<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 September 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) 231-1555
(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): 24,098,725 as of October 31, 1995.
1
<PAGE>
KEYSTONE FINANCIAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Condition - September 30, 1995 and December 31, 1994 3
Consolidated Statements of Income - Three months ended September 30, 1995 and 4
1994, and nine months ended September 30, 1995 and 1994.
Consolidated Statements of Cash Flows - Nine months ended September 30, 1995 and 5
1994.
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 1,2,3,4 and 5 have been omitted since they are not applicable to the
registrant.
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 N/A
September 30, 1995.
Signatures 15
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
- -----------------------------------------------------------------------------
(in thousands) (UNAUDITED) (NOTE)
ASSETS
<S> <C> <C>
- -----------------------------------------------------------------------------
Cash and due from banks $ 159,870 $ 181,953
Federal funds sold and other 210,087 49,622
Investment securities available for sale 687,542 755,795
Investment securities held to maturity
(market values 1995-$368,574; 1994-$402,963) 365,444 418,402
Assets held for resale 19,126 9,189
Loans and leases 3,243,618 3,193,405
Allowance for credit losses (43,303) (42,440)
- -----------------------------------------------------------------------------
Net Loans 3,200,315 3,150,965
Premises and equipment 63,462 61,759
Other assets 102,008 78,315
- -----------------------------------------------------------------------------
TOTAL ASSETS $4,807,854 $4,706,000
=============================================================================
LIABILITIES
- -----------------------------------------------------------------------------
Noninterest-bearing deposits $ 469,313 $ 513,641
Interest-bearing deposits 3,378,977 3,314,342
- -----------------------------------------------------------------------------
Total Deposits 3,848,290 3,827,983
Fed Funds purchased and security
repurchase agreements 221,935 239,652
Other short-term borrowings 19,797 14,376
- -----------------------------------------------------------------------------
Total Short-Term Borrowings 241,732 254,028
FHLB borrowings 175,070 148,887
Long-term debt 4,491 6,054
Other liabilities 91,057 61,274
- -----------------------------------------------------------------------------
TOTAL LIABILITIES 4,360,640 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
24,385,637 - 1995 and 24,051,077 - 1994 48,772 48,102
Surplus 113,364 106,812
Retained earnings 313,110 291,948
Deferred KSOP benefit expense (1,875) (2,250)
Treasury stock; shares 801,000 - 1995
and 690,000 - 1994, at cost (23,805) (20,576)
Net unrealized securities losses, net of tax (2,352) (16,262)
- -----------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 447,214 407,774
- -----------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,807,854 $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>
CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Three Months Ended Nine months Ended
September 30, September 30,
1995 1994 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
- -------------------------------------------------------------------------------------------
Loans and fees on loans 72,153 $61,334 $214,325 $173,942
Investments - taxable 13,464 14,541 42,369 43,786
Investments - tax exempt 2,056 2,194 6,360 7,014
Federal funds sold & other 2,965 1,033 6,023 2,711
Assets held for resale 788 175 1,208 961
- -------------------------------------------------------------------------------------------
91,426 79,277 270,285 228,414
- -------------------------------------------------------------------------------------------
INTEREST EXPENSE
- -------------------------------------------------------------------------------------------
Deposits 37,178 28,221 107,350 79,767
Short-term borrowings 2,583 1,653 7,449 4,558
FHLB borrowings 3,003 1,568 8,157 4,481
Long-term debt 166 212 384 424
- -------------------------------------------------------------------------------------------
42,930 31,654 123,340 89,230
- -------------------------------------------------------------------------------------------
NET INTEREST INCOME 48,496 47,623 146,945 139,184
Provision for credit losses 2,160 2,070 6,502 6,046
- -------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 46,336 45,553 140,443 133,138
- -------------------------------------------------------------------------------------------
NONINTEREST INCOME
- -------------------------------------------------------------------------------------------
Trust income 2,831 2,799 9,186 9,415
Service charges on deposit accounts 3,269 3,116 9,719 9,432
Secondary market activity 2,937 1,255 6,131 2,846
Fee income 3,329 2,575 9,059 7,085
Reinsurance income 460 651 1,542 1,814
Other income 286 596 940 2,912
Net gains - equity securities 1 10 104 546
Net gains - debt securities 5 (95) 288 288
- -------------------------------------------------------------------------------------------
13,118 10,907 36,969 34,338
NONINTEREST EXPENSE
- -------------------------------------------------------------------------------------------
Salaries 15,260 18,705 45,251 47,184
Employee benefits 2,618 3,331 8,378 9,884
Occupancy expense (net) 3,209 3,022 9,577 9,195
Furniture and equipment expense 3,065 3,024 9,070 8,374
Deposit insurance 142 1,963 4,437 6,018
Other expense 12,512 13,974 35,583 35,046
- -------------------------------------------------------------------------------------------
36,806 44,019 112,296 115,701
- -------------------------------------------------------------------------------------------
Income before income taxes 22,648 12,441 65,116 51,775
Income tax expense 7,215 3,203 20,006 14,551
- -------------------------------------------------------------------------------------------
NET INCOME $15,433 $9,238 $45,110 $37,224
- -------------------------------------------------------------------------------------------
PER SHARE DATA
- -------------------------------------------------------------------------------------------
Net income $0.65 $0.40 $1.92 $1.60
Average number of shares
outstanding 23,568,450 23,287,086 23,488,757 23,395,005
Dividends $0.34 $0.32 $1.02 $0.96
- -------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
Consolidated Statements of Cash Flows(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
(in thousands)
- -------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $45,110 $37,224
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for credit losses 6,502 6,046
Provision for depreciation & amortization 8,972 7,042
Deferred income taxes 7,506 451
Sale of assets held for resale 116,682 97,380
Origination of assets held for resale (113,117) (90,939)
(Increase)/decrease in interest receivable 1,344 (1,112)
Increase in interest payable 11,455 14,310
Other (18,828) 9,077
- -------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 65,626 79,479
- -------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Net decrease in interest-earning deposits 5,761 10,792
Available for sale securities:
Sales 85,164 75,722
Maturities 430,275 424,948
Purchases (428,088) (427,669)
Held to maturity securities:
Maturities 82,077 59,085
Purchases (30,878) (71,341)
Net increase in loans (68,737) (249,663)
Sales of loans 19,272 33,807
Purchase of loans (19,756) (16,052)
Purchases of premises and equipment (9,680) (7,197)
Other 56 (275)
- -------------------------------------------------------------------------------------
NET CASH PROVIDED BY (Used by)
INVESTING ACTIVITIES 65,466 (167,843)
- -------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in deposits 20,307 109,180
Net decrease in short-term borrowings (12,296) (38,770)
Proceeds from FHLB Borrowings 133,352 29,443
Repayments of FHLB Borrowings (107,169) (14,000)
Net increase(decrease) in long-term debt (1,563) 638
Acquisition of treasury stock (3,229) (11,844)
Cash dividends (23,948) (22,915)
Other 7,597 5,708
- -------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,051 57,440
- -------------------------------------------------------------------------------------
INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS 144,143 (30,924)
Cash and cash equivalents at beginning of
period 204,942 241,618
- -------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $349,085 $210,694
- -------------------------------------------------------------------------------------
</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 nine-month period ended September 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
service rights acquired through loan origination activities. Under the
prior 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
---------------------
On October 10, 1995, Keystone completed its previously announced
acquisition of Shawnee Financial Services Corporation (Shawnee) for
approximately $15.9 million, in a stock for stock exchange. Under the
terms of the agreement, each of the approximately 80,200 outstanding
shares of Shawnee Common Stock was converted into 6.25 shares of Keystone
Common Stock. Shawnee, a bank holding company headquartered in Everett,
Pennsylvania, had assets approximating $70 million. This transaction was
accounted for under the pooling of interests method of accounting.
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 $250 million in managed assets. Martindale will be a separate
subsidiary of Keystone and operate as a registered investment advisor.
6
<PAGE>
In July of 1995, Keystone announced the signing of a definitive agreement
to acquire National American Bancorp, Inc., (National) a bank holding
company with assets of approximately $150 million. Under the terms of the
agreement, approximately two shares of Keystone Common Stock will be
exchanged for each of the approximately 579,000 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.
Both the Martindale and National acquisitions are subject to regulatory
approval and are expected to be consummated late in 1995 or early in
1996.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
SUMMARY
Keystone Financial, Inc. (Keystone) reported an increase in third quarter
performance as income for the period grew to $15,433,000 or $0.65 per
share compared to $9,238,000 or $0.40 per share in the comparable period
of 1994. Return on average assets and return on average equity for the
third quarter were 1.28% and 13.91%, respectively. In comparing these
results, it should be noted that earnings for the third quarter of 1994
included merger and restructuring charges that resulted in an after-tax
impact of $5 million or $0.21 per share. Absent these 1994 charges, third
quarter 1995 earnings per share would have increased by 6.5% compared to
adjusted third quarter 1994 results.
Performance for the first nine months of 1995 produced net income of
$45,110,000 or $1.92 per share compared to $37,224,000 or $1.60 per share
for the comparable period of 1994. Excluding the impact of the above
mentioned charges on 1994 results, performance during the first nine
months ended September 30, 1995 reflected a 6.1% increase over adjusted
1994 results.
Results in the third quarter of 1995 were affected by a declining net
interest margin, improved noninterest revenue, and the favorable effect
of the FDIC insurance premium refund. Net interest income grew only 1%
from 1994 despite loan growth. Margin was affected by competitive pricing
pressures on asset generation; increased funding costs attributable, in
part, to disintermediation within the funding base; and by the final
adjustment of previously accrued loan fees. The loan fee adjustment
reduced quarterly margin from 4.44% to 4.37%. Noninterest revenues grew
20% primarily due to secondary market activity, including the gain on the
sale of securitized indirect automobile loans. The FDIC premium refund
improved third quarter results by $0.06 per share.
Asset quality measures, including the allowance for credit losses to
loans and relative levels of risk elements, remained constant with
historical trends. The allowance-to-loan ratio was at 1.34% at the end of
September while the coverage of the allowance to nonperforming loans
improved from 227% at December 31, 1994, to 274% at September 30, 1995.
8
<PAGE>
AVERAGE STATEMENT OF CONDITION
The average balance sheets for the nine-months ended September 30, 1995
and 1994 were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Change
1995 1994 Volume %
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 151,107 $ 150,204 $ 903 1%
Federal funds sold and other 133,251 71,759 61,492 86%
Investments 1,068,899 1,197,193 (128,294) (11)%
Assets held for resale 21,350 15,872 5,478 35%
Loans 3,253,551 2,855,824 397,727 14%
Allowance for credit losses (44,039) (40,784) (3,255) 8%
- ---------------------------------------------------------------------------
Net loans 3,209,512 2,815,040 394,472 14%
Other assets 144,338 134,620 9,718 7%
- ---------------------------------------------------------------------------
TOTAL ASSETS $4,728,457 $4,384,688 $ 343,769 8%
- ---------------------------------------------------------------------------
Noninterest-bearing deposits $ 469,101 $ 457,111 $ 11,990 3%
Interest-bearing deposits 3,363,682 3,151,376 212,306 7%
Short-term borrowings 202,403 186,028 16,375 9%
FHLB borrowings 180,177 123,888 56,289 45%
Other liabilities 84,838 59,481 25,357 43%
- ---------------------------------------------------------------------------
TOTAL LIABILITIES 4,300,201 3,977,884 322,317 8%
- ---------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 428,256 406,804 21,452 5%
- ---------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,728,457 $4,384,688 $ 343,769 8%
- ---------------------------------------------------------------------------
</TABLE>
Investment balances declined 11% during the nine months ended September
30, 1995, and were affected by both scheduled maturities and the need for
liquidity associated with loan growth. Lower long-term reinvestment
rates, as reflected in a flatter yield curve, provided little incentive
to extend investment maturities and resulted in higher short-term
investment balances.
Growth in loans continued throughout the commercial and consumer
categories and was funded by the decline in investments, deposit growth,
and increased FHLB borrowings. The most notable growth occurred in
installment credits and consumer leases.
The increase in other liabilities can primarily be attributed to deferred
taxes and security deposits from leasing activities and higher levels of
accrued interest.
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 11%, 3%, and 3%,
respectively, from the comparable period in 1994.
9
<PAGE>
NET INTEREST INCOME
The following table summarizes, on a fully taxable equivalent basis, changes in
net interest income and net interest margin for the nine months ended September
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 $274,591 8.19% $233,240 7.49% $41,351 .70
INTEREST EXPENSE 123,340 4.40 89,230 3.44 34,110 .96
- ---------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $151,251 $144,010 $ 7,241*
INTEREST SPREAD 3.79% 4.05% (.26)
IMPACT OF NONINTEREST FUNDS .71 .57 .14
- ---------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 4.50% 4.62% (.12)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
*The change in net interest income consisted primarily of favorable volume
variances.
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 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 8.19% for the
first nine months of 1995 versus 7.49% in the same period of 1994. As a
result, interest income increased from $233,240,000 for the first three
quarters of 1994 to $274,591,000 for the same period in 1995. During the
second and third quarters of 1995, approximately $1,600,000 of loan fees
were reversed that had been overaccrued in prior periods. This reversal
reduced the yield on earning assets from 8.24% to the reported yield of
8.19%.
On the funding side, the overall cost of funds of 4.40% for the first
nine months of 1995 reflected a substantial increase over the 3.44% for
the same period of 1994. Higher interest rates on time deposits led to
some growth in deposits and disintermediation of funds, primarily from
transaction accounts into higher cost variable rate CDs. As a result,
interest expense of $123,340,000 exceeded the expense of $89,230,000 for
the first three quarters of 1994.
Despite the constriction of margin due to interest rate trends,
competitive pressures and the loan fee adjustment, balance sheet growth
led to an increase in net interest income of $7,241,000 or 5%. Net
interest spread, or the difference between earning asset yields and the
cost of funds, declined from 4.05% in 1994 to 3.79% in 1995. The
increased contribution from noninterest funds in 1995 resulted in a net
interest margin of 4.50%, compared to the 4.62% recorded in 1994.
NONINTEREST INCOME
Noninterest income for the first three quarters of 1995 was $36,969,000
compared to $34,338,000 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, noninterest income grew 13% for the first nine months of 1995
compared to the same period in 1994. The growth occurred primarily from
secondary market activity, including the gain on the sale of securitized
indirect automobile loans and mortgage banking activity. Notable
increases also occurred in fees associated with credit card activities.
10
<PAGE>
NONINTEREST EXPENSES
Noninterest expenses decreased from $115,701,000 for the first nine
months of 1994 to $112,296,000 in 1995. The decrease amounted to
$3,405,000 or 3%. 1995 year-to-date expenses were favorably impacted by
the FDIC premium refund while 1994 expenses were unfavorably impacted by
merger and restructuring charges. Restated to exclude these items, year-
to-date noninterest expense increased approximately $5,595,000 or 5% in
part due to the fouth quarter 1994 acquisition of American Savings Bank
which was accounted for under the purchase method of accounting.
A comparison of adjusted noninterest expense is as follows (in
thousands):
<TABLE>
<CAPTION>
Adjusted year-to-date
Noninterest Expenses Change
--------------------- --------------
1995 (1) 1994 (2) Amount %
----------- ---------- -------- ----
<S> <C> <C> <C> <C>
Salaries $ 45,251 $ 43,484 $ 1,767 4
Benefits 8,378 9,634 (1,256) (13)
Occupancy 9,577 9,195 382 4
Furniture & Equipment 9,070 8,374 696 8
Deposit Insurance 6,437 6,018 419 7
Other 35,583 31,996 3,587 11
-------- -------- ------- ---
$114,296 $108,701 $ 5,595 5
======== ======== ======= ===
</TABLE>
(1) Adjusted for $2 million FDIC premium refund
(2) Adjusted for $4.5 million merger expenses and $2.5 million
restructuring accruals.
The 4% increase in adjusted salary expenses was primarily due to normal
merit increases and the fourth quarter 1994 addition of American Savings
Bank (ASB).
The 13% decrease in employee benefits, as adjusted, is due in part to
improved claims experience and the favorable impact to 1995 expense of
the final settlement of claims estimates for 1994. Additionally, savings
were achieved by eliminating pre-existing medical insurance plans of
acquired banks and fully integrating employees into Keystone's benefit
plan.
The 8% increase in furniture and equipment expense is due to increased
depreciation associated with the fixed assets purchased in the ASB
acquisition and to continued technological investment associated with
back-office consolidation initiatives.
Excluding the FDIC premium refund received in the third quarter of 1995,
deposit insurance increased $419,000 or 7% due to deposits acquired in
the ASB transaction. During the third quarter, the FDIC determined that
the Bank Insurance Fund had reached its recapitalization target in May,
1995, resulting in a refund of excess premiums paid from June through
September of 1995. Prospectively, premiums have been reduced from $0.23
to $0.04 per $100 of deposits, based upon Keystone's well-capitalized
position. The impact of reduced FDIC insurance premiums is expected to
reduce annual premium expense by approximately 75%.
The 11% increase in other expenses as adjusted occurred in bank card
expense, corresponding with the aforementioned increase in bank card
revenues; marketing, due to increased media promotions; core deposit
intangible and goodwill amortization associated with the ASB acquisition;
and problem loan expenses from the sale of other real estate properties.
Increases also occurred in directors expense due to amendments to the fee
plan adopted for 1995.
11
<PAGE>
ASSET QUALITY
Keystone's allowance for credit losses at September 30, 1995 reached
$43,303,000 compared to $42,440,000 at the end of 1994, as the allowance
to loan ratio increased slightly from 1.33% to 1.34%. The annualized
ratio of net loans charged-off to average loans of .20% for the first
three quarters of 1995 was an improvement from 1994's comparable ratio of
.30%. While the ratio of total risk elements to loans at September 30,
1995 was consistent with year-end 1994, decreases in nonperforming loans
were offset by increases in loans 90 days past due. The reduction in
nonperforming loans was due to the payoff of several significant loans as
well as the movement of a limited number of loans to other real estate.
The increase in loans 90 days past due occurred primarily as a result of
an increase in the number of residential mortgages and commercial real
estate migrating to this category.
The following table has been provided to compare nonperforming assets and
total risk elements at September 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>
9/30/95 12/31/94
-------- ---------
<S> <C> <C>
(dollars in thousands)
Nonaccrual loans $ 15,695 $ 24,403
Troubled debt restructurings 102 144
-------------------------------------------------------------
Nonperforming loans 15,797 24,547
Other real estate 9,288 5,870
-------------------------------------------------------------
Nonperforming assets 25,085 30,417
Loans past due 90 days or more 13,579 7,744
-------------------------------------------------------------
Total risk elements $ 38,664 $ 38,161
=============================================================
Ratio to period-end loans:*
Nonperforming assets .77% .95%
90-days past due .42% .24
-------------------------------------------------------------
Total risk elements 1.19% 1.19%
=============================================================
Coverage Ratios:
Ending allowance to nonperforming
loans 274% 173%
Ending allowance to risk elements** 147% 131%
Ending allowance to net charge-offs
(annualized) 6.7X 4.6X
-------------------------------------------------------------
</TABLE>
* The denominator consists of period-end loans and ORE.
** Excludes ORE.
Based upon the evaluation of loan quality, management believes that the
allowance for credit losses is adequate to absorb credit risk in the
portfolio.
12
<PAGE>
Shareholders' Equity
--------------------
Shareholders' equity at September 30, 1995 was $447,214,000 and reflected
an increase of $39,440,000 from the capital base of $407,774,000 recorded
at the end of 1994. This increase is attributable to the impact of
retained earnings and improvement in the market values of securities
"available for sale", offset by the impact of treasury stock purchases.
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
--------------------
"Well- Minimum
9/30/95 12/31/94 Capitalized" Requirements
------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Leverage ratio 9.15% 8.84% 5.00% 4.00%
"Tier 1" ratio 13.45% 12.96% 6.00% 4.00%
"Total" capital 14.70% 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 income and maintaining adequate
liquidity.
The management of net interest income entails appropriate monitoring and
measurement of interest rate risk. Interest rate risk is evidenced by
the change in net interest income 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. At
September 30, the one-year GAP was 9.87% 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 September
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.
13
<PAGE>
Exhibit Index
-------------
Exhibit # Description Page #
--------- ----------- ------
27 Financial Data Schedule 16
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.
Carl L. Campbell
Date: November 10, 1995 -------------------------------------
----------------- Carl L. Campbell, President and Chief
Executive Officer
Mark L. Pulaski
Date: November 10, 1995 -------------------------------------
----------------- Mark L. Pulaski, Senior Executive Vice
President, Chief Administrative Officer,
and Chief Financial Officer
Donald F. Holt
Date: November 10, 1995 --------------------------------------
----------------- 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 159,870
<INT-BEARING-DEPOSITS> 20,872
<FED-FUNDS-SOLD> 189,215
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 687,542
<INVESTMENTS-CARRYING> 365,444
<INVESTMENTS-MARKET> 368,574
<LOANS> 3,243,618
<ALLOWANCE> 43,303
<TOTAL-ASSETS> 4,807,854
<DEPOSITS> 3,848,290
<SHORT-TERM> 241,732
<LIABILITIES-OTHER> 91,057
<LONG-TERM> 179,561
<COMMON> 48,772
0
0
<OTHER-SE> 398,442
<TOTAL-LIABILITIES-AND-EQUITY> 4,807,854
<INTEREST-LOAN> 214,325
<INTEREST-INVEST> 48,729
<INTEREST-OTHER> 7,231
<INTEREST-TOTAL> 270,285
<INTEREST-DEPOSIT> 107,350
<INTEREST-EXPENSE> 123,340
<INTEREST-INCOME-NET> 146,945
<LOAN-LOSSES> 6,502
<SECURITIES-GAINS> 392
<EXPENSE-OTHER> 112,296
<INCOME-PRETAX> 65,116
<INCOME-PRE-EXTRAORDINARY> 65,116
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,110
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 1.92
<YIELD-ACTUAL> 3.79
<LOANS-NON> 15,695
<LOANS-PAST> 13,579
<LOANS-TROUBLED> 102
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 42,440
<CHARGE-OFFS> 6,131
<RECOVERIES> 1,307
<ALLOWANCE-CLOSE> 43,303
<ALLOWANCE-DOMESTIC> 43,303
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
