FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1997
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period
from ________to_________
- --------------------------------------------------------------------------------
Commission File Number 0-11460
KEYSTONE FINANCIAL, INC.
Pennsylvania 23-2289209
(State of Incorporation) (IRS Employer ID No.)
P.O. Box 3660
One Keystone Plaza
Front and Market Streets
Harrisburg, PA 17105-3660
Telephone: (717) 233-1555
- --------------------------------------------------------------------------------
Securities registered pursuant to section 12(g) of the Act: Common Stock, $2.00
par value.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 1998:
Common Stock $2.00 Par Value -- $1,969,986,000
The number of shares outstanding of the registrant's class of common stock as of
February 28, 1998:
Common Stock $2.00 Par Value -- 51,673,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholder report for the year ended December 31, 1997,
are incorporated by reference into Parts I and II and portions of the Proxy
Statement of Keystone Financial, Inc. for the 1998 annual shareholders meeting
are incorporated by reference into Part III.
1
<PAGE>
FORM 10-K
INDEX
PART I PAGE
- ---------- -------
Item 1 Business 3
Item 2 Properties 9
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders Not
Applicable
PART II
- -----------
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6 Selected Financial Data 10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7A Quantitative and Qualitative Disclosures about Market Risk 10
Item 8 Financial Statements and Supplementary Data 10
Item 9 Changes in and Disagreements with Accountants on Not
Accounting and Financial Disclosure Applicable
PART III
- ------------
Item 10 Directors and Executive Officers of the Registrant 10
Item 11 Executive Compensation 10
Item 12 Security Ownership of Certain Beneficial Owners and 10
Management
Item 13 Certain Relationships and Related Transactions 10
PART IV
- -----------
Item 14 Exhibits, Financial Statement Schedules and Reports 11
on Form 8-K
2
<PAGE>
PART I
ITEM 1 - BUSINESS
Introduction
Keystone Financial, Inc. (Keystone) was formed in 1984 as a result of mergers
between predecessor bank holding companies. With assets of $6.8 billion,
Keystone is the fourth largest banking corporation headquartered in the
Commonwealth of Pennsylvania.
Keystone is the parent of seven community banks and various nonbank
subsidiaries. The subsidiary banks, which consist of American Trust Bank, N.A.,
Financial Trust Company, Keystone Bank, N.A., Keystone National Bank, Mid-State
Bank and Trust Company, Northern Central Bank, and Pennsylvania National Bank
and Trust Company, operate in thirty-one Pennsylvania counties, three Maryland
counties and one county in West Virginia.
Nonbank subsidiaries offer a variety of financial services including discount
brokerage services, sales of mutual funds and annuities, asset management and
investment advisory services, reinsurance, small equipment leasing, mortgage
banking, and community development. None of the nonbank subsidiaries constitute
a significant portion of Keystone's business. At December 31, 1997, Keystone and
its subsidiaries had 3,126 full-time equivalent employees.
Keystone and its subsidiaries do not have any portion of their business
dependent upon a single or a limited number of customers, the loss of which
would have a material adverse effect on their business; no substantial portion
of their loans and investments are concentrated within a single industry or
group of related industries. The businesses of Keystone are not seasonal in
nature. For a further description of the nature of Keystone's business, refer to
the section entitled "Nature of Operations" contained within Exhibit 13.1.
Keystone's stock is traded on the NASDAQ Stock Market (servicemark) under the
symbol of KSTN. During 1997, Keystone completed its merger with Financial Trust
Corp, a bank holding company formerly headquartered in Carlisle, Pennsylvania,
and its acquisition of First Financial Corporation of Western Maryland, a thrift
holding company formerly based in Cumberland, Maryland. Refer to the Notes to
the Financial Statements section under the caption "Mergers and Acquisitions"
within Exhibit 13.1 for additional information.
Legislation and Competition
Changes in banking legislation since 1982 have increased the competition
experienced by banks and bank holding companies and expanded the opportunities
to grow geographically and offer new types of financial services. Beginning in
1982, amendments to the Pennsylvania Banking Code provided for the phased
elimination of geographical branching restrictions on Pennsylvania banks and for
the phased elimination of limitations on the number of Pennsylvania banks a bank
holding company could own. Amendments in 1986 further provided for the phased
implementation of interstate banking. Effective March 4, 1990, Pennsylvania
state-chartered and national banks could establish or acquire branch offices
anywhere in the state, there were no longer any limitations on the number of
Pennsylvania banks a bank holding company could own and a bank holding company
located in any state or the District of Columbia could, subject to a reciprocity
requirement, acquire a Pennsylvania bank or bank holding company.
3
<PAGE>
The Federal Interstate Banking and Branching Efficiency Act of 1994 has extended
to a nationwide basis the process of removing the legal barriers to interstate
banking which formerly existed under various state laws. Effective September 29,
1995, the Act permits bank holding companies in any state to acquire bank
holding companies or banks located in any other state. Effective June 1, 1997,
the Act permits a bank in one state to merge with a bank in another state as
long as neither state had enacted legislation prior to that date to prohibit
interstate branching. A bank may establish a de novo branch in another state or
acquire a branch in another state without acquiring the entire bank only if
expressly permitted by the law of the state where the new or acquired branch is
located. Pennsylvania has enacted legislation to permit de novo interstate
branching, subject to a reciprocity requirement.
The result of these developments has been an increased volume of merger activity
involving Pennsylvania banks and bank holding companies since 1982; larger
banking organizations have sought to position themselves to enter into
state-wide and inter-state banking; smaller banking organizations have sought to
increase their size in order to remain competitive on a regional basis. At the
same time, deregulation of the banking industry has increased the opportunities
to offer new types of financial services and enhanced the potential for
competition from savings and loan associations, insurance companies, brokerage
firms, and other nonbank financial institutions.
The market in which Keystone's banking subsidiaries operate is considered
competitive. Banks and bank holding companies with significant operations in the
Keystone market areas range in size from less than $100 million to over $50
billion in assets.
In addition to commercial banks, competitors for loans, deposits, and other
services include savings and loan associations, insurance companies, finance
companies, credit unions, brokerage houses, direct lending by federal and state
governments, and a proliferation of other types of financial institutions.
Keystone differentiates itself from its financial institution competitors by
focusing on the customers and delivering products customized to meet their
financial needs. The operating banks of Keystone maintain local management
presence to ensure close personal service and local decision-making on the
issues which directly affect the customer. At the same time, this structure
allows Keystone to standardize products and services and centralize a
significant portion of operations, data processing, and other functions which
are less directly related to customer contact. This approach enables Keystone to
effect improved cost management through economies derived from standardization
and centralization of these functions. In summary, Keystone believes that it
derives a competitive advantage from this approach by providing personal,
localized service in a cost efficient manner.
Although Keystone expects that competition will increase as a result of the
factors described herein, the effects thereof, if any, on Keystone are not
readily ascertainable.
Regulation and Supervision
The business of Keystone and its subsidiaries is subject to extensive regulation
and supervision under federal and state banking laws and other federal and state
laws and regulations. In general, these laws and regulations are intended for
the protection of the customers and depositors of Keystone's subsidiaries and
not for the protection of Keystone or its shareholders. Set forth below are
brief descriptions of selected laws and regulations applicable to Keystone and
its subsidiaries. These descriptions are not intended to be a comprehensive
description of all laws and regulations to which Keystone and its subsidiaries
are subject or to be complete descriptions of the laws and regulations
discussed. The descriptions of statutory and regulatory provisions are qualified
in their entirety by reference to the particular statutes and regulations.
Changes in applicable statutes, regulations or regulatory policy may have a
material effect on Keystone and its business.
4
<PAGE>
Regulation and Supervision of Bank Holding Companies
Keystone is subject to regulation under the Bank Holding Company Act of 1956. A
bank holding company is required to file annual reports and other information
concerning its business operations and those of its subsidiaries with the Board
of Governors of the Federal Reserve System (Federal Reserve Board). A bank
holding company and each of its subsidiaries are also subject to examination by
the Federal Reserve Board.
The Bank Holding Company Act requires the prior approval of the Federal Reserve
Board in any case where a bank holding company proposes to acquire direct or
indirect ownership or control of more than 5% of the voting shares of any bank
(unless it already owns a majority of such bank's voting shares), to merge or
consolidate with any other bank holding company or to acquire all or
substantially all of the assets of any bank. The Act further provides that the
Federal Reserve Board shall not approve any such acquisition of voting shares or
assets or any such merger or consolidation: (i) that would result in a monopoly
or would be in furtherance of any combination or conspiracy to monopolize or
attempt to monopolize the business of banking in any part of the United States
or (ii) the effect of which may be substantially to lessen competition or to
tend to create a monopoly in any section of the country, or that in any other
manner would be in restraint of trade, unless the anticompetitive effects of the
proposed transaction are clearly outweighed in the public interest by the
probable effect of the transaction in meeting the convenience and needs of the
community to be served.
The Bank Holding Company Act prohibits a bank holding company from engaging in,
or from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of, any company engaged in nonbanking activities unless the
Federal Reserve Board, by order or regulation, has found such activities to be
so closely related to banking or to managing or controlling banks as to be a
proper incident thereto. The Federal Reserve Board has by regulation determined
that certain activities are so closely related to banking or to managing or
controlling banks as to permit bank holding companies and subsidiaries formed
for the purpose to engage in such activities, subject to Board approval in
certain cases. These activities include operating a mortgage, consumer finance,
credit card, or factoring company; servicing loans and other extensions of
credit; providing certain investment and financial advice; leasing personal
property; providing certain bookkeeping or financially-oriented data processing
services; acting as an insurance agent for certain types of credit related
insurance, and discount brokerage.
Keystone Financial, Inc., is an affiliate of each of its subsidiary banks within
the meaning of the Federal Reserve Act (Act). As an affiliate, Keystone is
subject to certain restrictions imposed by the Act on extensions of credit by
the banks to Keystone, on investment in the stock or other securities of
Keystone by the banks and on the taking of such stock or securities as
collateral for loans to any borrower. Further, under the Bank Holding Company
Act, a bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of any property or the furnishing of services.
The Federal Reserve Board has adopted capital adequacy guidelines under which it
assesses the adequacy of capital in examining and supervising a bank holding
company and in analyzing applications filed with the Board. In 1989, the Federal
Reserve Board issued new risk-based capital adequacy guidelines that were fully
phased-in at the end of 1992. Keystone is in compliance with all existing
capital adequacy guidelines, including the risk-based guidelines. For a
discussion of these capital adequacy guidelines and Keystone's capital position,
reference is made to the caption "Shareholders' Equity", contained within the
Financial Review section of Exhibit No. 13.1.
Regulation and Supervision of Banks
The banking subsidiaries of Keystone include both state-chartered banks
(Financial Trust Company, Mid-State Bank and Trust Company and Northern Central
Bank) and banks chartered under the laws of the United States (American Trust
Bank, N.A., Keystone Bank, N.A., Keystone National Bank, and Pennsylvania
National Bank and Trust Company). Keystone's state-chartered banks are under the
supervision of the Pennsylvania Department of Banking and the Federal Deposit
Insurance Corporation (FDIC) while the federally-chartered banks are supervised
by the Office of the Comptroller of Currency (OCC). The supervisory agencies
conduct regular examinations of the banks. Deposits in all of the Keystone
banking subsidiaries are federally-insured by the FDIC. In addition, the banks
are subject, in certain instances, to the regulation of the Federal Reserve
5
<PAGE>
Board. The areas of operation of Keystone's subsidiary banks which are subject
to regulation by federal and state laws, regulations and regulatory agencies
include, among other things, reserves against deposits, maximum interest rates
for specific classes of loans, truth-in-lending disclosure, permissible types of
loans and investments, trust operations, issuance of securities, and payment of
dividends. In addition, the FDIC and OCC have issued to state nonmember banks
and national banks, respectively, capital adequacy and risk-based capital
guidelines similar to those adopted by the Federal Reserve Board for bank
holding companies, as referred to above. Keystone's subsidiary banks are in
compliance with all such guidelines.
As federally-insured banks, the state-chartered banks of Keystone must obtain
the prior approval of the Pennsylvania Department of Banking and the FDIC before
establishing any new branch banking office. The federally-chartered banks must
obtain approval of the OCC. Mergers of banks or thrifts located in Pennsylvania,
Maryland, and West Virginia are subject to the prior approval of one or more of
the following: The applicable state department of banking, the FDIC, the Federal
Reserve Board, the OCC, or the Office of Thrift Supervision. The approvals
required depend upon several factors, including whether the merged institution
is a federally-insured state bank or thrift institution, a member of the Federal
Reserve System, a national bank or a federal savings bank.
As affiliates of Keystone, the banks are subject to provisions of the Federal
Reserve Act which restrict the ability of banks to extend credit to affiliates,
to invest in the stock or securities thereof, or to take such stock or
securities as collateral for loans to any borrower.
The business and earnings of the banks are affected by the monetary policies of
the Federal Reserve Board which regulate the money supply in order to influence
rates of inflation and economic growth. Among the techniques used to implement
these objectives are open market dealings in United States Government
securities, changes in the discount rate for bank borrowings from the Federal
Reserve Banks and changes in the reserve requirements against bank deposits and
borrowings. Changes in these policies can influence to a significant degree the
overall growth and distribution of bank loans, investments and deposits, the
interest rates charged by banks on loans and the cost to banks of obtaining
funds, as well as the ability of banks to compete for loans and for funds with
other types of financial institutions.
The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) was
signed into law in 1989. FIRREA primarily affects the regulation of savings
associations (thrifts) and savings and loan holding companies, rather than the
regulation of commercial banks and bank holding companies. However, FIRREA does
contain a number of provisions affecting banks and bank holding companies, such
as provisions affecting thrift acquisitions, liability of commonly controlled
depository institutions, receivership and conservatorship rights and procedures,
and substantially increased penalties for violation of banking statutes,
regulations and orders. In 1991, Congress enacted the Federal Deposit Insurance
Corporation Improvement Act (FDICIA). This law has established a new framework
for the relationship between insured depository institutions and the various
regulatory bodies. For a discussion of FDICIA and associated regulations,
reference is made to the caption "Regulatory Matters", contained within the
Financial Review section of Exhibit No. 13.1.
In 1994, Congress enacted the Riegle Community Development and Regulatory
Improvement Act ("CDRIA"), a broad-based law primarily focused on ensuring that
banks deliver services to financially underserved communities. In that
connection, CDRIA established a fund to award financial grants to community
development financial institutions and to promote their partnering with banks.
Beyond community development, CDRIA made numerous changes to many provisions of
federal banking law, for example, streamlining the bank holding company
application process, liberalizing the makeup of national bank boards of
directors, simplifying the establishment of bank service corporations, modifying
management interlock rules, and tightening currency transaction reporting under
the Bank Secrecy Act. CDRIA also amended an array of consumer protection laws,
including the Truth in Lending Act, the Real Estate Settlement Procedures Act,
The Fair Credit Reporting Act, the Consumer Leasing Act, and the Flood Disaster
Protection Act.
6
<PAGE>
Late in 1996, Congress enacted the Economic Growth and Regulatory Paperwork
Reduction Act (EGARPRA), which, like CDRIA, amended a variety of banking laws,
by relieving certain regulatory burdens on banks and bank holding companies.
Among other things, EGARPRA eliminated per branch capital requirements for
national banks, eliminated branch applications for automated teller machines,
expedited procedures for bank holding companies to engage in permissible
nonbanking activities, modified rules for qualification of bank directors,
liberalized standards for loans to bank insiders, and streamlined the bank
examination process. In addition, EGARPRA recapitalized the Savings Association
Insurance Fund of FDIC through special assessments on banks and thrift
institutions and prepared for the development of a common bank charter for all
insured depository institutions. EGARPRA also amended the Fair Credit Reporting
Act and the Home Mortgage Disclosure Act and freed banks from liability under
certain circumstances for environmental cleanup of real estate taken as loan
collateral.
Changing conditions in the economy and in the financial industry can be expected
to continue to result in changes in legislation and regulatory policies which
will affect the business of banks and competition between banks and among banks
and other types of financial institutions.
Statistical Disclosure
The consolidated statistical disclosures found in the sections of Exhibit No.
13.1 entitled, "Selected Financial Data", "Financial Review", and "Supplemental
Financial Information", are incorporated herein by reference. Also incorporated
herein by reference are the following consolidated statistical disclosures
appearing in the Notes to Consolidated Financial Statements section of Exhibit
No. 13.1: the discussion of "Interest and Fees on Loans" appearing in the note
captioned "Summarized Accounting Policies", the note captioned "Investments",
and the table of total nonaccrual and restructured loan balances and related
annual interest data appearing in the note captioned "Loans and Leases".
7
<PAGE>
Executive Officers of the Corporation
Except as otherwise noted, each executive officer has held the position
indicated for at least five years, serves at the pleasure of the Board of
Directors and is not elected for any specific term of office.
Name Age Office with Keystone and/or Subsidiary
- ---------------- ----- -------------------------------------------
Carl L. Campbell 54 President, Chief Executive Officer and Director
Mark L. Pulaski 44 Chief Operating Officer, Chief Financial Officer,
and Vice Chairman
From 1995 to November 1997, Mr. Pulaski was
Senior Executive Vice President, Chief Financial
Officer (CFO) and Chief Administrative Officer
(CAO) of the Corporation; and prior to 1995, he
served as Executive Vice President, CFO and CAO
of the Corporation.
Ben G. Rooke 48 Executive Vice President, Counsel and Secretary
Ray L. Wolfe 59 Chairman of the Board (term expires at the annual
meeting in the year 2000), President and Chief
Executive Officer of Financial Trust Company.
Prior to May 30, 1997, Mr. Wolfe was Chairman and
Chief Executive Officer of Financial Trust Corp,
which was acquired by the Corporation on that
date.
8
<PAGE>
ITEM 2 - PROPERTIES
The headquarters of Keystone Financial, Inc., is located at One Keystone Plaza,
Harrisburg, Pennsylvania. This office space is leased under an agreement
scheduled to expire in 2002 with three consecutive renewal options each for five
years.
The main office of American Trust Bank, N.A. is located at 81 Baltimore Street
in Cumberland, Maryland and is owned by American Trust Bank. Of the twenty-five
community offices of American Trust Bank, twenty are owned and five are leased.
American Trust Bank also owns the premises for KeyCall, an automated telephone
banking center, located at 12400 Willowbrook Road in Cumberland, Maryland.
Financial Trust Company owns its headquarters at 1415 Ritner Highway, Carlisle,
Pennsylvania. It also operates a total of thirty-six offices, thirty of which
are owned, with the remainder leased.
Keystone Bank, N.A. is headquartered at 601 Dresher Road, Horsham, Pennsylvania
in a facility which contains executive and administrative offices and a
full-service banking center. Keystone Bank operates twenty-nine banking
facilities of which twenty-two are leased, and seven are owned. Six of the
leased facilities are owned by and leased from Key Trust Company, a wholly-owned
subsidiary of Keystone.
Keystone National Bank is headquartered at, and conducts limited banking
operations from, its leased facility at 2270 Erin Court, Lancaster,
Pennsylvania. This facility is also utilized as the headquarters of its wholly-
owned subsidiary, Keystone Financial Mortgage Corporation.
Mid-State Bank and Trust Co. owns its headquarters located at 1130 Twelfth
Avenue, Altoona, Pennsylvania. The five-story building contains executive
offices as well as a full-service banking facility. The bank also owns an
operations center, which houses the primary data processing facility for
Keystone, and is located in Bellwood, Pennsylvania. Mid-State Bank owns
twenty-one of its twenty-eight banking offices, while the remaining seven
offices are leased. In addition, Keystone and Mid-State lease office space for
various administrative and back-office functions in three buildings in Altoona,
including a building owned by a partnership in which a Keystone board member is
a partner.
The headquarters for Northern Central Bank is at 101 West Third Street,
Williamsport, Pennsylvania, in a leased building which contains executive and
administrative offices. An operations center is also located in Williamsport and
is owned by Northern Central Bank. The bank owns a total of twenty-eight of its
banking offices while the seven remaining offices are leased.
Pennsylvania National Bank and Trust Company is headquartered at One South
Centre Street in Pottsville, Pennsylvania, in a facility which contains
executive and administrative offices as well as a full-service banking center.
The Bank also owns an operations center located in St. Clair, Pennsylvania. In
addition to the headquarters facility, the Bank operates twenty-eight banking
offices of which twenty-one are owned by the Bank and seven are leased.
Of the nonbanking subsidiaries, Keystone Financial Leasing Corporation, Keystone
Financial Mortgage Corporation, Martindale Andres & Company and MMC&P are
headquartered in leased facilities in Pennsylvania.
All of the above-mentioned facilities are in good and usable condition.
ITEM 3 - LEGAL PROCEEDINGS
Keystone and its subsidiaries are involved as plaintiff or defendant in
litigation matters that arise in the ordinary course of their business. In the
opinion of management, none of the pending litigation matters, individually or
in the aggregate, would have a material adverse effect on Keystone's results of
operations.
9
<PAGE>
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information for this item is incorporated herein by reference to the section of
Exhibit No. 13.1 entitled "Market Prices and Dividends".
ITEM 6 - SELECTED FINANCIAL DATA
The section entitled "Selected Financial Data" of Exhibit No. 13.1 is
incorporated herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The section entitled "Financial Review" of Exhibit No. 13.1 is incorporated
herein by reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following sections of Exhibit No. 13.1 are incorporated herein by reference:
"Financial Review-Investments", "Financial Review - Asset/Liability Management
and Market Risk", "Summarized Accounting Policies - Financial Derivatives and
Other Hedging Activity", "Notes to Consolidated Financial Statements - Financial
Derivatives, Hedging Activity, and Commitments".
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The sections of Exhibit No. 13.1 entitled "Report of Ernst & Young LLP,
Independent Auditors", "Consolidated Financial Statements", and notes thereto,
and "Quarterly Information - Income Performance" are incorporated herein by
reference.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11 - EXECUTIVE COMPENSATION
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Part III, Items 10 - 13, is incorporated herein by
reference to the information appearing under the following captions in the Proxy
Statement for Keystone's 1998 Annual Meeting of Shareholders:
- -- Introduction
- -- Proposals for Shareholders-Election of Directors
- -- Executive Compensation
- -- Other Information Concerning Directors and Executive Officers
- -- 5% Beneficial Owners of Common Stock
The other information appearing in such Proxy Statement, including without
limitation that information appearing under the captions " Human Resources
Committee 1997 Report on Executive Compensation" and "Stock Price Performance
Graph", is not incorporated herein.
10
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a)(1)(2) The response to this portion of Item 14 is listed below.
(a)(3) Listing of Exhibits - The exhibits are listed on the Exhibit Index
beginning on page 14 of this Form 10-K.
(b) Reports on Form 8-K are listed below.
(c) Exhibits - The exhibits listed on the Exhibit Index beginning on
page 14 of this Form 10-K are filed herewith or are incorporated
by reference.
(d) Schedules - listed under Item 14 (a)(1)(2) below.
Item 14(a)(1)(2) List of Financial Statements and Financial Statement Schedules
The following consolidated financial statements and report of independent
auditors of Keystone Financial, Inc. and subsidiaries, included in the annual
report of the registrant to its shareholders for the year ended December 31,
1997, are incorporated by reference in Item 8:
Report of independent auditors
Consolidated statements of condition - December 31, 1997, and 1996
Consolidated statements of income - Years ended December 31, 1997 , 1996,
and 1995
Consolidated statements of changes in shareholders' equity -Years ended
December 31, 1997, 1996, and 1995
Consolidated statements of cash flows - Years ended December 31, 1997, 1996,
and 1995
Notes to consolidated financial statements
Schedules to the consolidated financial statements as per Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable, and therefore have been omitted. The following report of other
auditors required by Item 2-05 of Regulation S-X is filed herewith as a
financial statement schedule: Report of Beard & Company, Inc.
Item 14(b) Reports on Form 8-K
During the quarter ended December 31, 1997, the registrant filed the following
reports on Form 8-K:
Date of Report Item Description
- -------------------- ----------------------------------------------
October 17, 1997 5 Earnings release for the third quarter
October 28, 1997 5 Press release announcing management changes
November 21, 1997 5 Press release announcing increased dividend
11
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Financial Trust Corp
Carlisle, Pennsylvania
We have audited the consolidated balance sheet of Financial Trust Corp and
subsidiaries as of December 31, 1996, and the related consolidated statements of
income, shareholders' equity and cash flows for the year then ended (not
presented herein). 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Financial Trust Corp and subsidiaries as of December 31, 1996, and the results
of its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ BEARD & COMPANY, INC.
-------------------------
Reading, Pennsylvania
February 28, 1997
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
(Registrant)Keystone Financial, Inc.
By: /s/ Carl L. Campbell
---------------------------
Chief Executive Officer
Date: March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on March 26, 1998, by the following persons on behalf of the
registrant and in the capacities indicated.
/s/ Carl L. Campbell /s/ Mark L. Pulaski
- -------------------- -------------------
President, Chief Executive Vice Chairman and Chief Operating Officer
Officer & Director & Director
/s/ Ray L. Wolfe /s/ Donald F. Holt
- -------------------- -------------------
Chairman Senior Vice President and Corporate Controller
/s/ A. Joseph Antanavage, Jr /s/ June B. Barry
- -------------------- -------------------
Director Director
/s/ J. Glenn Beall, Jr. /s/ Paul I. Detwiler, Jr.
- -------------------- -------------------
Director Director
/s/ Donald Devorris /s/ Gerald E. Field
- -------------------- -------------------
Director Director
/s/ Walter W. Grant /s/ Philip C. Herr, II
- -------------------- -------------------
Director Director
/s/ Allan W. Holman, Jr. /s/ Richard G. King
- -------------------- -------------------
Director Director
/s/ Uzal H. Martz, Jr. /s/ Max A. Messenger
- -------------------- -------------------
Director Director
/s/ William L. Miller /s/ Don A. Rosini
- -------------------- -------------------
Director Director
/s/ F. Dale Schoeneman /s/ Ronald C. Unterberger
- -------------------- -------------------
Director Director
/s/ G. William Ward
- --------------------
Director
13
<PAGE>
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit Description and Method
No. of Filing
- ------- ------------------------------------------------------------------------
3.1 Restated Articles of Incorporation of Keystone Financial, Inc., as
amended through July 29, 1996, incorporated by reference to Exhibit 4.1
of Form S-4 of Keystone Financial, Inc. (No. 333-20283) filed on
January 23, 1997.
3.2 By-Laws of Keystone Financial, Inc., as amended November 21, 1996,
incorporated by reference to Exhibit 3 of Form 10-Q of Keystone
Financial, Inc. for the quarter ended September 30, 1997.
4.1 Keystone Financial, Inc. Series A Junior Participating Preferred
Stock Purchase Rights Agreement dated January 25, 1990, incorporated
by reference to Exhibit 1 to Form 8-A filed on February 9, 1990.
4.2 Amendment No. 1 to Series A Junior Participating Preferred Stock
Purchase Rights Agreement dated December 20, 1990, incorporated by
reference to Exhibit 2 to the Form 8 Amendment dated December 20, 1990.
The registrant hereby agrees to furnish to the Commission upon
request copies of the instruments defining the rights of the holders
of the long-term debt of the registrant and its consolidated
subsidiaries.
10.1* Keystone Financial, Inc., Corporate Directors Deferred Compensation
Plans, incorporated herein by reference to Exhibit 10.1 of Form 10-K
of Keystone Financial, Inc. for the year ended December 31, 1994.
10.2* Keystone Financial, Inc. 1988 Stock Incentive Plan, incorporated herein
by reference to Exhibit 10.2 of Form 10-K of Keystone Financial, Inc.,
for the year ended December 31, 1993.
14
<PAGE>
Exhibit Description and Method
No. of Filing
- ------- ------------------------------------------------------------------------
10.3* Keystone Financial, Inc. Management Incentive Compensation Plan as
amended and restated, incorporated herein by reference to Exhibit
10.3 of Form 10-K of Keystone Financial, Inc., for the year ended
December 31, 1993.
10.4* Form of employment agreement between Keystone Financial, Inc. and
Executive Officer Campbell, incorporated herein by reference to Exhibit
10.4 of Form 10-K of Keystone Financial, Inc. for the year ended
December 31, 1993.
10.5* Form of employment agreement between Keystone Financial, Inc. and
Executive Officers, Pulaski, and Rooke, incorporated herein by
reference to Exhibit 10.5 of Form 10-K of Keystone Financial, Inc. for
the year ended December 31, 1993.
10.6* Keystone Financial, Inc. 1995 Management Stock Purchase Plan,
incorporated herein by reference to Exhibit C of the Proxy Statement of
Keystone Financial, Inc., dated April 7, 1995.
10.7* Keystone Financial, Inc. Savings Restoration Plan, as amended and
restated effective January 1, 1994, and as corrected on June 14,
1994, incorporated herein by reference to Exhibit 10.7 of Form 10-K
of Keystone Financial, Inc., for the year ended December 31, 1994.
10.8* Keystone Financial, Inc. Supplemental Retirement Income Plan,
incorporated herein by reference to Exhibit 10.7 of Form 10-K of
Keystone Financial, Inc., for the year ended December 31, 1993.
10.9* Keystone Financial, Inc. 1990 Non-Employee Directors' Stock Option
Plan, as amended, incorporated herein by reference to Exhibit 10.8
of Form 10-K of Keystone Financial, Inc. for the year ended December
31, 1993.
15
<PAGE>
Exhibit Description and Method
No. of Filing
- ------- ------------------------------------------------------------------------
10.10* Keystone Financial, Inc. 1992 Stock Incentive Plan, filed herewith.
10.11* Keystone Financial, Inc. 1992 Director Fee Plan, as amended,
incorporated herein by reference to Exhibit 10.11 of Form 10-K of
Keystone Financial, Inc. for the year ended December 31, 1994.
10.12* Keystone Financial, Inc. form of Executive Split Dollar Agreements,
Form A and Form B, incorporated herein by reference to Exhibit 10.1 of
Form 10-K of Keystone Financial, Inc., for the year ended December 31,
1993.
10.13* Keystone Financial, Inc. 1995 Non-Employee Directors' Stock Option Plan,
incorporated herein by reference to Exhibit B of the Proxy Statement of
Keystone Financial, Inc., dated April 7, 1995.
10.14* Keystone Financial, Inc. Management Stock Ownership Program,
incorporated herein by reference to Exhibit 10.15 of Form 10-K of
Keystone Financial, Inc., for the year ended December 31, 1995.
10.15* Keystone Financial, Inc. 1996 Performance Unit Plan, incorporated herein
by reference to Exhibit 99.16 of Amendment No. 1 to Form S-4 of Keystone
Financial, Inc. (No. 333-20283), filed on March 10, 1997.
10.16* Keystone Financial, Inc. 1997 Stock Incentive Plan, incorporated herein
by reference to Exhibit 99.17 of Amendment No.2 to form S-4 of Keystone
Financial, Inc. (No. 333-20283), filed on March 27, 1997.
10.17* Separation Agreement and Release between Keystone Financial, Inc. and
Executive Officer Groves dated November 21, 1997, filed herewith.
10.18* Employment agreement between Keystone Financial, Inc. and Officer Wolfe,
incorporated herein by reference to Exhibit 99.9 of Form S-4 of Keystone
Financial, Inc. (No. 333-20283), filed on January 23, 1997.
10.19* Keystone Financial, Inc. Supplemental Deferred Compensation Plan, as
originally filed as exhibit 10.11 of Form 10-K of Keystone Financial,
Inc. for the year ended December 31, 1992, filed herewith.
16
<PAGE>
Exhibit Description and Method
No. of Filing
- ----- --------------------------------------------------------------------------
11.1 The statement regarding computation of per share earnings required
by this exhibit is contained in the note to the consolidated
financial statements captioned "Earnings Per Share," filed as a part
of Exhibit 13.1.
13.1 Portions of the Annual Report to Shareholders of Keystone Financial,
Inc., for the year ended December 31, 1997, filed herewith.
21.1 Subsidiaries of Registrant, filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors, filed herewith.
23.2 Consent of Beard & Company, Inc., independent auditors, filed herewith.
27.1 Financial Data Schedule, filed herewith.
99.1 Reconciliation of previously reported quarterly information, filed
herewith.
*The exhibits marked by an asterisk (*) are management contracts or compensatory
plans or arrangements.
17
EXHIBIT 10.10
KEYSTONE FINANCIAL, INC.
1992 STOCK INCENTIVE PLAN
The purposes of the 1992 Stock Incentive Plan (the "Plan") are to
encourage eligible employees of Keystone Financial, Inc. (the "Corporation") and
its Subsidiaries to increase their efforts to make the Corporation and each
Subsidiary more successful, to provide an additional inducement for such
employees to remain with the Corporation or a Subsidiary, to reward such
employees by providing an opportunity to acquire shares of the Common Stock, par
value $2.00 per share, of the Corporation (the "Common Stock") on favorable
terms and to provide a means through which the Corporation may attract able
persons to enter the employ of the Corporation or one of its Subsidiaries. For
the purposes of the Plan, the term "Subsidiary" means any corporation in an
unbroken chain of corporations beginning with the Corporation, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing at least fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other corporations in the chain.
SECTION 1
Administration
The Plan shall be administered by a Committee (the "Committee") appointed
by the Board of Directors of the Corporation (the "Board") and consisting of not
less than two members of the Board, each of whom at the time of appointment to
the Committee and at all times during service as a member of the Committee shall
be a "disinterested person" as then defined under Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the "1934 Act") or any successor
rule.
The Committee shall interpret the Plan and prescribe such rules,
regulations and procedures in connection with the operations of the Plan as it
shall deem to be necessary and advisable for the administration of the Plan
consistent with the purposes of the Plan.
The Committee shall keep records of action taken at its meetings. A
majority of the Committee shall constitute a quorum at any meeting, and the acts
of a majority of the members present at any meeting at which a quorum is
present, or acts approved in writing by a majority of the Committee, shall be
the acts of the Committee.
SECTION 2
Eligibility
Those employees of the Corporation or any Subsidiary who share
responsibility for the management, growth or protection of the business of the
Corporation or any Subsidiary shall be eligible to be granted stock options
(with or without reload option rights and/or cash payment rights) and to receive
restricted share, performance unit or bonus share awards as described herein.
Subject to the provisions of the Plan, the Committee shall have full and final
authority, in its discretion, to grant stock options (with or without reload
option rights and/or cash payment rights) and to award restricted shares,
performance units and bonus shares as described herein and to determine the
employees to whom any such grant or award shall be made and the number of shares
or units to be covered thereby. In determining the eligibility of any employee,
as well as in determining the number of shares or units covered by each grant or
award of a stock option, restricted shares, performance units or bonus shares
and whether reload option rights and/or cash payment rights shall be granted in
conjunction with a stock option, the Committee shall consider the position and
the responsibilities of the employee being considered, the nature and value to
the Corporation or a Subsidiary of his or her services, his or her present
<PAGE>
and/or potential contribution to the success of the Corporation or a Subsidiary
and such other factors as the Committee may deem relevant.
SECTION 3
Shares Available under the Plan
The aggregate number of shares of the Common Stock which may be issued and
as to which grants or awards of stock options (including reload options),
restricted shares, performance units or bonus shares may be made under the Plan
is 1,250,000 shares, subject to adjustment and substitution as set forth in
Section 7. If any stock option granted under the Plan is cancelled by mutual
consent or terminates or expires for any reason without having been exercised in
full, the number of shares subject thereto shall again be available for purposes
of the Plan. If shares of Common Stock are forfeited to the Corporation pursuant
to the restrictions applicable to restricted shares awarded under the Plan, the
shares so forfeited shall not again be available for purposes of the Plan unless
during the period such shares were outstanding the grantee received no dividends
or other "benefits of ownership" from such shares. To the extent any award of
performance units is not earned or is paid in cash rather than shares, the
number of shares covered thereby shall again be available for purposes of the
Plan. The shares which may be issued under the Plan may be either authorized but
unissued shares or treasury shares or partly each, as shall be determined from
time to time by the Board.
SECTION 4
Grant of Stock Options, Reload Options
and Cash Payment Rights and Awards of
Restricted Shares, Performance Units and Bonus Shares
The Committee shall have authority, in its discretion, (a) to grant
"incentive stock options" pursuant to Section 422 of the Internal Revenue Code
of 1986 (the "Code"), to grant "nonstatutory stock options" (i.e., stock options
which do not qualify under Sections 422 or 423 of the Code) or to grant both
types of stock options (but not in tandem), (b) to award restricted shares, (c)
to award performance units and (d) to award bonus shares. The Committee also
shall have the authority, in its discretion, to grant reload option rights in
conjunction with incentive stock options or nonstatutory stock options with the
effect provided in Section 5(D) and to grant cash payment rights in conjunction
with nonstatutory stock options with the effect provided in Section 5(E). Reload
option rights granted in conjunction with an incentive stock option may only be
granted at the time the incentive stock option is granted. Cash payment rights
may not be granted in conjunction with incentive stock options. Reload option
rights and/or cash payment rights granted in conjunction with a nonstatutory
stock option may be granted either at the time the stock option is granted or at
any time thereafter during the term of the stock option.
Notwithstanding any other provision contained in the Plan or in any stock
option agreement, but subject to the possible exercise of the Committee's
discretion contemplated in the last sentence of this Section 4, the aggregate
fair market value, determined as provided in Section 5(I) on the date of grant,
of the shares with respect to which incentive stock options are exercisable for
the first time by an employee during any calendar year under all plans of the
corporation employing such employee, any parent or subsidiary corporation of
such corporation and any predecessor corporation of any such corporation shall
not exceed $100,000. If the date on which one or more of such incentive stock
options could first be exercised would be accelerated pursuant to any provision
of the Plan or any stock option agreement, and the acceleration of such exercise
date would result in a violation of the restriction set forth in the preceding
sentence, then, notwithstanding any such provision, but subject to the
provisions of the next succeeding sentence, the exercise dates of such incentive
stock options shall be accelerated only to the date or dates, if any, that do
not result in a violation of such restriction and, in such event, the exercise
dates of the incentive stock options with the lowest option prices shall be
accelerated to the earliest such dates. The Committee may, in its discretion,
authorize the acceleration of the exercise date of one or more incentive stock
options even if such acceleration would violate the $100,000 restriction set
forth in the first sentence of this paragraph and even if such incentive stock
options are thereby converted in whole or in part to nonstatutory stock options.
<PAGE>
SECTION 5
Terms and Conditions of Stock Options,
Reload Option Rights and Cash Payment Rights
Stock options, reload option rights and cash payment rights granted under
the Plan shall be subject to the following terms and conditions:
(A) The purchase price at which each stock option may be exercised
(the "option price") shall be such price as the Committee, in its
discretion, shall determine but shall not be less than one hundred percent
(100%) of the fair market value per share of the Common Stock covered by
the stock option on the date of grant, except that in the case of an
incentive stock option granted to an employee who, immediately prior to
such grant, owns stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation or any
Subsidiary (a "Ten Percent Employee"), the option price shall not be less
than one hundred ten percent (110%) of such fair market value on the date
of grant. For purposes of this Section 5(A), the fair market value of the
Common Stock shall be determined as provided in Section 5(I). For purposes
of this Section 5(A), an individual (i) shall be considered as owning not
only shares of stock owned individually but also all shares of stock that
are at the time owned, directly or indirectly, by or for the spouse,
ancestors, lineal descendants and brothers and sisters (whether by the
whole or half blood) of such individual and (ii) shall be considered as
owning proportionately any shares owned, directly or indirectly, by or for
any corporation, partnership, estate or trust in which such individual is
a shareholder, partner or beneficiary.
(B) The option price for each stock option shall be paid in full
upon exercise and shall be payable in cash in United States dollars
(including check, bank draft or money order), which may include cash
forwarded through a broker or other agent-sponsored exercise or financing
program; provided, however, that in lieu of such cash the person
exercising the stock option may (if authorized by the Committee at the
time of grant in the case of an incentive stock option, or at any time in
the case of a nonstatutory stock option) pay the option price in whole or
in part by delivering to the Corporation shares of the Common Stock having
a fair market value on the date of exercise of the stock option,
determined as provided in Section 5(I), equal to the option price for the
shares being purchased; except that (i) any portion of the option price
representing a fraction of a share shall in any event be paid in cash and
(ii) no shares of the Common Stock which have been held for less than six
months may be delivered in payment of the option price of a stock option.
If the person exercising a stock option participates in a broker or other
agent-sponsored exercise or financing program, the Corporation will
cooperate with all reasonable procedures of the broker or other agent to
permit participation by the person exercising the stock option in the
exercise or financing program. Notwithstanding any procedure of the broker
or other agent-sponsored exercise or financing program, if the option
price is paid in cash, the exercise of the stock option shall not be
deemed to occur and no shares of the Common Stock will be issued until the
Corporation has received full payment in cash (including check, bank draft
or money order) for the option price from the broker or other agent. The
date of exercise of a stock option shall be determined under procedures
established by the Committee, and as of the date of exercise the person
exercising the stock option shall be considered for all purposes to be the
owner of the shares with respect to which the stock option has been
exercised. Payment of the option price with shares shall not increase the
number of shares of the Common Stock which may be issued under the Plan as
provided in Section 3.
(C) No stock option shall be exercisable by a grantee during
employment during the first six months of its term, except that this
limitation on exercise shall not apply if Section 8(B) becomes applicable.
No stock option shall be exercisable after the expiration of ten years
(five years in the case of an incentive stock option granted to a Ten
Percent Employee) from the date of grant. A stock option to the extent
exercisable at any time may be exercised in whole or in part.
<PAGE>
(D) Reload option rights granted in conjunction with a stock option
shall entitle the original grantee of the stock option (and unless
otherwise determined by the Committee, in its discretion, only such
original grantee), upon exercise of the stock option or any portion
thereof through delivery of previously owned shares of Common Stock, to
automatically be granted on the date of such exercise a new nonstatutory
stock option (a "reload option") (i) for a number of shares of Common
Stock not exceeding the number of shares delivered in payment of the
option price of the original option, (ii) having an option price not less
than one hundred percent (100%) of the fair market value per share of the
Common Stock covered by the reload option on such date of grant, (iii)
having an expiration date not later than the expiration date of the stock
option so exercised and (iv) otherwise having terms permissible for an
original grant of a stock option under the Plan. Subject to the preceding
sentence and the other provisions of the Plan, reload option rights and
reload options granted thereunder shall have such terms and be subject to
such restrictions and conditions, if any, as shall be determined, in its
discretion, by the Committee and set forth in the agreement referred to in
Section 5(H) relating to the original option with respect to which the
reload option rights were granted or, for reload option rights and reload
options not granted in conjunction with an incentive stock option, in an
amendment to such agreement or in the agreement relating to the reload
option or an amendment thereto. In granting reload option rights, the
Committee, may, in its discretion, provide for successive reload option
grants upon the exercise of reload options granted thereunder. Unless
otherwise determined, in its discretion, by the Committee, reload option
rights shall entitle the grantee to be granted reload options only if the
underlying option to which they relate is exercised by the grantee during
employment with the Corporation or a Subsidiary. Notwithstanding any
provision of the Plan or any stock option agreement, no holder of reload
option rights may be granted a reload option covering a number of shares
in excess of the number of shares then remaining available under the Plan.
Except as otherwise specifically provided herein or required by the
context, the term "stock option" as used in this Plan shall include reload
options granted hereunder. For the purposes of this Section 5(D), the fair
market value of the Common Stock shall be determined as provided in
Section 5(I).
(E) Cash payment rights granted in conjunction with a nonstatutory
stock option shall entitle the person who is entitled to exercise the
stock option, upon exercise of the stock option or any portion thereof, to
receive cash from the Corporation (in addition to the shares to be
received upon exercise of the stock option) equal to such percentage as
the Committee, in its discretion, shall determine not greater than one
hundred percent (100%) of the excess of the fair market value of a share
of the Common Stock on the date of exercise of the stock option over the
option price per share of the stock option times the number of shares
covered by the stock option, or portion thereof, which is exercised.
Payment of the cash provided for in this Section 5(E) shall be made by the
Corporation as soon as practicable after the time the amount payable is
determined. The Committee may, in its discretion, provide for the grant of
cash payment rights in connection with reload options. For purposes of
this Section 5(E), the fair market value of the Common Stock shall be
determined as provided in Section 5(I).
(F) No stock option shall be transferable by the grantee otherwise
than by Will, or if the grantee dies intestate, by the laws of descent and
distribution of the state of domicile of the grantee at the time of death.
All stock options shall be exercisable during the lifetime of the grantee
only by the grantee.
(G) Subject to the provisions of Section 4 in the case of incentive
stock options, unless the Committee, in its discretion, shall otherwise
determine:
(i) If the employment of a grantee who is not disabled within
the meaning of Section 422(c)(6) of the Code (a "Disabled Grantee")
is voluntarily terminated with the consent of the Corporation or a
Subsidiary or a grantee retires under any retirement plan of the
Corporation or a Subsidiary, any then outstanding incentive stock
option held by such grantee shall be exercisable by the grantee (but
only to the extent exercisable by the grantee immediately prior to
the termination of employment) at any time prior to the expiration
date of such incentive stock option or within three months after the
date of termination of employment, whichever is the shorter period;
<PAGE>
(ii) If the employment of a grantee who is not a Disabled
Grantee is voluntarily terminated with the consent of the
Corporation or a Subsidiary or a grantee retires under any
retirement plan of the Corporation or a Subsidiary, any then
outstanding nonstatutory stock option held by such grantee shall be
exercisable by the grantee (but only to the extent exercisable by
the grantee immediately prior to the termination of employment) at
any time prior to the expiration date of such nonstatutory stock
option or within one year after the date of termination of
employment, whichever is the shorter period;
(iii) If the employment of a grantee who is a Disabled Grantee
is voluntarily terminated with the consent of the Corporation or a
Subsidiary, any then outstanding stock option held by such grantee
shall be exercisable by the grantee in full (whether or not so
exercisable by the grantee immediately prior to the termination of
employment) by the grantee at any time prior to the expiration date
of such stock option or within one year after the date of
termination of employment, whichever is the shorter period;
(iv) Following the death of a grantee during employment, any
outstanding stock option held by the grantee at the time of death
shall be exercisable in full (whether or not so exercisable by the
grantee immediately prior to the death of the grantee) by the person
entitled to do so under the Will of the grantee, or, if the grantee
shall fail to make testamentary disposition of the stock option or
shall die intestate, by the legal representative of the grantee at
any time prior to the expiration date of such stock option or within
one year after the date of death, whichever is the shorter period;
(v) Following the death of a grantee after termination of
employment during a period when a stock option is exercisable, any
outstanding stock option held by the grantee at the time of death
shall be exercisable by such person entitled to do so under the Will
of the grantee or by such legal representative (but only to the
extent the stock option was exercisable by the grantee immediately
prior to the death of the grantee) at any time prior to the
expiration date of such stock option or within one year after the
date of death, whichever is the shorter period; and
(vi) Unless the exercise period of a stock option following
termination of employment has been extended as provided in Section
8(C), if the employment of a grantee terminates for any reason other
than voluntary termination with the consent of the Corporation or a
Subsidiary, retirement under any retirement plan of the Corporation
or a Subsidiary or death, all outstanding stock options held by the
grantee at the time of such termination of employment shall
automatically terminate.
Whether termination of employment is a voluntary termination with
the consent of the Corporation or a Subsidiary and whether a grantee is a
Disabled Grantee shall be determined in each case, in its discretion, by
the Committee and any such determination by the Committee shall be final
and binding.
If a grantee of a stock option, reload option rights, restricted
shares or performance units engages in the operation or management of a
business (whether as owner, partner, officer, director, employee or
otherwise and whether during or after termination of employment) which is
in competition with the Corporation or any of its Subsidiaries, the
Committee may immediately terminate all outstanding stock options held by
the grantee, declare forfeited all restricted shares held by the grantee
as to which the restrictions have not yet lapsed and terminate all
outstanding performance unit awards held by the grantee for which the
applicable Performance Period has not been completed; provided, however,
that this sentence shall not apply if the exercise period of a stock
option following termination of employment has been extended as provided
in Section 8(C), if the lapse of the restrictions applicable to restricted
shares has been accelerated as provided in Section 8(D) or if a
performance unit has been deemed to have been earned as provided in
Section 8(E). Whether a grantee has engaged in the operation or management
of a business which is in competition with the
<PAGE>
Corporation or any of its Subsidiaries shall also be determined, in its
discretion, by the Committee, and any such determination by the Committee
shall be final and binding.
(H) All stock options, reload option rights and cash payment rights
shall be confirmed by an agreement, or an amendment thereto, which shall
be executed on behalf of the Corporation by the Chief Executive Officer
(if other than the President), the President or any Vice President and by
the grantee.
(I) Fair market value of the Common Stock shall be the mean between
the following prices, as applicable, for the date as of which fair market
value is to be determined as quoted in The Wall Street Journal (or in such
other reliable publication as the Committee, in its discretion, may
determine to rely upon): (a) if the Common Stock is listed on the New York
Stock Exchange, the highest and lowest sales prices per share of the
Common Stock as quoted in the NYSE-Composite Transactions listing for such
date, (b) if the Common Stock is not listed on such exchange, the highest
and lowest sales prices per share of Common Stock for such date on (or on
any composite index including) the principal United States securities
exchange registered under the 1934 Act on which the Common Stock is
listed, or (c) if the Common Stock is not listed on any such exchange, the
highest and lowest sales prices per share of the Common Stock for such
date on the National Association of Securities Dealers Automated
Quotations System or any successor system then in use ("NASDAQ"). If there
are no such sale price quotations for the date as of which fair market
value is to be determined but there are such sale price quotations within
a reasonable period both before and after such date, then fair market
value shall be determined by taking a weighted average of the means
between the highest and lowest sales prices per share of the Common Stock
as so quoted on the nearest date before and the nearest date after the
date as of which fair market value is to be determined. The average should
be weighted inversely by the respective numbers of trading days between
the selling dates and the date as of which fair market value is to be
determined. If there are no such sale price quotations on or within a
reasonable period both before and after the date as of which fair market
value is to be determined, then fair market value of the Common Stock
shall be the mean between the bona fide bid and asked prices per share of
Common Stock as so quoted for such date on NASDAQ, or if none, the
weighted average of the means between such bona fide bid and asked prices
on the nearest trading date before and the nearest trading date after the
date as of which fair market value is to be determined, if both such dates
are within a reasonable period. The average is to be determined in the
manner described above in this Section 5(I). If the fair market value of
the Common Stock cannot be determined on the basis previously set forth in
this Section 5(I) on the date as of which fair market value is to be
determined, the Committee shall in good faith determine the fair market
value of the Common Stock on such date. Fair market value shall be
determined without regard to any restriction other than a restriction
which, by its terms, will never lapse.
(J) The obligation of the Corporation to issue shares of the Common
Stock under the Plan shall be subject to (i) the effectiveness of a
registration statement under the Securities Act of 1933, as amended, with
respect to such shares, if deemed necessary or appropriate by counsel for
the Corporation, (ii) the condition that the shares shall have been listed
(or authorized for listing upon official notice of issuance) upon each
stock exchange, if any, on which the Common Stock shares may then be
listed and (iii) all other applicable laws, regulations, rules and orders
which may then be in effect.
Subject to the foregoing provisions of this Section and the other
provisions of the Plan, any stock option granted under the Plan may be exercised
at such times and in such amounts and be subject to such restrictions and other
terms and conditions, if any, as shall be determined, in its discretion, by the
Committee and set forth in the agreement referred to in Section 5(H), or an
amendment thereto.
SECTION 6
Terms and Conditions of Restricted Share,
Performance Unit and Bonus Share Awards
<PAGE>
(A) Restricted Shares.
Restricted share awards shall be evidenced by a written agreement in the
form prescribed by the Committee in its discretion, which shall set forth the
number of shares of the Common Stock awarded, the restrictions imposed thereon
(including, without limitation, restrictions on the right of the grantee to
sell, assign, transfer or encumber such shares while such shares are subject to
other restrictions imposed under this Section 6), the duration of such
restrictions, events (which may, in the discretion of the Committee, include
performance-based events) the occurrence of which would cause a forfeiture of
the restricted shares and such other terms and conditions as the Committee in
its discretion deems appropriate. Restricted share awards shall be effective
only upon execution of the applicable restricted share agreement on behalf of
the Corporation by the Chief Executive Officer (if other than the President),
the President or any Vice President, and by the grantee.
Following a restricted share award and prior to the lapse or termination
of the applicable restrictions, the Committee shall deposit share certificates
for such restricted shares in escrow. Upon the lapse or termination of the
applicable restrictions (and not before such time), the grantee shall be issued
or transferred share certificates for such restricted shares. From the date a
restricted share award is effective, the grantee shall be a shareholder with
respect to all the shares represented by such certificates and shall have all
the rights of a shareholder with respect to all such shares, including the right
to vote such shares and to receive all dividends and other distributions paid
with respect to such shares, subject only to the restrictions imposed by the
Committee.
(B) Performance Units.
The Committee may award performance units which shall be earned by an
awardee based on the level of performance over a specified period of time by the
Corporation, a Subsidiary or Subsidiaries, any branch, department or other
portion thereof or the awardee individually, as determined by the Committee. For
the purposes of the grant of performance units, the following definitions shall
apply:
(i) "performance unit" shall mean an award, expressed in dollars
or shares of Common Stock, granted to an awardee with respect to a
Performance Period. Awards expressed in dollars may be established as
fixed dollar amounts, as a percentage of salary, as a percentage of a pool
based on earnings of the Corporation, a Subsidiary or Subsidiaries or any
branch, department or other portion thereof or in any other manner
determined by the Committee in its discretion, provided that the amount
thereof shall be capable of being determined as a fixed dollar amount as
of the close of the Performance Period.
(ii) "Performance Period" shall mean an accounting period of the
Corporation or a Subsidiary of not less than one year, as determined by
the Committee in its discretion.
(iii) "Performance Target" shall mean that level of performance
established by the Committee which must be met in order for the
performance unit to be fully earned. The Performance Target may be
expressed in terms of earnings per share, return on assets, asset growth,
ratio of capital to assets or such other level or levels of accomplishment
by the Corporation, a Subsidiary or Subsidiaries, any branch, department
or other portion thereof or the awardee individually as may be established
or revised from time to time by the Committee.
(iv) "Minimum Target" shall mean a minimal level of performance
established by the Committee which must be met before any part of the
performance unit is earned. The Minimum Target may be the same as or less
than the Performance Target in the discretion of the Committee.
(v) "performance shares" shall mean shares of Common Stock issued
in payment of earned performance units.
<PAGE>
An awardee shall earn the performance unit in full by meeting the
Performance Target for the Performance Period. If the Minimum Target has not
been attained at the end of the Performance Period, no part of the performance
unit shall have been earned by the awardee. If the Minimum Target is attained
but the Performance Target is not attained, the portion of the performance unit
earned by the awardee shall be determined on the basis of a formula established
by the Committee.
At any time prior to the end of a Performance Period, the Committee may
adjust downward (but not upward) the Performance Target and/or the Minimum
Target as a result of major events unforseen at the time of the performance unit
award, such as changes in the economy, the industry, laws affecting the
operations of the Corporation or a Subsidiary or any other event the Committee
determines would have a significant impact upon the probability of attaining the
previously established Performance Target.
Payment of earned performance units shall be made to awardees following
the close of the Performance Period as soon as practicable after the time the
amount payable is determined by the Committee. Payment in respect of earned
performance units, whether expressed in dollars or shares, may be made in cash,
in shares of Common Stock, or partly in cash and partly in shares of Common
Stock, as determined by the Committee at the time of payment. For this purpose,
performance units expressed in dollars shall be converted to shares, and
performance units expressed in shares shall be converted to dollars, based on
the fair market value of the Common Stock, determined as provided in Section
5(I), as of the date the amount payable is determined by the Committee.
If prior to the close of the Performance Period the employment of an
awardee of performance units is voluntarily terminated with the consent of the
Corporation or a Subsidiary or the awardee retires under any retirement plan of
the Corporation or a Subsidiary or the awardee dies during employment, the
Committee may in its absolute discretion determine to pay all or any part of the
performance unit based upon the extent to which the Committee determines the
Performance Target or Minimum Target has been achieved as of the date of
termination of employment, retirement or death, the period of time remaining
until the close of the Performance Period and/or such other factors as the
Committee may deem relevant. If the Committee in its discretion determines that
all or any part of the performance unit shall be paid, payment shall be made to
the awardee or his or her estate as promptly as practicable following such
determination and may be made in cash, in shares of Common Stock, or partly in
cash and partly in shares of Common Stock, as determined by the Committee at the
time of payment. For this purpose, performance units expressed in dollars shall
be converted to shares, and performance units expressed in shares shall be
converted to dollars, based on the fair market value of the Common Stock,
determined as provided in Section 5(I), as of the date the amount payable is
determined by the Committee.
Except as otherwise provided in Section 8(E), if the employment of an
awardee of performance units terminates prior to the close of a Performance
Period for any reason other than voluntary termination with the consent of the
Corporation or a Subsidiary, retirement under any retirement plan of the
Corporation or a Subsidiary or death, the performance units of the awardee shall
be deemed not to have been earned, and no portion of such performance units may
be paid. Whether termination of employment is a voluntary termination with the
consent of the Corporation or a Subsidiary shall be determined, in its
discretion, by the Committee. Any determination by the Committee on any matter
with respect to performance units shall be final and binding on both the
Corporation and the awardee.
Performance unit awards shall be evidenced by a written agreement in the
form prescribed by the Committee which shall set forth the amount or manner of
determining the amount of the performance unit, the Performance Period, the
Performance Target and any Minimum Target and such other terms and conditions as
the Committee in its discretion deems appropriate. Performance unit awards shall
be effective only upon execution of the applicable performance unit agreement on
behalf of the Corporation by the Chief Executive Officer (if other than the
President), the President or any Vice President, and by the awardee.
<PAGE>
(C) Bonus Shares.
The Committee shall have the authority in its discretion to award bonus
shares of Common Stock to eligible employees from time to time in recognition of
the contribution of the awardee to the performance of the Corporation, a
Subsidiary or Subsidiaries, or any branch, department or other portion thereof,
in recognition of the awardee's individual performance or on the basis of such
other factors as the Committee may deem relevant.
SECTION 7
Adjustment and Substitution of Shares
If a dividend or other distribution shall be declared upon the Common
Stock payable in shares of the Common Stock, the number of shares of the Common
Stock then subject to any outstanding stock options or performance unit awards
and the number of shares of the Common Stock which may be issued under the Plan
but are not then subject to outstanding stock options or awards shall be
adjusted by adding thereto the number of shares of the Common Stock which would
have been distributable thereon if such shares had been outstanding on the date
fixed for determining the shareholders entitled to receive such stock dividend
or distribution. Shares of Common Stock so distributed with respect to any
restricted shares held in escrow shall also be held by the Corporation in escrow
and shall be subject to the same restrictions as are applicable to the
restricted shares on which they were distributed.
If the outstanding shares of the Common Stock shall be changed into or
exchangeable for a different number or kind of shares of stock or other
securities of the Corporation or another corporation, whether through
reorganization, reclassification, recapitalization, stock split-up, combination
of shares, merger or consolidation, then there shall be substituted for each
share of the Common Stock subject to any then outstanding stock option or
performance unit award, and for each share of the Common Stock which may be
issued under the Plan but which is not then subject to any outstanding stock
option or award, the number and kind of shares of stock or other securities into
which each outstanding share of the Common Stock shall be so changed or for
which each such share shall be exchangeable. Unless otherwise determined by the
Committee in its discretion, any such stock or securities, as well as any cash
or other property, into or for which any restricted shares held in escrow shall
be changed or exchangeable in any such transaction shall also be held by the
Corporation in escrow and shall be subject to the same restrictions as are
applicable to the restricted shares in respect of which such stock, securities,
cash or other property was issued or distributed.
In case of any adjustment or substitution as provided for in this Section
7, the aggregate option price for all shares subject to each then outstanding
stock option prior to such adjustment or substitution shall be the aggregate
option price for all shares of stock or other securities (including any
fraction) to which such shares shall have been adjusted or which shall have been
substituted for such shares. Any new option price per share shall be carried to
at least three decimal places with the last decimal place rounded upwards to the
nearest whole number.
No adjustment or substitution provided for in this Section 7 shall require
the Corporation to issue or sell a fraction of a share or other security.
Accordingly, all fractional shares or other securities which result from any
such adjustment or substitution shall be eliminated and not carried forward to
any subsequent adjustment or substitution. Owners of restricted shares held in
escrow shall be treated in the same manner as owners of Common Stock not held in
escrow with respect to fractional shares created by an adjustment or
substitution of shares, except that, unless otherwise determined by the
Committee in its discretion, any cash or other property paid in lieu of a
fractional share shall be subject to restrictions similar to those applicable to
the restricted shares exchanged therefor.
If any such adjustment or substitution provided for in this Section 7
requires the approval of shareholders in order to enable the Corporation to
grant incentive stock options, then no such adjustment or substitution shall be
made without the required shareholder approval. Notwithstanding the foregoing,
in the case of incentive stock options, if the effect of any such adjustment or
substitution would be to cause the stock option to fail to continue to qualify
as an incentive stock option or to cause a modification, extension or renewal of
such stock option within the meaning of Section 424 of the Code, the Committee
may elect that such adjustment or substitution not be made but rather shall use
<PAGE>
reasonable efforts to effect such other adjustment of each then outstanding
stock option as the Committee, in its discretion, shall deem equitable and which
will not result in any disqualification, modification, extension or renewal
(within the meaning of Section 424 of the Code) of such incentive stock option.
SECTION 8
Additional Rights in Certain Events
(A) Definitions.
For purposes of this Section 8, the following terms shall have the
following meanings:
(1) The term "Person" shall be used as that term is used in
Sections 13(d) and 14(d) of the 1934 Act.
(2) Beneficial Ownership shall be determined as provided in Rule
13d-3 under the 1934 Act as in effect on the effective date of the Plan.
(3) "Voting Shares" shall mean all securities of a company entitling
the holders thereof to vote in an annual election of Directors (without
consideration of the rights of any class of stock other than the Common
Stock to elect Directors by a separate class vote); and a specified
percentage of "Voting Power" of a company shall mean such number of the
Voting Shares as shall enable the holders thereof to cast such percentage
of all the votes which could be cast in an annual election of directors
(without consideration of the rights of any class of stock other than the
Common Stock to elect Directors by a separate class vote).
(4) "Tender Offer" shall mean a tender offer or exchange offer to
acquire securities of the Corporation (other than such an offer made by
the Corporation or any Subsidiary), whether or not such offer is approved
or opposed by the Board.
(5) "Section 8 Event" shall mean the date upon which any of the
following events occurs:
(a) The Corporation acquires actual knowledge that any Person
other than the Corporation, a Subsidiary or any employee benefit
plan(s) sponsored by the Corporation has acquired the Beneficial
Ownership, directly or indirectly, of securities of the Corporation
entitling such Person to 10% or more of the Voting Power of the
Corporation;
(b) A Tender Offer is made to acquire securities of the
Corporation entitling the holders thereof to 20% or more of the
Voting Power of the Corporation; or
(c) A solicitation subject to Rule 14a-11 under the 1934 Act
(or any successor Rule) relating to the election or removal of 50%
or more of the members of any class of the Board shall be made by
any person other than the Corporation; or
(d) The shareholders of the Corporation shall approve a
merger, consolidation, share exchange, division or sale or other
disposition of assets of the Corporation as a result of which the
shareholders of the Corporation immediately prior to such
transaction shall not hold, directly or indirectly, immediately
following such transaction a majority of the Voting Power of (i) in
the case of a merger or consolidation, the surviving or resulting
corporation, (ii) in the case of a share exchange, the acquiring
corporation or (iii) in the case of a division or a sale or other
disposition of assets, each surviving, resulting or acquiring
corporation which, immediately following the transaction, holds more
than 10% of the consolidated assets of the Corporation immediately
prior to the transaction;
<PAGE>
provided, however, that (i) if securities beneficially owned by a grantee
are included in determining the Beneficial Ownership of a Person referred
to in paragraph 5(a), (ii) a grantee is required to be named pursuant Item
2 of the Schedule 14D-1 (or any similar successor filing requirement)
required to be filed by the bidder making a Tender Offer referred to in
paragraph 5(b) or (iii) if a grantee is a "participant" as defined in
14a-11 under the 1934 Act (or any successor Rule) in a solicitation (other
than a solicitation by the Corporation) referred to in paragraph 5(c),
then no Section 8 Event with respect to such grantee shall be deemed to
have occurred by reason of such event.
(B) Acceleration of the Exercise Date of Stock Options.
Subject to the provisions of Section 4 in the case of incentive stock
options, unless the agreement referred to in Section 5(H), or an amendment
thereto, shall otherwise provide, notwithstanding any other provision contained
in the Plan, in case any "Section 8 Event" occurs all outstanding stock options
(other than those held by a person referred to in the proviso to Section
8(a)(5)) shall become immediately and fully exercisable whether or not otherwise
exercisable by their terms.
(C) Extension of the Expiration Date of Stock Options.
Subject to the provisions of Section 4 in the case of incentive stock
options, unless the agreement referred to in Section 5(H), or an amendment
thereto, shall otherwise provide, notwithstanding any other provision contained
in the Plan, all stock options held by a grantee (other a grantee referred to in
the proviso to Section 8(a)(5)) whose employment with the Corporation or a
Subsidiary terminates within one year of any Section 8 Event for any reason
other than voluntary termination with the consent of the Corporation or a
Subsidiary, retirement under any retirement plan of the Corporation or a
Subsidiary or death shall be exercisable for a period of three months from the
date of such termination of employment, but in no event after the expiration
date of the stock option.
(D) Lapse of Restrictions on Restricted Share Awards.
If any "Section 8 Event" occurs prior to the scheduled lapse of all
restrictions applicable to restricted share awards under the Plan (other than
those held by a person referred to in the proviso to Section 8(a)(5)), all such
restrictions shall lapse upon the occurrence of any such "Section 8 Event"
regardless of the scheduled lapse of such restrictions.
(E) Payment of Performance Units.
If any "Section 8 Event" occurs prior to the end of any Performance
Period, all performance units awarded with respect to such Performance Period
(other than those held by a person referred to in the proviso to Section
8(a)(5)) shall be deemed to have been fully earned as of the date of such
Section 8 Event, regardless of the attainment or nonattainment of the
Performance Target or any Minimum Target, and shall be paid to the awardees
thereof as promptly as practicable thereafter. If the performance unit is not
expressed as a fixed amount in dollars or shares, the Committee may provide in
the performance unit agreement for the amount to be paid in the case of a
Section 8 Event.
SECTION 9
Effect of the Plan on the Rights of Employees and Employer
Neither the adoption of the Plan nor any action of the Board or the
Committee pursuant to the Plan shall be deemed to give any employee any right to
be granted a stock option (with or without reload option rights and/or cash
payment rights) or to be awarded restricted shares, performance units or bonus
shares under the Plan. Nothing in the Plan, in any stock option, reload option
rights or cash payment rights granted under the Plan, in any restricted share,
performance unit or bonus share award under the Plan or in any agreement
providing for any of the foregoing shall
<PAGE>
confer any right to any employee to continue in the employ of the Corporation or
any Subsidiary or interfere in any way with the rights of the Corporation or any
Subsidiary to terminate the employment of any employee at any time.
SECTION 10
Amendment
The right to alter and amend the Plan at any time and from time to time
and the right to revoke or terminate the Plan are hereby specifically reserved
to the Board; provided that no such alteration or amendment of the Plan shall,
without shareholder approval (a) increase by more than 10% the total number of
shares which may be issued under the Plan to persons subject to Section 16 under
the 1934 Act ("Section 16 Persons"), (b) materially increase the benefits
accruing under the Plan to Section 16 Persons, (c) materially modify the
requirements as to eligibility for participation in the Plan by Section 16
Persons, (d) make any changes in the class of employees eligible to receive
incentive stock options under the Plan or (e) increase the number of shares with
respect to which incentive stock options may be granted under the Plan. No
alteration, amendment, revocation or termination of the Plan shall, without the
written consent of the holder of a stock option, reload option rights, cash
payment rights, restricted shares, performance units or bonus shares theretofore
awarded under the Plan, adversely affect the rights of such holder with respect
thereto.
SECTION 11
Effective Date and Duration of Plan
The effective date and date of adoption of the Plan shall be March 26,
1992, the date of adoption of the Plan by the Board, provided that such adoption
of the Plan by the Board is approved by a majority of the votes cast at a duly
held meeting of shareholders held on or prior to March 25, 1993 at which a
quorum representing a majority of the outstanding voting stock of the
Corporation is, either in person or by proxy, present and voting. No stock
option granted under the Plan may be exercised and no restricted shares, bonus
shares or performance units payable in performance shares may be awarded until
after such approval. No stock option, reload option rights or cash payment
rights may be granted, and no restricted shares, bonus shares or performance
units payable in performance shares may be awarded under the Plan subsequent to
March 25, 2002, except that reload options and associated cash payment rights
may be granted pursuant to reload option rights then outstanding.
<PAGE>
SEPARATION AGREEMENT AND RELEASE
THIS SEPARATION AGREEMENT AND RELEASE (the "Agreement") is entered into
this 21st day of November, 1997 but is effective for all purposes hereunder as
of October 22, 1997 (the "Effective Date"), by and between KEYSTONE FINANCIAL,
INC., a Pennsylvania corporation ("Keystone") and GEORGE H. GROVES ("Groves").
WHEREAS, Groves was employed by Keystone as Senior Executive
Vice President and Chief Banking Officer; and
WHEREAS, by letter dated October 24, 1997, Groves tendered to Keystone his
resignation from all positions and directorships held by him with Keystone and
with any and all of Keystone's subsidiaries and affiliates, such resignation to
be effective as of the Effective Date; and
WHEREAS, Groves resignation was accepted by and was done with the consent
of Keystone; and
WHEREAS, both parties desire to achieve an amicable separation to fully
and finally resolve and/or avoid any existing or other potential disputes
between them.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and intending to be legally bound, Keystone and Groves agree as follows:
<PAGE>
1. PURPOSE OF AGREEMENT. The purpose of this Agreement is to confirm and
memorialize the termination of the employment relationship between Keystone and
Groves, to resolve fully and finally and/or avoid any and all existing or
potential disputes arising from the employment relationship and the termination
thereof without admission of any liability on the part of either party. To that
end, the parties acknowledge that this Agreement resolves any and all claims
either may have against the other with respect to Grove's employment and/or the
termination of such employment. For the purpose of this Agreement, the term
"Keystone" includes not only Keystone Financial, Inc. and its employee welfare
benefit, pension, fringe benefit or compensation plans, but also all other
entities affiliated with Keystone Financial, Inc.
2. TERMINATION OF EMPLOYMENT. Groves hereby acknowledges and agrees that
his employment with Keystone as Senior Executive Vice President and Chief
Banking Officer and any and all officer positions and directorships terminated
as of the Effective Date.
3. CONSIDERATION. Groves acknowledges and confirms that the only
consideration for his executing this Agreement is set forth herein, that no
other promises or agreements of any kind, save for those set forth in this
Agreement, have been made to him by any person or entity whatsoever to cause him
to sign this Agreement and that he fully understands the meaning and intent of
this Agreement.
4. SEPARATION PAYMENTS. In consideration of the promises set forth in this
Agreement, Keystone and Groves agree that Groves shall receive the separation
payments and other benefits set forth in Exhibit A, which is attached hereto and
incorporated herein. Keystone and Groves further agree that the separation
payments and benefits set forth in Exhibit A constitute all of the payments and
benefits which Groves shall receive due to the termination of his employment
with Keystone.
<PAGE>
5. NONDISCLOSURE OF INFORMATION. Groves acknowledges that as an employee,
officer and director of Keystone, he had access to extensive confidential and/or
proprietary information. Groves agrees that he shall not, without the written
consent of a duly authorized executive officer of Keystone, disclose to any
person any material confidential information obtained by him while in the employ
of Keystone with respect to any of the services, products, improvements,
formulas, designs or styles, processes, customers, methods of distribution or
business practices, the disclosure of which reasonably would be expected to
materially damage Keystone; provided, however, that for purposes of this
Agreement, confidential information shall not include any information known
generally to the public (other than as a result of unauthorized disclosure by
Groves) or any information of a type not otherwise considered confidential by
persons engaged in the same business or a business similar to that conducted by
Keystone. Provided, further, that this section shall not apply to any disclosure
that may be required by Groves by law, regulation or court order, but only after
Groves notifies an executive officer of Keystone of such demand for disclosure
and Keystone has a reasonable opportunity to respond to such demand. Any breach
of this Nondisclosure of Information provision shall be deemed a material breach
of this Agreement.
6. RETURN OF PROPERTY. Groves represents that he has surrendered to
Keystone any and all materials in Groves' possession, or elsewhere, whether or
not said materials are proprietary in nature, relating to the business of
Keystone including, but not limited to, data, documents, reports, programs,
diskettes, computer printouts, program listings, computer hardware and/or
software specifications, client lists, client information, and any and all
similar information without regard to form of representation, including all
copies thereof. Groves acknowledges that all such materials are the sole
property of Keystone and that Groves has no right, title or other interest in or
to such materials. These materials are included in the Nondisclosure of
Information provision contained in Section 5. Further, any breach of this Return
of Property provision shall be deemed a material breach of this Agreement.
<PAGE>
7. NO ACCESS. The parties acknowledge that Groves' office at Keystone was
fully equipped with a computer system and other equipment. In addition to the
return to Keystone of all of its property and any copies thereof as required in
Section 6 above, Groves agrees never to access Keystone's computer system for
any purpose whatsoever. Groves acknowledges and agrees that any such access
constitutes an illegal act and would cause irreparable damage and liability to
Keystone. Any breach of this No Access provision shall be deemed a material
breach of this Agreement.
8. NO SOLICITATION. Groves agrees that he shall not entice or solicit,
directly or indirectly, any other executives or key management personnel of
Keystone to leave the employ of Keystone to work with Groves or any entity with
which Groves has affiliated for a period of one (1) year from the Effective
Date. Groves acknowledges and agrees that any breach of the restrictions set
forth in this Section 8 will result in irreparable injury to Keystone for which
it may have no meaningful remedy in law and Keystone shall be entitled to
injunctive relief in order to enforce the provisions hereof. Upon obtaining such
injunction, Keystone shall be entitled to pursue reimbursement from Groves
and/or Groves' employer of costs incurred in securing a qualified replacement
for any employee enticed away from Keystone by Groves. Further, Keystone shall
be entitled to set off against or obtain reimbursement from Groves of any
payments owed or made to Groves by Keystone hereunder. Any breach of this No
Solicitation provision shall be deemed a material breach of this Agreement.
9. NONCOMPETITION. In consideration for the separation payments and other
benefits extended to Groves under this Agreement, Groves agrees that he shall
not, directly or indirectly, within the marketing area of Keystone (defined for
purposes of this Section 9 as all areas within one hundred (100) miles of the
work location to which Groves was assigned for the majority of the time during
the twelve (12) months preceding the Effective Date where Keystone has
established an active and material market presence) enter into or engage
generally in direct or indirect competition with Keystone in the business of
banking or any banking or trust related business, either directly or indirectly
as an individual on his own or as a partner or joint venturer, or as a director,
officer, shareholder (except as an incidental shareholder), employee or agent
for any person, for a period of one (1) year from the Effective Date. The
existence of any material claim or cause of action of Groves against Keystone,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Keystone of this provision. In the event that this
Section 9 shall be determined by any court of competent jurisdiction to be
unenforceable in part by reason of being too great a period of time or covering
too great a geographical area, it shall be in full force and effect as to that
period of time or geographical area determined to be reasonable by the court.
Any breach of this Noncompetition provision shall be deemed a material breach of
this Agreement.
<PAGE>
10. NO DISPARAGEMENT. Groves agrees not to make disparaging remarks about
Keystone or its operations, its employees, or any other aspect of its operation,
and Keystone agrees not to make disparaging remarks about Groves. Any breach by
either party of this No Disparagement provision shall be deemed a material
breach of this Agreement.
11. GENERAL RELEASE. In consideration for the separation payments and
other benefits extended to Groves under this Agreement, Groves, for himself, his
heirs, executors, administrators, successors and assigns, forever releases and
discharges Keystone, its board and their successors and assigns, officers,
agents, contractors, consultants and employees, past and present, collectively
or individually, from any and all claims, demands, causes of action, losses and
expenses of every nature whatsoever, known or unknown, that Groves ever had, now
has or hereafter may have, arising out of or in conjunction with his employment
with Keystone or the termination thereof, including, but not limited to, breach
of contract (express or implied), infliction of emotional harm, defamation,
wrongful discharge or any other tort, the Age Discrimination in Employment Act
(29 U.S.C. ss.621 et seq.), the Pennsylvania Human Relations Act, or any other
federal, state or municipal statute or ordinance including, but not limited to,
those relating to employment, labor relations or wages. It is expressly agreed
and understood that this Agreement is a general release.
In consideration of the foregoing release, and the covenants set forth
therein, Keystone, for itself, its agents, employees, successors and assigns,
releases Groves, his heirs, executors, administrators and assigns from any and
all claims, demands, causes of action, losses and expenses of every nature
whatsoever, known or unknown, that Keystone ever had, now has, or hereafter may
have, arising out of or in conjunction with Groves' employment by Keystone or
the termination thereof; provided, however, that Keystone expressly does not
release Groves with respect to any acts of gross negligence or any intentional
acts by Groves that are or were materially injurious to or which may contribute
or has contributed to the material detriment of Keystone. Nothing herein shall
act as a release of Groves from complying with this Agreement.
<PAGE>
12. COVENANT NOT TO SUE. Groves agrees that he will not bring any action, suit
or administrative proceeding or request contesting the validity of this
Agreement or attempting to negate, modify or reform it, nor will he sue Keystone
and its successors and assigns, agents, contractors, consultants or employees,
past and present, individually or collectively, for any reason arising out of
Groves' employment or termination thereof. Any breach of this Covenant Not To
Sue shall be deemed a material breach of this Agreement requiring Groves to
tender back to Keystone any and all payments paid to him thereunder, including
the value of any benefits provided by Keystone.
13. INDEMNIFICATION. Except as prohibited by law, Keystone agrees to defend and
indemnify Groves against expenses and any liability paid or incurred by Groves
in connection with any actual or threatened claim, cause of action, suit or
proceeding, civil or administrative, brought by any third party against Groves
by reason of Groves having been an officer of Keystone; provided, however,
Keystone does not agree to so indemnify Groves for any acts of gross negligence
or any intentional acts by Groves that are or were materially injurious to or
which may contribute or has contributed to the material detriment of Keystone.
If Groves obtains knowledge of: (a) facts that would give rise to a right of
defense or indemnification; or (b) commencement of an action that may require
defense or indemnification, Groves shall give written notice to Keystone as
promptly as practicable after his receipt of that knowledge. Following receipt
of such notice, Keystone shall be entitled to participate in the defense of such
claim, and upon notice delivered promptly to Groves, to assume the defense
thereof, with counsel reasonably satisfactory to Groves. Within a reasonable
period following the assumption of such defense by Keystone, Groves shall be
permitted to participate in the defense of such claim and may retain additional
counsel of his choice at his own expense. As an additional condition to
Keystone's obligation to defend and indemnify Groves under this paragraph,
Groves shall make himself available upon reasonable notice to testify in any
suit or proceeding which relates to Groves' duties as an officer of Keystone.
<PAGE>
14. CONFIDENTIALITY. The parties agree that the terms and existence of this
Agreement shall remain confidential. The parties agree further not to disclose
any information concerning this Agreement to any agency or person, including but
not limited to past, present and future employees of Keystone, except where such
disclosure is required by law or is necessary to carry out the terms of this
Agreement. Any breach of this Confidentiality provision shall be regarded as a
material breach of this Agreement. There is specifically excepted from the
foregoing the right of Groves to disclose information concerning this Agreement
to his family, financial advisors and attorneys, but Groves shall assume
responsibility for the failure of such persons to comply with the terms of this
Confidentiality provision.
15. ENFORCEMENT. In the event of an actual or threatened breach by Groves
of the provisions of Sections 5, 6, 7, 8 or 9, Keystone shall be entitled to
injunctive relief restraining Groves and any other so engaged from such
violation for the entire period set forth in the applicable section(s);
provided, however, that said period shall be extended by the time which may have
elapsed between the time Groves is notified of such violation and an injunction
issues restraining Groves from such violation. Nothing herein shall be construed
as prohibiting Keystone from pursuing any other remedies available for such
breach or threatened breach including, but not limited to, the recovery of
damages, reasonable fees of counsel and costs from Groves.
16. DAMAGES. Should suit be necessary to enforce either parties' rights in
this Agreement, the party determined in such suit to have breached this
Agreement shall pay damages, reasonable fees of counsel and costs incurred by
the other party enforcing its rights under this Agreement. The parties
acknowledge, however, that any damages to Keystone that may result from a breach
of the provisions of Sections 5, 6, 7, 8 or 9 of this Agreement by Groves are
not readily ascertainable. Accordingly, in the event of a breach of the
provisions of Sections 5, 6, 7, 8 or 9 of this Agreement by Groves, the parties
agree that Groves shall be required to pay to Keystone, as liquidated damages,
the sum of Four Hundred Thousand Dollars ($400,000.00), plus reasonable fees of
counsel and costs. Nothing herein shall, however, be construed as prohibiting
Keystone from pursuing injunctive relief restraining Groves and any other as
provided in Section 15 of this Agreement.
<PAGE>
17. REFERENCES. All requests for references about Groves by potential
future employers shall be directed to the Senior Vice President, Human
Resources, who will provide such information as Groves and Keystone mutually
determine. The parties may prepare a summary of such information which shall be
either attached to this Agreement as Exhibit B or, if prepared after the
execution of this Agreement, shall reference this Agreement and be signed by the
parties.
18. GOVERNING LAW. This Agreement shall be construed in accordance with and
be governed by the laws of the Commonwealth of Pennsylvania.
19. SEVERABILITY. Groves and Keystone acknowledge that any restrictions
contained in this Agreement are reasonable and that consideration for this
Agreement has been exchanged. In the event that any provision of this Agreement
shall be held to be void, voidable or unenforceable, the remaining portions
hereof shall remain in full force and effect; provided, that in the event that a
court shall determine that any provision is inequitably broad, it is the
intention of the parties that the court adjust such obligations of Groves rather
than eliminating such obligations entirely.
<PAGE>
20. EXECUTIVE EMPLOYMENT AGREEMENT. Groves and Keystone hereby acknowledge
that by executing this Agreement, the Executive Employment Agreement between
Groves and Keystone dated January 27, 1994 and as modified pursuant to a
memorandum to Groves from G. E. Aumiller dated March 11, 1994 and a letter to
Groves from Carl L. Campbell dated September 29, 1994 (the "Employment
Agreement") has been terminated and its terms thereby rendered null and void.
Groves hereby specifically acknowledges that he has no rights or claims to any
compensation or benefits pursuant to the terms of the Employment Agreement,
including, but not limited to, the right to arbitration and/or the payment of
attorneys fees and administrative court costs by Keystone pursuant to Section 19
of the Employment Agreement.
21. OTHER AGREEMENTS. This Agreement supersedes all other agreements, if
any, oral or written, heretofore made with respect to the subject matter hereof
and contains the entire agreement of the parties. This Agreement cannot be
amended or modified, except in writing signed by Groves and an agent of Keystone
specifically authorized to sign on behalf of Keystone in this matter.
22. ACKNOWLEDGMENT. Groves acknowledges and represents to Keystone as
follows:
a. He has had ample time (up to 21 days) to review all of the
provisions of this Agreement and fully understands it and the choices with
respect to the advisability of making the settlement and release provided
herein.
b. He acknowledges that, because of the consideration promised in
return, he has entered into this Agreement by his free will and choice
without any compulsion, duress or undue influence from anyone.
c. He acknowledges that he has been advised to seek independent
legal counsel regarding his rights and the advisability of entering into
this Agreement.
d. He acknowledges that he has been advised and understands that
once executed, he shall have up to seven (7) days thereafter to revoke
this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year first above written.
WITNESS:
/s/ Craig A. Golfieri /s/ George H. Groves
- --------------------- --------------------
ATTEST: KEYSTONE FINANCIAL, INC.
/s/ George R. Barr By Carl L. Campbell
- --------------------- --------------------
<PAGE>
EXHIBIT A
SCHEDULE OF SEPARATION PAYMENTS AND BENEFITS
I. SEPARATION PAYMENTS
A. SEPARATION PAYMENTS.
1. Groves shall receive separation payments in an amount equal to Four
Hundred Fifty Thousand Dollars ($450,000.00) payable in accordance with
subsections 2 and 3 below.
2. Groves shall receive a separation payment in an amount equal to the
balance of his Annual Salary (as such term is defined in the Employment
Agreement) for 1997 under the terms of the Employment Agreement had he remained
an employee of Keystone for the remainder of 1997. The separation payment shall
be made immediately following the expiration of the statutory revocation period
referenced in Section 22(d) of the Agreement.
Groves shall receive a separation payment equal to the balance of the Four
Hundred Fifty Thousand Dollars ($450,000.00) referenced in subsection 1 above on
January 2, 1998 (or on such other date as is mutually agreed to by Keystone and
Groves.) In the event of Groves' death prior to January 2, 1998, his heirs shall
receive the separation payment.
4. Groves hereby acknowledges that the separation payments referenced above
include payment for any vacation, personal days, sick days, short-term
disability and holidays to which Groves may have otherwise been entitled and
that such separation payments represent complete satisfaction of any such
obligations.
B. SEPARATION PAYMENTS IN LIEU OF BENEFITS.
1. Groves shall receive an additional separation payment of Two Hundred
Thousand Dollars ($200,000.00) on January 2, 1998 (or on such other date as is
mutually agreed to by Keystone and Groves). In the event of Groves' death prior
to January 2, 1998, his heirs shall receive the separation payment.
2. Groves hereby acknowledges that the payment of this Two Hundred Thousand
Dollars ($200,000.00) is in lieu of any welfare, fringe benefit or other
incentive compensation benefits to which Groves may have been entitled
including, but not limited to, medical, dental, accidental death and
dismemberment, long-term disability, life, payments pursuant to the Management
Incentive Compensation Plan (MICP) for 1997, payments pursuant to the
Performance Unit Plan (PUP) for the current performance period, any
phone/secretarial support, tax consulting services, automobile allowance and/or
club memberships and that such separation payment represents complete
satisfaction of any such obligations.
<PAGE>
C. SEPARATION PAYMENTS FOR RETIREMENT BENEFIT PURPOSES. W-2 wages are
generally included in the calculation of retirement benefits under the qualified
and nonqualified retirement programs maintained by Keystone. Employment contract
buyout payments (such as the separation payments provided herein) are
specifically excluded from the calculation of retirement benefits under the
qualified and nonqualified retirement programs maintained by Keystone.
<PAGE>
II. BENEFITS
A. SPLIT DOLLAR LIFE INSURANCE.
1. Keystone shall continue to maintain the split dollar life insurance
policy with a death benefit of Six Hundred Thousand Dollars ($600,000.00)
(Metropolitan Life Insurance Policy No. 947590025U) on the life of Groves (the
"Policy") for a period of eighteen (18) months from the Effective Date, such
maintenance period to end on April 22, 1999.
2. In the event of Groves' death prior to April 22, 1999, Groves'
designated beneficiaries shall receive the death benefits under the terms of the
Policy and Keystone shall receive a repayment of the premium payments that are
owed by Groves to Keystone.
3. On April 22, 1999, the Policy shall be transferred to Groves and Groves
shall not be required to repay the premium payments that would have otherwise
been owed by Groves to Keystone in the amount of approximately One Hundred
Thirty Thousand Five Hundred Forty-Four Dollars ($130,544.00).
B. QUALIFIED PENSION PLANS. Any retirement benefits to which Groves is enti-
tled under the terms of the Keystone Financial Pension Plan and/or the
Keystone Financial 401(k) Savings Plan shall be paid in accordance with
the terms of such plans.
C. NONQUALIFIED RETIREMENT BENEFITS. Any benefits to which Groves may be enti-
tled under the terms of the Supplemental Retirement Income Plan and/or the
Savings Restoration Plan shall be paid in accordance with the terms of
such plans.
<PAGE>
D. STOCK OPTIONS.
1. Groves acknowledges that he is not eligible to receive any further
grants of stock options pursuant to any program maintained by Keystone.
2. Outstanding vested incentive stock options held by Groves must be
exercised no later than the earlier of (i) three months from the Effective Date
or (ii) the scheduled expiration of the exercise period of such options.
3. Outstanding vested nonqualified stock options must be exercised no
later than the earlier of (i) one year from the Effective Date or (ii) the
scheduled expiration of the exercise period of such stock options.
4. All nonvested incentive stock options and nonvested nonqualified stock
options have lapsed as of the Effective Date.
E. MANAGEMENT STOCK OWNERSHIP PROGRAM. In accordance with the terms of the
MSOP and the underlying loan documents, Groves shall be required to repay
the outstanding loan balance within ninety (90) days from the Effective Date.
F. EMPLOYEE STOCK PURCHASE PLAN. Groves' account balance (plus accrued
interest) shall be distributed to Groves pursuant to the terms of the Plan.
G. PERFORMANCE UNIT PLAN AND MANAGEMENT INCENTIVE COMPENSATION PLAN. Groves
thereby acknowledges that the separation payment made pursuant to Section
I.B.2 hereof represents complete satisfaction of any amounts to which Groves
may have been entitled pursuant to the terms of the PUP and MICP.
H. COBRA. Groves shall be provided with a notice of his right to COBRA
continuation coverage. If Groves elects COBRA continuation coverage, the cost
of such coverage shall be paid exclusively by Groves.
III. TAX WITHHOLDING
All separation payments and benefits hereunder are subject to all
applicable federal, state and local taxes and reporting requirements.
<PAGE>
KEYSTONE FINANCIAL, INC.
SUPPLEMENTAL DEFERRED COMPENSATION PLAN
I. Purpose of the Plan.
The Keystone Financial, Inc. Supplemental Deferred Compensation Plan
("Plan") is an unfunded deferred compensation arrangement to provide
supplemental post-employment or retirement benefits solely for a select group of
management or highly compensated employees employed by Keystone Financial, Inc.
("KFI"), its subsidiaries and affiliated corporations ("Employers").
II. Administration of the Plan.
(a) The Plan shall be administered by the Human Resources Department
of KFI ("Human Resources Department").
(b) Decisions and determinations by the Human Resources Department
concerning the Plan shall be final and binding upon all parties. The Human
Resources Department shall have the authority to interpret the Plan, to make all
determinations reserved hereunder to the Employers, to establish and revise
rules and regulations relating to the Plan, and to make any other determinations
that are authorized herein or that it believes are necessary or advisable for
the administration of the Plan.
III. Participation
The Human Resources Committee of the Keystone Financial, Inc. Board
of Directors or such person or persons as the Committee shall designate (the
"Selection Committee") shall have the exclusive power to select solely from the
management and highly compensated employees of the Employers the individual
participants to receive benefits under the Plan. The Selection Committee shall
complete a separate Benefit Schedule in the form attached hereto as Appendix "A"
for each employee selected to be a participant in the Plan.
IV. Amount of Benefit.
The Selection Committee shall have the exclusive power to determine
the benefit to be paid by any Employer to a participant under the Plan. The
benefit of each participant under the Plan shall be set forth on the Benefit
Schedule. The Benefit Schedule must be completed by the Human Resources
Department and made a part of this Plan before any benefit under the Plan may be
paid to such participant.
V. Time and Terms of Payment.
The Selection Committee shall have the exclusive power to determine
the time when payment of any benefit under the Plan shall commence, the manner
in which such benefit shall be paid and the terms or conditions which must be
met in order for the participant to qualify for such benefit. The time, terms
and conditions of payment shall be set forth on the Benefit Schedule which is
completed by the Human Resources Department and made part of this Plan.
<PAGE>
VI. Survivor Benefits.
The Plan is for the exclusive benefit of the participants selected
to receive benefits under the Plan pursuant to Article III hereof. No other
person, including the participant's surviving spouse, his surviving children, or
his estate, shall have any interest in any benefit under the Plan except to the
extent specifically provided in the Benefit Schedule prepared with respect to
the participant by the Human Resources Department and made a part of this Plan.
VII. Non-Competition.
If the Benefit Schedule with respect to the individual participant
incorporates by reference this noncompetition provision, and if, without the
written consent of the Human Resources Department, the participant at any time
after his termination of employment with the Employers, and prior to the time he
has received all of any benefit due hereunder engages in or becomes associated
with, directly or indirectly, either the stockholder, director, officer,
partner, proprietor, employee, agent, advisor or consultant, any business which
in the opinion of the Human Resources Department competes in any way with the
business of the Employers (as such businesses were conducted at the time the
participant's termination of employment occurred), the Employers shall be
relieved of all further obligations hereunder and all amounts then remaining
unpaid under the Plan shall be forfeited. The Human Resources Department shall
provide written notice of this determination to the participant. However,
nothing herein shall prevent the participant from investing in the securities of
any competing company which are publicly traded so long as the participant's
investment does not give him or her any voice in the management or conduct of
the affairs of such company.
VIII. Forfeiture for Fraud.
Notwithstanding anything herein to the contrary, if the
participant shall be discharged or he resigns due to an act of fraud, theft,
embezzlement or misrepresentation affecting the finances of the Employers, all
amounts to be paid to such participant under the Plan shall be forfeited and the
Employers shall be relieved of any and all obligations hereunder.
IX. Failure to Locate.
If the Human Resources Department shall be unable, within one year
after any benefit becomes payable to any person under the Plan, to make
distribution to such person because of the Human Resources Department's
inability to ascertain his or her whereabouts by mailing to the last-known
address of such person on the records of the Employers and such person has not
made written claim thereof before the expiration of the one-year period, then
the Human Resources Department shall declare all rights of such person under the
Plan to be forfeited as of such date as the Human Resources Department shall
determine.
X. Relation to Other Plans.
The benefit of the participant under the Plan shall be in addition
to any benefits paid or payable to or on account of the participant under any
other pension, disability, equity, annuity or retirement plan or policy
whatsoever. Nothing herein contained shall in any manner modify, impair or
affect any existing or future rights of the participant to receive any employee
benefits to which he would otherwise be entitled or to participate in any
current or future pension plan of the Employers or any other supplemental
arrangement which constitutes a part of the participant's regular compensation
structure. However, any benefits credited under the Plan shall not be deemed
part of the participant's total compensation for the purpose of computing
benefits to which he may be entitled under any pension plan or other
supplemental compensation arrangement, unless such plan or arrangement
specifically provides to the contrary.
<PAGE>
XI. Prohibition Against Funding.
Should the Employers elect to acquire any investment in connection
with the liabilities assumed under the Plan or to establish any reserves on its
books, it is expressly understood and agreed that the participant shall not have
any right with respect to, or claim against, any such asset or reserve nor shall
any acquisition of an asset or establishment of a reserve create a trust of any
kind or any fiduciary relationship between the Employers and the participant,
his heirs personal representatives or assigns. Any such assets shall be and
remain a part of the general, unpledged and unrestricted assets of the Employers
subject to the claims of its general creditors. The participant shall be
required to look to the provisions of the Plan and to the Employers for
enforcement of any and all benefits due under the Plan and to the extent any
person acquires a right to receive any payments under the Plan, such right shall
be no greater than the right of any unsecured, general creditor of the
Employers.
XII. General Provisions.
(a) No benefit or payment under the Plan shall be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge, whether voluntary or involuntary, and no attempt to
anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the
same shall be valid. Nor shall any such benefit or payment be in any way liable
for or subject to the debts, contracts, liabilities, engagements or torts of any
person entitled to such benefit or payment, except to such extent as may be
required by law. If any person entitled to a benefit or payment under the Plan
becomes bankrupt or attempts to anticipate, alienate, sell , transfer, assign,
pledge, encumber or charge any benefit or payment under the Plan, in whole or in
part, or if any attempt is made to subject any such benefit or payment, in whole
or in part, to the debts, contracts, liabilities, engagements or torts of the
person entitled to any such benefit or payment, then such benefit or payment, in
the discretion of the Human Resources Department shall cease and terminate with
respect to such person, and the Human Resources Department in such case shall
hold or apply the same or any part thereof for the benefit of any dependent,
relative or beneficiary of such person, in such manner and proportion as the
Human Resources Department shall deem proper.
(b) The establishment of the Plan shall not be construed to confer
upon the participant the legal right to be retained in the employ of the
Employers or give the participant, or any other person, any right to any payment
whatsoever, except to the extent of the benefit provided for hereunder. The
participant shall remain subject to discharge to the same extent as if the Plan
had never been adopted.
(c) If the Human Resources Department determines that any person to
whom a benefit is payable under the Plan is incompetent by reason of age or
physical or metal disability, the Human Resources Department shall have the
power to cause the payments becoming due to such person to be made to another
for his benefit without any responsibility to see to the application of such
payments. Any payment made pursuant to such power shall, as to the amount of
such payment, operate as a complete discharge of the Employers.
(d) If at any time any doubt exists as to the identity of any person
entitled to any payment hereunder or the amount or time of such payment, the
Human Resources Department shall be entitled to hold such sum as a segregated
amount in trust until such identity, amount or time is determined or until an
order of a court of competent jurisdiction is obtained. The Human Resources
Department shall also be entitled to pay such sum into court in accordance with
the appropriate rules of law.
<PAGE>
(e) No liability shall attach to or be incurred by any officer,
director or employee of the Employers under or by reason of the terms,
conditions and provisions contained in the Plan, or for the acts or decisions
taken or made thereunder or in connection therewith; and as a condition
precedent to the establishment of the Plan or the receipt of benefits
thereunder, or both, such liability, if any, is expressly waived and released by
the participant and by any and all persons claiming under or through the
participant or any other person. Such waiver and release shall be conclusively
evidenced by any act of participation in or the acceptance of benefits under the
Plan.
(f) Any notices required or permitted to be given under the Plan
shall be sufficient if in writing and if sent by registered or certified mail to
the last-known address of the participant as shown on records of the Human
Resources Department as the case may be.
(g) The Plan shall be governed by and construed and administered
under the laws of the Commonwealth of Pennsylvania.
(h) The Plan shall be binding upon the parties hereto, their heirs,
executors, administrators, successors and assigns. In the event of a merger,
consolidation, or reorganization involving the Employers, the Plan shall
continue in force and become an obligation of the successor or successors of
KFI, its subsidiaries or affiliated corporations.
(i) If any provision of the Plan is held invalid or unenforceable,
its invalidity or unenforceability shall not affect any other provisions of the
Plan, and the Plan shall be construed and enforced as if such provision had not
been included therein.
(j) The Article headings contained herein are inserted only as a
matter of convenience and for reference and in no way define, limit, enlarge or
describe the scope or intent of the Plan nor in any way shall they affect the
Plan or the construction of any provision thereof.
(k) The Plan shall be evidenced by this document and the separate
Benefit Schedule executed by each participant which together shall set forth the
full extent of any obligation of the Employers to such participant.
TO RECORD the adoption of the Plan, Keystone Financial, Inc. on behalf of
the Employers has caused this instrument to be executed on this _____ day of
December, 1991.
ATTEST: KEYSTONE FINANCIAL, INC.
____________________________________ By_______________________________
<PAGE>
APPENDIX A
BENEFIT SCHEDULE
TO THE
KEYSTONE FINANCIAL, INC.
SUPPLEMENTAL DEFERRED COMPENSATION PLAN
Participant Information:
Name _________________________________________________________________
Social Security Number _______________________________________________
Home Address _________________________________________________________
______________________________________________________________________
Employer _____________________________________________________________
Position _____________________________________________________________
Annual Total Compensation ____________________________________________
Date of Retirement ___________________________________________________
Amount of Benefit: _____________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Time and Terms of Payment: _____________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Survivor Benefits: _____________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
Non-Competition Requirements: __________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Acceptance by Participant:
By executing this Benefit Schedule, the undersigned acknowledges that the
preceding description of benefits represents his of her entire agreement with
KFI for supplemental post-employment or retirement benefits in accordance with
the terms of the Keystone Financial, Inc. Supplemental Deferred Compensation
Plan, which terms are incorporated herein by reference.
Participant
---------------------------
Date: ______________________
Accepted by Human Resources
- --------------------------------------
Date _________________________________
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
(in thousands except per share data) Year Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- --------------------------- ---------- ----------- ----------- ----------- -----------
Operations:
- --------------------------- ---------- ----------- ----------- ----------- -----------
Interest income $510,738 $473,420 $446,786 $386,894 $378,403
Interest expense 232,494 211,301 200,775 152,463 151,943
- --------------------------- ---------- ----------- ----------- ----------- -----------
Net interest income 278,244 262,119 246,011 234,431 226,460
Provision for credit losses 15,316 10,713 8,568 10,324 11,580
Noninterest income 89,932 71,525 58,137 51,921 52,684
Noninterest expense 225,990 196,245 182,130 182,333 176,034
Income tax expense 38,953 37,180 34,001 25,907 25,846
- --------------------------- ---------- ----------- ----------- ----------- -----------
Net Income $87,917 $89,506 $79,449 $67,788 $65,684
- --------------------------- ---------- ----------- ----------- ----------- -----------
Pre-tax security gains,
included above $6,071 $871 $1,789 $978 $1,707
Net interest spread 3.87% 3.87% 3.90% 4.11% 4.19%
Impact of noninterest funds .72 .74 .71 .57 .55
- --------------------------- ---------- ----------- ----------- ----------- -----------
Net interest margin 4.59% 4.61% 4.61% 4.68% 4.74%
- --------------------------- ---------- ----------- ----------- ----------- -----------
Per Share:
- --------------------------- ---------- ----------- ----------- ----------- -----------
Net income:
Basic $1.70 $1.72 $1.60 $1.38 $1.34
Diluted 1.68 1.70 1.59 1.37 1.33
Dividends 1.06 0.98 0.93 0.86 0.79
Dividend payout ratio 63.65% 56.98% 58.13% 54.85% 44.67%
Average shares outstanding 51,692,534 52,118,819 49,557,082 49,188,961 49,036,666
Balances at December 31:
- --------------------------- ---------- ----------- ----------- ----------- -----------
Loans & leases $4,712,566 $4,336,470 $4,096,866 $3,900,900 $3,440,210
Allowance for credit losses (65,091) (56,256) (55,415) (53,708) (51,084)
Total assets 6,841,337 6,450,579 6,213,222 5,796,576 5,414,897
Deposits 5,233,165 5,059,721 4,993,608 4,726,842 4,419,421
FHLB borrowings & long-term debt 349,943 226,776 168,564 155,752 136,605
Shareholders' equity 685,485 660,406 621,766 533,643 527,617
Ratios:
- --------------------------- ---------- ----------- ----------- ----------- -----------
Return on average assets 1.33% 1.44% 1.35% 1.23% 1.24%
Return on average equity 13.27 14.09 14.00 12.90 13.01
Equity to assets, average 9.99 10.19 9.66 9.53 9.51
Risk adjusted capital ratios:
Leverage ratio 9.15% 10.03% 10.12% 9.59% 9.74%
"Tier 1" 12.50 14.43 14.48 13.75 13.95
"Total" capital 13.75 15.66 15.67 15.00 15.20
Loans to deposits, year-end 90.05% 85.71% 82.04% 82.53% 77.84%
Allowance for credit losses to
loans 1.38 1.30 1.35 1.38 1.48
Nonperforming assets to loans 0.55% 0.65% 0.72% 0.87% 1.21%
Loans 90 days past due 0.70 0.46 0.41 0.25 0.16
- --------------------------- ---------- ----------- ----------- ----------- -----------
Total risk elements to loans 1.25% 1.11% 1.13% 1.12% 1.37%
- --------------------------- ---------- ----------- ----------- ----------- -----------
</TABLE>
2
<PAGE>
Financial Review
This review has been provided to present information needed to fully understand
the financial condition and the results of operations of Keystone Financial
Inc., (Keystone). In May of 1997, Keystone consummated the merger of Financial
Trust Corp(FTC), a bank holding company with $1.2 billion in assets, and the
acquisition of First Financial Corporation of Western Maryland (FFWM), a thrift
institution with $355 million in assets. The merger of FTC was accounted for as
a pooling of interests and all prior periods have been restated. The thrift
institution acquired through the FFWM transaction was merged into an existing
Keystone bank and was accounted for under the purchase method of accounting.
Accordingly, the acquired assets and liabilities and results of operations of
FFWM were included in combined results from May 29, 1997 and reflected
approximately half of the growth in average earning assets and the majority of
the increase in total deposits.
Throughout this review net interest income and yield on earning assets are
presented on a fully taxable-equivalent basis. Additionally, balances represent
average daily balances unless otherwise indicated.
1997 Summary
Performance Results
Performance during 1997 was significantly influenced by the expansion of
Keystone's franchise during the year. The merger of FTC added another strategic
partner in Keystone's expanding financial services marketplace while the
acquisition of FFWM added important market share to Keystone's existing
franchise in Maryland and West Virginia.
Net income, which was affected by special charges incurred in connection with
the FTC merger, was $87.9 million in 1997 versus $89.5 million in 1996, a
decrease of 1.8%. Special charges, which included pre-tax merger expenses of
$11.4 million as well as certain portfolio restructuring charges, reduced net
income by $8.6 million, or $.17 per basic share. Excluding special charges, net
income in 1997 was $96.5 million or $1.87 per basic share, compared to $89.5
million and $1.72 in 1996, an 8.7% improvement in basic earnings per share.
Keystone's return on average assets (ROA)and return on average equity (ROE), the
most commonly used measures of financial institution performance, were 1.33% and
13.27%, respectively, versus 1.44% and 14.09%, in the prior year. Excluding the
effect of the special charges, ROA and ROE were 1.46% and 14.54% in 1997.
Comparable ratios for Keystone's peer group of financial institutions with
assets of $5 billion to $10 billion, as compiled by Keefe, Bruyette & Woods,
Inc. for 1997, were 1.39% and 16.03%, respectively.
Core operating performance in 1997 was marked by an increase in net interest
income, substantial growth in fee-based revenues, prudent credit risk
management, and expense growth which accompanied revenue expansion. Total
revenues, excluding security gains, grew 8.6%, including a 5.9% increase in net
interest income and 18.7% growth in noninterest revenues. The growth in net
interest income was stimulated by both increased loan volume and improvement in
the proportionate mix of earnings assets. The growth rate of noninterest
revenues continued to be driven by new and expanded asset management activities,
strength in mortgage banking performance and successful electronic banking
initiatives. Keystone continues to execute a strategic diversification of its
revenue stream by expanding its menu of financial services. The introduction of
KeyPremier Funds, Keystone's own proprietary mutual funds, and the acquisition
of MMC&P, a retirement benefit services firm, reflected Keystone's commitment to
meeting the expanding needs of its financial services customers.
Consumer credit concerns were an integral component of asset quality issues on a
national level, particularly in the area of credit card debt. Though Keystone
had eliminated its credit card operations prior to 1996, increased consumer
delinquencies and rising levels of personal bankruptcies did impact consumer
loan charge-offs levels during 1997. Though improvements in credit quality were
experienced through the course of the year, Keystone prudently increased its
provision for credit losses and sustained a strong ratio of allowance to loans
of 1.38% at December 31, 1997.
3
<PAGE>
Growth in operating expenses was influenced by expenses associated with the 1997
merger activity, by investments in activities connected with the growth in fee
income, and by ongoing improvement in Keystone's financial services delivery
system. During 1997, Keystone completed an aggressive effort to expand its
banking franchise and, at the same time, continued its expansion of financial
services capabilities. These efforts, combined with a prudent strategy to evolve
Keystone's delivery system, were critical to the overall expansion of the
revenue base.
Strategic Focus
Keystone has always been driven by its fundamental goal of increasing
shareholder value through continuous performance improvement. Managerial focus
on this goal has shaped Keystone's competitive market strategy, which is
designed to provide value to customers through local delivery of superior
financial services. This has led to the development of Keystone's operating
structure, now commonly described as "Super Community Banking". During 1997,
Keystone executed strategies in six major areas, which influenced 1997
performance and provided a foundation for improved performance in 1998 and
beyond. These six areas include relationship banking, marketing, asset
management, delivery systems, overhead expense management and franchise
expansion.
Strategic focus within Keystone begins with relationship banking, a business
approach executed to deliver a value proposition that is customer-focused. The
execution of relationship banking began with the formation of market teams
composed of competent, well-trained financial professionals capable of
delivering both customary and specialized financial services within specified
geographic regions. These teams focus on the delivery of financial solutions
built upon, simplified customer access to services that is distinguishable from
competitors' product-focused strategies. Successful execution requires
investment in Keystone's human capital, including targeted selection of new
associates, combined with training, skill development and performance-driven
variable compensation for Keystone's existing employee base.
Keystone's second strategic focus involves its approach to marketing efforts.
Keystone's customer-focused approach to the delivery of financial services has
dramatically influenced its overall marketing execution. Marketing begins with
life cycle segmentation, a process which allows Keystone to understand the
financial needs of its customer base by understanding the financial profile of
its individual customer segments. This understanding shapes Keystone's marketing
philosophy by reducing mass marketing initiatives and delivering a targeted
service delivery approach.
Keystone's asset management capabilities have had a dramatic impact on its
organizational evolution and performance. Over the last several years, Keystone
augmented existing financial products and services with more integrated
financial solutions. Keystone is now able to more effectively compete with both
financial institutions and other financial service providers. Prior to 1997,
Keystone acquired Martindale Andres & Company, a registered investment advisory
firm that provided expanded revenues, improved trust-related performance and, in
late 1996, introduced KeyPremier mutual funds. Keystone continued its expansion
of financial service capabilities in August of 1997, with the acquisition of
MMC&P, a retirement benefit services consulting firm specializing in retirement
plan recordkeeping and plan management for employee benefit programs.
Additionally, Keystone's asset management capabilities were extended to the
retail sector through Keystone Investor Services, a newly-formed subsidiary
specializing in the delivery of brokerage and annuity products.
Effective integration of financial services would not be complete without an
ongoing evaluation of the service delivery system. During 1997, Keystone evolved
its multi-channel service delivery system by transforming its community office
network and by expanding its alternate channel capabilities through ATMs and
telephone banking. Constant evaluation and modification of the service delivery
network is necessary to ensure a competitive advantage in the financial services
industry.
4
<PAGE>
Overhead expense management requires multi-skilled job training, continuing
investment in technology, evaluation of outsourcing alternatives, and
development of specialized expertise. An important gauge of management's
effectiveness in this area involves merger integration efforts and the
realization of anticipated efficiencies. The extent of merger integration made
necessary by Keystone's market and product expansion activities presented
special challenges during 1997. Keystone's demonstrated skill in directing this
effort has provided a strong foundation that will effectively accommodate future
growth.
Keystone's final key strategy involves franchise expansion. The year 1997 has
been pivotal to Keystone as it grows into an increasingly important regional
franchise in the mid-Atlantic states. Franchise expansion includes achievement
of performance gains from both the banking business as well as specialty
offerings necessary for a fully-developed financial services company.
Successful achievement of improved shareholder value through "Super Community
Banking" has been driven by aligning the needs of Keystone's customers with the
skills of its professional workforce, engaging the customer base with a shared
objective of improving the customer's financial position, and delivering
financial products and services consistent with Keystone's value proposition.
Economic Trends & Interest Rates
The financial services industry is constantly influenced by a multitude of
factors, not the least of which are overall economic trends and the interest
rate environment. Through the third quarter of 1997, virtually all critical
indicators of economic activity suggested that the economy was operating near
peak performance levels. Low interest rates, record-high employment, and
virtually nonexistent inflationary concerns created conditions wherein the
economic expansion was expected to continue unabated. The U.S. economy, in
particular, continued along a record-setting period of economic expansion. The
optimism born of a strong economy influenced stock market valuations as the Dow
Jones industrial average increased 23% during the year to 7908.
Entering the fourth quarter, emerging trends were observed which raised concerns
over the long-term sustainability of the robust economy. Global economic
developments, particularly the turmoil in Asian markets, caused speculation on
the impact of a crisis in that region and the potential ripple effect on the
U.S. economy. Interest rate conditions, which have been characterized by a
relatively flat yield curve throughout 1997, exhibited the potential for further
flattening that could compress net interest income by reducing traditional
spreads between long and short term rates. Despite these concerns, however, the
overall economic picture remained the most optimistic in a generation and fueled
the third largest economic expansion in history. The confidence born of a
fundamentally strong U.S. economy continues to heighten expectations for 1998.
The economic and interest rate conditions present during 1997 provided special
challenges for financial institutions. On the asset generation side, Keystone
has been responsive to strong consumer credit demand through its product
development and management effort, best exemplified by the Personal Financial
Analysis (PFA) program. This program is a unique financial service designed to
blend credit and debt consolidation needs with an effective investment or
savings plan. Demand for an expanded array of financial products also led to the
introduction of Keystone's family of KeyPremier mutual funds that are managed by
Keystone's nationally-recognized fund managers, Martindale Andres & Co.
Expanding consumer demand for enhanced retirement plan services influenced
Keystone's acquisition of MMC&P, thus improving its ability to provide a
complete package of retirement plan services. Performance beyond 1997 will
continue to depend largely on Keystone's ability to deliver products and
services which meet the changing financial needs of its customers.
Forward-Looking Statements
From time to time, Keystone has and will continue to make statements which may
include "forward-looking" information. Keystone cautions that "forward-looking"
information disseminated through financial presentations should not be construed
as guarantees of future performance. Furthermore, actual results may differ from
expectations contained in such "forward-looking" information as a result of
factors which are not predictable. Financial institution performance can be
affected by any number of factors, many of which are outside of management's
direct control. Examples include, but are not limited to, the effect of
prevailing economic conditions; the overall direction of government policies;
unforseen changes in the general interest rate environment; the actions and
policy directives of the Federal Reserve Board; competitive factors in the
5
<PAGE>
marketplace, and business risk associated with the management of the credit
extension function and fiduciary activities. Each of these factors could affect
estimates, assumptions, uncertainties, and risks considered in the development
of "forward-looking" information, and could cause actual results to differ
materially from management's expectations regarding future performance.
6
<PAGE>
NET INTEREST INCOME
Keystone derives revenue from both intermediation activities, the results of
which are reflected in net interest income, and from fee and service based
income, which is included in noninterest income performance. Net interest income
continues to be the most significant component of revenue, comprising over 77%
of total revenues.
Net interest income is defined as the difference between interest income on
earning assets and interest expense on deposits and borrowed funds. Net interest
margin provides a relative measure of a financial institution's ability to
efficiently deliver net interest income from a given level of average earning
assets. Both net interest income and net interest margin are influenced by
interest rate changes, changes in the relationships between rates, and changes
in the composition or absolute volumes of earning assets and liabilities.
The following table compares net interest income and net interest margin
components between 1997 and 1996 (in thousands):
<TABLE>
1997 1996 Change
- ----------------------- -------------------- -------------------- --------------------
Yield/ Yield/ Yield/
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
======================= ========== ========= ========== ========= =========== ========
Interest income $519,598 8.32% $482,393 8.20% $37,205 0.12
Interest expense 232,494 4.45 211,301 4.33 21,193 (0.12)
- ----------------------- ---------- --------- ---------- --------- ----------- --------
Net interest income $287,104 $271,092 $16,012*
======================= ========== ========= ========== ========= =========== ========
Interest spread 3.87% 3.87% -----
Impact of
noninterest funds 0.72 0.74 (0.02)
- ----------------------- ---------- --------- ---------- --------- ----------- --------
Net interest margin 4.59% 4.61% (0.02)
======================= ========== ========= ========== ========= =========== ========
*The change in net interest income consisted of a favorable volume variance
of $24.2 million, offset by an unfavorable rate variance of $8.2 million.
</TABLE>
Interest Rates
The interest rate environment, combined with Keystone's management of pricing,
product mix, and execution of relationship banking, influenced the rate of
growth in net interest income. The interest rate environment has remained
remarkably constant through the last three years, and rates throughout 1997 were
only slightly above the rates that existed throughout 1996. These slightly
higher rates influenced both a rise in earning asset yield and an increase in
the cost of funding sources. By the end of 1997, rates began to slide toward
historic lows and included an overall flattening of the yield curve.
Continuation of this trend on an extended basis would reduce the opportunity to
extend asset maturities to improve yields and would compress the natural spread
between long-term asset yields and short-term funding sources.
The following is a comparison of the average yield curve for U.S. Treasury
instruments for specific intervals between three months and thirty years, which
serves as an illustration of the relative comparability of interest rate trends
between 1997 and 1996.
<TABLE>
<CAPTION>
Three Six One Two Three Five Ten Thirty
Months Months Year Years Years Years Years Years
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------ --------- --------- --------- --------- --------- --------- --------- ---------
1997 5.18% 5.37% 5.60% 5.96% 6.07% 6.21% 6.34% 6.60%
1996 5.14% 5.28% 5.49% 5.83% 5.97% 6.17% 6.43% 5.70%
</TABLE>
7
<PAGE>
The similarity of performance in net interest margin belies the fact that
Keystone has continued to actively manage the development, the delivery, and
pricing of products in response to changes in customer preferences. Keystone's
relationship banking focus remains at the core of loan and deposit product
innovations, including the Personal Financial Analysis (PFA) lending product and
the highly regarded variable-rate CD. Successful management of both net interest
income and net interest margin is a function of proactively fulfilling customer
needs and preferences in a manner which is considerate of the changing interest
rate environment.
Interest Income/Earning Assets
Interest income grew 7.7% on the strength of slightly higher interest rates and
steady growth in loans, driving an improved earning asset mix. Interest income
grew to $520 million in 1997 from $482 million in 1996 an increase of $38
million. Generation of increased levels of interest income is influenced by the
evolution of relationship banking, overall trends in interest rates, dynamic
changes in rate relationships, and overall liquidity management. The credit
component of Keystone's relationship banking strategy has affected both growth
in earning assets and earning asset mix trends. Relationship banking, which
focuses primarily on middle market businesses and retail customers, has fostered
significant growth of both commercial real estate loans and direct consumer
credits, which grew 23% and 27%, respectively, during 1997 and have become
increasing components of Keystone's earning asset mix. At the same time,
customers are demanding products which are more responsive to interest rate
changes. Increasing components of both earning assets and funding sources are
now more sensitive to changes in interest rates, particularly specific maturity
points along the Treasury curve. By balancing customer needs with a successful
pricing strategy, Keystone has attempted to more effectively insulate net
interest income performance from interest rate risk.
Growth in loans was also affected by balance sheet management and liquidity
strategies. For example, a sale of approximately $259 million of mortgage loans
was executed as a strategic component of Keystone's acquisition of FFWM.
Keystone's ongoing mortgage banking operations and the strategic curtailment of
the indirect automobile lending business preserved funding capacity for
relationship banking and eliminated the need to aggressively price deposits to
fund commodity-based activities. Keystone's on-going execution of its mortgage
banking operations, which includes both the sale and service components, has
preserved customer affinity and permitted consistent customer access to a full
menu of mortgage products under various interest rate conditions.
Keystone's focus on relationship banking, responsiveness to interest rates, and
prudent liquidity management have enabled it to achieve an increase in earning
asset yields at 8.32% verses 8.20% in 1996. The 12 basis point improvement in
yields, combined with a 6% increase in earning assets, allowed Keystone to
sustain steady revenue growth.
Interest Expense/Funding Sources
Improvement in net interest income must include increased levels of interest
income combined with prudent management of both funding cost and capacity.
Financial institutions have been consistently challenged to achieve revenue
improvement despite an erosion of the funding base as customers seek increased
investment returns. Successful integration of relationship banking requires
innovative and responsive product management in terms of both deposit product
lines and asset management offerings. As competitive pressures constrain deposit
growth, deposit-gathering strategies have been augmented by self-funding
securitization activities as well as prudent use of credit markets, most notably
FHLB advances. Keystone's funding approach resulted in an increase in the
overall funding costs from 4.33% in 1996 to 4.45% in 1997, a 12 basis point
increase which was equal to the improvement in asset yield.
8
<PAGE>
Net Interest Spread and Net Interest Margin
Combining the impact of both yield on earning assets with the cost of funding
sources results in interest spread, a measure of a financial institution's
ability to effectively blend the impact of changing rates, shifting interest
rate indexes, and earning assets and funding mix changes with evolving consumer
needs. Net interest margin combines the impact of interest spread with both the
investment of noninterest funding sources and the level of nonearning assets. In
1997, Keystone successfully sustained both its overall interest spread and its
net interest margin, rising to the challenges of an increasingly competitive
marketplace for financial services. Interest spread was 3.87% in both 1997 and
1996. Similarly, net interest margin remained constant at 4.59% compared to
4.61% in 1996, reflecting little change in either interest spread or the net
impact of noninterest funding sources and nonearning assets.
Quarterly Performance
The following table provides a comparative summary of earning asset yields,
funding costs, and other information for each of the four quarters of 1997 and
1996 (in thousands):
<TABLE>
<CAPTION>
1997
- ------------------------------ --------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
============================== =========== ========== ========== ==========
<S> <C> <C> <C> <C>
Asset yield 8.38% 8.38% 8.33% 8.20%
Funding cost 4.55 4.47 4.44 4.36
- ------------------------------ ----------- ---------- ---------- ----------
Interest spread 3.83% 3.91% 3.89% 3.84%
- ------------------------------ ----------- ---------- ---------- ----------
Net interest margin 4.56% 4.62% 4.63% 4.56%
- ------------------------------ ----------- ---------- ---------- ----------
Net interest income $72,788 $74,087 $71,687 $68,542
============================== =========== ========== ========== ==========
1996
- ------------------------------ --------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
============================== =========== ========== ========== ==========
Asset yield 8.20% 8.11% 8.20% 8.26%
Funding cost 4.36 4.35 4.24 4.35
- ------------------------------ ----------- ---------- ---------- ----------
Interest spread 3.84% 3.76% 3.96% 3.91%
- ------------------------------ ----------- ---------- ---------- ----------
Net interest margin 4.58% 4.50% 4.68% 4.63%
- ------------------------------ ----------- ---------- ---------- ----------
Net interest income $69,012 $67,228 $67,532 $67,320
============================== =========== ========== ========== ==========
</TABLE>
Quarterly performance throughout 1997 and 1996 was marked by the consistency of
yields and cost of funds, reflecting similar interest rate conditions throughout
those periods. Factors influencing both net interest spread and net interest
margin performances gave rise to a relatively constant band of conditions and
consistent quarter-to-quarter performance.
PROVISION FOR CREDIT LOSSES
The provision for credit losses grew by 43% during the year from $10.7 million
in 1996 to $15.3 million in 1997. The provision was influenced by higher levels
of consumer charge-offs and the changing risk characteristics of Keystone's
credit portfolio. Charge-offs were primarily affected by the evolving risk
characteristics of consumer debt as reflected in higher levels of defaults and
personal bankruptcy trends. Since the end of 1996, the allowance for credit
losses expressed as a percentage of loans grew from 1.30% to 1.38%. In addition,
the allowance expressed as a percentage of nonperforming loans increased from
285% at the end of 1996 to 310% at the end of 1997, reflecting Keystone's
commitment to maintaining appropriate coverage of risk elements within its loan
portfolio. See the Allowance for Credit Losses and Asset Quality section of this
review for additional information.
9
<PAGE>
NONINTEREST INCOME
Revenue stream diversification has been directly influenced by Keystone's
commitment to enhance its position as the "financial services provider of
choice" in the market in which it operates. This focus has manifested itself in
an increasing relative contribution of noninterest revenues to the overall
revenue stream. During 1997, noninterest revenues (excluding security
transactions) accounted for 22.6% of aggregate revenues versus 20.7% in 1996. In
total, noninterest revenues grew 18.7% over 1996 performance.
Keystone's commitment to the expansion and diversification of the revenue stream
was exemplified not only by the growth of noninterest revenues but also by its
corporate acquisition and product development strategies. In prior years,
Keystone successfully integrated both Martindale Andres & Co. and Keystone
Financial Mortgage Corporation into its traditional banking franchise and also
expanded its cutting-edge electronic delivery of financial services. During
1997, Keystone's roll-out of KeyPremier, its proprietary family of mutual funds,
and the acquisition of MMC&P, a retirement benefit services firm, provided
additional complimentary financial services capabilities geared toward customer
needs. These services are particularly relevant in today's increasingly
competitive marketplace, reflecting the trend toward personal responsibility for
retirement planning efforts. This trend, exemplified by the growth in 401(K)
plans and self-directed IRA products, has created a need for responsive
retirement plan counseling, monitored investment performance, and enhanced
record-keeping capabilities for employers, employees, and individual consumers.
Trust and investment advisory services, the largest single source of fee-base
revenues within Keystone, was a major driver of the improved revenues and
reflected 21% growth over 1996 performance. Assets under management within
Keystone now exceed $3.5 billion, growth of nearly 10% since 1996. Such growth
has been influenced by the emergence of Martindale Andres & Co., now nationally
recognized as one of the top portfolio managers of its class in the country.
Expansion of revenue sources is also expected to continue through the
acquisition of MMC&P.
Keystone has been equally successful in evolving its mortgage banking strategy
through leveraging its traditional banking network as a source of mortgage
originations. The specialized expertise provided through Keystone Financial
Mortgage Corporation has been successfully integrated within Keystone's banking
network, providing seamless access to a full complement of mortgage products and
consistent delivery of this core component of the consumer relationship.
Keystone has demonstrated an ability to provide both a high level of service and
a competitive product menu under a variety of interest rate or market
conditions. Originations during 1997 approached $300 million, reflecting a 5%
increase over 1996. Residential mortgage loans serviced at the end of 1997 grew
to nearly $1.9 billion. As a result of the growth in originations and loans
serviced, mortgage banking revenues grew 31% during 1997.
During the third quarter of 1997, Keystone began a deliberate curtailment of
activities related to the indirect financing of automobiles through its
automobile dealer network in an attempt to focus on more relationship-oriented
lines of business. Execution of this strategic decision was completed by
year-end. Despite the reduction in indirect lending, both automobile dealer
floor plan financing and other more direct forms of automobile lending to
consumers remain vital and profitable elements of Keystone's product delivery
strategy that will continue to be explored and enhanced.
Deposit account service charges in 1997 were flat as compared to the prior year.
In late 1996, Keystone had introduced "KeyFree", its free checking option which
served as a vehicle to introduce consumers to the various financial services
available through Keystone including credit products, deposit services and
alternative investment products. This strategic initiative, which provided
Keystone with a competitive position in its marketplace, has constrained the
rate of growth in deposit fee income.
10
<PAGE>
Similar to the strategies employed within both asset management and mortgage
banking, Keystone has successfully leveraged its impressive electronic banking
configuration to improve related fee income growth. Growing demand for access to
funds and technological innovations contributed to a $2.3 million increase in
ATM and debit card fees. Keystone has consistently made strategic alliances and
prudent investments in ATM technology to improve its fee generation
capabilities. Keystone's joint ventures to place ATMs in convenience stores; the
expansion of KeyCheck, Keystone's ATM/debit card product; and the investment in
advanced function ATMs have all provided Keystone with a competitive advantage
in serving customers and generating fee income. Keystone now has an expansive
network of over 450 ATMs including both traditional and expanded service ATMs.
The investment in ATMs has allowed Keystone to become one of the 40 largest ATM
networks in the United States. Keystone remains committed to ATM network
expansion which will include partnerships with other convenience stores and
retail outlets. Aggregate ATM transaction activity grew 33% from 1996 and debit
card activity rose 63% over the same period, convincing evidence of Keystone's
successful execution of its electronic banking initiatives. Surcharge fees,
which enable Keystone to charge noncustomers who access their bank through
Keystone's ATM network, also have strategic relevance for improved fee
generation. These factors combined with other fee-based initiatives to grow
aggregate fee income by 26.5%.
Keystone has developed an effective distribution channel analysis model which
provides a framework to constantly evaluate Keystone's various delivery channel
networks. This model has been used to evaluate current and prospective networks,
including the most visible distribution channel, the community office. With a
current network of nearly 200 offices, Keystone must constantly evaluate a
number of factors, including demographic trends and market share, to maximize
its return on investment. Decisions regarding this investment are subjected to
thorough analysis. During 1997, Keystone sold nine offices resulting in gains of
$4.5 million, which are reflected in other income. This strategy has allowed
Keystone to increase investments in those markets which provide acceptable
profit contributions and explore alternative delivery options in other markets.
NONINTEREST EXPENSE
Noninterest expenses, exclusive of the special charges associated with the
merger of FTC, rose to $214.6 million from $196.2 million, an increase of $18.4
million or 9.3%. Of the overall increase, approximately 26% was attributed to
the absorption of the expense structures in both the FFWM and MMC&P
acquisitions, both of which were accounted for under the purchase method of
accounting. Core operating expenses, excluding the impact of acquisitions, grew
approximately 7%, resulting in an efficiency ratio of 57.8% for 1997, virtually
unchanged from the previous year. Special charges in connection with the merger
of FTC totaled $11.4 million and included professional fees, integration and
conversion expenses, and costs of various separation plans directly related to
the merger.
The most significant individual component of noninterest expense involves
salary-related expenses. Traditionally, salary and benefit expenses approximate
50% of total operating expense of a financial institution and this pattern
remained constant during 1997. Salary expenses grew to $92.6 million versus
$81.9 million in 1996, an increase of 13.1%. A portion of this increase was
related to personnel additions from the FFWM and MMC&P transactions. On average,
the number of full time equivalent employees grew only 3% from 1996 to 1997,
reflecting efficiency gains which offset employees added in the acquisitions.
Several additional factors influenced the growth in salary expenses, including
average salary increases approximating 4%. Effective in 1997, Keystone executed
a comprehensive sales compensation program that has been coordinated with
corporate efforts to improve revenue performance. This program resulted in
higher levels of variable compensation correlated to improved market revenue
performance, increased mortgage banking revenues and enhanced asset management
fees. This program was designed to provide additional incentive opportunities
and manage compensation expenses at levels commensurate with revenue
improvement.
Over the last several years, Keystone has demonstrated an ability to control the
pace of growth in employee benefits, a significant component of which is linked
to the cost of providing employee health care. Consistent with national health
care trends, the cost control features of managed care have constrained the
growth in these expenses while providing high quality health care services.
Further, Keystone's ability to efficiently and effectively absorb employees
through its merger and acquisition strategies has enabled it to leverage its
health care structure over a more substantial employee base.
11
<PAGE>
The evaluation and constant evolution of delivery channels in the financial
services industry continues to affect changes in the related expense structure.
During 1997, Keystone expanded the use of technology-related delivery channels
while, at the same time, subjecting its more traditional community office
network to analysis which quantified the effectiveness and efficiency of product
and service delivery. Technology investment in delivery channels included the
expanded ATM network and Keystone's automated telephone banking network. The
telephone banking network facilitates increased sales and services to new and
existing customers through this convenient delivery channel. The investment in
this program will also support more aggressive inbound and outbound sales
initiatives, providing enterprise-wide sales support and focused telemarketing
capabilities. Keystone will also continue to explore other, less traditional
delivery channels, such as PC and internet banking, as customer affinity for
these channels increases.
The reconfiguration of delivery channels has also affected the most traditional
and visible financial services outlet, the community banking office, and the
occupancy expenses related thereto. During 1997, Keystone modified its delivery
approach to certain markets by selling offices in these markets and relying on
more effective and efficient alternative channels of delivery for providing
products and services to customers within these markets. This strategy will
enable Keystone to make incremental investments in markets more closely aligned
with the changing flow of economic commerce. Keystone will continue to pursue
strategic initiatives through its on-going analysis of markets and market
potential. Through effective use of these analyses, Keystone will continue to
prudently manage the rate of growth in occupancy-focused expenses.
Other expenses grew to $68.7 million, or 6.1% compared with 1996 and were also
affected by the impact of the purchase accounting for the FFWM and MMC&P
transactions. Exclusive of the impact of the absorption of these expense
structures, increases in specific categories included merchant banking expenses,
postage and communication-related costs, each of which were influenced by
revenue-related activities or expansions of customer-focused product or service
capabilities.
Year 2000
Much has been written about the approach of the Year 2000 and the widespread
concern over its potential impact on computer systems. Historically, most
computer programs were written with two digits, rather than four, to designate
the applicable year. Accordingly, it is anticipated that most systems may
recognize a date using "00" as the year "1900" rather than "2000", thus
increasing the possibility of computer system failures, miscalculations, and
disruption of normal business operations. Issues surrounding the concern over
the approach of the Year 2000, particularly as it would affect the financial
services industry, have been the subject of intense management focus. Prior to
1997, Keystone began a planning effort designed to ensure identification of Year
2000 business issues and develop a strategic response to those issues. The
resulting business plan was designed to achieve substantial implementation of
its Year 2000 compliance program by the end of 1998 in order to provide
sufficient time and resources for testing and resolution of unforeseen
complexities that may arise prior to final implementation in 1999.
It is difficult to isolate the incremental cost of this effort given that it
primarily impacts technical manpower already in place and modestly accelerates
already planned technological investments. Costs incurred to execute this plan
have been reflected in Keystone's operating expenses in both 1996 and 1997 and
will continue to affect expense levels through the Year 2000 and beyond.
Keystone currently projects that it will incur capital investment and period
expenses in excess of $9 million over the course of program implementation,
inclusive of nearly $1 million that has been expensed through the end of 1997.
Period expense should aggregate approximately $3 to $4 million in 1998 and 1999,
with an additional $4 to $5 million of investments in software and system
replacements which will be capitalized and amortized over a three to five year
period. These forward-looking cost estimates may be influenced by any number of
factors and risks including, but not limited to, the availability and cost of
properly trained programmers, the ability to identify all possible issues, the
timely availability of compliant software, and other uncertainties.
12
<PAGE>
Keystone also continues to analyze and discuss these issues with its vendors,
service partners, and customer base to determine the extent to which Keystone is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The projected costs include the estimated time and costs associated with
the impact of third party issues. While Keystone has taken and will continue to
take appropriate actions to mitigate the risk of adverse consequences associated
with the failure of a third party to address these issues, there can be no
guarantee that the systems of third parties will be timely converted and will
not have an adverse effect on Keystone.
Income Taxes
Income tax expense reached $39 million in 1997 versus $37 million in 1996,
reflecting effective tax rates of 30.7% and 29.3% respectively.
13
<PAGE>
BALANCE SHEET OVERVIEW
At the end of 1997, Keystone's total assets reached $6.8 billion versus $6.4
billion at December 31, 1996. Approximately $355 million of assets were acquired
in connection with the acquisition of FFWM. During 1997, Keystone executed
certain asset sales, including the restructuring of its mortgage loan portfolio
in connection with the FFWM acquisition, which constrained asset growth.
However, this strategy precluded the need for aggressive acquisition pricing for
deposit funding to support increased strategic lending activities. Average loans
grew 9% to $4.6 billion at the end of 1997 versus $4.2 billion in 1996. Deposit
acquisition continued to be less than robust though growth did occur in both
variable rate CD's and the insured money market product lines.
LOANS
Keystone experienced solid growth in its loan portfolio as well as changes in
the loan mix consistent with its relationship banking focus. Loans grew 9.1%,
including increases in commercial real estate and direct consumer loans of 23%
and 27%, respectively. The absolute level of loan growth was offset by runoff in
indirect automobile loans and consumer mortgages, influenced largely by
Keystone's securitization strategies. The following is a summary of various
lending categories within Keystone between 1996 and 1997.
<TABLE>
<CAPTION>
1997 1996 Change
- ------------------------ ------------------ ----------------- ------------------
Amount % Amount % Amount %
- ------------------------ ---------- ------- ---------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Commercial $622,569 14% $558,276 13% $ 64,293 12 %
Floor plan financing 186,737 4 150,052 4 36,685 24
Commercial-real estate
secured 1,294,933 28 1,055,688 25 239,245 23
Consumer mortgages 944,731 21 1,153,491 28 (208,760) (18)
Direct consumer 856,225 19 675,783 16 180,442 27
Indirect consumer 293,013 6 330,463 8 (37,450) (11)
Lease financing 374,421 8 265,416 6 109,005 41
- ------------------------ ---------- ------- ---------- ------ ----------- ------
$4,572,629 100% $4,189,169 100% $383,460 9 %
- ------------------------ ---------- ------- ---------- ------ ----------- ------
</TABLE>
Keystone's focus on relationship banking has manifested itself in the pace of
growth in both commercial real estate and commercial lending. This improvement
demonstrated Keystone's commitment to meeting the credit needs of these critical
segments of Keystone's market. Keystone's emphasis on meeting the needs of both
middle market and smaller business customers requires skillful execution and
understanding of real estate-based lending issues. The delivery of products and
services which are adaptable to individual business situations has been a
hallmark of Keystone's focus on relationship banking.
One of the more specialized business segments that remains important to
Keystone's strategic execution of its lending strategy involves automobile
dealer floor plan financing. Keystone's commitment to this and other facets of
automobile dealer financial needs remains a natural extension of its overall
relationship banking focus for business customers.
Similarly, Keystone's emphasis on direct consumer lending, combined with its
ability to develop, deliver, and manage products for that important segment, has
influenced the growth in various forms of consumer lending. Traditional home
equity lending, including credit products growing out of PFA efforts,
contributed to the substantial increase in lending to this market sector.
Additionally, growth in lease financing, primarily automobile financing, has
evidenced Keystone's attention to providing competitive products that are
responsive to consumer needs. Keystone's array of consumer credit products is
undergoing continuous improvement in order to facilitate service to this
important market segment.
14
<PAGE>
Keystone experienced runoff of various degrees in mortgages and indirect
lending. With respect to mortgages, Keystone has executed a strategy of
providing competitive mortgage products with an emphasis on service delivery.
Keystone established Keystone Financial Mortgage Corporation (KFMC) to
facilitate delivery of specialized services to its consumer base and to ensure
consistent access to competitive products. KFMC's expertise in product delivery,
combined with its ability to access the secondary market via securitization,
continues to provide a competitive advantage throughout Keystone's market.
During 1996, Keystone had executed a similar securitization strategy to
accommodate consumer financing needs through its automobile dealer network. The
indirect securitization programs provided automobile financing to customers of
automobile dealers on a self-funding basis, thus preserving core funding for
core relationship activities. In 1997, Keystone evaluated the profitability and
alignment of its indirect automobile lending business with its overall
relationship banking strategy and elected to curtail this activity. Keystone
will continue to explore opportunities designed to expand automobile financing
activities into more comprehensive retail relationships.
15
<PAGE>
ALLOWANCE FOR CREDIT LOSSES AND ASSET QUALITY
Keystone's ratio of the allowance for credit losses to loans reached 1.38% at
December 31, 1997 versus 1.30% at the end of 1996. The absolute level of the
allowance reached $65.1 million at the end of 1997 compared to $56.3 million at
the end of the previous year. The following table sets forth five years of
activity within the allowance for loan losses beginning January 1, 1993 (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
============================= ========== ========= ================================
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, $56,256 $55,415 $53,708 $51,084 $46,405
Allowance obtained through
acquisitions 8,311 ----- 935 2,096 -----
Loans charged off:
Commercial (1,930) (1,936) (874) (4,417) (2,871)
Real estate-secured:
Commercial (1,234) (1,646) (1,971) (4,265) (2,834)
Consumer (1,116) (651) (708) (638) (470)
Consumer (10,010) (6,702) (5,498) (2,932) (3,704)
Lease financing (2,987) (1,330) (786) (198) (238)
- ----------------------------- ---------- --------- --------------------------------
Total loans charged off (17,277) (12,265) (9,837) (12,450) (10,117)
- ----------------------------- ---------- --------- --------------------------------
Recoveries:
Commercial 501 461 281 528 1,743
Real estate-secured:
Commercial 410 465 538 849 359
Consumer 219 152 164 280 73
Consumer 1,104 1,138 900 968 997
Lease financing 251 177 158 29 44
- ----------------------------- ---------- --------- --------------------------------
Total recoveries 2,485 2,393 2,041 2,654 3,216
- ----------------------------- ---------- --------- --------------------------------
Net loans charged off (14,792) (9,872) (7,796) (9,796) (6,901)
Provision charged to
operations 15,316 10,713 8,568 10,324 11,580
- ----------------------------- ---------- --------- --------------------------------
Balance at December 31, $65,091 $56,256 $55,415 $53,708 $51,084
============================= ========== ========= ================================
Ratio of allowance to
year-end loans 1.38% 1.30% 1.35% 1.38% 1.48%
============================= ========== ========= ================================
</TABLE>
The following statistics are relevant to activity that has occurred within the
allowance for credit losses during the most recent five year period:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- --------------------------------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Ratio to Average Loans:
Provision .33% .26% .21% .29% .34%
Net charge-offs .32% .24% .20% .27% .20%
</TABLE>
Traditionally, Keystone has reflected a loan loss provision in excess of the
level of net charge-offs, a pattern which was sustained over the most recent
five year period. During that time, trends have emerged which reflect the
underlying risk characteristics and the changing composition of Keystone's loan
portfolio.
16
<PAGE>
While commercial credits have experienced less significant charge-off activity,
consumer credit charge-offs have grown substantially. This shift was affected by
both Keystone's strategic emphasis on consumer lending and by national trends
associated with higher levels of consumer defaults and personal bankruptcies.
Keystone will continue to manage its exposure to credit risk as it relates to
its strategic focus on relationship banking, with particular emphasis on the
consumer sector.
Risk Elements
As a means of assessing the risk profile of its loan portfolio, Keystone has
monitored the level of aggregate risk elements which include the following:
nonaccrual loans, nonperforming assets (NPA's)and loans past due more than 90
days. Keystone will also review trends with respect to less severe categories of
past due loans, including loans which are 30 to 60 days past due and 60 to 90
days past due. Nonperforming assets include nonaccrual loans, restructurings,
and other real estate (ORE). Nonaccrual loans are loans for which interest
income is not accrued due to concerns about the collection of interest and/or
principal. Restructured loans may involve renegotiated interest rates, repayment
terms, or both, because of a deterioration in the financial condition of the
borrower. ORE activity in 1997 reflected no unusual or significant fluctuations
in balances. The following table provides a comparative summary of nonperforming
assets and total risk elements at the end of each of the last five years (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ----------------------------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $20,520 $19,350 $19,142 $26,701 $26,571
Restructurings 489 393 503 144 5,508
- ----------------------------- --------- ---------- ---------- ---------- ----------
Nonperforming loans 21,009 19,743 19,645 26,845 32,079
Other real estate 5,028 8,305 9,777 7,028 9,505
- ----------------------------- --------- ---------- ---------- ---------- ----------
Nonperforming assets 26,037 28,048 29,422 33,873 41,584
Loans past due 90 days
or more 33,062 20,141 16,798 10,062 5,771
- ----------------------------- --------- ---------- ---------- ---------- ----------
Total risk elements $59,099 $48,189 $46,220 $43,935 $47,355
- ----------------------------- --------- ---------- ---------- ---------- ----------
</TABLE>
Substantially all of the loans in the nonaccrual category at December 31, 1997,
were contractually past due as to principal or interest.
The relationships of nonperforming assets and total risk elements to total loans
and to the allowance for credit losses provide important measures of asset
quality. The allowance for credit losses must be adequate to absorb credit risk
in these categories and in the remainder of the loan portfolio. The following
table summarizes the total risk element components expressed as a percentage of
year-end loans and relevant coverage provided by the allowance for credit
losses.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ------------------------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Ratio to Year-End Loans:
Nonperforming assets 0.55% 0.65% 0.72% 0.87% 1.21%
90 days past due 0.70 0.46 0.41 0.25 0.16
- ------------------------------------------- ------- ------- ------- ------- -------
Total risk elements 1.25% 1.11% 1.13% 1.12% 1.37%
- ------------------------------------------- ------- ------- ------- ------- -------
Coverage Ratios:
Ending allowance to nonperforming loans 310% 285% 282% 200% 159%
Ending allowance to risk elements* 120% 141% 152% 146% 135%
Ending allowance to net charge-offs 4.4x 5.7x 7.1x 5.5x 7.4x
- ------------------------------------------- ------- ------- ------- ------- -------
* Excludes ORE.
</TABLE>
While the level of nonperforming assets has continued to decline, loans 90 days
past due as a percent of loans have increased over the last few years. As a
result, total risk elements expressed as a percent of loans increased from 1.11%
at December 31, 1996 to 1.25% at December 31, 1997. The increase was due to the
migration of a single credit of approximately $5.7 million into loans 90 days
past due as well as an increase in consumer loan delinquencies. Management will
continue to closely monitor these and other components of risk elements and
manage the level of adversely classified assets. Coverage ratios, which measure
the capacity of the allowance to absorb the impact of possible collectability
problems, remained at strong levels.
Credit risk associated with nonperforming assets also can be measured in terms
of exposure to specific categories of loans. The following table provides the
components of nonperforming assets, detailed by loan categories, at the end of
each of the past five years, (in thousands):
<TABLE>
<CAPTION>
- ------------------------------- ---------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial $4,550 $4,340 $4,833 $5,651 $8,762
Commercial real estate:
Construction and
development 220 764 1,951 5,690 6,007
Permanent 11,960 12,196 10,919 10,597 12,871
Residential real estate 1,465 1,014 1,173 4,486 3,443
Consumer 2,814 1,429 769 421 996
- ------------------------------- ---------- --------- ---------- --------- ---------
Nonperforming loans 21,009 19,743 19,645 26,845 32,079
Other real estate 5,028 8,305 9,777 7,028 9,505
- ------------------------------- ---------- --------- ---------- --------- ---------
Total nonperforming assets $26,037 $28,048 $29,422 $33,873 $41,584
- ------------------------------- ---------- --------- ---------- --------- ---------
</TABLE>
The following is a comparative summary of past due loans at the end of 1997 and
1996 (in thousands):
<TABLE>
<CAPTION>
% of Total % of Total
1997 Loans 1996 Loans
- ------------------ ---------- ------------ ----------- --------------
<C> <C> <C> <C> <C>
30-59 days $53,320 1.1% $47,135 1.1%
60-89 days 15,807 0.3 16,421 0.4
Over 90 days 33,062 0.8 20,141 0.4
- ------------------ ---------- ------------ ----------- --------------
$102,189 2.2% $83,697 1.9%
- ------------------ ---------- ------------ ----------- --------------
</TABLE>
The level of past due credits in the over 90-days category increased as a result
of the aforementioned $5.7 million credit and higher consumer delinquencies
brought about by the stress of high debt levels on consumer credit.
Management has identified approximately $8.3 million of loans outstanding at
December 31, 1997 where concern exists as to the potential for future
classification into one of the risk element categories. Substantially all of
these loans were current at the end of 1997. Such loans totaled $9.1 million at
December 31, 1996.
Overall Assessment
Keystone has assessed all of the above factors in the establishment of the
allowance for credit losses. The determination as to the adequacy of the
allowance reflects management's judgment, and was based upon collateral, various
estimates, local market conditions, and other information that requires
17
<PAGE>
subjective analysis. These factors, which are prone to change, are monitored by
management to evaluate their potential impact on management's assessment of the
adequacy of the allowance. Based on its evaluation of loan quality, management
believes that the allowance for credit losses at December 31, 1997 was adequate
to absorb potential losses within the loan portfolio.
INVESTMENTS
Keystone has established corporate investment policies that address various
aspects of portfolio management including, but not limited to, quality
standards, liquidity and maturity limits, investment concentrations, and
regulatory guidelines. Compliance with these policies is reported regularly to
the Board of Directors. Keystone's objectives with respect to investment
management include maintenance of appropriate asset liquidity, facilitation of
asset/liability management strategies, and maximization of return.
At December 31, 1997, Keystone's investments represented 23.7% of total assets.
The following is a summary of the carrying values of investments at December 31,
1997 and 1996 (in thousands):
1997 1996
- --------------------------- ------------------------- -------------------------
Available Held to Available Held to
for Sale Maturity for Sale Maturity
- --------------------------- ------------ ------------ ------------ ------------
Negotiable money market
investments $178,404 $----- $194,566 $ -----
U.S. Treasury securities 194,120 ----- 244,542 -----
U.S. Government agency
obligations 503,078 366,238 559,438 230,402
Obligations of states and
political subdivisions 74,171 143,910 103,520 134,194
Corporate and other 141,627 18,240 108,028 15,362
- --------------------------- ------------ ------------ ------------ ------------
$1,091,400 $528,388 $1,210,094 $379,958
=========================== ============ ============ ============ ============
FASB Statement No. 119, "Disclosures About Derivative Financial Instruments and
the Fair Value of Financial Instruments" defined two distinct types of off-
balance sheet derivative activities: "trading" activities and "end-user"
activities. Keystone does not engage in derivatives trading activities and has
made only limited use, as an end-user, of interest rate swaps. These swaps,
together with other strategies, have been used to manage Keystone's overall
exposure to the effect of changes in interest rates. Keystone has also made use
of forward mortgage commitments as well as put options and short sales of U.S.
Treasury securities. These instruments were executed to reduce the market risk
associated with interest rate fluctuations in fixed consumer mortgages and the
indirect automobile loans held for sale. Further disclosures of these activities
are included in the footnotes of the financial statements. Both the FASB and SEC
have issued pronouncements concerning the derivatives, hedging activities and
overall market risk. The FASB Exposure Draft on accounting for derivatives,
which has undergone considerable revision, continues to be deliberated and a
final standard is expected in 1998. Key elements of the expected standard
include provisions to measure derivatives at fair value as assets or liabilities
as well as establishment of more specific criteria for hedge accounting
treatment. Currently, these proposed changes are not expected to have a material
impact on Keystone's future financial statement presentations.
A broader definition of derivatives would include any financial instrument which
derives its value or contractual cash flows from the price of some other
security or index. Keystone's investment policy governs the nature and extent of
on- balance sheet financial derivative holdings, which currently include both
collateralized mortgage obligations and structured notes. This policy limits
Keystone's exposure to derivatives risk by defining restrictions on the amount
of credit, prepayment, extension, and interest-rate risk associated with
derivative financial instruments. Keystone's aggregate investment in this form
of financial derivative holdings is substantially composed of U.S. Government
18
<PAGE>
Agency holdings.
The weighted average life of Keystone's fixed rate investments was 4.16 years at
December 31, 1997. Ratings for state and municipal, and corporate issues are
provided by major rating agencies, principally Moody's and Standard & Poor's. At
the end of 1997, the portion of all state and municipal holdings rated "AAA" was
90.0% and the portion of all corporate issues rated "A" or better was 98.5%.
The relationship of market value to the amortized cost of investments at
December 31, 1997, was 101.4% compared to 100.6% at the end of 1996. At December
31, 1997, investments "held-to-maturity", which are carried at amortized cost,
contained gross unrealized gains and losses of $10 million and $173,000,
respectively. Unrealized gains and losses included in the carrying value of the
"available-for-sale" investments of $15 million and $2 million, respectively,
were reflected, on a net of tax basis, as an adjustment to shareholders' equity.
Keystone holds no concentration of corporate or municipal investment securities
of any single issuer which exceeds 10% of shareholders' equity.
DEPOSITS
Customer deposits remained the primary source of funding for traditional banking
activities. Keystone has actively responded to competitive pressures which have
the potential to contribute to the erosion of this important funding base.
During 1997, Keystone experienced growth of 3% in overall deposit funding due
primarily to the late May acquisition of FFWM, summarized as follows (in
thousands):
Change
==========
1997 1996 Amount %
============================== ============= ============ ============== ======
Noninterest-bearing demand $606,907 $604,536 $2,371 --%
NOW 330,514 532,480 (201,966) (38)
Savings 600,759 569,814 30,945 5
Money market 650,082 536,237 113,845 21
Variable-rate CD 575,025 415,812 159,213 38
Other time deposits less than
$100,000 2,114,231 2,055,888 58,343 3
Time deposits $100,000 or more 278,181 288,273 (10,092) (4)
- ------------------------------ ------------- ------------ -------------- ------
$5,155,699 $5,003,040 $152,659 3%
============================== ============= ============ ============== ======
Keystone's retail customers continued to express a preference for competitive
deposit products which are responsive both to individual liquidity needs and
competitive investment returns. Both the indexed money market account (IMMA),
which is included in the money market category, and the variable rate
certificate of deposit have been developed in response to these customer
preferences. The IMMA, whose rate is pegged to the Treasury Bill, has provided
customers with a market-based rate of return combined with the liquidity
features of a more traditional money market account. Of the total growth of $114
million in money market deposits, approximately $71 million was attributed to
growth in the IMMA accounts. Similarly, the variable-rate CD has provided
Keystone with a significant competitive advantage in retaining and growing its
certificate of deposit funding. Consumer access to variable-rate deposits has
furnished a viable alternative, blending the security of deposit insurance with
the flexibility to achieve higher returns. Keystone experienced some erosion of
its traditional NOW deposits, which was partially attributable to growth in
these other, more innovative product lines. NOW deposits were also impacted by
the introduction of a sweep account product now provided to retail customers. As
a consequence of these various initiatives, Keystone has been able to grow these
competitive deposit products and sustain its critical funding composition.
19
<PAGE>
BORROWED FUNDS
While deposits remain the most significant bank funding source, Keystone has
consistently accessed other funding sources critical to its overall funding
strategy. The following table provides a summary of the various components of
borrowed funds(in thousands):
<TABLE>
<CAPTION>
Change
------
1997 1996 Amount %
- ---------------------------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Short-term borrowings $371,645 $323,938 $47,707 15%
FHLB borrowings 240,533 159,503 81,030 51
Long-term debt 64,016 3,569 60,447 100+
- ---------------------------- ----------- ----------- ------------- ----------
$676,194 $487,010 $189,184 39%
- ---------------------------- ----------- ----------- ------------- ----------
</TABLE>
Growth in Keystone's lending and strategic acquisition efforts has influenced
the volume and composition of nondeposit funding sources. The most common form
of these funding sources, short-term borrowings, are obtained to meet both the
short-term funding needs and the short-term investment requirements of primarily
commercial and governmental entities. FHLB borrowings, which are collateralized
by Keystone's mortgage portfolio, reflect a variety of credit products available
to Keystone through the membership of its banks in the Federal Home Loan Bank.
These borrowings consist primarily of fixed-rate borrowings with various
maturities, primarily in the one to five year time frames. In May of 1997,
Keystone issued $100 million of senior medium-term notes at a coupon rate of
7.30%, with a maturity date of 2004 under a $400 million shelf registration. The
proceeds were used primarily to fund the acquisition of FFWM. From time to time,
Keystone expects to access this funding source for general corporate purposes as
the need arises.
SHAREHOLDERS' EQUITY
The changing nature of the financial services industry, including the expansion
of fee-based activities such as asset management services and mortgage banking,
requires a proactive view of capital management. Maintenance of appropriate
levels of capital is subjected to constraints and restrictions imposed by
regulatory authorities, dividend requirements, and acquisition opportunities.
Keystone's capital management policies have been designed to ensure maintenance
of appropriate levels of capital under a variety of economic conditions. At the
end of 1997, shareholders' equity reached $685 million versus $660 million at
December 31, 1996 resulting in an equity to assets ratio of 10.02%.
The principal source of new capital for Keystone is earnings retention, which is
a function of its return on beginning equity and the dividends paid to
shareholders. Keystone, in its capital management policies, has set forth
specific guidelines to ensure a favorable, consistent, and sustainable pattern
of dividend payments. Dividend declarations during 1997 equated to an 8% payout
on year-end 1996 book value. Many financial institutions, including Keystone,
continued to generate earnings retention levels in excess of asset growth rates
which has resulted in increased relative levels of capital.
Under guidelines set forth in its capital management policies, Keystone has
sought to execute strategies and tactics which would moderate capital growth and
increase the level of earning assets, thus improving the leverage of its capital
base. The acquisition of treasury stock reissued in the acquisition of FFWM and
the annual dividend to shareholders were influenced by Keystone's capital
management strategies. Despite these efforts, the ability to manage capital
levels continues to be constrained by external factors. Among these factors are
the desire to preserve pooling-of-interests accounting treatment for future
merger opportunities as well as Keystone's objective to preserve "well-
capitalized" ratings for its member banks.
Bank regulators have set forth requirements for risk-based capital, which
resulted in the establishment of international capital standards for banks.
These requirements set forth minimum "leverage", "Tier 1" and "Total" capital
20
<PAGE>
ratios in order to provide measures of capital adequacy that are more risk
responsive than previous regulatory guidelines. Risk-based capital standards
included the establishment of ranges of capital adequacy which extend from
"significantly undercapitalized" to "well-capitalized". These assessments of
capital adequacy directly influence the focus of regulatory oversight, including
the premium rates charged for deposit insurance. Regulators, including both the
Federal Reserve Board and the Office of the Comptroller of the Currency, now
operate under a risk-based supervisory approach designed to encourage management
focus on the most effective use of limited capital and the generation of the
highest possible returns with the least amount of associated risk. With
regulatory oversight increasingly focused on capital issues, Keystone and other
financial institutions have been challenged to develop a capital measurement
system that will ensure effective management of capital levels and associated
business risk. Keystone will continue to be responsive to the need to balance
both capital adequacy levels and business risk issues.
The following table provides Keystone's risk-based capital position at the end
of 1997 and a comparison to the various regulatory capital requirements.
<TABLE>
<CAPTION>
"Well Minimum
Keystone Capitalized" Requirements
- ------------------------- ------------- --------------- ---------------
<S> <C> <C> <C>
Leverage ratio 9.15% 5.00% 4.00%
"Tier 1" capital ratio 12.50% 6.00% 4.00%
"Total" capital ratio 13.75% 10.00% 8.00%
- ------------------------- ------------- --------------- ---------------
</TABLE>
Failure to meet any one of the minimum capital ratios would result in an
institution being classified as "undercapitalized" or "significantly
undercapitalized". Such classifications could disrupt dividends, capital
distributions, or affiliate management fees. In addition, other restrictions,
prohibitions, and related supervisory actions would be likely depending upon the
overall level of capital. Keystone anticipates no significant problems in
meeting the current or future capital standards. Intangible assets, consisting
primarily of core deposit intangibles and goodwill, totaled $63 million at
December 31, 1997 or 10% of "Tier 1" capital.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
The process by which financial institutions manage earning assets and funding
sources under different interest rate environments is called asset/liability
management. The primary goal of asset/liability management is to increase net
interest income within an acceptable range of overall risk tolerance. Two
important performance barometers are net interest margin and liquidity. Net
interest margin is increased by widening interest spread while controlling
interest rate sensitivity. The adequacy of liquidity is determined by the
ability to meet the cash flow requirements of both depositors and customers
requesting bank credit. Asset/liability management within Keystone is the
primary responsibility of the Asset/Liability Management Committee (ALCO) whose
representation includes both bank and holding company personnel.
Interest Rate Risk
Interest rate risk, which is the single most significant market risk within
Keystone, can be quantified by measuring the change in net interest margin
relative to changes in market interest rates. Risk is identified by reviewing
repricing characteristics of interest-earning assets and interest-bearing
liabilities. Keystone's asset/liability management policy sets forth guidelines
that limit the level of interest rate risk within specified tolerance ranges.
Keystone and its subsidiary banks utilize a variety of techniques to measure and
monitor interest rate risk, including the use of simulation analysis. In order
to quantify the impact of changes in interest rates on net interest income,
Keystone conducts quarterly interest rate shock simulations which quantify the
impact of interest rate changes over periods up to two years. These simulations
are used to determine whether corrective action may be warranted or required in
order to adjust the overall interest rate risk profile of Keystone or its banks.
Keystone's asset/liability management policy limits interest rate risk exposure
to 5% of net interest income for the succeeding twelve-month period and 8% for
the succeeding twenty-four-month period. Simulations prepared as of December 31,
21
<PAGE>
1997 for the ensuing twelve month and twenty-four month periods have measured
potential reductions in net interest income of approximately 1% and 2%,
respectively, well within Keystone's defined tolerance levels. Current
simulations are prepared under the assumption that rates will increase 200 basis
points or decrease 100 basis points over a three month period and then
stabilize. Simulation results are influenced by a number of estimates and
assumptions with regard to embedded options, prepayment behaviors, pricing
strategies, cashflows, and others. Such assumptions and estimates are inherently
uncertain and, as a consequence, results will neither precisely estimate net
interest income nor precisely measure the impact of higher or lower interest
rates on net interest income. The results of these simulations are reported to
Keystone's Board of Directors on a quarterly basis. Management has determined
that Keystone maintained a level of interest rate risk within its
asset/liability management policy limits at December 31, 1997.
Management augments rate shock simulations with GAP interest rate sensitivity
analysis and with market value of portfolio equity (MVPE) computations. GAP is
defined as the volume difference between interest rate-sensitive assets and
liabilities. GAP is used by management to assist in evaluating the results of
rate shock simulations, to identify areas that may warrant corrective action,
and to identify interest rate risk exposure for periods beyond one year. By
utilizing GAP to monitor longer term interest rate risk, Keystone attempts to
minimize fluctuations in net interest margin and thereby achieve consistent net
interest income growth during periods of changing interest rates. MVPE is a more
comprehensive measure that attempts to quantify the impact of aggregate interest
rate risk exposure on the intrinsic value of financial institutions, and is
particularly useful in quantifying the impact of changing interest rates on that
intrinsic value. Analyses similar to those conducted for interest rate shock
simulations are conducted for MVPE computations, with policy guidelines on the
acceptable reduction in Keystone's intrinsic value under defined interest rate
conditions. Under current guidelines, intrinsic value must exceed regulatory
capital requirements for "well capitalized" institutions. Computations of
Keystone's MVPE yielded intrinsic values well in excess of these limits, under
both a 200 basis points increase or 100 basis points decrease in overall
interest rates. This measurement tool, while valuable as a gauge of longer-term
interest rate risk, is less useful as a tool to provide strategic solutions to
the management of that risk.
The following table provides an analysis of Keystone's interest rate sensitivity
as measured under GAP at December 31, 1997 compared to 1996 (dollars in
thousands):
December 31,
December 31, 1997 1996
- --------------------------------------------------------------------------------
1 month 3 months 6 months 1 year 1 year
- --------------------------------------------------------------------------------
Assets $1,684,979 $1,978,390 $2,342,271 $3,017,875 $2,988,260
Liabilities 1,408,717 2,398,355 2,794,965 3,313,948 2,996,283
Cumulative GAP 276,262 (419,965) (452,694) (296,073) (8,023)
As a percent of
total assets 4.04% (6.14)% (6.62)% (4.33)% (0.12)%
Gap ratio 1.20 0.82 0.84 0.91 1.00
- --------------------------------------------------------------------------------
While rate shock simulations, GAP analysis, and MVPE computations provide
measures of interest rate risk, such presentations cannot accurately reflect all
actual repricing opportunities which will occur within loan and deposit
categories. The information provided by these analyses, however, provides some
indication of the potential for interest rate adjustment, but does not
necessarily mean that the rate adjustment will occur, or that it will occur in
accordance with the assumptions.
Despite these inherent limitations, Keystone believes that the tools used to
manage its level of interest rate risk provide an appropriate measure of market
risk exposure.
22
<PAGE>
Liquidity
Liquidity is defined as Keystone's ability to meet maturing obligations and
customers' demand for funds on a continuous basis. Liquidity is sustained by
stable core deposits, a diversified mix of liabilities, strong credit
perception, and the maintenance of sufficient assets convertible to cash without
material loss or disruption of normal operations. Keystone monitors liquidity
through regular computations of prescribed liquidity ratios at each of the
affiliate banks. Banks which fail to meet the prescribed minimum standards for
these ratios must set forth tactics to promptly comply with policy guidelines
and provide mandatory progress reports to Keystone's ALCO and to Keystone's
Board of Directors. Keystone actively manages liquidity within a defined range
and has developed reasonable liquidity contingency plans, including ensuring
availability of alternate funding sources to maintain adequate liquidity under a
variety of business conditions.
Keystone's primary sources of liquidity are funds derived through earnings and
deposit balances. Liquidity is also provided by scheduled maturities of loans
and investment securities, as well as the early payoff of customer loan
balances. Liquidity may also be influenced by the volume and timing of
securitizations, particularly mortgage loans. Consideration is given to the
maturity of assets and expected future growth/funding needs when developing
investment strategies. These liquidity sources may also be augmented by other
forms of liability liquidity, such as FHLB borrowings. Various funding sources
have been used to support increases in overall earning asset balances during the
year. Keystone's operating, investing, and financing activities are conducted
within the overall constraints of Keystone's liquidity management policy.
Parent company liquidity represents another important aspect of liquidity
management. Within Keystone, the parent company relies on the banking
subsidiaries to provide funding for dividends to shareholders and unallocated
corporate expenses. The amount of dividends from bank subsidiaries to the parent
company is constrained by both state and federal regulations, which have not
historically limited Keystone's practices. Periodically, the parent company may
also access other forms of funding such as medium-term notes to facilitate
strategic corporate initiatives. Based upon the inherent strength and
profitability of the Keystone banks, holding company liquidity is deemed
adequate.
REGULATORY MATTERS
Keystone and its banking affiliates are subject to periodic examinations by one
or more of the various regulatory agencies. During 1997, examinations were
conducted at the holding company and at Keystone's various banking and
nonbanking subsidiaries. These examinations included, but were not limited to,
procedures designed to review lending practices, credit quality, liquidity,
compliance, and capital adequacy of Keystone and its subsidiaries. No comments
were received from the various regulatory bodies which would have a material
effect on Keystone's liquidity, capital resources, or operations.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA), established
a new framework for the relationship between insured depository institutions and
the various regulatory bodies. FDICIA regulations, which addressed capital
adequacy, brokered deposits, annual audits, expanded regulatory requirements,
audit committee composition, and truth in savings provisions have been
implemented throughout Keystone.
INFLATION
Keystone's ability to cope with the impact of inflation is best determined by an
analysis of its ability to respond to changing interest rates and manage
noninterest income and expense. As discussed in the asset/liability management
section of this review, Keystone manages the mix of interest rate-sensitive
assets and liabilities in order to limit the impact of changing interest rates
on net interest income. Inflation also has a direct impact on noninterest income
and expense, such as service fees, salary expense and benefits, and other
overhead expenses. Inflationary pressure over the last several years has been
modest, although concern exists over the sustained strength of the economy and
the potential impact on inflationary pressure. Management will continue to
monitor the impact of these pressures on the pricing of its products and
services and on the control of overhead expenses.
23
<PAGE>
SEGMENT REPORTING
In 1997, the FASB issued a new accounting pronouncement, Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information". This new Standard will be effective for 1998 and will
require disclosure of financial information on the basis of operating segments
used by management for decision-making and performance assessment. Keystone's
super community banking operating structure and relationship banking philosophy
will influence the manner in which Keystone defines it operating segments.
Keystone currently provides traditional commercial and retail banking services
to both middle market business and retail customers. Keystone also provides
substantial asset management and mortgage banking services, as well as other
related financial services to its customer base. Keystone will consider these
factors in assessing the impact of the new accounting Standard and will comply
with the reporting requirements for the year ended December 31, 1998.
24
<PAGE>
1996 VS 1995
Summary
Keystone's financial performance for 1996 reflected continued improvement as net
income reached a record high of $89.5 million, a 12.6% improvement over 1995 net
income of $79.4 million. Basic earnings per share also grew to $1.72 in 1996, a
7.5% improvement over the 1995 performance of $1.60. Keystone recorded strong
performance in both ROA and ROE, which were 1.44% and 14.09%, respectively in
1996, a slight improvement over the comparable measures of 1.35% and 14.00% in
1995.
During the fourth quarter of 1995, Keystone completed mergers of two
Pennsylvania bank holding companies, Shawnee Financial Services Corporation
(Shawnee) and National American Bancorp (NAB); and the acquisition of Martindale
Andres & Company, a Philadelphia-based asset management firm. The bank
subsidiaries of both Shawnee and NAB were merged into existing Keystone
affiliated banks and the mergers were accounted for under the
pooling-of-interests method of accounting. Due to the immaterial impact of both
transactions to Keystone's financial position and results of operation, prior
periods were not restated. Consolidated results of Keystone included Shawnee's
and NAB's results of operations from the consummation dates of October 10, 1995,
and December 29, 1995, respectively. Total assets added through these three
transactions approximated $230 million.
Revenue expansion efforts were the primary focus of Keystone's profit
improvement initiatives during 1996. Total revenues, consisting of both net
interest income and noninterest income, grew 9% from 1995 to 1996, including a
6% increase in net interest income and a 23% increase in revenue from
noninterest sources. Net interest income growth was stimulated primarily by loan
growth, including loans added in the late 1995 bank mergers, as net interest
margin was constant from 1995 to 1996. Under the direction of Martindale Andres
& Company, assets under management continued to grow, translating to improvement
in trust and investment advisory fees. Keystone's ratio of noninterest expense
to revenues of 57.42% for 1996 reflected improvement over the ratio of 58.44%
for 1995, as growth in noninterest expenses was 8%. Additional expense added
from the late 1995 mergers was partially offset by the benefit of a full-year
reduction in the FDIC insurance premium. Finally, Keystone continued to sustain
solid asset quality in its investment and loan portfolios, including a low level
of nonperforming loans.
Interest Income
Interest income reached $482 million in 1996, compared to $456 million in 1995,
an increase of 6%. The improvement was driven by loan growth of 5%, as the total
yield on earning assets actually declined slightly from 8.23% for 1995 to 8.20%
for 1996. The most notable loan growth occurred in the categories of commercial,
direct consumer and leases. The 5% growth was achieved despite the
securitization and sale of indirect loans and fixed rate consumer mortgages in
the secondary market.
Interest Expense
While the overall cost of funds remained stable at 4.33% for 1995 and 1996,
interest expense increased 5% from $201 million in 1995 to $211 million in 1996.
This increase was driven by a 5% increase in deposits, including the impact of
deposits acquired in acquisitions.
Net Interest Income
Net interest income grew $16 million or 6% to reach $271 million for 1996. Both
the yield on earning assets and cost of funds were relatively constant between
1996 and 1995, resulting in little change in interest spread. Net interest
margin also remained stable at 4.61% for both years.
Provision for Credit Losses
The provision for credit losses increased from $8.6 million in 1995 to $10.7
million in 1996, as a direct response to increased charge-offs and a decrease in
the allowance for loan losses expressed as a percentage of loans from 1.35% at
the end of 1995 to 1.30% at December 31, 1996.
25
<PAGE>
Noninterest Income
Keystone's total noninterest revenue increased $13 million or 23% in 1996. Areas
of continued focus and strength included trust and investment management fees,
service charges on deposits, electronic banking fees, and income from loan
servicing.
Trust and investment management fees increased 19% in 1996, and were benefitted
by the late 1995 acquisition of Martindale Andres & Company and an overall
increase in assets under management. Revenues from these activities were
positively influenced by both expanded product offerings and intensified
marketing efforts to customers, including the introduction of KeyPremier funds
late in the year.
Service charges on deposits and fee income consisting primarily of ATM and debit
card fees and revenue from merchant banking activities increased 11% and 16%,
respectively, from 1995 to 1996, and were benefitted by late 1995 acquisitions.
In addition, towards the later part of 1996, Keystone significantly expanded its
ATM network through contracts with convenience stores to provide ATM's at their
locations.
During 1996, Keystone became more active in the securitization and sale of
indirect loans and consumer mortgages in the secondary market as a strategy to
provide liquidity for "relationship banking" activities. As a result of this
increased sale and servicing activity, mortgage banking and other secondary
market income increased by $3 million or 39% in 1996.
As a result of Keystone's 1996 acquisition of KeyInvestor Services, a
distributor of investment products, revenue from annuity sales increased notably
in 1996. This improvement, together with a gain recognized on the sale of its
credit card portfolio, led to a $4 million increase in other income from 1995.
Noninterest Expense
Noninterest expenses increased from $182 million in 1995 to $196 million in
1996, an increase of 8%. While overhead expenses were impacted favorably by the
full-year reduction in FDIC insurance premiums, the late 1995 bank mergers and
acquisitions of Martindale Andres and KeyInvestor resulted in increases in the
various other categories of noninterest expense.
Salary and benefit expenses increased a total of $10 million, or 11%, from 1995
to 1996. Merger and acquisition activity drove a 5% increase in the average
number of full-time equivalent employees. This increase, combined with
Keystone's emphasis on performance-based incentive programs and an overall
average merit increase of 5%, led to higher salary and benefit expenses.
Office reconfiguration, including the expansion of delivery channels and
continued technological investments, attributed to growth in occupancy expenses
of 7% and furniture and equipment expenses of 13% in 1996. Efforts included the
expansion of the ATM network into convenience stores and the start-up of KeyCall
telephone center.
During the third quarter of 1995, the FDIC announced that the Bank Insurance
Fund reached its recapitalization level, and enacted a significant reduction to
insurance premiums, particularly for "well-capitalized" institutions. As a
result, Keystone's deposit insurance expense decreased $5 million in 1996.
Conversely, in 1996, a one-time premium was levied on thrifts and banks which
had acquired thrift deposits to boost the undercapitalized Savings Association
Insurance Fund. This one-time charge resulted in an increase of nearly $2
million to the "other" category of noninterest expense in 1996. The remaining
increase of approximately $4.5 million was related to the late 1995 mergers and
acquisitions as well as expenses associated with revenue expansion activities.
Income Taxes
Keystone's recorded tax expense reached $37 million for 1996 versus $34 million
in 1995. Expressed as a percentage of income before taxes, the effective tax
rate decreased slightly from 30.0% in 1995 to 29.3% in 1996.
26
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Shareholders and Board of Directors
Keystone Financial, Inc.
We have audited the accompanying consolidated statements of condition of
Keystone Financial, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the management of
Keystone Financial, Inc. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the 1996 financial
statements of Financial Trust Corp, a wholly owned subsidiary, which statements
reflect total assets constituting 19% as of December 31, 1996, and net interest
income constituting 20% of the related consolidated totals for the year ended
December 31, 1996. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to data
included for Financial Trust Corp, is based solely on the report of the other
auditors.
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, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Keystone Financial, Inc. and subsidiaries
at December 31, 1997 and 1996, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young, LLP
----------------------
Pittsburgh, Pennsylvania
January 30, 1998
27
<PAGE>
Consolidated Statements of Condition December 31,
(in thousands, except share data) 1997 1996
- ------------------------------------------------ -------------- -------------
ASSETS
- ------------------------------------------------ -------------- -------------
Cash and due from banks $206,223 $206,972
Federal funds sold 25,300 44,500
Interest-bearing deposits with banks 1,928 36,913
Investment securities available for sale 1,091,400 1,210,094
Investment securities held to maturity
(market values 1997 - $538,218; 1996 - $383,526) 528,388 379,958
Loans held for resale 43,055 51,225
Loans and leases 4,712,566 4,336,470
Allowance for credit losses (65,091) (56,256)
- ------------------------------------------------ -------------- -------------
Net loans 4,647,475 4,280,214
Premises and equipment 116,615 97,932
Other assets 180,953 142,771
- ------------------------------------------------ -------------- -------------
TOTAL ASSETS $6,841,337 $6,450,579
- ------------------------------------------------ -------------- -------------
LIABILITIES
- ------------------------------------------------ -------------- -------------
Noninterest-bearing deposits $637,164 $625,536
Interest-bearing deposits 4,596,001 4,434,185
- ------------------------------------------------ -------------- -------------
Total deposits 5,233,165 5,059,721
Federal funds purchased and security repurchase
agreements 399,730 368,886
Other short-term borrowings 26,160 29,078
- ------------------------------------------------ -------------- -------------
Total short-term borrowings 425,890 397,964
FHLB borrowings 248,150 224,203
Long-term debt 101,793 2,573
Other liabilities 146,854 105,712
- ------------------------------------------------ -------------- -------------
TOTAL LIABILITIES 6,155,852 5,790,173
- ------------------------------------------------ -------------- -------------
SHAREHOLDERS' EQUITY
- ------------------------------------------------ -------------- -------------
Preferred stock; $1.00 par value, authorized
8,000,000 shares; none issued or outstanding ----- -----
Common stock: $2.00 par value, authorized
100,000,000 shares; issued 52,029,017 - 1997
and 52,320,142 - 1996 104,058 104,640
Surplus 155,430 139,213
Retained earnings 418,605 422,018
Deferred KSOP benefit expense (1,150) (1,249)
Treasury stock; 1996 - 333,966 shares at cost ----- (8,412)
Net unrealized securities gains, net of tax 8,542 4,196
- ------------------------------------------------ -------------- -------------
TOTAL SHAREHOLDERS' EQUITY 685,485 660,406
- ------------------------------------------------ -------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,841,337 $6,450,579
- ------------------------------------------------ -------------- -------------
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands except per share data) 1997 1996 1995
- --------------------------------------- ------------- ------------ -------------
INTEREST INCOME
- --------------------------------------- ------------- ------------ -------------
<S> <C> <C> <C>
Loans and fees on loans $404,096 $370,364 $353,025
Investments - taxable 82,664 79,977 69,957
Investments - tax-exempt 12,230 12,723 13,105
Federal funds sold and other 5,340 5,668 9,063
Loans held for resale 6,408 4,688 1,636
- --------------------------------------- ------------- ------------ -------------
510,738 473,420 446,786
- --------------------------------------- ------------- ------------ -------------
INTEREST EXPENSE
- --------------------------------------- ------------- ------------ -------------
Deposits 194,898 186,257 176,571
Short-term borrowings 18,134 14,506 12,747
FHLB borrowings 14,677 10,175 10,955
Long-term debt 4,785 363 502
- --------------------------------------- ------------- ------------ -------------
232,494 211,301 200,775
- --------------------------------------- ------------- ------------ -------------
NET INTEREST INCOME 278,244 262,119 246,011
Provision for credit losses 15,316 10,713 8,568
- --------------------------------------- ------------- ------------ -------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 262,928 251,406 237,443
- --------------------------------------- ------------- ------------ -------------
NONINTEREST INCOME
- --------------------------------------- ------------- ------------ -------------
Trust and investment advisory fees 21,291 17,597 14,843
Service charges on deposit accounts 17,356 17,234 15,497
Fee income 20,029 15,840 13,651
Mortgage banking income 9,633 7,334 6,130
Other secondary market income 2,477 3,607 1,728
Reinsurance income 3,512 2,864 2,577
Other income 9,563 6,178 1,922
Net gains - equity securities 5,754 529 755
Net gains - debt securities 317 342 1,034
- --------------------------------------- ------------- ------------ -------------
89,932 71,525 58,137
- --------------------------------------- ------------- ------------ -------------
NONINTEREST EXPENSE
- --------------------------------------- ------------- ------------ -------------
Salaries 92,650 81,894 73,852
Employee benefits 17,311 16,508 14,683
Occupancy expense, net 16,407 15,916 14,894
Furniture and equipment expense 18,732 16,156 14,324
Special charges 11,410 ----- -----
Deposit insurance 778 1,014 6,195
Other expense 68,702 64,757 58,182
- --------------------------------------- ------------- ------------ -------------
225,990 196,245 182,130
- --------------------------------------- ------------- ------------ -------------
Income before income taxes 126,870 126,686 113,450
Income tax expense 38,953 37,180 34,001
- --------------------------------------- ------------- ------------ -------------
NET INCOME $87,917 $89,506 $79,449
- --------------------------------------- ------------- ------------ -------------
PER SHARE DATA
- --------------------------------------- ------------- ------------ -------------
Net income:
Basic $1.70 $1.72 $1.60
Diluted 1.68 1.70 1.59
- --------------------------------------- ------------- ------------ -------------
Dividends $1.06 $0.98 $0.93
- --------------------------------------- ------------- ------------ -------------
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
Issued and Deferred Net Unrealized
Outstanding KSOP Securities
(in thousands) Common Common Retained Benefit Treasury Gains(Losses), Shareholders'
Shares Stock Surplus Earnings Expense Stock Net of Tax Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1995 36,175 $73,730 $153,558 $344,487 ($2,250) ($20,576) ($15,306) $533,643
- ------------------------------------------------------------------------------------------------------------------------------------
1995 Net Income - - - 79,449 - - - 79,449
Dividends - - - (39,875) - - - (39,875)
Stock issued:
Benefit plans 276 552 4,686 - - - - 5,238
KSOP 21 42 571 - - - - 613
Dividend reinvestment 89 176 2,480 - - - - 2,656
Deferred KSOP benefit expense - - - - 500 - - 500
Acquisition of treasury stock (229) - - - - (6,649) - (6,649)
Reissuance of treasury stock 17 - (29) - - 286 - 257
Shares issued in acquisitions 1,721 1,640 (21,372) 17,387 - 26,939 - 24,594
Other (1) (1) (8) - - - - (9)
Change in unrealized gain on
available-for-sale securities - - - - - - 21,349 21,349
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1995 38,069 $76,139 $139,886 $401,448 ($1,750) $- $6,043 $621,766
- ------------------------------------------------------------------------------------------------------------------------------------
1996 Net Income - - - 89,506 - - - 89,506
Dividends - - - (46,998) - - - (46,998)
Stock issued:
Stock split/dividend 14,004 28,009 (6,170) (21,938) - - - (99)
Benefit plans 137 273 2,561 - - - - 2,834
KSOP 12 24 278 - - - - 302
Dividend reinvestment 98 195 2,696 - - - - 2,891
Deferred KSOP benefit expense - - - - 501 - - 501
Acquisition of treasury stock (424) - - - - (9,915) - (9,915)
Reissuance of treasury stock 90 - (38) - - 1,503 - 1,465
Change in unrealized gain on
available-for-sale securities - - - - - - (1,847) (1,847)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1996 51,986 $104,640 $139,213 $422,018 ($1,249) ($8,412) $4,196 $660,406
- ------------------------------------------------------------------------------------------------------------------------------------
1997 Net Income - - - 87,917 - - - 87,917
Dividends - - - (55,964) - - - (55,964)
Stock issued:
Benefit plans 524 1,048 8,178 - - - - 9,226
KSOP 28 56 763 - - - - 819
Dividend reinvestment 130 260 3,422 - - - - 3,682
Deferred KSOP benefit expense - - - - 523 - - 523
Acquisition of treasury stock (2,318) - - - - (72,586) - (72,586)
Reissuance of treasury stock 7 - - - - 182 - 182
Retirement of treasury stock - (2,290) (3,312) (35,366) - 40,931 - (37)
Shares issued in acquisitions 1,672 344 7,166 - (424) 39,885 - 46,971
Change in unrealized gain on
available-for-sale securities - - - - - - 4,346 4,346
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1997 52,029 $104,058 $155,430 $418,605 ($1,150) $- $8,542 $685,485
====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
30
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands) 1997 1996 1995
- ------------------------------------------------ -------------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $87,917 $89,506 $79,449
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for credit losses 15,316 10,713 8,568
Provision for depreciation and amortization 18,062 15,840 14,830
Deferred income taxes 14,537 14,880 11,219
Sale of loans held for resale 203,887 441,716 157,803
Origination of loans held for resale (385,458) (466,469) (162,678)
Increase in interest receivable (4,459) (3,964) (1,690)
Increase (decrease) in interest payable (567) (1) 3,299
Other 20,660 (6,391) (25,987)
- ------------------------------------------------ -------------- ----------- ----------
NET CASH PROVIDED BY(USED IN) OPERATING ACTIVITIES (30,105) 95,830 84,813
- ------------------------------------------------ -------------- ----------- ----------
INVESTING ACTIVITIES:
Net cash received in bank acquisitions 35,646 ----- 49,639
Net increase in interest-earning deposits (25,363) (3,121) (6,922)
Available for sale securities:
Sales 176,606 98,724 116,880
Maturities 855,464 1,208,804 701,267
Purchases (891,694) (1,368,734) (847,228)
Held to maturity securities:
Maturities 91,370 108,438 103,343
Purchases (192,900) (103,268) (55,258)
Net increase in loans (198,217) (265,833) (145,153)
Proceeds from sales of loans 302,840 52,013 34,305
Purchases of loans (11,947) (1,986) (15,869)
Purchases of premises and equipment (23,641) (16,870) (19,050)
Other (6,404) (1,025) (1,619)
- ------------------------------------------------ -------------- ----------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 111,760 (292,858) (85,665)
- ------------------------------------------------ -------------- ----------- ----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits (99,242) 66,113 74,606
Net increase in short-term borrowings 27,926 64,593 23,499
Proceeds from FHLB borrowings 242,313 420,892 138,352
Repayments of FHLB borrowings (253,418) (360,715) (129,973)
Issuance of long-term debt 100,000 ---- ----
Repayment of long-term debt (780) (1,962) (2,068)
Acquisition of treasury stock (72,586) (9,915) (6,649)
Cash dividends (55,964) (46,998) (39,875)
Other 10,147 7,894 8,755
- ------------------------------------------------ -------------- ----------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (101,604) 139,902 66,647
- ------------------------------------------------ -------------- ----------- ----------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (19,949) (57,126) 65,795
Cash and cash equivalents at beginning of year 251,472 308,598 242,803
- ------------------------------------------------ -------------- ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $231,523 $251,472 $308,598
- ------------------------------------------------ -------------- ----------- ----------
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized Accounting Policies
The accounting policies discussed below are followed consistently by Keystone
Financial, Inc., and its subsidiaries (Keystone). These policies are in
accordance with generally accepted accounting principles and conform to common
practices in the banking industry.
On May 30, 1997, Keystone acquired Financial Trust Corp in a transaction
accounted for under the pooling of interests method of accounting. As such, all
periods presented include the consolidated accounts of Financial Trust Corp.
Nature of Operations: Keystone provides a wide range of financial services to a
diverse client base through its banking subsidiaries. The client base includes
individual, business, public, and institutional customers primarily located in
Pennsylvania, Maryland, and West Virginia. Lending services include secured and
unsecured commercial loans, residential and commercial mortgages, installment
loans, revolving consumer loans and lease financing. Deposit services include a
variety of checking, savings, time, money market, and individual retirement
accounts. Money management services are available to customers through a variety
of techniques, all of which are designed to improve cash flow, control
disbursements, and increase return on investments.
A full spectrum of asset management services is offered by specialists,
including administration of trusts and estates, investment management,
administration of retirement and employee benefit plans, and other fiduciary
responsibilities.
Keystone's nonbanking subsidiaries perform specialized services including
mortgage banking, small-ticket equipment leasing, discount brokerage services,
investment advisor services, and reinsurance.
Keystone is subject to the regulations of certain federal and state agencies and
undergoes periodic examinations by certain regulatory authorities.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from the estimates, and such
difference may be material to the financial statements.
Principles of Consolidation: The consolidated financial statements include the
accounts of: Keystone Financial, Inc., the parent company; its wholly-owned
banking subsidiaries consisting of: American Trust Bank, N.A., and its
subsidiaries, ATB Real Estate Investment Trust, Inc., Keystone Brokerage, Inc.,
and Key Investor Services, Inc.; Financial Trust Company; Keystone Bank, N.A.,
and its subsidiary, Keystone Financial Leasing Corporation; Keystone National
Bank and its subsidiary, Keystone Financial Mortgage Corporation; Mid-State Bank
and Trust Company; Northern Central Bank; Pennsylvania National Bank and Trust
Company; and other nonbanking subsidiaries of Keystone consisting of Financial
Trust Services Company, Key Trust Company, Keystone Financial Mid-Atlantic
Funding Corp., Keystone Financial Unlimited, Inc., Keystone Investment Services,
Inc., Keystone Life Insurance Company, Martindale Andres & Co., MMC&P and two
community development corporations. All significant intercompany accounts have
been eliminated in consolidation.
Trading Account Assets: Securities classified as trading account assets are held
for resale in anticipation of short-term market movements and are carried at
fair value with market adjustments recorded against income. Keystone has made
limited use of trading account portfolios.
32
<PAGE>
Investments: Keystone classifies its securities as either "held-to-maturity" or
"available-for-sale" at the time of purchase. Debt securities are classified as
held-to-maturity based upon management's positive ability and intent to hold
such securities to maturity. Held-to-maturity securities are stated at cost,
adjusted for amortization of premiums and accretion of discounts (amortized
cost).
Debt securities not classified as trading or held-to-maturity and marketable
equity securities not classified as trading are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
unrealized gains and losses, net of tax, reported as a component of
shareholders' equity.
The cost of debt securities classified as held-to-maturity or available-for-sale
is adjusted for amortization of premiums and accretion of discounts to maturity,
or in the case of a mortgage-backed security, over the estimated life of the
security. Such amortization/accretion, as well as interest and dividends, is
included in interest income from investments. Realized gains and losses and
declines in value judged to be other than temporary are included in net
securities gains (losses). The cost of securities sold is based on the specific
identification method, and sales are reported as of the trade date.
Loans Held for Resale: Loans held for resale, primarily consisting of fixed-rate
consumer mortgages, are valued at the lower of cost or market, determined on an
aggregate basis.
Mortgage Servicing Rights: An asset is recognized for mortgage servicing rights
acquired through purchase or origination. If mortgage loans are sold or
securitized with servicing retained, the total cost of the mortgage loans is
allocated to the loans and the servicing rights based on their relative fair
values. Keystone performs a periodic review for impairment in the fair value of
recorded mortgage servicing rights.
Interest and Fees on Loans: Interest income on loans is accrued based upon the
principal amount outstanding using methods that produce level yields. Loan
origination fees and certain direct loan origination costs have been deferred
and the net amount amortized as an adjustment of the related loan yield over the
estimated contractual life of the related loans.
Keystone places loans and leases on nonaccrual when collection of principal is
in doubt, or when interest is 90 days past due, unless the loan is well-secured
and in the process of collection. Classification of a loan as nonaccrual is also
considered when the financial condition of the borrower is in a state of
significant deterioration. When loans are placed on nonaccrual, including those
identified as impaired, loan interest receivable is reversed. Interest payments
received on these loans and leases are applied as a reduction of the principal
balance when concern exists as to the ultimate collectability of principal;
otherwise such payments are recognized as interest income. Loans and leases are
removed from nonaccrual when they have performed in accordance with contract
terms for a reasonable period of time and when concern no longer exists as to
their collectability.
Impaired Loans: Impaired loans are defined as those loans for which it is
probable that contractual amounts due will not be received. Impaired loans are
reported at the present value of expected future cash flows using the loan's
effective interest rate, or as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. The determination of impairment requires judgement including
estimates of the amount and timing of cash flows. Loans included as components
of risk elements are not deemed to be impaired when it is probable that
contractual amounts due will be received through the normal collection process.
Identification of impaired loans is the primary obligation of the credit
extension function and is augmented by the normal loan review process. Factors
which are considered in the identification of impaired loans include, but are
not limited to: classification into nonaccrual or workout status; a history of
33
<PAGE>
payment delinquency; adverse industry trends; and a general understanding of a
customer's financial status. An insignificant delay or payment shortfall, such
as those attributable to seasonal payment waivers, would not necessarily require
treatment as an impaired loan when other factors make it probable that
contractual amounts will be received. The majority of loans classified as
impaired on an individual basis are commercial loans and commercial loans
secured by real estate. Other loans, such as residential real estate and
consumer loans and leases are aggregated for the purpose of measuring impairment
due to their homogeneous risk characteristics and their predilection for
statistically valid historical analysis. Loans, including impaired loans, are
charged-off when they are deemed to be substantially uncollectible.
Direct Lease Financing: Financing of equipment, principally consisting of
automobiles and business equipment, is provided to customers under lease
arrangements accounted for as direct financing leases. These leases are reported
in the consolidated statements of condition under the loan caption as a net
amount, consisting of the aggregate of lease payments receivable and estimated
residual values, less unearned income. Income is recognized in a manner which
results in an approximate level yield over the lease term.
Allowance for Credit Losses: The allowance for credit losses is maintained at a
level believed adequate by management to absorb potential loan and lease losses.
Management's determination of the adequacy of the allowance is based on periodic
evaluation of the risk characteristics of the loans and leases, credit loss
experience, economic conditions, appraisals, valuation estimates, and such other
relevant factors which, in management's judgment, deserve recognition. This
evaluation is inherently subjective as it requires material estimates including
the amount and timing of expected future cash flows on impaired loans, which
might be susceptible to significant change.
Financial Derivatives and other Hedging Activity: Interest rate swap contracts
have been utilized to hedge specific credit and/or funding activities, and the
differential of interest paid or received is reflected on the accrual method in
interest income or expense. The fair values of these swap contracts have been
appropriately disclosed in a footnote to these financial statements and have not
been recognized in the financial statements.
Forward mortgage commitments, as well as put options and short sales of U.S.
Treasury securities, have been used to reduce the market risk associated with
interest rate fluctuations of fixed-rate consumer mortgages and the indirect
automobile loans held for sale. Changes in the market value of the forward
mortgage commitments, as well as the securities underlying the put options and
short sales, are recognized in income when the related changes in the fair
values of the loans being hedged are recognized.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities:
In June 1996, the Financial Accounting Standards Board issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". This statement provided new accounting and reporting standards
for sales, securitizations, and servicing of receivables and other financial
assets, for certain secured borrowing and collateral transactions, and for
extinguishment of liabilities. Provisions of this standard, which became
effective in 1997 or will become effective in 1998, have not had a significant
impact on Keystone's financial condition or results of operations.
Premises and Equipment: Bank premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed generally on
the straight-line method over the estimated useful lives of the related assets.
Intangible Assets: Intangible assets, consisting primarily of goodwill and core
deposit intangibles, are stated at cost, less accumulated amortization.
Amortization of goodwill is generally recognized on the straight-line method
over periods ranging from 15-25 years. Amortization of core deposit intangibles
is recognized on an accelerated basis, generally over a ten-year period.
34
<PAGE>
Other Real Estate: Other real estate is comprised of property acquired through a
foreclosure proceeding or an acceptance of a deed in lieu of foreclosure.
Balances are carried at the lower of the related loan balance or estimated fair
value less estimated disposition costs. Any losses realized upon disposition of
the property, and holding costs prior thereto, are charged against income.
Trust Assets and Income: Assets held in a fiduciary capacity are not assets of
the company and are therefore not included in the consolidated financial
statements.
Stock Based Compensation: Stock options and shares issued under the Employee
Stock Purchase Plan are accounted for under Accounting Principles Board Opinion
(APB) No. 25. Stock options are granted at exercise prices not less than the
fair value of the common stock on the date of grant. Under APB 25, no
compensation expense is recognized related to these plans. The pro forma impact
to net income and earnings per share that would occur if compensation expense
was recognized based on the estimated fair value of the options and purchase
rights on the date of the grant is disclosed in the notes to the consolidated
financial statements.
Pensions: The provision for pension expense was actuarially determined using the
projected unit credit actuarial cost method. The funding policy is to contribute
an amount sufficient to meet the requirements of ERISA, subject to Internal
Revenue Code contribution limitations.
Income Taxes: The provision for income taxes is based on the results of
operations and the impact of tax rate changes on the carrying amount of deferred
tax assets and liabilities. In computing the tax liability, the results of
operations are adjusted principally for the tax effect of tax-exempt income.
Comprehensive Income: In June of 1997, the Financial Accounting Standards Board
(FASB) issued Statement 130, "Reporting Comprehensive Income", which will be
effective for fiscal years beginning after December 15, 1997, and will require
reclassification of financial statements for earlier periods. This Statement
sets forth guidance regarding the reporting and prominent display of
comprehensive income and its components in the financial statements. The
adoption of this statement is not expected to have a significant impact on
Keystone's financial statements.
Per Share Information: During 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings per Share", which requires dual presentation
of basic and diluted earnings per share. This statement was adopted in 1997 and
required restatement of all prior-period earnings per share data. Basic earnings
per share is calculated by dividing net income by the weighted average number of
shares of common stock outstanding during each period. Diluted earnings per
share is calculated by increasing the denominator for the assumed conversion of
all potentially dilutive securities. Keystone's dilutive securities are limited
to stock options granted under various incentive plans.
Historical shares outstanding and per share data have been restated to reflect
the 1996 three-for-two stock split.
Treasury Stock: The acquisition of treasury stock is recorded under the cost
method. The subsequent disposition or sale of the treasury stock is recorded
using the average cost inventory method.
Segment Reporting: In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which is effective for years beginning after December 15, 1997.
This statement establishes standards for reporting information about operating
35
<PAGE>
segments and related disclosures about products and services, geographic areas,
and major customers. Keystone will adopt the new requirements beginning with its
annual report for the year ended December 31, 1998.
Cash Flow Information: Keystone considers cash and due from banks and federal
funds sold as cash and cash equivalents. Interest paid on deposits and other
borrowings aggregated $233,061,000, $211,302,000, and $196,293,000 in 1997,
1996, and 1995, respectively. Cash payments for income taxes approximated
$19,253,000, $23,898,000, and $22,983,000 for 1997, 1996, and 1995,
respectively.
36
<PAGE>
Investments
The amortized cost, related fair value, and unrealized gains and losses for
investment securities classified as available-for-sale or held-to-maturity were
as follows at December 31 (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------- ------------ ---------------------- ------------
1997
Available-for-Sale
- -------------------------------------- ------------ ---------------------- ------------
Amortized Unrealized Fair Value
Cost Gains Losses
- -------------------------------------- ------------ ---------------------- ------------
<S> <C> <C> <C> <C>
Negotiable money market investments $178,455 $18 $69 $178,404
U.S. Treasury securities 193,099 1,063 42 194,120
U.S. Government agency obligations 502,483 2,363 1,768 503,078
Obligations of states and political
subdivisions 72,487 1,688 4 74,171
Corporate and other securities 131,735 9,918 26 141,627
- -------------------------------------- ------------ ---------------------- ------------
Total $1,078,259 $15,050 $1,909 $1,091,400
- -------------------------------------- ------------ ---------- ----------- ------------
1997
Held-to-Maturity
- -------------------------------------- ------------------------------------------------
Amortized Unrealized Fair Value
Cost Gains Losses
- -------------------------------------- ------------ ---------------------- ------------
U.S. Government agency obligations $366,238 $4,928 $150 $371,016
Obligations of states and political
subdivisions 143,910 4,845 5 148,750
Corporate and other securities 18,240 230 18 18,452
- -------------------------------------- ------------ ---------------------- ------------
Total $528,388 $10,003 $173 $538,218
- -------------------------------------- ------------ ---------- ----------- ------------
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------- ------------- --------------------------------
1996
Available-for-Sale
- --------------------------------------- ------------- --------------------------------
Amortized Unrealized Fair Value
Cost Gains Losses
- --------------------------------------- ------------- --------------------------------
<S> <C> <C> <C> <C>
Negotiable money market investments $194,566 $15 $15 $194,566
U.S. Treasury securities 244,010 1,083 551 244,542
U.S. Government agency obligations 561,245 2,817 4,624 559,438
Obligations of states and political
subdivisions 101,992 1,669 141 103,520
Corporate and other securities 101,846 6,324 142 108,028
- --------------------------------------- ------------- --------------------------------
Total $1,203,659 $11,908 $5,473 $1,210,094
- --------------------------------------- ------------- --------- ----------------------
1996
Held-to-Maturity
- --------------------------------------- ----------------------------------------------
Amortized Unrealized Fair Value
Cost Gains Losses
- --------------------------------------- ------------- --------------------------------
U.S. Government agency obligations $230,402 $1,997 $1,680 $230,719
Obligations of states and political
subdivisions 134,194 3,308 135 137,367
Corporate and other securities 15,362 156 78 15,440
- --------------------------------------- ------------- --------------------------------
Total $379,958 $5,461 $1,893 $383,526
- --------------------------------------- ------------- --------- ----------------------
1995
Available-for-Sale
- --------------------------------------- ------------- --------------------------------
Amortized Unrealized Fair Value
Cost Gains Losses
- -------------------------------------- ------------- --------------------- ------------
Negotiable money market investments $237,107 $11 $16 $237,102
U.S. Treasury securities 327,338 2,137 434 329,041
U.S. Government agency obligations 380,533 2,199 1,236 381,496
Obligations of states and political 107,723 1,763 190 109,296
subdivisions
Corporate and other securities 92,890 5,565 651 97,804
- --------------------------------------- ------------- --------------------------------
Total $1,145,591 $11,675 $2,527 $1,154,739
- -------------------------------------- ------------- ----------- --------- ------------
1995
Held-to-Maturity
- -------------------------------------- ------------------------------------------------
Amortized Unrealized Fair Value
Cost Gains Losses
- -------------------------------------- ------------- --------------------- ------------
U.S. Government agency obligations $237,122 $4,423 $338 $241,207
Obligations of states and political
subdivisions 132,541 4,242 102 136,681
Corporate and other securities 15,599 367 19 15,947
- --------------------------------------- ------------- --------------------------------
Total $385,262 $9,032 $459 $393,835
- -------------------------------------- ------------- ----------- --------- ------------
</TABLE>
Investment securities having a carrying value of $717,785,000 at December 31,
1997, were pledged to secure public and trust deposits and security repurchase
agreements.
38
<PAGE>
Security gains and losses included in operating results from 1995 through 1997
were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------- --------------- -------------- ---------------
<S> <C> <C> <C>
Gains $6,847 $980 $1,800
Losses (776) (109) (11)
- -------------------- --------------- -------------- ---------------
Net $6,071 $871 $1,789
- -------------------- --------------- -------------- ---------------
</TABLE>
39
<PAGE>
The following tables display at December 31, 1997, the amortized cost, related
fair values, and the weighted average yield (tax-equivalent basis) available
thereon of investment securities maturing at various intervals (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Available for Sale
- -----------------------------------------------------------------------------------------------------------------------------------
After One, After Five,
Within One Year But Within Five Years But Within Ten Years After Ten Years
- -----------------------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield Cost Value Yield Cost Value Yield
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Negotiable money market
investments $ 178,455 $178,404 5.54% $- $- - % $ - $- - % $- $- - %
U.S. Treasury securities 125,202 125,442 5.96 67,897 68,678 6.37 - - - - - -
Government agency obligations 56,919 56,935 5.70 346,198 345,840 6.28 81,389 82,171 7.42 17,978 18,132 7.28
Obligations of states and
political subdivisions 3,675 3,704 5.47 28,399 28,957 4.90 28,899 29,679 5.06 11,514 11,832 5.38
Corporate and other securities 8,664 8,677 6.63 54,753 54,976 6.46 400 400 7.68 67,918 77,573 8.12
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 372,915 $373,162 5.68% $497,247 $498,451 5.94% $110,688 $112,250 5.46% $97,410 $107,537 7.08%
- -----------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
-----------------------------------------------------------------------------------------------------------------------------------
After One, After Five,
Within One Year But Within Five Years But Within Ten Years After Ten Years
- -----------------------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield Cost Value Yield Cost Value Yield
- -----------------------------------------------------------------------------------------------------------------------------------
Government agency obligations $ 2,172 $ 2,170 3.58% $109,589 $110,813 6.67% $135,956 $137,211 6.97% $118,521 $120,822 7.07%
Obligations of states and
political subdivisions 9,060 9,209 6.53 20,675 21,524 5.87 14,496 15,067 5.46 99,679 102,950 5.52
Corporate and other securities - - - 16,964 17,148 6.53 1,276 1,304 7.27 - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total $11,232 $11,379 5.96% $147,228 $149,485 6.54% $151,728 $153,582 6.83% $218,200 $223,772 6.36%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
Loans and Leases
The composition of loans and leases was as follows at December 31, (in
thousands):
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------- ------------ - ------------
<S> <C> <C>
Consumer financings:
Consumer loans $1,218,730 $978,157
Net investment in direct lease financing
receivables 335,017 301,483
- ------------------------------------------------- ------------ - ------------
1,553,747 1,279,640
Loans secured by real estate:
Consumer 862,227 1,186,663
Commercial 1,384,923 1,077,017
- ------------------------------------------------- ------------ - ------------
2,247,150 2,263,680
Commercial 911,669 793,150
- ------------------------------------------------- ------------ - ------------
Total $4,712,566 $4,336,470
================================================= ============ = ============
</TABLE>
At December 31, 1997, substantially all of the consumer real estate loans
outstanding were pledged under blanket collateral agreements to secure
outstanding Federal Home Loan Bank borrowings. No industry-related
concentrations are deemed to exist.
Activity within the allowance for credit losses was summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
======================================== =========== = ========= = ===========
<S> <C> <C> <C>
Balance at January 1 $56,256 $55,415 $53,708
Allowance obtained through acquisitions 8,311 ----- 935
Recoveries on loans previously charged off 2,485 2,393 2,041
Loans charged off (17,277) (12,265) (9,837)
- ------------------------------------------------- ------------ - ------------
Net loans charged off (14,792) (9,872) (7,796)
Provision charged to operations 15,316 10,713 8,568
- ------------------------------------------------- ------------ - ------------
Balance at December 31 $65,091 $56,256 $55,415
========================================= ========== = ========== = ==========
</TABLE>
41
<PAGE>
Total nonaccrual and restructured loan balances and related annual interest data
were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------- ---------- - --------- - ----------
<S> <C> <C> <C>
Nonaccrual $20,520 $19,350 $19,142
Restructured 489 393 503
- ------------------------------------- ---------- - --------- - ----------
Total $21,009 $19,743 $19,645
- ------------------------------------- ---------- - --------- - ----------
Interest computed at original
terms $2,144 $1,896 $2,045
Interest recognized 473 598 623
- ------------------------------------- ---------- - --------- - ----------
</TABLE>
At December 31, 1997, there were no significant commitments to lend additional
funds on these loans.
The following is a summary presentation of loans that are considered to be
impaired as defined under FASB Statement No. 114:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------- ---------
At December 31, 1997 1996
- ---------------------------------------------------------------------- ---------
<S> <C> <C> <C>
Recorded investment in impaired loans $12,805 $7,375
Amount of allowance for loan losses
specifically allocated to impaired loans 1,540 1,560
- ---------------------------------------------------------------------- ---------
For the years ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------- ---------
Average recorded investment in impaired loans 13,305 9,212 10,414
Interest income recognized on impaired loans 153 326 361
- ---------------------------------------------------------------------- ---------
</TABLE>
Certain directors and executive officers of Keystone and its subsidiaries, and
their associates, were indebted to the bank subsidiaries during 1997. Such loans
were made in the ordinary course of business and on customary terms. Loan
activity during 1997 with these related parties was as follows (in thousands):
Beginning Balance Additions Repayments Ending Balance
- --------------------- ------------------ ----------------- -----------------
$116,066 $102,287 $93,504 $124,849
Financial Derivatives, Hedging Activity, and Commitments
Keystone engages in activities associated with the use of off-balance sheet
derivative financial instruments (derivatives) and hedges to manage its exposure
to changes in interest rates. Activities have included limited interest rate
swap activity, forward commitments for mortgage banking inventory management,
the use of short sales and put options to hedge against the potential
deterioration in the value of indirect auto financings held for sale, loan
commitments and standby letters of credit made in the ordinary course of its
banking business.
At December 31, 1997, outstanding hedging activity was limited to forward
mortgage commitments related to management of its mortgage banking inventory.
Under the terms of these commitments, Keystone agreed to deliver a specified
volume of mortgage loans with a specified portfolio yield, and received a
pre-established price commitment pursuant to timely delivery of the mortgage
loans. The purpose of these arrangements is to manage the effect of interest
rate changes on these loans between the date of the original loan commitment and
the date of delivery for sale into the secondary market. At December 31, 1997,
42
<PAGE>
Keystone had entered into commitments to deliver approximately $44,721,000 of
mortgage loans for sale into the secondary market. The delivery dates for these
commitments are short-term in nature and will expire at various dates in the
first half of 1998.
Keystone is a party to financial instruments with off-balance sheet risk used in
the normal course of business to meet the financing needs of its customers.
These financial instruments include loan commitments and standby letters of
credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the financial
statements.
Keystone's maximum exposure to credit loss in the event of nonperformance by the
counterparty to the financial instrument for the loan commitments and standby
letters of credit is the contractual or notional amount of those instruments.
Keystone uses the same policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The amount and nature of collateral obtained, if
deemed necessary, is based on management's credit evaluation of the couterparty.
Standby letters of credit are agreements used by Keystone's customers as a means
of improving their credit standings in dealing with others. Under these
agreements, Keystone guarantees certain financial commitments of its customers.
At December 31, 1997, outstanding commitments for loans and standby letters of
credit were as follows (in thousands):
Loan commitments $75,574
--------------------------- ------------
Standby letters of credit $1,027,782
--------------------------- ------------
Premises and Equipment
The following summarizes premises and equipment at December 31, (in thousands):
1997 1996
- ---------------------------------------------- ----------- ------------
Land $12,801 $12,333
Buildings 97,298 84,085
Equipment 108,169 99,000
Leasehold improvements 15,741 14,676
- ---------------------------------------------- ----------- ------------
234,009 210,094
Accumulated depreciation and amortization (117,394) (112,162)
- ---------------------------------------------- ----------- ------------
Total $116,615 $97,932
- ---------------------------------------------- ----------- ------------
Depreciation and amortization expense amounted to $14,554,000 in 1997,
$13,058,000 in 1996, and $11,616,000 in 1995.
Keystone and its subsidiaries lease various equipment and buildings under
operating lease agreements. In 1997, 1996, and 1995, total rent expense amounted
to $7,377,000, $7,956,000, and $7,715,000, respectively. Future annual minimum
lease payments do not significantly exceed historic levels.
43
<PAGE>
Federal Home Loan Bank Borrowings
The subsidiary banks of Keystone are members of a Federal Home Loan Bank (FHLB)
and, as such, can take advantage of the FHLB program for overnight and term
advances at published daily rates, which are advantageous to members as compared
to issuing notes directly in the market. Under the terms of a blanket collateral
agreement, advances from the FHLB are collateralized by first mortgage loans and
securities. Advances available under this agreement are limited by available and
qualifying collateral and the amount of FHLB stock held by the borrower. At
December 31, 1997, Keystone member banks could borrow an additional $836,265,000
based on qualifying collateral. Such additional borrowing would require that the
banks increase their investment in FHLB stock by $83,941,200. Outstanding
borrowings from the Federal Home Loan Bank are summarized as follows (in
thousands):
- ---------------------------------------------------------------
December 31,
1997 1996
- ----------------------------------------------------------------
Due 1997, 5.48% to 7.04% $------ $67,420
Due 1998, 5.45% to 7.71% 57,957 48,848
Due 1999, 4.75% to 6.51% 49,286 30,786
Due 2000, 5.54% to 6.51% 70,830 2,500
Due 2001, 4.92% to 6.80% 6,000 71,000
Due 2002, 5.25% to 6.08% 60,550 ------
Due After 2002, 4.75% to 7.23% 3,527 3,649
- ------------------------------------ -------------- -----------
$248,150 $224,203
- ------------------------------------ -------------- ------------
Of the December 31, 1997 outstanding balance, $164,900,000 was either
adjustable, variable, or subject to conversion. Of the $164,900,000, $10,000,000
was variable with Prime and $13,500,000 was adjustable with LIBOR. The remaining
$141,400,000 are advances which are subject to conversion to adjustable rates at
the option of the FHLB at various dates in 1998 and 1999. In the event the FHLB
elects to convert these advances to adjustable rates, Keystone has the option to
prepay the borrowings without penalty.
Long-term Debt
Long-term debt at December 31 consisted of the following (in thousands):
1997 1996
- ----------------------------------------------- ----------- -----------
Medium-term notes, interest at 7.3% $99,777 $-----
Other 2,016 2,573
- ----------------------------------------------- ----------- -----------
Total $101,793 $2,573
- ----------------------------------------------- ----------- -----------
On May 15, 1997, Keystone Financial Mid-Atlantic Funding Corp., a wholly-owned
funding subsidiary of Keystone, issued $100 million of senior medium term notes
under a $400 million shelf registration statement. The notes, which mature on
May 15, 2004, provide for semi-annual interest payments at a fixed rate of 7.3%,
and are unconditionally guaranteed by Keystone. The proceeds from the issuance
of the notes were used primarily to finance the acquisition of First Financial
of Western Maryland (see Mergers and Acquisitions footnote).
44
<PAGE>
Shareholders' Equity
Series A Junior Participating Preferred Stock (Preferred Stock) (par value $1.00
per share, with voting powers and dividends and liquidation rights per share
equal to 187.5 times that of the current common stock) has been established in
connection with the adoption of a Shareholders' Rights Plan (Rights Plan). Under
the Rights Plan, 200,000 shares of Preferred Stock are reserved for issuance on
the exercise of rights attached to the outstanding common stock. The rights are
exercisable only if a person or group acquires or announces a tender or exchange
offer to acquire 20% or more of Keystone's common stock. In the event a person
or group acquires a 20% position, each right not owned by the person or group
will entitle its holder to purchase at the exercise price of $70.00, a number of
shares of common stock, 5.333 one-thousandths (0.005333) of a share of Preferred
Stock, or other securities or assets of Keystone or common shares of the
acquiring company having a market value equal to twice the exercise price. At
any time after a person or group acquires 20% or more (but less than 50%) of the
outstanding common stock, the Board of Directors may exchange part or all of the
rights (other than the rights held by the person or group) for shares of common
or 5.333 one-thousandths of a share of Preferred Stock on a one-for-one basis.
The Board of Directors is entitled to redeem the rights at any time before a 20%
position has been acquired. Unless extended, the rights will expire on February
8, 2000.
Stock-based Compensation
Keystone provides eligible employees and directors with various stock option and
stock purchasing plans which are more fully described below. Keystone has
adopted the disclosure only provisions of FASB Statement No. 123, "Accounting
for Stock-Based Compensation", and accordingly, continues to account for its
plans in accordance with APB Opinion No. 25 and related interpretations. As
such, no compensation expense has been recognized for its stock option plans and
employee stock purchase plan.
Keystone has an employee "Stock Incentive Plan" and a "Nonemployee Directors'
Stock Option Plan." Under the terms of these plans, Keystone has reserved for
issuance a total of 2,875,000 shares of common stock for qualifying employees
and nonemployee directors, of which approximately 2,836,000 are available for
future grants. The plans provide for the issuance of nonqualified options and,
under the employee plan, incentive stock options. Options are granted at an
exercise price not less than the fair market value of Keystone common stock on
the date of grant, vest in two years, and expire approximately ten years after
the grant date. Keystone also has outstanding options pursuant to predecessor
plans and plans of acquired banks.
The following table provides a summary of options outstanding under the "Stock
Incentive Plan," the "Nonemployee Directors' Stock Option Plan", and other
predecessor or acquired plans.
45
<PAGE>
Weighted
Average
Exercise Common
Price Shares
- ---------------------------- ------------ ------------
January 1, 1995 $16.63 1,954,121
Granted $20.70 201,645
Exercised $9.59 (279,300)
Terminated $20.08 (50,830)
- ---------------------------- ------------ ------------
December 31, 1995 $17.92 1,825,636
- ---------------------------- ------------ ------------
Granted $21.09 312,636
Exercised $10.60 (83,966)
Terminated $20.88 (51,146)
- ---------------------------- ------------ ------------
December 31, 1996 $18.62 2,003,160
- ---------------------------- ------------ ------------
Granted $25.40 307,339
Exercised $16.30 (443,815)
Terminated $23.16 (21,926)
- ---------------------------- ------------ ------------
December 31, 1997 $19.61 1,844,758
- ---------------------------- ------------ ------------
The following table summarizes information about stock options outstanding at
December 31, 1997:
- ------------------------------------------------------- ---------------------
Options Outstanding Options Exercisable
- ------------------------------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (years) Price Exercisable Price
- ---------------------------------------------- ---------------------------------
$4.95 - $10.50 226,944 3.03 $8.95 226,944 $8.95
$11.13 - $15.98 225,007 3.35 $14.42 218,245 $14.39
$16.46 - $20.92 478,224 6.83 $19.79 244,590 $19.53
$21.08 - $26.31 912,763 6.81 $23.41 502,878 $22.22
$36.00 - $39.94 1,820 4.80 $37.73 ----- -----
- --------------------------------------------------------------------------------
$4.95 - $39.94 1,844,758 5.93 $19.61 1,192,657 $17.71
- --------------------------------------------------------------------------------
Options exercisable at the end of 1996 and 1995 were 1,333,422 and 883,029,
respectively.
Under the "Employee Stock Purchase Plan", eligible employees are provided an
opportunity to purchase Keystone common stock at a discount from market price.
The Plan provides for the purchase of stock through payroll deductions at a
price which is the lesser of 85% of the fair market value of the common stock as
of the first or last day of the annual purchase period. The purchase period
commences on July 1 and ends on June 30. Through modifications made to the plan
in 1995, Keystone reserved 750,000 shares of common stock, of which 559,000
remain available for future purchases. The amount of common shares issued under
this program in 1997, 1996, and 1995 were as follows:
46
<PAGE>
Price Per Shares
Share Issued
- -------------------------- ----------- ----------
1997 $19.20 94,195
1996 $15.79 97,196
1995 $15.90 74,249
The following pro forma amounts indicate the net income and earnings per share
that would have resulted if compensation expense for the stock option plans and
employee stock purchase plan was determined under the recognition provisions of
Statement No. 123 using the fair value of the awards at the grant date.
1997 1996 1995
- ----------------------- ------------- ------------- ------------ -------------
Net Income As reported $87,917 $89,506 $79,449
(in thousands) Pro forma 86,457 88,348 78,876
Diluted earnings per As reported $1.68 $1.70 $1.59
share Pro forma 1.65 1.68 1.58
The pro forma effect is not fully reflected in 1995 since Statement No. 123 is
applicable only to options granted subsequent to December 31, 1994, and
Keystone's options have a two-year vesting period.
Information regarding the weighted-average grant-date fair values for stock
options and purchase rights granted in 1997, 1996, and 1995 were as follows:
Assumptions
------------------------------------
Grant Date Dividend Expected Interest
Fair Value Yield Volatility Rate Life
(Per Option
/Share)
- ------------------------------ -------------------------------------------------
Stock option plans:
1997 $4.20 4.2% 15% 6.37% 7yrs
1996 $3.01 4.6% 15% 5.50% 7yrs
1995 $3.34 4.3% 15% 7.88% 7yrs
Employee stock purchase plan:
1997 $6.30 4.5% 15% 5.63% 1yr
1996 $4.28 4.1% 12% 5.75% 1yr
1995 $3.50 4.8% 13% 5.64% 1yr
- ------------------------------ -------------------------------------------------
The fair values were estimated using the Black-Scholes model. This model is
predominantly used to value traded options, which differ from Keystone's
options, and requires the use of numerous assumptions, many of which are
subjective in nature. Therefore, the pro forma results are estimates of the
impact to operations if compensation expense had been recognized for all stock
based compensation plans and are not indicative of the impact on future periods.
Keystone also has a Management Stock Ownership Program (the "Program") which is
intended, among other things, to promote alignment of management and shareholder
interests and to encourage management to focus on value creation. To accomplish
these purposes, the Program establishes stock ownership goals for executive and
senior officers of the Corporation to be achieved over a five-year period. In
order to assist the officers in attaining their stock ownership goals, a related
plan provides for nonrecourse, noninterest-bearing loans, in amounts not to
47
<PAGE>
exceed 50% of the officer's stock ownership goal, to be used to purchase shares
of Keystone common stock at fair market value. The loans are secured by
collateral having an initial value of 120% of the loan amount and consisting of
the shares of Keystone stock purchased with the loan plus additional shares of
stock or other acceptable collateral owned by the executive. The aggregate
number of shares which may be issued and sold pursuant to the Program is limited
to 750,000 shares of Common Stock, subject to proportionate adjustment in the
event of stock splits and similar events. At December 31, 1997, approximately
650,000 shares remain available for future issuances. During 1997, 1996 and
1995, 6,000, 19,000 and 72,000 shares, respectively, were issued under the
Program. At December 31, 1997 and 1996, the amount executives participating in
the Program owed Keystone for financed purchases totaled $1,709,000 and
$1,786,000, respectively.
Keystone has a dividend reinvestment plan for shareholders under which
additional shares of Keystone common stock may be purchased at market value with
reinvested dividends and voluntary cash payments. Keystone has reserved 900,000
shares of common stock for this Plan, and approximately 336,000 shares remain
unissued. The following number of shares of Keystone common stock were purchased
pursuant to this plan: 130,000 in 1997, 98,000 in 1996, and 89,000 in 1995.
Employee Benefit Plans
Keystone provides a noncontributory defined benefit pension plan covering
substantially all full-time employees. Plan benefits are based on years of
service and qualifying compensation during the final years of employment. A
summary of the components of net periodic pension expense for Keystone's defined
benefit plan was as follows for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Service cost benefits earned during the period $2,907 $2,793 $2,648
Interest cost on projected benefit obligation 5,458 5,166 4,547
Actual return on plan assets (20,922) (9,802) (13,590)
Net amortization and deferral 12,940 2,377 7,189
- -------------------------------------------------- ---------- ---------- -----------
Pension expense $383 $534 $794
================================================== ========== ========== ===========
</TABLE>
The following table sets forth the funded status and amounts recognized in
Keystone's consolidated statement of condition as of December 31, (in
thousands):
1997 1996
- -------------------------------------------------------- ---------- -----------
Actuarial present value of the accumulated benefit
obligation, including vested benefits of $66,042
in 1997 and $59,432 in 1996 $66,789 $59,964
- -------------------------------------------------------- ----------- -----------
Actuarial present value of projected benefit
obligation for service rendered to date (84,890) $(75,060)
Fair value of plan assets 106,239 89,560
- -------------------------------------------------------- ----------- -----------
Plan assets in excess of projected benefit obligation 21,349 14,500
Unrecognized net assets at transition (3,137) (3,862)
Unrecognized net gain (12,839) (5,181)
Unrecognized prior service cost (1,497) (1,501)
- -------------------------------------------------------- ---------- -----------
Prepaid pension expense, included in other assets $3,876 $3,956
======================================================== =========== ===========
48
<PAGE>
Actuarial assumptions used in the determination of the projected benefit
obligation were as follows:
1997 1996 1995
- --------------------------------------------------- -------- -------- -------
Rate of increase in future compensation levels 5.50% 5.50% 5.50%
Expected long-term rate of return on plan assets 8.50 8.50 8.00
Weighted average discount rate 7.00 7.50 7.50
- --------------------------------------------------- -------- -------- -------
The unrecognized net assets at transition and the unrecognized prior service
costs are being amortized over the expected service lives of eligible employees,
which approximate 15 years. Trusteed pension plan assets consist primarily of
equity and fixed income securities and short-term investments.
A 401(k) deferred savings plan covers eligible employees of Keystone. The plan
provides for a matching employer contribution equal to 60% of the employee
contribution. While empolyees can contribute up to 15% of their compensation,
the employer match is limited to 5% of employee compensation. Matching
contributions are paid entirely in Keystone stock.
In July 1992, Keystone established a leveraged KSOP and borrowed $3,500,000 for
the purpose of acquiring 186,000 shares of Keystone stock. The shares purchased
by the KSOP are used to meet matching contribution requirements of the 401(k)
plan. Dividends received on shares held by the KSOP are used to service the
principal and interest payments on the borrowing. Debt service is also provided
by matching cash contributions required under the original 401(k) plan. Benefit
expense is recognized based on a percentage of total debt service for the
current year to total debt service over the life of the borrowing.
Group-based incentive plans include both long-term and annual incentive programs
designed to focus management and employee efforts on profit performance
objectives and revenue growth targets. Employees earn awards under these
programs based on the profitability of their operating unit and/or Keystone or
based on achievement of revenue-driven sales objectives. Expenses for these
plans, a predecessor profit sharing plan, and the above-mentioned 401(k) plan
totaled $9,160,000 in 1997, $6,640,000 in 1996, and $6,467,000 in 1995.
49
<PAGE>
Income Taxes
Deferred income taxes reflect the tax effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of deferred
tax assets and liabilities are as follows (in thousands):
December 31,
- ----------------------------------------- -------------------------
Deferred tax assets: 1997 1996
- ----------------------------------------- ------------ ------------
Allowance for credit losses $20,717 $16,388
Deferred liabilities 1,879 945
Compensation accruals 3,229 2,599
- ----------------------------------------- ------------ ------------
Deferred tax liabilities:
- ----------------------------------------- ------------ ------------
Lease financing activities (47,672) (33,950)
Net unrealized gains on securities
available-for-sale (4,600) (2,465)
Premises and equipment (3,862) (2,542)
Intangible assets (4,044) (1,494)
Other 287 (1,086)
- ----------------------------------------- ------------ ------------
Net deferred tax liability ($34,066) $(21,605)
- ----------------------------------------- ------------ ------------
The provision for income taxes consisted of the following components (in
thousands):
1997 1996 1995
- --------------------------------- --------- ---- ----------- --- ----------
Deferred provision $14,537 $14,880 $11,219
Current provision:
Federal taxes 23,229 21,441 22,217
State taxes 1,187 859 565
- --------------------------------- --------- ---- ----------- --- ----------
Total $38,953 $37,180 $34,001
- --------------------------------- --------- ---- ---------- ---- ----------
A reconciliation of income tax expense and the amounts which would have been
recorded based upon statutory rates (35%) was as follows (in thousands):
1997 1996 1995
- ------------------------------------ ---------- ---- ---------- ---- ----------
Provision on pre-tax income at
statutory rates $44,405 $44,340 $39,708
Tax exempt interest income (5,089) (6,212) (6,863)
Other (363) (948) 1,156
- ----------------------------------- ---------- ---- ---------- ---- -----------
Total $38,953 $37,180 $34,001
- ------------------------------------ ---------- ---- ---------- ---- ----------
Effective Rate 30.7% 29.3% 30.0%
==================================== ========== ==== ========== ==== ==========
Income taxes attributable to investment security gains were $2,125,000 in 1997,
$305,000 in 1996, and $626,000 in 1995.
50
<PAGE>
Earnings Per Share
Effective December 31, 1997, Keystone adopted Statement of Financial Accounting
Standards No.128, "Earnings Per Share." This statement requires the dual
presentation of basic and diluted earnings per share, and requires the
restatement of all prior period earnings per share amounts. The following is a
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations (in thousands, except per share data):
1997 1996 1995
- -------------------------------- --------------- -------------- --------------
Numerator $87,917 $89,506 $79,449
Denominators:
Basic shares outstanding 51,693 52,119 49,557
Dilutive option effect 627 362 289
- -------------------------------- --------------- -------------- --------------
Dilutive shares outstanding 52,320 52,481 49,846
- -------------------------------- --------------- -------------- --------------
EPS:
Basic $1.70 $1.72 $1.60
Diluted $1.68 $1.70 $1.59
- -------------------------------- --------------- -------------- --------------
Regulatory Capital Requirements
Bank regulators have set forth requirements for risk-based capital, which
resulted in the establishment of international capital standards for banks.
The following table provides Keystone's risk-based capital position at the end
of 1997 and 1996 and a comparison to the various regulatory capital requirements
(in thousands):
<TABLE>
<CAPTION>
1997 1996 Well-
---- ---- Capitalized Minimum
Amount Ratio Amount Ratio Ratio Ratio
- --------------------- -------- ------- --------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted
assets) $675,575 13.75% $688,794 15.66% 10% 8%
Tier 1 capital
(to risk-weighted
assets) 614,172 12.50 634,590 14.43 6 4
Tier 1 capital
(to average
assets) 614,172 9.15 634,590 10.03 5 4
- --------------------- -------- -------- --------- -------- ------------ --------
</TABLE>
At December 31, 1997 and 1996, each significant subsidiary of Keystone had
capital at or above the "well-capitalized" level for each of the three ratios.
Failure to meet any one of the minimum capital ratios would result in an
institution being classified as "undercapitalized" or "significantly
undercapitalized". Such classifications could disrupt dividends, capital
distributions, or affiliate management fees. In addition, other restrictions,
prohibitions, and related supervisory actions would be likely depending upon the
overall level of capital. Keystone anticipates no problems in meeting the
current or future capital standards. As of December 31, 1997, each subsidiary
bank had been categorized as "well-capitalized" by its primary regulator at its
most recent examination.
51
<PAGE>
Restrictions
Under Federal Reserve regulations, depository institutions must maintain
reserves in the form of cash or amounts on deposit with Federal Reserve Banks.
For the year ended December 31, 1997, Keystone's bank subsidiaries maintained
average reserve balances of approximately $53,252,000 in compliance therewith.
Dividends that may be paid to Keystone by the subsidiary banks are limited by
state and federal regulations. The related amount available for dividends
aggregated $222,000,000 at December 31, 1997. Federal Reserve regulations also
limit each subsidiary bank as to the amount it may loan its affiliates,
including Keystone. At December 31, 1997, the maximum amount available for loans
to affiliates approximated 10% of consolidated net assets.
Fair Value of Financial Instruments
FASB Statement No. 107 requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value. In cases where quoted market prices
are not available, fair value is based on estimates using present value or other
valuation techniques. These techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison with independent markets, and, in many cases, could not be
realized in immediate settlement of the instrument. Statement No. 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of Keystone Financial, Inc.
52
<PAGE>
The following schedule displays at December 31, the carrying values and related
estimated fair values for financial instruments (in thousands):
1997 1996
------------------------------------------- -----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ------------------------------------------- ------------------------------------
Financial Assets:
Cash and due from banks $206,223 $206,223 $206,972 $206,972
Federal funds sold and other 27,228 27,228 81,413 81,413
Investment securities
available for sale 1,091,400 1,091,400 1,210,094 1,210,094
Investment securities held
to maturity 528,388 538,218 379,958 383,526
Loans held for resale 43,055 43,055 51,225 51,225
Loans, net of allowance for
credit losses 4,275,218 4,447,413 3,948,949 3,996,601
Leases 372,257 380,855 331,265 336,101
- ------------------------------------------- ------------------------------------
Financial Liabilities:
Time deposits $3,023,702 $3,048,175 $2,842,032 $2,848,996
Other deposits 2,209,463 2,209,463 2,217,689 2,217,689
Short-term borrowings 425,890 425,890 397,964 397,964
FHLB borrowings 248,150 249,629 224,203 222,349
Long-term debt 101,793 101,793 2,573 2,573
- ------------------------------------------- ------------------------------------
Off-Balance Sheet Instruments:
Lending commitments and
letters of credit $----- $(684) $----- $(2,625)
All other $----- $(217) $----- $(79)
- ------------------------------------------- ------------------------------------
The following methods and assumptions were used to estimate fair market value
disclosures for financial instruments:
Cash and short-term instruments: The carrying amounts reported in the balance
sheet for cash and short-term instruments approximate those assets' fair values.
Investment securities (including mortgage-backed securities): Fair values for
investment securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and have no
significant changes in credit risk, fair values are based on carrying values.
The fair values for other loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of comparable credit quality. The carrying amount of accrued
interest approximates its fair value.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, savings, and certain types of money market
accounts) are reported at a value equal to the amount payable on demand at the
reporting date. The carrying amounts for variable-rate, fixed-term money market
accounts and certificates of deposit approximate their fair market value at the
reporting date. Fair values for fixed-rate certificates of deposit are estimated
53
<PAGE>
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities.
Short-term borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
approximate their fair values.
FHLB and long-term borrowings: The fair values of Keystone's FHLB and long-term
borrowings are estimated using discounted cash flow analyses, based on
Keystone's current incremental borrowing rates for similar types of borrowings.
Unfunded lending commitments and letters of credit: Fair values for Keystone's
unfunded lending commitments and letters of credit are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standings.
Other off-balance sheet instruments: Fair values for off-balance sheet
instruments including interest rate swaps, forward mortgage commitments, and
securities underlying put options and short sales are based on dealer quotes and
current trading prices. The fair values represent the estimated amounts that
Keystone would receive or pay to terminate the contracts, taking into account
current interest rates.
Mergers and Acquisitions
On May 30, 1997 Keystone completed the merger of Financial Trust Corp (Financial
Trust), a financial institution with $1.2 billion of assets headquartered in
Carlisle, Pennsylvania. Under the terms of the agreement, each Financial Trust
shareholder received Keystone common stock at a fixed exchange ratio of 1.65
shares for each Financial Trust share, resulting in the issuance of 14.2 million
shares of Keystone stock. The merger was accounted for under the
pooling-of-interests method of accounting, and, as such, all prior period
information has been restated.
During the second quarter of 1997, Keystone recorded previously announced
special charges associated with the merger of Financial Trust. These charges,
which totaled $11.4 million, included the estimated expenses for professional
services, employment matters, system conversions and occupancy and equipment.
The following summarizes the activity in the special charge accrual (in
thousands):
Paid Balance at
Initial During December 31,
Accrual 1997 1997
- ---------------------------- -------------- ---------------- --------------
Professional $2,400 $2,197 $203
Employment matters 1,700 1,002 698
Integration and conversion 2,785 2,646 139
Net occupancy and equipment 2,575 1,114 1,461
Other 1,950 1,145 805
- ---------------------------- -------------- ---------------- --------------
$11,410 $8,104 $3,306
- ---------------------------- -------------- ---------------- --------------
The majority of the remaining expenses will be paid during 1998.
54
<PAGE>
The results of operations and financial condition of Financial Trust were
combined with Keystone as follows (in thousands):
Financial Consolidated
For the year ended: Keystone Trust Keystone
- ---------------------------- --------------- ----------------- ----------------
1996:
Net interest income $209,763 $52,356 $262,119
Net income 69,475 20,031 89,506
1995:
Net interest income $197,352 $48,659 $246,011
Net income 61,314 18,135 79,449
- ---------------------------- --------------- ----------------- ----------------
December 31, 1996:
- ---------------------------- --------------- ----------------- ----------------
Assets $5,231,268 $1,219,311 $6,450,579
Liabilities 4,723,961 1,066,212 5,790,173
Shareholders' equity 507,307 153,099 660,406
- ---------------------------- --------------- ----------------- ----------------
Financial data for Keystone and Financial Trust from the beginning of 1997 to
the date of consummation, May 30, 1997, is presented below:
Financial Consolidated
Keystone Trust Keystone
- ------------------------ ----------------- ------------------ ----------------
Net interest income $89,411 $22,623 $112,034
Net income 28,773 9,225 37,998
Dividends declared 23,120 4,796 27,916
- ------------------------ ----------------- ------------------ ----------------
On May 29, Keystone completed the acquisition of First Financial Corporation of
Western Maryland (FFWM), a thrift holding company with assets approximating $355
million based in Cumberland, Maryland. Under the terms of the agreement with
FFWM, each of its shareholders received Keystone common stock at a fixed
exchange ratio of 1.29 shares of Keystone for each FFWM share, or cash. The
issuance of 1.6 million Keystone shares amounted to 60% of the total
consideration of $76 million and, accordingly, the transaction was accounted for
as a purchase. The transaction resulted in the recognition of goodwill and core
deposit intangibles totaling approximately $34 million and $6 million,
respectively, which will be amortized over 25 and 10-year periods. The results
of FFWM have been included herein from the consummation date of May 29, 1997.
Pro forma results of operations as though FFWM had been combined with Keystone
at the beginning of the periods presented do not differ materially from
consolidated results presented herein.
During 1995, Keystone completed mergers of two Pennsylvania bank holding
companies, Shawnee Financial Services Corporation (Shawnee) and National
American Bancorp (NAB); and the acquisition of Martindale Andres & Company
(Martindale), a Philadelphia-based asset management firm. The Shawnee and NAB
mergers resulted in the issuance of 501,000 and 1,158,000 shares, respectively,
of Keystone stock in exchange for 80,200 and 579,000 shares of Shawnee and NAB,
respectively. The bank subsidiaries of both Shawnee and NAB were merged into
existing Keystone affiliated banks and the mergers were accounted for under the
pooling of interests method of accounting. Due to the immaterial impact of both
55
<PAGE>
transactions to Keystone's financial position and results of operation, prior
periods were not restated. Consolidated results of Keystone include Shawnee's
and NAB's results of operations from the consummation dates of October 10, 1995
and December 29, 1995, respectively.
The acquisition of Martindale Andres, which occurred on November 30, 1995 was
accounted for under the purchase method of accounting and, accordingly, the
results of Martindale's operations were included in Keystone's consolidated
results beginning December 1, 1995. Pro forma results of operations of Keystone
as though Martindale had been acquired as of January 1 of the respective periods
would not have been materially different from the consolidated results presented
herein. The purchase price, consisting of both cash and shares of Keystone
common stock, was not significant to Keystone's financial condition.
56
<PAGE>
Parent Company Financial Statements
The following parent company condensed statements reflect the financial
condition and results of operations of Keystone (in thousands):
Statements of Condition
December 31,
1997 1996
- ----------------------------------------------- ------------ ------------
Assets:
Cash $1,489 $1,027
Investment securities 65,024 22,383
Investments in:
Subsidiary banks 630,102 591,786
Other subsidiaries 115,624 54,362
Other assets 889 9,911
- ----------------------------------------------- ------------ ------------
TOTAL ASSETS $813,128 $679,469
- ----------------------------------------------- ------------ ------------
Liabilities:
Long-term debt $100,106 $1,669
Other liabilities 27,537 17,394
- ----------------------------------------------- ------------ ------------
TOTAL LIABILITIES 127,643 19,063
Shareholders' Equity 685,485 660,406
- ----------------------------------------------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $813,128 $679,469
- ----------------------------------------------- ------------ ------------
Statements of Income
Year Ended December 31,
1997 1996 1995
- -------------------------------------------- ---------- ----------- -----------
Income:
Dividends from subsidiaries:
Bank subsidiaries $67,305 $71,891 $48,363
Other subsidiaries ---- 134 30
Expenses 11,627 2,934 6,889
- -------------------------------------------- ---------- ----------- -----------
Income before taxes and undistributed
earnings of subsidiaries 55,678 69,091 41,504
Income taxes (benefit) (3,712) (799) (2,630)
Equity in undistributed earnings
of subsidiaries 28,527 19,616 35,315
- --------------------------------------------- ---------- ----------- ----------
NET INCOME $87,917 $89,506 $79,449
- -------------------------------------------- ---------- ----------- -----------
57
<PAGE>
Statements of Cash Flows
Year Ended December 31,
1997 1996 1995
- ------------------------------------------ ----------- ----------- -----------
OPERATING ACTIVITIES:
Net income $87,917 $89,506 $79,449
Equity in undistributed earnings (28,527) (19,616) (35,315)
Other 14,729 1,042 (10,842)
- ------------------------------------------ ----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 74,119 70,932 33,292
- ------------------------------------------ ----------- ----------- -----------
INVESTING ACTIVITIES:
Net (increase) decrease in investments (38,529) (13,030) 9,147
Investments in subsidiaries (24,459) (8,451) (4,042)
- ------------------------------------------ ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (62,988) (21,481) 5,105
- ------------------------------------------ ----------- ----------- -----------
FINANCING ACTIVITIES:
Cash dividends declared (55,964) (46,998) (39,875)
KSOP activity:
Common stock proceeds 819 302 613
Payment of debt (523) (569) (562)
Proceeds of long-term debt 98,960 --- ---
Acquisition of treasury stock (72,586) (9,915) (6,649)
Proceeds from issuance of common stock
under benefits plans 12,908 7,190 8,151
Other 5,717 34 573
- ------------------------------------------ ----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (10,669) (49,956) (37,749)
- ------------------------------------------ ----------- ----------- -----------
Increase (decrease) in cash 462 (505) 648
Cash at beginning of year 1,027 1,532 884
- ------------------------------------------ ----------- ----------- -----------
CASH AT END OF YEAR $1,489 $1,027 $1,532
- ------------------------------------------ ----------- ----------- -----------
58
<PAGE>
Net Interest Income
Keystone's largest source of revenue is net interest income, which is the
difference between interest on earning assets and interest expense on deposits
and other borrowed funds. The following table provides a summary of net interest
income performance for the three years ended December 31, 1997:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- --------------------------
(in thousands) Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------- ---------- -------- ----- --------- -------- ----- --------- -------- ----
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold and other $84,032 $5,340 6.35% $106,374 $5,668 5.33% $153,528 $9,063 5.90%
Investment securities:
Negotiable money market investments 108,278 6,155 5.68 153,631 8,583 5.59 98,541 5,773 5.86
Taxable investment securities 1,174,674 77,034 6.56 1,143,073 71,458 6.25 1,060,838 64,230 6.05
Nontaxable investment securities(1) 225,384 17,557 7.79 235,731 18,953 8.04 223,046 19,525 8.75
Loans held for resale 77,330 6,408 8.29 53,656 4,688 8.74 21,378 1,636 7.65
Consumer loans (2) (3) 1,523,659 136,257 8.94 1,271,662 113,377 8.92 1,159,363 103,071 8.89
Real estate loans (1) (2) (3) 2,239,664 196,964 8.79 2,209,179 196,152 8.88 2,187,063 193,349 8.84
Commercial loans (1) (2) (3) 809,306 73,883 9.13 708,328 63,514 8.97 640,408 59,457 9.28
- ----------------------------------------- ---------- -------- ----- --------- -------- ----- --------- -------- ----
Total earning assets 6,242,327 $519,598 8.32% 5,881,634 $482,393 8.20% 5,544,165 $456,104 8.23%
- ----------------------------------------- ---------- -------- ----- --------- -------- ----- --------- -------- ----
Allowance for credit losses (61,800) (56,211) (55,324)
Other assets 449,475 407,225 382,395
- ----------------------------------------- ---------- -------- ----- --------- -------- ----- --------- -------- ----
Total Assets $6,630,002 $6,232,648 $5,871,236
- ----------------------------------------- ---------- -------- ----- --------- -------- ----- --------- -------- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW deposits $330,514 $4,865 1.47% $532,480 $7,889 1.48% $586,576 $10,614 1.81%
Savings deposits 600,759 11,065 1.84 569,814 12,515 2.20 603,918 13,826 2.29
Money market deposits 650,082 16,306 2.51 536,237 12,732 2.37 501,709 12,929 2.58
Time deposits 2,967,437 162,662 5.48 2,759,973 153,121 5.55 2,501,740 139,202 5.56
Short-term borrowings 371,645 18,134 4.88 323,938 14,506 4.48 257,113 12,747 4.96
FHLB borrowings 240,533 14,677 6.10 159,503 10,175 6.38 178,791 10,955 6.13
Long-term debt 64,016 4,785 7.47 3,569 363 10.17 5,574 502 9.01
- ----------------------------------------- ---------- -------- ----- --------- -------- ----- --------- -------- ----
Total interest-bearing liabilities 5,224,986 $232,494 4.59% 4,885,514 $211,301 4.33% 4,635,421 $200,775 4.33%
- ----------------------------------------- ---------- -------- ----- --------- -------- ----- --------- -------- ----
Demand deposits 606,907 604,536 576,445
Other liabilities 135,789 107,247 92,008
Shareholders' equity 662,320 635,351 567,362
- ----------------------------------------- ---------- -------- ----- --------- -------- ----- --------- -------- ----
Total Liabilities and Equity $6,630,002 $6,232,648 $5,871,236
- ----------------------------------------- ---------- -------- ----- --------- -------- ----- --------- -------- ----
Interest rate spread 3.87% 3.87% 3.90%
- ----------------------------------------- ---------- -------- ----- --------- -------- ----- --------- -------- ----
Net interest income and net
interest margin $287,104 4.59% $271,092 4.61% $255,329 4.61%
Tax-equivalent adjustment (8,860) (8,973) (9,318)
- ----------------------------------------- ---------- -------- ----- --------- -------- ----- --------- -------- ----
Net interest income $278,244 $262,119 $246,011
- ----------------------------------------- ---------- -------- ----- --------- -------- ----- --------- -------- ----
</TABLE>
59
<PAGE>
The following table sets forth for the periods indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates (in thousands):
<TABLE>
<CAPTION>
1997 change from 1996 1996 change from 1995
--------------------------- --------------------------
Total Change due to(4) Total Change due to(4)
Change Volume Rate Change Volume Rate
------ ------ ---- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Interest income on: Federal funds sold and other ($328) ($1,400) $1,072 ($3,395) ($2,606) ($789)
Investment securities(1) 1,752 (156) 1,908 9,466 9,697 (231)
Loans held for resale 1,720 1,973 (253) 3,052 2,790 262
Loans and leases (1)(2)(3) 34,061 39,782 (5,721) 17,166 17,844 (678)
- ---------------------------------------------------------------------------------------------------------------
37,205 40,199 (2,994) 26,289 27,725 (1,436)
- ---------------------------------------------------------------------------------------------------------------
Interest expense on: NOW deposits 3,024 2,973 51 2,725 919 1,806
Savings deposits 1,450 (652) 2,102 1,311 762 549
Money market deposits (3,574) (3,968) 394 197 (1,641) 1,838
Time deposits (9,541) (2,623) (6,918) (13,919) (13,452) (467)
Short-term borrowings (3,628) (2,255) (1,373) (1,759) (3,079) 1,320
FHLB borrowings (4,502) (4,962) 460 780 1,217 (437)
Long-term debt (4,422) (4,543) 121 139 198 (59)
- ---------------------------------------------------------------------------------------------------------------
(21,193) (16,030) (5,163) (10,526) (15,076) 4,550
- ---------------------------------------------------------------------------------------------------------------
Net Interest Income Change - Tax Equivalent $16,012 $24,169 ($8,157) $15,763 $12,649 $3,114
- ---------------------------------------------------------------------------------------------------------------
(1) Interest income and yields are adjusted to a fully taxable-equivalent basis
using a 35% tax rate.
(2) Non-performing loans are included in the average balances.
(3) Interest on loans includes fees on loans of $6,523,000 in 1997, $5,954,000
in 1996, and $3,696,000 in 1995.
(4) The change in interest due to both rate and volume has been allocated to
the volume and rate changes in proportion to the absolute dollar amounts of
each change.
60
<PAGE>
</TABLE>
GAP
Interest rate sensitivity is evidenced by the changes in net interest income and
net interest margin relative to changes in market interest rates. One indicator
of interest rate sensitivity is GAP, which measures the volume difference
between interest rate sensitive assets and liabilities. The following table
apportions the balance sheet at December 31, 1997, into rate sensitive periods
based on the repricing or maturity dates of the various cash-flow streams (in
thousands).
61
<PAGE>
<TABLE>
<CAPTION>
Rate-Sensitive
- ---------------------------------------------------------------------------------------------------------------------
1 to 90 91 to 180 181 to 360 1 to 2 Beyond
Days Days Days Years 2 Years Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and other $ 27,228 $ - $ - $ - $ - $ 27,228
Investment securities 300,189 50,838 132,199 159,565 976,997 1,619,788
Loans held for resale 16,134 3,193 21,833 1,895 - 43,055
Consumer loans 360,682 119,823 220,418 350,150 502,674 1,553,747
Consumer mortgages 112,868 110,925 162,332 72,512 403,590 862,227
Commercial real estate loans 507,991 57,788 116,623 142,936 559,585 1,384,923
Commercial loans 653,298 21,314 22,199 34,920 179,938 911,669
- ---------------------------------------------------------------------------------------------------------------------
Total earning assets 1,978,390 363,881 675,604 761,978 2,622,784 6,402,637
- ---------------------------------------------------------------------------------------------------------------------
Other assets - - - - 438,700 438,700
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,978,390 $ 363,881 $ 675,604 $ 761,978 $3,061,484 $6,841,337
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW deposits $ 226,385 $ - $ - $ - $ 385,465 $ 611,850
Savings deposits 69,230 - - - 169,492 238,722
Money market deposits 366,772 9,839 9,839 - 335,277 721,727
Time deposits 1,218,939 359,177 465,119 603,034 377,433 3,023,702
Short-term borrowings 404,915 200 100 20,675 - 425,890
FHLB borrowings 110,142 27,350 43,925 43,689 23,044 248,150
Long-term debt 1,972 44 - - 99,777 101,793
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,398,355 396,610 518,983 667,398 1,390,488 5,371,834
- ---------------------------------------------------------------------------------------------------------------------
Demand deposits - - - - 637,164 637,164
Other liabilities - - - - 146,854 146,854
Shareholders' equity - - - - 685,485 685,485
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,398,355 $ 396,610 $ 518,983 $ 667,398 $2,859,991 $6,841,337
- ---------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity $ (419,965) $ (32,729) $ 156,621 $ 94,580 $ 201,493
Cumulative GAP $ (419,965) $(452,694) $ (296,073) $ (201,493)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
62
<PAGE>
Other Liquidity Elements
The predominant source of income from earning assets is derived from the loan
portfolio. Commercial loans and commercial loans secured by real estate comprise
49% of total loans and are closely monitored in terms of the volume of loans
which are sensitive to changes in interest rates. The following table shows the
maturity of commercial loans and commercial loans secured by real estate as of
December 31, 1997(in thousands):
<TABLE>
<CAPTION>
After
One But
Within After
Within Five Five
One Year Years Years Total
- ------------------------------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Commercial $485,357 $265,354 $160,958 $911,669
Commercial real estate 273,842 431,993 679,088 1,384,923
- ------------------------------------ ----------- ---------- ----------- ------------
$759,199 $697,347 $840,046 $2,296,592
- ------------------------------------ ----------- ---------- ----------- ------------
Loans maturing after one year with:
Fixed interest rates:
Commercial $137,266 $69,143
Commercial real estate 208,622 347,346
Variable interest rates:
Commercial 128,088 91,815
Commercial real estate 223,371 331,742
- ------------------------------------ ----------- ---------- ----------- ------------
Total $697,347 $840,046
- ------------------------------------ ----------- ---------- ----------- ------------
</TABLE>
Deposits with balances exceeding $100,000 and short-term borrowings are not
considered core funding sources because they are generally short-term in nature
and are subject to competitive bids. The following is a maturity summary of
deposits of $100,000 or more at December 31, 1997 (in thousands):
Certificates of Other Time
Deposit of Deposits of
$100,000 or more $100,000 or more
- ----------------------------------- ------------------ ------------------
3 months or less $139,618 $4,473
Over 3 months through 6 months 57,530 3,881
Over 6 months through 12 months 45,997 5,969
Over 12 months 83,824 24,109
- ----------------------------------- ------------------ ------------------
Total $326,969 $38,432
- ----------------------------------- ------------------ ------------------
63
<PAGE>
The following table presents the amounts and interest rates for federal funds
purchased and security repurchase agreements for each of the last three years
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, $399,730 $368,886 $312,494
Weighted average interest rate at year end 4.75% 4.75% 4.52%
Maximum amount outstanding at any month end $405,268 $377,727 $322,256
Average amount outstanding during the year $367,102 $307,225 $246,357
Weighted average interest rate during the
year 4.78% 4.58% 5.00%
- ---------------------------------------------- ------------ ----------- ------------
</TABLE>
Investment Portfolio Analysis
Keystone's investment policy specifically addresses the use of derivatives and
other hedging activities and provides for specific restrictions on the type and
extent of Keystone's exposure.
A narrow definition of financial derivatives includes off-balance sheet
instruments such as futures, forwards, swaps, and options which are designed to
manage various types of business risks. Keystone has historically made limited
use of the off-balance sheet derivatives known as "interest rate swaps" as a
means to manage the income exposure associated with changes in interest rates,
as well as forward commitments, put options, and short sales to manage exposure
to market risk.
A broader definition of derivatives would include any financial instrument which
derives its value, or contractually required cash flows, from the price of some
other security or index. Keystone's investment in this form of financial
derivatives is limited to some forms of collateralized mortgage obligations
(CMO's) and structured notes. The following is a brief description of both "on"
and "off"-balance sheet derivatives and other hedging activity utilized by
Keystone.
Interest Rate Swaps
Interest rate swaps are "off"-balance sheet instruments which provide for the
exchange of interest payments on a specified principal amount (notional amount)
for a specified period of time. Investment policy requires that Keystone may
execute a swap contract only as a hedge of an interest rate position and not for
the purpose of speculation or trading. That policy further requires that swap
contracts must be approved in advance by the affiliate banks' president and
parent company executives, and that swap counterparties must be reviewed for
credit-worthiness on at least an annual basis. Keystone's policy also sets forth
specific limitations on exposure to a single counterparty and sets an aggregate
limit on the notional value of interest rate swaps at 50% of capital.
Other Hedging Activity
Forward mortgage commitments, as well as put options and short sales of U.S.
Treasury securities, have been used to reduce the market risk, associated with
interest rate fluctuations, of fixed-rate consumer mortgages and indirect
automobile loans held for sale. In accordance with Keystone's written policy,
such transactions must be ratified by the Board of Directors and can only be
executed as a hedge of market risk and not for the purpose of speculation or
trading. Such activity is self-limited by the level of loan production.
CMO's
Purchases of CMO's are restricted principally to U.S. Government issues that
have passed various regulatory standards associated with mortgage extension or
prepayment risk. All Keystone CMO holdings can be disaggregated into groupings
which more accurately define the extent of mortgage extension or prepayment
risk, and include PAC's (planned amortization class), VADM's (very accurately
64
<PAGE>
defined maturity), TAC's (targeted amortization class) and others. All CMO's are
subject to at least annual examination to ensure compliance with regulatory
standards. CMO's which fail to meet these standards are disclosed to the Board
of Directors and are subjected to special review and monitoring procedures.
Other more volatile forms of CMO's include interest-only, principal-only, and
inverse floating bonds, which are subject to even more stringent limits set
forth in Keystone's investment policy. At December 31, 1997, Keystone had none
of these volatile forms of CMO's in its investment portfolio. An even
higher-risk form of CMO's, known as CMO residuals, are specifically designated
as prohibited investments under Keystone's investment policy.
Structured Notes
A structured note is a debt security whose cash flow characteristics, including
coupon rate, redemption amount or redemption rate may be dependent on one or
more indices or future cash flow adjustment. Keystone's activity in structured
notes has been limited to U.S. Government Agency index amortization notes
(IANs), whereby the principal balance amortizes according to the prepayments on
a specific collateral pool of mortgage-backed securities. Keystone's investment
in structured notes is also limited by investment policy guidelines and
aggregated $9,968,000 at the end of 1997.
The following presentation provides an analysis of the composition of
investments included in both investments available-for-sale and investments
held-to-maturity. This comparison includes a detailed presentation of derivative
financial instruments included in the U.S. Government agency category (in
thousands):
December 31, 1997
- -------------------------------------- ----------------------------------------
Amortized Market Unrealized
Cost Value Gain/(Loss)
- -------------------------------------- ------------- ------------ -------------
U.S. Government Agency Obligations:
Conventional $671,826 $674,358 $2,532
Mortgage-backed 125,450 127,693 2,243
CMO's:
PAC's(1) 21,611 21,610 (1)
VADM's (2) 10,966 11,023 57
TAC's (3) 6,190 6,179 (11)
Other 22,710 23,131 421
Structured notes 9,968 10,100 132
- -------------------------------------- ------------- ------------ -------------
Subtotal 868,721 874,094 5,373
- -------------------------------------- ------------- ------------ -------------
Negotiable money market instruments 178,455 178,404 (51)
U.S. Treasury securities 193,099 194,120 1,021
State and political subdivision
obligations 216,397 222,921 6,524
Corporate and other 149,975 160,079 10,104
- -------------------------------------- ------------- ------------ -------------
Total $1,606,647 $1,629,618 $22,971
- -------------------------------------- ------------- ------------ -------------
(1) A PAC(planned amortization class) has a principal payment schedule that is
guaranteed within a predetermined range of mortgage prepayment rates, i.e.
has built-in call protection, lower prepayment risk and lower average life
variability.
(2) A VADM(very accurately defined maturity) has a stated final payment date
which provides protection from mortgage payment extension risk.
(3) A TAC(targeted amortization class) has a payment schedule that offers some
call protection if mortgage prepayments increase, but little to no
extension protection if prepayments slow down.
65
<PAGE>
Credit Risk and Loan Portfolio Analysis
Keystone's objective as a lending institution is to profitably meet the credit
needs of customers within the communities in which it operates. Credit risk and
lending practices are governed by written policies and procedures which have
been designed to provide for an acceptable level of risk and compensating
return. These policies have also established requirements for lending authority,
underwriting practices, collateral standards, lending concentrations, geographic
limits, and other important elements of the credit process. Significant policies
are reviewed, at a minimum, on an annual basis.
Keystone maintains a corporate loan review function which is independent of the
underwriting and administrative process. Loan review performs continuous reviews
to determine adherence to credit policies, assess the effectiveness of the
credit process, and objectively evaluate the quality of the loan portfolio. In
connection with these reviews, adversely classified credits within the portfolio
are identified and included on a classified loan report, which is reviewed by
management on a monthly basis.
Loan Composition
Keystone maintains a diverse loan portfolio. The composition of Keystone's loan
portfolio is illustrated in the following comparison of loan balances at the end
of each of the last five years (in thousands):
1997 1996 1995 1994 1993
- ---------------- ----------- ----------- ------------ ------------ -------------
Commercial:
Commercial and
industrial $637,617 $547,153 $487,843 $426,434 $404,171
Floor plan
financing 203,189 172,248 167,504 150,066 118,362
Obligations of
political
subdivisions 70,863 73,749 64,677 60,160 58,915
- ---------------- ----------- ----------- ------------ ------------ -------------
911,669 793,150 720,024 636,660 581,448
- ---------------- ----------- ----------- ------------ ------------ -------------
Commercial Real
Estate:
Commercial and
industrial 1,080,776 843,746 828,508 840,910 799,614
Multi-family
residential 130,148 99,074 92,544 84,548 91,288
Obligations of
political
subdivisions 40,930 29,686 33,010 31,023 27,037
Construction
and land
development 117,503 91,755 86,983 68,652 63,074
Agricultural 15,566 12,756 13,363 14,364 14,424
- ---------------- ----------- ----------- ------------ ------------ -------------
1,384,923 1,077,017 1,054,408 1,039,497 995,437
- ---------------- ----------- ----------- ------------ ------------ -------------
Consumer:
Real estate 862,227 1,186,663 1,206,547 1,184,346 1,042,375
Installment 704,242 626,573 631,584 655,163 550,152
Home equity 473,365 311,086 256,505 227,110 185,083
Personal lines
of credit 41,123 40,498 43,244 46,392 30,645
Leases 335,017 301,483 184,554 111,732 55,070
- ---------------- ----------- ----------- ------------ ------------ -------------
2,415,974 2,466,303 2,322,434 2,224,743 1,863,325
- ---------------- ----------- ----------- ------------ ------------ -------------
Total $4,712,566 $4,336,470 $4,096,866 $3,900,900 $3,440,210
- ---------------- ----------- ----------- ------------ ------------ -------------
66
<PAGE>
Concentration Risk
The diversity of Keystone's loan portfolio is directly influenced by Keystone's
efforts to manage credit risk. Keystone's credit policy has established specific
limits on the level of credit to a borrower or single group of borrowers, which
serve to reduce concentration risk. This diversity is evidenced by the absence
of industry and customer concentrations.
o The largest group of customers in a single industry to whom Keystone provides
credit extensions is automobile dealers. At December 31, 1997 credit
extensions totaling $258,547,000 were outstanding, and consisted of floor
plan and related commercial loans and mortgages.
o Keystone has no dependence on a single customer. The top ten credit
relationships account for only 4% of the total loans outstanding at the end
of 1997.
Geographic Risk
In addition to industry or customer concentrations, credit risk is also affected
by the geographic characteristics of the loan portfolio. The credit risk profile
of Keystone's portfolio is enhanced by the stable economic climate and the
industry diversification of Keystone's-defined market.
o The overwhelming majority of Keystone's lending activities are conducted
within its own defined market.
o Keystone has no loan exposure in foreign countries.
Categories of Exposure
Keystone's loan portfolio can be evaluated in terms of its exposure to certain
types of loans which are presumed to exhibit a higher degree of credit risk.
Examples include credit extensions for highly leveraged transactions,
speculative real estate ventures, or certain commercial real estate loans. These
types of loans may subject a lender to a higher level of loss from economic
downturns, dramatic changes in interest rates, or depressed real estate markets.
The following comments provide insight into this aspect of Keystone's loan
profile.
o Keystone has not been active in the organization, syndication, or purchase of
highly leveraged transactions.
o Keystone's commercial real estate lending practice requires an evaluation of
the borrower's ability to repay debt from cash flow provided through
operations. The underlying value of real estate is viewed as a secondary
source of repayment. In addition, Keystone's lending practices generally
require guarantees, endorsements, and other forms of recourse which provide
additional security for such credits.
Keystone has examined its exposure to commercial and commercial real estate
loans. This examination included a review of all customer account relationships
and classification of credits into risk-related categories. The following table
summarizes the commercial and commercial real estate segments of the portfolio
(in thousands):
December 31, 1997
- -----------------------------------------------------------
Average
Balance Relationship
- ----------------------------- ------------ - --------------
Commercial loans $911,669
Commercial real estate 1,384,923
- ----------------------------- ------------ - --------------
$2,296,592 $121
- ----------------------------- ------------ - --------------
At December 31, 1997, approximately 37% of the balance of commercial real estate
was nonowner occupied. Individual categories of nonowner-occupied in excess of
$75 million were office buildings and apartment/rental units which totaled
$123,356,000 and $129,773,000, respectively.
67
<PAGE>
Secondary Market Activity
Keystone sells a significant portion of its fixed consumer mortgages to
secondary market investors. Keystone recognizes an income stream from the
servicing of these loans subsequent to the sale. The sale of these loans enables
mortgage loans to be self-funding.
Allocation of Allowance
The allowance for credit losses is maintained at a level adequate to absorb
losses associated with credit risk. Management exercises its judgment to
allocate the allowance to specific categories of loans. The following table
summarizes the allocation of the allowance for credit losses at December 31, (in
thousands):
1997 1996 1995 1994 1993
- -------------------------- --------- ---------- --------- ---------- ----------
Commercial $11,266 $9,944 $11,450 $11,168 $11,564
Real estate secured:
Commercial 12,630 11,922 11,969 12,104 13,338
Consumer 1,849 2,324 2,251 2,563 2,957
Consumer 16,844 12,693 7,724 7,036 6,854
General risk 22,502 19,373 22,021 20,837 16,371
- -------------------------- --------- ---------- --------- ---------- ----------
$65,091 $56,256 $55,415 $53,708 $51,084
- -------------------------- --------- ---------- --------- ---------- ----------
While management has apportioned the allowance to the different loan categories,
the allowance is general in nature and is available for the loan portfolio in
its entirety.
Keystone assesses the reasonableness of the allocation of the allowance by
preparing a percentage-based comparison of the allocated allowance to the actual
loan portfolio. At December 31, the following comparison is provided:
1997 1996 1995 1994 1993
- ---------------------------- ---------- ---------- --------- ---------- --------
Commercial:
% of Total loans 19% 18% 18% 16% 17%
% Allocation of allowance 17% 18% 21% 21% 23%
Commercial real estate:
% of Total loans 29% 25% 26% 27% 29%
% Allocation of allowance 19% 21% 22% 23% 26%
Consumer real estate:
% of Total loans 18% 27% 29% 30% 30%
% Allocation of allowance 3% 4% 4% 5% 6%
Consumer:
% of Total loans 34% 30% 27% 27% 24%
% Allocation of allowance 26% 23% 14% 13% 13%
General Risk:
% Allocation of allowance 35% 34% 39% 38% 32%
- ---------------------------- ---------- ---------- --------- ---------- --------
Total loans 100% 100% 100% 100% 100%
- ---------------------------- ---------- ---------- --------- ---------- --------
Allocation of allowance 100% 100% 100% 100% 100%
- ---------------------------- ---------- ---------- --------- ---------- --------
68
<PAGE>
Quarterly Information
Income Performance
1997
- --------------------------------------------------------------------------------
(in thousands, except per Fourth Third Second First
share data Quarter Quarter Quarter Quarter
- ------------------------- -------------- ------------- ------------ ------------
Interest income $131,273 $132,215 $126,804 $120,446
Interest expense 60,650 60,446 57,341 54,057
- ------------------------- -------------- ------------- ------------ ------------
Net interest income 70,623 71,769 69,463 66,389
Provision for credit
losses 3,544 4,319 3,659 3,794
- ------------------------ -------------- ------------- ------------- ------------
Net interest income after
provision 67,079 67,450 65,804 62,595
Noninterest income 21,681 20,825 20,429 20,926
Security transactions 2,842 3,524 (444) 149
Noninterest expense 55,329 55,531 63,768 51,362
- ------------------------ -------------- ------------- ------------- ------------
Income before income taxes 36,273 36,268 22,021 32,308
Income taxes 10,709 11,668 7,039 9,537
- ------------------------ -------------- ------------- ------------- ------------
Net income $25,564 $24,600 $14,982 $22,771
- ------------------------ -------------- ------------- ------------- ------------
Tax effect of security
transactions $995 $1,233 ($155) $52
- ------------------------ -------------- ------------- ------------- ------------
Earnings per share:
Basic $0.49 $0.48 $0.29 $0.44
Diluted 0.49 0.47 0.29 0.43
Dividends per share $0.28 $0.26 $0.26 $0.26
Average shares outstanding 51,979,519 51,834,406 51,320,373 51,630,443
- ------------------------ -------------- ------------- ------------- ------------
1996
- --------------------------------------------------------------------------------
(in thousands, except per Fourth Third Second First
share data) Quarter Quarter Quarter Quarter
- ------------------------ -------------- ------------- ------------- ------------
Interest income $120,864 $119,070 $116,634 $116,852
Interest expense 54,470 53,955 51,139 51,737
- ------------------------ -------------- ------------- ------------- ------------
Net interest expense 66,394 65,115 65,495 65,115
Provision for credit
losses 3,778 2,494 2,307 2,134
- ------------------------ -------------- ------------- ------------- ------------
Net interest income after
provision 62,616 62,621 63,188 62,981
Noninterest income 18,727 17,861 16,814 17,252
Security transactions (2) 29 314 530
Noninterest expense 49,475 49,716 47,650 49,404
- ------------------------ -------------- ------------- ------------- ------------
Income before income taxes 31,866 30,795 32,666 31,359
Income Taxes 9,077 8,508 9,897 9,698
- ------------------------ -------------- ------------- ------------- ------------
Net income $22,789 $22,287 $22,769 $21,661
- ------------------------ -------------- ------------- ------------- ------------
Tax effect of security
transactions $(1) $10 $110 $186
- ------------------------ -------------- ------------- ------------- ------------
Earnings per share:
Basic $0.44 $0.43 $0.43 $0.42
Diluted 0.44 0.42 0.43 0.41
Dividends per share $ 0.26 $0.24 $0.24 $0.24
Average shares outstanding 52,134,311 52,243,456 52,116,068 52,041,141
- ------------------------ -------------- ------------- ------------- ------------
69
<PAGE>
STOCK INFORMATION
Market Prices and Dividends
The common stock of Keystone Financial, Inc. trades on The Nasdaq Stock MarketSM
under the symbol KSTN. The Nasdaq Stock MarketSM, which began operation in 1971,
is the world's first electronic securities market and the fastest growing stock
market in the U.S. Nasdaq utilizes today's information technologies-computers
and telecommunications-to unite its participants in a screen-based, floorless
market. This competitive marketplace, along with the many products and services
available to issuers and their shareholders, attracts today's largest and
fastest growing companies to Nasdaq. More domestic and foreign companies list on
Nasdaq than on all other U.S. stock markets combined. At the close of business
on January 30, 1998, there were approximately 15,056 shareholders of record.
The table below sets forth the quarterly range of high and low closing sales
prices for Keystone common stock as reported by NASDAQ and dividends declared
per common share.
Quarterly Closing Dividends
Sales Price Range Declared
- -------------------- ------------ ------------ ------------
High Low
- -------------------- ------------ ------------ ------------
1997
- -------------------- ------------ ------------ ------------
I $28.00 $24.88 $0.26
II 33.25 24.50 0.26
III 38.88 30.56 0.26
IV 41.00 34.00 0.28
- -------------------- ------------ ------------ ------------
$1.06
==================== ============ ============ ============
1996
- -------------------- ------------ ------------ ------------
I $22.83 $19.83 $0.24
II 22.75 20.75 0.24
III 25.33 21.67 0.24
IV 27.75 24.50 0.26
- -------------------- ------------ ------------ ------------
$0.98
==================== ============ ============ ============
While Keystone is not obligated to pay cash dividends, the Board of Directors
presently intends to continue the policy of paying quarterly dividends. Future
dividends will depend, in part, upon the earnings and financial condition of
Keystone.
The payment of dividends is subject to applicable regulatory rules and policies.
See the dividend and loan restriction information listed in the notes to the
consolidated financial statements.
70
<PAGE>
Exhibit 21.1
Jurisdiction of
Incorporation
------------------
First Tier Subsidiaries of Registrant:
American Trust Bank, N.A. United States
Financial Trust Company Pennsylvania
Keystone Bank, N.A. United States
Keystone National Bank United States
Mid-State Bank and Trust Company Pennsylvania
Northern Central Bank Pennsylvania
Pennsylvania National Bank and Trust Company United States
Keystone Financial Unlimited, Inc. Pennsylvania
Key Trust Company Pennsylvania
Keystone CDC, Inc. Pennsylvania
Keystone Financial Community Development Corporation Pennsylvania
Keystone Financial Life Insurance Company Arizona
Keystone Financial Mid-Atlantic Funding Corporation Pennsylvania
Keystone Investment Services, Inc. Delaware
Martindale Andres & Company Pennsylvania
MMC&P, Inc. Pennsylvania
Second Tier Subsidiaries of Registrant:
Keystone Financial Leasing Corporation Pennsylvania
Keystone Financial Mortgage Corporation Pennsylvania
Keystone Brokerage, Inc. Pennsylvania
Key Investor Services, Inc. Maryland
Key Investor Services, Inc. Pennsylvania
Key Investor Services, Inc. West Virginia
ATB Holding Company, Inc. Delaware
ATB Real Estate Investment Trust, Inc. Maryland
Financial Trust Services Company Pennsylvania
Financial Trust Life Insurance Company Arizona
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Regarding:
1) Registration Statement on Form S-8 relating to the 1988 Stock
Incentive Plan (File #33-38427).
2) Registration Statement on Form S-3 relating to the Dividend
Reinvestment Plan (File #333-02063).
3) Registration Statement on Form S-8 relating to the 1992 Director
Fee Plan (File #33-48031).
4) Registration Statement on Form S-3 relating to the Main Line
Bancshares, Inc. Stock Option Agreements (File #33-50526).
5) Registration Statement on Form S-8 relating to the 1990 Non-
Employee Directors' Stock Option Plan (File #33-59372).
6) Registration Statement on Form S-8 relating to the 1992 Stock
Incentive Plan (File #33-68800).
7) Registration Statement on Form S-8 relating to the Elmwood Bancorp,
Inc. Key Employee Stock Compensation Program (File #33-77358)
8) Registration Statement on Form S-8 relating to the Amended and
Restated Nonqualified Stock Option Agreement with Donald E. Stone
(File #33-77354).
9) Registration Statement on Form S-8 relating to The Frankford
Corporation 1983 Incentive Stock Option Plan (File #33-82088).
10) Registration Statement on Form S-8 relating to the 1995 Employee
Stock Purchase Plan (File #33-91572).
11) Registration Statement on Form S-8 relating to the 1995 Management
Stock Purchase Plan (File #33-91574).
12) Registration Statement on Form S-8 relating to the National
American Bancorp, Inc. 1994 Employee Stock Option Plan
(File #333-02065).
13) Registration Statement on Form S-8 relating to the 1995 Non-Employee
Director's Stock Option Plan (File # 333-04281).
14) Registration Statement on Form S-3 relating to the Senior/
Subordinated Medium-Term Notes (File #333-25393).
We consent to the incorporation by reference in the above listed
Registration Statements of our report dated, January 30, 1998, with
respect to the consolidated financial statements of Keystone Financial,
Inc. and subsidiaries incorporated by reference in this Annual Report
(Form 10-K) for the year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
----------------------
Pittsburgh, Pennsylvania
March 27 , 1998
<PAGE>
Exhibit 23.2
CONSENT OF BEARD & COMPANY, INC., INDEPENDENT AUDITORS
Regarding:
1) Registration Statement on Form S-8 relating to the 1988 Stock
Incentive Plan (File #33-38427).
2) Registration Statement on Form S-3 relating to the Dividend Reinvest
ment Plan (File #333-02063).
3) Registration Statement on Form S-8 relating to the 1992 Director Fee
Plan (File #33-48031).
4) Registration Statement on Form S-3 relating to the Main Line
Bancshares, Inc. Stock Option Agreements (File #33-50526).
5) Registration Statement on Form S-8 relating to the 1990 Non-Employee
Directors' Stock Option Plan (File #33-59372).
6) Registration Statement on Form S-8 relating to the 1992 Stock
Incentive Plan (File #33-68800).
7) Registration Statement on Form S-8 relating to the Elmwood Bancorp,
Inc. Key Employee Stock Compensation Program (File #33-77358).
8) Registration Statement on Form S-8 relating to the Amended and
Restated Nonqualified Stock Option Agreement with Donald E. Stone
(File #33-77354).
9) Registration Statement on Form S-8 relating to The Frankford
Corporation 1983 Incentive Stock Option Plan (File #33-82088).
10) Registration Statement on Form S-8 relating to the 1995 Employee
Stock Purchase Plan (File #33-91572).
11) Registration Statement on Form S-8 relating to the 1995 Management
Stock Purchase Plan (File #33-91574).
12) Registration Statement on Form S-8 relating to the National American
Bancorp, Inc. 1994 Employee Stock Option Plan (File # 333-02065).
13) Registration Statement on Form S-8 relating to the 1995 Non-Employee
Director's Stock Option Plan (File # 333-04281).
14) Registration Statement on Form S-3 relating to the Senior/
Subordinated Medium-Term Notes (File #333-25393).
We consent to the incorporation by reference in the above listed
Registration Statements of our report dated, February 28, 1997, with
respect to the consolidated financial statements of Financial Trust Corp
and subsidiaries for the year ended December 31, 1996, included in this
Annual Report (Form 10-K) of Keystone Financial, Inc. for the year ended
December 31, 1997.
/s/ BEARD & COMPANY, INC
------------------------
Reading, Pennsylvania
March 25, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements and statistical disclosures referenced within item
14(a)(1)(2) and item 1 of the Form 10-K and is qualified in its entirety by
reference to such financial statements and statistical disclosures.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 206,223
<INT-BEARING-DEPOSITS> 1,928
<FED-FUNDS-SOLD> 25,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,091,400
<INVESTMENTS-CARRYING> 528,388
<INVESTMENTS-MARKET> 538,218
<LOANS> 4,712,566
<ALLOWANCE> 65,091
<TOTAL-ASSETS> 6,841,337
<DEPOSITS> 5,233,165
<SHORT-TERM> 425,890
<LIABILITIES-OTHER> 146,854
<LONG-TERM> 349,943
0
0
<COMMON> 104,058
<OTHER-SE> 581,427
<TOTAL-LIABILITIES-AND-EQUITY> 6,841,337
<INTEREST-LOAN> 404,096
<INTEREST-INVEST> 94,894
<INTEREST-OTHER> 11,748
<INTEREST-TOTAL> 510,738
<INTEREST-DEPOSIT> 194,898
<INTEREST-EXPENSE> 232,494
<INTEREST-INCOME-NET> 278,244
<LOAN-LOSSES> 15,316
<SECURITIES-GAINS> 6,071
<EXPENSE-OTHER> 225,990
<INCOME-PRETAX> 126,870
<INCOME-PRE-EXTRAORDINARY> 87,917
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87,917
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 1.68
<YIELD-ACTUAL> 3.87
<LOANS-NON> 20,520
<LOANS-PAST> 33,062
<LOANS-TROUBLED> 489
<LOANS-PROBLEM> 8,347
<ALLOWANCE-OPEN> 56,256
<CHARGE-OFFS> 17,277
<RECOVERIES> 2,485
<ALLOWANCE-CLOSE> 65,091
<ALLOWANCE-DOMESTIC> 65,091
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
Exhibit 99.1
Reconciliation of Previously Reported Quarterly Information
On May 30, 1997, Financial Trust Corp was merged into Keystone, resulting in the
termination of the separate legal existence of Financial Trust Corp. The merger
was accounted for under the pooling-of-interests method of accounting and,
accordingly, the consolidated financial statements were restated. Columns one
and two of the following presentation represent amounts previously reported by
the individual entities. Column three, which represents total combined Keystone
as reported in the 1997 Annual Report to Shareholders, is the sum of columns one
and two with the exception of earnings per share amounts, which are calculated
based on total average shares of the combined entity after giving effect to the
issuance of shares resulting from the merger.
Historical Combined
Keystone Financial Trust Keystone
-------- --------------- --------
For the quarter ended:
March 31, 1996
Net Interest Income $52,591 $12,524 $65,115
Net Income 16,857 4,804 21,661
Basic Earnings per Share $ 0.44 $0.56 $0.42
June 30, 1996
Net Interest Income $52,435 $13,060 $65,495
Net Income 17,733 5,036 22,769
Basic Earnings per Share $ 0.47 $0.59 $0.43
September 30, 1996
Net Interest Income $51,899 $13,216 $65,115
Net Income 17,025 5,262 22,287
Basic Earnings per Share $0.45 $0.62 $0.43
December 31, 1996
Net Interest Income $52,838 $13,556 $66,394
Net Income 17,860 4,929 22,789
Basic Earnings per Share $0.47 $0.58 $0.44
March 31, 1997
Net Interest Income $53,012 $13,377 $66,389
Net Income 17,129 5,642 22,771
Basic Earnings per Share $0.46 $0.66 $0.44
========================= ============= ============== ==============
<PAGE>
