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, 1997
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): 51,768,000 as of July 31, 1997.
1
<PAGE>
KEYSTONE FINANCIAL, INC.
INDEX PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Condition -
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Income - Three months ended
June 30, 1997 and 1996, and six months ended June 30, 1997
and 1996 4
Consolidated Statements of Cash Flows - six months ended
June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
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 18
Security Holders
ITEM 6. Exhibits and Reports on Form 8-K 19
(a) Exhibits
(b) Reports on Form 8-K
Signatures 20
2
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
June 30, December 31,
1997 1996
- --------------------------------------------------------------------------------
(in thousands)
ASSETS
- --------------------------------------------------------------------------------
Cash and due from banks $225,829 $206,972
Federal funds sold and other 100,953 81,413
Investment securities available
for sale 1,073,211 1,210,094
Investment securities held to
maturity(market values
1997-$457,201; 1996-$383,526) 453,364 379,958
Loans held for resale 207,374 51,225
Loans and leases 4,592,755 4,336,470
Allowance for credit losses (64,900) (56,256)
- --------------------------------------------------------------------------------
Net Loans 4,527,855 4,280,214
Premises and equipment 110,029 97,932
Other assets 182,220 142,771
- --------------------------------------------------------------------------------
TOTAL ASSETS $6,880,835 $6,450,579
================================================================================
LIABILITIES
- --------------------------------------------------------------------------------
Noninterest-bearing deposits $648,231 $625,536
Interest-bearing deposits 4,663,256 4,434,185
- --------------------------------------------------------------------------------
Total Deposits 5,311,487 5,059,721
Fed Funds purchased and security
repurchase agreements 366,582 368,886
Other short-term borrowings 30,252 29,078
- --------------------------------------------------------------------------------
Total Short-Term Borrowings 396,834 397,964
FHLB borrowings 260,137 224,203
Long-term debt 102,029 2,573
Other liabilities 151,127 105,712
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 6,221,614 5,790,173
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Preferred stock; $1.00 par value,
authorized 8,000,000 shares;
none issued or outstanding --- ---
Common stock: $2.00 par value,
authorized 100,000,000; issued
52,725,705 - 1997 and
52,320,142 - 1996 105,451 104,640
Surplus 149,490 139,213
Retained earnings 431,855 422,018
Deferred KSOP benefit expense (1,423) (1,249)
Treasury stock:1,105,931 - 1997
and 333,966 - 1996 shares at cost (29,876) (8,412)
Net unrealized securities gains,
net of tax 3,724 4,196
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 659,221 660,406
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $6,880,835 $6,450,579
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
3
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CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
- --------------------------------------------------------------------------------
Three Months Ended
June 30,
1997 1996
- --------------------------------------------------------------------------------
INTEREST INCOME
- --------------------------------------------------------------------------------
Loans and fees on loans $100,063 $91,485
Investments - taxable 20,048 19,232
Investments - tax exempt 3,184 3,212
Federal funds sold & other 1,674 1,384
Loans held for resale 1,835 1,321
- --------------------------------------------------------------------------------
126,804 116,634
- --------------------------------------------------------------------------------
INTEREST EXPENSE
- --------------------------------------------------------------------------------
Deposits 47,988 45,646
Short-term borrowings 4,423 3,090
FHLB borrowings 3,949 2,310
Long-term debt 981 93
- --------------------------------------------------------------------------------
57,341 51,139
- --------------------------------------------------------------------------------
NET INTEREST INCOME 69,463 65,495
Provision for credit losses 3,659 2,307
- --------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 65,804 63,188
- --------------------------------------------------------------------------------
NONINTEREST INCOME
- --------------------------------------------------------------------------------
Trust and investment advisory fees 5,155 4,294
Service charges on deposit accounts 4,258 4,373
Fee income 4,908 3,969
Mortgage banking income 2,744 1,978
Other secondary market income 278 637
Reinsurance income 768 706
Other income 2,318 857
Net gains (losses) - equity securities (120) 360
Net losses - debt securities (324) (46)
- --------------------------------------------------------------------------------
19,985 17,128
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
Salaries 22,289 19,904
Employee benefits 4,189 4,065
Occupancy expense (net) 4,031 3,948
Furniture and equipment expense 4,408 3,923
Special charges 11,410 ---
Other expense 17,441 15,810
- --------------------------------------------------------------------------------
63,768 47,650
- --------------------------------------------------------------------------------
Income before income taxes 22,021 32,666
Income tax expense 7,039 9,897
- --------------------------------------------------------------------------------
NET INCOME $14,982 $22,769
- --------------------------------------------------------------------------------
PER SHARE DATA
- --------------------------------------------------------------------------------
Net income $0.29 $0.43
Dividends $0.26 $0.24
Average number of shares outstanding 51,320,373 52,116,068
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
1997 1996
- --------------------------------------------------------------------------------
INTEREST INCOME
- --------------------------------------------------------------------------------
Loans and fees on loans $194,957 $183,682
Investments - taxable 40,024 38,677
Investments - tax exempt 6,310 6,346
Federal funds sold & other 2,508 3,017
Loans held for resale 3,451 1,764
- --------------------------------------------------------------------------------
247,250 233,486
- --------------------------------------------------------------------------------
INTEREST EXPENSE
- --------------------------------------------------------------------------------
Deposits 94,507 91,095
Short-term borrowings 8,515 6,588
FHLB borrowings 7,381 4,996
Long-term debt 995 197
- --------------------------------------------------------------------------------
111,398 102,876
- --------------------------------------------------------------------------------
NET INTEREST INCOME 135,852 130,610
Provision for credit losses 7,453 4,441
- --------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 128,399 126,169
- --------------------------------------------------------------------------------
NONINTEREST INCOME
- --------------------------------------------------------------------------------
Trust and investment advisory fees 9,999 8,605
Service charges on deposit accounts 8,405 8,428
Fee income 9,429 7,654
Mortgage banking income 4,262 3,659
Other secondary market income 801 1,105
Reinsurance income 1,788 1,386
Other income 6,671 3,229
Net gains-equity securities --- 516
Net gains(losses)-debt securities (295) 328
- --------------------------------------------------------------------------------
41,060 34,910
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
Salaries 43,909 39,881
Employee benefits 8,680 9,035
Occupancy expense (net) 8,143 8,115
Furniture and equipment expense 8,989 7,779
Special charges 11,410 ---
Other expense 33,999 32,244
- --------------------------------------------------------------------------------
115,130 97,054
- --------------------------------------------------------------------------------
Income before income taxes 54,329 64,025
Income tax expense 16,576 19,595
- --------------------------------------------------------------------------------
NET INCOME $37,753 $44,430
- --------------------------------------------------------------------------------
PER SHARE DATA
- --------------------------------------------------------------------------------
Net income $0.73 $0.85
Dividends $0.52 $0.48
Average number of shares outstanding 51,474,552 52,078,605
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1997 1996
(in thousands)
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income $37,753 $44,430
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for credit losses 7,453 4,441
Provision for depreciation & amortization 8,275 7,814
Deferred income taxes 9,626 7,157
Special charges accrual 7,751 ---
Sale of loans held for resale 213,825 274,551
Origination of loans held for resale (202,932) (271,786)
Increase in interest receivable (1,338) (1,468)
Increase in interest payable 6,516 3,199
Other (6,132) (3,846)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 80,797 64,492
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Net decrease in interest-earning deposits 28,406 5,266
Available for sale securities:
Sales 129,237 75,594
Maturities 409,746 646,616
Purchases (406,000) (731,149)
Held to maturity securities:
Maturities 27,316 83,473
Purchases (53,939) (73,545)
Net increase in loans (213,866) (79,539)
Proceeds from sales of loans 84,521 25,536
Purchases of premises and equipment (10,676) (7,467)
Other (3,753) (3,277)
- --------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (9,008) (58,492)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits (20,920) 29,848
Net decrease in short-term borrowings (1,130) (18,275)
Proceeds from FHLB borrowings 168,242 39,244
Repayments of FHLB borrowings (167,358) (69,354)
Issuance of long-term debt 100,000 ---
Repayments of long-term debt (544) (1,102)
Acquisition of treasury stock (61,349) ---
Cash dividends (27,915) (23,734)
Other 5,327 2,656
- --------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (5,647) (40,717)
- --------------------------------------------------------------------------------
INCREASE (DECREASE)IN CASH AND
CASH EQUIVALENTS 66,142 (34,717)
Cash and cash equivalents at beginning of
period 251,472 308,598
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $317,614 $273,881
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
6
<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, 1997 are not
necessarily indicative of the results that may be expected for 1997.
For further information, refer to the audited consolidated financial statements,
footnotes thereto, and the Financial Review for the year ended December 31,
1996, as contained in the Annual Report to Shareholders.
RECENTLY CONSUMMATED MERGERS
- ----------------------------
On May 30, Keystone completed the merger of Financial Trust Corp (Financial
Trust), a financial institution with $1.2 billion of assets headquartered in
Carlisle, Pennsylvania. Under the terms of the agreement, each Financial Trust
shareholder received Keystone common stock at a fixed exchange ratio of 1.65
shares for each Financial Trust share, resulting in the issuance of 14.2 million
shares of Keystone stock. The merger was accounted for under the pooling of
interests method of accounting, and, as such, all prior period information has
been restated.
The results of operations of Financial Trust were combined with Keystone for the
six months ended June 30, 1996, as follows (in thousands):
Financial Consolidated
Keystone Trust Keystone
- ------------------------------------------------------------------------------
Net interest income $105,026 $25,584 $130,610
Net income 34,590 9,840 44,430
- ------------------------------------------------------------------------------
Net interest income and net income for Keystone and Financial Trust from the
beginning of 1997 to the date of consummation, May 30, 1997, is presented below:
Financial Consolidated
Keystone Trust Keystone
- ------------------------------------------------------------------------------
Net interest income $89,411 $22,623 $112,034
Net income 28,773 9,225 37,998
- ------------------------------------------------------------------------------
On May 29, Keystone completed the merger of First Financial Corporation of
Western Maryland (First Financial), a thrift holding company with assets
approximating $355 million based in Cumberland, Maryland. Under the terms of the
agreement with First Financial, each of its shareholders received Keystone
common stock at a fixed exchange ratio of 1.29 shares of Keystone for each First
Financial share, or cash. The stock issuance of 1.6 million Keystone shares
amounted to 60% of the total consideration of $76 million, and as such, the
transaction was accounted for as a purchase. The results of First Financial have
been included herein from the consummation date of May 29, 1997.
7
<PAGE>
Pro forma results of operations as though First Financial had been combined with
Keystone at the beginning of the periods presented do not differ materially from
the consolidated results presented herein.
SPECIAL CHARGES EXPENSE
- -----------------------
During the second quarter, Keystone recorded previously announced special
charges associated with the merger of Financial Trust. These charges, which
totaled $11.4 million, included the estimated expenses for professional
services, employment matters, system conversions and occupancy and equipment.
The following summarizes the activity in the special charge accrual (in
thousands):
Paid
Initial During Balance at
Accrual 2nd Quarter June 30, 1997
- ------------------------------------------------------------------------------
Professional $2,400 $2,050 $350
Employment matters 1,700 11 1,689
Integration and conversion 2,785 1,598 1,187
Net occupancy and equipment 2,575 --- 2,575
Other 1,950 --- 1,950
- ------------------------------------------------------------------------------
$11,410 $3,659 $7,751
- ------------------------------------------------------------------------------
The majority of the remaining expenses is expected to be paid in the second
half of 1997.
LONG-TERM DEBT
- --------------
On May 15, 1997, a fully-owned subsidiary of Keystone, Keystone Financial Mid-
Atlantic Funding Corp., issued $100 million of senior medium term notes under a
$400 million shelf registration statement. The notes, which mature on May 15,
2004, provide for semi-annual interest payments at a fixed rate of 7.3%, and are
unconditionally guaranteed by Keystone. The proceeds from the issuance of the
notes were primarily used to finance the acquisition of First Financial and to
fund share repurchases.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In June of 1997, the Financial Accounting Standards Board (FASB) issued
Statement 130, "Reporting Comprehensive Income," which will be effective for
fiscal years beginning after December 15, 1997, and require reclassification of
financial statements for earlier periods. This Statement will require the
reporting and prominent display of comprehensive income and its components in
the financial statements. The impact to Keystone of adoption is not expected to
be significant based on conditions in existence at June 30, 1997.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
The purpose of this review is to provide additional information necessary to
fully understand the consolidated financial condition and results of operations
of Keystone Financial, Inc. (Keystone). Throughout this review, net interest
income and the yield on earning assets are stated on a fully taxable-equivalent
basis. Balances represent daily average balances, unless otherwise indicated.
Prior period information has been restated to give effect to the merger of
Financial Trust Corp (Financial Trust), which was accounted for under the
pooling of interests method of accounting.
SUMMARY
- -------
Net income for the first half of 1997 reached $37,753,000 or $0.52 per share,
resulting in a return on average assets (ROA) of 1.17% and return on average
equity (ROE) of 11.73%. Results for the second quarter and the six month period
ended June 30, 1997 included the negative impact of the previously announced
special charges of $11.4 million associated with the merger of Financial Trust.
Additionally, approximately $500,000 of investment losses were incurred as a
result of post-consummation portfolio restructuring. Together, these items
reduced net income by $8.6 million or 17 cents per share for both the second
quarter and first half of 1997.
Excluding the special charges and investment losses, earnings per share, ROA and
ROE reached $0.90, 1.44% and 14.35%, respectively, for the six months ended June
30, 1997 compared to $0.85, 1.45% and 14.23% for the same period in 1996, an
increase of 5.9% in earnings per share.
Core operating performance reflected improvement from 1996 year-to-date results
due to increased net interest income, sustained improvement in noninterest
revenue, effective credit risk management, and controlled expense growth.
Earning asset and loan growth, in part due to the purchase acquisition of First
Financial Corporation of Western Maryland (First Financial), drove an
improvement of 4% in net interest income for the first six months of 1997 versus
the same period in 1996.
Noninterest revenue, an area of particular focus for Keystone, reflected
increases in the majority of categories. The most notable growth occurred in
trust fees, due to increases in assets under management, and in fee income, due
to the continued expansion of the ATM network. Other income for the first six
months of 1997 included gains from the sale of bank branches approximating $3.8
million, while 1996 included a $2 million gain from the sale of the credit card
portfolio.
Excluding the special charges, growth in overhead expense for the first half of
the year was 7%, and reflected the impact of the acquisition of First Financial,
increased incentive-based compensation, the expanded ATM network, and increased
activity at the KeyCall phone center. Expressed as a percentage of total
revenue, overhead expense excluding special charges was 57.13% for the first
half of 1997, slightly improved from a ratio of 57.46% for the same period in
1996. On-going improvement should be achieved from operating efficiencies
attributable to the recent acquisitions.
9
<PAGE>
Asset quality performance ratios reflected modest improvement, as total
delinquent loans expressed as a percent of period end loans declined from 1.93%
at December 31, 1996 to 1.70% at June 30, 1997, while the ratio of the allowance
for credit losses to nonperforming loans increased from 285% at year-end 1996 to
301% at June 30, 1997.
Since December 31, 1996, Keystone repurchased approximately 2.3 million shares
in connection with previously announced programs.
10
<PAGE>
AVERAGE STATEMENT OF CONDITION
- -------------------------------
The average balance sheets for the six-months ended June 30, 1997 and 1996 were
as follows (in thousands):
Change
1997 1996 Volume %
- -------------------------------------------------------------------------------
Cash and due from banks $179,807 $182,201 $(2,394) (1)%
Federal funds sold and other 93,195 114,120 (20,925) (18)
Investments 1,488,280 1,506,932 (18,652) (1)
Loans held for resale 91,576 51,279 40,297 79
Loans 4,448,114 4,121,209 326,905 8
Allowance for credit losses (58,294) (56,213) (2,081) 4
- -------------------------------------------------------------------------------
Net loans 4,389,820 4,064,996 324,824 8
Other assets 247,722 217,502 30,220 14
- --------------------------------------------------------------------------------
TOTAL ASSETS $6,490,400 $6,137,030 $353,370 6 %
- --------------------------------------------------------------------------------
Noninterest-bearing deposits $598,636 $595,691 $2,945 --- %
Interest-bearing deposits 4,465,478 4,354,497 110,981 3
Short-term borrowings 367,220 301,399 65,821 22
FHLB borrowings 247,474 156,253 91,221 58
Other long-term debt 25,447 4,110 21,337 519
Other liabilities 137,067 98,947 38,120 39
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 5,841,322 5,510,897 330,425 6
- -------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 649,078 626,133 22,945 4
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $6,490,400 $6,137,030 $353,370 6 %
- -------------------------------------------------------------------------------
Loan growth was strong despite the sale of approximately $259 million of
consumer mortgages in the second quarter of 1997. Expansion occurred primarily
in commercial real estate and consumer installment loans and lease categories.
Funding for loan growth was obtained from deposit growth, maturities and sales
of investments, and increased borrowing activity, primarily FHLB advances.
Long-term debt increased due to the May issuance of $100 million in medium term
notes.
11
<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 six months ended June 30,
1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
Increase/
1997 1996 (Decrease)
YIELD/ YIELD/ YIELD/
AMOUNT RATE AMOUNT RATE AMOUNT RATE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $251,627 8.27% $237,728 8.22% $13,899 0.05
Interest expense 111,398 4.40 102,876 4.29 8,522 (0.11)
- -----------------------------------------------------------------------------------------
Net interest income $140,229 $134,852 $5,377
Interest spread 3.87% 3.93% (0.06)
Impact of noninterest funds 0.73 0.72 0.01
- -----------------------------------------------------------------------------------------
Net interest margin 4.60% 4.65% (0.05)
- ---------------------------------------------------------------------------------------
*The change in net interest income consisted primarily of favorable volume variances.
</TABLE>
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. The acquisition of First Financial in late
May contributed approximately 24% of the total increase in net interest income
of $5,377,000.
Interest income grew 6% during the first half of 1997 compared to the same
period in 1996, due primarily to core loan growth, the addition of First
Financial, and a five basis point increase in the total yield on earning assets.
Interest expense increased 8% during the first half of 1997 compared to the same
period in 1996, due primarily to an eleven basis point increase in the cost of
funds. The increase in the cost of funds was driven by the continued movement of
deposits from transaction and savings accounts into higher rate CD's and other
time deposits, as well as the impact of interest expense from the medium term
notes issued in the latter part of May.
In summary, funding costs have increased at a pace in excess of the improvement
in the yield on earning assets, which had the effect of narrowing the spread six
basis points from 3.93% for the first six months of 1996 to 3.87% for the same
period of 1997. The net interest margin declined similarly, from 4.65% to 4.60%,
as the impact of the reinvestment of noninterest funds remained stable.
PROVISION FOR CREDIT LOSSES
- ---------------------------
The provision for credit losses increased $3,012,000 or 68% in the first half of
1997 compared to 1996, and was influenced by increases in both loans and net
charge-offs. Consistent with national trends, Keystone is experiencing a higher
level of consumer loan charge-offs in 1997, though past due levels have improved
since the end of 1996. Expressed as a percentage of average loans, the provision
reached 0.34% for the first half of 1997 versus 0.22% for the same period in
1996.
12
<PAGE>
NONINTEREST INCOME
- --------------------
Keystone continued to demonstrate strong growth in noninterest income which in
total increased $6,150,000 or 18% from the first six months of 1996 to the same
period in 1997. The most notable growth occurred in trust and investment
advisory fees, ATM and other fee income, and mortgage banking, all areas on
which Keystone has been placing greater focus. Keystone also recorded gains from
the sale of several community offices as part of its strategic management of its
delivery system.
Trust and investment management fees increased $1,394,000 or 16% compared to
last year. During the first quarter, Keystone unveiled its Key Premier funds, a
family of seven mutual funds designed to meet a wide range of investment
opportunities. This continued focus on expanded product offerings and the
expertise provided through the Martindale Andres $ Co., Inc, subsidiary,
contributed to the growth in revenue from asset management activities.
Fee income, which includes revenue from credit card activities and electronic
banking services, increased $1,775,000 or 23% compared to last year. Such fees
were benefitted by the expansion of our ATM network into convenience stores, and
the increased popularity of the KeyCheck debit card.
Mortgage banking income demonstrated an increase of $603,000 or 16% compared to
the first six months of 1996. In connection with Keystone's asset and liability
management activities, and in light of the acquisition of First Financial,
Keystone conducted a thorough review of its mortgage portfolio. Mortgage loans
totaling approximately $259 million were sold, resulting in a gain of
approximately $300,000 included in second quarter results.
Pursuant to Keystone's strategy of office reconfiguration, community offices
were sold in the first half of 1997 which contributed approximately $3.8 million
to other income. First quarter 1996 results had benefitted from a $2,000,000
gain recognized on the sale of the credit card portfolio. Excluding these gains
in both 1997 and 1996, other income increased approximately $1,642,000 primarily
from increased sales of investment products.
NONINTEREST EXPENSES
- --------------------
Excluding special charges associated with the Financial Trust merger, growth in
noninterest expenses totaled $6,666,000 or 7% from the first half of 1996 to the
same period in 1997. Over half of the increase occurred in salary expense, which
increased 10% and was impacted by: merit increases; the implementation of an
integrated performance-based compensation program; and an increase in employees
due to the second quarter purchase acquisition, expanded services at the KeyCall
phone center, and full implementation of Key Investor Services.
Furniture and equipment expense, which increased 16% in the first half of 1997,
was impacted by higher equipment maintenance and rent on ATM machines due to the
expansion of Keystone's network into convenience stores. In addition, continued
technological investments in fixed assets resulted in higher levels of
depreciation expense in the first half of 1997 compared to 1996.
13
<PAGE>
Excluding various nonrecurring expense accruals made in the first quarter of
1996, other expenses increased nearly 10% for the first six months of 1997
compared to the same period in 1996. Increases were primarily related to revenue
expansion activities and occurred in the categories of reinsurance expense,
marketing, telephone, ATM processing and merchant card fees.
14
<PAGE>
ASSET QUALITY
- -------------
Keystone's allowance for credit losses reached $64,900,000 or 1.41% of loans at
June 30, 1997, compared to 1.30% of loans at the end of 1996. The increase in
the allowance expressed as a percentage of loans is responsive to an increase in
the level of net charge offs, which reached 0.32% of outstanding loans for the
first six months of 1997 compared to 0.22% for the same period in 1996.
The following table provides a comparative summary of the activity in the
allowance for credit losses for the six-month periods ended June 30, 1997 and
1996(in thousands).
1997 1996
- -------------------------------------------------------------------------
Allowance for Credit Losses:
Balance at beginning of period $56,256 $55,415
Allowance obtained through merger 8,311 ---
Loans charged-off:
Commercial (682) (984)
Real estate secured (1,305) (1,341)
Consumer (5,061) (2,889)
Lease financing (1,260) (412)
- -------------------------------------------------------------------------
Total loans charged-off (8,308) (5,626)
- -------------------------------------------------------------------------
Recoveries:
Commercial 154 347
Real estate secured 365 248
Consumer 563 509
Lease financing 106 79
- -------------------------------------------------------------------------
Total recoveries 1,188 1,183
- -------------------------------------------------------------------------
Net loans charged-off (7,120) (4,443)
Provision for credit losses 7,453 4,441
- -------------------------------------------------------------------------
Balance at end of period $64,900 $55,413
- -------------------------------------------------------------------------
Net loans charged-off to average loans* 0.32% 0.22%
- -------------------------------------------------------------------------
Provision for credit losses to average loans* 0.34% 0.22%
- -------------------------------------------------------------------------
Allowance for credit losses to loans 1.41% 1.33%
- -------------------------------------------------------------------------
*Annualized
Total risk elements expressed as a percentage of loans remained stable at 1.11%
at the end of June compared to December 31, 1996, while the coverage ratio of
the allowance for credit losses expressed as a percentage of total risk elements
improved from 141% to 152% during the same period. Delinquent loans, which
consist of loans more than 30 days past due and still accruing interest,
decreased as a percentage of total loans, from 1.93% at December 31, 1996 to
1.70% at June 30, 1997.
15
<PAGE>
The following table has been provided to compare nonperforming assets and total
risk elements at June 30, 1997 to the balances at the end of 1996, in both
absolute dollars and as a percentage of loans. This presentation is supplemented
by a comparison of various coverage ratios.
June 30, December 31,
(dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------
Nonaccrual loans $21,021 $19,350
Restructurings 561 393
- -------------------------------------------------------------------------------
Nonperforming loans 21,582 19,743
Other real estate 8,223 8,305
- -------------------------------------------------------------------------------
Nonperforming assets 29,805 28,048
Loans past due 90 days or more 21,064 20,141
- -------------------------------------------------------------------------------
Total risk elements $50,869 $48,189
- -------------------------------------------------------------------------------
Ratio to period-end loans:*
Nonperforming assets .65% .65%
90-days past due .46 .46
- -------------------------------------------------------------------------------
Total risk elements 1.11% 1.11%
- -------------------------------------------------------------------------------
Coverage Ratios:
Ending allowance to nonperforming loans 301% 285%
Ending allowance to risk elements** 152% 141%
Ending allowance to annualized
net charge-offs 4.5X 6.1X
- -------------------------------------------------------------------------------
* The denominator consists of period-end loans and ORE.
**Excludes ORE.
Based upon the evaluation of loan quality and other relevant factors, management
believes that the allowance for credit losses is adequate to absorb credit risk
in the portfolio.
16
<PAGE>
CAPITAL MANAGEMENT
- ------------------
In accordance with board authorized share repurchase programs, Keystone
purchased 2.6 million shares for treasury during 1996 and the first half of
1997, at a cost of nearly $70 million. Approximately 1.5 million of the
repurchased shares were reissued in connection with the purchase acquisition of
First Financial.
As previously announced, and in accordance with the board of directors'
authorization, Keystone's share repurchase programs terminated concurrent
with the consummation of the Financial Trust merger to satisfy pooling of
interests accounting requirements.
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:
Regulatory Standards
---------------------
June 30, December 31, Well Minimum
1997 1996 Capitalized Requirement
- ---------------------------------------------------------------------------
Leverage ratio 9.08% 10.03% 5.00% 4.00%
Tier 1 12.27% 14.43% 6.00% 4.00%
Total capital ratio 13.52% 15.66% 10.00% 8.00%
The decline in the above ratios can be attributed to the influence of the
planned share repurchases as well as the acquisition of First Financial.
Similarly, the ratio of equity to assets decreased from 10.24% at December 31,
1996 to 9.58% at June 30, 1997.
17
<PAGE>
PART II - ITEM 4:
Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Shareholders was held on May 8, 1997. Proxies were
solicited by management pursuant to Regulation 14A under the Securities and
Exchange Act of 1934. The proposal to approve the Agreement and Plan of
Reorganization and the Agreement and Plan of Merger between Keystone and
Financial Trust Corp, were submitted to a vote at the meeting and approved.
Nominees for the six director positions were elected. All other matters
submitted to a vote of shareholders were also approved, and the shareholder vote
thereon was as follows:
The approval of Agreement and Plan of Reorganization and Agreement and Plan of
Merger between the Corporation and Financial Trust Corp:
For Against Abstaining
- ---------------------------------------------------
25,049,471 159,865 326,495
Election of Directors:
For Withheld
- ---------------------------------------------------
June B. Barry 28,041,222 529,355
J.Glenn Beall, Jr. 28,309,610 260,967
Richard W. DeWald 28,333,976 236,601
Gerald E. Field 28,339,159 231,418
Philip C. Herr, II 28,332,923 237,654
William L. Miller 28,345,581 224,996
The ratification of the appointment of Ernst & young LLP as independent auditors
of the Corporation for 1997:
For Against Abstaining
- ---------------------------------------------------
28,358,486 54,525 447,471
Proposal to adopt the amendment to the Restated Articles to increase authorized
number of Common Stock to 100,000,000 shares:
For Against Abstaining
- ---------------------------------------------------
28,358,486 54,525 447,471
Proposal to adopt the 1996 Performance Unit Plan:
For Against Abstaining
- ---------------------------------------------------
24,267,141 944,223 466,345
Proposal to adopt the 1997 Stock Incentive Plan:
For Against Abstaining
- ---------------------------------------------------
21,174,573 4,001,359 501,359
For further information concerning these matters, refer to the definitive proxy
statement date April 4, 1997 in the registrant's file, which is incorporated
herein by reference.
18
<PAGE>
ITEM 6(a) Exhibits:
Exhibit # Description Page #
---------- ------------- --------
27 Financial Data Schedule 21
ITEM 6(b) Reports on Form 8-K:
During the quarter ended June 30, 1997, the registrant filed the following
reports on Form 8-K:
Date of Report Item Description
- --------------- ----- ---------------------------------------
May 30, 1997 2 Merger of Financial Trust
April 18, 1997 5 Earnings release for the quarter
ended March 31, 1997.
19
<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 14, 1997
- -----------------------
/S/ Carl L. Campbell
- -----------------------
Carl L. Campbell,
President and Chief Executive Officer
DATE: August 14, 1997
- -----------------------
/s/ Mark L. Pulaski
- -----------------------
Mark L. Pulaski,
Senior Executive Vice President,
Chief Administrative Officer,
and Chief Financial Officer
DATE: August 14, 1997
- -----------------------
/s/ Donald F. Holt
- -----------------------
Donald F. Holt,
Senior Vice President,
Controller and Principal
Accounting Officer
20
<PAGE>
<TABLE> <S> <C>
<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-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 225,829
<INT-BEARING-DEPOSITS> 9,168
<FED-FUNDS-SOLD> 91,785
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,073,211
<INVESTMENTS-CARRYING> 453,364
<INVESTMENTS-MARKET> 457,201
<LOANS> 4,592,755
<ALLOWANCE> 64,900
<TOTAL-ASSETS> 6,880,835
<DEPOSITS> 5,311,487
<SHORT-TERM> 396,834
<LIABILITIES-OTHER> 151,127
<LONG-TERM> 362,166
0
0
<COMMON> 105,451
<OTHER-SE> 553,770
<TOTAL-LIABILITIES-AND-EQUITY> 6,880,835
<INTEREST-LOAN> 194,957
<INTEREST-INVEST> 46,334
<INTEREST-OTHER> 5,959
<INTEREST-TOTAL> 247,250
<INTEREST-DEPOSIT> 94,507
<INTEREST-EXPENSE> 111,398
<INTEREST-INCOME-NET> 135,852
<LOAN-LOSSES> 7,453
<SECURITIES-GAINS> (295)
<EXPENSE-OTHER> 115,130
<INCOME-PRETAX> 54,329
<INCOME-PRE-EXTRAORDINARY> 54,329
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,753
<EPS-PRIMARY> .73
<EPS-DILUTED> .73
<YIELD-ACTUAL> 3.87
<LOANS-NON> 21,021
<LOANS-PAST> 21,064
<LOANS-TROUBLED> 561
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 56,256
<CHARGE-OFFS> 8,308
<RECOVERIES> 1,188
<ALLOWANCE-CLOSE> 64,900
<ALLOWANCE-DOMESTIC> 64,900
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
