<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ____________ to ______________
Commission File Number 0-11460
KEYSTONE FINANCIAL, INC.
Pennsylvania 23-2289209
(State of Incorporation) (IRS Employer I.D. No.)
ONE KEYSTONE PLAZA
FRONT & MARKET STREETS
P.O. BOX 3660
HARRISBURG, PA 17105-3660
(Address of principal executive offices)
(717) 233-1555
(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 or No
------------ -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock ($2 par value): 23,545,654 as of July 31, 1995.
<PAGE>
KEYSTONE FINANCIAL, INC.
INDEX
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Condition - June 30, 1995 and December 31, 1994 3
Consolidated Statements of Income - Three months ended June 30, 1995 and 1994, 4
and six months ended June 30, 1995 and 1994.
Consolidated Statements of Cash Flows - Six months ended June 30, 1995 and 1994. 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 8
PART II. OTHER INFORMATION
Items 1,2,3, and 5 have been omitted since they are not applicable to the
registrant.
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 14
(b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during the quarter ended June N/A
30, 1995.
Signatures 15
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION
June 30, 1995 December 31, 1994
------------------------------------------------------------------------------------------
(in thousands) (UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
------------------------------------------------------------------------------------------
Cash and due from banks $ 172,038 $ 181,953
Federal funds sold and other 187,736 49,622
Investment securities available for sale 585,716 755,795
Investment securities held to maturity
(market values 1995-$382,051; 1994-$402,963) 379,344 418,402
Mortgages held for resale 14,818 9,189
Loans and Leases 3,283,331 3,193,405
Allowance for credit losses (43,589) (42,440)
------------------------------------------------------------------------------------------
Net Loans 3,239,742 3,150,965
Premises and equipment 63,289 61,759
Other assets 90,955 78,315
------------------------------------------------------------------------------------------
TOTAL ASSETS $4,733,638 $4,706,000
------------------------------------------------------------------------------------------
LIABILITIES
------------------------------------------------------------------------------------------
Noninterest-bearing deposits $ 487,327 $ 513,641
Interest-bearing deposits 3,368,050 3,314,342
------------------------------------------------------------------------------------------
Total Deposits 3,855,377 3,827,983
Fed Funds purchased and Security
repurchase agreements 148,954 239,652
Other short-term borrowings 21,821 14,376
------------------------------------------------------------------------------------------
Total Short-Term Borrowings 170,775 254,028
FHLB borrowings 194,919 148,887
Long-term debt 4,929 6,054
Other Liabilities 71,190 61,274
------------------------------------------------------------------------------------------
TOTAL LIABILITIES 4,297,190 4,298,226
SHAREHOLDERS' EQUITY
------------------------------------------------------------------------------------------
Preferred stock; $1.00 par value,
authorized 8,000,000 shares;
none issued or outstanding
Common stock: $2.00 par value,
authorized 50,000,000; issued
24,257,981 - 1995 and 24,051,077 - 1994 48,516 48,102
Surplus 110,389 106,812
Retained Earnings 305,698 291,948
Deferred KSOP benefit expense (2,000) (2,250)
Treasury stock; shares 790,000 - 1995
and 690,000 - 1994, at cost (23,464) (20,576)
Net unrealized securities losses, net of tax (2,691) (16,262)
------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 436,448 407,774
------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,733,638 $4,706,000
------------------------------------------------------------------------------------------
</TABLE>
Note: The balance sheet at December 31, 1994 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (unaudited)
----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
----------------------------------------------------------------------------------------------------------------------------------
Loans and fees on loans $71,878 $57,415 $142,172 $112,608
Investments - taxable 13,937 14,932 28,905 29,245
Investments - tax exempt 2,146 2,115 4,304 4,820
Federal funds sold & other 1,915 816 3,058 1,678
Mortgages held for resale 225 344 420 786
-----------------------------------------------------------------------------------------------------------------------------------
90,101 75,622 178,859 149,137
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
-----------------------------------------------------------------------------------------------------------------------------------
Deposits 36,287 26,148 70,172 51,546
Short-term borrowings 2,251 1,546 4,866 2,905
FHLB borrowing 2,737 1,427 5,154 2,913
Long-term debt 103 114 218 212
-----------------------------------------------------------------------------------------------------------------------------------
41,378 29,235 80,410 57,576
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 48,723 46,387 98,449 91,561
Provision for credit losses 2,258 2,334 4,342 3,976
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 46,465 44,053 94,107 87,585
-----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
-----------------------------------------------------------------------------------------------------------------------------------
Trust income 3,156 3,330 6,355 6,616
Service charges on deposit
accounts 3,284 3,241 6,450 6,316
Mortgage banking 1,868 553 3,194 1,591
Fee income 2,883 2,207 5,730 4,510
Reinsurance income 559 614 1,082 1,163
Other income 261 1,899 654 2,316
Net gains - equity securities 76 255 103 536
Net gains - debt securities 278 53 283 383
-----------------------------------------------------------------------------------------------------------------------------------
12,365 12,152 23,851 23,431
NONINTEREST EXPENSE
------------------------------------------------------------------------------------------------------------------------------------
Salaries 15,039 14,178 29,991 28,479
Employee benefits 2,349 3,259 5,760 6,553
Occupancy expense (net) 3,119 3,030 6,368 6,173
Furniture and equipment expense 2,981 2,736 6,005 5,350
Deposit insurance 2,149 2,028 4,295 4,055
Other expense 11,920 11,035 23,071 21,072
-----------------------------------------------------------------------------------------------------------------------------------
37,557 36,266 75,490 71,682
-----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 21,273 19,939 42,468 39,334
Income tax expense 6,252 5,999 12,791 11,348
-----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $15,021 $13,940 $29,677 $27,986
-----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
-----------------------------------------------------------------------------------------------------------------------------------
Net income $0.64 $0.60 $1.27 $1.20
Average number of shares outstanding 23,465,047 23,374,726 23,448,250 23,399,111
Dividends $0.34 $0.32 $0.68 $0.64
-----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows(unaudited)
Six Months Ended
June 30,
(in thousands)
1995 1994
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 29,677 $ 27,986
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for credit losses 4,342 3,976
Provision for depreciation & amortization 5,601 4,624
Deferred income taxes 4,991 (1,025)
Sale of mortgages held for resale 61,278 72,865
Origination of mortgages held for resale (99,578) (56,708)
(Increase)decrease in interest receivable 1,902 (472)
Increase in interest payable 5,427 3,791
Other (12,076) 5,679
-----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,564 60,716
-----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits 15,715 3,185
Available for sale securities:
Sales 77,260 36,627
Maturities 318,431 311,879
Purchases (205,875) (286,862)
Held to maturity securities:
Maturities 50,290 34,279
Purchases (12,779) (40,234)
Net increase in loans (58,235) (124,153)
Sales of loans 15,160 26,388
Purchase of loans (17,314) (16,052)
Purchases of premises and equipment (6,476) (4,132)
Other (273) (379)
-----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (Used by)
INVESTING ACTIVITIES 175,904 (59,454)
-----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in deposits 19,380 17,710
Net decrease in short-term borrowings (83,253) (34,578)
Proceeds from FHLB Borrowings 128,352 ---
Repayments of FHLB Borrowings (82,319) (14,000)
Net increase(decrease) in long-term debt (1,125) 1,211
Acquisition of treasury stock (2,888) (8,927)
Cash dividends (15,942) (15,459)
Other 4,241 4,539
-----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (33,554) 49,504)
-----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS 143,914 (48,242)
Cash and cash equivalents at beginning of period 204,942 241,618
-----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $348,856 193,376
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
Notes To Consolidated
Financial Statements
BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements for the interim
periods do not include all of the information and footnotes required by
generally accepted accounting principles. However, in the opinion of
management, all adjustments necessary for a fair presentation have been
included, and such adjustments were of a normal recurring nature.
Operating results for the six-month period ended June 30, 1995 are not
necessarily indicative of the results that may be expected for 1995.
For further information, refer to the audited consolidated financial statements,
footnotes thereto, and the Financial Review for the year ended December 31,
1994, as contained in the Annual Report to Shareholders.
IMPAIRED LOANS
--------------
Effective January 1, 1995, Keystone adopted Financial Accounting Standards Board
(FASB) Statement No. 114, "Accounting by Creditors for Impairment of a Loan", as
amended by Statement No. 118, "Accounting by Creditors for Impairment of a Loan
-Income Recognition and Disclosures." Under this new standard, the credit loss
for loans to which it applies is based on discounted cash flows using the loans
interest rate or the fair value of the collateral for collateral dependent
loans. Prior to the adoption of the new standard, cash flows were not
discounted in estimating credit loss. Adoption of the new standard did not have
a material impact on Keystone's financial condition or results of operation.
MORTGAGE SERVICING RIGHTS
-------------------------
Effective January 1, 1995, Keystone adopted Financial Accounting Standards Board
(FASB) Statement No. 122, "Mortgage Servicing Rights", which amended FASB
Statement No. 65, "Accounting for Certain Mortgage Banking Activities." The new
standard requires capitalization of mortgage servicing rights acquired through
loan origination activities upon the sale or securitization of the mortgages
with servicing rights retained. Under the old standard, only mortgage servicing
rights acquired through a purchase transaction could be capitalized. Adoption of
the new standard did not have a material impact on Keystone's financial
condition or results of operation.
BUSINESS COMBINATIONS
---------------------
In January of 1995, Keystone announced the signing of a definitive agreement to
acquire Shawnee Financial Services (Shawnee) for approximately $15 million, in a
stock for stock exchange. Under the terms of the agreement, each outstanding
share of Shawnee Common Stock will be converted into 6.25 shares of Keystone
Common Stock. Shawnee, a bank holding company headquartered in Everett,
Pennsylvania, has assets of approximately $75 million.
In July of 1995, Keystone announced the signing of a definitive agreement to
acquire Martindale Andres (Martindale), a Philadelphia-area asset management
firm. The acquisition of Martindale will result in the addition of $400 million
in managed assets. Martindale will operate as a registered investment advisor
and will not have a significant impact on Keystone's financial condition.
In July of 1995, Keystone also announced the signing of a definitive agreement
to acquire National American Bancorp, Inc., (National), a bank holding company
with assets of approximately $153 million. Under the terms of the agreement,
approximately two shares of Keystone Common Stock will be exchanged for each of
the approximately 578,000 shares of National Common Stock. As a result, the
aggregate consideration for the transaction is approximately $35 million. The
transaction will be accounted for under the pooling of interests method of
accounting.
6
<PAGE>
The above acquisitions are subject to shareholder and regulatory approval and
are expected to be consummated in the remainder of 1995.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
SUMMARY
Keystone Financial, Inc. (Keystone) continued to report improved operating
performance as net income for the first six months of 1995 reached $29,677,000
compared with $27,986,000 for the same period of 1994. Year-to-date earnings
per share grew from $1.20 in 1994 to $1.27 in 1995, an increase of 6%. Return
on average assets (ROA) and return on average equity (ROE) for the first six
months of 1995 were 1.27% and 14.25%, respectively. Comparable 1994 performance
included an ROA of 1.30% and an ROE of 13.75%.
Operating performance in the second quarter and first half of 1995 was
influenced by growth in net interest income, improvement in noninterest
revenues, and controlled growth of expenses. Growth in net interest income was
achieved despite the effect of the reversal of certain loan fees that had been
overaccrued in prior periods. This adjustment served to reduce the reported net
interest margin for the six month period from 4.61% to 4.57%. Noninterest
revenue growth was affected by increased mortgage banking activities and related
to both increased demand and more effective delivery of these services through
Keystone's specialized mortgage banking subsidiary. Noninterest expenses
remained stable, and efforts to fully implement the consolidation of Keystone's
loan and deposit operations are proceeding as planned.
Keystone's asset quality ratios continue to reflect the adequacy of the reserve
for credit losses and low levels of problem credits. The ratio of the allowance
for credit losses to loans remained at 1.33%, while the coverage of
nonperforming loans provided by the allowance grew to 277%.
AVERAGE STATEMENT OF CONDITION
The quarterly average balance sheets for the six-months ended June 30, 1995 and
1994 were as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Change
<S> <C> <C> <C> <C>
1995 1994 Volume %
---------------------------------------------------------------------------
Cash and due from banks $ 149,932 $ 147,374 $ 2,558 2%
Federal funds sold and other 100,006 90,422 9,584 11%
Investments 1,094,279 1,213,762 (119,483) (10)%
Mortgages held for sale 11,773 19,061 (7,288) (38)%
Loans 3,248,108 2,813,507 434,601 15%
Allowance for credit losses (43,883) (40,833) (3,050) 7%
---------------------------------------------------------------------------
Net loans 3,204,225 2,772,674 431,551 16%
Other assets 142,136 123,456 18,680 15%
---------------------------------------------------------------------------
TOTAL ASSETS $4,702,351 $4,366,749 $ 335,602 8%
---------------------------------------------------------------------------
Noninterest-bearing deposits $ 464,514 $ 452,090 $ 12,424 3%
Interest-bearing deposits 3,357,704 3,130,514 227,190 7%
Short-term borrowings 197,241 192,078 5,163 3%
FHLB borrowings 176,013 123,145 52,868 43%
Other liabilities 86,896 58,489 28,407 49%
---------------------------------------------------------------------------
TOTAL LIABILITIES 4,282,368 3,956,316 326,052 8%
---------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 419,983 410,433 9,550 2%
---------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,702,351 $4,366,749 $ 335,602 8%
---------------------------------------------------------------------------
</TABLE>
8
<PAGE>
The growth in loans occurred throughout the commercial and consumer categories
and was funded by a decline in investments, deposit growth, and increased FHLB
borrowings. Substantial loan growth occurred in installment credits and
consumer leases.
Excluding the impact of the fourth quarter 1994 American Savings Bank
acquisition, which was accounted for under the purchase method of accounting,
loans, total assets and deposits increased 13%, 3%, and 3%, respectively, from
the comparable period in 1994.
NET INTEREST INCOME
The following table summarizes, on a fully taxable equivalent basis, changes in
net interest income and net interest margin for the six months ended June 30,
1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994 INCREASE/DECREASE
AMOUNT YIELD/ YIELD/ YIELD/
RATE AMOUNT RATE AMOUNT RATE
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME $181,817 8.21% $152,396 7.42% $29,421 .79
INTEREST EXPENSE 80,410 4.34 57,576 3.36 22,834 (.98)
--------------------------------------------------------------------------------------------------
NET INTEREST INCOME $101,407 $ 94,820 $ 6,587 (.19)
INTEREST SPREAD 3.87% 4.06%
IMPACT OF NONINTEREST FUNDS .70 .55 .15
--------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 4.57% 4.61% (.04)
--------------------------------------------------------------------------------------------------
</TABLE>
*The change in net interest income included favorable variances in both volume
and rates of $5,128,000 and $1,459,000, respectively.
Keystone's primary source of revenue is net interest income, which represents
the difference between interest income on earning assets and interest expense on
deposits and other borrowed funds. Interest rates, which had risen
significantly throughout 1994, stabilized in the first half of 1995. The higher
interest rates improved earning asset yields but, to a greater extent,
heightened competitive pressures on core funding sources.
The rise in interest rates, coupled with increases in loan volumes, favorably
influenced earning asset yields which reached 8.21% for the first six months of
1995 versus 7.42% in the same period of 1994. As a result, interest income
increased from $152,396,000 for the first six months of 1994 to $181,817,000 for
the same period in 1995. During the second quarter of 1995, approximately
$700,000 of loan fees were reversed that had been overaccrued in prior periods.
This reversal reduced the yield on earning assets from 8.25% to the reported
yield of 8.21%.
On the funding side, the overall cost of funds of 4.34% for the first six months
of 1995 reflected a substantial increase over the 3.36% for the same period of
1994. Higher interest rates on time deposits led to both an overall growth in
deposits and movement of funds from transaction accounts into the higher cost
time deposits. As a result, interest expense of $80,410,000 exceeded the
expense of $57,576,000 for the first six months of 1994.
As a consequence of interest rate trends and growth levels achieved during the
first six months of 1995, net interest income increased 7% from $94,820,000 in
1994 to $101,407,000 in 1995. Net interest spread, or the difference between
earning asset yields and the cost of funds, declined from 4.06% in 1994 to 3.87%
in 1995. The increased contribution from noninterest funds in 1995 mitigated
the impact of a compressed spread and resulted in a net interest margin of
4.57%, compared to the 4.61% recorded in 1994.
9
<PAGE>
NONINTEREST INCOME
Noninterest income for the first six months of 1995 was $23,851,000 compared to
$23,431,000 in 1994. Income in 1994 had included $1,200,000 related to the sale
of Keystone's corporate trust operations. Excluding both the gain on the sale
of corporate trust operations and securities gains, core noninterest income grew
9% for the first six months of 1995 compared to the same period in 1994. The
growth occurred primarily from increases in mortgage banking volume and from
fees associated with credit card activities . The increased income from
mortgage banking was attributed to increased demand and more effective delivery
of services through Keystone's specialized mortgage banking subsidiary.
NONINTEREST EXPENSES
Noninterest expenses grew from $71,682,000 for the first half of 1994 to
$75,490,000 in 1995, an increase of $3,808,000, or 5%.
Salary expenses rose from $28,479,000 in the first half of 1994 to $29,991,000
for the same period of 1995. The increase of $1,512,000 or 5% was primarily due
to normal merit increases. Average full-time equivalents have remained
consistent with the comparable period of 1994, despite the impact of employees
added in the American Savings acquisition. Keystone is continuing its
restructuring activities which commenced in late 1994 and expects to more fully
realize the savings associated with those efforts during the second half of
1995.
Employee benefit expenses decreased from $6,553,000 for the first six months in
1994 to $5,760,000 for the same period in 1995. The decrease of $793,000 or 12%
is due in part to improved claims experience and the favorable impact of the
final settlement during the quarter of claims estimates for 1994. Additionally,
savings were achieved by eliminating pre-existing medical insurance plans of
acquired banks and fully integrating the affected employees into Keystone's
benefit plan.
Furniture and equipment expense grew 12% from $5,350,000 in 1994 to $6,005,000
in 1995 due to increased depreciation associated with the fixed assets purchased
in the American Savings Bank acquisition and due to continued technological
investment associated with back-office consolidation initiatives.
Other expenses increased from $21,072,000 for the first half of 1994 to
$23,071,000 during the same period in 1995, an increase of $1,999,000 or 9%.
Increases occurred in bank card expense corresponding with the aforementioned
increase in bank card revenues. Growth also related to increased media
promotions; core deposit intangible amortization associated with the American
Savings Bank acquisition; and problem loan expenses from the sale of other real
estate properties. Increases also occurred in directors expense due to a new
fee plan adopted for 1995.
ASSET QUALITY
Keystone's allowance for credit losses at June 30, 1995 reached $43,589,000
compared to $42,440,000 at the end of 1994, as the allowance to loan ratio
remained constant at 1.33%. The management of asset quality continues to be a
priority within Keystone and is reflected in the reduced levels of total risk
elements at June 30, 1995, which were $36,005,000 or 1.09% of total loans versus
1.19% at the end of 1994. Similarly, the annualized ratio of net loans charged-
off to average loans of .20% for the first six months of 1995 was an improvement
from .34% for the comparable period in 1994.
10
<PAGE>
The following table has been provided to compare nonperforming assets and
total risk elements at June 30, 1995 to the balances at the end of 1994, in
both absolute dollars and as a percentage of loans. This presentation is
supplemented by a comparison of various coverage ratios.
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994
(dollars in thousands)
<S> <C> <C>
Nonaccrual loans $15,651 $24,403
Troubled debt restructurings 108 144
------------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans 15,759 24,547
Other real estate 7,281 5,870
------------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets 23,040 30,417
Loans past due 90 days or more 12,965 7,744
------------------------------------------------------------------------------------------------------------------------------------
Total risk elements $36,005 $38,161
====================================================================================================================================
Ratio to period-end loans:*
Nonperforming assets .70% .95%
90-days past due .39 .24
------------------------------------------------------------------------------------------------------------------------------------
Total risk elements 1.09% 1.19%
====================================================================================================================================
Coverage Ratios:
Ending allowance to nonperforming loans 277% 173%
Ending allowance to risk elements** 152% 131%
Ending allowance to net charge-offs (annualized) 6.1X 4.6X
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The denominator consists of period-end loans and ORE.
** Excludes ORE.
Effective January 1, 1995, Keystone adopted Financial Accounting Standards Board
(FASB) Statement No. 114, "Accounting by Creditors for Impairment of a Loan", as
amended by Statement No. 118, "Accounting by Creditors for Impairment of a Loan
-Income Recognition and Disclosures." Under this new standard, the credit loss
for loans to which it applies is based on discounted cash flows using the loans
interest rate or the fair value of the collateral for collateral dependent
loans. Prior to the adoption of the new standard, cash flows were not
discounted in estimating credit loss. Adoption of the new standard did not have
a material impact on Keystone's financial condition or results of operation.
Based upon the evaluation of loan quality, management believes that the
allowance for credit losses is adequate to absorb credit risk in the portfolio.
SHAREHOLDERS' EQUITY
Shareholders' equity at June 30, 1995 was $436,448,000 and reflected an increase
of $28,674,000 from the capital base of $407,774,000 recorded at the end of
1994. This increase is attributable to the impact of retained earnings as well
as the increase in the market value of securities "available for sale" from the
end of 1994. The net unrealized losses on "available for sale" securities was
reduced to $2,691,000 at June 30, 1995 versus $16,262,000 at the end of 1994 as
declines in interest rates resulted in improved market values.
11
<PAGE>
Keystone's regulatory capital measures, which include the leverage ratio, "Tier
1" capital, and "Total" capital ratios, continued to be well in excess of both
regulatory minimums and the thresholds established for "well capitalized"
institutions. The following comparative presentation of these ratios and
associated regulatory standards is provided:
<TABLE>
<CAPTION>
Regulatory Standards
June 30, December 31, "Well- Minimum
1995 1994 Capitalized" Requirements
<S> <C> <C> <C> <C>
Leverage ratio 9.17% 8.84% 5.00% 4.00%
"Tier 1" ratio 13.41% 12.96% 6.00% 4.00%
"Total" capital 14.65% 14.21% 10.00% 8.00%
ratio
</TABLE>
Asset/Liability Management
The process by which financial institutions manage their assets and liabilities
under different interest rate environments is called asset/liability management.
The two principal goals of asset/liability management are optimizing net
interest margin and maintaining adequate liquidity.
The management of net interest margin entails appropriate monitoring and
measurement of interest rate risk. Interest rate risk is evidenced by the
change in net interest margin relative to changes in market interest rates.
Keystone and its subsidiary banks utilize a variety of techniques to measure and
manage interest rate risk, including periodic rate "shock" simulations, which
measure the impact of dynamic changes in interest rates on net interest income.
In addition to simulation techniques, Keystone also monitors its GAP position.
GAP is defined as the volume difference between interest rate sensitive assets
and liabilities, as expressed as a percentage of total assets. At June 30, the
one-year GAP was 7.55% and reflected earning assets eligible for interest rate
adjustment in excess of adjustable rate liabilities. Based on tests conducted
in connection with the simulation techniques and the measurement of GAP,
management has determined that all Keystone banks have acceptable levels of
interest rate risk at June 30, 1995.
Liquidity management, which is the second principal goal of asset/liability
management, is defined as Keystone's ability to meet maturing obligations and
customer demands for funds. Liquidity is created by stable core deposits, a
diversified mix of liabilities, strong credit perception, and the maintenance of
significant assets convertible to cash without undue disruption to normal
operations. Keystone actively manages liquidity and has developed reasonable
contingency plans to ensure that liquidity remains adequate under a variety of
business conditions.
12
<PAGE>
PART II - ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on May 11, 1995. Proxies were
solicited by management pursuant to Regulation 14A under the Securities and
Exchange Act of 1934. Nominees for the five director positions were elected.
All other matters submitted to a vote of shareholders were also approved, and
the shareholder vote thereon was as follows:
<TABLE>
<CAPTION>
Election of Directors: For Withheld
--------------------- --- --------
<S> <C> <C>
Carl L. Campbell 18,258,182 140,744
Paul I. Detwiler, Jr. 18,240,644 158,262
Walter W. Grant 18,259,386 139,540
Ronald C. Unterberger 18,251,820 147,160
G. William Ward 18,259,432 139,494
</TABLE>
<TABLE>
<CAPTION>
Broker
For Against Abstaining Non-Votes
--- ------- ---------- ---------
<S> <C> <C> <C> <C>
The ratification of the
appointment of Ernst & Young LLP 18,260,349 41,860 96,717
as independent auditors of the
Corporation for 1995.
Adoption of the 1995 Employee 16,053,611 711,401 242,731 1,391,183
Stock Purchase Plan
Adoption of the 1995 Nonemployee 15,305,678 1,506,935 334,564 1,251,749
Directors' Stock Option Plan
Adoption of the 1995 Management 15,663,127 1,174,993 308,920 1,251,886
Stock Purchase Plan.
</TABLE>
For further information concerning these matters, refer to the definitive joint
proxy statement/prospectus dated April 7, 1995 in the registrant's file, which
is incorporated herein by reference.
13
<PAGE>
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit # Description Page #
--------- ----------- ------
<S> <C> <C>
27 Financial Data Schedule 16
</TABLE>
14
<PAGE>
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.
Date: August 11, 1995 Carl L. Campbell
--------------- -----------------------------------------
Carl L. Campbell, President and Chief
Executive Officer
Date: August 11, 1995 Mark L. Pulaski
--------------- -----------------------------------------
Mark L. Pulaski, Senior Executive Vice
President, Chief Administrative Officer,
and Chief Financial Officer
Date: August 11, 1995 Donald F. Holt
--------------- -----------------------------------------
Donald F. Holt, Senior Vice President,
Controller and Principal Accounting Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SECOND
QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 172,038
<INT-BEARING-DEPOSITS> 10,917
<FED-FUNDS-SOLD> 176,819
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 585,716
<INVESTMENTS-CARRYING> 379,344
<INVESTMENTS-MARKET> 382,051
<LOANS> 3,283,331
<ALLOWANCE> 43,589
<TOTAL-ASSETS> 4,733,638
<DEPOSITS> 3,855,377
<SHORT-TERM> 170,775
<LIABILITIES-OTHER> 71,190
<LONG-TERM> 199,848
<COMMON> 48,516
0
0
<OTHER-SE> 387,932
<TOTAL-LIABILITIES-AND-EQUITY> 4,733,638
<INTEREST-LOAN> 142,172
<INTEREST-INVEST> 33,209
<INTEREST-OTHER> 3,478
<INTEREST-TOTAL> 178,859
<INTEREST-DEPOSIT> 70,172
<INTEREST-EXPENSE> 80,410
<INTEREST-INCOME-NET> 98,449
<LOAN-LOSSES> 4,342
<SECURITIES-GAINS> 386
<EXPENSE-OTHER> 75,490
<INCOME-PRETAX> 42,468
<INCOME-PRE-EXTRAORDINARY> 42,468
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,677
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.27
<YIELD-ACTUAL> 3.87
<LOANS-NON> 15,651
<LOANS-PAST> 12,965
<LOANS-TROUBLED> 108
<LOANS-PROBLEM> 120
<ALLOWANCE-OPEN> 42,440
<CHARGE-OFFS> 4,208
<RECOVERIES> 1,015
<ALLOWANCE-CLOSE> 43,589
<ALLOWANCE-DOMESTIC> 43,589
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
