<PAGE>
As filed with the Securities and Exchange Commission on June 22, 1995
Registration No. 33-91532
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
to
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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KEYSTONE FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
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Pennsylvania 6711 23-2289209
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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One Keystone Plaza
Front and Market Streets
P.O. Box 3660
Harrisburg, Pennsylvania 17105-3660
(717) 233-1555
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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Ben G. Rooke, Esquire
Keystone Financial, Inc.
One Keystone Plaza
Front and Market Streets
P.O. Box 3660
Harrisburg, Pennsylvania 17105-3660
(717) 231-5701
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Page 1 of 108
Exhibit Index at Page 99
<PAGE>
[Preliminary Copy]
Proxy Statement/Prospectus
KEYSTONE FINANCIAL, INC.
501,150 Shares of Common Stock, $2 par value
issuable in proposed merger with
SHAWNEE FINANCIAL SERVICES CORPORATION
This Proxy Statement/Prospectus is being furnished to the shareholders
of Shawnee Financial Services Corporation ("Shawnee") in connection with the
solicitation of proxies by its Board of Directors for use at a Special Meeting
of Shareholders of Shawnee to be held on August 1, 1995. The purpose of the
Special Meeting is to consider a proposed merger (the "Merger") of Shawnee
into Keystone Financial, Inc. ("Keystone"). As a result of the Merger,
Keystone, which will be the surviving corporation, will acquire all of the
assets and liabilities of Shawnee, and the shareholders of Shawnee will become
shareholders of Keystone. Each outstanding share of Shawnee Common Stock will
be converted in the Merger into 6.25 shares of Keystone Common Stock. The
Keystone Common Stock is quoted on the NASDAQ National Market System under the
symbol "KSTN." Based on the June 20, 1995 closing sale price for Keystone
Common Stock of $28.125 per share, the value of the 6.25 shares of Keystone
Common Stock being offered for each Shawnee share in the Merger would be
$175.78. Shawnee shareholders should note that the market value of the
Keystone Common Stock may change prior to consummation of the Merger. The
approximate date on which this Proxy/Statement Prospectus will first be mailed
to the shareholders of Shawnee is June , 1995.
------
------------------------------
THE SHARES OF KEYSTONE COMMON STOCK TO BE ISSUED IN THE MERGER HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF KEYSTONE COMMON STOCK OFFERED HEREBY ARE NOT
SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR
SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
------------------------------
No person has been authorized to give any information or to make any
representation not contained in this Proxy Statement/Prospectus, and, if given
or made, any such information or representation should not be relied upon as
having been authorized by Keystone or Shawnee. This Proxy
Statement/Prospectus does not constitute an offer or solicitation by any
person in any State in which such offer or solicitation is not authorized by
the laws thereof or in which the person making such offer or solicitation is
not qualified to make the same. Neither the delivery of this Proxy
Statement/Prospectus at any time nor the distribution of Keystone Common Stock
hereunder shall imply that the information contained herein is correct as of
any time subsequent to its date.
------------------------------
The date of this Proxy Statement/Prospectus is June , 1995.
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<PAGE>
AVAILABLE INFORMATION
Keystone has filed with the Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933 (the "Securities Act") a Registration
Statement on Form S-4 (the "Registration Statement") covering the shares of
Keystone Common Stock issuable in the Merger. As permitted by the rules and
regulations of the SEC, this Proxy Statement/Prospectus omits certain
information, exhibits and undertakings contained in the Registration
Statement. The statements contained in this Proxy Statement/Prospectus as to
the contents of any contract or other document filed as an exhibit to the
Registration Statement are of necessity brief descriptions and are not
necessarily complete. Each such statement is qualified in its entirety by
reference to the copy of such contract or document filed as an exhibit to the
Registration Statement. The Registration Statement and the exhibits thereto
can be inspected at the public reference facilities of the SEC at Room 1024,
450 Fifth Street, N.W., Washington, D.C., and copies of such material can be
obtained at prescribed rates by mail addressed to the SEC, Public Reference
Section, Washington, D.C. 20549.
Keystone is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy statements and other information with the SEC. Such reports,
proxy statements and other information can be inspected and copied at the
public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C.; Suite 1400, 500 West Madison Street, Chicago,
Illinois; and Room 1228, 75 Park Place, New York, New York. Copies of such
material can also be obtained at prescribed rates by mail addressed to the
SEC, Public Reference Section, Washington, D.C. 20549. Keystone Common Stock
is quoted on the NASDAQ National Market System, and such reports, proxy
statements and other Keystone information can also be inspected at the offices
of NASDAQ Operations, 1735 K Street, N.W., Washington, D.C.
This Proxy Statement/Prospectus incorporates by reference certain
documents relating to Keystone which are not presented herein or delivered
herewith. See "Keystone Documents Incorporated by Reference" below. Copies
of such documents are available upon written or oral request and without
charge to any person to whom this Proxy Statement/Prospectus has been
delivered. Requests for Keystone documents should be directed to Keystone
Financial, Inc., One Keystone Plaza, Front and Market Streets, P.O. Box 3660,
Harrisburg, Pennsylvania 17105-3660, Attention: Ben G. Rooke, Corporate
Secretary (telephone: 717-231-5701). In order to ensure timely delivery of
the documents, any request by a Shawnee shareholder should be made not later
than July 25, 1995.
KEYSTONE DOCUMENTS INCORPORATED BY REFERENCE
The following documents previously filed by Keystone with the SEC
pursuant to the Exchange Act (File No. 0-11460) are hereby incorporated by
reference into this Proxy Statement/Prospectus:
1. Keystone's Annual Report on Form 10-K for the year ended
December 31, 1994;
2. Keystone's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995; and
3. The description of the Keystone Common Stock which is
contained in Keystone's Current Report on Form 8-K dated July 31, 1992.
All documents filed by Keystone with the SEC pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy
Statement/Prospectus and prior to the date of the Shawnee Special Meeting
shall be deemed to be incorporated by reference in this Proxy
Statement/Prospectus and to be a part hereof from the date of the filing of
such documents.
Shawnee shareholders who wish to obtain copies of the Keystone documents
incorporated by reference herein may do so by following the instructions under
"Available Information" above.
-2-
<PAGE>
KEYSTONE FINANCIAL, INC.
and
SHAWNEE FINANCIAL SERVICES CORPORATION
-----------
PROXY STATEMENT/PROSPECTUS
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TABLE OF CONTENTS
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Page
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SUMMARY........................................................... iii
INTRODUCTION
Record Date; Voting Rights................................... 1
Purpose of the Special Meeting............................... 1
Voting and Revocation of Proxies............................. 2
Solicitation of Proxies...................................... 2
PLAN OF MERGER
The Merger................................................... 2
Background of and Reasons for the Merger..................... 3
Required Vote; Management Recommendation..................... 6
Voting Agreements............................................ 6
Trust Department Shares...................................... 6
Opinion of Shawnee Financial Advisor......................... 7
Conversion of Shawnee Shares................................. 11
Tax Consequences to Shawnee Shareholders..................... 12
Boards of Directors Following the Merger..................... 13
Interests of Certain Persons in the Transaction.............. 13
Warrant Agreement............................................ 14
Inconsistent Activities...................................... 16
Conduct of Shawnee Business Pending the Merger............... 16
Shawnee Dividend Limitation.................................. 16
Conditions to the Merger..................................... 16
Representations and Warranties............................... 17
Amendment, Waiver and Termination............................ 17
Dissenters' Rights of Shawnee Shareholders................... 18
Restrictions on Resales by Shawnee Affiliates................ 20
Effect of Certain Transactions Involving Keystone............ 21
Expenses..................................................... 21
Effective Date of the Merger................................. 21
Accounting Treatment......................................... 21
INFORMATION CONCERNING KEYSTONE
KEYSTONE SELECTED FINANCIAL DATA............................... 23
STOCK PRICES AND DIVIDENDS ON KEYSTONE COMMON STOCK............ 25
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<PAGE>
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INFORMATION CONCERNING SHAWNEE
SHAWNEE SELECTED FINANCIAL DATA................................ 26
SHAWNEE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 27
MARKET AND DIVIDEND INFORMATION CONCERNING
SHAWNEE COMMON STOCK........................................ 38
BUSINESS OF SHAWNEE............................................ 39
MANAGEMENT OF SHAWNEE.......................................... 41
CERTAIN BENEFICIAL OWNERS OF SHAWNEE COMMON STOCK.............. 43
SHAWNEE'S INDEPENDENT AUDITORS................................. 43
COMPARISON OF KEYSTONE COMMON STOCK
AND SHAWNEE COMMON STOCK....................................... 44
LEGAL OPINIONS.................................................... 49
EXPERTS........................................................... 49
OTHER MATTERS..................................................... 49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS........................ 50
ANNEXES
I. Opinion of Berwind Financial Group, L.P. to Shawnee...... A-1
II. Statutory Provisions Concerning Dissenters'
Rights of Shawnee Shareholders........................ A-3
</TABLE>
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<PAGE>
SUMMARY
The following is a brief summary of certain information which may also
be contained elsewhere in this Proxy Statement/Prospectus. This summary is
provided for convenience and should not be considered complete. It is
qualified in its entirety by the more detailed information contained in this
Proxy Statement/Prospectus and in the Annexes hereto.
The Parties
Keystone Financial, Inc. ("Keystone") is a bank holding company with its
principal executive offices at One Keystone Plaza, Front and Market Streets,
P.O. Box 3660, Harrisburg, Pennsylvania 17105-3660 (telephone: 717-233-
1555).
In terms of assets, Keystone is the seventh largest bank holding company
in Pennsylvania. Its banking subsidiaries are Mid-State Bank and Trust
Company, Altoona, Pennsylvania ("Mid-State"); Pennsylvania National Bank and
Trust Company, Pottsville, Pennsylvania; Northern Central Bank, Williamsport,
Pennsylvania; The Frankford Bank, N.A., Horsham, Pennsylvania; American Trust
Bank, Cumberland, Maryland; and American Trust Bank of West Virginia, Inc.,
Keyser, West Virginia.
Keystone's subsidiary banks provide a wide range of financial products
and services through a combined total of 140 community offices located in
central and southeastern Pennsylvania, western Maryland and northeastern West
Virginia. Keystone's subsidiary banks operate under the "supercommunity"
banking philosophy, functioning as local community banks with a personalized
service approach to customers while at the same time taking advantage of the
size of the larger Keystone organization to provide a broad product line and
gain operating and management efficiencies through economies of scale. In
addition to the traditional banking services provided by its member banks,
Keystone has established several nonbanking subsidiaries to deliver an array
of services to both Keystone and its customers, including brokerage, mortgage
banking, leasing, investments and credit life and accident and health
insurance. See "Keystone Documents Incorporated by Reference."
Keystone Common Stock is traded in the over-the-counter market under the
symbol "KSTN" and is listed in the NASDAQ National Market System. On June 20,
1995, the closing sale price for Keystone Common Stock on the NASDAQ National
Market System was $28.125. See "Information Concerning Keystone--Stock Prices
and Dividends on Keystone Common Stock."
At March 31, 1995, Keystone reported consolidated total assets of $4.680
billion, deposits of $3.825 billion and net loans and leases of $3.195
billion. Keystone reported net income of $51,359,000, or $2.20 per share, for
the year ended December 31, 1994 and net income of $14,656,000, or $0.63 per
share, for the three months ended March 31, 1995. See "Information Concerning
Keystone--Selected Financial Data" and "Keystone Documents Incorporated by
Reference."
Shawnee Financial Services Corporation ("Shawnee") is a bank holding
company with its principal executive offices at 115 East Main Street, Everett,
Pennsylvania 15537 (telephone: 814-652-5138). Its sole subsidiary is The
Everett Bank, which has four banking offices in Bedford County in central
Pennsylvania. See "Information Concerning Shawnee--Business of Shawnee."
At March 31, 1995, Shawnee reported consolidated total assets of $71.209
million, deposits of $62.627 million and net loans of $38.752 million.
Shawnee reported net income of $727,000, or $9.07 per share, for the year
ended December 31, 1994 and net income of $191,000, or $2.38 per share, for
the three months ended March 31, 1995. See "Information Concerning Shawnee--
Selected Financial Data;" Information Concerning Shawnee--Management's
Discussion and Analysis of Financial Condition and Results of Operations;" and
"Index to Consolidated Financial Statements."
-iii-
<PAGE>
The Shawnee Special Meeting
The Special Meeting of Shareholders of Shawnee (the "Special Meeting")
will be held at 11:00 a.m., local time, on August 1, 1995 at The Everett
Bank's Board Room, 115 East Main Street, Everett, Pennsylvania. Only holders
of record of Common Stock, par value $10.00 per share, of Shawnee ("Shawnee
Common Stock") at the close of business on June 24, 1995 will be entitled to
vote at the Special Meeting. At that date, 80,184 shares of Shawnee Common
Stock were outstanding, each share being entitled to one vote. See
"Introduction."
The Merger
At their Special Meeting, the shareholders of Shawnee will be asked to
approve an Agreement and Plan of Reorganization and a related Agreement and
Plan of Merger (collectively, the "Plan of Merger") between Keystone and
Shawnee. The Plan of Merger provides for the merger of Shawnee into Keystone
(the "Merger"). It is contemplated that simultaneously with or following the
Merger, The Everett Bank will be merged (the "Bank Merger") into Mid-State,
one of Keystone's operating bank subsidiaries. See "Plan of Merger--The
Merger." As a result of the Merger, each outstanding share of Shawnee Common
Stock will be converted into 6.25 shares of Keystone Common Stock, with cash
to be paid in lieu of any fractional share. See "Plan of Merger--Conversion
of Shawnee Shares." On June 20, 1995, the closing sale price for Keystone
Common Stock on the NASDAQ National Market System was $28.125 per share.
Reasons for the Merger
Shawnee. The past several years have evidenced significant changes in
the banking industry, including greater regulation at the federal level (both
in terms of paperwork and complexity) and significant consolidation among
banks.
During the first quarter of 1994, the Board of Directors of Shawnee
began to consider its goals for the future. These goals included the
enhancement of shareholder value, continued service to the Everett area and
surrounding communities and continued attention to the needs of its employees.
In April 1994, certain representatives of Shawnee were approached by Keystone
concerning a possible merger of the two companies. Throughout the summer and
fall of 1994, these discussions continued, leading to a definitive proposal in
November 1994 for Keystone to acquire Shawnee. This proposal addressed issues
relating to the structure of the transaction as a tax-free exchange, and
proposed an exchange ratio of 5.849 shares of Keystone Common Stock for each
share of Shawnee Common Stock outstanding.
Berwind Financial Group, L.P. ("Berwind") was retained by the Board in
October 1994 to advise it concerning the financial aspects of a potential
merger with Keystone or another party. Berwind has represented many banks in
acquisition transactions, acting on behalf of both acquirors and acquirees.
Berwind reported its preliminary findings on the value of Shawnee to the Board
of Directors in December 1994. Following this presentation, the Board
directed Berwind to negotiate with Keystone over the next week to obtain a
higher price for Shawnee shareholders while meeting the Board's other, non-
financial objectives. Berwind reported back to the Board on December 13, 1994
that Keystone would be willing to increase its offer to 6.25 shares of
Keystone Common Stock for each share of Shawnee Common Stock outstanding,
which the Board then voted to accept. The Board directed its attorneys to
proceed to negotiate a definitive merger agreement with Keystone. This
agreement was negotiated between the parties, presented to the Board, and
signed on January 5, 1995.
Prior to the signing of the Plan of Merger with Keystone, Shawnee
received an opinion from its financial advisor to the effect that the Keystone
offer was fair to the shareholders of Shawnee. Details of this opinion and
Berwind's analysis are set forth in greater detail in this Proxy
Statement/Prospectus. See "Plan of Merger--Opinion of Shawnee Financial
Advisor." In addition to Berwind's fairness opinion, the Board favored the
Merger for various other reasons, including the strength of Keystone as a
banking institution and its ability to continue to serve customers in the
bank's market, opportunities for The Everett Bank's employees within
Keystone's organization
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<PAGE>
and the significant benefits to Shawnee shareholders resulting from the
consideration offered by Keystone and the tax-free nature of the transaction.
For a more complete discussion of these reasons, see "Plan of Merger--
Background of and Reasons for the Merger."
Based upon the above and other factors, the Board unanimously approved
the Plan of Merger on January 5, 1995.
Shawnee has been contacted periodically by other banking institutions
which have expressed an interest in a possible merger. Since beginning its
discussions with Keystone last year, three bank holding companies have
indicated orally a preliminary interest, and one bank holding company has
expressed such an interest by means of a letter. No oral or written offer was
made by any of such parties, and Shawnee did not pursue any further contact
with these parties.
Keystone. For Keystone, the addition of Everett's offices to Mid-State
resulting from the Merger and the Bank Merger will provide a natural extension
to Mid-State's market area and a bridge between the areas served by Mid-State
and American Trust Bank, Keystone's subsidiary headquartered in Cumberland,
Maryland. The Merger will enable Mid-State to better serve the agricultural
market in eastern Bedford County and to serve this market's larger commercial
customers by providing financial products and services which Everett has been
unable to provide.
Vote Required for Approval
Approval of the Plan of Merger by the shareholders of Shawnee requires
the affirmative vote of the holders of at least 75% of the outstanding shares
of Shawnee Common Stock. A failure to vote, an abstention or a broker non-
vote will have the same legal effect as a vote against the approval of the
Plan of Merger. See "Plan of Merger--Required Vote; Management
Recommendation." As of June 19, 1995, the directors and executive officers of
Shawnee beneficially owned an aggregate of 21.33% of the outstanding Shawnee
Common Stock.
The directors and executive officers of Shawnee have entered into
agreements with Keystone to vote in favor of the Merger shares of Shawnee
Common Stock beneficially owned by them individually or jointly and to use
their best efforts to cause certain other shares over which they have or share
voting power to be voted in favor of the Merger. These agreements cover an
aggregate of 21.33% of the outstanding Shawnee Common Stock. No monetary or
other compensation was paid to any Shawnee director or executive officer for
entering into these agreements. See "Plan of Merger--Voting Agreements."
The Trust Department of Keystone's wholly owned subsidiary, Mid-State,
acting in a fiduciary capacity, has voting power over 8.37% of the outstanding
Shawnee Common Stock. It is anticipated that these shares will be voted in
favor of the Merger.
The Merger does not require approval by the shareholders of Keystone.
Opinion of Financial Advisor
The investment banking firm of Berwind Financial Group, L.P. has
rendered an opinion to Shawnee dated June , 1995 that the terms of the
-----
Merger are fair, from a financial point of view, to Shawnee and its
shareholders. This opinion is attached as Annex I to this Proxy
Statement/Prospectus and should be read in its entirety for information as to
the matters considered and the assumptions made in rendering such opinion.
See "Plan of Merger--Opinion of Shawnee Financial Advisor."
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<PAGE>
Board of Directors' Recommendation
The Board of Directors of Shawnee believes that the Merger is in the
best interests of the shareholders of Shawnee and unanimously recommends that
Shawnee shareholders vote "FOR" approval of the Plan of Merger.
SHAWNEE SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
Post-Merger Boards of Directors
Following the Bank Merger, L. Frank Bittner, presently Chairman of the
Board of Directors of Shawnee, will become a member of the Board of Directors
of Mid-State. No change in the Board of Directors of Keystone will be made by
reason of the Merger. See "Plan of Merger--Boards of Directors Following the
Merger."
Interests of Certain Persons in the Transaction
As a director of Mid-State, L. Frank Bittner will receive the same fees
as other Mid-State directors, consisting of an annual retainer of $3,500, plus
$500 per Board meeting and $200 per Board Committee meeting attended. Samuel
K. Bohn, the President and a director of Shawnee and Everett, will be offered
$50,000 per year for a two-year period to assist in the post-Merger transition
and/or for a covenant not to compete. Ralphard L. Black, Vice President of
Shawnee and Executive Vice President of Everett, will be employed as a Vice
President of Mid-State without change by reason of the Merger in his salary,
which is currently $65,000 per year.
It is not intended that any of the remaining directors and executive
officers of Shawnee, none of whom are employees, will be retained by Keystone
or Mid-State following the Merger. No severance or similar payments will be
made to such persons.
Keystone has agreed to indemnify Shawnee's directors and officers with
respect to events occurring prior to the Merger and to provide such persons
with certain directors' and officers' liability insurance coverage. See "Plan
of Merger--Interests of Certain Persons in the Transaction."
Employee Matters
Keystone has agreed to consider Everett employees for employment within
the Keystone organization to permit Everett employees employed by Keystone and
its subsidiaries to participate on an equal basis in Keystone's internal open
position posting and application procedures. Shawnee and Everett employees
who become employees of Keystone and its subsidiaries will be provided
employee benefits no less favorable than those provided to other similarly
situated employees. Following the Merger, Keystone and Mid-State will perform
the respective obligations of Shawnee and Everett with respect to vested
benefits accrued under Everett's retirement and profit sharing plans.
Tax Consequences
No gain or loss for federal or Pennsylvania income tax purposes will be
recognized by shareholders of Shawnee on the exchange of their shares for
Keystone Common Stock in the Merger, except with respect to cash received in
lieu of fractional shares and cash paid to shareholders who elect dissenters'
rights. For a more complete
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<PAGE>
description of the Federal and Pennsylvania income tax consequences of the
Merger, see "Plan of Merger--Tax Consequences to Shawnee Shareholders."
Warrant Agreement
In connection with the Plan of Merger, Shawnee has entered into an
agreement granting Keystone a warrant to purchase up to 19.9% of the
outstanding Shawnee Common Stock, at an exercise price of $182.81 per share,
upon the occurrence of certain events. In general, the events which would
permit Keystone to exercise its warrant would involve an attempt by a third
person to gain control of Shawnee. The Warrant Agreement is designed to
compensate Keystone for its risks, costs and expenses and the commitment of
resources associated with the Plan of Merger in the event the Merger is not
consummated due to an attempt by a third person to gain control of Shawnee.
The Warrant Agreement may discourage third persons from making competing
offers to acquire Shawnee and is intended to increase the likelihood that the
Plan of Merger will be consummated in accordance with its terms. Exercise of
the warrant for more than 5% of the outstanding Shawnee Common Stock would be
subject to the approval of regulatory authorities. See "Plan of Merger--
Warrant Agreement."
Dissenters' Rights
Record holders of Shawnee Common Stock who object to the Merger and
comply with the prescribed statutory procedures are entitled to have the fair
value of their shares determined in accordance with the Pennsylvania Business
Corporation Law and paid to them in cash in lieu of the shares of Keystone
Common Stock they would otherwise be entitled to receive in the Merger. A
copy of the pertinent statutory provisions is attached to this Proxy
Statement/Prospectus as Annex II. Failure to follow such provisions precisely
may result in a loss of dissenters' rights. See "Plan of Merger--Dissenters'
Rights of Shawnee Shareholders."
Differences in Shareholder Rights
The rights of the holders of Keystone Common Stock differ in certain
respects from those of the holders of Shawnee Common Stock. While for both
Shawnee and Keystone certain mergers and other potential change-of-control
transactions and certain amendments to the articles of incorporation or by-
laws require approval by 75% of the outstanding shares, the types of
transactions or amendments subject to the special vote requirements differ
between the two companies, and a such transaction or amendment involving
Keystone would also require approval by a majority of the shares not
beneficially owned by a 20% shareholder. While both Keystone and Shawnee have
classified Boards of Directors, there are differences in the rights of
shareholders of the two companies to increase or decrease the size of the
Board, to fill vacancies and to nominate and remove directors. Unlike
Shawnee, Keystone has established a shareholder rights plan and is subject to
certain provisions of the Pennsylvania Business Corporation Law which may
discourage outside persons from attempting to acquire control of Keystone or
make such an attempt more difficult. Because Keystone Common Stock is
publicly traded, holders of Keystone Common Stock are not entitled to
dissenters' appraisal rights in a variety of situations in which such rights
would be available to shareholders of Shawnee. Unlike Shawnee, Keystone has
an authorized class of preferred stock which, if issued, could affect the
rights of the holders of Keystone Common Stock. For a more detailed
discussion of the differences between the rights of the holders of Shawnee
Common Stock and those of the holders of Keystone Common Stock, see
"Comparison of Keystone Common Stock and Shawnee Common Stock."
Regulatory Approvals
The Merger requires approval by the Board of Governors of the Federal
Reserve System and the Pennsylvania Department of Banking. The Bank Merger
requires approval by the FDIC and the Pennsylvania
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<PAGE>
Department of Banking. Applications for these approvals have been filed and
are expected to be approved, although no assurances may be given as to whether
or when such approvals may be received.
Conditions; Amendment; Termination
In addition to shareholder and regulatory approval, consummation of the
Merger is contingent upon the receipt of certain tax opinions and the
satisfaction of a number of other conditions. See "Plan of Merger--Conditions
to the Merger." Notwithstanding prior shareholder approval, the Plan of
Merger may be amended in any respect other than the ratio for converting
Shawnee Common Stock into Keystone Common Stock in the Merger.
The Plan of Merger may be terminated, and the Merger abandoned,
notwithstanding prior shareholder approval, by mutual agreement of Keystone
and Shawnee or by either of them in the event of a material breach by the
other party, failure to receive shareholder or regulatory approval or failure
to satisfy the conditions to the Merger prior to September 30, 1995 or, in
certain circumstances, December 31, 1995. Shawnee may also terminate the Plan
of Merger if (1) the average closing bid price for Keystone Common Stock for
the 10 trading days ending six trading days prior to the closing date for the
Merger is less than $24.86 and (2) such decline in Keystone's stock price
exceeds by more than 15% the decline in the NASDAQ Combined Bank Index since
January 4, 1995. See "Plan of Merger--Amendment, Waiver and Termination."
Effective Date of the Merger
It is presently anticipated that if the Plan of Merger is approved by
the shareholders of Shawnee, the Merger will become effective in the third
quarter of 1995. However, there can be no assurance that all conditions
necessary to the consummation of the Merger will be satisfied or, if
satisfied, that they will be satisfied in time to permit the Merger to become
effective at the anticipated time. See "Plan of Merger--Effective Date of the
Merger."
Exchange of Certificates
Instructions on how to effect the exchange of Shawnee Common Stock
certificates for Keystone Common Stock certificates will be sent as promptly
as practicable after the Merger becomes effective to each shareholder of
record of Shawnee immediately prior to the Merger. Shareholders should not
send in stock certificates until they receive written instructions to do so.
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Pre-Announcement Prices
The following table sets forth (i) the closing sale price for Keystone
Common Stock on the NASDAQ National Market System on January 5, 1995, the last
trading day prior to the first public announcement of the Merger and (ii) an
equivalent per share price for Shawnee Common Stock computed by multiplying
the closing sale price for Keystone Common Stock on January 5, 1995 by the
Merger exchange ratio of 6.25 to 1.
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Last
Pre-Announcement Equivalent Per
Price Share Price
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<S> <C> <C>
Keystone Common Stock....... $29.625 --
Shawnee Common Stock........ -- $185.16
</TABLE>
On June 20, 1995, the closing sale price for Keystone Common Stock was
$28.125. Using this price, the equivalent per share price for Shawnee Common
Stock would have been $175.78.
The last trade of Shawnee Common Stock known to Shawnee management to
have occurred prior to announcement of the Merger was a trade of 300 shares of
Shawnee Common Stock at $92.00 per share on January 4, 1995 by parties not
affiliated with Shawnee. There is no established market for Shawnee Common
Stock, and there has been only limited trading in Shawnee Common Stock.
Therefore, this price may not necessarily be indicative of the true market
value of Shawnee Common Stock.
Accounting Treatment
Normally, the Merger would be accounted for by Keystone under the
pooling-of-interests method of accounting. However, if the number of treasury
shares purchased by Keystone under its share repurchase program exceeds
certain limits, Keystone may be required to account for the Merger under the
purchase method of accounting. See "Plan of Merger--Accounting Treatment."
Pro forma financial information concerning the Merger is not included
herein since the addition of Shawnee under either accounting method would not
have materially affected the Keystone historical financial information as
presented.
-ix-
<PAGE>
Selected Financial Information--(unaudited)
The following table sets forth certain historical financial information
for Keystone and Shawnee. The addition of Shawnee would not have materially
affected the Keystone financial information as presented. This information is
based on the consolidated financial statements of Keystone incorporated herein
by reference and the consolidated financial statements of Shawnee appearing
elsewhere herein and should be read in conjunction with such statements and
the related notes.
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
---------------------- ----------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(In Thousands, Except Per Share Amounts)
Keystone
Earnings
Net interest income............ $ 49,726 $ 45,174 $ 188,418 $ 182,510 $ 177,927 $ 163,734 $ 155,726
Provision for
credit losses................. 2,084 1,642 9,484 7,940 16,053 16,323 15,107
Net income..................... 14,656 14,046 51,359 51,349 45,742 40,268 37,720
Per Share
Net income..................... $ 0.63 $ 0.60 $ 2.20 $ 2.20 $ 1.99 $ 1.77 $ 1.66
Dividends...................... 0.34 0.32 1.30 1.19 1.10 1.02 0.91
Balances at Period End
Assets......................... $4,679,942 $4,346,653 $4,706,000 $4,419,726 $4,311,779 $4,120,215 $4,041,232
Deposits....................... 3,825,127 3,573,328 3,827,983 3,582,688 3,655,261 3,560,284 3,523,779
Long-term debt................. 5,528 6,793 6,054 5,990 5,144 2,143 2,989
Shareholders' equity........... 424,632 411,289 407,774 412,880 378,314 348,143 327,092
Shawnee
Earnings
Net interest income............ $ 721 $ 731 $ 3,083 $ 3,036 $ 2,833 $ 2,437 $ 2,101
Provision for
loan losses................... 0 0 0 0 0 50 27
Net income..................... 191 194 727 834 728 486 571
Per Share
Net income..................... $ 2.38 $ 2.42 $ 9.07 $ 10.35 $ 9.01 $ 6.02 $ 7.10
Dividends...................... -- -- 2.70 2.60 2.50 2.40 2.30
Balances at Period End
Assets......................... $ 71,209 $ 72,935 $ 69,951 $ 72,392 $ 68,671 $ 61,721 $ 58,905
Deposits....................... 62,627 64,332 61,650 64,150 60,947 54,667 51,966
Long-term debt................. -- -- -- -- -- -- --
Shareholders' equity........... 8,053 7,603 7,581 7,306 6,719 6,193 5,886
</TABLE>
-x-
<PAGE>
Comparative Per Share Data--(unaudited)
The following table sets forth for the periods indicated (i) historical
earnings, book values and dividends per share for Keystone Common Stock and
(ii) historical and equivalent comparative earnings and book values per share
for Shawnee Common Stock. The addition of Shawnee would not have materially
affected Keystone's historical earnings and book values per share. The
following data is based on the consolidated financial statements of Keystone
incorporated herein by reference and the consolidated financial statements of
Shawnee appearing elsewhere herein and should be read in conjunction with such
statements and the related notes.
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
---------------- -------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income Per Common Share
Keystone Shareholders
Keystone................. $ 0.63 $ 0.60 $ 2.20 $ 2.20 $ 1.99 $ 1.77 $ 1.66
Shawnee Shareholders
Shawnee.................. $ 2.38 $ 2.42 $ 9.07 $10.35 $ 9.01 $ 6.02 $ 7.10
Shawnee equivalent (1)... 3.94 3.75 13.75 13.75 12.44 11.06 10.38
Book Value Per Common Share
Keystone Shareholders
Keystone................. $ 18.06 $17.58 $ 17.46 $17.65 $16.29 $15.27 $14.41
Shawnee Shareholders
Shawnee.................. $100.43 $94.82 $ 94.55 $91.11 $83.09 $76.58 $72.97
Shawnee equivalent (1)... 112.88 -- 109.13 -- -- -- --
Cash Dividends Declared Per
Common Share (2)
Keystone Shareholders
Keystone................. $ 0.34 $ 0.32 $ 1.30 $ 1.19 $ 1.10 $ 1.02 $ 0.91
Shawnee Shareholders
Shawnee.................. -- -- $ 2.70 $ 2.60 $ 2.50 $ 2.40 $ 2.30
Shawnee equivalent (1)... $ 2.13 $ 2.00 8.13 7.44 6.88 6.38 5.69
</TABLE>
- -----------------------
(1) The Shawnee equivalent per share data represents the historical data of
Keystone multiplied by the Merger exchange ratio of 6.25 shares of
Keystone Common Stock for each share of Shawnee Common Stock.
(2) While Keystone is not obligated to pay cash dividends, the Board of
Directors presently intends to continue the policy of paying quarterly
cash dividends. Future dividends will depend, in part, upon the earnings
and financial condition of Keystone.
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<PAGE>
KEYSTONE FINANCIAL, INC.
and
SHAWNEE FINANCIAL SERVICES CORPORATION
---------------------------
PROXY STATEMENT/PROSPECTUS
---------------------------
INTRODUCTION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Directors of Shawnee Financial Services
Corporation ("Shawnee") of proxies to be voted at a Special Meeting of
Shareholders of Shawnee (the "Special Meeting") to be held on Tuesday, August
1, 1995 and at any adjournment or adjournments thereof. The Special Meeting
will be held at 11:00 a.m., local time, at the Board Room of The Everett Bank,
115 East Main Street, Everett, Pennsylvania. The approximate date on which
this Proxy Statement/Prospectus will first be mailed to the shareholders of
Shawnee is June , 1995.
-----
Record Date; Voting Rights
The Board of Directors of Shawnee has fixed the close of business on
June 24, 1995 as the record date for determining the shareholders of Shawnee
entitled to notice of and to vote at the Special Meeting. At that date,
80,184 shares of Common Stock, par value $10.00 per share, of Shawnee
("Shawnee Common Stock") were outstanding. Each such share entitles its
holder of record at the close of business on the record date to one vote on
each matter properly submitted to the shareholders for action at the Special
Meeting. Shawnee does not have any other outstanding class of capital stock.
On June 19, 1995, there were approximately 168 shareholders of record of
Shawnee Common Stock.
Purpose of the Special Meeting
At the Special Meeting, the shareholders of Shawnee will be asked to
consider and vote upon a proposal to approve an Agreement and Plan of
Reorganization and a related Agreement and Plan of Merger, each dated as of
January 5, 1995 (collectively, the "Plan of Merger"), between Shawnee and
Keystone Financial, Inc. ("Keystone"). As more fully described below under
"Plan of Merger," the Plan of Merger provides for a merger of Shawnee into
Keystone (the "Merger"). In the Merger, each outstanding share of Shawnee
Common Stock (other than shares subject to dissenters' rights) will be
converted into 6.25 shares of Keystone Common Stock. It is contemplated that
simultaneously with or shortly following the Merger, Shawnee's subsidiary, The
Everett Bank ("Everett"), will be merged into Mid-State Bank and Trust Company
("Mid-State"), one of Keystone's operating bank subsidiaries.
Shawnee has received an opinion of the investment banking firm of
Berwind Financial Group, L.P. that the terms of the Merger are fair to the
shareholders of Shawnee from a financial point of view. See "Plan of Merger--
Opinion of Shawnee Financial Advisor."
THE BOARD OF DIRECTORS OF SHAWNEE BELIEVES THAT THE MERGER IS IN THE
BEST INTERESTS OF THE SHAREHOLDERS OF SHAWNEE AND UNANIMOUSLY RECOMMENDS THAT
SHAWNEE SHAREHOLDERS VOTE TO APPROVE THE PLAN OF MERGER.
<PAGE>
Voting and Revocation of Proxies
All properly executed proxies not theretofore revoked will be voted at
the Special Meeting or any adjournments thereof in accordance with the
instructions thereon. Proxies containing no voting instructions will be voted
in favor of approval of the Plan of Merger. As to any other matter brought
before the Special Meeting and submitted to a shareholder vote, proxies will
be voted in accordance with the judgment of the proxyholders named thereon.
However, the proxy of any shareholder who votes against approval of the Plan
of Merger will not be used to vote in favor of any proposal to adjourn the
Special Meeting in the event Shawnee management wishes to adjourn the meeting
in order to allow time for the solicitation of additional votes to approve the
transaction.
A shareholder who has executed and returned a proxy may revoke it at any
time before it is voted by filing with the Secretary of Shawnee written notice
of such revocation or a later dated proxy or by attending the Special Meeting
and voting in person. Attendance at the Special Meeting will not, of itself,
constitute a revocation of a proxy.
Solicitation of Proxies
In addition to solicitation by mail, directors, officers and employees
of Shawnee may solicit proxies from the shareholders of Shawnee in person or
by telephone or otherwise. No additional compensation will be paid for such
solicitation. Brokerage houses, nominees, fiduciaries and other custodians
will be requested to forward proxy soliciting materials to beneficial owners
of shares held of record by them and will be reimbursed for their reasonable
expenses. Shawnee will bear its own expenses in connection with the
solicitation of proxies for the Special Meeting, except that Keystone and
Shawnee will each pay 50% of the printing costs related to the solicitation of
proxies from Shawnee shareholders. See "Plan of Merger--Expenses." Shawnee
estimates that its out-of-pocket expenses in connection with the solicitation
of proxies for the Special Meeting will be approximately $5,500, including 50%
of total printing costs estimated at $9,000.
PLAN OF MERGER
This section of the Proxy Statement/Prospectus describes the material
terms of the Plan of Merger. The following description does not purport to be
complete and is qualified in its entirety by reference to the Plan of Merger,
which has been filed with the SEC as an exhibit to the Registration Statement.
The Plan of Merger is incorporated in this Proxy Statement/Prospectus by
reference to such filing and is available upon request. See "Available
Information."
The Merger
The Plan of Merger provides for a merger of Keystone and Shawnee in
which Keystone will be the surviving corporation. As a result of the Merger,
Keystone will acquire all of the assets and liabilities of Shawnee, and
Shawnee will cease to exist as a separate corporation.
In the Merger, the shareholders of Shawnee will become shareholders of
Keystone. Each of the approximately 80,184 outstanding shares of Shawnee
Common Stock (other than shares subject to dissenters' rights) will be
converted into 6.25 shares of Keystone Common Stock, with cash to be paid in
lieu of any fractional share. See "Conversion of Shawnee Shares."
Keystone is a bank holding company with its principal executive offices
in Harrisburg, Pennsylvania. The principal subsidiaries of Keystone are Mid-
State, Altoona, Pennsylvania; Pennsylvania National Bank and Trust Company,
Pottsville, Pennsylvania; Northern Central Bank, Williamsport, Pennsylvania;
The Frankford Bank, N.A., Horsham, Pennsylvania; American Trust Bank,
Cumberland, Maryland; and American Trust Bank of West
-2-
<PAGE>
Virginia, Inc., Keyser, West Virginia. Keystone's bank subsidiaries operate a
combined total of 140 banking offices in central and southeastern
Pennsylvania, western Maryland and northeastern West Virginia. See "Summary--
The Parties--Keystone" and "Keystone Documents Incorporated by Reference."
Shawnee is a bank holding company with its principal executive offices
in Everett, Pennsylvania. Shawnee's sole subsidiary is Everett, which has
four banking offices in Bedford County in central Pennsylvania. See "Business
of Shawnee." It is contemplated that simultaneously with or shortly following
the Merger of Shawnee and Keystone, Everett will be merged into Mid-State.
Background of and Reasons for the Merger
Shawnee. In the view of Shawnee's management, the past several years
have been a period of substantial and rapid change in the banking industry in
general. Recent changes in federal and state banking laws and regulations
have had a major impact upon the banking industry in Pennsylvania and
throughout the United States. In response to these changes, many mergers and
consolidations involving banks and bank holding companies have occurred.
Further merger activity is likely to occur in the future, resulting in
increased concentration levels in banking markets and other significant
changes in the competitive environment. These changes are expected to
intensify competition in local and regional banking markets. In addition,
recent changes in banking laws have significantly increased the severity and
complexity of banking regulations, as well as increasing the costs that banks
must incur in complying with those regulations. With these considerations in
mind, the Board of Directors began to consider its future course of action in
early 1994.
During the spring of 1994, representatives of Keystone approached
Shawnee's senior management to indicate Keystone's interest in pursuing a
possible acquisition of Shawnee. A series of initial contacts and preliminary
discussions ensued over the next few months, and in June of 1994 Keystone made
a preliminary overture to acquire Shawnee. Although no definitive decision
had been made by the Board to sell the company at that time, Shawnee's Board
decided it would be appropriate to retain legal and financial advisors to
assist it in the evaluation of the Keystone proposal and other strategic
options.
In mid-October 1994, Shawnee retained the investment banking firm of
Berwind Financial Group, L.P. ("Berwind"), to act as its financial advisor in
connection with any possible transaction with Keystone. Berwind has extensive
experience in representing buyers and sellers in commercial transactions, with
a particular expertise in the banking industry. Berwind evaluated the
business and prospects of Shawnee over the next several months, engaged in
discussions with senior management about the same, and prepared an analysis of
Shawnee to be presented to the Board. In addition, upon the receipt of a more
definitive offer from Keystone in November 1994, Berwind also prepared a
preliminary analysis of this offer.
The Keystone offer made on November 22, 1994 proposed a tax-free
exchange of shares whereby 5.849 shares of Keystone stock would be tendered
for each one share of Shawnee stock outstanding. It also stated Keystone's
intention to attempt to provide employment opportunity to as many of the
bank's employees as possible, consistent with the previous discussions between
the parties. At Keystone's closing stock price on November 22, 1994, the
aggregate value of the consideration offered to Shawnee's shareholders was
$13,835,388.
At a meeting of the Shawnee Board of Directors held on December 8, 1994,
Shawnee's senior management provided its Board of Directors with reports on
the status of the discussions with Keystone, including a discussion of the
November 22 proposal. Also, Berwind made detailed presentations regarding the
financial consequences of Shawnee remaining as an independent financial
institution or affiliating with a larger bank holding company, such as
Keystone. Substantial information was provided to the Shawnee Board of
Directors regarding the likely future value of Shawnee's common stock under
these different scenarios.
In addition, evaluating only publicly available information, Berwind
discussed with the Shawnee Board the financial condition and operations of
Keystone and, in general, other large bank holding companies that might have
-3-
<PAGE>
an interest in making an acquisition in Shawnee's market, and the terms of
other recent, comparable transactions. The Board did not want to contact
other potential acquirors prior to fully exploring a transaction with
Keystone. At the conclusion of the December 8th meeting, the Shawnee Board of
Directors authorized Berwind to negotiate on its behalf with a view towards
obtaining a higher price per share than that presented in the November 22
proposal (5.849 shares of Keystone) while maintaining the Board's interest in
protecting its employees and other constituencies.
At the December 13, 1994 Board meeting, Berwind communicated to the
Board of Directors that it was able to achieve an increase in the
consideration offered per share from 5.849 shares of Keystone for each share
of Shawnee to 6.25 shares of Keystone for each share of Shawnee common stock.
Keystone's increased offer was conditioned upon Shawnee's agreeing to begin
the negotiation of a definitive merger agreement. Berwind advised that this
offer was also subject to Keystone's performing a due diligence review on
Shawnee and Shawnee engaging in a similar due diligence review of Keystone.
Due diligence refers to the process where legal and financial representatives
from each party review the books and records of the other party. Thereafter,
the Board authorized its attorneys to negotiate with Keystone with a view
toward reaching a definitive merger agreement that would address the legal,
financial and social concerns of the Board.
Over the next few weeks, representatives of Keystone and Shawnee
conducted due diligence investigations of each others' respective operations
and negotiated the Plan of Merger. Keystone also informed Shawnee that, as a
condition to Keystone's executing the Plan of Merger, Keystone would require
the execution by Shawnee of the Warrant Agreement, thereby giving Keystone the
ability to protect the benefit of its bargain in the event another acquiror
would pay a higher price for Shawnee and the Board of Shawnee would accept
such an offer. The Warrant Agreement permits Keystone, under certain
circumstances, to acquire up to 19.9% of the shares of Shawnee at a price of
$182.81 per share (see "Plan of Merger--Warrant Agreement").
Shawnee has been contacted periodically by other banking institutions
which have expressed an interest in a possible merger. Since beginning its
discussions with Keystone last year, three bank holding companies have
indicated orally a preliminary interest, and one bank holding company has
expressed such an interest by means of a letter. Only one of these bank
holding companies was larger in asset size than Keystone. No oral or written
offer was made by any of such parties, and Shawnee did not pursue any further
contact with these parties.
On January 5, 1995, the Shawnee Board of Directors met to consider
Keystone's acquisition proposal, including the Plan of Merger and the Warrant
Agreement. Attorneys from the law firm of Buchanan Ingersoll discussed with
the Board of Directors the legal ramifications of the provisions of the merger
agreements. Berwind made a detailed presentation regarding the proposal and
the alternatives available to Shawnee, and compared the terms of the Keystone
proposal to the terms of other comparable transactions. After the
presentations, the financial advisor gave the opinion that, from a financial
point of view, the offer from Keystone was fair to Shawnee and its
shareholders. At Keystone's closing stock price on January 5, 1995, the
aggregate value of the consideration offered to Shawnee's shareholders was
$14,846,569. For a detailed discussion of the analysis underlying the
financial advisor's fairness opinion, see "Plan of Merger--Opinion of Shawnee
Financial Advisor." Then, after extensive discussion and consideration, the
Board of Directors unanimously voted to accept the Keystone proposal and
approve the Plan of Merger and the Warrant Agreement.
In reaching its determination to approve the Plan of Merger and the
Warrant Agreement, the Shawnee Board of Directors considered a variety of
factors, including:
(1) The consideration offered by Keystone in the Plan of Merger in relation to
the market value, book value and earnings per share of Shawnee on an
historical basis;
(2) Shawnee's business, results of operations, financial position and
prospects for its remaining independent in a rapidly consolidating
industry;
-4-
<PAGE>
(3) The management, business, results of operations and financial condition of
Keystone, which the Board believes will serve the interests of its
shareholders, its employees and the community served by Shawnee after the
Merger;
(4) The current and historical dividends paid on Shawnee Common Stock and
Keystone Common Stock and the significant increase in dividends per year
which would result to Shawnee's shareholders from the Merger;
(5) The expectation that the Merger will be a tax-free transaction to Shawnee
shareholders;
(6) The financial terms of other recent business combinations in the banking
industry;
(7) The financial advice rendered by Berwind, including its opinion to the
effect that the exchange ratio contemplated by the Plan of Merger is fair
from a financial point of view to Shawnee shareholders;
(8) The overall terms of the Plan of Merger, which provided protections for
the employees of Shawnee;
(9) The overall business environment in the banking industry, including
increased competition from larger banks which offer a more diversified
portfolio of products and services and the costs of complying with
increasingly complex federal and state banking regulation; and
(10) The benefit to shareholders of Shawnee by providing them with equity
ownership in a larger, publicly traded banking organization and, thereby,
increasing the liquidity of their investment.
The Board considered factors (1), (4), (5) and (6) of great importance
as a means to enhance its shareholders' value over the short, intermediate,
and long-term. The Board also believed that factors (3) and (8) were very
significant because it hoped that the bank would be able to provide employment
and serve its community into the future. Other than the presentation made by
Berwind, which provided certain quantifications with respect to recent,
comparable transactions, the Board did not independently quantify, or assign
weightings to any of the 10 reasons listed above. Further, no negative
factors were expressed by the Board with respect to the transaction with
Keystone.
The Board of Directors of Shawnee believes that the terms of the
proposed Merger are fair to and in the best interests of Shawnee and its
shareholders. Shawnee's Board of Directors also believes that the Merger will
significantly enhance the ability of Shawnee's offices to satisfy the
financial needs of its present customers and the communities served. For
these reasons, the Board of Directors unanimously recommends that Shawnee
shareholders vote to approve the merger of Shawnee into Keystone.
Keystone. For Keystone, the Merger is part of a continuing search for
areas in which to expand its existing franchise. The central part of
Pennsylvania is historically Keystone's primary market area. Keystone views
this area as an attractive market and one with which it is familiar. The
territory served by Everett provides a bridge between the market areas of Mid-
State and American Trust Bank, Keystone's subsidiary headquartered in
Cumberland, Maryland. Keystone views the addition of Everett's offices to
Mid-State as a natural extension of Mid-State's market which provides Mid-
State a means of better serving the agricultural market in eastern Bedford
County. Keystone also believes Mid-State can better serve this market's
larger commercial customers through the acquisition of Everett because it can
provide these customers with financial products and services which Everett has
been unable to provide. Finally, Keystone believes the expansion of its
market by means of the Merger will result in increased efficiency and cost
savings in the delivery of financial services.
-5-
<PAGE>
Required Vote; Management Recommendation
Approval of the Plan of Merger requires the affirmative votes of the
holders of at least 75% of the outstanding shares of Shawnee Common Stock,
voting in person or by proxy at the Shawnee Special Meeting. Because Shawnee
shareholder approval requires the affirmative votes of 75% of all outstanding
Shawnee shares, a failure to vote, an abstention or a broker non-vote will
have the same legal effect as a vote by a Shawnee shareholder against approval
of the Plan of Merger. THE BOARD OF DIRECTORS OF SHAWNEE UNANIMOUSLY
RECOMMENDS THAT SHAWNEE SHAREHOLDERS VOTE "FOR" APPROVAL OF THE PLAN OF
MERGER.
The Board of Directors of Keystone has approved the Plan of Merger, and
under the Pennsylvania Business Corporation Law no approval of the Plan of
Merger by the shareholders of Keystone is required.
Voting Agreements
In connection with the Plan of Merger, the directors and executive
officers of Shawnee have entered into agreements to vote certain shares of
Shawnee Common Stock beneficially owned by them in favor of the Merger. The
directors and executive officers of Shawnee have agreed with Keystone that
they will vote in favor of the Merger all shares of Shawnee Common Stock owned
by them as individuals or (to the extent of their proportionate voting
interest) jointly with other persons, and that they will use their best
efforts to cause any other shares of Shawnee Common Stock over which they have
or share voting power to be voted in favor of the Merger. In the aggregate,
these agreements commit 17,105 shares of Shawnee Common Stock (21.33% of the
outstanding shares) to be voted in favor of the Merger.
The agreements further provide that with respect to shares of Shawnee
Common Stock owned by the Shawnee directors and executive officers as
individuals or (to the extent of the director's or executive officer's
proportionate voting interest) jointly with other persons (collectively,
"Shares"), the directors and executive officers will not until the Merger has
been consummated or the Plan of Merger has been terminated: (1) vote Shares
in favor of any other merger or transaction which would have the effect of a
person other than Keystone or an affiliate acquiring control of Shawnee or
Everett or (2) sell or otherwise transfer Shares (i) pursuant to any tender
offer or similar proposal made by a person other than Keystone or an
affiliate, (ii) to any person other than Keystone or an affiliate seeking to
obtain control of Shawnee or Everett or (iii) for the principal purpose of
avoiding the director's or executive officer's obligations under the
agreement. The agreements define "control" as the ability to (1) direct the
voting of 10% or more of the shares eligible to vote in an election of
directors or (2) direct the management and policies of Shawnee or Everett.
The agreements are applicable to the directors or executive officers
only in their capacities as shareholders and do not affect the exercise of
their responsibilities as directors or executive officers. The agreements
also do not apply to any shares of Shawnee Common Stock held by a director or
executive officer as a trustee or other fiduciary. No monetary or other
compensation was paid to any Shawnee director or executive officer for
entering into these agreements.
The foregoing is a summary of the material terms of the voting
agreements. The form of these agreements has been filed with the SEC as an
exhibit to the Registration Statement. Such form is incorporated herein by
reference, and the foregoing summary of the agreements is qualified in its
entirety by reference to such filing.
Trust Department Shares
The Trust Department of Mid-State, a wholly owned Keystone subsidiary,
acting in a fiduciary capacity, has voting power over 6,708 shares of Shawnee
Common Stock, representing 8.37% of the outstanding shares. It
-6-
<PAGE>
is anticipated that these shares will be voted in favor of approval of the
Plan of Merger. See "Information Concerning Shawnee--Certain Beneficial
Owners of Shawnee Common Stock."
Opinion of Shawnee Financial Advisor
Shawnee has retained Berwind to act as its financial advisor and to
render a fairness opinion in connection with the Merger. Berwind has rendered
its opinion to the Board of Directors of Shawnee that, based upon and subject
to the various considerations set forth therein, as of January 5, 1995, and as
of June , 1995, the Merger is fair, from a financial point of view, to
-----
the holders of Shawnee Common Stock.
The full text of Berwind's opinion as of June , 1995, which sets
-----
forth the assumptions made, matters considered and limitations of the review
undertaken, is attached as Annex I to this Proxy Statement/Prospectus and
should be read in its entirety in connection with this Proxy
Statement/Prospectus. This section of the Proxy Statement/Prospectus sets
forth the material terms of Berwind's opinion; however, the summary of the
opinion of Berwind set forth herein is qualified in its entirety by reference
to the full text of such opinion attached as Annex I to this Proxy
Statement/Prospectus.
Shawnee retained Berwind to act as Shawnee's financial advisor in
connection with the Merger. Berwind was selected to act as Shawnee's financial
advisor based upon its qualifications, expertise and experience. Berwind has
knowledge of, and experience with, Pennsylvania banking markets and banking
organizations operating in those markets and was selected by Shawnee because
of its knowledge of, experience with, and reputation in the financial services
industry.
In such capacity, Berwind participated in the negotiations with respect
to the pricing and other terms of the Merger, but the decision with respect to
the Merger exchange ratio was determined by Shawnee in the process of its
negotiations with Keystone. On January 5, 1995, Shawnee's Board of Directors
approved and executed the Plan of Merger. Berwind delivered an opinion (the
January Opinion) to Shawnee's Board stating that, as of such date, the Merger
was fair to the shareholders of Shawnee from a financial point of view.
Berwind reached the same opinion as of June , 1995. The full text of the
-----
opinion of Berwind dated as of June , 1995, which sets forth assumptions
-----
made, matters considered and limits on the review undertaken (the Proxy
Opinion), is attached as Annex I to this Proxy Statement/Prospectus. No
limitations were imposed by Shawnee's Board of Directors upon Berwind with
respect to the investigations made or procedures followed by Berwind in
rendering the January Opinion or the Proxy Opinion.
In rendering its Proxy Opinion, Berwind: (i) reviewed the historical
financial performances, current financial positions and general prospects of
Shawnee and Keystone, (ii) reviewed the Plan of Merger, (iii) reviewed and
analyzed the stock market performance of Keystone, (iv) studied and analyzed
the consolidated financial and operating data of Shawnee and Keystone, (v)
considered the terms and conditions of the proposed Merger between Shawnee and
Keystone as compared with the terms and conditions of comparable bank mergers
and acquisitions, (vi) met and/or communicated with certain members of
Shawnee's and Keystone's senior management to discuss their respective
operations, historical financial statements and future prospects and (vii)
conducted such other financial analyses, studies and investigations as it
deemed appropriate.
Berwind relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by and
discussed with it for purposes of its opinion. With respect to Shawnee's
financial forecasts reviewed by Berwind in rendering its opinion, Berwind
assumed that such financial forecasts were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
management of Shawnee as to the future financial performance of Shawnee.
Shawnee's senior management reviewed for accuracy and completeness all
information concerning Shawnee, including any forecasts, provided to Berwind.
Berwind did not make an independent evaluation or appraisal of the assets
(including loans) or liabilities of Shawnee or Keystone, nor was it furnished
with any such appraisal. Berwind also did not independently verify and has
relied on and assumed that all allowances for loan and lease losses set forth
in the balance sheets of
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Shawnee and Keystone were adequate and complied fully with applicable law,
regulatory policy and sound banking practice as of the date of such financial
statements.
The following is a summary of selected analyses prepared by Berwind and
presented to Shawnee's Board in connection with the January Opinion and
analyzed by Berwind in connection with the January and Proxy Opinions.
Comparable Companies and Comparable Acquisition Transaction Analyses.
Berwind compared selected financial and operating data for Shawnee with those
of a peer group of selected banks and bank holding companies with assets
between $50 million and $100 million, as of the most recent financial period
publicly available, located in Pennsylvania (40 banks). Financial data and
operating ratios compared in the analysis of the Shawnee peer group included
but were not limited to: return on average assets, return on average equity,
shareholders' equity to assets ratio and certain asset quality ratios. The
analysis showed Shawnee's return on average assets was 1.02% compared to the
peer group median of 1.02%, its return on average equity was 10.09% compared
to a peer group median of 10.53%, its equity as a percentage of assets was
10.35% versus the peer group median of 9.89%, its nonperforming assets as a
percentage of loans and other real estate owned was 0.50% compared to the peer
group median of 1.26%, its nonperforming assets as a percentage of equity plus
loan loss reserve was 2.52% compared to the peer group median of 7.08% and its
loan loss reserve as a percentage of nonperforming assets was 97.42% compared
to 97.31%.
Berwind also compared selected financial, operating and stock market
data for Keystone with those of a peer group of selected commercial banking
companies with assets between $2.5 billion and $6 billion, as of the most
recent period publicly available, located in Delaware, Maryland, New Jersey,
New York, Ohio, Pennsylvania and West Virginia (11 banks). Financial,
operating and stock market data, ratios and multiples compared in the analysis
of the Keystone peer group included but were not limited to: return on
average assets, return on average equity, shareholders' equity to asset
ratios, certain asset quality ratios, price to book value, price to tangible
book value, price to earnings (latest twelve months) and dividend yield. The
analysis showed Keystone's return on average assets was 1.10% compared to the
peer group median of 1.36%, its return on average equity was 11.73% compared
to a peer group median of 14.12%, its shareholders' equity as a percentage of
assets was 9.04% versus the peer group median of 8.82%, its nonperforming
assets as a percentage of loans and other real estate owned was 1.25% compared
to the peer group median of 1.09%, its nonperforming assets as a percentage of
shareholders' equity plus loan loss reserve was 9.58% compared to the peer
group median of 6.83% and its loan loss reserve as a percentage of
nonperforming assets was 155.94% compared to 105.64%.
In addition, the analysis showed that Keystone's price per share ($30.25
on the date of the January Opinion) as a percentage of book value per share
was 173.35% compared to the peer group median of 157.26%, its price per share
as a percentage of tangible book value was 174.75% compared to the peer group
median of 162.40% and its price per share as a multiple of latest twelve
months earnings per share of 14.00 compared to the peer group median of 11.25
times.
Berwind also compared the multiples of book value, tangible book value
and latest twelve months' earnings inherent to the Merger with the multiples
paid in recent acquisitions of banks and bank holding companies that Berwind
deemed comparable. These ratios are generally considered significant by
analysts when evaluating a bank acquisition transaction. The transactions
deemed comparable by Berwind included both interstate and intrastate
acquisitions announced since January 1, 1994, in which the selling
institution's assets were between $50 million and $100 million.
Berwind compared seventy-six transactions located throughout the country
and analyzed those transactions in three groups: a national group (76 banks),
a regional group (14 banks) and a performance group (25 banks). The national
group included transactions throughout the United States; the regional group
included transactions in Maryland, New Jersey, Pennsylvania, Virginia and West
Virginia; and the performance group included transactions involving banks with
year-to-date return on average assets greater than 0.75% and less than 1.25%.
The median values calculated for price per share as a percentage of book value
per share was 173.98%, 178.58% and 170.32%
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for the national, regional and performance group, respectively; the range of
price per share as a percentage of tangible book value per share was 174.18%,
178.59% and 170.32% for the national, regional and performance group,
respectively; and the range of the price per share as a multiple of latest
twelve months earnings per share was 14.17, 18.11 and 17.95 times earnings for
the national, regional and performance group, respectively.
These medians compare to the Merger's price per share as a percentage of
book value per share, price per share as a percentage of tangible book value
per share, and price per share as a multiple of latest twelve months earnings
per share of 198.56%, 198.56% and 22.34 times, respectively. No company or
transaction, however, used in this analysis is identical to Shawnee, Keystone
or the Merger. Accordingly, an analysis of the result of the foregoing is not
mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies and other factors that would affect the public trading values of the
companies or company to which they are being compared.
Discounted Dividend Analyses. Using discounted dividend analyses,
Berwind estimated the present value of the future dividend streams that
Shawnee could produce over a five-year period under different assumptions as
to dividend pay out levels, if Shawnee performed in accordance with various
earnings growth forecasts. Berwind also estimated the ending value for
Shawnee's Common Stock after the five-year period by applying a range of
earnings multiples from 8 to 12 to Shawnee's terminal year earnings. The
range of multiples used reflected a variety of scenarios regarding the growth
and profitability prospects of Shawnee. The dividend streams and terminal
values were then discounted to present value using discount rates ranging from
10% to 20%, reflecting different assumptions regarding the rates of return
required by holders or prospective buyers of Shawnee's Common Stock. This
analysis is generally considered significant by analysts in that it provides
an estimate of the value of the bank if it were to remain independent under
various earnings and dividends scenarios. The range of present values per
fully diluted share of Shawnee common stock resulting from these assumptions
were $56 to $121 if earnings per share and dividends grow at 5% per annum; $63
to $136 at assumed growth rates of 7.5%; and $70 to $152 at assumed rates of
growth of 10% per annum.
Pro Forma Contribution Analysis. Berwind analyzed the changes in the
amount of earnings, book value and dividends represented by one share of
Shawnee Common Stock prior to the Merger and 6.25 shares of Keystone Common
Stock after the Merger. The analysis considered, among other things, the
changes that the Merger would cause to Shawnee's earnings per share, book
value per share and indicated dividends. On a per share equivalent basis,
Shawnee's earnings per share increase 19% from $11.51 to $13.75, its tangible
book value per share increases 13% from $95.22 to $107.91 and its dividend per
share increases 215% from $2.70 to $8.50 per share. In reviewing the pro
forma combined earnings, equity and assets of Keystone based on the Merger
with Shawnee, Berwind analyzed the contribution that Shawnee would have made
to the combined company's earnings, equity and assets as of and for the period
ended December 31, 1994. Berwind also reviewed the percentage ownership that
Shawnee's stockholders would hold in the combined company.
In connection with rendering its January Opinion and Proxy Opinion,
Berwind performed a variety of financial analyses. Although the evaluation of
the fairness, from a financial point of view, of the consideration to be paid
in the Merger was to some extent a subjective one based on the experience and
judgment of Berwind and not merely the result of mathematical analysis of
financial data, Berwind principally relied on the previously discussed
financial valuation methodologies in its determinations. Berwind believes its
analyses must be considered as a whole and that selecting portions of such
analyses and factors considered by Berwind without considering all such
analyses and factors could create an incomplete view of the process underlying
Berwind's opinion. In its analysis, Berwind made numerous assumptions with
respect to business, market, monetary and economic conditions, industry
performance and other matters, many of which are beyond Shawnee's and
Keystone's control. Any estimates contained in Berwind's analyses are not
necessarily indicative of future results or values, which may be significantly
more or less favorable than such estimates.
In reaching its opinion as to fairness, none of the analyses performed
by Berwind was assigned a greater weighting by Berwind than any other
analysis. As a result of its consideration of the aggregate of all factors
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present and analyses performed, Berwind reached the conclusion, and opined,
that terms of the Merger as set forth in the Plan of Merger, are fair from a
financial point of view to Shawnee and its shareholders.
In connection with delivering its Proxy Opinion, Berwind updated certain
analyses described above to reflect current market conditions and events
occurring since the date of the Plan of Merger. Such reviews and updates led
Berwind to conclude that it was not necessary to change the conclusions it had
reached in connection with rendering the January Opinion.
Berwind, as part of its investment banking business, is engaged
regularly in the valuation of assets, securities and companies in connection
with various types of asset and security transactions, including mergers,
acquisitions, private placements, and valuations for various other purposes
and in the determination of adequate consideration in such transactions.
Berwind's Proxy Opinion was based solely upon the information available
to it and the economic, market and other circumstances as they existed as of
the date its Proxy Opinion was delivered; events occurring after the date of
its Proxy Opinion could materially affect the assumptions used in preparing
its Proxy Opinion. Berwind has not undertaken to reaffirm and revise its
Proxy Opinion or otherwise comment upon any events occurring after the date
thereof.
In delivering its January Opinion and Proxy Opinion, Berwind assumed
that in the course of obtaining the necessary regulatory and governmental
approvals for the Merger, no restriction will be imposed on Keystone that
would have a material adverse effect on the contemplated benefits of the
Merger. Berwind also assumed that there would not occur any change in
applicable law or regulation that would cause a material adverse change in the
prospects or operations of Keystone after the Merger.
During Berwind's presentation, and upon its conclusion, Shawnee's Board
and its counsel asked questions to better understand the assumptions and
limitations of the methodologies employed by Berwind in its analyses.
Although the Board relied upon the expertise of Berwind as to the assumptions
employed by Berwind, the Board made its own determination as to the
reasonableness of Berwind's analyses and as to the adequacy of the
consideration offered by Keystone.
Pursuant to the terms of the engagement letter dated October 25, 1994,
Shawnee has paid Berwind $42,500 for acting as financial advisor in connection
with the Merger, including delivering its January and Proxy Opinions. In
addition, Shawnee has agreed to pay Berwind approximately $29,000 upon the
consummation of the Merger and to reimburse Berwind for its reasonable out-of-
pocket expenses. Whether or not the Merger is consummated, Shawnee has also
agreed to indemnify Berwind and certain related persons against certain
liabilities relating to or arising out of its engagement.
The full text of the Proxy Opinion of Berwind as of June , 1995,
-----
which set forth assumptions made and matters considered, is attached hereto as
Annex I to this Proxy Statement/Prospectus. Shawnee's stockholders are urged
to read the Proxy Opinion in its entirety. Berwind's Proxy Opinion is directed
only to the consideration to be received by Shawnee stockholders in the Merger
and does not constitute a recommendation to any holder of Shawnee Common Stock
as to how such holder should vote at the Shawnee Special Meeting.
THE ABOVE DISCUSSION SETS FORTH THE MATERIAL TERMS OF BERWIND'S PROXY
OPINION. HOWEVER, THE FOREGOING PROVIDES ONLY A SUMMARY OF THE PROXY OPINION
OF BERWIND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
THAT OPINION, WHICH IS SET FORTH IN ANNEX I TO THIS PROXY
STATEMENT/PROSPECTUS.
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Conversion of Shawnee Shares
Exchange Ratio. On the effective date of the Merger, each outstanding
share of Shawnee Common Stock (other than shares subject to dissenters'
rights) will be converted into 6.25 shares of Keystone Common Stock, with cash
to be paid in lieu of the issuance of any fractional share. On June 20, 1995,
the closing sale price for Keystone Common Stock reported on the NASDAQ
National Market System was $28.125.
Surrender of Certificates. As promptly as practicable after the
effective date of the Merger, Keystone will send to each shareholder of record
of Shawnee immediately prior to the Merger a letter of transmittal containing
instructions on how to effect the exchange of Shawnee Common Stock
certificates for certificates representing the shares of Keystone Common Stock
into which their shares have been converted. Shawnee shareholders should not
send in their certificates until they receive such written instructions.
However, certificates should be surrendered promptly after instructions to do
so are received.
Any dividends declared on Keystone Common Stock after the effective date
of the Merger will apply to all whole shares of Keystone Common Stock into
which shares of Shawnee Common Stock have been converted in the Merger.
However, no former Shawnee shareholder will be entitled to receive any such
dividend until such shareholder's Shawnee Common Stock certificates have been
surrendered for exchange as provided in the letter of transmittal. Upon such
surrender, the shareholder will be entitled to receive all such dividends
payable on the whole shares of Keystone Common Stock represented by the
surrendered certificate or certificates (without interest thereon and less the
amount of taxes, if any, which may have been imposed or paid thereon).
Payment for Fractional Shares. No fractional shares of Keystone Common
Stock will be issued in connection with the Merger. Instead, each Shawnee
shareholder who surrenders for exchange Shawnee Common Stock certificates
representing a fraction of a share of Keystone Common Stock will be entitled
to receive, in addition to a certificate for the whole shares of Keystone
Common Stock represented by the surrendered certificates, cash in an amount
equal to such fractional part of a share multiplied by the value of $29.25 for
one whole share of Keystone Common Stock.
Unexchanged Certificates. On the effective date of the Merger, the
stock transfer books of Shawnee will be closed, and no further transfers of
Shawnee Common Stock will be made or recognized. Certificates for Shawnee
Common Stock not surrendered for exchange will entitle the holder only to
receive, upon surrender as provided in the letter of transmittal, a
certificate for the whole shares of Keystone Common Stock represented by such
certificates, plus payment of any amount for a fractional share or dividends
to which such holder is entitled as outlined above.
If the Merger becomes effective and any former Shawnee shareholder does
not surrender his or her Shawnee Common Stock certificates for exchange on or
before the second anniversary of the effective date, Keystone, at its option,
may at any time thereafter sell such shareholder's Keystone Common Stock
without notice to the shareholder. After any such sale, the sole right of
such shareholder shall be to receive, upon surrender of the shareholder's
Shawnee Common Stock certificates, the net proceeds of the sale (without
interest and less the amount of any taxes which may have been imposed or paid
thereon).
Keystone Shareholder Rights Plan. If no Distribution Date under
Keystone's shareholder rights plan (see "Comparison of Keystone Common Stock
and Shawnee Common Stock--Keystone Shareholder Rights Plan") shall have
occurred prior to the effective date of the Merger, then each share of
Keystone Common Stock issued in the Merger shall also evidence one Right under
Keystone's shareholder rights plan. If the Distribution Date shall have
occurred, then it is a condition to the Merger that Keystone take one of the
actions set forth under "Conditions to the Merger" below.
Adjustment of Exchange Ratio. The Plan of Merger contains provisions
for the proportionate adjustment of the exchange ratio in the event of a stock
dividend, stock split, reclassification or similar event involving the
Keystone Common Stock or the Shawnee Common Stock which occurs prior to the
Merger. Although no such
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adjustments are anticipated, any such adjustment would be proportionate and
therefore would not decrease the value of the consideration per preadjustment
share of Shawnee Common Stock to be received by Shawnee shareholders in the
Merger.
Tax Consequences to Shawnee Shareholders
Federal Income Tax. The Plan of Merger requires as a condition to the
Merger that each party receive a written opinion of counsel or of independent
public accountants that:
(1) The Merger will constitute a reorganization within the
meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended (the "Code"), and Keystone and Shawnee will each be a "party to
a reorganization" within the meaning of Section 368(b) of the Code;
(2) No gain or loss will be recognized by Keystone or Shawnee as
a result of the Merger;
(3) Except for cash received in lieu of fractional shares, no
gain or loss will be recognized by holders of Shawnee Common Stock on
the exchange of their shares for shares of Keystone Common Stock;
(4) The basis of the shares of Keystone Common Stock to be
received by the shareholders of Shawnee will be the same as the basis of
the shares of Shawnee Common Stock exchanged therefor; and
(5) The holding period of the shares of Keystone Common Stock
received by the shareholders of Shawnee will include the period during
which the Shawnee Common Stock exchanged therefor was held by the
Shawnee shareholder, provided that the Shawnee Common Stock was held as
a capital asset at the time of the exchange.
No gain or loss for federal income tax purposes will be recognized by
shareholders of Shawnee on the exchange of their shares for whole shares of
Keystone Common Stock. However, gain or loss will be recognized by Shawnee
shareholders upon the receipt of cash in payment for a fractional share. To
compute the amount, if any, of such gain or loss, the cost or other basis of
the Shawnee Common Stock exchanged must be allocated proportionately to the
total number of shares of Keystone Common Stock received, including any
fractional share interest. Gain or loss will be recognized measured by the
difference between the cash received and the basis of the fractional share
interest as so allocated. Under Section 302(a) of the Code, any such gain or
loss will generally be entitled to capital gain or loss treatment if the
Shawnee Common Stock was a capital asset in the hands of the shareholder.
If any shares of Keystone Common Stock received in the Merger are
subsequently sold, gain or loss on the sale should be computed by allocating
the cost or other basis of the Shawnee Common Stock exchanged in the Merger to
the shares sold in the manner described in the preceding paragraph. The
holding period for the shares of Keystone Common Stock received in the Merger
will include the holding period for the shares of Shawnee Common Stock
exchanged in determining, for example, whether any such gain or loss is a
long-term or short-term capital gain or loss.
Where a Shawnee shareholder exercises dissenters' rights and receives
cash in exchange for Shawnee Common Stock, the cash will be treated as
received by the shareholder as a distribution in redemption of the Shawnee
Common Stock subject to the provisions and limitations of Section 302 of the
Code. The cash received by a dissenting Shawnee shareholder will be treated
as if the shares had been sold to Shawnee for the cash received and will
generally be entitled to capital gain or loss treatment under Section 302 of
the Code, provided the shares are a capital asset in the hands of the
shareholder. However, because the ownership of shares by certain individuals
related to the shareholder and by certain partnerships, estates, trusts and
corporations in which the shareholder has an interest may have an adverse
impact on the tax treatment of the cash received by the shareholder and result
in it
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being taxed as a dividend, a Shawnee shareholder should consult with his own
personal tax advisor as to the federal, state and local tax consequences of
exercising dissenters' rights.
Pennsylvania Personal Income Tax. No gain or loss for Pennsylvania
personal income tax purposes will be recognized by shareholders of Shawnee who
are subject to that tax on the receipt by them of whole shares of Keystone
Common Stock in exchange for their Shawnee Common Stock. For Pennsylvania
personal income tax purposes, the tax basis for the Keystone Common Stock
received by Shawnee shareholders in the Merger (including any fractional share
interests to which they are entitled) will be the same as the basis of the
Shawnee Common Stock exchanged. Cash received in lieu of a fractional share
of Keystone Common Stock will be treated and taxed as if the fractional share
had actually been received by the Shawnee shareholder and then immediately
sold by the shareholder to Keystone for the cash received. Cash received by a
Shawnee shareholder exercising dissenters' rights will be treated as if the
shareholder had sold his or her shares to Shawnee for the cash received and
will be taxed accordingly.
The foregoing is intended only as a summary of certain federal income
tax and Pennsylvania personal income tax consequences of the Merger under
existing law and regulations, as presently interpreted by judicial decisions
and administrative rulings, all of which are subject to change without notice,
and any such change might be retroactively applied to the Merger. Among other
things, the summary does not address state income tax consequences in states
other than Pennsylvania or any local taxes. Accordingly, it is recommended
that Shawnee shareholders consult their own tax advisors with specific
reference to their own tax situations and potential changes in the applicable
law as to all federal, state and local tax matters in connection with the
Merger.
Boards of Directors Following the Merger
No change will be made by reason of the Merger in the Board of Directors
of Keystone. At the time the Bank Merger becomes effective, L. Frank Bittner,
currently Chairman of the Board of Directors of Shawnee, will be added to the
Board of Directors of Mid-State to serve for a term or terms expiring not less
than one year after the Merger. The Board of Directors of Mid-State presently
consists of 19 directors. If prior to the Merger Mr. Bittner becomes unable
or declines to serve as a director of Mid-State, Shawnee shall be entitled to
designate a substitute director acceptable to Keystone.
Interests of Certain Persons in the Transaction
Arrangements with Shawnee Directors and Executive Officers. As
indicated under the preceding caption, following the Merger L. Frank Bittner,
currently Chairman of the Board of Directors of Shawnee and Everett, will
become a director of Mid-State. As a director of Mid-State, Mr. Bittner will
receive the same fees as other Mid-State directors. Effective July 1, 1995,
those fees will consist of an annual retainer of $3,500, payable in shares of
Keystone Common Stock, plus $500 per Board meeting and $200 per Board
Committee meeting attended. Chairmen of Board Committees receive an
additional $500 annual retainer, and directors who participate by telephone in
Board or Board Committee meetings receive $100 per meeting.
Mid-State has indicated its intention to offer Samuel K. Bohn, the
President and a director of Shawnee and Everett, $50,000 per year for a two-
year period following the Merger to assist Mid-State in the post-Merger
transition and/or in return for a covenant not to compete.
It is intended that following the Merger Ralphard L. Black, Vice
President of Shawnee and Executive Vice President of Everett, will be employed
as a Vice President of Mid-State. There will be no change by reason of the
Merger in Mr. Black's salary, which is currently $65,000 per year.
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It is not intended that any of the remaining directors and executive
officers of Shawnee, none of whom are employees, will be retained by Keystone
or Mid-State following the Merger. No severance or similar payments will be
made to such persons.
Shawnee Directors' and Officers' Indemnification and Insurance.
Keystone has agreed that following the Merger it will perform the obligations
of Shawnee under Shawnee's By-Laws concerning the indemnification of Shawnee's
directors and officers with respect to events occurring at or prior to the
Merger and will cause Mid-State to perform the obligations of Everett under
its By-Laws concerning the indemnification of the directors and officers of
Everett with respect to events occurring at or prior to the Bank Merger. The
By-Laws of Shawnee generally require Shawnee to indemnify its directors and
officers against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
any civil, criminal, administrative or investigative proceeding to which such
person is a party by reason of having served in such capacity if such person
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of Shawnee and, in the case of any criminal
proceeding, had no reasonable cause to believe that his conduct was unlawful.
In the case of a suit by or in the right of Shawnee, no indemnification may be
made as to any claim, issue or matter as to which the director or officer
shall have been found liable for misconduct in the performance of his duty to
Shawnee. The By-Laws of Keystone and its subsidiaries contain similar
provisions regarding the indemnification of directors and officers. The By-
Laws of Everett provide that directors and officers may be indemnified for
reasonable expenses actually incurred in connection with any proceeding to
which such person is a party by reason of having served in such capacity,
except that no indemnification shall be made as to any matter as to which such
person is found to have been guilty of or liable for gross neglect of duty or
willful misconduct or to have committed an act or failed to perform a duty for
which there is a common law or statutory liability, and no person shall be
indemnified with respect to any matter which has been the subject of a
compromise settlement unless approved by the parent holding company.
Keystone has also agreed to use its best efforts to obtain a one-year
tail policy of directors' and officers' liability insurance for the directors
and officers of Shawnee and Everett with respect to events which occurred
prior to the Merger. Such insurance is to be provided on terms substantially
equivalent to Shawnee's current directors' and officers' liability policy,
which has a $6 million coverage limit, except that the maximum premium
Keystone must pay for such policy is limited to $20,000. In addition, for
claims made within three years following the Merger and at a time when such
tail policy is not in effect, Keystone will indemnify the former directors and
officers of Shawnee and Everett against any claim or liability, whether or not
indemnifiable under the By-Laws of Shawnee or Everett, if and to the extent
that such claim or liability would have been covered under Shawnee's current
policy of directors' and officers' liability insurance if such policy were
then in effect.
Employee Matters. The Plan of Merger provides that Keystone will
consider Everett employees for employment within the Keystone organization and
that following the Merger Keystone will permit Everett employees employed by
Keystone and its subsidiaries to participate on an equal basis with other
similarly situated employees in Keystone's internal open position posting and
application procedures. Shawnee and Everett employees who become employees of
Keystone and its subsidiaries shall be provided employee benefits, including
retirement, health and welfare benefits, life insurance, incentive
compensation and vacation and severance arrangements, no less favorable than
those provided to other similarly situated employees. With respect to group
health benefits, Keystone will waive any otherwise applicable waiting periods
and preexisting conditions if at the time of the Merger the employee was
covered under a similar plan of Shawnee. Following the Merger, Keystone and
Mid-State will perform the respective obligations of Shawnee and Everett with
respect to vested benefits accrued through the date of the Merger under
Everett's retirement and profit sharing plans.
Warrant Agreement
In connection with the Plan of Merger, Keystone and Shawnee have entered
into an Investment Agreement, and Shawnee has issued to Keystone a Warrant
thereunder (collectively, the "Warrant Agreement"), entitling Keystone to
purchase up to approximately 19.9% of Shawnee's outstanding Common Stock upon
the
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occurrence of certain events described below. The Warrant Agreement covers
19,921 shares of Shawnee Common Stock at an exercise price of $182.81 per
share.
The Warrant Agreement is designed to compensate Keystone for its risks,
costs and expenses and the commitment of resources associated with the Plan of
Merger in the event the Merger is not consummated due to an attempt by a third
person to gain control of Shawnee. See also "Expenses" below. Keystone may
not exercise or sell its Warrant except upon (i) a willful breach by Shawnee
of the Plan of Merger, (ii) the failure of Shawnee's shareholders to approve
the Plan of Merger after the announcement by a third person of a bona fide
proposal to acquire 10% or more of the Shawnee Common Stock, to acquire, merge
or consolidate with Shawnee or to acquire substantially all of Shawnee's
assets or Everett, (iii) the acquisition by a third person of 1% or more of
the outstanding Shawnee Common Stock if after such acquisition such person
would beneficially own 10% or more of the Shawnee Common Stock, (iv) the
commencement by a third person of a tender offer or exchange offer which would
result in beneficial ownership of 10% or more of the Shawnee Common Stock or
(v) the entry by Shawnee into an agreement or understanding with a third
person for the third person to acquire, merge or consolidate with Shawnee or
to acquire substantially all of its assets or Everett (each of the foregoing
is hereafter referred to as a "Warrant Event"). No Warrant Event has occurred
as of the date of this Proxy Statement/Prospectus, and neither Keystone nor
Shawnee is aware that any Warrant Event is contemplated by any third person.
The Warrant Agreement may discourage third persons from making competing
offers to acquire Shawnee and is intended to increase the likelihood that the
Merger will be consummated in accordance with the terms set forth in the Plan
of Merger.
If a Warrant Event occurs, Keystone may exercise the Warrant in whole or
in part or may sell or transfer all or part of the Warrant to other persons.
Under federal banking law, exercise of the Warrant by Keystone for more than
5% of the outstanding Shawnee Common Stock would require approval of the Board
of Governors of the Federal Reserve System ("Federal Reserve Board"). Any
sale of the Warrant or of shares of Shawnee Common Stock purchased thereunder
would be subject to a right of first refusal by Shawnee unless sold in a
public offering registered under the Securities Act. Shawnee agrees in the
Warrant Agreement to effect such registration if requested.
Keystone may require Shawnee to redeem the Warrant or any shares of
Shawnee Common Stock purchased thereunder if (i) a third person acquires
beneficial ownership of 50% or more of the outstanding Shawnee Common Stock or
(ii) a third person acquires, merges or consolidates with Shawnee or acquires
substantially all of its assets or Everett (each of the foregoing is hereafter
referred to as a "Redemption Event"). In general, the per share redemption
price for the Warrant would be the higher of 10% of the exercise price or a
per share price based on the difference between the exercise price and the
highest price paid or agreed to be paid by the third person in connection with
the Redemption Event. The per share redemption price for shares of Shawnee
Common Stock purchased under the Warrant would generally be the higher of 110%
of the exercise price or the highest price paid or agreed to be paid by the
third person in connection with the Redemption Event.
The Warrant Agreement also contains provisions giving Shawnee the right
to repurchase shares of Shawnee Common Stock issued under the Warrant in
certain limited circumstances and provisions for issuance of a substitute
Warrant to purchase shares of the surviving or acquiring company in the event
of a merger or other acquisition of Shawnee or Everett.
The foregoing description is a summary of the material terms of the
Warrant Agreement and does not purport to be complete. It is qualified in its
entirety by reference to the Warrant Agreement, which has been filed with the
SEC as an exhibit to the Registration Statement. The Warrant Agreement is
incorporated in this Proxy Statement/Prospectus by reference to such filing.
-15-
<PAGE>
Inconsistent Activities
Shawnee has agreed in the Plan of Merger that unless and until the
Merger has been consummated or the Plan of Merger has been terminated in
accordance with its terms, Shawnee will not (i) solicit or encourage any
proposals by a third person to acquire more than 1% of the Shawnee Common
Stock, any stock of Everett or any significant portion of its or Everett's
assets (whether by tender offer, merger, purchase of assets or otherwise),
(ii) afford a third party which may be considering any such transaction access
to its or Everett's properties, books or records except as required by law,
(iii) enter into any discussions, negotiations, agreement or understanding for
any such transaction or (iv) authorize or permit any of its directors,
officers, employees or agents to do any of the foregoing. Notwithstanding the
foregoing, Shawnee may take an action referred to in clause (ii) or (iii) of
the previous sentence (or permit its directors, officers, employees or agents
to do so) if Shawnee's Board of Directors, after consulting with counsel,
determines that such actions should be taken or permitted in the exercise of
its fiduciary duties. If Shawnee becomes aware of any offer or proposed offer
to acquire any shares of Shawnee or Everett or any significant portion or its
or Everett's assets, or of any other matter which is reasonably likely to
adversely affect the parties' ability to consummate the Merger, Shawnee is
required to give immediate notice thereof to Keystone.
Conduct of Shawnee Business Pending the Merger
Shawnee has agreed in the Plan of Merger that, pending consummation of
the Merger, Shawnee and Everett will conduct their businesses only in the
ordinary course and that, except as consented to by Keystone, Shawnee and
Everett will not, among other things, (i) issue, purchase or otherwise dispose
of or acquire any shares of their capital stock or grant any options or other
rights to acquire such stock; (ii) make certain changes in the compensation or
benefits payable to employees or enter into employment contracts; (iii) merge
or consolidate with, or acquire control over, any other corporation, bank or
other organization or acquire or dispose of any material assets outside the
ordinary course of business; (iv) make capital expenditures or lease assets in
excess of certain limits; or (v) make material changes to their lending or
investment policies.
Shawnee Dividend Limitation
Shawnee has agreed in the Plan of Merger that pending the Merger it will
not declare or pay dividends on the Shawnee Common Stock other than its
regular $2.70 per share dividend declared in 1994 ($0.25 per share declared
June 14, 1994, payable July 1, 1994, and $2.45 per share declared December 13,
1994, payable January 1, 1995). In 1995, Shawnee has agreed not to declare or
pay dividends exceeding $2.70 per share over the twelve month period, and has
further agreed to prorate the dividend based on the $2.70 annual amount, with
the prorated dividend to be payable shortly prior to the Merger.
Conditions to the Merger
In addition to shareholder approval, the Merger is contingent upon the
satisfaction of a number of other conditions, including (i) approval of the
Merger by the Federal Reserve Board and the Pennsylvania Department of Banking
without conditions deemed unduly burdensome by Keystone and the absence of any
suit by the United States to prohibit the Merger filed within the 30 days
following Federal Reserve Board approval, (ii) receipt of the tax opinion
described above (see "Tax Consequences"), (iii) receipt of the agreements of
Shawnee affiliates described below under "Restrictions on Resales by Shawnee
Affiliates" and (iv) the absence of any judicial or administrative order
prohibiting or adversely affecting the Merger or any pending or threatened
litigation or administrative proceeding challenging the Merger. Keystone's
obligation to consummate the Merger is subject to the additional conditions
that the Bank Merger shall have been approved by the Federal Deposit Insurance
Corporation ("FDIC") and the Pennsylvania Department of Banking without
conditions deemed unduly burdensome by Keystone and that no suit to prohibit
the Bank Merger shall have been filed by the United States during the 30
-16-
<PAGE>
days following FDIC approval. In addition, unless waived, each party's
obligation to consummate the Merger is subject to the performance by the other
party of its obligations under the Plan of Merger, the accuracy of the
representations and warranties of the other party contained therein and the
receipt of certain certificates and opinions from the other party and its
counsel. If the Distribution Date under Keystone's shareholder rights plan
(see "Comparison of Keystone Common Stock and Shawnee Common Stock--Keystone
Shareholder Rights Plan") shall have occurred, then either (i) all Rights
outstanding under the plan (other than those which have become void) shall
have been exchanged for Keystone Common Stock and the ratio for converting
Shawnee Common Stock into Keystone Common Stock in the Merger shall have been
proportionately adjusted as provided in the Plan of Merger, (ii) all Rights
outstanding under the plan shall have been redeemed or (iii) Keystone shall
have made provision for the issuance of equivalent rights to the holders of
Shawnee Common Stock upon consummation of the Merger.
Representations and Warranties
The representations and warranties of Keystone and Shawnee contained in
the Plan of Merger relate, among other things, to the organization and good
standing of Keystone, Shawnee and their subsidiaries; the capitalization of
Keystone and Shawnee and ownership of their subsidiaries; the authorization by
Keystone and Shawnee of the Plan of Merger and the Warrant Agreement and the
absence of conflict with laws or other agreements; the accuracy and
completeness of the financial statements and other information furnished to
the other party; the absence of material adverse changes since December 31,
1994; the absence of undisclosed litigation; compliance with laws; and the
accuracy of this Proxy Statement/Prospectus and of Keystone's Registration
Statement of which it is a part. Additional representations and warranties by
Shawnee concern payment of taxes; title to properties; the absence of
undisclosed equity investments, employment contracts, employee benefit plans
or material contracts; and the absence of certain potential environmental
liabilities. None of the representations and warranties contained in the Plan
of Merger will survive the consummation of the Merger.
Amendment, Waiver and Termination
Notwithstanding prior shareholder approval, the Plan of Merger may be
amended in any respect by written agreement between the parties, except that
after shareholder approval no amendment may change the rate of exchange of
Shawnee Common Stock for Keystone Common Stock in the Merger or change the
form of such consideration. Keystone or Shawnee may also (i) extend the time
for performance of any of the obligations of the other; (ii) waive any
inaccuracies in the representations and warranties of the other; (iii) waive
compliance by the other with any of its obligations under the Plan of Merger;
and (iv) waive any condition precedent to its obligations under the Plan of
Merger other than approval by the shareholders of Shawnee of the Plan of
Merger, governmental regulatory approvals required to consummate the Merger,
securities registration requirements incident to the issuance of Keystone
Common Stock in the Merger, the receipt of the tax opinions described above
and the absence of any judicial or administrative order prohibiting the
Merger.
Notwithstanding prior shareholder approval, the Plan of Merger may be
terminated without liability of either party at any time prior to
effectiveness of the Merger (i) by mutual consent of Keystone and Shawnee or
(ii) by either party in the event of (a) a material breach by the other party
of a representation and warranty or covenant which has not been cured within
30 days after notice to the breaching party, (b) failure of the Shawnee
shareholders to approve the Plan of Merger at the Special Meeting, (c) a final
judicial or regulatory determination denying any regulatory approval required
for the Merger or imposing conditions or requirements which Keystone
determines to be unduly burdensome or (d) failure to satisfy prior to
September 30, 1995 any condition to its obligations to consummate the Merger,
if such failure occurs despite the good faith effort of the terminating party
to perform all covenants and satisfy all conditions required of it. The
deadline for satisfying the conditions to the Merger will be extended to
December 31, 1995 if the failure to satisfy such conditions results from a
delay in receiving Federal Reserve Board approval.
-17-
<PAGE>
Shawnee may terminate the Plan of Merger if (i) the average of the
closing bid prices for Keystone Common Stock on the NASDAQ National Market
System for the 10 consecutive trading days ending on the sixth trading day
prior to the closing date for the Merger (the "Valuation Period") shall be
less than $24.86 (85% of the closing bid price on January 4, 1995) and (ii)
the number obtained by dividing such average Keystone bid price by $29.25 (the
closing bid price on January 4, 1995) is less than 85% of the number obtained
by dividing the average of the NASDAQ Combined Bank Index for the Valuation
Period by 708.30 (such index at January 4, 1995).
Dissenters' Rights of Shawnee Shareholders
A holder of shares of Shawnee Common Stock is entitled to exercise the
rights of a dissenting shareholder under Subchapter D of Chapter 15
("Subchapter D") of the Pennsylvania Business Corporation Law of 1988, as
amended (the "BCL"), to object to the Plan of Merger and make written demand
that Shawnee or Keystone, as the surviving corporation in the Merger, pay in
cash the fair value of the shares held as determined in accordance with such
statutory provisions. The following summary does not purport to be a complete
statement of the provisions of Subchapter D and is qualified in its entirety
by reference to such statutory provisions, which (together with Section 1930
of the BCL) are set forth in full as Annex II to this Proxy
Statement/Prospectus.
A record holder of shares of Shawnee Common Stock may assert dissenters'
rights as to fewer than all such shares registered in his name only if he
dissents with respect to all the shares beneficially owned by any one person
and discloses the name and address of the person or persons on whose behalf he
dissents.
A beneficial owner of shares of Shawnee Common Stock who is not the
record holder of such shares is entitled to assert dissenters' rights with
respect to shares held on his behalf only if he submits to Shawnee no later
than the time of the assertion of dissenters' rights a written consent of the
record holder of such shares. A beneficial owner may not dissent with respect
to less than all shares of Shawnee Common Stock owned by him, whether or not
the shares so owned by him are registered in his name.
In the event that a holder of shares of Shawnee Common Stock wishes to
dissent to the Plan of Merger and obtain payment of the fair value of his
shares, he must satisfy all the following conditions to acquire any right to
payment of the fair value of his shares under Subchapter D:
(1) He must file with Shawnee, prior to the vote on the Plan of
Merger, a written notice of intention to demand that he be paid the fair
value for his shares if the Plan of Merger is effectuated. Neither a
proxy indicating a vote against, nor a vote in person against, the Plan
of Merger shall constitute the written notice required.
(2) He must effect no change in the beneficial ownership of his
shares from the date of filing such written notice continuously through
the effective date of the Merger.
(3) He must not vote his shares in favor of the Plan of Merger.
Neither an abstention from voting with respect to, nor failure to vote
in person or by proxy against approval of, the Plan of Merger
constitutes a waiver of the rights of a dissenting shareholder.
However, a signed proxy that is returned without any instruction as to
how the proxy should be voted will be voted in favor of approval of the
Plan of Merger and will be deemed a waiver of the rights of a dissenting
shareholder.
A dissenter who fails in any of these respects shall not acquire any
right to payment of the fair value of his shares under Subchapter D. Each
written notice of intention to demand payment must clearly state that the
shareholder intends to demand that he be paid the fair value of his shares if
the Plan of Merger is effectuated, must provide the name, address and
telephone number of the shareholder and should be sent to Shawnee Financial
Services Corporation, 115 East Main Street, P.O. Box 149, Everett,
Pennsylvania 15537, Attention: Samuel K. Bohn, President. A dissenting
shareholder shall retain all other rights of a Shawnee shareholder until those
rights are modified by effectuation of the Plan of Merger.
-18-
<PAGE>
If the Plan of Merger is approved by the shareholders of Shawnee by the
required vote at the Special Meeting, Shawnee or Keystone shall mail a notice
to all dissenters who gave due notice of intention to demand payment of the
fair value of their shares and who did not vote in favor of the Plan of
Merger. Such notice shall:
(1) State where and when a demand for payment must be sent and
certificates representing Shawnee shares must be deposited in order to
obtain payment. The time set for receipt of the demand and deposit of
shares shall be not less than 30 days from the mailing of the notice.
(2) Supply a form for demanding payment that includes a request
for certification of the date on which the shareholder, or the person on
whose behalf the shareholder dissents, acquired beneficial ownership of
the shares.
(3) Be accompanied by a copy of Subchapter D.
The dissenting shareholder must make written demand for payment of the
fair value of the shares with respect to which dissent is made and must
deposit certificates representing such shares in accordance with the terms of
the notice to demand payment sent by Shawnee or Keystone. A shareholder who
fails to timely demand payment, or fails to timely deposit certificates, as
required by the notice to demand payment, shall not have any right under
Subchapter D to receive payment of the fair value of his shares.
Within 60 days after the date set for demanding payment and depositing
certificates, if the Plan of Merger has not been effectuated, Shawnee or
Keystone shall return any certificates that have been deposited. When
deposited certificates have been returned, Shawnee or Keystone may at any
later time send a new notice to demand payment, which will have a like effect
as the original notice.
Promptly after effectuation of the Plan of Merger, or upon timely
receipt of demand for payment if the Plan of Merger has already been
effectuated, Keystone shall either remit to dissenters who have made demand
and have deposited their certificates the amount that Keystone estimates to be
the fair value of the shares, or shall give written notice that no remittance
will be made. The remittance or notice shall be accompanied by: (1) the
closing balance sheet and statement of income of Shawnee for the fiscal year
ending not more than 16 months before the date of remittance or notice,
together with the latest available interim financial statements; (2) a
statement of Keystone's estimate of the fair value of the shares; and (3) a
notice of the right of the dissenter to demand payment or supplemental
payment, as the case may be, accompanied by a copy of Subchapter D. If
Keystone does not remit the amount of its estimate of the fair value of the
shares, it shall return any certificates that have been deposited. Keystone
may make a notation on any such certificates that demand for payment has been
made.
If Keystone gives notice of its estimate of the fair value of the
shares, without remitting such amount, or remits payment of its estimate of
the fair value of a dissenter's shares and the dissenter believes that the
amount stated or remitted is less than the fair value of his shares, the
dissenter may send to Keystone his own estimate of the fair value of the
shares, which shall be deemed a demand for payment of such amount or the
deficiency.
Where the dissenter does not file his own estimate within 30 days after
the mailing by Keystone of its remittance or notice, the dissenter shall be
entitled to no more than the amount stated on the notice or remitted to him by
Keystone.
Within 60 days after the latest of (1) effectuation of the Plan of
Merger, (2) timely receipt of any demands for payment, or (3) timely receipt
of any estimates by dissenters of the fair value of their shares, if any
demands for payment remain unsettled, Keystone may file in court an
application for relief requesting that the fair value of the shares be
determined by the court. All dissenting shareholders, wherever residing,
whose demands have not been settled shall be made parties to the proceeding.
A copy of the application for relief shall be served on each such dissenter.
-19-
<PAGE>
The court may appoint an appraiser to receive evidence and recommend a
decision on the issue of fair value, which appraiser shall have such power and
authority as may be specified by the court.
Each dissenter who is made a party to the proceeding shall be entitled
to recover the amount, if any, by which the fair value of his shares is found
to exceed the amount, if any, previously remitted by Keystone, plus interest.
If Keystone fails to file an application for relief, any dissenter who
made a demand and who has not already settled his claim against Keystone may
do so in the name of Keystone at any time within 30 days after the expiration
of the 60-day period. If a dissenter does not file an application within such
30-day period, each dissenter entitled to file an application shall be paid
Keystone's estimate of the fair value of his shares and no more, and may bring
an action to recover any amount not previously remitted.
In general, the costs and expenses of any valuation proceeding,
including the reasonable compensation and expenses of the appraiser appointed
by the court, shall be determined by the court and assessed against Keystone.
However, any part of the costs and expenses may be apportioned and assessed as
the court deems appropriate against all or some of the dissenting shareholders
who are parties to the proceeding and whose action in demanding supplemental
payment the court finds to be dilatory, obdurate, arbitrary, vexatious or in
bad faith.
Fees and expenses of counsel and of experts for the respective parties
may be assessed as the court deems appropriate against Keystone and in favor
of any or all dissenters if Keystone or Shawnee failed to comply substantially
with the requirements of Subchapter D. Such fees and expenses may be assessed
against either Keystone or a dissenter, in favor of any other party, if the
court finds that the party against whom the fees and expenses are assessed
acted in bad faith or in a dilatory, obdurate, arbitrary or vexatious manner
in respect to the rights provided by Subchapter D. If the court finds that
the services of counsel for any dissenter were of substantial benefit to other
dissenters similarly situated and should not be assessed against Keystone, it
may award to those counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefited.
SHAWNEE SHAREHOLDERS WISHING TO EXERCISE DISSENTERS' RIGHTS ARE ADVISED
TO CONSULT THEIR OWN COUNSEL TO ENSURE THAT THEY FULLY AND PROPERLY COMPLY
WITH THE REQUIREMENTS OF SUBCHAPTER D.
Restrictions on Resales by Shawnee Affiliates
The shares of Keystone Common Stock issuable in the Merger have been
registered under the Securities Act, and such shares will generally be freely
tradeable by the Shawnee shareholders who receive Keystone shares as a result
of the Merger. However, this registration does not cover resales by Shawnee
shareholders who may be deemed to control or be under common control with
Shawnee and who therefore may be deemed "affiliates" of Shawnee as that term
is defined in Rule 145 under the Securities Act. Such affiliates may not sell
their shares of Keystone Common Stock acquired in the Merger except pursuant
to: (i) an effective Registration Statement under the Securities Act covering
the shares to be sold; (ii) the conditions contemplated by Rules 144 and 145
under the Securities Act; or (iii) another applicable exemption from the
registration requirements of the Securities Act. The management of Shawnee
will notify those persons whom it believes may be such affiliates.
The Plan of Merger requires as a condition to the Merger that each such
Shawnee affiliate enter into an agreement not to sell the shares of Keystone
Common Stock acquired in the Merger except in accordance with the requirements
of the Securities Act and the regulations thereunder.
-20-
<PAGE>
Effect of Certain Transactions Involving Keystone
The Plan of Merger provides that Keystone may not enter into an
agreement for a merger, consolidation or share exchange in which it will not
be the surviving or resulting corporation unless the surviving or resulting
corporation shall have agreed in writing to be bound by the terms of the Plan
of Merger and the Warrant Agreement. If under the terms of any such
transaction the outstanding Keystone Common Stock is converted into or
exchanged for other securities of any person, cash or other property, the Plan
of Merger shall be appropriately amended so that Shawnee shareholders will
receive in the Merger, for each share of Shawnee Common Stock held, 6.25 times
the consideration paid in such transaction for shares of Keystone Common
Stock. As indicated above, it is a condition to the Merger that the parties
receive the tax opinion described under "Tax Consequences" above. While this
condition will not prevent Keystone from entering into any such transaction,
Shawnee is not required to amend or waive this condition.
As of the date of this Proxy Statement/Prospectus, Keystone does not
contemplate entering into any transaction of the type described above, and
Keystone is not aware that any such transaction is contemplated by any third
person.
Expenses
Keystone and Shawnee will each pay 50% of (1) all printing costs related
to securities registration and the solicitation of proxies for the Special
Meeting, (2) all filing fees and legal and accounting fees and expenses
related to the tax opinion referred to above and to the regulatory approvals
required for the Merger and (3) the fees of Berwind Financial Group, L.P.,
Shawnee's financial advisor, except that the portion of such fees payable by
Keystone shall be limited to $26,250. Each party will pay its own other
expenses incurred in connection with the Plan of Merger. However, the Plan of
Merger provides that if the Merger is not consummated as a direct or indirect
consequence of a change of control of Shawnee, Shawnee shall reimburse
Keystone for all of its reasonable out-of-pocket expenses incurred in
connection with the Plan of Merger.
Effective Date of the Merger
It is presently anticipated that if the Plan of Merger is approved by
the shareholders of Keystone and Shawnee, the Merger will become effective in
the third quarter of 1995. However, as noted above, consummation of the
Merger is subject to the satisfaction of a number of conditions, some of which
cannot be waived. There can be no assurance that all conditions to the Merger
will be satisfied or, if satisfied, that they will be satisfied in time to
permit the Merger to become effective within the anticipated time frame. In
addition, as also noted above, Keystone and Shawnee retain the power to
abandon the Merger or to extend the time for performance of conditions or
obligations necessary to its consummation, notwithstanding prior shareholder
approval.
Accounting Treatment
Normally, the Merger would be accounted for by Keystone under the
pooling-of-interests method of accounting, which views the Merger as a uniting
of the separate ownership interests of Keystone and Shawnee through an
exchange of shares. However, if the number of treasury shares purchased by
Keystone under its share repurchase program exceeds certain limits, Keystone
may be required to account for the Merger under the purchase method of
accounting.
Under the pooling-of-interests method, the financial statements of the
merged company normally reflect the combined historical financial data of the
merging companies, subject only to certain adjustments to the capital accounts
to reflect the share exchange of shares. However, due to the immaterial
impact of the Merger on
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<PAGE>
Keystone's previously reported results, it is anticipated that Keystone's
historical financial statements would not be restated if the Merger is
accounted for as a pooling-of-interests.
If the Merger is accounted for under the purchase method, the assets and
liabilities of Shawnee acquired in the Merger will be recorded by Keystone for
financial reporting purposes at their market values as of the date of the
Merger, and any excess of the consideration paid over the net market values
acquired will be recorded and amortized as goodwill.
Pro forma financial information concerning the Merger is not included
herein since the addition of Shawnee under either accounting method would not
have materially affected the Keystone historical financial information as
presented.
-22-
<PAGE>
INFORMATION CONCERNING KEYSTONE
Keystone Financial, Inc.
SELECTED FINANCIAL DATA
The following unaudited table of selected financial data should be read in
conjunction with Keystone's consolidated financial statements and the related
notes and with Keystone's management's discussion and analysis of financial
condition and results of operation (Financial Review), incorporated herein by
reference. See "Keystone Documents Incorporated by Reference."
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
-------------------------- ---------------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------------ ------------ ------------ ------------ ------------ ------------ -------------
(In Thousands, Except Per Share Amounts and Ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Interest income.............. $ 88,758 $ 73,515 $ 313,202 $ 307,755 $ 330,645 $ 365,516 $ 377,048
Interest expense............. 39,032 28,341 124,784 125,245 152,718 201,782 221,322
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income.......... 49,726 45,174 188,418 182,510 177,927 163,734 155,726
Provision for credit losses.. 2,084 1,642 9,484 7,940 16,053 16,323 15,107
Noninterest income........... 11,486 11,279 44,629 45,819 39,276 33,563 29,185
Noninterest expense.......... 37,933 35,416 151,723 148,003 138,840 127,896 120,501
Income tax expense........... 6,539 5,349 20,481 21,037 16,568 12,810 11,583
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income................... $ 14,656 $ 14,046 $ 51,359 $ 51,349 $ 45,742 $ 40,268 $ 37,720
=========== =========== =========== =========== =========== =========== ===========
Pre-tax security gains,
included in above.......... $ 32 $ 611 $ 834 $ 1,669 $ 1,750 $ 1,976 $ 84
Per Share:
Net income................... $ 0.63 $ 0.60 $ 2.20 $ 2.20 $ 1.99 $ 1.77 $ 1.66
Dividends.................... 0.34 0.32 1.30 1.19 1.10 1.02 0.91
Dividend payout ratio........ 54.00% 53.30% 59.22% 54.01% 55.27% 57.58% 54.89%
Average shares
outstanding................ 23,431,267 23,423,767 23,395,425 23,304,618 22,983,908 22,732,729 22,700,587
Balances at Period End:
Loans and leases............. $ 3,237,611 $ 2,800,225 $ 3,193,405 $ 2,775,198 $ 2,785,335 $ 2,821,302 $ 2,762,647
Allowance for
credit losses.............. 43,109 40,175 42,440 40,181 38,940 35,770 32,299
Total assets................. 4,679,942 4,346,653 4,706,000 4,419,726 4,311,779 4,120,215 4,041,232
Deposits..................... 3,825,127 3,573,328 3,827,983 3,582,688 3,655,261 3,560,284 3,523,779
Long-term debt............... 5,528 6,793 6,054 5,990 5,144 2,143 2,989
Shareholders' equity......... 424,632 411,289 407,774 412,880 378,314 348,143 27,092
Book value per share......... 18.06 17.58 17.46 17.65 16.29 15.27 14.41
Selected Ratios:
Return on average assets..... 1.26% 1.31% 1.16% 1.19% 1.08% 0.98% 0.96%
Return on average equity..... 14.33 13.81 12.71 12.98 12.58 11.87 11.82
Interest rate spread......... 3.96 4.04 4.04 4.07 4.02 3.66 3.51
Net interest margin.......... 4.63 4.60 4.63 4.63 4.67 4.48 4.45
Average equity to
average assets............. 8.82 9.47 9.09 9.13 8.62 8.29 8.10
Loans to deposits
at period end.............. 84.64 78.36 83.42 77.46 76.20 79.24 78.40
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
-------------- -----------------------------------------
1995 1994 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------ ------
(In Thousands, Except Per Share Amounts and Ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Ratios (Continued):
Allowance for credit losses to
loans at period end............. 1.33 1.43 1.33 1.45 1.40 1.27 1.17
Nonperforming assets to
loans and ORE................... 0.79 1.34 0.95 1.32 1.66 1.51 1.17
Loans 90 days past due............ 0.28 0.26 0.24 0.14 0.22 0.30 0.53
Total risk elements to loans and
ORE at period end (1)........... 1.07 1.60 1.19 1.46 1.88 1.81 1.70
Risk-Adjusted Capital Ratios:
Leverage ratio.................... 9.14% 9.42% 8.84% 9.18% 8.66% 8.30% 7.81%
"Tier 1" capital ratio............ 13.39 14.86 12.96 14.05 13.06 12.21 11.21
"Total" capital ratio............. 14.64 16.11 14.21 15.30 14.26 13.44 12.36
</TABLE>
- -----------------
(1) Total risk elements include nonperforming assets and loans past due
90 days or more.
-24-
<PAGE>
STOCK PRICES AND DIVIDENDS ON KEYSTONE COMMON STOCK
Keystone Common Stock is traded in the over-the-counter market under the
symbol "KSTN" and is listed in the NASDAQ National Market System. The following
table sets forth the high and low closing sales prices for Keystone Common Stock
for the periods indicated, in each case as reported by NASDAQ, and the cash
dividends per share declared on Keystone Common Stock for such periods.
<TABLE>
<CAPTION>
Quarterly Closing Sales
Price Range Cash
----------------------- Dividends
High Low Declared
----------- ---------- ---------
<S> <C> <C> <C>
1993
First Quarter............ $34.00 $29.00 $ .29
Second Quarter........... 34.50 30.75 .29
Third Quarter............ 31.75 28.25 .29
Fourth Quarter........... 32.50 29.75 .32
-----
$1.19
=====
1994
First Quarter............ $32.25 $27.50 $ .32
Second Quarter........... 32.00 27.75 .32
Third Quarter............ 32.00 27.75 .32
Fourth Quarter........... 30.25 27.25 .34
-----
$1.30
=====
1995
First Quarter............ $30.25 $26.25 $ .34
Second Quarter (through
June 20, 1995)......... 29.125 26.75 .34
</TABLE>
On January 5, 1995, the last NASDAQ trading day prior to the public
announcement of the Merger, the closing sale price for the Keystone Common Stock
was $29.625. On June 20, 1995, the closing sale price for the Keystone Common
Stock was $28.125. On April 30, 1995, there were approximately 23,509,609 shares
of Keystone Common Stock outstanding. On March 31, 1995 Keystone had
approximately 10,790 shareholders of record.
While Keystone is not obligated to pay cash dividends, Keystone's Board of
Directors presently intends to continue the policy of paying quarterly cash
dividends. Future dividends will depend, in part, upon the earnings and
financial condition of Keystone.
-25-
<PAGE>
INFORMATION CONCERNING SHAWNEE
Shawnee Financial Services Corporation
SELECTED FINANCIAL DATA
The following unaudited table of selected financial data should be read
in conjunction with Shawnee Management's Discussion and Analysis of Financial
Condition and Results of Operations, which follows, and with Shawnee's
consolidated financial statements and the related notes, which begin on page
F-1.
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
----------------- --------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
(In Thousands, Except Per Share Amounts and Ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Interest income........................ $ 1,263 $ 1,238 $ 5,090 $ 5,074 $ 5,033 $ 5,480 $ 5,460
Interest expense....................... 542 507 2,007 2,039 2,199 2,993 3,332
------- ------- ------- ------- ------- ------- -------
Net interest income.................... 721 731 3,083 3,036 2,833 2,487 2,128
Provision for loan losses.............. 0 0 0 0 0 50 27
Noninterest income..................... 40 42 145 158 69 89 303
Noninterest expense.................... 509 507 2,259 2,093 1,967 1,930 1,681
Income tax expense..................... 61 72 242 266 207 110 152
------- ------- ------- ------- ------- ------- -------
Net income............................. $ 191 $ 194 $ 727 $ 834 $ 728 $ 486 $ 571
======= ======= ======= ======= ======= ======= =======
Pre-tax security gains (losses),
included in above.................... $ -- $ -- $ -- $ 1 $ (22) $ (1) $ 188
Per Share:
Net income............................. $ 2.38 $ 2.42 $ 9.07 $ 10.35 $ 9.01 $ 6.02 $ 7.10
Dividends.............................. -- -- 2.70 2.60 2.50 2.40 2.30
Dividend payout ratio.................. N/A N/A 29.77% 24.98% 27.75% 39.95% 32.48%
Average shares
outstanding.......................... 80,184 80,184 80,184 80,600 80,870 80,870 80,670
Balances at Period End:
Loans.................................. $38,915 $38,659 $40,044 $39,016 $31,231 $30,647 $31,920
Allowance for loan losses.............. 184 185 184 184 196 207 179
Total assets........................... 71,209 72,935 69,951 72,392 68,671 61,721 58,905
Deposits............................... 62,627 64,332 61,650 64,150 60,947 54,667 51,966
Long-term debt......................... -- -- -- -- -- -- --
Shareholders' equity................... 8,053 7,603 7,581 7,306 6,719 6,193 5,866
Book value per share................... 100.43 94.82 94.55 91.11 83.09 76.58 72.97
Selected Ratios:
Return on average assets............... 1.12% 1.13% 1.01% 1.18% 1.16% 0.79% 0.98%
Return on average equity............... 10.60 11.55 9.69 12.28 11.83 8.52 0.18
Interest rate spread................... 3.70 3.81 3.92 3.94 3.99 3.16 2.73
Net interest margin.................... 4.40 4.35 4.51 4.51 4.72 4.30 3.95
Average equity to
average assets....................... 10.49 9.59 10.52 10.31 10.68 9.31 9.58
Loans to deposits
at period end........................ 61.81 59.71 62.79 60.53 50.92 55.68 61.08
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
--------------- ------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------ ------
(In Thousands, Except Per Share Amounts and Ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Ratios (Continued):
Allowance for loan losses to
loans at period end............ 0.47 0.48 0.48 0.47 0.63 0.68 0.56
Nonperforming assets to
loans and ORE.................. 0.44 0.44 0.44 0.44 0.56 -- 0.25
Loans 90 days past due........... 0.25 0.33 0.10 0.14 0.09 0.23 0.25
Total risk elements to loans
and ORE at period end (1)........ 0.69 0.77 0.54 0.58 0.65 0.23 0.50
Risk-Adjusted Capital Ratios:
Leverage ratio................... 14.04% (2) 14.03% (2) (2) (2) (2)
"Tier 1" capital ratio........... 14.04 (2) 14.03 (2) (2) (2) (2)
"Total" capital ratio............ 14.36 (2) 14.36 (2) (2) (2) (2)
</TABLE>
- ------------------------
(1) Total risk elements include nonperforming assets and loans past due 90 days
or more.
(2) These numbers are not available.
SHAWNEE MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The disclosures called for by SEC Industry Guide 3, which detail many
aspects of a banking company's financial condition and results of operations,
are generally required by the SEC for banking companies subject to the SEC's
periodic reporting requirements. Shawnee is not subject to the SEC's periodic
reporting requirements. Shawnee does not in its ordinary course maintain the
information necessary to compile many of the disclosures required pursuant to
Guide 3 and compiling such information would be very expensive and time
consuming. Therefore, Shawnee is not providing all disclosures required by Guide
3 to shareholders. Shawnee believes it is providing shareholders with all
material information concerning the company and its operations (including
elements of the bank's loan portfolio) for shareholders to make an investment
decision in favor or against the proposed Merger.
-27-
<PAGE>
1994 versus 1993
Net Income
Net income decreased year to year by 12.86% from 834,494 in 1993 to
$727,198 in 1994. The principal reasons for this decline were an increased cost
of funds, resulting from several interest rate hikes by the Federal Reserve
Board during the year, and an increase in certain expenses, relating to
increased staff levels and the phase-in of certain newer technologies. The bank
remained solidly profitable, however, although net income per share fell from
$10.35 in 1993 to $9.07 in 1994.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
<S> <C> <C> <C>
1994 1993 % Change
---------- ---------- --------
INTEREST INCOME
Loans.............................. $3,443,191 $3,403,912 1.15%
Investment Securities.............. 1,273,873 1,253,638 1.61%
Interest-bearing Deposits.......... 79,073 208,369 (62.05%)
Federal Funds Sold................. 293,477 208,404 40.82%
---------- ----------
5,089,614 5,074,323 .30%
INTEREST EXPENSE
Deposits........................... 2,007,075 2,038,678 (1.55%)
---------- ----------
NET INTEREST INCOME................ 3,082,539 3,035,645 1.54%
Provision for Loan Losses........ 0 0
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES........ 3,082,539 3,035,645 1.54%
OTHER INCOME
Service Fees....................... 79,510 69,874 13.79%
Other.............................. 65,256 75,179 (13.20%)
Net Investment Gains............... 0 9,300
Gain on Sale of Equipment.......... 0 3,700
---------- ----------
144,766 158,053 (8.41%)
OTHER EXPENSES
Salaries........................... 913,234 829,935 10.04%
Pension and Other Employee Benefits 223,195 230,393 (3.12%)
Occupancy Expense.................. 121,905 115,601 5.45%
Depreciation....................... 210,583 213,394 (1.32%)
Other.............................. 790,263 703,407 12.35%
---------- ----------
2,259,180 2,092,730 7.95%
---------- ----------
INCOME BEFORE INCOME TAXES..... 968,125 1,100,968 (12.07%)
PROVISION FOR INCOME TAXES......... 240,927 266,474 (9.59%)
---------- ----------
NET INCOME..................... $ 727,198 $ 834,494 (12.86%)
========== ==========
NET INCOME PER SHARE............... $ 9.07 $ 10.35 (12.37%)
========== ==========
</TABLE>
-28-
<PAGE>
Net Interest Income
Interest income was virtually unchanged year to year ($5,089,614 in 1994
vs. $5,074,323 in 1993), with a decrease of income from interest-bearing
deposits held by the bank in other institutions being offset by an increase in
income from federal funds sold. The latter are instruments sold to other banks
to meet short-term liquidity needs.
Interest on loans grew only 1.15% year to year, with growth occurring
primarily in the real estate loan area. The return on average earning assets
dropped from 7.74% in 1993 to 7.68% in 1994, as the general decline in interest
rates from 1993 levels was the primary driver of these lower asset yields.
The Bank's net interest margin (i.e., the difference between the cost of
funds for the bank and the cost at which it can lend these funds) remained the
same in 1994 as in 1993 at 4.51%. Management anticipates a decline in net
interest margins in 1995 if short-term interest rates continue to rise.
Interest Expense
Interest expense remained practically unchanged year to year, although
deposits decreased by approximately $2.5 million year to year. The effects of
the Federal Reserve's interest rate policy began to have a greater effect during
the later part of 1994, reflecting an increased cost of funds which is expected
to continue into 1995. An increase in the bank's cost of funds is also likely
because the bank must compete against various bank and non-bank institutions to
retain or expand its deposit base.
Provision for Loan Losses
Non-performing assets as a percentage of total assets remained at
comparable levels year to year.
Shawnee's allowance for loan losses was $184,000 at the end of 1994 and
represented .48% of loans. The allowance at the end of 1993 was $184,000, or
.47% of loans. Total risk elements, which include nonperforming assets and loans
90 days past due, decreased from .58% of loans at the end of 1993 to .52% of
loans at December 31, 1994.
Shawnee's 1994 provision was consistent with the volume of net charge-offs
and responsive to overall asset quality trends, and the allowance for loan
losses is maintained at a level which, in management's judgment, is adequate to
absorb potential losses in its loan portfolio.
The breakdown of the categories for loan loss reserves were as follows for
both 1994 and 1993:
Real Estate Loans $ 30,000
Installment Loans $ 40,000
Commercial Loans $114,000
Other than as disclosed in this Management's Discussion and Analysis or
elsewhere in this Proxy Statement/Prospectus, Shawnee management is unaware of
any potential problem loans. Further, the Bank does not make any foreign loans,
nor is it aware of any significant concentration of loans.
Non-Interest Income
Other income, which includes revenues from service fees, was also flat year
to year ($144,766 in 1994 vs. $158,043 in 1993). Gains on the sales of
securities in 1993 matched increases in service fees and other revenues in 1994.
-29-
<PAGE>
Non-Interest Expense
Other expenses, which includes salaries, employee benefits and expenses
related to the maintenance and upkeep of the bank's properties, rose 7.9% year
to year. Salary expense increased as a result of increased staff levels added
during the year. In addition, increased occupancy expense, insurance expense and
expenses related to the continuing phase-in of several automated teller machines
("ATMs") affected costs significantly. While expenses relating to operation of
ATMs currently exceed revenues, management believes that the attractiveness to
customers of ATMs makes them worthwhile, and that this imbalance will equalize
over time.
Book Value and Dividends
Book value continued its historic climb to $94.55 in 1994 from $91.11 in
1993. This occurred notwithstanding the implementation of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," which
negatively impacted shareholders' equity by $235,119, or $2.93 per share. As
required by SFAS No. 115, implemented on January 1, 1994, management classified
its entire securities portfolio as available for sale due to the identification
of circumstances which could result in the securities not being held to
maturity.
In 1994 Shawnee raised its dividend to $2.70 per share from $2.60 per share
in 1993, continuing its historical pattern of increasing annual dividends.
Other Key Indices
As of December 31, 1994, the average yields on the Bank's interest
generating assets were as follows:
Loans 8.82%
Investments 6.38%
Interest-bearing deposits 4.11%
Federal Funds 4.21%
The average cost for customers' deposits was 3.59%.
Return on average assets (ROA) and return on average equity (ROE) were
1.01% and 9.69%, respectively, for 1994 versus 1.18% and 12.28% for 1993. These
ratios indicate to shareholders how well their money is being employed by
Shawnee and compare favorably with other banks of similar size. The declines in
ROA and ROE were largly due to the decrease in earnings year to year. The
decline in ROE was proportionately greater than that of ROA because the capital
base of Shawnee continued to increase given the Bank's overall profitability,
while the Bank's asset size fell slightly.
Capital Resources
The Bank is required to maintain certain levels of capital in accordance
with regulations of the FDIC. The minimum guidelines for the ratio of total
capital to risk-weighted assets (including certain off-balance-sheet
activities, such as standby letters of credit) is 8%. At least 4% of the
total capital must be "Tier I Capital" or core capital, which may be composed
of common equity, retained earnings and a limited amount of perpetual
preferred stock, less goodwill and intangible assets other than purchased
mortgage servicing rights acquired after February 18, 1992. The remainder may
consist of subordinated debt, cumulative preferred stock and a limited amount
of loan loss reserves ("Tier II Capital"). In addition, the Federal Reserve
Board has established minimum leverage ratio guidelines for bank holding
companies. These guidelines provide a minimum leverage ratio of tangible
equity (shareholders' equity less disallowed intangibles) to adjusted average
quarterly assets equal to 3% for bank holding companies that meet certain
specified criteria. The Bank's capital levels and capital requirements as of
December 31, 1994, are set forth in the following table:
-30-
<PAGE>
<TABLE>
<CAPTION>
Shawnee's Capital In Excess
FDIC Minimum Actual of Minimum
Capital Capital Requirements
Requirements ----------------- ------------------
as % of % of % of
Adjusted Adjusted Adjusted
Total Total Total
Assets Amount Assets Amount Assets
---------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Risk-Based Capital:
Tier 1 Capital........ 4.00% $7,816,000 14.03% $784,000 10.03%
Tier 2 Capital........ $ 184,000 0.33% $184,000 0.33%
Total Capital....... 8.00% $8,000,000 14.36% $509,000 6.36%
Leverage Ratio........ 3.00% $7,816,000 14.03% $862,000 11.03%
</TABLE>
As of December 31, 1994, Shawnee complied with all capital levels required
by the FDIC.
-31-
<PAGE>
1993 versus 1992
Net Income
Net income in 1993 reached an historic high as a result of a very favorable
net interest margin (i.e., the difference between the cost of funds for the Bank
and the cost at which it can lend these funds). This was coupled with a stronger
economy in 1993 than in 1992 and lower interest rates, causing business and
individuals to increase their demand for loans. On a year-to-year basis, net
income increased almost 15% from $728,484 in 1992 to $834,494 in 1993, and net
income per share increased from $9.01 to $10.35.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
<S> <C> <C> <C>
1993 1992 % Change
---------- ---------- --------
INTEREST INCOME
Loans................................ $3,403,912 $3,255,668 4.55%
Investment Securities................ 1,253,638 1,334,187 (6.04%)
Interest-bearing Deposits............ 208,369 272,788 (23.62%)
Federal Funds Sold................... 208,404 170,177 22.46%
---------- ---------- --------
5,074,323 5,032,920 .82%
INTEREST EXPENSE
Deposits............................. 2,038,678 2,199,492 (7.31%)
---------- ----------
NET INTEREST INCOME................ 3,035,645 2,833,328 7.14%
Provision for Loan Losses............ 0 0
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES........ 3,035,645 2,833,328 7.14%
OTHER INCOME
Service Fees......................... 69,874 42,773 63.36%
Other................................ 75,179 48,629 54.60%
Net Investment Gains................. 9,300 (21,950)
Gain on Sale of Equipment............ 3,700 0 100.00%
---------- ----------
158,053 69,452 127.57%
OTHER EXPENSES
Salaries............................. 829,935 728,183 13.97%
Pension and Other Employee Benefits.. 230,393 217,382 5.99%
Occupancy Expense.................... 115,601 134,290 (13.92%)
Depreciation......................... 213,394 176,734 20.74%
Other................................ 703,407 710,532 (1.00%)
---------- ----------
2,092,730 1,967,121 6.39%
---------- ----------
INCOME BEFORE INCOME TAXES......... 1,100,968 935,659 17.67%
PROVISION FOR INCOME TAXES........... 266,474 207,175 28.62%
---------- ----------
NET INCOME......................... $ 834,494 $ 728,484 14.55%
========== ==========
NET INCOME PER SHARE................. $ 10.35 $ 9.01 14.87%
========== ==========
</TABLE>
-32-
<PAGE>
Net Interest Income
Lending increased substantially in 1993. In particular, lending in the
mortgage, installment and commercial sectors was up approximately 25% year to
year. This resulted in interest income from loans increasing $148,244 or 4.5%.
This was partially offset by less income from the Bank's holdings of investment
securities, as interest rates declined over the course of the year.
Interest Expense
Interest expense declined to $2,038,678 (7.31%) from 1992 to 1993,
notwithstanding an increase in deposits of approximately $3.2 million year to
year. This decrease was a result of the Federal Reserve Board's move to lower
interest rates through most of 1993, thereby decreasing the interest the Bank
was required to pay on depositor's accounts. The Bank's net interest margin
decreased from 4.72% to 4.51% year to year.
Provision for Loan Losses
Shawnee's allowance for loan losses fell slightly from 1992 to 1993 from
$195,788 to $184,118. This reflected an improvement in the economy but remained
at a level that management believed was adequate to absorb possible losses on
loans that may become uncollectible.
Non-Interest Income
Other income increased significantly year to year ($158,053 vs. $69,452).
Increased service fee income and gains from the sale of investment securities
accounted for the bulk of the difference year to year.
Non-Interest Expense
Other expenses increased 6.3% from 1992. Salary expense increased
significantly as a result of a raise effected during the year and an increase in
staff levels. In addition, certain other expenses increased as a result of costs
related to the expansion to a branch office in Loysburg, Pennsylvania (and
related depreciation increase) and the addition of three drive-up ATMs and one
interior ATM. Also, a change in accounting principle, SFAS 109 (Accounting for
Income Taxes) resulted in a deferred benefit of $24,621 in 1993.
Book Value and Dividends
Given the increase in net income of 15% year to year, book value per share
increased to $91.11 in 1993 from $83.09 in 1992, a boost of 9.65% year to year.
Shawnee also increased its dividend from $2.50 to $2.60.
Other Key Indices
Other measures of overall performance, including return on assets and
return on equity, also improved from 1992 to 1993, from 1.16% to 1.18%, and from
11.83% to 12.28%, respectively.
Interest Rate Sensitivity and Liquidity
The objective of the Corporation's asset/liability management policy is to
maximize current and future net interest income within acceptable levels of
interest rate risk while satisfying liquidity and capital requirements.
Consistent with conservative banking practices, the Asset/Liability Management
Committee recommends the allocation of funds within prescribed guidelines to
achieve specified target goals for Return on Equity and Return on Assets. These
guidelines are established to reduce the bank's level of risk to fluctuating
interest rates, while leaving open the possibility of capitalizing on favorable
trends.
-33-
<PAGE>
The following table summarizes the Corporation's interest rate sensitivity
or gap position, which is the estimated aggregate maturity and repricing of
interest earning assets and interest bearing liabilities, at December 31, 1994:
Interest Rate Sensitivity
<TABLE>
<CAPTION>
90-Day 90-Day 180-Day 180-Day 365-Day 365-Day
Volume Yield Volume Yield Volume Yield
----------- ------ ----------- ------- ----------- -------
(Dollars in Thousands)
Assets
<S> <C> <C> <C> <C> <C> <C>
Beginning Balance 0 0.00% $14,496,879 7.55% $17,952,970 7.63%
U.S. Governments $ 200,000 7.06% 300,000 5.29% 300,000 6.08%
Government Agencies 700,000 7.71% 300,000 8.88% 200,000 6.79%
Municipals 85,000 11.25% 100,000 8.47% 300,000 6.74%
Certificates 793,000 5.26% 298,000 5.38% 297,000 6.54%
Other Securities 100,000 9.20% 200,000 6.20% 200,000 5.81%
Federal Funds 5,900,000 5.75% 0 0.00% 0 0.00%
PHEAA 1,496,215 7.83% 0 0.00% 0 0.00%
Demand Loans 2,369,199 10.66% 0 0.00% 0 0.00%
Tax Free Loans 4,200 7.42% 4,200 7.42% 43,400 7.42%
Real Estate Loans 960,329 9.12% 490,476 8.94% 808,495 8.97%
Installment 1,888,936 8.94% 1,763,415 8.66% 3,577,361 7.80%
----------- ----------- -----------
Total Rate Sensitive
Assets $14,496,879 7.55% $17,952,970 7.63% $23,684,226 7.64%
Liabilities
Beginning Balance 0 0.00% $18,075,439 4.02% $22,232,594 4.06%
Super-Nov $ 507,009 2.50% 0 0.00% 0 0.00%
MMDA 5,774,297 3.00% 0 0.00% 0 0.00%
IRAs 3,976,716 6.09% 0 0.00% 0 0.00%
$100,000 CDs 2,346,261 4.29% 200,000 4.25% 202,000 4.98%
Other CDs 5,471,155 3.63% 3,957,155 4.22% 3,199,964 4.60%
----------- ----------- -----------
Total Rate Sensitive
Liabilities $18,075,439 4.02% $22,232,594 4.06% $25,634,558 4.14%
Total Assets: $70,802,682
Total Equity: $ 7,682,285
RSA/RSL 0.80 0.81 0.92
GAP (RSA-RSL) (3,578,560) (4,279,624) (1,950,332)
GAP/Total Assets -5.05% -6.04% -2.75%
</TABLE>
As measured by the one-year cumulative sensitivity gap at December 31,
1994, the Corporation was liability sensitive such that the maturity and
repricing of interest bearing liabilities exceeded interest earning assets. As
discussed elsewhere in this Management's Discussion and Analysis, short-term
market interest rates rose dramatically in 1994 as a result of the Federal
Reserve's efforts to slow the economy by raising the federal funds rate. Long-
term rates have also risen but not to the same extent as short-term rates.
Management expects these rate increases to continue into 1995. The focus in 1994
was to reduce the Corporation's sensitivity to rising interest
-34-
<PAGE>
rates to the extent possible while limiting the negative impact on earnings.
Measures in 1994 to reduce the liability-sensitive position included adjusting
lending rates upward to reflect the increased costs on deposits, subject to
competitive factors, as well as increasing investments in higher-yielding,
longer-term government agency investments (many of which remain subject to calls
prior to maturity).
On a quarterly basis, or as may be necessitated by significant changes in
the marketplace, the Committee reviews its asset/liability management policy.
Factors considered by the Committee in evaluating interest rate risk include,
but are not limited to, the current interest rate outlook nationally and
locally, current forecasts on loans and deposits, various rate-sensitive asset-
to-liabilities ratios, and current and projected liquidity needs.
Shawnee manages its liquidity position by continually evaluating its
funding needs and the cost and terms of funding sources. The Corporation has
sufficient sources of funds available to meet its routine operational cash needs
by virtue of its monetary assets and liabilities. The Corporation does not
borrow to meet its long-term liquidity needs.
Net cash from operating activities in 1994 was provided by net income,
increased by non-cash related items such as depreciation expense. Net cash from
investing activities was primarily redeployed in the purchase of investment
securities. Interest bearing accounts were decreased to offset an approximate
$2.5 million decline in customer deposits. Federal funds sold and repayments on
loans provide sources of short-term liquidity. In addition, the Corporation's
securities portfolio provides liquidity due to the active markets for the
securities held.
-35-
<PAGE>
Three Months Ended March 31, 1995 versus Three Months Ended March 31, 1994
Net Income
Net income decreased marginally quarter to quarter by .98% from $194,000
in 1994 to $191,000 in 1995. The principal reason for this decline was a
higher overall level of interest paid on deposits. Net income per share
slipped from $2.42 to $2.38.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1995 1994
------- ------
(In thousands, except per
share and share data)
<S> <C> <C>
INTEREST INCOME
Loans................................ $ 841 $ 839
Investment Securities................ 298 316
Interest-bearing Deposits............ 14 31
Federal Funds Sold................... 110 52
------- -------
1,263 1,238
INTEREST EXPENSE
Deposits............................. 542 507
------- -------
NET INTEREST INCOME................ 721 731
Provision for Loan Losses............ 0 0
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES.......... 721 731
OTHER INCOME
Service Fees......................... 13 20
Other................................ 27 22
------- -------
40 42
OTHER EXPENSES
Salaries............................. 206 209
Pension and Other Employee Benefits.. 42 47
Occupancy Expense.................... 33 33
Depreciation......................... 53 53
Other................................ 175 165
------- -------
509 507
------- -------
INCOME BEFORE INCOME TAXES......... 252 266
PROVISION FOR INCOME TAXES........... 61 72
------- -------
NET INCOME......................... $ 191 $ 194
======= =======
NET INCOME PER SHARE................. $2.38 $2.42
======= =======
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING................... 80,184 80,184
======= =======
</TABLE>
-36-
<PAGE>
Net Interest Income
Interest income increased 2% quarter to quarter from $1,238,000 in 1994
to $1,263,000 in 1995. Interest earned from federal funds sold increased
significantly on higher volumes, offset partially by a decrease on investment
securities income. This reflected the bank's overall move toward lessening
the maturities of its investments in light of a trend of increasing interest
rate moves by the Federal Reserve Board. Interest income from loans was flat
quarter to quarter ($839,000 in 1994 versus $841,000 in 1995) with the overall
level of loans remaining fairly constant quarter to quarter as well.
The return on average earning assets decreased slightly from 1.13% to
1.12% from 1994 to 1995. The increase in interest expense accounted for the
change.
The bank's net interest margin (i.e., the difference between the cost of
funds for the bank and the cost at which it can lend these funds) increased in
1995 as compared to 1994, 4.40% versus 4.35%. The principal factor causing the
increase in net interest margin was an overall rise in the level of non-
interest-bearing deposits during the first quarter of 1995.
Interest Expense
Interest expense on deposits increased significantly year to year from
$507,000 in 1994 to $542,000 in 1995, or 6.9%. The increase in the expense
was due primarily to the increase in short-term interest rates during the
period. In addition, competitive pressures in the bank's market area required
it to offer higher yields to maintain its deposit base at prior levels.
Provision for Loan Losses
Nonperforming loans as a percentage of total average assets remained
approximately the same quarter to quarter (.238% versus .235%). Shawnee did
not increase its allowance for loan losses during the first quarter of 1995
and did not experience any increase in nonperforming loans during the period.
Total risk elements, which include nonperforming assets and loans 90 days past
due, decreased from .77% of loans in 1994 to .69% of loans in 1995.
The Bank's provision for loan losses continued to be consistent with the
volume of net charge-offs and responsive to overall asset quality trends. The
provision is maintained at a level which management believes to be adequate to
absorb potential losses in its portfolio.
Non-Interest Income
Other income was flat quarter to quarter ($40,000 in 1995 versus $42,000
in 1994). A slight decrease in service fee income was offset by a small
increase in other income.
Non-Interest Expense
The overall level of non-interest expenses necessary for the operation
of the bank remained constant quarter to quarter ($509,000 in 1995 versus
$507,000 in 1994). Salaries and benefits decreased slightly by 3.1%. Other
expenses, which included an increase in the cost of FDIC insurance, increased
by 6.1%.
Book Value and Dividends
Book value per share increased significantly during the first quarter of
1995 to $100.43 per share from $94.55 at the end of 1994. The increase was
due to the continued profitability of the bank ($2.38 per share during the
quarter) as well as a turnaround in the value of the securities portfolio held
by the bank from a net unrealizable holding loss of $235,000 at the end of
1994 to a net unrealized holding gain of $46,000 at the end of the first
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quarter of 1995. The bank holds these securities as "available for sale" but
has no present intention of liquidating these securities.
Shawnee paid a dividend of $2.45 per share in January, 1995. Shawnee
has historically paid its second, and larger, dividend in January of each
year. Pursuant to the Plan of Merger, Shawnee is permitted to pay an
additional dividend in 1995 based on a pro-ration of $2.70 per share divided
by the number of months until the merger is consummated. Shawnee anticipates
paying a dividend of $1.35 per share at the end of June.
Other Key Indices
Return on average assets (ROA) and return on average equity (ROE) were
1.12% and 10.60% for the first quarter of 1995. These ratios indicate to
shareholders how well Shawnee is employing the bank's assets to create income
and how well the bank is employing shareholders' equity to create income. ROA
decreased slightly quarter to quarter (1.13% vs 1.12%) due to slightly lower
levels of income on a marginally higher asset base, and ROE declined from
11.55% to 10.60% due primarily to higher overall levels of shareholders'
equity because of the turnaround in the value of the securities portfolio.
Liquidity
On a quarterly basis, or as may be necessitated by significant changes
in the marketplace, the bank, through its Asset and Liability Committee
("ALCO") reviews its asset/liability management policy. During the first
quarter the bank increased loan rates including mortgage rates, in particular,
to reflect changes in the overall market and increased the rates paid on
deposits to maintain its deposit base and counter competitive pressures.
Shawnee manages its liquidity position by continually evaluating its
funding needs and the cost and terms of funding sources.
Net cash from operating activities during the first quarter was provided
by net income, increased by non-cash related items such as depreciation
expense, for a net overall increase of $250,000.
Net cash flows from investing activities during the quarter, including
proceeds from the maturities of investment securities, were primarily
redeployed by purchasing additional investment securities. The bank was also
able to marginally increase loans during the quarter, reversing a decline in
lending of $352,000 during the fourth quarter of 1994. Areas of lending which
increased included student loans and commercial loans. Overall, net cash
provided by investing activities increased by $247,000 during the quarter.
The net level of deposits increased by $795,000 during the first
quarter. This was primarily due to the bank's increase in demand deposits of
12.8%. Cash flows were decreased by the payment of a dividend in the first
quarter.
Overall, net cash and cash equivalents increased by $1,277,000 during
the quarter. In addition, federal funds sold, and repayments on loans provide
sources of short-term liquidity. Further, Shawnee's securities portfolio
provides liquidity due to the active markets for the securities held.
MARKET AND DIVIDEND INFORMATION CONCERNING SHAWNEE COMMON STOCK
There has never been an organized public trading market for Shawnee
Common Stock. Shawnee Common Stock is traded occasionally in the over-the-
counter market. At the present time, there are no securities dealers which
make a market for Shawnee Common Stock, and NASDAQ does not report prices for
trades of Shawnee Common Stock. While Shawnee's management from time to time
receives information concerning trades of Shawnee Common Stock, it does not
have any reliable basis on which to provide information concerning trades of
Shawnee Common Stock, and it does not have any reliable basis on which to
provide information concerning
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<PAGE>
historical ranges of trading prices or bid-and-asked quotations. On January
4, 1995, prior to the announcement of the Shawnee Merger, 300 shares of
Shawnee Common Stock were traded by parties not affiliated with Shawnee at a
price of $92 per share. Because of the limited trading in Shawnee Common
Stock, this price should not necessarily be considered as indicative of
Shawnee Common Stock's true market value.
For 1994, Shawnee declared an annual dividend of $2.70 per share. For
1993, the annual dividend was $2.60 per share. Under the terms of the Plan of
Merger, Shawnee is permitted to pay prior to the effective date of the Merger
a prorated dividend for 1995 based on the annual rate of $2.70 per share. The
amount of this dividend will depend upon the timing of the merger and of the
record date for the first Keystone dividend following the Merger.
While banking laws and regulations limit the amount of dividends that
may be paid by Shawnee, these laws and regulations would not currently
restrict the payment by Shawnee of dividends at Shawnee's historical rates.
BUSINESS OF SHAWNEE
History and Business
The Everett Bank was incorporated on December 21, 1949 as a Pennsylvania
banking institution. In 1986, the shareholders of The Everett Bank approved a
reorganization into a holding company structure, whereby The Everett Bank
became the sole subsidiary of the newly-created Shawnee Financial Services
Corporation ("Shawnee"). Shawnee's headquarters are located at 115 East Main
Street, Everett, Pennsylvania 15537, a two-story building in downtown Everett
which contains a full service banking facility and the central administration
offices of Shawnee.
Shawnee, through its sole subsidiary, The Everett Bank, transacts
business with customers primarily within its local trade area, which is
concentrated in Bedford County, Pennsylvania. Shawnee engages in a full-
service commercial banking business within the vicinity of its service area.
It offers various loan services, including secured and non-secured commercial
and consumer loans, construction and mortgage loans, all types of deposit
services, including check services, and interest-bearing demand, savings and
other time deposits. Shawnee's business is not seasonal in nature, but does
vary with the business cycle. In addition, as a community bank, Shawnee's
profitability is impacted by the commercial activity in Bedford County.
As of March 31, 1995, The Everett Bank had total assets of approximately
$71,209,000, total shareholders' equity of approximately $8,053,000, and total
deposits and liabilities of approximately $62,627,000.
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
December
March 31, ------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Commercial........................ $ 2,339,866 $ 2,387,347 $ 3,760,268
Real Estate - Construction........ 471,293 1,201,212 582,979
Real Estate - Mortgage............ 16,738,711 16,011,682 15,271,983
Installment Loans to Individuals.. 18,563,650 18,694,713 19,391,395
Other............................. 1,657,331 1,564,913 1,284,900
----------- ----------- -----------
$39,830,651 $39,859,867 $40,291,525
</TABLE>
In addition to its main office in Everett, the Bank has three branch
offices located in Bedford, Breezewood and Loysburg, Pennsylvania. All of
these facilities are owned by Shawnee. Management believes all such
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<PAGE>
facilities are in good repair and well suited to their current uses. The
Northern Bedford County branch office in Loysburg was significantly updated
and expanded in 1993.
In the past two years, the Bank added four automated teller machines
("ATMs") to various locations. These machines permit customers to conduct
routine banking transactions 24 hours a day, and all but one are located on
the premises of a banking office. All the ATMs are part of the MAC Network,
which consists of over 14,000 ATMs owned by numerous banks and savings and
loans in over 16 states.
As of December 31, 1994, the Bank had 38 full-time employees and seven
part-time employees. The Bank believes its relationship with its employees to
be good.
Competition
The Everett Bank competes actively with other commercial banks and
savings and loans in its area, many of which are larger than The Everett Bank,
as well as with major banking and financial institutions headquartered
elsewhere. The Everett Bank is generally competitive with all competing
financial institutions in its service area with respect to interest rates paid
on time and savings deposits, service charges on deposit accounts and interest
rates charged on loans. Recently, a number of competitors have begun to offer
enhanced financial services and products, including mutual funds, to their
customers which The Everett Bank does not offer.
Regulation and Supervision
Shawnee is a bank holding company, registered as such with the Federal
Reserve Board under the Bank Holding Company Act of 1956. As a bank holding
company, Shawnee is required to file with the Federal Reserve Board an annual
report and other information. The Federal Reserve Board is also empowered to
make examinations and inspections of Shawnee and its subsidiary.
In addition, The Everett Bank is subject to the supervision of and is
regularly examined by the Pennsylvania Department of Banking and the Federal
Deposit Insurance Corporation ("FDIC"), and is subject to certain regulations
of the Federal Reserve Board. The areas of operation of The Everett Bank
which are subject to regulation by federal and Pennsylvania laws, regulations
and regulatory agencies include reserves against deposits, maximum interest
rates for specific classes of loans, truth-in-lending and truth-in-savings
disclosure, permissible types of loans and investments, mergers and
acquisitions, issuance of securities, payment of dividends, Community
Reinvestment Act evaluations, establishment of branches and other aspects of
operations.
Shawnee is not a reporting company under the Exchange Act and is
therefore not required to file reports with the Securities and Exchange
Commission. Shawnee has regularly provided its shareholders with an Annual
Report which has included audited financial statements.
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<PAGE>
MANAGEMENT OF SHAWNEE
The table below provides information concerning the Board of Directors
and executive officers of Shawnee. Share ownership information contained in
the table reflects beneficial ownership (see note (1) to the table) of Shawnee
Common Stock as of June 19, 1995, and is based upon information furnished by
or on behalf of the persons referred to in the table.
<TABLE>
<CAPTION>
Amount and Percentage
Nature of of
Director Beneficial Outstanding
of Ownership of Shawnee
Name, Principal Occupation During The Shawnee Shawnee Common Common
Past Five Years, Other Directorships Age Since Stock (1)(2) Stock
- -------------------------------------------- -------- -------- ------------------ ------------
<S> <C> <C> <C> <C>
Term Ending in 1998:
Samuel K. Bohn 66 1986 3,000 3.74%
Director and President of Shawnee;
Director, President and
Secretary of The Everett Bank
Stephen G. McCahan, Jr. 63 1986 225 (3)
Director of Shawnee; Director of
The Everett Bank; President of Everett
Rexall Pharmacy Inc., Everett and Saxon,
Pennsylvania
Barry R. Scatton 48 1988 220 (3)
Director of Shawnee; Director of
The Everett Bank; Attorney-at-Law,
Bedford County, Pennsylvania
Term Ending in 1997:
Constance B. Cragan 45 1993 240 (3)
Director of Shawnee; Director of
The Everett Bank; Owner of Cragan
Insurance Agency
B. Frank Dunkle, Jr. 66 1986 1,700 2.12%
Director and Secretary of Shawnee;
Director, Vice President and
Assistant Secretary of The Everett
Bank; Owner and Tax Consultant for
B. F. Dunkle Services, Everett,
Pennsylvania
Carl R. Feather 55 1993 200 (3)
Director of Shawnee; Director of
The Everett Bank; Owner, Feather
Mobile Home Sales
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Amount and Percentage
Nature of of
Director Beneficial Outstanding
of Ownership of Shawnee
Name, Principal Occupation During The Shawnee Shawnee Common Common
Past Five Years, Other Directorships Age Since Stock (1)(2) Stock
- -------------------------------------------- -------- --------- ------------------ ------------
<S> <C> <C> <C> <C>
Term Ending in 1996:
L. Frank Bittner 66 1986 8,648 (4) 10.79%
Chairman of the Board of Shawnee;
Chairman of the Board of The Everett
Bank; President of Breezewood
Enterprises and Snyder's Gateway,
a truck stop gasoline, restaurant
and rest stop complex in Breezewood,
Pennsylvania
John H. Jordan 88 1986 2,420 3.02%
Director and Treasurer of Shawnee;
Director and Vice President of
The Everett Bank; Attorney-at-Law,
Bedford County, Pennsylvania
Other Executive Officers
Ralphard L. Black 52 -- 452 (3)
Vice President of Shawnee, Executive
Vice President of The Everett Bank,
not a director
All directors and executive officers
of Shawnee as a group (9 persons) 17,105 21.33%
</TABLE>
- -------------------
(1) Under regulations of the Securities and Exchange Commission, a person who
has or shares voting or investment power with respect to a security is
considered a beneficial owner of the security. Voting power is the power
to vote or direct the voting of shares, and investment power is the power
to dispose of or direct the disposition of shares. Unless otherwise
indicated in the other footnotes below, each director and officer has sole
voting power and sole investment power with respect to the shares
indicated opposite his name in the table.
(2) Includes 5,652 shares held jointly with spouses.
(3) Less than one percent of the outstanding shares.
(4) Includes 3,846 shares held by Alice C. Bittner, wife of L. Frank Bittner,
for which Mr. Bittner disclaims beneficial ownership.
Each of the persons listed above has held the position described above
or other executive positions with the same entity (or a subsidiary thereof)
for at least the past five years.
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<PAGE>
CERTAIN BENEFICIAL OWNERS OF SHAWNEE COMMON STOCK
The following table sets forth, as of June 19, 1995, and as to each
person who owns of record, or who is known by the Board of Directors of
Shawnee to be the beneficial owner of, more than 5% of the outstanding shares
of Shawnee Common Stock, the name and address of such person, the number of
shares beneficially owned and the percentage of the outstanding shares of
Shawnee Common Stock so owned:
<TABLE>
<CAPTION>
Percentage of
Outstanding
Amount and Nature of Shawnee
Name and Address Beneficial Ownership Common Stock
- --------------------------- -------------------- -------------
<S> <C> <C>
L. Frank Bittner (1) 8,648 10.79%
Everett, Pennsylvania
June A. Derrick 12,600 15.71%
Everett, Pennsylvania
Mid-State Bank and
Trust Company (2) 6,708 8.37%
Altoona, Pennsylvania
</TABLE>
- ---------------
(1) Includes 3,856 shares held by Alice C. Bittner, wife of L. Frank Bittner,
for which Mr. Bittner disclaims beneficial ownership.
(2) Mid-State is a wholly owned bank subsidiary of Keystone. These shares are
held by Mid-State in a fiduciary capacity, as trustee of a trust under
which Mid-State has sole voting and investment power over the shares. It
is anticipated that these shares will be voted in favor of approval of the
Plan of Merger. The amount shown in the table does not include 300 shares
of Shawnee Common Stock held by Mid-State in a custodial account over
which it has no voting or investment power.
SHAWNEE'S INDEPENDENT AUDITORS
Edwards Leap & Sauer, Inc., Shawnee's auditors since 1966, have been
selected to serve as Shawnee's independent auditors for 1995. Services
provided to Shawnee by Edwards Leap & Sauer, Inc. include examination of
Shawnee's financial statements and consultation in connection with accounting-
related and tax matters. It is not expected that a representative of Edwards
Leap & Sauer, Inc. will attend the Shawnee Special Meeting.
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<PAGE>
COMPARISON OF KEYSTONE COMMON STOCK AND SHAWNEE COMMON STOCK
General
Upon consummation of the Merger, shareholders of Shawnee will become
shareholders of Keystone. Since the Articles of Incorporation ("Articles")
and By-Laws of Keystone and Shawnee are not the same, the Merger will result
in certain changes in the rights of the holders of Shawnee Common Stock. The
material differences in the rights of holders of Keystone Common Stock and
Shawnee Common Stock are discussed below.
Voting Rights
General. The holders of Keystone Common Stock, like the holders of
Shawnee Common Stock, are generally entitled to one vote for each share held
of record on all matters submitted to a shareholder vote and do not have
cumulative voting rights in the election of directors. The absence of
cumulative voting means that a nominee for director must receive the votes of
a plurality of the shares voted in order to be elected.
Special Votes for Certain Transactions. The Articles of Keystone and
Shawnee contain provisions requiring special shareholder votes to approve
certain types of transactions. In the absence of these provisions, either the
transactions would require approval by a majority of the shares voted at a
meeting or no shareholder vote would be required.
Keystone's Articles require that certain transactions between Keystone
or a subsidiary and an "interested shareholder" be approved by the votes of
the holders of (1) 75% of the voting power of all outstanding voting stock of
Keystone and (2) a majority of the voting power of the voting stock not
beneficially owned by the interested shareholder. An "interested shareholder"
is generally defined by Keystone's Articles to mean a person or a group acting
in concert that beneficially owns more than 20% of the voting power of
Keystone's outstanding voting stock.
The transactions subject to Keystone's special vote requirements include
(1) a merger, consolidation or share exchange of Keystone or a subsidiary with
an interested shareholder, (2) the sale, lease, exchange or other disposition,
or the loan, mortgage, pledge or investment, by Keystone or a subsidiary of 5%
or more of Keystone's assets to, with or for the benefit of an interested
shareholder, (3) the issuance or transfer to an interested shareholder of
securities of Keystone or a subsidiary valued at 5% or more of Keystone's
consolidated total assets, (4) the adoption of any plan for the liquidation of
Keystone proposed by or on behalf of an interested shareholder, (5) any
reclassification of securities, recapitalization of Keystone, merger or
consolidation of Keystone with a subsidiary or other transaction which
increases the percentage of any class of stock of Keystone or a subsidiary
owned by an interested shareholder and (6) any other transaction which is
similar in purpose or effect to the foregoing.
Keystone's special shareholder vote requirements do not apply to any
transaction approved by a majority of the "disinterested directors." A
disinterested director is any member of the Keystone Board who is not an
interested shareholder or an affiliate, associate or representative of an
interested shareholder and who (1) was a director before the interested
shareholder became an interested shareholder or (2) is a successor to a
disinterested director and was recommended for election by a majority of the
disinterested directors then on the Board.
Shawnee's Articles require that certain transactions involving Shawnee
be approved by the vote of the holders of at least 75% of the outstanding
shares of Shawnee Common Stock. The transactions subject to Shawnee's special
voting requirements are a merger, consolidation, liquidation or dissolution of
Shawnee or any action that would result in the sale or other disposition of
all or substantially all of the assets of Shawnee.
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<PAGE>
Board of Directors
Classified Boards. The Articles of Keystone and the By-Laws of Shawnee
divide the Board of Directors into three classes, each consisting of one-third
(or as near as may be) of the whole number of the Board of Directors. One
class of directors is elected at each Annual Meeting of Shareholders, and each
class serves for a term of three years.
The number of directors which constitute the full Board of Directors of
Keystone may be increased or decreased only by the Board of Directors, by a
vote including a majority of the disinterested directors then in office, and
except as otherwise required by law, vacancies on the Board of Directors of
Keystone, including vacancies resulting from an increase in the size of the
Board, may be filled only by the Board of Directors by a similar vote.
Directors elected by the Board to fill vacancies serve for the full remainder
of the term of the class to which they have been elected.
Shawnee's By-Laws provide that Shawnee's Board of Directors shall
consist of not less than six nor more than 25 directors, and that within those
limits the Board may fix the number of directors. Vacancies on the Shawnee
Board, including vacancies resulting from an increase in the number of
directors, may be filled by a majority vote of the remaining directors (though
less than a quorum). Directors elected by the Board to fill vacancies serve
for the remainder of the term of the class to which they have been elected.
The shareholders of Shawnee can also change the number of Shawnee directors by
amending the By-Laws in accordance with the provisions described below and may
at the same meeting elect directors to fill any vacancies created by an
increase in the size of the Board.
Removal of Directors. Keystone's Articles provide that a director, any
class of directors or the entire Board of Directors may be removed from office
by shareholder vote only for cause and only if, in addition to any other vote
required by law, such removal is approved by a majority of the voting power of
the outstanding voting stock of Keystone which is not beneficially owned by an
interested shareholder.
Shawnee's Articles and By-Laws are silent as to removal of directors by
shareholder vote. Under the Pennsylvania Business Corporation Law ("BCL"),
because Shawnee has a classified Board, the entire Board, any class of
directors or any individual director may be removed from office only for cause
by a majority of the votes cast at a meeting of the Shawnee shareholders. In
addition, the entire Board may be removed from office with or without cause by
the unanimous vote or consent of the holders of Shawnee Common Stock.
Nomination of Director Candidates. The Articles of Keystone and the By-
Laws of Shawnee require that any shareholder intending to nominate a candidate
for election as a director must give the corporation advance written notice of
the nomination, containing certain specified information. Keystone's Articles
require that the notice be given not later than 120 days in advance of the
meeting at which the election is to be held. Shawnee's By-Laws require the
notice to be given not less than 60 days prior to the meeting at which the
election is to be held.
Amendment of Articles and By-Laws
Proposal of amendments. Because Shawnee does not have a class of
securities registered under the Exchange Act, the BCL provides that amendments
to Shawnee's Articles may be proposed either (1) by the Board of Directors or
(2) by a petition of the holders of not less than 10% of the outstanding
Shawnee Common Stock. Under the BCL, because Keystone's Common Stock is
registered under the Exchange Act, the shareholders of Keystone are not
entitled by statute to propose amendments to Keystone's Articles. Any
amendment to Keystone's Articles must first be proposed by Keystone's Board of
Directors. Any shareholder of Shawnee or Keystone may propose an amendment to
the corporation's By-Laws.
Approval of Amendments. Keystone's Articles require the votes of the
holders of (1) 75% of the voting power of all outstanding voting stock of
Keystone and (2) a majority of the voting power of the voting stock not
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<PAGE>
beneficially owned by an interested shareholder to approve any amendment to
Keystone's Articles or By-Laws. The special voting requirement does not apply
to any amendment approved by a majority of the disinterested directors if at
the time of such approval the disinterested directors constitute a majority of
Keystone's Board. Under applicable provisions of the BCL, such amendments may
be adopted by a majority of the votes cast at a meeting of Keystone
shareholders. Except as to matters for which a shareholder vote is required
by statute, Keystone's Board may also amend the By-Laws without shareholder
approval by a vote including a majority of the disinterested directors then in
office.
Shawnee's Articles require the vote of the holders of at least 75% of
the outstanding Shawnee Common Stock to approve any amendment of the special
shareholder vote provisions described above under "Voting Rights--Special
Votes for Certain Transactions." Under applicable provisions of the BCL,
amendments to other provisions of Shawnee's Articles may be approved by a
majority of the votes cast at a meeting of Shawnee shareholders.
Shawnee's By-Laws require the vote of the holders of at least 75% of the
outstanding Shawnee Common Stock to adopt any amendment to the By-Laws of
Shawnee. Except as to matters for which a shareholder vote is required by
statute, Shawnee's Board may also amend the By-Laws without shareholder
approval by a majority vote of the members of the Board.
Keystone Shareholder Rights Plan
Keystone has established a shareholder rights plan under which each
share of Keystone Common Stock presently outstanding or which is issued
hereafter prior to the Distribution Date (defined below) is granted one
preferred share purchase right (a "Right"). Each Right entitles the
registered holder to purchase from Keystone eight one-thousandths (8/1,000ths)
of a share of Series A Junior Participating Preferred Stock, par value $1.00
per share (the "Preferred Shares"), of Keystone at a price of $56.00 per eight
one-thousandths of a Preferred Share, subject to adjustment in the event of
stock dividends and similar events occurring prior to the Distribution Date.
Each eight one-thousandths of a Preferred Share would have voting, dividend
and liquidation rights which are the approximate equivalent of one share of
Keystone Common Stock.
The Rights are not exercisable until the Distribution Date, which is the
earlier to occur of (i) 10 days following a public announcement that a person
or group (an "Acquiring Person") has acquired beneficial ownership of 20% or
more of the outstanding Keystone Common Stock or (ii) 10 business days (unless
extended by the Board of Directors prior to any person or group becoming an
Acquiring Person) following the commencement of, or announcement of an
intention to make, a tender offer or exchange offer the consummation of which
would result in the beneficial ownership by a person or group of 20% or more
of the outstanding Keystone Common Stock.
Until the Distribution Date, the Rights will be transferred with and
only with Keystone Common Stock, and the surrender for transfer of any
certificate for Keystone Common Stock will also constitute the transfer of the
Rights associated with the shares represented by such certificate. As soon as
practicable following the Distribution Date, separate certificates evidencing
the Rights will be mailed to holders of record of Keystone Common Stock as of
the close of business on the Distribution Date, and the Rights will then
become separately tradeable.
In the event that any person becomes an Acquiring Person, each holder of
a Right, other than Rights beneficially owned by the Acquiring Person or its
associates or affiliates (which will be void), will thereafter have the right
to receive upon exercise that number of Common Shares or, at the option of
Keystone, Preferred Shares (or shares of a class or series of Keystone's
preferred stock having equivalent rights, preferences and privileges) or, in
certain circumstances, other securities or assets, having a market value of
two times the exercise price of the Right. In the event that after the first
public announcement that any person has become an Acquiring Person, Keystone
is acquired in a merger or other business combination transaction or 50% or
more of its consolidated assets or earning power are sold, proper provision
will be made so that each holder of a Right, other than rights beneficially
owned by the Acquiring Person or its associates or affiliates (which will be
void) will thereafter have
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<PAGE>
the right to receive, upon exercise of the Right, that number of shares of
common stock of the acquiring company which at the time of such transaction
will have a market value of two times the exercise price of the Right.
At any time after the acquisition by a person or group of beneficial
ownership of 20% or more of the outstanding Keystone Common Stock and prior to
the acquisition by such person or group of 50% or more of the outstanding
Keystone Common Stock, the Board of Directors may exchange the Rights (other
than Rights owned by such person or group, which have become void), in whole
or in part, at an exchange ratio of one share of Keystone Common Stock, or
eight one-thousandths of a Preferred Share (or of a share of a class or series
of Keystone's preferred stock having equivalent rights, preferences and
privileges), or, in certain circumstances, an amount of other securities or
assets having equivalent value, per Right (subject to adjustment).
At any time prior to the acquisition by a person or group of beneficial
ownership of 20% or more of the outstanding Keystone Common Stock, the Board
of Directors may redeem the Rights in whole, but not in part, at a price of
$.01 per Right.
Prior to the Distribution Date, the terms of the Rights may be amended
by the Board of Directors in any respect whatever, without the consent of the
holders of the Rights, except for an amendment that would reduce the
redemption price. Prior to any person becoming an Acquiring Person, Keystone
may without the consent of the holders of the Rights lower the 20% thresholds
referred to above to not less than the greater of (i) any percentage greater
than the largest percentage of the outstanding Keystone Common Stock then
known to Keystone to be beneficially owned by any person or group of
affiliated or associated persons and (ii) 10%. The Rights will expire on
February 8, 2000, unless the expiration date is extended or unless the Rights
are earlier redeemed by Keystone as described above.
Pennsylvania Business Corporation Law
The provisions of Keystone's Articles described under "Voting Rights"
and "Board of Directors" above and Keystone's shareholder rights plan are in
addition to certain provisions of Chapter 25 of the BCL which may have the
effect of discouraging or rendering more difficult a hostile takeover attempt
against Keystone. Because it does not have a class of securities registered
under the Exchange Act, Shawnee is not subject to these provisions.
Under Section 2538 of the BCL, any merger, consolidation, share exchange
or sale of assets between Keystone or a subsidiary and any Keystone
shareholder, any division of Keystone in which any Keystone shareholder
receives a disproportionate amount of any shares or other securities of any
corporation resulting from the division, any voluntary dissolution of Keystone
in which a Keystone shareholder is treated differently from other shareholders
of the same class or any reclassification in which any Keystone shareholder's
voting or economic interest in Keystone is materially increased relative to
substantially all other shareholders must, in addition to any other
shareholder vote required, be approved by a majority of the votes which all
shareholders other than the shareholder receiving the special treatment are
entitled to cast with respect to the transaction. This special vote
requirement does not apply to a transaction (1) which has been approved by a
majority vote of the Board, without counting the vote of certain directors
affiliated with or nominated by the interested shareholder or (2) in which the
consideration to be received by Keystone's shareholders is not less than the
highest amount paid by the interested shareholder in acquiring shares of the
same class.
Under Subchapter 25E of the BCL, if any person or group acting in
concert which acquires voting power over Keystone shares representing 20% or
more of the votes which all Keystone shareholders would be entitled to cast in
an election of directors, any other Keystone shareholder may demand that such
person or group purchase such shareholder's shares at a price determined in an
appraisal proceeding.
Under Subchapter 25G of the BCL, Keystone may not engage in merger,
consolidation, share exchange, division, asset sale or a variety of other
"business combination" transactions with a person which becomes the
"beneficial owner" of Keystone shares representing 20% or more of the voting
power in an election of Keystone
-47-
<PAGE>
directors unless (1) the business combination or the acquisition of the 20%
interest is approved by Keystone's Board of Directors prior to the date the
20% interest is acquired, (2) the person beneficially owns at least 80% of the
outstanding shares and the business combination (a) is approved by a majority
vote of the disinterested shareholders and (b) satisfies certain minimum price
and other conditions prescribed in Subchapter 25F, (3) the business
combination is approved by a majority vote of the disinterested shareholders
at a meeting called no earlier than five years after the date the 20% interest
is acquired or (4) the business combination (a) is approved by shareholder
vote at a meeting called no earlier than five years after the date the 20%
interest is acquired and (b) satisfies certain minimum price and other
conditions prescribed in Subchapter 25F
Keystone has elected to opt out from coverage by Subchapter 25G of the
BCL, which would have required a shareholder vote to accord voting rights to
control shares acquired by a 20% shareholder in a control-share acquisition,
and Subchapter 25H of the BCL, which would have required a person or group to
disgorge to Keystone any profits received from a sale of Keystone's equity
securities within 18 months after the person or group acquired or offered to
acquire 20% of Keystone's voting power or publicly disclosed an intention to
acquire control of Keystone.
Dissenters' Rights
The BCL provides for dissenters' rights in a variety of transactions
including: (i) mergers or consolidations to which a corporation is a party
(other than mergers not requiring a shareholder vote); (ii) certain sales,
leases or exchanges of all or substantially all of the assets of a
corporation; and (iii) certain share exchanges or plans of division. However,
except in the case of (1) a merger, consolidation, share exchange or division
in which their shares would be converted into or exchanged for something other
than shares of the surviving, new, acquiring or other corporation (or cash in
lieu of fractional shares) or (2) a transaction in which certain shareholders
receive materially different treatment from that accorded other holders of the
same class or series of shares, shareholders of a Pennsylvania business
corporation are not entitled to dissenters' rights in any of the transactions
mentioned above if their stock is either listed on a national securities
exchange or held of record by 2,000 or more shareholders. Neither the
Keystone nor Shawnee Common Stock is listed on a national securities exchange.
However, Keystone currently has more than 2,000 shareholders of record, and
Shawnee currently has fewer than 2,000 shareholders of record. Shareholders
of Shawnee will have the right to dissent from the Merger. See "Plan of
Merger--Dissenters' Rights of Shawnee Shareholders."
Preferred Stock
Shawnee's Articles do not authorize any class of stock other than
Shawnee Common Stock. The Articles of Keystone authorize Keystone to issue up
to 8,000,000 shares of Keystone preferred stock.
The authorized shares of Keystone preferred stock are issuable in one or
more series on the terms set by the resolution or resolutions of Keystone's
Board of Directors providing for the issuance thereof. Each series of
preferred stock would have such dividend rate, which might or might not be
cumulative, such voting rights, which might be general or special, and such
liquidation preferences, redemption and sinking funds provisions, conversion
rights or other rights and preferences, if any, as Keystone's Board of
Directors may determine. Except for such rights as may be granted to the
holders of any series of preferred stock in the resolution establishing such
series or as required by law, all of the voting and other rights of the
shareholders of Keystone belong exclusively to the holders of Keystone Common
Stock.
Dividend Rights
The holders of Shawnee Common Stock and Keystone Common Stock are
entitled to dividends when, as and if declared by their Board of Directors out
of funds legally available therefor. However, if Keystone preferred
-48-
<PAGE>
stock is issued, the Board of Directors of Keystone may grant preferential
dividend rights to the holders of such stock which would prohibit payment of
dividends on the Keystone Common Stock unless and until specified dividends on
the preferred stock had been paid.
Liquidation Rights
Upon liquidation, dissolution or winding up of Keystone or Shawnee,
whether voluntary or involuntary, the holders of Keystone or Shawnee Common
Stock are entitled to share ratably in the assets of the corporation available
for distribution after all liabilities of the corporation have been satisfied.
However, if preferred stock is issued by Keystone, the Board of Directors of
Keystone may grant preferential liquidation rights to the holders of such
stock which would entitle them to be paid out of the assets of the corporation
available for distribution before any distribution is made to the holders of
Keystone Common Stock.
Miscellaneous
There are no preemptive rights, sinking fund provisions, conversion
rights, or redemption provisions applicable to Keystone or Shawnee Common
Stock. Holders of fully paid shares of Keystone or Shawnee Common Stock are
not subject to any liability for further calls or assessments.
LEGAL OPINIONS
Opinions with respect to certain legal matters in connection with the
Merger will be rendered by Reed Smith Shaw & McClay, Pittsburgh, Pennsylvania,
as counsel for Keystone, and by Buchanan Ingersoll Professional Corporation,
Pittsburgh, Pennsylvania, as counsel for Shawnee.
EXPERTS
The consolidated financial statements of Keystone incorporated by
reference in Keystone's Annual Report (Form 10-K) for the year ended December
31, 1994 have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon included therein and incorporated herein by
reference. Such consolidated financial statements are incorporated herein by
reference in reliance upon such report given upon the authority of such firm
as experts in auditing and accounting.
The consolidated financial statements of Shawnee appearing on pages F-2
through F-18 of this Proxy Statement/Prospectus have been audited by Edwards,
Leap & Sauer, independent auditors, whose report thereon is included herein on
page F-1. Such financial statements have been included herein in reliance
upon such report, given upon the authority of said firm as experts in auditing
and accounting.
OTHER MATTERS
The management of Shawnee does not know of any other matters intended
to be presented for shareholder action at the Special Meeting. If any other
matter does properly come before the Special Meeting and is put to a
shareholder vote, the proxies solicited hereby will be voted in accordance
with the judgment of the proxyholders named thereon.
-49-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Shawnee Financial Services Corporation and Subsidiary:
Audited Annual Financial Statements:
Report of Independent Auditors.................................. F-1
Consolidated Balance Sheets as of December 31, 1994 and 1993.... F-2
Consolidated Statements of Income for the years ended
December 31, 1994, 1993 and 1992............................ F-3
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1994, 1993 and 1992............ F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992............................ F-5
Notes to Consolidated Financial Statements...................... F-6
Unaudited Interim Financial Statements
Consolidated Balance Sheets as of March 31, 1995 (unaudited)
and December 31, 1994....................................... F-19
Consolidated Statements of Income for three-month periods ended
March 31, 1995 and 1994 (unaudited)......................... F-20
Consolidated Statements of Changes in Stockholders'
Equity for three-month periods ended March 31, 1995 and
1994 (unaudited)........................................... F-21
Consolidated Statements of Cash Flows for three-month periods
ended March 31, 1995 and 1994 (unaudited).................. F-22
Notes to Consolidated Financial Statements (unaudited)......... F-23
-50-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Shawnee Financial Services Corporation
Everett, Pennsylvania
We have audited the accompanying consolidated balance sheets of Shawnee
Financial Services Corporation and Subsidiary, as of December 31, 1994 and
1993, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the years ended December 31, 1994,
1993 and 1992. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Shawnee
Financial Services Corporation and Subsidiary, as of December 31, 1994 and
1993, and the results of its operations and its cash flows for the years ended
December 31, 1994, 1993 and 1992 in conformity with generally accepted
accounting principles.
As discussed in Note A to the financial statements, the Bank changed its
method of accounting for investment securities by adopting Financial
Accounting Standards Board No. 115 "Accounting for Certain Investments in Debt
and Equity Securities."
EDWARDS, LEAP & SAUER
Hollidaysburg, Pennsylvania
January 31, 1995
F-1
<PAGE>
CONSOLIDATED BALANCE SHEETS
SHAWNEE FINANCIAL SERVICES CORPORATION
<TABLE>
<CAPTION>
December 31,
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,978,991 $ 2,993,064
Interest-bearing deposits 1,091,000 3,954,000
Investment securities 18,227,117 18,349,962
(market value of $19,288,735 for 1993)
Federal funds sold 5,900,000 5,250,000
Loans, net 38,707,461 38,831,713
Premises and equipment, net 2,194,054 2,382,203
Other assets 852,311 630,576
----------- -----------
Total assets $69,950,934 $72,391,518
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest-bearing $ 7,867,090 $ 7,679,608
Interest-bearing 53,783,190 56,470,387
----------- -----------
Total deposits 61,650,280 64,149,995
Dividends payable 196,451 188,432
Accrued interest and other liabilities 522,915 747,385
----------- -----------
Total liabilities 62,369,646 65,085,812
STOCKHOLDERS' EQUITY
Capital stock, $10 par value, 1,000,000 shares
authorized; 80,870 shares issued of
which 80,184 are outstanding 808,700 808,700
Surplus 671,935 671,935
Retained earnings 6,387,222 5,876,521
Net unrealized holding losses on
securities available for sale (235,119) 0
----------- -----------
7,632,738 7,357,156
Less: treasury stock, 686 shares at cost (51,450) (51,450)
----------- -----------
Total stockholders' equity 7,581,288 7,305,706
----------- -----------
Total liabilities and
stockholders' equity $69,950,934 $72,391,518
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
SHAWNEE FINANCIAL SERVICES CORPORATION
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1994 1993 1992
----------- ----------- ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $3,443,191 $3,403,912 $3,255,668
Investment securities 1,273,873 1,253,638 1,334,187
Interest-bearing deposits 79,073 208,369 272,788
Federal funds sold 293,477 208,404 170,177
---------- ---------- ----------
5,089,614 5,074,323 5,032,820
INTEREST EXPENSE
Deposits 2,007,075 2,038,678 2,199,492
---------- ---------- ----------
NET INTEREST INCOME 3,082,539 3,035,645 2,833,328
PROVISION FOR LOAN LOSSES 0 0 0
---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,082,539 3,035,645 2,833,328
OTHER INCOME
Service fees 79,510 69,874 42,773
Other 65,256 75,179 48,629
Net investment gains (losses) 0 9,300 (21,950)
Gain on sale of equipment 0 3,700 0
---------- ---------- ----------
144,766 158,053 69,452
OTHER EXPENSES
Salaries 913,234 829,935 728,183
Pension and other employee benefits 223,195 230,393 217,382
Occupancy expense 121,905 115,601 134,290
Depreciation 210,583 213,394 176,734
Other 790,263 703,407 710,532
---------- ---------- ----------
2,259,180 2,092,730 1,967,121
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 968,125 1,100,968 935,659
PROVISION FOR INCOME TAXES 240,927 266,474 207,175
---------- ---------- ----------
NET INCOME $ 727,198 $ 834,494 $ 728,484
========== ========== ==========
NET INCOME PER SHARE OF CAPITAL STOCK $9.07 $10.35 $9.01
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SHAWNEE FINANCIAL SERVICES CORPORATION
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Net
Unrealized
Capital Retained Holding Treasury
Stock Surplus Earnings Losses Stock Total
--------- --------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1991 $808,700 $659,965 $4,724,196 $6,192,861
Net income 728,484 728,484
Cash dividends (202,175) (202,175)
--------- --------- ---------- --------- --------- ----------
Balance at
December 31, 1992 808,700 659,965 5,250,505 6,719,170
Net income 834,494 834,494
Cash dividends (208,478) (208,478)
Treasury stock
purchased $(171,600) (171,600)
Treasury stock sold 11,970 120,150 132,120
--------- --------- ---------- --------- --------- ----------
Balance at
December 31, 1993 808,700 671,935 5,876,521 (51,450) 7,305,706
Net income 727,198 727,198
Cash dividends (216,497) (216,497)
Net unrealized holding
losses on securities
available for sale $(235,119) (235,119)
--------- -------- ---------- --------- --------- ----------
Balance at
December 31, 1994 $808,700 $671,935 $6,387,222 $(235,119) $ (51,450) $7,581,288
========= ======== ========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SHAWNEE FINANCIAL SERVICES CORPORATION
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1994 1993 1992
------------ ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 727,198 $ 834,494 $ 728,484
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 210,583 213,394 176,734
(Gain) loss on sale of investment
securities 0 (9,300) 21,950
(Gain) on sale of equipment 0 (3,700) 0
Increase in other assets (100,613) (154,274) (23,867)
(Decrease) increase in accrued interest
and other liabilities (224,470) (75,220) 135,902
----------- ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 612,698 805,394 1,039,203
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest-bearing deposits 2,863,000 1,981,000 999,000
Proceeds from sales and maturities
of investment securities 4,930,000 17,537,031 14,280,178
Purchase of investment securities (5,163,396) (17,131,463) (17,559,334)
Net decrease (increase) in loans 124,252 (7,796,985) (594,145)
Premises and equipment expenditures (22,434) (443,626) (93,888)
Proceeds from sale of equipment 0 3,700 0
----------- ------------ ------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 2,731,422 (5,850,343) (2,968,189)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits (2,499,715) 3,202,900 6,279,990
Proceeds from sale of treasury stock 0 132,120 0
Purchase of treasury stock 0 (171,600) 0
Dividends paid (208,478) (202,089) (194,003)
----------- ------------ ------------
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (2,708,193) 2,961,331 6,085,987
----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 635,927 (2,083,618) 4,157,001
Cash and cash equivalents at beginning of year 8,243,064 10,326,682 6,169,681
----------- ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 8,878,991 $ 8,243,064 $ 10,326,682
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SHAWNEE FINANCIAL SERVICES CORPORATION
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of Shawnee Financial Services Corporation and its wholly-owned
subsidiary, The Everett Bank. All significant intercompany accounts have been
eliminated in the consolidation.
Investment Securities: In May 1993, the Financial Accounting Standards Board
(the FASB) issued Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Statement
No. 115 requires all investments in debt and equity securities to be
classified into three categories. Securities which management has positive
intent and ability to hold until maturity are classified as held to maturity.
Securities held to maturity are stated at cost, adjusted for amortization of
premium and accretion of discount, computed primarily under the interest
method. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities. All other
securities are classified as available for sale securities. Unrealized
holding gains and losses for trading securities are included in earnings.
Unrealized gains and losses for available for sale securities are excluded
from earnings and reported as a net amount and separate component of
stockholders' equity until realized.
As required by Statement No. 115, management implemented the standard on
January 1, 1994 and classified its entire securities portfolio as available
for sale due to the identification of circumstances which could result in the
securities not being held to maturity. Circumstances resulting in securities
sales could include, but are not limited to, changes in market interest rates,
changes in prepayment risk, income tax considerations, and liquidity needs.
At this time, management has no intention of establishing a trading securities
classification.
Interest and dividends on securities are reported as interest income. Gains
and losses realized on sales of securities represent the differences between
net proceeds and carrying values determined by the specific identification
method.
Loans and Allowance for Loan Losses: Loans are stated at unpaid principal
balances, less the allowance for loan losses and net unearned discounts.
Unearned discounts on installment loans are recognized as income over the term
of the loans using a method that approximates the interest method.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired. Any unpaid interest previously accrued on those loans is reversed
from income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal
balance. Interest income on other nonaccrual loans is recognized only to the
extent of interest payments received.
The allowance for loan losses is maintained at a level which, in management's
judgement, is adequate to absorb potential losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectibilty of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, and economic conditions. Allowances for impaired
loans generally are determined based on collateral values or the present value
of estimated cash flows. The allowance is increased by a provision for loan
losses, which is charged to expense, and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans are charged
or credited to the provision for loan losses.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHAWNEE FINANCIAL SERVICES CORPORATION
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on the straight-line method
and accelerated methods over the estimated useful lives of the assets ranging
from 3 to 40 years. Expenditures for maintenance and repairs are charged to
expense as incurred. Cost of major additions or improvements are capitalized.
When premises and equipment are removed or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is credited or charged to income.
Income Taxes: In February 1992, the FASB issued Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Statement No.
109 requires a change from the deferred method of accounting for income taxes
of APB Opinion 11 to the asset and liability method of accounting for income
taxes. Under the asset and liability method of Statement No. 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Effective January 1, 1993, management adopted Statement No. 109 and reported
the cumulative effect of that change in the method of accounting for income
taxes in the accompanying 1993 statement of income.
Earnings Per Share: Earnings per share are calculated on the basis of the
weighted average number of common shares outstanding.
Cash Flow Information: For purposes of the Statements of Cash Flows, cash and
cash equivalents are defined as those amounts included in the balance sheet
captions Cash and due from banks and Federal funds sold.
Cash payments for interest in 1994, 1993 and 1992 were $2,185,657, $1,997,160
and $2,079,466, respectively. Cash payments for income taxes for 1994, 1993
and 1992 were $339,249, $281,575 and $145,549, respectively.
Reclassifications: Certain amounts in 1993 and 1992 have been reclassified to
conform with the 1994 presentation.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHAWNEE FINANCIAL SERVICES CORPORATION
NOTE B - INVESTMENT SECURITIES
Securities available for sale consisted of the following:
<TABLE>
<CAPTION>
December 31, 1994
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 5,691,352 $ 2,815 $206,123 $ 5,488,044
Obligations of other U.S.
government agencies 8,296,813 16,590 351,939 7,961,464
Obligations of states and
political subdivisions 3,184,621 47,069 53,157 3,178,533
Stocks 216,235 214,680 0 430,915
Corporate notes 1,194,337 196 26,372 1,168,161
----------- -------- -------- -----------
$18,583,358 $281,350 $637,591 $18,227,117
=========== ======== ======== ===========
<CAPTION>
December 31, 1993
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 5,293,058 $162,308 $ 2,689 $ 5,452,677
Obligations of other U.S.
government agencies 7,899,117 285,454 4,932 8,179,639
Obligations of states and
political subdivisions 3,614,578 192,642 755 3,806,465
Stocks 216,235 257,814 0 474,049
Corporate notes 1,326,974 49,663 732 1,375,905
----------- -------- -------- -----------
$18,349,962 $947,881 $ 9,108 $19,288,735
=========== ======== ======== ===========
</TABLE>
The amortized cost and estimated market values as of December 31, 1994, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHAWNEE FINANCIAL SERVICES CORPORATION
<TABLE>
<CAPTION>
NOTE B - INVESTMENT SECURITIES (CONTINUED)
Amortized Estimated
Cost Market Value
----------- ------------
<S> <C> <C>
Due in one year or less $ 3,084,929 $ 3,076,654
Due after one year through five years 12,834,310 12,363,185
Due after five years through ten years 2,353,339 2,262,452
Due after ten years 94,545 93,911
----------- -----------
18,367,123 17,796,202
Stocks 216,235 430,915
----------- -----------
Total $18,583,358 $18,227,117
=========== ===========
</TABLE>
Investment securities with a carrying amount of approximately $5,300,000 at
December 31, 1994 were pledged to secure deposits as required or permitted by
law.
NOTE C - LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1993
----------- ------------
<S> <C> <C>
Commercial $ 2,387,347 $ 3,760,268
Real estate - construction 1,201,212 582,979
Real estate - mortgage 16,011,682 15,271,983
Installment loans to individuals 18,694,713 19,391,395
Other 1,564,913 1,284,900
----------- ------------
39,859,867 40,291,525
Less: Unearned discount 968,419 1,275,694
Allowance for loan losses 183,987 184,118
----------- ------------
Net Loans $38,707,461 $38,831,713
=========== ============
</TABLE>
The Bank's primary business activity is with customers located within its
local trade area which is concentrated in Bedford County, Pennsylvania.
Commercial, residential and personal loans are granted. Although the loan
portfolio is diversified, loans outstanding to individuals and businesses are
dependent upon local economic conditions in the immediate trade area.
Loans on which the accrual of interest has been discontinued amounted to
$170,600 at December 31, 1994 and 1993. The gross amount of interest which
would have been recorded if all such loans had been accruing interest at their
original terms from the date of being placed on nonaccrual is $53,399 for 1994
and $37,949 for 1993.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHAWNEE FINANCIAL SERVICES CORPORATION
NOTE C - LOANS (CONTINUED)
In the normal course of business, loans are extended to directors and
executive officers and their associates. In management's opinion, all of these
loans are on substantially the same terms and conditions as loans to other
individuals and businesses of comparable creditworthiness.
A summary of loans to executive officers and directors, including associates
of such persons, is as follows:
<TABLE>
<CAPTION>
1994
------------
<S> <C>
Loans at beginning of year $ 953,473
New loans 1,315,202
Loan payments (438,942)
----------
Loans at end of year $1,829,733
==========
</TABLE>
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year $184,118 $195,788 $206,503
Provision charged to operations 0 0 0
Loans charged off (10,623) (15,135) (15,731)
Recoveries 10,492 3,465 5,016
-------- -------- --------
$183,987 $184,118 $195,788
======== ======== ========
</TABLE>
NOTE D - PREMISES AND EQUIPMENT
Major classes of premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1994 1993
----------- -----------
<S> <C> <C>
Land $ 337,247 $ 337,247
Buildings and improvements 1,839,486 1,839,486
Furniture and equipment 1,541,516 1,519,082
---------- ----------
3,718,249 3,695,815
Less: Accumulated depreciation 1,524,195 1,313,612
---------- ----------
$2,194,054 $2,382,203
========== ==========
</TABLE>
Depreciation expense amounted to $210,583, $213,394 and $176,734 for the years
ended December 31, 1994, 1993 and 1992, respectively.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHAWNEE FINANCIAL SERVICES CORPORATION
NOTE E - INCOME TAXES
As discussed in Note A, management implemented Statement No. 109 as of January
1, 1993. The cumulative effect of this change in accounting for income taxes
was a deferred benefit of $24,621 as of January 1, 1993 and is reported in the
statement of income for the year ended December 31, 1993.
The provision for income taxes consist of:
<TABLE>
<CAPTION>
1994 1993 1992
--------- ---------- ---------
<S> <C> <C> <C>
Current $234,167 $287,752 $207,175
Deferred 6,760 (21,278) 0
-------- -------- --------
Total $240,927 $266,474 $207,175
======== ======== ========
</TABLE>
The significant components of temporary differences under Statement No. 109
for 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
------- ----------
<S> <C> <C>
Provision for loan losses $ 838 $(12,307)
Depreciation 1,243 18,586
Other 4,679 (27,557)
------ --------
Total $6,760 $(21,278)
====== ========
</TABLE>
A reconciliation of the federal statutory tax rate to the effective tax rate
applicable to income before income taxes follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------------- ------------------ -------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory rate $329,163 34.0% $374,329 34.0% $318,124 34.0%
Effect of tax free income (79,737) (8.2) (91,560) (8.3) (98,917) (9.1)
Non-deductible interest expense 7,507 .8 9,016 .8 10,945 1.0
Other (16,006) (1.7) (25,311) (2.3) (22,977) (3.8)
-------- ---- -------- ---- -------- ----
Actual tax expense and
effective rate $240,927 24.9% $266,474 24.2% $207,175 22.1%
======== ==== ======== ==== ======== ====
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHAWNEE FINANCIAL SERVICES CORPORATION
NOTE E - INCOME TAXES (CONTINUED)
The deferred tax assets and deferred tax liabilities recorded on the balance
sheet as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Deferred Tax
-----------------------
Assets Liabilities
--------- ------------
<S> <C> <C>
Provision for loan losses $ 11,469 $ 0
Depreciation 0 19,530
Pension expense 21,505 0
Unrealized holding losses on
available for sale securities 121,122 0
Other 1,074 0
-------- -------
$155,170 $19,530
======== =======
</TABLE>
NOTE F - PENSION PLANS
The Bank has a non-contributory defined benefit pension plan covering
substantially all employees meeting minimum age and service requirements. The
plan generally provides benefits based on years of credited service and final
average earnings. The current funding policy is to contribute annually the
maximum amount that can be deducted for federal income tax purposes. Pension
plan assets are primarily mortgage-backed securities. Changes in plan assets
values attributable to differences between actual and expected returns on plan
assets are deferred as unrecognized gains or losses and included in the
determination of the pension cost over time.
Net pension expense for 1994, 1993 and 1992 consisted of the following:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Service-cost benefits earned during the year $ 36,689 $ 40,392 $ 30,737
Interest accrued on projected benefit obligation 69,765 60,414 54,025
Actual return on plan assets (71,332) (68,615) (66,664)
Net amortization and deferral 2,163 8,180 11,477
-------- -------- --------
Net pension expense $ 37,285 $ 40,371 $ 29,575
======== ======== ========
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHAWNEE FINANCIAL SERVICES CORPORATION
NOTE F - PENSION PLANS (CONTINUED)
The following table sets forth the plan's funded status and amounts recognized
in the accompanying balance sheets at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
------------ -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits (based upon retirement date)
of $749,134 and $653,449 for 1994 and
1993, respectively. $ (759,580) $(707,501)
=========== =========
Projected benefit obligation $(1,034,990) $(904,102)
Plan assets at fair value 957,705 838,531
----------- ---------
Projected benefit obligation in excess of plan assets (77,285) (65,571)
Unrecognized actuarial gain 54,449 31,072
Unrecognized prior service costs 9,642 10,177
Unrecognized transition credit (49,518) (52,588)
----------- ---------
Prepaid (accrued) pension costs included
in the balance sheet $ (62,712) $ (76,910)
=========== =========
</TABLE>
The projected benefit obligation was determined using an assumed discount rate
of 7.5% for 1994 and 1993 and 5.5% for 1992. The expected rate of increase in
compensation was 5.5% for each year and the assumed rate of return on plan
investment earnings was 7.5% for 1994 and 1993 and 8.0% for 1992.
The Bank maintains a profit sharing plan covering substantially all employees.
Contributions to the plan are at the discretion of the Board of Directors.
Amounts charged to operations during 1994, 1993 and 1992 were $0, $30,792 and
$48,025, respectively.
NOTE G - COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various outstanding commitments
and certain contingent liabilities which are not reflected in the accompanying
financial statements. These commitments and contingent liabilities represent
financial instruments with off-balance-sheet risk. The contract or notional
amounts of those instruments were comprised of commitments to extend credit
approximating $912,700 and $1,780,000 as of December 31, 1994 and 1993,
respectively.
The instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The same
credit policies are used in making commitments and conditional obligations as
for on-balance-sheet instruments. The amount of collateral obtained, if
deemed necessary upon extension of credit, is based on management's credit
evaluation. The terms are typically for a one year period, with an annual
renewal option subject to prior approval by management.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHAWNEE FINANCIAL SERVICES CORPORATION
NOTE G - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the loan agreement.
These commitments are comprised primarily of available commercial and personal
lines of credit.
The exposure to loss under these commitments is limited by subjecting them to
credit approval and monitoring procedures. Substantially all of the
commitments to extend credit are contingent upon customers maintaining
specific credit standards at the time of the loan funding. Management
assesses the credit risk associated with certain commitments to extend credit
in determining the level of the allowance for loan loses. Since some of the
commitments are expected to expire without being drawn upon, the total
contractual amounts do not necessarily represent future funding requirements.
The Bank is involved in various legal actions from normal business activities.
Management believes that the liability, if any, arising from such actions will
not have a material adverse effect on the Bank's financial position.
NOTE H - RECENT ACCOUNTING PRONOUNCEMENTS
During 1992, the FASB issued Statement No. 107 "Disclosures about Fair Value
of Financial Instruments" which is effective for fiscal years ending after
December 15, 1992, except for entities with less than $150 million in total
assets. For those entities, the effective date is for fiscal years ending
after December 15, 1995. Statement No. 107 requires disclosure of the fair
value of financial instruments, both assets and liabilities recognized and not
recognized in the financial statements, with exceptions for certain financial
instruments.
In May 1993, the FASB issued Statement No. 114 "Accounting by Creditors for
Impairment of a Loan" which is effective for fiscal years beginning after
December 15, 1994. Statement No. 114 addresses the methods to be used by a
creditor to measure the impairment of a loan and the proper recognition of a
change in the value of an impaired loan.
In October 1994, the FASB issued Statement No. 118 "Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosure" which amends
Statement No. 114 by allowing creditors to use existing methods for
recognizing interest income on impaired loans. Statement No. 118 is effective
concurrent with the effective date of Statement No. 114.
In October 1994, the FASB issued Statement No. 119 "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments"
which is effective for calendar year 1994 financial statements, except for
entities with less than $150 million in total assets having a one year delay.
Statement No. 119 primarily requires disclosures about the amounts, nature and
terms of derivatives that do not fall under FASB's Statement No. 105
"Disclosures of Information about Financial Instruments with Off-Balance Sheet
Risk and Financial Instruments with Concentrations of Credit Risk."
Management is currently evaluating the combined financial statement impact of
these statements.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHAWNEE FINANCIAL SERVICES CORPORATION
NOTE I - SUBSEQUENT EVENT (PROPOSED MERGER)
On January 5, 1995, Shawnee Financial Services Corporation entered into a
preliminary merger agreement with Keystone Financial, Inc., a Pennsylvania
corporation (Keystone). Under the terms of the agreement, Shawnee will be
merged with and into Keystone, which will be the surviving corporation. Each
outstanding share of Shawnee's common stock will be converted into 6.25
shares, subject to adjustment, of Keystone common stock, par value $2.00 per
share. Simultaneously with or following the merger, Shawnee's subsidiary, The
Everett Bank, will be merged with and into Mid-State Bank and Trust Company, a
Pennsylvania bank and trust company and wholly-owned subsidiary of Keystone.
Management believes the merger will be finalized during 1995.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHAWNEE FINANCIAL SERVICES CORPORATION
NOTE J - PARENT COMPANY ONLY - CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
Cash $ 285,427 $ 290,723
Taxes receivable 27,485 17,507
Investment in subsidiary 7,163,929 6,959,483
Furniture and equipment 172,262 234,026
Other assets 137,970 0
---------- ----------
Total assets $7,787,073 $7,501,739
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Dividends payable $ 196,451 $ 188,433
Deferred tax liability 9,334 7,600
---------- ----------
Total liabilities 205,785 196,033
STOCKHOLDERS' EQUITY
Capital stock 808,700 808,700
Additional paid-in capital 671,935 671,935
Retained earnings 6,387,222 5,876,521
Net unrealized holding losses on
securities available for sale (235,119) 0
---------- ----------
7,632,738 7,357,156
Less: treasury stock, 686 shares at cost (51,450) (51,450)
---------- ----------
Total stockholders' equity 7,581,288 7,305,706
---------- ----------
Total liabilities and
stockholders' equity $7,787,073 $7,501,739
========== ==========
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHAWNEE FINANCIAL SERVICES CORPORATION
NOTE J - PARENT COMPANY ONLY - CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
INCOME
Dividend income $216,497 $208,478 $202,175
Gain on sale of asset 0 3,700 0
-------- -------- --------
216,497 212,178 202,175
GENERAL AND ADMINISTRATIVE
EXPENSES
Depreciation 71,720 50,322 0
Miscellaneous 4,017 4,760 3,873
-------- -------- --------
75,737 55,082 3,873
-------- -------- --------
INCOME BEFORE
INCOME TAXES 140,760 157,096 198,302
INCOME TAXES CREDIT (25,751) (9,907) (1,317)
-------- -------- --------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS
OF SUBSIDIARY 166,511 167,003 199,619
EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY 560,687 667,492 528,865
-------- -------- --------
NET INCOME $727,198 $834,495 $728,484
======== ======== ========
</TABLE>
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHAWNEE FINANCIAL SERVICES CORPORATION
NOTE J - PARENT COMPANY ONLY - CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1994 1993 1992
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 727,198 $ 834,495 $ 728,484
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of asset 0 (3,700) 0
Depreciation 71,720 50,322 0
Equity in undistributed
earnings of subsidiary (560,687) (667,492) (528,865)
Increase (decrease) in cash due to
changes in assets and liabilities:
Taxes receivable (9,978) (16,190) (666)
Other assets (16,848) 0 0
Deferred tax liability 1,734 7,600 0
--------- --------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 213,139 205,035 198,953
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of equipment (9,957) (284,398) 0
Proceeds from sale of equipment 0 3,750 0
--------- --------- ---------
NET CASH USED BY
INVESTING ACTIVITIES (9,957) (280,648) 0
CASH FLOWS FROM FINANCING
ACTIVITIES
Dividends paid (208,478) (202,088) (194,003)
Purchase of treasury stock 0 (171,600) 0
Proceeds from sale of treasury stock 0 132,120 0
--------- --------- ---------
NET CASH USED BY
FINANCING ACTIVITIES (208,478) (241,568) (194,003)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH (5,296) (317,181) 4,950
Cash at beginning of year 290,723 607,904 602,954
--------- --------- ---------
CASH AT END OF YEAR $ 285,427 $ 290,723 $ 607,904
========= ========= =========
</TABLE>
F-18
<PAGE>
CONSOLIDATED BALANCE SHEETS
SHAWNEE FINANCIAL SERVICES CORPORATION
(In thousands)
<TABLE>
<CAPTION>
(unaudited)
March 31, December 31,
1995 1994
--------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,606 $ 2,979
Interest-bearing deposits 893 1,091
Investment securities 18,557 18,227
Federal funds sold 7,550 5,900
Loans, net 38,752 38,708
Premises and equipment, net 2,137 2,194
Other assets 714 852
------- -------
Total assets $71,209 $69,951
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest-bearing $ 8,877 $ 7,867
Interest-bearing 53,750 53,783
------- -------
Total deposits 62,627 61,650
Dividends payable 0 197
Accrued interest and other liabilities 529 523
------- -------
Total liabilities 63,156 62,370
STOCKHOLDERS' EQUITY
Capital stock, $10 par value, 1,000,000 shares authorized;
80,870 shares issued of which 80,184 are outstanding 809 809
Surplus 672 672
Retained earnings 6,578 6,387
Net unrealized holding gains (losses) on securities
available for sale 46 (235)
------- -------
8,105 7,633
Less: treasury stock, 686 shares at cost (52) (52)
------- -------
Total stockholders' equity 8,053 7,581
------- -------
Total liabilities and
stockholders' equity $71,209 $69,951
======= =======
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
SHAWNEE FINANCIAL SERVICES CORPORATION
(Unaudited)
(In thousands, except per share and share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1995 1994
-------- --------
<S> <C> <C>
INTEREST INCOME
Loans $ 841 $ 839
Investment securities 298 316
Interest-bearing deposits 14 31
Federal funds sold 110 52
------- -------
1,263 1,238
INTEREST EXPENSE
Deposits 542 507
------- -------
NET INTEREST INCOME 721 731
PROVISION FOR LOAN LOSSES 0 0
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 721 731
OTHER INCOME
Service fees 13 20
Other 27 22
------- -------
40 42
OTHER EXPENSES
Salaries 206 209
Pension and other employee benefits 42 47
Occupancy expense 33 33
Depreciation 53 53
Other 175 165
------- -------
509 507
------- -------
INCOME BEFORE INCOME TAXE 252 266
PROVISION FOR INCOME TAXES 61 72
------- -------
NET INCOME $ 191 $ 194
======= =======
NET INCOME PER SHARE OF CAPITAL STOCK $2.38 $2.42
======= =======
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 80,184 80,184
======= =======
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SHAWNEE FINANCIAL SERVICES CORPORATION
Three Months Ended March 31, 1995 and 1994
(Unaudited, except December 31, 1994 and 1993 amounts)
(In thousands)
<TABLE>
<CAPTION>
Net
Unrealized
Holding
Capital Retained Gains Treasury
Stock Surplus Earnings (Losses) Stock Total
------ ------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993 $809 $672 $5,877 $ 0 $(52) $7,306
Net income 194 194
Net unrealized holding
gains on securities
available for sale 290 290
---- ---- -------- ------- ----- --------
Balance at
March 31, 1994 $809 $672 $6,071 $ 290 $(52) $7,790
==== ==== ======== ======= ===== ========
Balance at
December 31, 1994 $809 $672 $6,387 $(235) $(52) $7,581
Net income 191 191
Net unrealized holding
gains on securities
available for sale 281 281
---- ---- -------- ------- ----- --------
Balance at
March 31, 1995 $809 $672 $6,578 $ 46 $(52) $8,053
==== ==== ======== ======= ===== ========
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SHAWNEE FINANCIAL SERVICES CORPORATION
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1995 1994
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 191 $ 194
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 53 53
Loss on disposal of equipment 6 0
(Increase) decrease in other assets (6) 14
Increase (decrease) in accrued interest
and other liabilities 6 (130)
------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 250 131
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest-bearing deposits 198 1,389
Proceeds from maturities of investment securities 1,095 1,172
Purchase of investment securities (1,000) (1,591)
Net (increase) decrease in loans (44) 352
Premises and equipment expenditures (2) (3)
------- -------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 247 1,319
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 977 182
Dividends paid (197) (188)
------- -------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 780 (6)
------- -------
NET INCREASE IN CAS AND CASH EQUIVALENTS 1,277 1,444
Cash and cash equivalents at beginning of period 8,879 8,243
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,156 $ 9,687
======= =======
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Selected Information - Substantially All Disclosures Required By
Generally Accepted Accounting Principles Are Not Included)
SHAWNEE FINANCIAL SERVICES CORPORATION
NOTE A - BASIS OF PRESENTATION
Management Representation: The accompanying consolidated financial
-------------------------
statements, which are unaudited except for December 31, 1994 and 1993 amounts
(which are audited), have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three months
ended March 31, 1995 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1995. The interim consolidated
financial statements and the following discussion should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Corporation's audited financial statements for the years ended
December 31, 1994 and 1993.
NOTE B - CASH FLOW DISCLOSURES (In thousands)
Supplemental Disclosures: Cash paid during the first three months of the year
------------------------
for interest and income taxes were as follows:
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Interest $ 471 $ 469
Income taxes 0 66
Non Cash Transactions:
----------------------
Recorded unrealized gains on securities
available for sale 425 439
Deferred income taxes on recorded
unrealized gains on securities
available for sale 144 149
</TABLE>
NOTE C - EARNINGS PER SHARE
Earnings per common share are based on the weighted average number of common
shares outstanding during each period.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Selected Information - Substantially All Disclosures Required By
Generally Accepted Accounting Principles Are Not Included)
SHAWNEE FINANCIAL SERVICES CORPORATION
NOTE D - INVESTMENT SECURITIES
In May 1993, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Statement No. 115 requires all
investments in debt and equity securities to be classified into three
categories. Securities which management has positive intent and ability to
hold until maturity are classified as held to maturity. Securities held to
maturity are stated at cost, adjusted for amortization of premium and
accretion of discount, computed primarily under the interest method.
Securities that are bought and held principally for the purpose of selling
them in the near term are classified as trading securities. All other
securities are classified as available for sale securities. Unrealized
holding gains and losses for trading securities are included in earnings.
Unrealized holding gains and losses for available for sale securities are
excluded from earnings and reported as a net amount and separate component of
stockholders' equity until realized.
As required by Statement No. 115, management implemented the standard on
January 1, 1994 and classified its entire securities portfolio as available
for sale due to the identification of circumstances which could result in the
securities not being held to maturity. Circumstances resulting in securities
sales could include, but are not limited to, changes in market interest rates,
changes in prepayment risk, income tax considerations, and liquidity needs.
At this time, management has no intention of establishing a trading securities
classification.
NOTE E - RECENT ACCOUNTING PRONOUNCEMENTS
Prior to 1993, the FASB issued Statement No. 107 "Disclosure about Fair Value
of Financial Instruments" which is effective for fiscal years ending after
December 15, 1992, except for entities with less than $150 million in total
assets. For those entities, the effective date is for fiscal years ending
after December 15, 1995. Statement No. 107 requires disclosure of the fair
value of financial instruments, both assets and liabilities recognized and not
recognized in the financial statements, with exceptions for certain financial
instruments.
In May 1993, the FASB issued Statement No. 114 "Accounting By Creditors for
Impairment of a Loan" which is effective for fiscal years beginning after
December 15, 1994. Statement No. 114 addresses the methods to be used by a
creditor to measure the impairment of a loan and the proper recognition of a
change in the value of an impaired loan.
In October 1994, the FASB issued Statement No. 118 "Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosure" which amends
Statement No. 114 by allowing creditors to use existing methods for
recognizing interest income on impaired loans. Statement No. 118 is effective
concurrent with the effective date of Statement No. 114.
In October 1994, the FASB issued Statement No. 119 "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments"
which is effective for calendar year 1994 financial statements, except for
entities with less than $150 million in total assets having a one year delay.
Statement No. 119 primarily requires disclosures about the amounts, nature and
terms of derivatives that do not fall under FASB's Statement No. 105
"Disclosures of Information about Financial Instruments with Off-Balance Sheet
Risk and Financial Instruments with Concentrations of Credit Risk."
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Selected Information - Substantially All Disclosures Required By
Generally Accepted Accounting Principles Are Not Included)
SHAWNEE FINANCIAL SERVICES CORPORATION
NOTE E - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Management implemented the above applicable standards for the three months
ended March 31, 1995 and determined that the combined financial statement
impact of these statements was not material. Management is currently
evaluating the financial statement impact of Statement No. 107.
NOTE F - PROPOSED MERGER
On January 5, 1995, Shawnee Financial Services Corporation entered into a
merger agreement with Keystone Financial, Inc., a Pennsylvania corporation
(Keystone). Under the terms of the agreement, Shawnee will be merged with and
into Keystone, which will be the surviving corporation. Each outstanding
share of Shawnee's common stock will be converted into 6.25 shares, subject to
adjustment, of Keystone common stock, par value $2.00 per share.
Simultaneously with or following the merger, Shawnee's subsidiary, The Everett
Bank, will be merged with and into Mid-State Bank and Trust Company, a
Pennsylvania bank and trust company and wholly-owned subsidiary of Keystone.
Management believes the merger will be finalized during 1995.
F-25
<PAGE>
ANNEX I
June , 1995
---
[Form of Fairness Opinion]
Board of Directors
Shawnee Financial Services Corporation
115 East Main Street
Everett, PA 15537
Directors:
You have requested our opinion as to the fairness, from a financial
point of view, to the shareholders of Shawnee Financial Services Corporation
("Shawnee") of the financial terms of the proposed merger whereby Shawnee will
be merged into Keystone Financial, Inc. ("Keystone"). The terms of the
proposed merger (the "Merger") between Shawnee and Keystone are set forth in
the Agreement and Plan of Reorganization and the Agreement and Plan of Merger
(collectively, the "Plan of Merger") dated January 5, 1995, and provide that
each outstanding share of Shawnee Common Stock will be converted into 6.25
shares of Keystone Common Stock subject to certain terms and conditions as
detailed in the Plan of Merger.
Berwind Financial Group, L.P. as part of its investment banking
business, regularly is engaged in the valuation of assets, securities and
companies in connection with various types of asset and security transactions,
including mergers, acquisitions, private placements and valuations for various
other purposes, and in the determination of adequate consideration in such
transactions.
In arriving at our opinion, we have, among other things: (i) reviewed
the historical financial performances, current financial positions and general
prospects of Shawnee and Keystone, (ii) reviewed the Plan of Merger, (iii)
reviewed and analyzed stock market performance of Keystone, (iv) studied and
analyzed the consolidated financial and operating data of Shawnee and
Keystone, (v) considered the terms and conditions of the proposed Merger
between Shawnee and Keystone as compared with the terms and conditions of
comparable bank mergers and acquisitions, (vi) met and/or communicated with
certain members of Shawnee's and Keystone's senior managements to discuss
their respective operations, historical financial statements and future
prospects, (vii) reviewed the Proxy Statement/Prospectus, and (viii) conducted
such other financial analyses, studies and investigations as we deemed
appropriate.
Our opinion is given in reliance on information and representations made
or given by Shawnee and Keystone, and their respective officers, directors,
auditors, counsel and other agents, and on filings, releases and other
information issued by Shawnee and Keystone, including financial statements,
financial projections and stock price data, as well as certain information
from recognized independent sources. We have not independently verified the
information concerning Shawnee and Keystone nor other data which we have
considered in our review and, for purposes of the opinion set forth below, we
have assumed and relied upon the accuracy and completeness of all such
information and data. Additionally, we assume that the proposed Merger is, in
all respects, lawful under applicable law.
With regard to financial and other information relating to the general
prospects of Shawnee and Keystone, we have assumed that such information has
been reasonably prepared and reflects the best currently available
A-1
<PAGE>
Board of Directors
June ___, 1995
Page 2
estimates and judgments of the managements of Shawnee and Keystone as to
Shawnee's and Keystone's most likely future performance. In rendering our
opinion, we have assumed that in the course of obtaining the necessary
regulatory approvals for the Merger, and in preparation of the final Proxy
Statement/Prospectus, no conditions will be imposed that will have a material
adverse effect on the contemplated benefits of the proposed Merger to Shawnee.
Our opinion is based upon information provided to us by the managements
of Shawnee and Keystone, as well as market, economic, financial and other
conditions as they exist and can be evaluated only as of the date hereof and
speaks to no other period. Our opinion pertains only to the financial
consideration of the proposed Merger and does not constitute a recommendation
to the Board of Shawnee and does not constitute a recommendation to Shawnee's
shareholders as to how such shareholders should vote on the Plan of Merger.
Based on the foregoing, it is our opinion that, as of the date hereof,
the proposed Merger between Shawnee and Keystone is fair, from a financial
point of view, to the shareholders of Shawnee.
Sincerely,
BERWIND FINANCIAL GROUP, L.P.
A-2
<PAGE>
ANNEX II
STATUTORY PROVISIONS CONCERNING DISSENTERS' RIGHTS
OF SHAWNEE SHAREHOLDERS
PENNSYLVANIA BUSINESS CORPORATION LAW OF 1988
SUBCHAPTER D.--DISSENTERS RIGHTS
(S) 1571. Application and effect of subchapter.
(a) General rule.--Except as otherwise provided in subsection (b), any
shareholder of a business corporation shall have the right to dissent from,
and to obtain payment of the fair value of his shares in the event of, any
corporate action, or to otherwise obtain fair value for his shares, where this
part expressly provides that a shareholder shall have the rights and remedies
provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on
transfer of a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of
election).
Section 2907(a) (relating to proceedings to terminate breach of
qualifying conditions)
Section 7104(b)(3) (relating to procedure).
(b) Exceptions.--
(1) Except as otherwise provided in paragraph (2), the holders of
the shares of any class or series of shares that, at the record date
fixed to determine the shareholders entitled to notice of and to vote at
the meeting at which a plan specified in any of section 1930, 1931(d),
1932(c) or 1952(d) is to be voted on, are either:
(i) listed on a national securities exchange; or
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<PAGE>
(ii) held of record by more than 2,000 shareholders;
shall not have the right to obtain payment of the fair value of any such
shares under this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that paragraph in the
case of:
(i) Shares converted by a plan if the shares are not converted
solely into shares of the acquiring, surviving, new or other
corporation or solely into such shares and money in lieu of
fractional shares.
(ii) Shares of any preferred or special class unless the articles,
the plan or the terms of the transaction entitle all
shareholders of the class to vote thereon and require for the
adoption of the plan or the effectuation of the transaction the
affirmative vote of a majority of the votes cast by all
shareholders of the class.
(iii) Shares entitled to dissenters rights under section 1906(c)
(relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase,
lease, exchange or other disposition all or substantially all of the
shares, property or assets of another corporation by the issuance of
shares, obligations or otherwise, with or without assuming the liabilities
of the other corporation and with or without the intervention of another
corporation or other person, shall not be entitled to the rights and
remedies of dissenting shareholders provided in this subchapter regardless
of the fact, if it be the case, that the acquisition was accomplished by
the issuance of voting shares of the corporation to be outstanding
immediately after the acquisition sufficient to elect a majority or more
of the directors of the corporation.
(c) Grant of optional dissenters rights.--The bylaws or a resolution of
the board of directors may direct that all or a part of the shareholders shall
have dissenters rights in connection with any corporate action or other
transaction that would otherwise not entitle such shareholders to dissenters
rights.
(d) Notice of dissenters rights.--Unless otherwise provided by statute,
if a proposed corporate action that would give rise to dissenters rights under
this subpart is submitted to a vote at a meeting of shareholders, there shall
be included in or enclosed with the notice of meeting:
(1) a statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the fair value
of their shares by complying with the terms of this subchapter; and
(2) a copy of this subchapter.
(e) Other statutes.--The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part
that makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective.--This subchapter may not
be relaxed by any provision of the articles.
(g) Cross references.--See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
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<PAGE>
(S) 1572. Definitions.
The following words and phrases when used in this subchapter shall have
the meanings given to them in this section unless the context clearly
indicates otherwise:
"Corporation." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation,
division, conversion or otherwise of that issuer. A plan of division may
designate which of the resulting corporations is the successor corporation for
purpose of this subchapter. The successor corporation in a division shall
have sole responsibility for payments to dissenters and other liabilities
under this subchapter except as otherwise provided in the plan of division.
"Dissenter." A shareholder or beneficial owner who is entitled to and
does assert dissenters rights under this subchapter and who has performed
every act required up to the time involved for the assertion of those rights.
"Fair value." The fair value of shares immediately before the
effectuation of the corporate action to which the dissenter objects, taking
into account all relevant factors, but excluding any appreciation or
depreciation in anticipation of the corporate action.
"Interest." Interest from the effective date of the corporate action
until the date of payment at such rate as is fair and equitable under all of
the circumstances, taking into account all relevant factors including the
average rate currently paid by the corporation on its principal bank loans.
(S) 1573. Record and beneficial holders and owners.
(a) Record holders of shares.--A record holder of shares of a business
corporation may assert dissenters rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all the shares of
the same class or series beneficially owned by any one person and discloses
the name and address of the person or persons on whose behalf he dissents. In
that event, his rights shall be determined as if the shares as to which he has
dissented and his other shares were registered in the names of different
shareholders.
(b) Beneficial owners of shares.--A beneficial owner of shares of a
business corporation who is not the record holder may assert dissenters rights
with respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the
corporation not later than the time of the assertion of dissenters rights a
written consent of the record holder. A beneficial owner may not dissent with
respect to some but less than all shares of the same class or series owned by
the owner, whether or not the shares so owned by him are registered in his
name.
(S) 1574. Notice of intention to dissent.
If the proposed corporate action is submitted to a vote at a meeting of
shareholders of a business corporation, any person who wishes to dissent and
obtain payment of the fair value of his shares must file with the corporation,
prior to the vote, a written notice of intention to demand that he be paid the
fair value for his shares if the proposed action is effectuated, must effect
no change in the beneficial ownership of his shares from the date of such
filing continuously through the effective date of the proposed action and must
refrain from voting his shares in approval of such action. A dissenter who
fails in any respect shall not acquire any right to payment of the fair value
of his shares under this subchapter. Neither a proxy nor a vote against the
proposed corporate action shall constitute the written notice required by this
section.
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<PAGE>
(S) 1575. Notice to demand payment.
(a) General rule.--If the proposed corporate action is approved by the
required vote at a meeting of shareholders of a business corporation, the
corporation shall mail a further notice to all dissenters who gave due notice
of intention to demand payment of the fair value of their shares and who
refrained from voting in favor of the proposed action. If the proposed
corporate action is to be taken without a vote of shareholders, the
corporation shall send to all shareholders who are entitled to dissent and
demand payment of the fair value of their shares a notice of the adoption of
the plan or other corporate action. In either case, the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to obtain
payment.
(2) Inform holders of uncertificated shares to what extent transfer of
shares will be restricted from the time that demand for payment is
received.
(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on whose
behalf the shareholder dissents, acquired beneficial ownership of the
shares.
(4) Be accompanied by a copy of this subchapter.
(b) Time for receipt of demand for payment.--The time set for receipt of
the demand and deposit of certificated shares shall be not less than 30 days
from the mailing of the notice.
(S) 1576. Failure to comply with notice to demand payment, etc.
(a) Effect of failure of shareholder to act.--A shareholder who fails to
timely demand payment, or fails (in the case of certificated shares) to timely
deposit certificates, as required by a notice pursuant to section 1575
(relating to notice to demand payment) shall not have any right under this
subchapter to receive payment of the fair value of his shares.
(b) Restriction on uncertificated shares.--If the shares are not
represented by certificates, the business corporation may restrict their
transfer from the time of receipt of demand for payment until effectuation of
the proposed corporate action or the release of restrictions under the terms
of section 1577(a) (relating to failure to effectuate corporate action).
(c) Rights retained by shareholder.--The dissenter shall retain all
other rights of a shareholder until those rights are modified by effectuation
of the proposed corporate action.
(S) 1577. Release of restrictions or payment for shares.
(a) Failure to effectuate corporate action.--Within 60 days after the
date set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it shall return
any certificates that have been deposited and release uncertificated shares
from any transfer restrictions imposed by reason of the demand for payment.
(b) Renewal of notice to demand payment.--When uncertificated shares
have been released from transfer restrictions and deposited certificates have
been returned, the corporation may at any later time send a new notice
conforming to the requirements of section 1575 (relating to notice to demand
payment), with like effect.
A-6
<PAGE>
(c) Payment of fair value of shares.--Promptly after effectuation of
the proposed corporate action, or upon timely receipt of demand for payment if
the corporate action has already been effectuated, the corporation shall
either remit to dissenters who have made demand and (if their shares are
certificated) have deposited their certificates the amount that the
corporation estimates to be the fair value of the shares, or give written
notice that no remittance under this section will be made. The remittance or
notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the issuer
of the shares held or owned by the dissenter for a fiscal year ending not
more than 16 months before the date of remittance or notice together with
the latest available interim financial statements.
(2) A statement of the corporation's estimate of the fair value of
the shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
(d) Failure to make payment.--If the corporation does not remit the
amount of its estimate of the fair value of the shares as provided by
subsection (c), it shall return any certificates that have been deposited and
release uncertificated shares from any transfer restrictions imposed by reason
of the demand for payment. The corporation may make a notation on any such
certificate or on the records of the corporation relating to any such
uncertificated shares that such demand has been made. If shares with respect
to which notation has been made shall be transferred, each new certificate
issued therefor or the records relating to any transferred uncertificated
shares shall bear a similar notation, together with the name of the original
dissenting holder or owner of such shares. A transferee of such shares shall
not acquire by such transfer any rights in the corporation other than those
which the original dissenter had after making demand for payment of their fair
value.
(S) 1578. Estimate by dissenter of fair value of shares.
(a) General rule.--If the business corporation gives notice of its
estimate of the fair value of the shares, without remitting such amount, or
remits payment of its estimate of the fair value of a dissenter's shares as
permitted by section 1577(c) (relating to payment of fair value of shares) and
the dissenter believes that the amount stated or remitted is less than the
fair value of his shares, he may send to the corporation his own estimate of
the fair value of the shares, which shall be deemed a demand for payment of
the amount or the deficiency.
(b) Effect of failure to file estimate.--Where the dissenter does not
file his own estimate under subsection (a) within 30 days after the mailing by
the corporation of its remittance or notice, the dissenter shall be entitled
to no more than the amount stated in the notice or remitted to him by the
corporation.
(S) 1579. Value proceedings general.
(a) General rule.--Within 60 days after the latest of:
(1) effectuation of the proposed corporate action;
(2) timely receipt of any demands for payment under section 1575
(relating to notice to demand payment); or
(3) timely receipt of any estimates pursuant to section 1578 (relating
to estimate by dissenter of fair value of shares);
if any demands for payment remain unsettled, the business corporation may file
in court an application for relief requesting that the fair value of the
shares be determined by the court.
A-7
<PAGE>
(b) Mandatory joinder of dissenters.--All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served
on each such dissenter. If a dissenter is a nonresident, the copy may be
served on him in the manner provided or prescribed by or pursuant to 42 Pa.
C.S. Ch. 53 (relating to bases of jurisdiction and interstate and
international procedure).
(c) Jurisdiction of the court.--The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
(d) Measure of recovery.--Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found
to exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application.--If the
corporation fails to file an application as provided in subsection (a), any
dissenter who made a demand and who has not already settled his claim against
the corporation may do so in the name of the corporation at any time within 30
days after the expiration of the 60-day period. If a dissenter does not file
an application within the 30-day period, each dissenter entitled to file an
application shall be paid the corporation's estimate of the fair value of the
shares and no more, and may bring an action to recover any amount not
previously remitted.
(S) 1580. Costs and expenses of valuation proceedings.
(a) General rule.--The costs and expenses of any proceeding under
section 1579 (relating to valuation proceedings generally), including the
reasonable compensation and expenses of the appraiser appointed by the court,
shall be determined by the court and assessed against the business corporation
except that any part of the costs and expenses may be apportioned and assessed
against all or some of the dissenters who are parties and whose action in
demanding supplemental payment under section 1578 (relating to estimate by
dissenter of fair value of shares) the court finds to be dilatory, obdurate,
arbitrary, vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good faith
appears.--Fees and expenses of counsel and of experts for the respective
parties may be assessed as the court deems appropriate against the corporation
and in favor of any or all dissenters if the corporation failed to comply
substantially with the requirements of this subchapter and may be assessed
against either the corporation or a dissenter, in favor of any other party, if
the court finds that the party against whom the fees and expenses are assessed
acted in bad faith or in a dilatory, obdurate, arbitrary or vexatious manner
in respect to the rights provided by this subchapter.
(c) Award of fees for benefits to other dissenters.--If the court finds
that the services of counsel for any dissenter were of substantial benefit to
other dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of
the amounts awarded to the dissenters who were benefited.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment to its registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in
Harrisburg, Pennsylvania, on the 21st day of June, 1995.
KEYSTONE FINANCIAL, INC.
By /s/ Carl L. Campbell
---------------------------
Carl L. Campbell, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following
persons in the capacities and on the dates indicated.
Signature and Capacity Date
---------------------- ----
CARL L. CAMPBELL, President, Chief Executive Officer
and Director; MARK L. PULASKI, Executive Vice President,
Treasurer and Chief Financial Officer; DONALD F. HOLT,
Senior Vice President, Controller and Principal Accounting
Officer; A. JOSEPH ANTANAVAGE, Director; J. GLENN BEALL, JR.,
Director; PAUL I. DETWILER, JR., Director; DONALD DEVORRIS,
Director; RICHARD W. DEWALD, Director; GERALD E. FIELD,
Director; WILLIAM A. GETTIG, Director; WALTER W. GRANT,
Director; ROGER S. HADDON, Director; PHILIP C. HERR II,
Director; UZAL H. MARTZ, JR., Director; MAX A. MESSENGER,
Director; WILLIAM L. MILLER, Director; ROBERT R. MITCHELL,
Director; DON A. ROSINI, Director; F. DALE SCHOENEMAN,
Director; RONALD C. UNTERBERGER, Director; G. WILLIAM WARD,
Director.
By /s/ Carl L. Campbell June 21, 1995
--------------------
Carl L. Campbell
Attorney-in-Fact
II-1
<PAGE>
EXHIBIT INDEX
-------------
(Pursuant to Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
Page Number
in Sequential
Exhibit Numbering
No. Description and Method of Filing System
- --------------------------- -------------------------------------------------------------------------------------- -------------
<S> <C> <C>
23.1 Consent of Ernst & Young LLP, independent auditors (filed herewith). 100
23.2 Consent of Edwards, Leap & Sauer, independent auditors (filed herewith). 101
23.4 Consent of Berwind Financial Group, L.P. (to be filed by amendment) NA
23.5 Consent of Coopers & Lybrand L.L.P. (filed herewith) 102
23.6 Consent of Deloitte & Touche LLP (filed herewith) 103
23.7 Consent of KPMG Peat Marwick L.L.P. (filed herewith) 104
24.1 Power of Attorney (set forth on Page II-5 of the Registration Statement). NA
99.1 Preliminary copy of letter to shareholders of Shawnee Financial Services
Corporation (filed herewith). 105
99.2 Preliminary copy of Notice of Special Meeting of Shareholders of Shawnee
Financial Services Corporation (filed herewith). 106
99.3 Preliminary copy of form of proxy for use by shareholders of Shawnee
Financial Services Corporation (filed herewith). 108
</TABLE>
II-2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement (Form S-4) (No. 33-91532) and the related Proxy
Statement/Prospectus of Keystone Financial, Inc. for the registration of
501,150 shares of its common stock and to the incorporation by reference
therein of our report dated January 31, 1995 with respect to the consolidated
financial statements of Keystone Financial, Inc. and subsidiaries included in
its Annual Report (Form 10-K) for the year ended December 31, 1994, filed with
the Securities and Exchange Commission.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
June 21, 1995
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby renew our consent to the inclusion in the Proxy
Statement/Prospectus which is a part of this Registration Statement on Form
S-4 (No. 33-91532) of our report dated January 31, 1995, on the consolidated
financial statements of Shawnee Financial Services Corporation and subsidiary.
We also renew our consent to the references made to us under the caption
"Experts" in such Proxy Statement/Prospectus.
/s/ Edwards, Leap & Sauer
EDWARDS, LEAP & SAUER
Hollidaysburg, Pennsylvania
June 20, 1995
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We renew our consent to the incorporation by reference in this
Registration Statement on Form S-4 (No. 33-91532) and the related Proxy
Statement/Prospectus of Keystone Financial, Inc. of our report dated January
14, 1994, except for Note 13 as to which the date is January 18, 1994, on our
audits of the consolidated financial statements of The Frankford Corporation
and subsidiaries as of December 31, 1993 and for the years ended December 31,
1993 and 1992, which report is included in the Annual Report on Form 10-K of
Keystone Financial, Inc. for the year ended December 31, 1994.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
June 20, 1995
<PAGE>
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1
to Registration Statement No. 33-91532 of Keystone Financial, Inc. on Form S-4
and the related Proxy Statement/Prospectus of our report with respect to the
consolidated financial statements of Elmwood Bancorp, Inc. and subsidiary as
of December 31, 1993 and for each of the two years ended December 31, 1993,
dated January 24, 1994, appearing in and incorporated by reference in the
Annual Report on Form 10-K of Keystone Financial, Inc. for the year ended
December 31, 1994.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
June 21, 1995
<PAGE>
EXHIBIT 23.7
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this
Registration Statement on Form S-4 (No. 33-91532) and the related Proxy
Statement/Prospectus of our report dated January 28, 1994, with respect to the
consolidated financial statements of WM Bancorp and subsidiaries as of
December 31, 1993 and for the years ended December 31, 1993 and 1992, which
report is included in the Annual Report on Form 10-K of Keystone Financial,
Inc. for the year ended December 31, 1994.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Baltimore, Maryland
June 21, 1995
<PAGE>
EXHIBIT 99.1
[Preliminary Copy]
SHAWNEE FINANCIAL SERVICES CORPORATION
115 E. Main Street
Everett, Pennsylvania 15537
June _____, 1995
Dear Shareholder:
A Special Meeting of the Shareholders of the Shawnee Financial Services
Corporation ("Shawnee") will be held on Tuesday, August 1, 1995, at 11:00
a.m., local time, at the Board Room of The Everett Bank, 115 East Main Street,
Everett, Pennsylvania 15537.
The purpose of the Special Meeting is to consider and vote upon a
proposal to approve an Agreement and Plan of Reorganization and a related
Agreement and Plan of Merger (collectively, the "Plan of Merger") providing
for the merger of Shawnee into Keystone Financial, Inc. ("Keystone").
Keystone is a bank holding company with its principal office in Harrisburg,
Pennsylvania. Through its subsidiary banks, Keystone currently maintains 140
banking offices in central and southeastern Pennsylvania, western Maryland and
northeastern West Virginia.
If the merger is approved, Shawnee shareholders will receive 6.25 shares
of Keystone Common Stock in exchange for each share of Shawnee Common Stock
owned by them. Upon consummation of the merger, Shawnee shareholders will no
longer hold any interest in Shawnee. Instead, you will be a shareholder of
Keystone. Keystone Common Stock is quoted on the NASDAQ National Market
System under the symbol "KSTN." Based on the June 20, 1995 closing sale price
for Keystone Common Stock of $28.125 per share, the value of the 6.25 shares
of Keystone Common Stock being offered for each Shawnee share in the merger
would be $175.78. Shareholders should note that the market value of the
Keystone Common Stock may change prior to consummation of the merger.
SHAREHOLDERS ARE ENCOURAGED TO READ AND CAREFULLY CONSIDER THE ATTACHED PROXY
STATEMENT/PROSPECTUS WHICH CONTAINS A MORE COMPLETE DESCRIPTION OF THE TERMS
OF THE PROPOSED MERGER AND PROVIDES DETAILED FINANCIAL, BUSINESS AND OTHER
INFORMATION CONCERNING SHAWNEE AND KEYSTONE.
The Board of Directors of Shawnee has carefully considered the Plan of
Merger and believes that the proposed merger is in the best interests of
Shawnee and its shareholders. ACCORDINGLY, YOUR BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE PLAN OF MERGER. All
the executive officers and directors of Shawnee have advised Shawnee of their
intention to vote the shares of Shawnee Common Stock owned by them in favor of
the Plan of Merger.
The affirmative vote of the holders of 75% of all outstanding shares of
Shawnee Common Stock is necessary for approval of the Plan of Merger. Your
vote is important regardless of the number of shares you own. We urge you to
participate in this significant development by marking, signing, dating and
returning promptly the enclosed proxy in the accompanying postage paid, pre-
addressed envelope, whether or not you plan to attend the Special Meeting.
You will retain the right to vote your shares in person at the Special Meeting
if you so desire. All properly executed proxies not previously revoked will
be voted at the Special Meeting in accordance with the instructions given on
the proxy. Proxies containing no voting instructions regarding the proposal
to approve the Plan of Merger will be voted in favor of the merger.
Sincerely yours,
Samuel K. Bohn
President and Chief Executive Officer
<PAGE>
EXHIBIT 99.2
[Preliminary Copy]
SHAWNEE FINANCIAL SERVICES CORPORATION
P.O. Box 149
Everett, Pennsylvania 15537
--------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on August 1, 1995
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TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Shawnee
Financial Services Corporation (the "Corporation") will be held on Tuesday,
August 1, 1995 at 11:00 a.m., local time, at the Board Room of The Everett
Bank, 115 East Main Street, Everett, Pennsylvania, for the purpose of
considering and acting upon the following:
1. Approval of the Agreement and Plan of Reorganization and the
Agreement and Plan of Merger, each dated as of January 5, 1995,
between the Corporation and Keystone Financial, Inc., which provide
for the merger of the Corporation into Keystone Financial, Inc. and
the conversion of each outstanding share of the Corporation's
Common Stock into 6.25 shares of Keystone Common Stock, as
described in the accompanying Proxy Statement/Prospectus;
2. Such other matters as may properly come before the meeting or any
adjournment thereof.
Only shareholders of record at the close of business on June 24, 1995
are entitled to notice of and to vote at the Special Meeting.
ALL SHAREHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD PROMPTLY, WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING.
If you attend the meeting you may, if you wish, withdraw your proxy and vote
your shares in person.
By Order of the Board of Directors
B. Frank Dunkle, Jr., Secretary
June _____, 1995
<PAGE>
EXHIBIT 99.3
[Preliminary Copy]
SHAWNEE FINANCIAL SERVICES CORPORATION
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Ronald R. McFarland, Everett, Pennsylvania, and
Frederick M. Shumaker, Bedford, Pennsylvania, or either of them, as proxies,
with full power of substitution, to vote all shares of Common Stock of Shawnee
Financial Services Corporation which the undersigned is entitled to vote at the
Special Meeting of Shareholders to be held August 1, 1995 and at any adjournment
thereof, as follows:
The Board of Directors recommends a vote "FOR" Item 1.
1. Approval of the Agreement and
Plan of Reorganization and the
Agreement and Plan of Merger
dated as of January 5, 1995
between the Corporation and
Keystone Financial, Inc.,
which provide for the merger
of the Corporation into Keystone
and the conversion of each
outstanding share of the
Corporation's Common Stock into
6.25 shares of Keystone Common
Stock, as described in the
Proxy Statement/Prospectus............. FOR [_] AGAINST [_] ABSTAIN [_]
2. To vote in their discretion on such other matters as may properly come
before the meeting or any adjournment thereof.
(continued)
<PAGE>
This proxy, when properly executed, will be voted in the manner directed herein.
If no direction is made, this proxy will be voted FOR Item 1.
Dated: , 1995
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Signature
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Signature
Please sign exactly as name
appears hereon. For joint
accounts, each joint owner should
sign. When signing as attorney,
executor, administrator, trustee
or guardian, please give your full
title as such. If a corporation,
please sign the full corporate
name by President or other
authorized officer, giving your
full title as such. If a
partnership, please sign in the
partnership name by authorized
person, giving your full title as
such.
PLEASE MARK, DATE, EXECUTE AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED
ENVELOPE.
