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 March 31, 1998
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): 51,394,545 as of April 30, 1998.
1
<PAGE>
KEYSTONE FINANCIAL, INC.
INDEX PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Condition -
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Income - Three months
ended March 31, 1998 and 1997 4
Consolidated Statements of Comprehensive Income - Three months
ended March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows - Three months ended
March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk 14
PART II. OTHER INFORMATION
Items 1,2,3,4 and 5 have been omitted since they are not applicable.
ITEM 6. Exhibits and Reports on Form 8-K 15
(a) Exhibits
(b) Reports on Form 8-K
Signatures 16
2
<PAGE>
PART I. ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION
March 31, December 31,
1998 1997
- --------------------------------------------------------------------------------
(in thousands, except share data)
ASSETS
- --------------------------------------------------------------------------------
Cash and due from banks $190,818 $206,223
Federal funds sold 68,874 25,300
Interest bearing deposits with banks 2,635 1,928
Investment securities available
for sale 1,154,340 1,091,400
Investment securities held to
maturity(market values
1998-$553,219; 1997-$538,218) 544,856 528,388
Loans held for resale 54,367 43,055
Loans and leases 4,648,367 4,712,566
Allowance for credit losses (64,291) (65,091)
- --------------------------------------------------------------------------------
Net Loans 4,584,076 4,647,475
Premises and equipment 118,846 116,615
Other assets 177,416 180,953
- --------------------------------------------------------------------------------
TOTAL ASSETS $6,896,228 $6,841,337
================================================================================
LIABILITIES
- --------------------------------------------------------------------------------
Noninterest-bearing deposits $654,215 $637,164
Interest-bearing deposits 4,579,115 4,596,001
- --------------------------------------------------------------------------------
Total Deposits 5,233,330 5,233,165
Federal funds purchased and security
repurchase agreements 352,962 399,730
Other short-term borrowings 19,106 26,160
- --------------------------------------------------------------------------------
Total Short-Term Borrowings 372,068 425,890
FHLB borrowings 359,039 248,150
Long-term debt 101,623 101,793
Other liabilities 152,178 146,854
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 6,218,238 6,155,852
- --------------------------------------------------------------------------------
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
52,148,788 - 1998 and
52,029,017 - 1997 104,298 104,058
Surplus 157,843 155,430
Retained earnings 428,227 418,605
Deferred KSOP benefit expense (1,001) (1,150)
Treasury stock:
500,000 shares at cost - 1998 (20,291) ---
Accumulated other comprehensive income 8,914 8,542
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 677,990 685,485
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $6,896,228 $6,841,337
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
1998 1997
- --------------------------------------------------------------------------------
INTEREST INCOME
- --------------------------------------------------------------------------------
Loans and fees on loans $101,873 $94,894
Investments - taxable 21,776 19,976
Investments - tax exempt 2,929 3,126
Federal funds sold & other 1,439 834
Loans held for resale 1,042 1,616
- --------------------------------------------------------------------------------
129,059 120,446
- --------------------------------------------------------------------------------
INTEREST EXPENSE
- --------------------------------------------------------------------------------
Deposits 49,217 46,519
Short-term borrowings 4,555 4,092
FHLB borrowings 4,264 3,432
Long-term debt 1,869 14
- --------------------------------------------------------------------------------
59,905 54,057
- --------------------------------------------------------------------------------
NET INTEREST INCOME 69,154 66,389
Provision for credit losses 3,757 3,794
- --------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 65,397 62,595
- --------------------------------------------------------------------------------
NONINTEREST INCOME
- --------------------------------------------------------------------------------
Trust and investment advisory fees 6,681 4,844
Service charges on deposit accounts 4,205 4,147
Fee income 5,310 4,521
Mortgage banking income 2,745 1,518
Other secondary market income 677 523
Reinsurance income 631 1,020
Other income 2,427 4,353
Net gains - equity securities 1,520 120
Net gains - debt securities 11 29
- --------------------------------------------------------------------------------
24,207 21,075
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
Salaries 24,295 21,620
Employee benefits 5,345 4,491
Occupancy expense (net) 4,514 4,112
Furniture and equipment expense 5,072 4,581
Other expense 16,881 16,558
- --------------------------------------------------------------------------------
56,107 51,362
- --------------------------------------------------------------------------------
Income before income taxes 33,497 32,308
Income tax expense 9,361 9,537
- --------------------------------------------------------------------------------
NET INCOME $24,136 $22,771
- --------------------------------------------------------------------------------
PER SHARE DATA
- --------------------------------------------------------------------------------
Net income:
Basic $0.47 $0.44
Diluted $0.46 $0.43
Dividends $0.28 $0.26
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31,
(in thousands)
1998 1997
Before Net of Before Net of
Tax Tax Tax Tax
----------- ----------- ---------- -----------
Net Income $24,136 $22,771
Unrealized gains(losses) on
securities:
Unrealized holding gains(losses)
arising during the period 2,103 1,367 (8,137) (5,289)
Less: Reclassification
adjustment for gains included
in net income (1,531) (995) (149) (97)
- --------------------------------- ----------- ----------- ---------- -----------
372 (5,386)
- --------------------------------- ----------- ----------- ---------- -----------
Comprehensive Income $24,508 $17,385
================================= =========== =========== ========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1998 1997
(in thousands)
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income $24,136 $22,771
Adjustments to reconcile net income to
net cash used in operating activities:
Provision for credit losses 3,757 3,794
Provision for depreciation & amortization 5,008 4,251
Deferred income taxes 5,961 7,351
Sale of loans held for resale 58,067 16,463
Origination of loans held for resale (102,964) (82,293)
Decrease in interest receivable 2,036 4,076
Increase in interest payable 5,680 1,033
Other (6,568) 4,718
- --------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (4,887) (17,836)
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Net(increase)decrease in interest-bearing deposits
with banks (707) 15,477
Available for sale securities:
Sales 5,215 72,726
Maturities 332,336 250,810
Purchases (395,154) (113,236)
Held to maturity securities:
Maturities 42,942 6,845
Purchases (59,497) (1,606)
Net (increase) decrease in loans 92,761 (119,401)
Purchases of loans (3,998) ----
Proceeds from sales of loans 1,757 4,837
Purchases of premises and equipment (6,090) (5,141)
Other (1,569) (525)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 7,996 110,786
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 165 (16,942)
Net decrease in short-term borrowings (53,822) (53,870)
Proceeds from FHLB borrowings 131,000 142,952
Repayments of FHLB borrowings (20,111) (116,975)
Repayment of long term debt (170) (244)
Acquisition of treasury stock (20,291) (22,250)
Cash dividends (14,514) (11,824)
Other 2,803 2,176
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY(USED IN) FINANCING ACTIVITIES 25,060 (76,977)
- --------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 28,169 15,973
Cash and cash equivalents at beginning of
period 231,523 251,472
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $259,692 $267,445
- --------------------------------------------------------------------------------
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 have been prepared
in accordance with generally accepted accounting principles for interim
financial information and instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, these statements 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 three-month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998.
For further information, refer to the audited consolidated financial statements,
footnotes thereto, and the Financial Review for the year ended December 31,
1997, as contained in the Annual Report to Shareholders.
COMPREHENSIVE INCOME
- --------------------
During the quarter ended March 31, 1998, Keystone adopted Financial Accounting
Standards Board Statement 130, "Reporting Comprehensive Income". Sources of
comprehensive income not included in net income are limited to unrealized gains
and losses on certain investments in debt and equity securities.
7
<PAGE>
ITEM 2. 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 May 30, 1997
merger of Financial Trust Corp (Financial Trust), which was accounted for under
the pooling of interests method of accounting. The results of First Financial
Corporation of Western Maryland (First Financial), which was acquired through a
purchase acquisition, have been included herein from the consummation date of
May 29, 1997.
SUMMARY
- -------
Keystone reported net income of $24.1 million for the first three months of 1998
versus $22.8 million for the same period in 1997. Basic earnings per share rose
to $0.47 compared to $0.44 in 1997, an increase of 6.8%. These earnings resulted
in a return on average assets of 1.44% and return on average equity of 14.24%
compared with 1.45% and 14.15%, respectively for the same period in 1997.
Performance during the first quarter of 1998 featured steady core loan growth,
solid improvement in fee-based revenues, and stable asset quality.
While overall performance measures reflected steady improvement, competitive
pressures influenced net interest margin. Earning asset yields remained stable
due to improved pricing discipline, while funding costs rose as a result of
consumer preferences for more competitively-priced deposit products. As a result
of loan and other earning asset growth, net interest income increased 4% from
the same quarter last year.
Credit quality remained solid despite a rise in nonaccrual loans attributable to
a single commercial credit that has good prospects for recovery. The allowance
to loan ratio was constant at 1.38%.
Noninterest income, exclusive of investment securities gains, continued to be a
more significant portion of the revenue stream, accounting for over 24% of
aggregate revenues. Growth was especially strong in trust and asset management
fees and in mortgage banking revenues. The strong economy and relatively low
interest rates boosted refinancing activity in the first quarter, and influenced
mortgage banking volumes.
Growth in overhead expenses was 9% compared to the same quarter last year, which
included the impact of mid-year 1997 acquisitions. Increases in salaries and
benefits were directly associated with the rise in noninterest revenue
performance including, investment advisory and mortgage banking fees, as well as
increases associated with telephone call center staffing.
During the quarter, the Company repurchased 500,000 shares of its stock and
announced a new program to repurchase 500,000 additional shares.
8
<PAGE>
AVERAGE STATEMENT OF CONDITION
- -------------------------------
The average balance sheets for the three months ended March 31, 1998 and 1997
were as follows (in thousands):
Change
1998 1997 Volume %
- -------------------------------------------------------------------------------
Cash and due from banks $176,432 $179,244 $ (2,812) (2)%
Federal funds sold and other 105,790 60,157 45,633 76
Investments 1,572,899 1,501,677 71,222 5
Loans held for resale 52,536 73,186 (20,650) (28)
Loans 4,670,305 4,394,196 276,109 6
Allowance for credit losses (65,068) (56,687) (8,381) 15
- -------------------------------------------------------------------------------
Net loans 4,605,237 4,337,509 267,728 6
Intangible assets 61,884 21,099 40,785 100+
Other assets 223,928 208,625 15,303 7
- --------------------------------------------------------------------------------
TOTAL ASSETS $6,798,706 $6,381,497 $417,209 7 %
- --------------------------------------------------------------------------------
Noninterest-bearing deposits $615,563 $588,484 $ 27,079 5 %
Interest-bearing deposits 4,599,252 4,427,131 172,121 4
Short-term borrowings 375,513 373,856 1,657 --
FHLB borrowings 294,199 221,802 72,397 33
Other long-term debt 101,730 2,476 99,254 100+
Other liabilities 125,270 115,156 10,114 9
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 6,111,527 5,728,905 382,622 7
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 687,179 652,592 34,587 5
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $6,798,706 $6,381,497 $417,209 7 %
- --------------------------------------------------------------------------------
Loan growth of 6% was strongest in the categories of commercial real estate and
consumer installment loans. The impact of loans added through the second quarter
1997 acquisition of First Financial was substantially offset by sales of
consumer mortgages and the run-off of indirect loans and leases occurring in
conjunction with the curtailment of this line of business.
Intangible assets were impacted by the second quarter 1997 acquisition of First
Financial.
Funding for loan growth was obtained from deposit growth and increased FHLB
borrowings. Leveraged investment purchases also contributed to the increase in
FHLB borrowings.
Long-term debt increased due to the May 1997 issuance of $100 million in medium
term notes.
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 three months ended March 31,
1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Increase/
1998 1997 (Decrease)
YIELD/ YIELD/ YIELD/
AMOUNT RATE AMOUNT RATE AMOUNT RATE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $131,220 8.22% $122,599 8.20% $8,621 0.02
Interest expense 59,905 4.52 54,057 4.36 5,848 0.16
- -----------------------------------------------------------------------------------------
Net interest income $ 71,315 $ 68,542 $2,773
Interest spread 3.70% 3.84% (0.14)
Impact of noninterest funds 0.73 0.72 0.01
- -----------------------------------------------------------------------------------------
Net interest margin 4.43% 4.56% (0.13)
- -----------------------------------------------------------------------------------------
*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. Net interest income for the first quarter of
1998 increased 4% from the same period in 1997, despite the net interest margin
decreasing from 4.56% in 1997 to 4.43% in 1998.
Interest income grew 7% in the first quarter of 1998 compared to the same
quarter in 1997, primarily due to core loan growth as well as the 1997
acquisition of First Financial. As a result of various promotions, notable
growth occurred in consumer installment loans. Increased competition and a
declining interest rate environment led to a relatively stable total yield on
earning assets of 8.22% in 1998 compared with 8.20% in 1997.
Interest expense increased 11% in 1998, as the total cost of funds increased 16
basis points, from 4.36% in 1997 to 4.52% in 1998. Several factors contributed
to the increase in interest expense including the continued movement of deposits
into higher rate CD's, increased FHLB borrowings, as well as the second quarter
1997 acquisition of First Financial and issuance of $100 million in medium term
notes.
As a result of the yield on earning assets remaining stable and the cost of
funds increasing significantly, the interest spread dropped from 3.84% in 1997
to 3.70% in 1998. Similarly, the margin decreased from 4.56% to 4.43%, as the
impact of the reinvestment of noninterest funds was relatively unchanged.
PROVISION FOR CREDIT LOSSES
- ---------------------------
The provision for credit losses, at $3.8 million, was consistent with the level
of expense recognized in the first quarter of 1997. Similarly, the annualized
provision expressed as a percentage of average loans reached 0.33% for the first
quarter of 1998 versus 0.35% for the same period in 1997. Refer to the Asset
Quality section for additional information.
10
<PAGE>
NONINTEREST INCOME
- --------------------
Noninterest revenues continued to demonstrate significant growth as they
increased $3 million or 15% from the first quarter of 1997 to 1998. Excluding
net securities gains and gains on the sale of branches from both periods, total
noninterest revenue increased 21% in 1998.
Trust and investment management fees increased $2 million or 38% in 1998
compared to last year, as assets in the KeyPremier mutual funds reached the $1
billion mark. The third quarter 1997 acquisition of MMC&P, a retirement benefit
services firm, also contributed to the growth in revenue.
Fee income, which includes revenue from credit card activities and electronic
banking services, increased $800,000 or 17% compared to last year. Such fees
were benefitted by increased credit card activity, 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 $1.2 million or 81% compared
to the first quarter of 1997, as loans serviced for others increased 62%. As a
result of relatively low interest rates and a strong economy, mortgage
originations also reflected a 49% increase in the first quarter of 1998 compared
to 1997.
As part of Keystone's ongoing review of its delivery channels, community offices
were sold in both years, contributing nearly $1 million to other income in 1998
and $3 million in 1997. Excluding these gains from both years, other income
increased 13% primarily from increased sales of annuities.
First quarter 1998 results included net securities gains of $1.5 million,
resulting from a strategic decision to reduce our equity securities portfolio,
and at the same time, take advantage of favorable market conditions.
NONINTEREST EXPENSES
- --------------------
Growth in total noninterest expenses approximated $4.7 million or 9% during the
first quarter of 1998, as 1997 results did not include the impact of the second
and third quarter acquisitions of First Financial and MMC&P. These acquisitions
had the largest impact on salaries and benefits, which increased 12% and 19%,
respectively. Salary expense was also impacted by merit increases, increased
phone center staffing and the continued expansion of performance-based incentive
programs. Benefits expense in the first quarter of 1997 was unusually low due to
the termination of a benefit program of an acquired entity.
Occupancy costs, as well as furniture and equipment expense, increased
approximately 10%, and were impacted by the acquisition of First Financial, the
expanded ATM network, and the recently completed "state-of-the-art" phone
center, KeyCall.
INCOME TAXES
Income tax expense for the first quarter of 1998 reached $9.4 million, resulting
in an effective tax rate of 28% compared with 30% for the same period in 1997.
The slight decrease was attributable in part to a number of tax planning
strategies including expanded investments in low-income housing projects.
11
<PAGE>
ASSET QUALITY
- --------------
Keystone's allowance for credit losses reached $64 million or 1.38% of loans at
March 31, 1998, compared to 1.33% of loans at the end of the same quarter in
1997. Annualized net charge-offs expressed as a percentage of average loans
increased from 0.27% in 1997 to 0.40% in 1998, with consumer loans and leases
constituting 86% of the first quarter net charge-offs. This increase is in line
with similar trends experienced throughout the industry, and is being monitored
closely by Keystone.
The following table provides a comparative summary of the activity in the
allowance for credit losses for the three-month periods ended March 31, 1998 and
1997 (in thousands).
1998 1997
- --------------------------------------------------------------------------
Allowance for Credit Losses:
Balance at beginning of period $65,091 $56,256
Loans charged-off:
Commercial (564) (336)
Real estate secured (576) (583)
Consumer (3,375) (2,184)
Lease financing (959) (429)
- ------------------------------------------------------------------------
Total loans charged-off (5,474) (3,532)
- ------------------------------------------------------------------------
Recoveries:
Commercial 64 83
Real estate secured 425 236
Consumer 350 273
Lease financing 78 34
- -------------------------------------------------------------------------
Total recoveries 917 626
- -------------------------------------------------------------------------
Net loans charged-off (4,557) (2,906)
Provision for credit losses 3,757 3,794
- -------------------------------------------------------------------------
Balance at end of period $64,291 $57,144
- -------------------------------------------------------------------------
Net loans charged-off to average loans* 0.40% 0.27%
- -------------------------------------------------------------------------
Provision for credit losses to average loans* 0.33% 0.35%
- -------------------------------------------------------------------------
Allowance for credit losses to loans 1.38% 1.33%
- -------------------------------------------------------------------------
*Annualized
12
<PAGE>
The following table has been provided to compare nonperforming assets and total
risk elements at March 31, 1998 to the balances at the end of 1997, in both
absolute dollars and as a percentage of loans. This presentation is supplemented
by a comparison of various coverage ratios.
March 31, December 31,
(dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------
Nonaccrual loans $26,922 $20,520
Restructurings 250 489
- -------------------------------------------------------------------------------
Nonperforming loans 27,172 21,009
Other real estate 4,460 5,028
- -------------------------------------------------------------------------------
Nonperforming assets 31,632 26,037
Loans past due 90 days or more 23,479 33,062
- -------------------------------------------------------------------------------
Total risk elements $55,111 $59,099
- -------------------------------------------------------------------------------
Ratio to period-end loans:*
Nonperforming assets .68% .55%
90-days past due .50 .70
- -------------------------------------------------------------------------------
Total risk elements 1.18% 1.25%
- -------------------------------------------------------------------------------
Coverage Ratios:
Ending allowance to nonperforming loans 237% 310%
Ending allowance to risk elements** 127% 120%
Ending allowance to annualized
net charge-offs 3.5X 4.4X
- -------------------------------------------------------------------------------
* The denominator consists of period-end loans and ORE.
**Excludes ORE.
Nonaccrual loans increased $6.4 million, as a large commercial loan in the 90
days past due category at December 31, 1997 was placed on nonaccrual status
during the quarter. The prospects for recovery on this loan are good. While the
migration of this loan into nonaccrual status caused the ratio of the allowance
to nonperforming loans to decrease from 310% at the end of 1997 to 237% at March
31, 1998, the ratio of the allowance to total risk elements is slightly
improved.
Based upon the evaluation of loan quality and other relevant factors, management
believes that the allowance for credit losses is adequate to absorb credit
losses inherent in the portfolio.
13
<PAGE>
CAPITAL MANAGEMENT
- ------------------
During the first quarter of 1998, Keystone completed a 500,000 share repurchase
program announced in January 1998 at a cost of $20 million, and announced a new
program for 500,000 additional shares.
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
---------------------
March 31, December 31, Well Minimum
1998 1997 Capitalized Requirement
- -------------------------------------------------------------------------------
Leverage ratio 9.02% 9.15% 5.00% 4.00%
Tier 1 12.46% 12.50% 6.00% 4.00%
Total capital ratio 13.71% 13.75% 10.00% 8.00%
The slight decline in the above ratios can be attributed in part to the share
repurchases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
Through March 31, 1998 there have been no material changes to the information on
this topic presented in the December 31, 1997 Annual Report.
14
<PAGE>
PART II.
ITEM 6(a) Exhibits:
Exhibit # Description
---------- -------------
11 Statement Re Computation of Per Share Earnings
12 Statement Re Computation of Ratios
27 Financial Data Schedule
ITEM 6(b) Reports on Form 8-K:
During the quarter ended March 31, 1998, the registrant filed the following
reports on Form 8-K:
Date of Report Item Description
- --------------- ----- ---------------------------------------
January 16, 1998 5 Earnings release for the quarter ended
December 31, 1997.
January 26, 1998 5 Press release for share repurchase
program.
March 27, 1998 5 Press release for share buyback plan
and declaration of dividend.
15
<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: May 14, 1998
- -----------------------
/S/ Carl L. Campbell
- -----------------------
Carl L. Campbell,
President and Chief Executive Officer
DATE: May 14, 1998
- -----------------------
/s/ Mark L. Pulaski
- -----------------------
Mark L. Pulaski,
Vice Chairman,
Chief Operating Officer,
and Chief Financial Officer
DATE: May 14, 1998
- -----------------------
/s/ Donald F. Holt
- -----------------------
Donald F. Holt,
Senior Vice President,
Controller and Principal
Accounting Officer
16
<PAGE>
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations (in thousands, except per
share data):
Three Months Ended March 31,
1998 1997
- ------------------------------------ ----------------- ---------------
Numerator $24,136 $22,771
Denominators:
Basic shares outstanding 51,827 51,630
Dilutive option effect 730 626
- ------------------------------------ ----------------- ---------------
Dilutive shares outstanding 52,557 52,256
- ------------------------------------ ----------------- ---------------
EPS:
Basic $0.47 $0.44
Diluted $0.46 $0.43
- ------------------------------------ ----------------- ---------------
Ratio of Earnings to Fixed Charges:
(in thousands)
Three Months Ended
March 31,
1998 1997
- ---------------------------------------------------------------- -----------
1. Income before taxes $33,497 $32,308
2. Fixed charges:
a. Interest expense $59,905 $54,057
b. Interest component of rent expense 697 576
- ---------------------------------------------------------------- -----------
c. Total fixed charges (line 2a.+ line 2b.) 60,602 54,633
d. Interest on deposits 49,217 46,519
- ---------------------------------------------------------------- -----------
e. Fixed charges excluding interest on
deposits (line 2c.-line 2d.) $11,385 $8,114
- ---------------------------------------------------------------- -----------
3. Income before taxes plus fixed charges:
a. Including interest on deposits
(line 1.+ line 2c.) $94,099 $86,941
b. Excluding interest on deposits
(line 1.+ line 2e.) 44,882 40,422
- ---------------------------------------------------------------- -----------
4. Ratio of earnings to fixed charges:
a. Including interest on deposits
(line 3a. divided by line 2c.) 1.55x 1.59x
b. Excluding interest on deposits
(line 3b. divided by line 2e.) 3.94x 4.98x
- ---------------------------------------------------------------- -----------
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the first
quarter 10-Q and is qualified in its entirety by reference to such 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 190,818
<INT-BEARING-DEPOSITS> 2,635
<FED-FUNDS-SOLD> 68,874
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,154,340
<INVESTMENTS-CARRYING> 544,856
<INVESTMENTS-MARKET> 553,219
<LOANS> 4,648,367
<ALLOWANCE> 64,291
<TOTAL-ASSETS> 6,896,228
<DEPOSITS> 5,233,330
<SHORT-TERM> 372,068
<LIABILITIES-OTHER> 152,178
<LONG-TERM> 460,662
0
0
<COMMON> 104,298
<OTHER-SE> 573,692
<TOTAL-LIABILITIES-AND-EQUITY> 6,896,228
<INTEREST-LOAN> 101,873
<INTEREST-INVEST> 24,705
<INTEREST-OTHER> 2,481
<INTEREST-TOTAL> 129,059
<INTEREST-DEPOSIT> 49,217
<INTEREST-EXPENSE> 59,905
<INTEREST-INCOME-NET> 69,154
<LOAN-LOSSES> 3,757
<SECURITIES-GAINS> 1,531
<EXPENSE-OTHER> 56,107
<INCOME-PRETAX> 33,497
<INCOME-PRE-EXTRAORDINARY> 24,136
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,136
<EPS-PRIMARY> .47
<EPS-DILUTED> .46
<YIELD-ACTUAL> 3.70
<LOANS-NON> 26,922
<LOANS-PAST> 23,479
<LOANS-TROUBLED> 250
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 65,091
<CHARGE-OFFS> 5,474
<RECOVERIES> 917
<ALLOWANCE-CLOSE> 64,291
<ALLOWANCE-DOMESTIC> 64,291
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
