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, 2000
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): 49,132,000 as of July 31, 2000.
<PAGE>
KEYSTONE FINANCIAL, INC.
INDEX PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Condition - June 30, 2000
and December 31, 1999 3
Consolidated Statements of Income - Three months ended
June 30, 2000 and 1999,and six months ended June 30,
2000 and 1999 4
Consolidated Statements of Cash Flows - Six months ended
June 30, 2000 and 1999 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 14
(a) Exhibits
(b) Reports on Form 8-K
Signatures 15
<PAGE>
PART I. ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION (in thousands, except share data)
--------------------------------------------------------------------------------
June 30, December 31,
2000 1999
ASSETS
--------------------------------------------------------------------------------
Cash and due from banks $199,906 $334,273
Federal funds sold 88,000 -
Interest bearing deposits with banks 1,539 877
Investment securities available
for sale 1,101,654 1,073,338
Investment securities held to
maturity (fair values:
2000-$552,093; 1999-$575,368) 564,482 588,201
Loans held for resale 164,575 110,203
Loans and leases 4,609,584 4,459,546
Allowance for credit losses (61,604) (59,975)
--------------------------------------------------------------------------------
Net Loans 4,547,980 4,399,571
Premises and equipment 116,924 118,762
Other assets 253,873 262,283
--------------------------------------------------------------------------------
TOTAL ASSETS $7,038,933 $6,887,508
--------------------------------------------------------------------------------
LIABILITIES
--------------------------------------------------------------------------------
Noninterest-bearing deposits $708,849 $652,613
Interest-bearing deposits 4,330,294 4,307,721
--------------------------------------------------------------------------------
Total Deposits 5,039,143 4,960,334
Federal funds purchased and security
repurchase agreements 331,199 316,130
Other short-term borrowings 100,000 50,000
--------------------------------------------------------------------------------
Total Short-Term Borrowings 431,199 366,130
FHLB borrowings 727,363 728,776
Long-term debt 131,784 129,920
Other liabilities 143,132 152,323
--------------------------------------------------------------------------------
TOTAL LIABILITIES 6,472,621 6,337,483
--------------------------------------------------------------------------------
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
49,082,788-2000 and 48,731,057-1999 98,166 97,462
Surplus 173,523 167,939
Retained earnings 312,803 301,118
Deferred KSOP benefit expense (158) (207)
Net unrealized securities losses,
net of tax (18,022) (16,287)
--------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 566,312 550,025
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,038,933 $6,887,508
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
--------------------------------------------------------------------------------
Three Months Ended
June 30,
2000 1999
INTEREST INCOME
--------------------------------------------------------------------------------
Loans and fees on loans $100,163 $ 92,378
Investments - taxable 22,945 21,621
Investments - tax exempt 3,333 2,937
Federal funds sold & other 1,876 596
Loans held for resale 2,916 1,878
--------------------------------------------------------------------------------
131,233 119,410
--------------------------------------------------------------------------------
INTEREST EXPENSE
--------------------------------------------------------------------------------
Deposits 48,653 42,892
Short-term borrowings 5,535 3,792
FHLB borrowings 11,045 5,651
Long-term debt 2,166 2,331
--------------------------------------------------------------------------------
67,399 54,666
--------------------------------------------------------------------------------
NET INTEREST INCOME 63,834 64,744
Provision for credit losses 4,637 3,950
--------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 59,197 60,794
--------------------------------------------------------------------------------
NONINTEREST INCOME
--------------------------------------------------------------------------------
Trust and investment advisory fees 7,490 7,326
Service charges on deposit accounts 4,965 4,458
Fee income 5,997 6,860
Mortgage banking income 1,937 3,479
Reinsurance income 871 1,045
Other income 3,915 5,487
Net gains - equity securities 177 11
Net gains (losses) - debt securities (58) 9
--------------------------------------------------------------------------------
25,294 28,675
--------------------------------------------------------------------------------
NONINTEREST EXPENSE
--------------------------------------------------------------------------------
Salaries 22,121 21,952
Employee benefits 4,593 3,979
Occupancy expense (net) 4,757 4,494
Furniture and equipment expense 5,406 5,158
Restructuring-related special charges --- 650
Other expense 19,054 17,813
--------------------------------------------------------------------------------
55,931 54,046
--------------------------------------------------------------------------------
Income before income taxes 28,560 35,423
Income tax expense 8,366 11,219
--------------------------------------------------------------------------------
NET INCOME $20,194 $24,204
--------------------------------------------------------------------------------
PER SHARE DATA
--------------------------------------------------------------------------------
Net income:
Basic $0.41 $0.49
Diluted $0.41 $0.49
Dividends $0.29 $0.29
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
--------------------------------------------------------------------------------
Six Months Ended
June 30,
2000 1999
INTEREST INCOME
--------------------------------------------------------------------------------
Loans and fees on loans $194,631 $ 184,720
Investments - taxable 46,130 44,256
Investments - tax exempt 6,762 5,652
Federal funds sold & other 3,296 1,867
Loans held for resale 5,550 3,492
--------------------------------------------------------------------------------
256,369 239,987
--------------------------------------------------------------------------------
INTEREST EXPENSE
--------------------------------------------------------------------------------
Deposits 94,918 86,881
Short-term borrowings 10,108 7,505
FHLB borrowings 21,620 11,558
Long-term debt 4,503 4,669
--------------------------------------------------------------------------------
131,149 110,613
--------------------------------------------------------------------------------
NET INTEREST INCOME 125,220 129,374
Provision for credit losses 8,425 6,613
--------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 116,795 122,761
--------------------------------------------------------------------------------
NONINTEREST INCOME
--------------------------------------------------------------------------------
Trust and investment advisory fees 14,598 14,000
Service charges on deposit accounts 9,798 8,795
Fee income 12,158 13,119
Mortgage banking income 3,417 7,061
Reinsurance income 1,808 1,892
Other income 7,031 9,444
Net gains - equity securities 177 439
Net gains - debt securities 27 6
--------------------------------------------------------------------------------
49,014 54,756
--------------------------------------------------------------------------------
NONINTEREST EXPENSE
--------------------------------------------------------------------------------
Salaries 44,053 45,783
Employee benefits 8,748 9,602
Occupancy expense (net) 9,806 9,233
Furniture and equipment expense 11,237 10,528
Restructuring-related special charges --- 19,798
Other expense 36,290 35,936
--------------------------------------------------------------------------------
110,134 130,880
--------------------------------------------------------------------------------
Income before income taxes 55,675 46,637
Income tax expense 15,626 14,118
--------------------------------------------------------------------------------
NET INCOME $40,049 $32,519
--------------------------------------------------------------------------------
PER SHARE DATA
--------------------------------------------------------------------------------
Net income:
Basic $0.82 $0.66
Diluted $0.82 $0.66
Dividends $0.58 $0.58
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
--------------------------------------------------------------------------------
Six Months Ended
June 30,
2000 1999
--------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income $40,049 $ 32,519
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for credit losses 8,425 6,613
Provision for depreciation & amortization 14,851 11,205
Deferred income taxes 15,089 118
Special charges accrual (1,528) 5,013
School district settlement (34,013) ---
Sale of loans held for resale 99,244 188,364
Origination of loans held for resale (153,313) (240,540)
(Increase)decrease in interest receivable (2,017) 6,276
Increase in interest payable 13,890 1,329
Other 5,398 9,689
--------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,075 20,586
--------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing
deposits with banks (662) 2,127
Available for sale securities:
Sales 281 7,871
Maturities 360,502 779,283
Purchases (389,291) (658,250)
Held to maturity securities:
Maturities 38,907 78,013
Purchases (15,192) (47,681)
Net (increase) decrease in loans (183,637) 52,615
Purchases of loans --- (5,378)
Proceeds from sales of loans 27,417 10,078
Purchases of premises and equipment (10,998) (4,918)
Other (154) (570)
--------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (172,827) 213,190
--------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 78,809 (204,760)
Net increase in short-term borrowings 65,069 69,049
Proceeds from FHLB borrowings 156,000 14,362
Repayments of FHLB borrowings (157,413) (10,792)
Repayment of long-term debt (53) (284)
Acquisition of treasury stock --- (88,701)
Cash dividends (28,364) (28,323)
Other 6,337 11,941
--------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 120,385 (237,508)
DECREASE IN CASH AND CASH EQUIVALENTS (46,367) (3,732)
Cash and cash equivalents at beginning of period 334,273 332,322
--------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $287,906 $328,590
--------------------------------------------------------------------------------
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
<PAGE>
Notes To Consolidated Financial Statements
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
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 accounting principles generally accepted
in the United States. 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, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000.
For further information, refer to the audited consolidated financial statements,
footnotes thereto, and the Financial Review for the year ended December 31,
1999, as contained in the annual report to shareholders.
<PAGE>
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. The disclosure of comprehensive income is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
----------------------------------------------------------------------------------------------------------------
Before Net of Before Tax Net of
Tax Tax Tax
--------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net Income $ 20,194 $24,204
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period (341) (222) (12,494) (8,121)
Less: Reclassification adjustment for
gains included in net income 119 77 20 13
---------------------------------------------- --------------- ---------------- ---------------- --------------
(460) (299) (12,514) (8,134)
---------------------------------------------- --------------- ---------------- ---------------- --------------
Comprehensive Income $19,895 $16,070
============================================== =============== ================ ================ ==============
Six Months Ended June 30,
2000 1999
----------------------------------------------------------------------------------------------------------------
Before Net of Before Tax Net of
Tax Tax Tax
--------------- ---------------- ---------------- --------------
Net Income $40,049 $32,519
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period (2,465) (1,602) (19,478) (12,661)
Less: Reclassification adjustment for
gains included in net income 204 133 445 289
----------------------------------------------- --------------- ------------- ------------- -----------------
(2,669) (1,735) (19,923) (12,950)
----------------------------------------------- --------------- ------------- ------------- -----------------
Comprehensive Income $38,314 $19,569
=============================================================================================================
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
Keystone Financial, Inc. (Keystone) is the fourth largest financial institution
headquartered in Pennsylvania. Keystone offers a wide-range of financial
products and services through its bank and specialized nonbank subsidiaries
located in Pennsylvania, Maryland, West Virginia and Delaware.
As announced on May 17, Keystone intends to merge with M&T Bank Corporation of
Buffalo, New York, creating a banking franchise with combined assets of
approximately $30 billion and 450 branches located throughout New York,
Pennsylvania, Maryland and West Virginia.
The merger is subject to the approval of stockholders of both companies, as well
as various regulatory agencies, and is on target to be completed in October,
2000.
The purpose of this review is to provide additional information necessary to
fully understand the consolidated financial condition and results of operations
of Keystone. Throughout this review, net interest income and the yield on
earning assets are stated on a fully taxable-equivalent basis. Balances
represent average daily balances, unless otherwise indicated. In addition,
income statement comparisons are based on results for the six months ended June
30, 2000 compared to the same period of 1999 unless otherwise indicated.
FORWARD LOOKING STATEMENTS
From time to time, Keystone has and will continue to make statements which may
include "forward-looking" information. Keystone cautions that "forward-looking"
information disseminated through financial presentations should not be construed
as guarantees of future performance. Furthermore, actual results may differ from
expectations contained in such "forward-looking" information as a result of
factors which are not predictable. Financial institution performance can be
affected by any number of factors, many of which are outside of management's
direct control. Examples include, but are not limited to, the effect of
prevailing economic conditions; the overall direction of government policies;
unforeseen changes in the general interest rate environment; the actions and
policy directives of the Federal Reserve Board; competitive factors in the
marketplace; and business risks associated with the management of the credit
extension function and fiduciary activities. Each of these factors could affect
estimates, assumptions, uncertainties, and risks considered in the development
of "forward-looking" information, and could cause actual results to differ
materially from management's expectations regarding future performance.
SUMMARY OF FINANCIAL RESULTS
Keystone recognized net income of $20.2 million or earnings per share of $0.41
for the second quarter, compared with $24.6 million or $0.50 per share for the
second quarter of the prior year. Amounts for the six months ended June 30, 2000
were net income of $40.0 million or $0.82 per share, compared with $45.7 million
or $0.92 per share for the same period last year. Amounts for 1999 exclude
special charges associated with internal restructuring which reduced earnings
per share by $0.01 for the quarter and by $0.26 for the six months ended June
30, 1999.
Year-to-date earnings for 2000 resulted in a return on average assets of 1.16%
and a return on average equity of 14.35%. While average earning assets increased
2.4% from last year, the current interest rate environment created pressure on
the net interest margin, which declined from 4.26% in 1999, to 4.03% in 2000
year-to-date. Similarly, net interest income declined 3% during the same period.
Noninterest sources of revenue were also impacted by the higher interest rate
environment as demand for fixed rate mortgages declined. As a result of lower
fixed-rate originations and sales, mortgage banking revenue levels declined from
1999 to 2000. Other income declined in the same period as 1999 amounts included
the benefit of a pension plan curtailment gain.
Total noninterest expenses, exclusive of special charges, declined 1% from 1999
to 2000 as 1999 amounts did not reflect the full benefit of internal
restructuring. The provision for credit losses increased 27% and was responsive
to loan growth. Net charge-off levels for 2000 were consistent with 1999
year-to-date levels. Total risk elements expressed as a percentage of loans
increased to 1.34% at June 30, 2000 from 1.20% at December 31, 1999. The
increase is associated with the migration of a limited number of commercial real
estate loans into nonaccrual status.
Keystone's equity to assets ratio reached 8.05% at June 30, 2000. All regulatory
capital measures were in excess of the threshold for "well capitalized"
designation.
<PAGE>
AVERAGE STATEMENT OF CONDITION
The average balance sheets for the six months ended June 30, 2000 and 1999 were
as follows (in thousands):
--------------------------------------------------------------------------------
Change
2000 1999 Volume %
--------------------------------------------------------------------------------
Cash and due from banks $182,322 $194,045 $(11,723) (6)%
Federal funds sold and other 108,139 76,465 31,674 41
Investments 1,671,053 1,707,870 (36,817) (2)
Loans held for resale 128,705 86,863 41,842 48
Loans 4,546,058 4,431,406 114,652 3
Allowance for credit losses (61,638) (60,530) (1,108) 2
--------------------------------------------------------------------------------
Net loans 4,484,420 4,370,876 113,544 3
Intangible assets 51,807 58,803 (6,996) (12)
Other assets 319,450 245,538 73,912 30
--------------------------------------------------------------------------------
TOTAL ASSETS $6,945,896 $6,740,460 $205,436 3 %
--------------------------------------------------------------------------------
Noninterest-bearing deposits $671,450 $672,219 $ (769) --- %
Interest-bearing deposits 4,353,376 4,438,950 (85,574) (2)
Short-term borrowings 363,182 355,518 7,664 2
FHLB borrowings 731,822 413,349 318,473 77
Other long-term debt 130,562 130,109 453 ---
Other liabilities 134,079 141,330 (7,251) (5)
--------------------------------------------------------------------------------
TOTAL LIABILITIES 6,384,471 6,151,475 232,996 4
--------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 561,425 588,985 (27,560) (5)
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $6,945,896 $6,740,460 $ 205,436 3%
--------------------------------------------------------------------------------
Loan growth totaling $205 million or 5% occurred throughout the commercial and
consumer categories during 2000. Such growth was offset by declines attributable
to the run-off of indirect automobile loans and leases to result in a net
increase of $115 million. Increases in loans held for resale are attributable to
the timing of residential mortgage sales.
The increase in other assets is partially attributable to investment in
bank-owned life insurance. Declining deposit levels were offset with increased
reliance on FHLB borrowings. The decline in shareholders' equity is attributable
to share repurchase activity that took place in the first half of 1999.
<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,
2000 and 1999 (in thousands):
--------------------------------------------------------------------------------
Increase/
2000 1999 (Decrease)
Yield/ Yield/ Yield/
Amount Rate Amount Rate Amount Rate
--------------------------------------------------------------------------------
Interest income $260,749 8.11% $244,237 7.80% $ 16,512 0.31
Interest expense 131,149 4.73 110,613 4.18 20,536 0.55
--------------------------------------------------------------------------------
Net interest income $129,600 $133,624 $(4,024)
Interest spread 3.38% 3.62% (0.24)
Impact of noninterest funds 0.65 0.64 0.01
-------------------------------------------------------------------------------
Net interest margin 4.03% 4.26% (0.23)
-------------------------------------------------------------------------------
Net interest income declined $4 million or 3% year-to-date 2000 compared with
1999. Due to the liability-sensitive position of Keystone's balance sheet, the
overall cost of funds was impacted by the increasing interest rate environment
to a more significant extent than loan yields. As a result, the net interest
margin decreased 23 basis points.
Interest income increased $16.5 million or 6.8% in 2000. The improvement was
attributable to an increase of 31 basis points in the total yield on earning
assets and a slight increase in the volume of earning assets.
Interest expense increased $20.5 million or 18.6% in 2000, as the total cost of
funds increased 55 basis points. In addition to the impact of deposit repricing
associated with the higher interest rate environment, Keystone's cost of funds
has been impacted by deposit runoff and greater reliance on higher cost FHLB
borrowings.
PROVISION FOR CREDIT LOSSES
The provision for credit losses reached $8.4 million for 2000, compared with
$6.6 million for 1999. The increased expense was responsive to loan growth
occurring during 2000. The allowance for loan losses expressed as a percentage
of total loans at June 30, 2000 was comparable to the same period of 1999 (1.34%
versus 1.35%). Refer to the asset quality section of this report for additional
information related to the allowance for credit losses.
NONINTEREST INCOME
Excluding securities gains from both periods, total noninterest sources of
revenue decreased $5.5 million or 10% in 2000. While Keystone demonstrated 4%
growth in trust and investment advisory fees and 11% growth in service charges
on deposits, mortgage originations and the associated mortgage banking revenue
were adversely impacted by the higher interest rate environment. While mortgage
originations remained strong in total, originations to date in 2000 have
primarily been variable rate mortgages, which Keystone is holding in its loan
portfolio. In the first half of 1999, consumer preferences for fixed-rate
products generated higher levels of mortgage banking income as such credits were
sold in the secondary market. As a consequence of the decline in loans sold,
mortgage banking revenue declined $3.6 million or 52%. Fee income levels
declined in 2000 due to the discontinuation of a merchant processing
relationship and losses associated with declines in the residual value of leased
automobiles. Other income in 1999 included a pension curtailment gain which did
not recur for 2000, contributing to a $2.4 million decline.
NONINTEREST EXPENSE
Excluding special charges Keystone incurred in 1999 related to its internal
restructuring, total noninterest expenses declined 1%. Improvements occurred in
salaries and benefits as a result of efficiencies gained through the
restructuring which enabled Keystone to reduce its level of full-time equivalent
employees from 2,965 at December 31, 1998 to 2,618 at June 30, 2000.
Both occupancy and furniture and equipment expense demonstrated slight increases
due to technological improvements.
INCOME TAXES
Income tax expense for 2000 was $15.6 million, resulting in an effective tax
rate of 28%, compared to Keystone's effective tax rate of 30% for 1999 year to
date. The effective tax rate for 1999 was impacted by special charges that were
partially nondeductible.
ASSET QUALITY
Keystone's allowance for credit losses reached $62 million or 1.34% of loans at
June 30, 2000, comparable to the ratio at the end of 1999. Annualized net
charge-offs expressed as a percentage of average loans remained stable at .30%
year-to-date in 2000 compared with .31% in 1999.
The following table provides a comparative summary of the activity in the
allowance for credit losses for the six-month periods ended June 30, 2000 and
1999(in thousands).
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
Allowance for Credit Losses:
Balance at beginning of period $59,975 $60,274
Loans charged-off:
Commercial (867) (1,199)
Real estate secured (2,766) (1,477)
Consumer (4,577) (4,840)
Lease financing (915) (626)
--------------------------------------------------------------------------------
Total loans charged-off (9,125) (8,142)
--------------------------------------------------------------------------------
Recoveries:
Commercial 245 146
Real estate secured 921 582
Consumer 1,007 420
Lease financing 156 78
--------------------------------------------------------------------------------
Total recoveries 2,329 1,226
--------------------------------------------------------------------------------
Net loans charged-off (6,796) (6,916)
Provision for credit losses 8,425 6,613
--------------------------------------------------------------------------------
Balance at end of period $61,604 $59,971
--------------------------------------------------------------------------------
<PAGE>
The following table has been provided to compare nonperforming assets and total
risk elements at June 30, 2000 to the balances at the end of 1999, 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) 2000 1999
--------------------------------------------------------------------------------
Nonaccrual loans $37,248 $27,183
Restructurings 830 841
Other real estate 3,017 3,170
--------------------------------------------------------------------------------
Nonperforming assets 41,095 31,194
Loans 90 days or more past due 20,856 22,508
--------------------------------------------------------------------------------
Total risk elements $61,951 $53,702
--------------------------------------------------------------------------------
Ratio to period-end loans:*
Nonperforming assets .89% .70%
90-days past due .45 .50
--------------------------------------------------------------------------------
Total risk elements 1.34% 1.20%
--------------------------------------------------------------------------------
Coverage Ratios:
Ending allowance to nonperforming loans 162% 214%
Ending allowance to risk elements** 105% 119%
Ending allowance to annualized
net charge-offs 4.5X 2.5X
--------------------------------------------------------------------------------
* The denominator consists of period-end loans and ORE. **Excludes ORE.
During 2000, a few commercial loans migrated into nonaccrual status from the
less-severe delinquent categories, causing the increase in risk elements.
Management has identified no systemic credit quality issues associated with the
commercial loan portfolio.
Management's determination of the adequacy of the allowance is based on periodic
evaluations of the loan portfolio and other relevant factors. This evaluation is
inherently subjective as it requires material estimates, including, but not
limited to, the amounts and timing of expected future cash flows or the fair
value of collateral on impaired loans; estimated losses on installment and
residential mortgage loans; and general amounts for historical loss experience,
economic conditions, known deterioration in certain classes of loans or
collateral, trends in delinquencies, uncertainties in estimating losses, and
inherent risks in the various portions of the loan portfolio, all of which may
be susceptible to significant change.
In determining the adequacy of the allowance for loan losses, management also
makes allocations to specific problem commercial loans or pools of loans with
consideration given to the above factors. While allocations are made to specific
loans and pools of loans, the allowance is available for all loan losses. Based
on its evaluation of loan quality, management believes that the allowance for
credit losses at June 30, 2000 is adequate to absorb potential losses within the
loan portfolio.
CAPITAL MANAGEMENT
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
2000 1999 Capitalized Requirement
---------------------------------------------------------------------------
Leverage ratio 7.67% 7.48% 5.00% 4.00%
Tier 1 10.59% 10.54% 6.00% 4.00%
Total capital ratio 11.82% 11.78% 10.00% 8.00%
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2000, there have been no material changes to the information on this
topic presented in the December 31, 1999 Annual Report.
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 June 30, 2000, the registrant filed the following
reports on Form 8-K:
Date of Report Item Description
--------------- ----- ------------------------------------------------------
May 25, 2000 5 Press release announcing reconvened shareholders
meeting
May 25, 2000 5 Press release announcing dividend declaration
May 18, 2000 5 Press release announcing adjournment of shareholders
meeting
May 16, 2000 5 Press release announcing definitive agreement for
acquisition
April 18, 2000 5 Earnings release for the first quarter
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: August 11, 2000
Carl L. Campbell
----------------------------
President & Chief
Executive Officer
DATE: August 11, 2000
Donald F. Holt
----------------------------
Executive Vice President &
Chief Financial Officer
