UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended March 31, 1997
Commission File Number: 0-13775
KEYSTONE HERITAGE GROUP, INC.
(Registrant)
PENNSYLVANIA 23-2219740
(State of incorporation) (I.R.S. Employer
Identification No.)
555 WILLOW STREET, LEBANON, PENNSYLVANIA 17046
(Address of principal executive offices) (Zip Code)
717-274-6800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No ____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 12, 1997
Common Stock ($5.00 par value) 3,951,583 shares
<PAGE>
KEYSTONE HERITAGE GROUP, INC.
Index
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996 (Unaudited) 3
Consolidated Statements of Income for the
Three Months ended March 31, 1997 and
1996 (Unaudited) 4
Consolidated Statements of Stockholders' Equity
for the Three Months ended March 31, 1997 and
1996 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 1997 and
1996 (Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Signature Page 17
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<PAGE>
KEYSTONE HERITAGE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 20,118 $ 22,832
Interest bearing deposits with banks 225 181
Federal funds sold 14,700 0
Investment securities available for sale 61,340 62,596
Investment securities held to maturity
(fair value of $80,591 and $92,079
for 1997 and 1996, respectively) 80,749 91,652
Loans held for sale 4,321 6,019
Loans, net of unearned income of
$1,688 for 1997 and $1,812 for 1996 428,035 422,534
Allowance for loan losses (7,899) (7,736)
--------- ---------
Loans, net 420,136 414,798
Premises and equipment, net 8,550 8,132
Accrued interest receivable 3,819 3,677
Other real estate owned 180 695
Deferred tax asset, net 2,683 2,604
Other assets 3,773 3,121
--------- ---------
Total assets $ 620,594 $ 616,307
========= =========
LIABILITIES
Non-interest bearing deposits $ 67,059 $ 72,683
Interest bearing deposits 461,971 454,150
--------- ---------
Total deposits 529,030 526,833
Short-term borrowings 14,295 12,478
Other borrowings 6,277 6,438
Accrued interest payable 4,680 5,184
Other liabilities 3,216 3,135
--------- ---------
Total liabilities 557,498 554,068
STOCKHOLDERS' EQUITY
Common stock - $5 par value; 10,000,000
shares authorized; 4,071,683 outstanding
at March 31, 1997 and December 31, 1996 20,358 20,358
Capital surplus 22,078 22,078
Retained earnings 22,762 21,418
Net unrealized gain on investment securities
available for sale, net of taxes 355 508
Treasury stock, 106,100 shares at March 31,
1997 and 93,700 shares at December 31, 1996 (2,457) (2,123)
--------- ---------
Total stockholders' equity 63,096 62,239
Total liabilities and stockholders'
equity $ 620,594 $ 616,307
========= =========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
KEYSTONE HERITAGE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 9,449 $ 8,753
Interest and dividends on investment
securities available for sale:
Taxable investment securities 829 737
Equity investments 63 55
Interest and dividends on investment
securities held to maturity:
Taxable investment securities 1,109 1,145
Non-taxable investment securities 173 125
------- -------
Total interest on investment
securities 2,174 2,062
Interest on money market investments 59 37
------- -------
Total interest income 11,682 10,852
INTEREST EXPENSE
Interest on deposits 4,906 4,503
Interest on short-term borrowings 122 121
Interest on other borrowings 97 162
------- -------
Total interest expense 5,125 4,786
Net interest income 6,557 6,066
Provision for loan losses 0 0
------- -------
Net interest income after provision
for loan losses 6,557 6,066
OTHER OPERATING INCOME
Trust income 317 317
Service charges on deposits 342 306
Net realized gain on investment
securities available for sale 174 23
Net gain on sale of mortgage loans 214 74
Other income 605 483
------- -------
Total other operating income 1,652 1,203
OTHER OPERATING EXPENSE
Salaries and employee benefits 2,744 2,364
Occupancy expense, net 361 328
Equipment expense 454 506
Deposit insurance expense 15 1
Other expense 1,275 1,276
------- -------
Total other operating expense 4,849 4,475
Income before income taxes 3,360 2,794
Income taxes 1,023 871
------- -------
Net income $ 2,337 $ 1,923
======= =======
PER COMMON SHARE
Net income $ .59 $ .47
======= =======
Cash dividends paid $ .25 $ .20
</TABLE>
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<PAGE>
KEYSTONE HERITAGE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended March 31
(Dollars in thousands)
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) On
Securities
Common Capital Retained Treasury Available
Stock Surplus Earnings Stock for Sale Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 20,358 $22,078 $16,107 $ 0 $ 336 $ 58,879
Net Income -0- -0- 1,923 -0- -0- 1,923
Cash dividends ($.20 per share) -0- -0- (814) -0- -0- (814)
Change in unrealized gain (loss)
on investment securities
available for sale, net of taxes -0- -0- -0- -0- (111) (111)
-------- ------- ------- -------- -------- --------
Balance, March 31, 1996 $ 20,358 $22,078 $17,216 $ 0 $ 225 $ 59,877
======== ======= ======= ======== ======== ========
Balance, December 31, 1996 $ 20,358 $22,078 $21,418 $ (2,123) $ 508 $ 62,239
Net income -0- -0- 2,337 -0- -0- 2,337
Cash dividends ($.25 per share) -0- -0- (993) -0- -0- (993)
Acquisition of 12,400 shares of
treasury stock at cost -0- -0- -0- (334) -0- (334)
Change in unrealized gain
(loss) on investment securities
available for sale, net of taxes -0- -0- -0- -0- (153) (153)
-------- ------- ------- -------- -------- --------
Balance, March 31, 1997 $ 20,358 $22,078 $22,762 ($ 2,457) $ 355 $ 63,096
======== ======= ======= ======== ======== ========
</TABLE>
-5-
<PAGE>
KEYSTONE HERITAGE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 2,337 $ 1,923
Adjustments to reconcile net income to cash:
Depreciation and amortization 307 391
Deferred income taxes (2) 242
Increase in accrued interest receivable (142) (102)
Decrease increase in accrued interest payable (504) (1,278)
Net gain on sale of loans (214) (74)
Originations of residential mortgage loans sold (7,010) (5,994)
Proceeds from sale of residential mortgage loans 8,400 4,725
Net realized gain on investment
securities available for sale (174) (23)
Other, net (819) (504)
-------- --------
Net cash provided by operating activities 2,179 (694)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in money market investments (14,744) (4,952)
Maturities of investment securities
held to maturity 12,402 9,726
Maturities of investment securities
available for sale 5,130 11,291
Sale of investment securities available for sale 378 63
Funds invested in investment securities
held to maturity (1,460) (4,958)
Funds invested in investment securities
available for sale (4,194) (3,174)
Net increase in loans made to customers (4,781) (423)
Net expenditures for premises and equipment (725) (133)
Proceeds from sale of other real estate owned 575 0
-------- --------
Net cash (used in) provided from
investing activities (7,419) 7,440
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 2,197 (10,077)
Net increase in short-term borrowings 1,817 470
Net (decrease) in other borrowings (161) (3,068)
Acquisition of treasury stock (334) 0
Cash dividends paid (993) (814)
-------- --------
Net cash used by (provided by)
financing activities 2,526 (13,489)
Net decrease in cash and due from banks (2,714) (6,743)
Cash and due from banks at beginning of period 22,832 23,766
Cash and due from banks at end of period $ 20,118 $ 17,023
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 2,771 $ 2,824
Income taxes paid 400 74
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Loans charged-off 99 345
</TABLE>
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<PAGE>
KEYSTONE HERITAGE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements of Keystone Heritage
Group, Inc. have not been reviewed by independent certified public
accountants. However, in management's opinion, the statements reflect all
adjustments and disclosures necessary for a fair presentation of the
consolidated balance sheet of the Company as of March 31, 1997 and December
31, 1996, the consolidated statements of income for the three months ended
March 31, 1997 and 1996 and the consolidated statements stockholders'
equity and the consolidated statements of cash flows for the three months
ended March 31, 1997 and 1996. The accounting policies followed in the
presentation of interim financial results are the same as those followed on
an annual basis or those adopted during the first quarter of 1997. The
consolidated financial statements of Keystone Heritage Group, Inc. and
subsidiaries include the accounts of the Company and its wholly owned
subsidiaries, Lebanon Valley National Bank and Keystone Heritage Life
Insurance Company. All significant intercompany balances and transactions
have been eliminated in the consolidated financial statements. For purposes
of comparability, certain prior year amounts have been reclassified.
2. Earnings per common share are based upon the weighted average number of
shares outstanding. The weighted average number of shares outstanding was
3,970,113 and 4,071,683 for the three months ended March 31 1997 and 1996.
3. In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share".
SFAS 128, which supersedes APB Opinion No. 15 (APB 15), "Earnings Per
Share", specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS) for entities with publicly held
common stock. It replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with diluted EPS, Basic
EPS, unlike primary EPS, excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS is computed similarly
to fully diluted EPS under APB 15. The Company will adopt SFAS 128 as of
December 31, 1997. Management does not expect SFAS 128 to have a material
effect on the EPS of the Company.
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Keystone Heritage Group, Inc. (the "Company") is a bank holding company
organized under the laws of Pennsylvania and registered under the Federal Bank
Holding Company Act of 1956. The Company's principal subsidiary is Lebanon
Valley National Bank (the "Bank").
Results of Operations
Net income for the Company for the three months ended March 31, 1997 was
$2.337 million or $.59 per share, compared to $1.923 million or $.47 per share
for the three months ended March 31, 1996. Return on average stockholders'
equity and return on average assets for the 1997 period were 15.14 percent and
1.56 percent, respectively.
Net Interest Income
Net interest income is the primary source of income for the Company. Net
interest income is the difference between interest earned on loans and
investments and interest paid on deposits and other funding sources. Deposits
are the primary source of funds for the Company. The factors which influence net
interest income include changes in interest rates and changes in asset and
liability balances.
For purposes of this discussion, interest income and the average yield
earned on loans and investments are presented on a taxable equivalent basis.
This provides a basis for comparison of tax exempt loans and investments with
taxable loans and investments by giving effect to interest earned on tax exempt
loans and investments by an amount equivalent to federal income taxes which
would have been paid on the assumption that the interest earned on those assets
was taxable at the Company's statutory tax rate of 35 percent.
The table presented on page 15 is a comparative statement of average
balances of interest earning assets and interest bearing liabilities, interest
income and interest expense, and interest rates for the three months ended March
31, 1997 and 1996.
Net interest income for the three months ended March 31, 1997 was $6.7
million, a $518 thousand or 8.4 percent increase from the same period of 1996.
The net interest margin for the first quarter of 1997 was 4.72 percent compared
to 4.65 percent for the same period of 1996. Average earning assets for the
three month period ended March 31, 1997 were $578.6 million, a $41.0 million or
a 7.6 percent increase from the same period of 1996. For the three month
comparative periods, net interest income and the net interest margin increased
in 1997 primarily as a result of an increase in average loans outstanding of
$38.3 million or 9.8 percent. This loan growth was primarily funded by increases
in average interest bearing deposit balances of $38.3 million, or 9.2 percent.
The aforementioned increase in average loans outstanding was attributable
to a $41 million increase in commercial and agricultural loans. The Company's
consumer loan portfolio increased by $2 million from the same period of 1996.
The was due to the net effect of an $8.4 million increase in direct installment
and home equity loans which was somewhat offset by a $5.5 million decrease in
indirect automobile installment loans which are originated through third-party
dealerships. The trend in indirect loans should continue as the Company has been
concentrating its marketing and sales efforts on direct installment loans
originated through the Company's branch network.
The increase in average deposit balances resulted from a $39.9 million
increase in time deposits. This increase is somewhat attributable to five new
branch offices which opened between September 1996 and April 1997. These new
branches had a total of $15.4 million in time deposits and $17.2 million in
total deposits as of March 31, 1997.
-8-
<PAGE>
Provision and Allowance for Loan Losses
There was no provision for loan losses charged to net income during the
three month period ended March 31, 1997 or 1996.
Net recoveries of $163 thousand were recorded for the three months ended
March 31, 1997 compared to net charge-offs of $249 thousand for the same period
of 1996. There were no commercial loan charge-offs in 1997 compared to $264
thousand in 1996.
The allowance for loan losses was $7.9 million or 1.85 percent of total
loans outstanding at March 31, 1997 and $7.7 million or 1.83 percent at December
31, 1996. The allowance for loan losses is a reserve for estimated potential
loan losses in the loan portfolio. Losses occur primarily from the loan
portfolio, but may also be derived from commitments to extend credit and standby
letters of credit. Loan losses and recoveries of previously charged-off loans
are charged or credited directly to the allowance for loan losses. The allowance
for loan losses is an amount which, in management's judgement, is considered
adequate to absorb potential losses inherent in the loan portfolio. Management
performs a quarterly assessment of the Bank's loan portfolio to determine the
appropriate level of the allowance for loan losses. The factors considered in
this evaluation include, but are not necessarily limited to, estimated loan
losses identified through the review of loans by the Company's personnel;
general economic conditions; deterioration in loan concentrations or pledged
collateral; historic loss experience; and trends in portfolio volume,
composition, delinquencies, and non-accruals. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses.
-9-
<PAGE>
The following is a summary of the activity in the allowance for loan losses
for the three months ended March 31, 1997 and 1996:
Three Months Ended
March 31
(Dollars in thousands) 1997 1996
Allowance for loan losses
at beginning of period $ 7,736 $ 8,025
Loans charged-off:
Commercial 0 264
Agriculture 0 0
Real estate construction 0 0
Loans to individuals 99 81
Real estate - residential mortgage 0 0
------- -------
Total loans charged-off 99 345
Recoveries of loans previously charged-off:
Commercial 246 81
Agriculture 0 0
Real estate construction 0 4
Loans to individuals 16 11
Real estate - residential mortgage 0 0
------- -------
Total recoveries of loans previously
charged-off 262 96
Net loans charged-off (163) 249
Current period's provision for
loan losses 0 0
------- -------
Allowance for loan
losses at end of period $ 7,899 $ 7,776
======= =======
Other Operating Income and Expense
Other operating income was $1.7 million and $1.2 million for the three
months ended March 31, 1997 and 1996, respectively. The increase in other
operating income is primarily attributable to mortgage banking operations;
results from this line of business were increased significantly following the
acquisition, during the first quarter of 1996, of the business assets and
operations of Central Mortgage, a mortgage banking company located in Lancaster,
Pennsylvania. Other operating income is generated from mortgage banking
activities through the sale of originated mortgage loans in the secondary
market. The Company recognized $214 thousand of gains from the sale of $8.4
million of mortgages in the secondary market in the three month period of 1997
compared to recognizing $74 thousand from selling $4.7 million in the secondary
market in the same period of 1996. In addition, the Company recognized $174
thousand from the sale of investments securities available for sale in 1997
compared to $23 thousand for the same period in 1996. Other income increased by
$122 thousand from 1996 which was due to a number of factors such as fee income
pricing increases and due to the introduction of a direct debit card product
during the third quarter of 1996.
Other operating expense for the three months ended March 31, 1997 was $4.9
million, a 8.4 percent increase over the $4.5 million reported for the same
period of 1996.
Salaries and benefits expense increased by $380 thousand or 16.1 percent
for the three months ended March 31, 1997 compared to the same period of 1996.
The increase in salary and benefit expenses is primarily a result of the
staffing expense for Central Mortgage being present for the full quarter in 1997
compared to one month in 1996, the opening of five de novo branch offices, which
opened between the second half of 1996 and April of 1997 and overall merit
increases of 3.5 percent which were applied to base salaries as of January 1,
1997.
-10-
<PAGE>
Non-Performing Assets
Loans, other than consumer loans not secured by real estate, are typically
classified as non-accrual at the time they reach 90 days past due as to
principal or interest. Loans may also be placed on non-accrual status when, in
management's opinion, the collectability of principal or interest is doubtful,
or should management believe that circumstances warrant such action. Consumer
loans not secured by residential real estate are charged-off when they become
120 days past due.
Non-performing loans at March 31, 1997 totalled $573 thousand or .13
percent of total loans outstanding, compared to $973 thousand or .23 percent of
loans at December 31, 1996 and $1.0 million or .26 percent of loans at March 31,
1996. Non-performing assets at March 31, 1997 were $753 thousand or .18 percent
of loans plus other real estate owned compared to $1.7 million or .39 percent of
loans plus other real estate owned at December 31, 1996 and $2.0 million or .50
percent of loans plus other real estate owned at March 31, 1996. The improvement
in non-performing assets at March 31, 1997 as compared to March 31, 1996 was a
result of decreased levels of non-accrual loans and decreased levels of other
real estate owned.
The following is a presentation of non-performing assets as of March 31,
1997, December 31, 1996, and March 31, 1996:
<TABLE>
<CAPTION>
March 31 Dec. 31 March 31
(Dollars in thousands) 1997 1996 1996
<S> <C> <C> <C>
Non-performing loans $ 573 $ 973 $ 1,008
Other real estate owned, net 180 695 947
-------- -------- --------
Total non-performing assets $ 753 $ 1,668 $ 1,955
======== ======== ========
Loans past due 90 days or more as to
principal or interest 578 624 524
Allowance for loan losses to
non-performing loans 13.79x 12.58x 7.71x
Non-performing loans as a
percent of loans outstanding .13% .23% .26%
Non-performing assets as a
percent of loans outstanding
plus other real estate owned .18% .39% .50%
</TABLE>
Interest income of approximately $11 thousand would have been recognized
during the three months ended March 31, 1997, had these loans been current in
accordance with their original terms and been outstanding through the period or
since origination. Interest income on these loans of $1 thousand was recognized
during the three months ended March 31, 1997.
Concentrations of credit are considered to exist if a number of
counterparties are engaged in similar activities and have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions.
Agriculture-related borrowings at March 31, 1997 totalled $110 million or 26.1
percent of total loans outstanding. These loans may be impacted by adverse
climate or economic conditions not common to other industries. The Company's
exposure to possible loss in the event of nonperformance by these borrowers is
represented by the contractual amount of those instruments. The Company's policy
is to require supporting collateral for these loans which is generally in the
form of agriculture real estate, livestock, and farm equipment. At March 31,
1997 there were no significant agriculture related borrowings which were
classified as non-performing assets and there were no charge-offs of agriculture
related loans during the three months ended March 31, 1997.
Financial Position
Total assets at March 31, 1997 were $621 million compared to $616 million
at December 31, 1996. Total loans outstanding at March 31, 1997 were $428
million compared to $423 million at December 31, 1996. Total deposits at March
31, 1997 were $529 million compared to $527 million at December 31, 1996.
-11-
<PAGE>
Capital Adequacy
The Company's stockholders' equity was $63.1 million at March 31, 1997 and
$62.2 million at December 31, 1996. Total stockholders' equity increased by 1.4
percent from December 31, 1996 which was the net effect of the recognition of
$2.3 million in net income for the three month period, cash dividend payments to
stockholders of $993 thousand, an unfavorable change in net unrealized gains or
losses on investment securities available for sale of $153 thousand, and due to
the acquisition of treasury stock at a cost of $334 thousand. Net unrealized
gains on investment securities available for sale of $355 thousand and $508
thousand were included as a component of stockholders' equity at March 31, 1997
and December 31, 1996, respectively.
The Company announced its intentions to repurchase up to 5 percent or
203,584 shares of its outstanding common stock in June, 1996. These repurchased
shares will be available for reissuance through the Company's Dividend
Reinvestment or Stock Option Plans or for other general corporate purposes. A
total of 12,400 shares of common stock were re-acquired by the Company during
the first quarter of 1997 with a cumulative total of 106,100 acquired as of
March 31, 1997.
The maintenance of an appropriate level of capital is a priority of the
Company's management. The Company's capital adequacy and dividend policy are
closely monitored by management and are reviewed regularly by the Board of
Directors of the Company. The Company intends to provide an adequate return to
its stockholders while retaining a sufficient capital base to provide for future
growth and to comply with regulatory standards.
Banking regulators' risk-based capital guidelines address the capital
adequacy of banking organizations. These guidelines include a definition of
capital and a framework for calculating risk-weighted assets by assigning assets
and off-balance sheet items to broad risk categories, as well as minimum ratios
to be maintained by banking organizations. The risk-based capital ratios are
calculated by dividing qualifying capital by risk-weighted assets.
Under the risk-based capital guidelines, Total Capital is defined as the
sum of core or "Tier 1" Capital and "Tier 2" Capital. As the guidelines apply to
Keystone Heritage Group, Inc., Tier 1 Capital is total stockholders' equity and
Tier 2 Capital includes a portion of the allowance for loan losses. The rules
require that banking organizations must have ratios of 4.00 percent and 8.00
percent for Tier 1 and Total Capital, respectively. At March 31, 1997 the
Company's Tier 1 and Total Capital ratios were 13.18 percent and 14.49 percent,
respectively. Tier 1 and Total Capital ratios were 13.12 percent and 14.43
percent respectively, at December 31, 1996. In addition to the risk-based
capital ratio, a bank is also required to maintain a "Leverage ratio" of Tier 1
capital to average total assets of 3 percent or higher. The Company's Leverage
ratio was 10.28 percent at March 31, 1997 and December 31, 1996, respectively.
Off-Balance Sheet Items
The Company's loan portfolio consists of loans to businesses and
individuals primarily in its five-county market area of Lebanon, Lancaster,
Berks, Dauphin, and Schuylkill counties.
In the ordinary course of business, the Company enters into agreements with
customers, such as commitments to extend credit and standby letters of credit
which involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts presented in the balance sheet. The Company's exposure to
possible loss in the event of nonperformance by the other party to the financial
instruments for commitments to extend credit and financial guarantees written is
represented by the contractual amount of those instruments. The Company may not
be obligated to advance funds if the customer's financial condition deteriorates
or if the customer fails to meet certain terms.
Commitments and conditional obligations generally have fixed expiration
dates or termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being used, the total commitment
amounts do not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case-by-case basis, applying the
same credit standards used in the lending process, through periodic
reassessments of the customer's creditworthiness and through ongoing credit
reviews. The amount of collateral obtained, if deemed necessary by the Company
upon extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties.
-12-
<PAGE>
The Company has entered into interest rate swap 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 swap 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 swap contracts
involves not only the risk of dealing with counterparties and their ability to
meet the terms of the contracts but also the interest rate risk associated with
unmatched positions. Notional principal amounts often are used to express the
volume of these transactions.
The interest income or interest expense differential from interest rate
swap contracts is recognized on the accrual basis as a component of interest
income or interest expense over the life of the contract. Gains or losses from
early termination of interest rate swap contracts are deferred and amortized
over the remaining term of the underlying assets or liabilities. The Company is
not exposed to credit risk in terms 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 Company's use of these interest rate swap contracts is closely
monitored by the Company's Board of Directors and is closely controlled as to
levels of exposure. At March 31, 1997 the Company had seven interest rate
agreements outstanding having a total notional amount of $70 million. These
agreements consisted of interest rate swap agreements each with a notional
amount of $10 million.
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 following is the amount of financial instruments with off-balance sheet
risk not reflected in the consolidated balance sheets at March 31, 1997 and
December 31, 1996:
Contractual Amounts
March 31 December 31
(Dollars in thousands) 1997 1996
Financial instruments whose
contractual amounts represent
credit risk:
Commitments to extend credit $94,339 $93,811
Standby letters of credit 7,118 7,335
Contractual amounts of off-balance
sheet financial instruments not
constituting credit risk:
Interest rate swap, notional
value 70,000 70,000
Supervision and Regulation
During the latter part of 1996, Congress agreed on a legislative package to
stabilize the Savings and Loan (S&L) industry's deposit insurance fund (SAIF).
The legislation required the S&L industry to recapitalize its insurance fund
with a one-time assessment. Previous proposals required the bank insurance fund
(BIF) to contribute a substantial amount to help recapitalize SAIF. Under the
current legislation, banks are required to pay an annual rate of 1.29 cents for
every $100 of domestic deposits from 1997 through 1999 and pay 2.43 cents per
$100 of domestic deposits for the years of 2000 through 2017. The amount of FDIC
insurance to be paid under this new legislation will not materially impact the
financial position, equity or the results of operations for the Company in
future periods.
The Bank is a national bank, chartered under the National Bank Act, and is
subject to the primary supervision of, and is examined by, the Comptroller of
the Currency. As a member of the Federal Reserve System, the Bank is subject to
provisions of the Federal Reserve Act, which restricts the ability of a bank to
extend credit to its parent holding company or to certain of the parent's
subsidiaries, or to invest in the Company's common stock or to take such stock
as collateral for loans to any borrower. The operations of the Bank are also
subject to regulation by the FDIC.
-13-
<PAGE>
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share". SFAS
128, which supersedes APB Opinion No. 15 (APB 15), "Earnings Per Share",
specifies the computation, presentation, and disclosure requirements for
earnings per share (EPS) for entities with publicly held common stock. It
replaces the presentation of primary EPS with a presentation of basic EPS and
fully diluted EPS with diluted EPS, Basic EPS, unlike primary EPS, excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS is computed similarly to fully diluted EPS under APB 15. The Company will
adopt SFAS 128 as of December 31, 1997. Management does not expect SFAS 128 to
have a material effect on the EPS of the Company.
-14-
<PAGE>
AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997 Three Months Ended March 31, 1996
Average Average Average Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans $428,693 $ 9,532 9.02% $390,350 $ 8,833 9.10%
Money market investments 4,440 59 5.39 2,729 37 5.42
Investment securities:
Taxable 130,111 2,001 6.24 132,655 1,938 5.87
Non-taxable 15,372 266 7.01 11,863 193 6.54
-------- -------- ---- -------- -------- ----
Total investment securities 145,483 2,267 6.32 144,518 2,131 5.93
Total earning assets 578,616 $ 11,858 8.31% 537,597 $ 11,001 8.23%
======== ==== ======== ====
Other assets 29,544 27,023
-------- --------
Total assets $608,161 $564,620
======== ========
Liabilities and stockholders' equity
Interest bearing deposits:
Now accounts $ 54,065 $ 170 1.27% $ 55,062 $ 191 1.39%
Savings and money market 127,198 983 3.13 127,790 986 3.10
Time 273,633 3,753 5.56 233,735 3,326 5.72
-------- -------- ---- -------- -------- ----
Total interest bearing deposits 454,896 4,906 4.37 416,587 4,503 4.35
Short-term borrowings 12,068 122 4.08 11,505 121 4.22
Other Borrowings 6,338 97 6.21 11,111 162 5.86
-------- -------- ---- -------- -------- ----
Total interest bearing liabilities 473,302 $ 5,125 4.39% 439,203 $ 4,786 4.38%
======== ==== ======== ====
Non-interest bearing deposits 63,832 58,060
Other liabilities 8,434 8,138
Stockholders' equity 62,593 59,219
-------- --------
Total liabilities and
stockholders' equity $608,161 $564,620
======== ========
Net interest income $ 6,733 $ 6,215
Total yield on earning assets 8.31% 8.23%
Rate on supporting liabilities 3.59% 3.58%
---- ----
Net interest margin 4.72% 4.65%
==== ====
</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 are included
in interest income.
-15-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-16-
<PAGE>
KEYSTONE HERITAGE GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Keystone Heritage Group, Inc.
(Registrant)
Date May 12, 1997 By /s/ Kurt A. Phillips
Kurt A. Phillips
Chief Financial and Accounting Officer
-17-
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000715366
<NAME> KEYSTONE HERITAGE GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> Mar-31-1997
<CASH> 20,118
<INT-BEARING-DEPOSITS> 225
<FED-FUNDS-SOLD> 14,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61,340
<INVESTMENTS-CARRYING> 80,749
<INVESTMENTS-MARKET> 80,591
<LOANS> 428,035
<ALLOWANCE> 7,899
<TOTAL-ASSETS> 620,594
<DEPOSITS> 529,030
<SHORT-TERM> 14,295
<LIABILITIES-OTHER> 7,896
<LONG-TERM> 6,277
0
0
<COMMON> 20,358
<OTHER-SE> 42,738
<TOTAL-LIABILITIES-AND-EQUITY> 620,594
<INTEREST-LOAN> 9,449
<INTEREST-INVEST> 2,174
<INTEREST-OTHER> 59
<INTEREST-TOTAL> 11,682
<INTEREST-DEPOSIT> 4,906
<INTEREST-EXPENSE> 5,125
<INTEREST-INCOME-NET> 6,557
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 174
<EXPENSE-OTHER> 4,849
<INCOME-PRETAX> 3,360
<INCOME-PRE-EXTRAORDINARY> 3,360
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,337
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
<YIELD-ACTUAL> 4.72
<LOANS-NON> 573
<LOANS-PAST> 578
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,736
<CHARGE-OFFS> 99
<RECOVERIES> 262
<ALLOWANCE-CLOSE> 7,899
<ALLOWANCE-DOMESTIC> 7,899
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
