABILITIES-OTHER> 8,332
<LONG-TERM> 14,009
<COMMON> 20,358
0
0
<OTHER-SE> 38,521
<TOTAL-LIABILITIES-AND-EQUITY> 577,777
<INTEREST-LOAN> 34,946
<INTEREST-INVEST> 7,746
<INTEREST-OTHER> 539
<INTEREST-TOTAL> 43,231
<INTEREST-DEPOSIT> 17,836
<INTEREST-EXPENSE> 19,068
<INTEREST-INCOME-NET> 24,163
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 126
<EXPENSE-OTHER> 18,389
<INCOME-PRETAX> 11,185
<INCOME-PRE-EXTRAORDINARY> 11,185
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,657
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.88
<YIELD-ACTUAL> 4.66
<LOANS-NON> 741
<LOANS-PAST> 793
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,140
<CHARGE-OFFS> 583
<RECOVERIES> 468
<ALLOWANCE-CLOSE> 8,025
<ALLOWANCE-DOMESTIC> 8,025
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,353
</TABLE>
