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, 1998
OR
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange
Act of 1934 for the transition period
from ________to_________
- - ------------------------------------------------------------------------------
Commission File Number 0-11460 KEYSTONE FINANCIAL, INC.
Pennsylvania 23-2289209
(State of Incorporation) (IRS Employer 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, 1999:
Common Stock $2.00 Par Value -- $1,736,637,000
The number of shares outstanding of the registrant's class of common stock as of
February 28, 1999:
Common Stock $2.00 Par Value -- 49,259,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholder report for the year ended December 31, 1998,
are incorporated by reference into Parts I and II and portions of the Proxy
Statement of Keystone Financial, Inc. for the 1999 annual shareholders meeting
are incorporated by reference into Part III.
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FORM 10-K
INDEX
PART I
- - -----------
Item 1 Business 3
Item 2 Properties 9
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
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 Operation 10
Item 7A Quantitative and Qualitative Disclosures about 10
Market Risk
Item 8 Financial Statements and Supplementary Data 10
Item 9 Changes in and Disagreements with Accountants on 10
Accounting and Financial Disclosure
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
Management 10
Item 13 Certain Relationships and Related Transactions 10
PART IV
- - -----------
Item 14 Exhibits, Financial Statement Schedules and Reports 11
on Form 8-K
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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 $7 billion, Keystone
is the third largest bank holding company headquartered in the Commonwealth of
Pennsylvania.
Keystone is the parent of Keystone Financial Bank, N.A. (the bank) and various
nonbank subsidiaries. The bank operates in thirty-one Pennsylvania counties,
three Maryland counties and one county in West Virginia. Prior to December 31,
1998, Keystone was the holding company for seven banks: 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. These seven former banks were combined on that
date to form Keystone Financial Bank.
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, mortgage banking, and community
development. None of the nonbank subsidiaries constitute a significant portion
of Keystone's business. At December 31, 1998, Keystone and its subsidiaries had
2,965 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. Keystone has one reportable segment - community
banking. Refer to the "Notes to Consolidated Financial Statements - Segment
Reporting" section of Exhibit 13.1 for additional information. 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 in the over-the-counter market under the symbol of
KSTN and is included in the National Market System of NASDAQ.
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.
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
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that date to prohibit interstate branching. Only Texas and Montana adopted such
legislation. 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 interstate 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 $150
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
combining the localness of a community bank with a diverse line of products and
services typically only offered by much larger banks. Keystone operates through
twenty local market teams to ensure close personal service and local
decision-making.
As a one-stop financial partner to customers, Keystone's offerings include
investment management and estate planning, mutual funds, annuities, transaction
services and insurance products. Keystone's associates are "Relationship
Bankers", who emphasize long-term relationships with customers by providing
superior service that results in value-added pricing.
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.
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
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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 making, acquiring, brokering, or
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 securities brokerage.
Keystone Financial, Inc., is an affiliate of its subsidiary bank 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 bank
to Keystone, on investment in the stock or other securities of Keystone by the
bank 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. 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
Keystone's federally-chartered national bank is supervised by the Office of the
Comptroller of Currency (OCC), which conducts regular examinations of the bank.
Deposits are federally-insured by the FDIC. In addition, the bank is subject, in
certain instances, to the regulation of the Federal Reserve Board. The areas of
operation of the bank 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
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of loans, truth-in-lending disclosure, permissible types of loans and
investments, trust operations, issuance of securities, and payment of dividends.
In addition, national banks are subject to 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 bank is in
compliance with all such guidelines.
National banks must obtain approval from the OCC before establishing a new
branch. Any merger of financial institutions in which the resulting institution
is a national bank is also subject to the prior approval of the OCC. Any other
merger in which the resulting institution is a federally insured bank or thrift
institution would, depending upon the nature of the merged institution, require
the prior approval of the Federal Reserve Board, the FDIC or the Office of
Thrift Supervision and, in the case of a resulting state-chartered institution,
the applicable financial institution regulatory authority of the chartering
state.
As an affiliate of Keystone, the bank is 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 bank 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.
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 under served communities. In that regard,
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, stream-lining 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.
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.
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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".
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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 55 Chairman (May 1998) and Chief Executive Officer
Prior to May of 1998, Mr. Campbell served as
President and Chief Executive Officer.
Mark L. Pulaski 45 President (May 1998) and Chief Operating
Officer (November 1997)
From November 1997 until May 1998, Mr. Pulaski
served as Vice Chairman, Chief Operating Officer
and Chief Financial Officer (CFO). From 1995 to
November 1997, Mr. Pulaski was Senior Executive
Vice President, CFO and Chief Administrative
officer (CAO) of the Corporation. Prior to 1995,
he served as Executive Vice President, CFO and CAO
of the Corporation.
Ben G. Rooke 49 Executive Vice President, Vice Chairman (May
1998), Counsel and Secretary
George R. Barr, Jr. 47 Executive Vice President (December 1998) and
Deputy General Counsel
Prior to December 1998, Mr. Barr served as
Senior Vice President.
James M. Deitch 45 Executive Vice President (December 1998)
Prior to December 1998, Mr. Deitch served as Vice
Chairman and Chief Operating Officer of Financial
Trust Company (a former subsidiary of Keystone)
and Chairman and Chief Executive Officer of
Keystone National Bank (a former subsidiary of
Keystone).
Edwin R. Eckberg 53 Executive Vice President (December 1998)
Prior to December 1998, Mr. Eckberg served as
Senior Vice President.
Donald F. Holt 42 Executive Vice President (December 1998)and
Chief Financial Officer (May 1998)
Mr. Holt previously served as Senior Vice
President (through December 1998) and Corporate
Controller (through May 1998)
Robert E. Leech 53 Executive Vice President (December 1998)
Prior to December 1998, Mr. Leech served as
President and Chief Executive Officer of
Trust/Asset Management Division.
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Name Age Office with Keystone and/or Subsidiary
- - ---------------- ----- -------------------------------------------
Robert R. Wozniewicz 50 Executive Vice President (December 1998)
Prior to December 1998, Mr. Wozniewicz served as
Chairman, President, and Chief Executive Officer
of American Trust Bank, N.A., a former
subsidiary of Keystone.
ITEM 2 - PROPERTIES
The headquarters of Keystone Financial, Inc. and Keystone Financial Bank are
located at One Keystone Plaza, Harrisburg, Pennsylvania, in a leased building.
The lease expires in 2002 with three consecutive renewal options each for five
years. This building also houses a full-service branch of the bank and an office
for Martindale Andres & Company, a subsidiary of Keystone.
Keystone Financial Bank has a total of 177 branches located throughout
Pennsylvania, Maryland and West Virginia. Of these 177 branches, 127 are owned
and the remainder are leased. Six of the branches are owned by Key Trust, a
subsidiary of Keystone, and leased to the bank.
The bank owns the premises of its automated Telephone Banking Center located in
Cumberland, Maryland. The bank also owns operations centers located in the
following Pennsylvania towns: Bellwood, Williamsport, and St. Clair.
Keystone and the bank 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 premises for
various branches include administrative offices.
Keystone owns the headquarters for its Asset Management Division, which are
located in Harrisburg, Pennsylvania.
Of the nonbanking subsidiaries, Martindale Andres and Company and MMC&P
Retirement Benefits Services are headquartered in leased facilities in
Pennsylvania.
In conjunction with the unification of its seven banks and related reduction in
support staff, Keystone is currently reviewing its branch network and
administrative offices occupancy needs. This review may result in decisions to
dispose of certain properties or terminate certain leases. Such dispositions or
terminations are not expected to have a material impact on Keystone's financial
condition or results of operations.
ITEM 3 - LEGAL PROCEEDINGS
Disclosure not required.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
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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 "Consolidated Financial Statements",
and notes thereto, and "Quarterly Information - Income Performance" are
incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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 1999 Annual Meeting of Shareholders:
- - -- Introduction
- - -- Management Proposal - 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 1998 Report on Executive Compensation" and "Stock Price Performance
Graph", is not incorporated herein.
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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
31,1998, are incorporated by reference in Item 8:
Report of independent auditors
Consolidated statements of condition - December 31, 1998, and 1997
Consolidated statements of income - Years ended December 31, 1998, 1997,
and 1996
Consolidated statements of changes in shareholders'equity - Years ended
December 31, 1998, 1997, and 1996
Consolidated statements of cash flows - Years ended December 31, 1998, 1997,
and 1996
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, 1998, the registrant filed the following
reports on Form 8-K:
Filing Date Item Description
- - -------------------- ----- ----------------------------------------
October 20, 1998 5 Earnings release for the third quarter
November 23, 1998 5 Press release announcing unification of
seven bank subsidiaries
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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
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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 25, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on March 25, 1999, by the following persons on behalf of the
registrant and in the capacities indicated.
/s/ Carl L. Campbell /s/ Mark L. Pulaski
- - ----------------------- ----------------------
Chief Executive Officer President, Chief Operating Officer
& Chairman & Director
/s/ Donald F. Holt
----------------------
Executive Vice President and
Chief Financial Officer
A. Joseph Antanavage, Jr /s/ June B. Barry
- - ----------------------- ----------------------
Director Director
/s/ George T. Brubaker /s/ Paul I. Detwiler, Jr.
- - ----------------------- ----------------------
Director Director
/s/ Donald Devorris /s/ Gerald E. Field
- - ----------------------- ----------------------
Director Director
/s/ Philip C. Herr, II /s/ Allan W. Holman, Jr.
- - ----------------------- ----------------------
Director Director
/s/ Richard G. King /s/ Uzal H. Martz, Jr.
- - ----------------------- ----------------------
Director Director
/s/ Max A. Messenger /s/ William L. Miller
- - ----------------------- ----------------------
Director Director
/s/ Don A. Rosini /s/ James I. Scheiner
- - ----------------------- ----------------------
Director Director
/s/ F. Dale Schoeneman /s/ Molly D. Shepard
- - ----------------------- ----------------------
Director Director
/s/ Ronald C. Unterberger /s/ G. William Ward
- - ----------------------- -----------------------
Director Director
/s/ Ray L. Wolfe
- - -----------------------
Director
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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 19, 1998, filed
herewith.
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, originally filed as
Exhibit 10.2 of Form 10-K of Keystone Financial, Inc., for the year
ended December 31, 1993, filed herewith.
10.3* Keystone Financial, Inc. Management Incentive Compensation Plan as
amended and restated, originally filed as Exhibit 10.3 of Form 10-K of
Keystone Financial, Inc., for the year ended December 31, 1993, filed
herewith.
10.4* Form of employment agreement between Keystone Financial, Inc. and
Executive Officer Campbell, filed herewith.
10.5* Form of employment agreement between Keystone Financial, Inc. and
Executive Officers, Pulaski, Rooke, and Leech, filed herewith.
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, originally
filed as Exhibit 10.7 of Form 10-K of Keystone Financial, Inc., for the
year ended December 31, 1993, filed herewith.
10.9* Keystone Financial, Inc. 1990 Non-Employee Directors' Stock Option
Plan, as amended, originally filed as Exhibit 10.8 of Form 10-K of
Keystone Financial, Inc. for the year ended December 31, 1993, filed
herewith.
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Exhibit Description and Method
No. of Filing
- - -----------------------------------------------------------------------------
10.10* Keystone Financial, Inc. 1992 Stock Incentive Plan, incorporated
herein by reference to Exhibit 10.10 of Form 10-K of Keystone
Financial, Inc., for the year ended December 31, 1997.
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, as amended
November 19, 1998, filed herewith.
10.17* Keystone Financial, Inc. Supplemental Deferred Compensation Plan,
incorporated herein by reference to Exhibit 10.19 of Form 10-K of
Keystone Financial, Inc., for the year ended December 31, 1997.
10.18* Form of employment agreement between Keystone Financial, Inc. and
executive officer Deitch, filed herewith.
10.19* Form of change of control agreement between Keystone Financial, Inc.
and executive officers Barr, Eckberg, Holt, and Wozniewicz, filed
herewith.
10.20* Employment Agreement between Keystone Financial, Inc. and Director
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.
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.
12.1 Statement regarding computation of ratios, filed herewith.
13.1 Portions of the Annual Report to Shareholders of Keystone Financial,
Inc., for the year ended December 31, 1998, 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.
*The exhibits marked by an asterisk (*) are management contracts or compensatory
plans or arrangements.
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Exhibit 3.2
BYLAWS
of
KEYSTONE FINANCIAL, INC.
(a Pennsylvania corporation)
November 21, 1996
as amended to November 19, 1998
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KEYSTONE FINANCIAL, INC.
BYLAWS
ARTICLE I
SHAREHOLDERS
Section 1.01. Annual Meetings. Annual meetings of the shareholders
shall be held on the last Thursday of April in each year at 2:00 p.m., at the
principal business office of the Corporation, or at such other date, time and
place as may be fixed by the Board of Directors. Written notice of the annual
meeting shall be given at least ten days prior to the meeting to each share-
holder entitled to vote thereat. Any business may be transacted at the annual
meeting irrespective of whether or not the notice calling such meeting shall
contain a reference thereto, except otherwise expressly required herein or by
law.
Section 1.02. Special Meetings. Special meetings of the shareholders may be
called at any time, for the purpose or purposes set forth in the call, by the
Chairman of the Board, the President or the Board of Directors, by delivering a
written request to the Secretary. Special meetings shall be held at the
principal business office of the Corporation or at such other place as may be
fixed by the Board of Directors. Written notice of special meetings shall be
given at least ten days prior to the meeting to each shareholder entitled to
vote thereat. No business may be transacted at any special meeting other than
that stated in the notice of meeting and business which is germane thereto.
Section 1.03. Organization. The Chairman of the Board, if one has been
elected and is present, or in his absence, the President, or in his absence, any
Vice President designated by the Board, shall preside, and the Secretary, or in
his absence, any Assistant Secretary, shall take the minutes at all meetings of
the shareholders. In the absence of the Secretary and an Assistant Secretary,
the presiding officer at the meeting shall designate any other person to take
the minutes of the meeting.
Section 1.04. Notice of Business to be Presented at Shareholder Meetings.
(a) Annual Meetings of Shareholders. The proposal of business to be
considered by the shareholders at an annual meeting of shareholders may be made
(i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction
of the Board of Directors or (iii) by any shareholder of the Corporation who was
a shareholder of record at the time of giving of notice provided for in this
Section, who is entitled to vote at the meeting and who has complied with the
notice procedures set forth in this Section. For business to be properly brought
before an annual meeting by a shareholder pursuant to clause (iii) of the
preceding sentence, such business must be a proper matter for shareholder
action, the shareholder must have given timely notice thereof in writing to the
Secretary of the Corporation and such notice must comply with the following
requirements:
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(1) To be timely, a shareholder's notice given pursuant to this
Section must be received at the principal executive offices of
the Corporation, addressed to the Secretary, not less than 120
calendar days before the date of the Corporation's proxy
statement released to shareholders in connection with the
previous year's annual meeting or, if none, its most recent
previous annual meeting. Notwithstanding the preceding sentence,
(A) for business to be presented at the 1999 annual meeting of
shareholders, a shareholder's notice shall be considered timely
if so received by the Corporation on or before December 19, 1998
and (B) if the date of the annual meeting at which such business
is to be presented has been changed by more than 30 days from the
date of the most recent previous annual meeting, a shareholder's
notice shall be considered timely if so received by the
Corporation (i) on or before the later of (x) 150 calendar days
before the date of the annual meeting at which such business is
to be presented or (y) 30 days following the first public
announcement by the Corporation of the date of such annual
meeting and (ii) not later than 15 calendar days prior to the
scheduled mailing date of the Corporation's proxy materials for
such annual meeting. In no event shall the public announcement of
an adjournment of an annual meeting commence a new time period
for the giving of a shareholder's notice as described above.
(2) A shareholder's notice given pursuant to this Section shall
set forth (A) the name and address of the shareholder who intends
to make the proposal and the classes and numbers of shares of the
Corporation's stock beneficially owned by such shareholder; (B) a
representation that the shareholder is and will at the time of
the annual meeting be a holder of record of stock of the
Corporation entitled to vote at such meeting on the proposal(s)
specified in the notice and intends to appear in person or by
proxy at the meeting to present such proposal(s), (C) a
description of the business the shareholder intends to bring
before the meeting, including the text of any proposal or
proposals to be presented for action by the shareholders, (D) the
name and address of any beneficial owner(s) of the Corporation's
stock on whose behalf such business is to be presented and the
class and number of shares beneficially owned by each such
beneficial owner and (E) the reasons for conducting such business
at the meeting and any material interest in such business of such
shareholder or any such beneficial owner.
(b) Special Meetings of Shareholders. Only such business shall be conducted
at a special meeting of shareholders as shall have been brought before the
meeting pursuant to the Corporation's notice of meeting.
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(c) General.
(i) Only such business shall be conducted at a meeting of shareholders as
shall have been brought before the meeting in accordance with the procedures set
forth in this Section. The Chairman of the meeting shall have the power and the
duty to determine whether any business proposed to be brought before a meeting
was proposed in accordance with the procedures set forth in this Section and, if
any business is not in compliance with this Section, to declare that such
defective proposal shall be disregarded.
(ii)For purposes of this Section, (A) "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and (B)
"beneficial ownership" shall be determined in accordance with Rule 13d-3 under
the Exchange Act or any successor rule.
Notwithstanding the foregoing provisions of this Section, a shareholder shall
also comply with all applicable requirements of the Exchange Act and the rules
and regulations thereunder with respect to the matters set forth in this
Section. Nothing in this Section shall be deemed to affect any rights of a
shareholder to request inclusion of a proposal in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act, or any successor rule,
or to present for action at an annual meeting any proposal so included.
ARTICLES II
DIRECTORS
Section 2.01. Number, Election and Term of Office. The number of Directors
which shall constitute the full Board of Directors shall be fixed by the Board
of Directors, pursuant to a resolution adopted by a majority vote of the
Disinterested Directors then in office, but shall not be less than five or more
than twenty-five. Between annual meetings of the shareholders, the Board of
Directors by a vote of a majority of the Disinterested Directors then in office,
may increase the membership of the Board, within the maximum above prescribed,
by not more than three members and, by like vote, appoint qualified persons to
fill the vacancies created thereby in accordance with Section 2.10 hereof. No
decrease in the number of Directors constituting the full Board of Directors
shall shorten the term of any incumbent Director. The Directors shall be
classified with respect to the time for which they shall severally hold office
by dividing them into three classes, each class being as nearly equal in number
as possible. If such classes of Directors are not equal, the Board of Directors,
by a majority vote of the Disinterested Directors then in office, shall
determine which class shall contain an unequal number of Directors. At each
annual meeting of shareholders, the shareholders shall elect Directors of the
class whose term then expires, to hold office until the third succeeding annual
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meeting. Each Director of the Corporation shall hold office for the term for
which elected and until his or her successor shall be elected and shall qualify.
Each Director shall hold office from the time of his election but shall be
responsible as a Director from such time only if he consents to his election;
otherwise from the time he accepts office or attends his first meeting of the
Board. As used herein, the term "Disinterested Director" shall have the meaning
provided in Article 10.1(g) of the Restated Articles.
Section 2.02. Regular Meetings;Notice. Regular meetings of the Board of
Directors shall be held at such time and place as shall be designated by the
Board of Directors from time to time. Notice of such regular meetings of the
Board shall not be required to be given, except as otherwise expressly required
herein or by law. However, whenever the time or place of regular meetings shall
be initially fixed and then changed, notice of such action shall be given
promptly by telephone or otherwise to each Director not participating in such
action. Any business may be transacted at any regular meeting.
Section 2.03. Annual Meeting of the Board. The annual meeting of the Board
of Directors each year shall be held immediately after the annual meeting of the
shareholders at such place as may be fixed by the Board.
Section 2.04. Special Meetings; Notice. Special meetings of the Board may
be called at any time by the Board itself by vote at a meeting, or by the
Chairman, the President, or not less than one-fourth in number of the members of
the Board, to be held at such place, day, and hour as shall be specified by the
person(s) calling the meeting. Notice of every special meeting of the Board of
Directors stating the place, day, and hour thereof shall be given to each
Director by being mailed, sent by telecopier, telex, telegraph or electronic
mail or given personally or by telephone, in each case at least 24 hours before
the time at which the meeting is to be held. Any business may be transacted at
any special meeting regardless of whether the notice calling such meeting
contains a reference thereto, except as otherwise required herein or by law.
Section 2.05. Meetings by Telephone. One or more of the Directors may
participate in any special meeting of the Board of Directors or any committee
thereof by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting are able to hear each
other. Participation in a special meeting in this manner by a Director will by
considered to be attendance in person for all purposes under these Bylaws. This
Section 2.05 shall not apply to the annual meting or to the regular meetings of
the Board of Directors.
Section 2.06. Organization. At all meetings of the Board of Directors, the
presence of at least a majority of the Directors at the time in office shall be
necessary and sufficient to constitute a quorum for the transaction of business.
If a quorum is not present at any meeting, the meeting may be adjourned from
time to time by a majority of the Directors present until a quorum as aforesaid
shall be present; but notice of the time and place to which such meeting is
adjourned shall be given to any Directors not present either by being sent by
telecopier, telex, telegraph, or electronic mail or given personally or by
telephone at least 8 hours prior to the hour of reconvening. Except as otherwise
provided herein, the Restated Articles or by law, resolutions of the Board shall
be adopted, and any action of the Board at a meeting upon any matter shall be
valid and effective, with the affirmative vote of at least a majority of the
Directors present at a meeting duly convened. The Chairman of the Board, if one
has been elected and is present, or if not, the President, shall preside at each
meeting of the Board. In the absence of both the Chairman and the President, the
Directors present shall designate one of their number to preside at the meeting.
The Secretary, or in his absence any Assistant Secretary, shall take the minutes
at all meetings of the Board of Directors. In the absence of the Secretary and
an Assistant Secretary, the presiding officer shall designate any person to
take the minutes of the meeting.
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Section 2.07. Director Nominations and Qualifications.
(a) The Board of Directors shall establish a Nominating Committee from
among its members. This Nominating Committee shall establish criteria for
selection of nominees to stand for election or reelection at any annual meeting
of the shareholders and shall report its recommendations to the Board for its
action. Any shareholder who desires to have an individual considered for
nomination must submit his recommendation in writing to the Secretary of the
Corporation at least ninety (90) days prior to any annual meeting at which the
election of Directors will occur.
(b) Any Director or nominee who has attained the age of 70 on or prior
to date of any annual meeting shall not stand for reelection or election at that
annual meeting. Furthermore, the term of any Director who has attained the age
of 70 on or prior to the date of any annual meeting shall expire at that annual
meeting.
(c) Any Director who becomes more than 50% retired from a principal
occupation on or prior to the date of any annual meeting shall not stand for
reelection at that annual meeting. Furthermore, the term of any Director who
becomes more than 50% retired from a principal occupation on or prior to the
date of any annual meeting, shall expire at that annual meeting.
(d) Director who shall no longer be engaged in his usual and customary
occupation on or prior to the date of any annual meeting shall not stand for
reelection at that annual meeting. Furthermore, the term of any Director who
shall no longer be engaged in his usual and customary occupation on or prior to
the date of any annual meeting shall expire at that annual meeting. The Board
may waive the application of this subsection (d) by a majority vote at any
regular or special meeting of the Board.
(e) Any Director who shall move his residence from the trade area of
the corporation on or prior to the date of any annual meeting shall not stand
for reelection at that annual meeting. Furthermore, the term of any Director who
shall move his residence from the trade area of the corporation on or prior to
the date of any annual meeting shall expire at that annual meeting. For the
purposes of this subsection (e) "trade area" shall be defined as any county in
which the Corporation or any of its banking subsidiaries has an office or branch
and any county contiguous thereto.
(f) Any vacancy created by virtue of this section shall be filled
according to the provisions of Section 2.10 of these Bylaws.
Section 2.08 Presumption of Assent. Minutes of each meeting of the Board
shall be made available to each Director at or before the next succeeding
regular meeting. Each Director shall be presumed to have assented to the
correctness of such minutes unless his objection thereto shall be made to the
Secretary within two business days after such succeeding regular meeting.
Section 2.09. Resignations. Any Director may resign by submitting to the
Chairman of the Board, if one has been elected, or to the President or the
Secretary, his resignation which shall become effective upon its receipt by such
officer or as otherwise specified herein.
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Section 2.10. Vacancies. Vacancies in the Board of Directors, including
vacancies resulting from an increase in the number of Directors, shall be filled
only by a majority vote of the Disinterested Directors (as defined in Article
10.1(g) of the Restated Articles) then in office, though less than a quorum,
except as otherwise required by law. All such Directors elected to fill
vacancies shall hold office for a term expiring at the annual meeting of
shareholders at which the term of the class to which they have been elected
expires.
Section 2.11. Committees. (a) General. Standing or temporary committees may
be appointed from its own number by the board of Directors from time to time,
and the Board may from time to time invest committees with such power and
authority, subject to such conditions as it may see fit. Any action taken by any
committee shall be subject to alteration or revocation by the Board of
Directors; provided, however, that third parties shall not be prejudiced by such
alteration or revocation.
(b) Executive Committee. An Executive Committee may be appointed by a
majority of the full Board; it shall have all the powers and exercise all the
authority of the Board in the management of the business and affairs of the
Corporation except as specifically limited by the Board and except as to matters
for which action by the full Board is required by the Restated Articles or
Section 1731(a)(2) of the Pennsylvania Business Corporation Law.
(c) Audit Committee. An Audit Committee shall be appointed by a majority of
the full Board. The Audit Committee shall be composed of Directors who are
independent of management of the Corporation, are free of any relationship that,
in the opinion of the Board of Directors, would interfere with their exercise of
independent judgment as a Committee member and comply with the requirements of
applicable laws and regulations as to the composition of Audit Committee.
The Audit Committee shall assist the Board in fulfilling its oversight
responsibilities in the areas of internal controls, financial reporting, the
Corporation's internal and external audit programs, compliance with significant
laws and regulations in areas in which it has oversight responsibility and in
other related areas from time to time assigned to it.
The Audit Committee shall, at least once in each year, make or cause to be
made by independent certified public accountants selected by the Board or
shareholders for the purpose, an audit of the books and affairs of the
Corporation. Such audit shall be performed in accordance with Generally Accepted
Auditing Standards. Upon completion of the audit, the Committee shall make a
report thereof and its recommendations to the Board of Directors at its next
regular meeting.
Section 2.12. Emergency Preparedness. Notwithstanding any other provisions
of law, the Articles or these Bylaws, during any emergency period caused by a
national catastrophe or local disaster, a majority of the surviving members (or
the sole survivor) of the Board of Directors who have not been rendered
incapable of acting because of incapacity or the difficulty of communication or
transportation to the place of meeting shall constitute a quorum for the sole
purpose of electing Directors to fill such emergency vacancies; and a majority
of the Directors present at such a meeting may act to fill such vacancies.
Directors so elected shall serve until such absent Directors are able to attend
meetings or until the shareholders act to elect Directors for such purpose.
During such an emergency period, if the Board is unable to or fails to meet, any
action appropriate to the circumstances may be taken by such officers of the
Corporation as may be present and able. Questions as to the existence of a
national catastrophe or local disaster and the number of surviving members
capable of acting shall be conclusively determined at the time by the Board of
Directors or the officers so acting.
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ARTICLE III
OFFICERS AND EMPLOYEES
Section 3.01. Executive Officers. The Executive Officers of the Corporation
shall be the Chairman, the President, the Secretary, the Treasurer, and one or
more Vice Presidents as the Board may from time to time determine, all of whom
shall be elected by the Board of Directors. Any two or more offices may be held
by the same person. Each Executive Officer shall hold office at the pleasure of
the Board of Directors, or until his death or resignation.
Section 3.02. Additional Officers; Other Agents and Employees. The Board of
Directors may from time to time appoint or hire such additional officers,
assistant officers, agents, employees and independent contractors as the Board
deems advisable; the Board or the President shall prescribe their duties,
conditions of employment and compensation; and the Board shall have the right to
dismiss them at any time, without prejudice to their contract rights, if any.
Subject to the power of the Board, the President may employ from time to time
such other agents, employees, and independent contractors as he may deem
advisable for the prompt and orderly transaction of the business of the
Corporation, and he may prescribe their duties and the conditions of their
employment, fix their compensation and dismiss them at any time, without
prejudice to their contract rights, if any.
Section 3.03. The Chairman. The Chairman of the Board shall be elected from
among the Directors. The Chairman (and in his absence, the President) shall
preside at all meetings of the shareholders and of the Board and shall have such
other powers and duties as from time to time may be prescribed in these Bylaws
or by the Board of Directors.
Section 3.04. The President. Subject to the control of the Board of
Directors, the President shall have general policy supervision of and general
management and executive powers over all the property, business, operations,
affairs and employees of the Corporation, and shall see that the policies and
programs adopted or approved by the Board are carried out.
In absence of the Chairman, the President shall preside at all meetings of
the shareholders and of the Board. The President shall exercise such other
powers and duties as from time to time may be prescribed in these Bylaws or by
the Board of Directors. In his absence for reasons other than disability, the
President may designate any officer or Director of the Corporation to exercise
all of the powers and duties of the President. In case of the disability of the
President, the Board shall designate an officer or Director to exercise such
powers.
Section 3.05. The Vice Presidents. The Vice Presidents may be given by
resolution of the Board general executive powers, subject to the control of the
President, concerning one or more or all segments of the operations of the
Corporation. The Vice Presidents shall exercise such other powers and duties as
from time to time may be prescribed in these Bylaws or by the Board of Directors
or by the President.
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Section 3.06. The Secretary and Assistant Secretaries. It shall be the duty
of the Secretary (a) to keep or cause to be kept at the registered office of the
Corporation an original or duplicate record of the proceedings of the
shareholders and the Board of Directors and a copy of the Articles and of the
Bylaws; (b) to attend to the giving of notices of the Corporation as may be
required by law or these Bylaws; (c) to be responsible for the corporate records
and the seal of the Corporation and see that the seal is affixed to such
documents as may be necessary or advisable; (d) to have charge of and keep at
the registered office of the Corporation, or cause to be kept at the office of a
transfer agent or registrar, the stock books of the Corporation and an original
or duplicate share register, giving the names of the shareholders in
alphabetical order and showing their respective addresses, the number and
classes of shares held by each, the number and date of certificates issued for
the shares, and the date of cancellation of every certificate surrendered for
cancellation; and (e) to exercise all powers and duties incident to the office
of Secretary and such other powers and duties as may be prescribed by the Board
of Directors or by the President from time to time. The Secretary of his office
shall be an Assistant Treasurer. The Assistant Secretaries shall assist the
Secretary in the performance of his duties and shall also exercise such other
powers and duties as from time to time may be assigned to them by the Board of
Directors, the President or the Secretary. At the direction of the Secretary or
in his absence or disability, an Assistant Secretary shall perform the duties of
the Secretary.
Section 3.07. The Treasurer and Assistant Treasurers. The Treasurer shall
exercise all powers and duties incident to the office of Treasurer and such
other duties as may be prescribed by the Board of Directors or by the President
from time to time. The Treasurer, by virtue of his office, shall be an Assistant
Secretary. The Assistant Treasurers shall assist the Treasurer in the
performance of his duties and shall also exercise such other powers and duties
as from time to time may be assigned to them by the Board of Directors, the
President or the Treasurer. At the direction of the Treasurer or in his absence
or disability, an Assistant Treasurer shall perform the duties of the Treasurer.
Section 3.08. Compensation. The compensation of all Executive Officers,
elected pursuant to Section 3.01 of these Bylaws, shall be fixed from time to
time by the Board of Directors or by any committee authorized by the Board of
Directors to do so. The President may fix the compensation of all other
officers, agent and employees. The Board may direct that additional compensation
be paid to any officers or employees for any year or years, based upon the
performance of such persons during such year, or on the success of the
operations of the Corporation during such year, or for any other reason deemed
appropriate.
Section 3.09. Vacancies. Any vacancy in any office or position by reason of
death, resignation, removal, disqualification, disability or other cause, shall
be filled in the manner provided in this Article III for regular election or
appointment to such office.
Section 3.10. Delegation of Duties. The Board of Directors may in its
discretion delegate for the time being the powers and duties, or any of them, of
any officer to any other person whom it may select.
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ARTICLE IV
SHARES OF CAPITAL STOCK
Section 4.01. Share Certificates. Every holder of fully-paid stock of the
Corporation shall be entitled to a certificate or certificates, to be in such
form as the Board of Directors may from time to time prescribe, and signed (in
facsimile or otherwise, as permitted by law) by the President or a Vice
President and the Secretary or the Treasurer or an Assistant Secretary or an
Assistant Treasurer which shall represent and certify the number and class of
shares of stock owned by such holder. The Board may authorize the issuance of
certificates for fractional shares or, in lieu thereof, scrip or other evidence
of ownership, which may (or may not) as determined by the Board entitle the
holder thereof to voting, dividends or other rights of shareholders.
Section 4.02. Transfer of Shares. Transfers of shares of the stock of the
Corporation shall be made on the books of the Corporation only upon surrender to
the Corporation of the certificate or certificates for such shares properly
endorsed by the shareholder or by his assignee, agent or legal representative,
who shall furnish proper evidence of assignment, authority or legal succession,
or by the agent of one of the foregoing thereunto duly authorized by an
instrument duly executed and filed with the Corporation in accordance with
regular commercial practice.
Section 4.03. Lost, Stolen, Destroyed or Mutilated Certificates. New
certificates for shares of stock may be issued to replace certificates lost,
stolen, destroyed or mutilated upon such conditions as the Board of Directors
may from time to time determine.
Section 4.04. Regulations Relating to Shares. The Board of Directors shall
have power and authority to make all such rules and regulations not inconsistent
with these Bylaws as it may deem expedient concerning the issue, transfer and
registration of certificates representing shares of the Corporation.
Section 4.05. Holders of Record. The Corporation shall be entitled to treat
the holder of record of any share or shares of stock of the Corporation as the
holder and owner in fact thereof for all purposes and shall have express or
other notice thereof, except as otherwise expressly provided by the laws of
Pennsylvania.
ARTICLE V
MISCELLANEOUS CORPORATE TRANSACTIONS AND DOCUMENTS
Section 5.01. Notes, Checks, etc. All notes, bonds, drafts, acceptances,
checks, endorsements (other than for deposit) guarantees, and all evidences of
indebtedness of the Corporation whatsoever, shall be signed by such officers or
agents of the Corporation, subject to such requirements as to countersignature
or other conditions, as the Board of Directors from time to time may determine.
Facsimile signatures on checks may be used if authorized by the Board of
Directors.
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Section 5.02. Execution of Instruments Generally. Except as provided in
Section 5.01, all deeds, mortgages, contracts and other instruments requiring
execution by the Corporation may be signed by the President, any Vice President
or the Treasurer; and authority to sign any of the foregoing, which may be
general or confined to specific instances, may be conferred by the Board of
Directors upon any other person or persons. Any person having authority to sign
on behalf of the Corporation may delegate from time to time by instrument in
writing all or any part of such authority to any other person or persons if
authorized to do so by the Board of Directors, which authority may be general or
confined to specific instances.
Section 5.03. Voting of Investment Securities Owned by Corporation.
Investment securities owned by the Corporation and having voting power in any
other corporation shall be voted by the President or his designee, unless the
Board confers authority to vote with respect thereto, which may be general or
confined to specific investments, upon some other person. Any person authorized
to vote such securities shall have the power to appoint proxies with general
power of substitution.
ARTICLE VI
GENERAL PROVISIONS
Section 6.01. Offices. The principal business office of the Corporation
shall be at One Keystone Plaza, Front & Market Streets, P.O. Box 3660,
Harrisburg, Pennsylvania 17105-3660. The Corporation may also have offices at
such other places within or without the Commonwealth of Pennsylvania as the
business of the Corporation may require.
Section 6.02. Corporate Seal. The Board of Directors shall prescribe the
form of a suitable corporate seal which shall contain the full name of the
Corporation and the year and state of incorporation.
Section 6.04. Financial Reports to Shareholders. The Board shall have
discretion to determine whether financial reports shall be sent to shareholders,
what such reports shall contain, and whether they shall be audited or accom-
panied by the report of an independent certified public accountant.
Section 6.05. Prior Board Approval of Certain Matters. The following
matters or actions shall be subject to the prior consideration and approval of
the Board of Directors:
(1) Proposed budget of all subsidiaries of the Corporation.
(2) All proposed changes in the duties or title of Executive management of
Keystone Financial, Inc. (Corporate CEO, Corporate Executive Officers, Bank
CEOs), including any salary adjustments, promotion or demotions related thereto.
Section 6.06. Non-Applicability of Statute. Subchapter 25G (Control-Share
Acquisitions) and Subchapter 25H (Disgorgement by Certain controlling
shareholders Following Attempts to Acquire control) of the Pennsylvania Business
Corporation Law, added by the Act of April 27, 1990 (P.L. _________ No. 36),
shall not be applicable to the Corporation. (This By-Law provision was adopted
by action of the Board of Directors on July 26, 1990).
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ARTICLE VII
VALIDATION OF CERTAIN CONTRACTS
Section 7.01. General. A contract or transaction between the Corporation
and one or more of its Directors or officers or between the Corporation and
another person in which one or more Directors or officers of the Corporation are
directors or officers or have a financial or other interest, shall not be void
or voidable solely for that reason, or solely because the Director or officer is
present at or participants in the meeting of the Board of Directors that
authorizes the contract or transaction, or solely because his or their votes are
counted for that purpose, if:
(1) the material facts as to the relationship or interest and as to the contract
or transaction are disclosed or are known to the Board of Directors, and the
Board authorizes the contract or transaction by the affirmative votes of the
disinterested Directors even though the disinterested Directors are less than a
quorum;
(2) the material facts as to the relationship or interest and as to the contract
or transaction are disclosed or are known to the shareholders entitled to vote
thereon, and the contract or transaction is specifically approved by vote of
those shareholders;
(3) or the contract or transaction is fair as to the Corporation as of the time
it is authorized, approved or ratified by the Board of Directors or the share-
holders.
Common or interested Directors may be counted in determining the presence
of a quorum at a meeting of the Board that authorizes a contract or transaction
referred to in this Section. As used in this Section, the term "person" includes
a corporation for profit or not-for-profit, partnership, joint venture, firm,
association, trust or other enterprise or legal entity.
ARTICLE VIII
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 8.01. Indemnification of, and Advancement of Expenses to,
Directors, Officers and Others.
(a) Right to Indemnification. Except as prohibited by law, every Director and
officer of the Corporation shall be entitled as of right to be indemnified by
the Corporation against expenses and any actual or threatened claim, action,
suit or proceeding, civil, criminal, administrative, investigative or other;
whether brought by or in the right of the Corporation or otherwise, in which he
or she may be involved in any manner, as a party, witness or otherwise, or is
threatened to be made so involved, by reason of the fact that such person is or
was serving at the request of the Corporation as a director, officer, employee,
fiduciary or other representative of another corporation, partnerships, joint
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venture, trust, employee benefit plan or other entity (such claim, action, suit
or proceeding hereinafter being referred to as an "Action"); provided, that no
such right of indemnification shall exist with respect to an Action initiated by
an indemnitee (as hereinafter defined) against the Corporation (an "Indemnitee
Action") other than an Action for indemnity or advancement of expenses as
provided in Subsection (c). Persons who are not Directors or officers of the
Corporation may be similarly indemnified in respect of service to the
Corporation or to another such entity at the request of the Corporation to the
extent the Board of Directors at any time denominates such person as entitled to
the benefits of this Section. As used in this Section 8.01, "indemnitee" shall
include each Director and officer of the Corporation and each other person
denominated by the Board of Directors as entitled to the benefits of this
Section 8.01; "expenses" shall include fees and expenses of counsel selected by
an indemnitee; and "liability" shall include amounts of judgments, excise taxes,
finds, penalties and amounts paid in settlement.
(b) Right to Advancement of Expenses. Every indemnitee shall be entitled as of
right to have his or her expenses in defending any Action, or in initiating and
pursuing any Indemnitee Action for indemnity or advancement of expenses under
Subsection (c) of this Section 8.01, paid in advance by the Corporation prior to
final disposition of such Action or Indemnitee Action, provided that the
Corporation receives a written undertaking by or on behalf of the indemnitee to
repay the amount advanced if it should ultimately be determined that the
indemnitee is not entitled to be indemnified for such expenses.
(c) Right of Indemnitee to Initiate Action. If a written claim under Subsection
(a) or Subsection (b) of this Section 8.01 is not paid in full by the
Corporation within thirty days after such claim has been received by the
Corporation, the indemnitee may at any time thereafter initiate an Indemnitee
Action to recover the unpaid amount of the claim and, if successful in whole or
in part, the indemnitee shall also be entitled to be paid the expense of
prosecuting such Indemnitee Action. The only defense to an Indemnitee Action to
recover a claim for indemnification under Subsection(a) of this Section 8.01
shall be that the indemnitee's conduct was such that under Pennsylvania law the
Corporation is prohibited from indemnifying the indemnitee for the amount
claimed, but the burden of proving such defense shall be on the Corporation.
Neither the failure of the Corporation (including its Board of Directors,
independent legal counsel and its shareholders) to have made a determination
prior to the commencement of such Indemnitee Action that indemnification of the
indemnitee is proper in the circumstances, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel or its
shareholders) that the indemnitee's conduct was such that indemnification is
prohibited by Pennsylvania law, shall be a defense to such Indemnitee Action or
create a presumption that the indemnitee's conduct was such that indemnification
is prohibited by Pennsylvania's law. The only defense under Subsection (b) of
this Section 8.01 shall be the indemnitee's failure to provide the undertaking
required by Subsection (b) of this Section 8.01.
(d) Insurance and Funding. The Corporation may purchase and maintain insurance
to protect itself and any person eligible to be indemnified hereunder against
any liability or expense asserted or incurred by such person in connection with
any Action, whether or not the Corporation would have the power to indemnify
such person against such liability or expense by law or under the provisions of
this Section 8.01. The Corporation may create a trust fund, grant a security
interest, cause a letter of credit to be issued or use other means (whether or
not similar to the foregoing) to ensure the payment of such sums as may become
necessary to effect indemnification as provided herein.
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(e) Non-Exclusivity; Nature and Extent of Rights. The rights to
indemnification and advancement of expenses provided for in this
Section 8.01 shall (I) not be deemed exclusive of any other
rights, whether now existing or hereafter created, to which any
indemnitee may be entitled under any agreement, bylaw, charter
provision, vote of shareholders or Directors or otherwise, (ii)
be deemed to create contractual rights in favor of each
indemnitee who serves the Corporation at any time while this
Section 8.01 is in effect (and each such indemnitee shall be
deemed to be so serving in reliance on the provisions of this
Section) and (iii) continue as to each indemnitee who has ceased
to have the status pursuant to which he or she was entitled or
was denominated as entitled to indemnification under this Section
8.01 and shall inure to the benefit of the heirs and legal
representatives of each indemnitee. Any amendment or repeal of
this Section 8.01 or adoption of any other Bylaw or provision of
the Articles of Incorporation which limits in any way the right
to indemnification or the right to advancement of expenses
provided for in this Section 8.01 shall operate prospectively
only and shall not affect any action taken, or failure to act, by
an indemnitee prior to the adoption of such amendment, repeal,
Bylaw or other provision.
(f) Partial Indemnity. If an indemnitee is entitled under any
provision of this Section 8.01 to indemnification by the
Corporation for some or a portion of the expenses or a liability
paid or incurred by the indemnitee in the preparation,
investigation, defense, appeal or settlement of any Action or
Indemnitee Action but not, however, for the total amount thereof,
the Corporation shall indemnify the indemnitee for the portion of
such expenses or liability to which the indemnitee is entitled.
(g) Applicability of Section. This Section 8.01 shall apply to
every Action other than an Action filed prior to January 27,
1987, except that it shall not apply to the extent that
Pennsylvania law does not permit its application to any breach of
performance of duty or any failure of performance of duty by an
indemnitee occurring prior to January 27, 1987.
Section 8.02. Personal Liability of Directors.
(a) To the fullest extent that the laws of the Commonwealth of
Pennsylvania, as in effect on January 27, 1987 or as thereafter
amended, permit elimination or limitation of the liability of
directors, no Director of the Corporation shall be personally
liable for monetary damages as such for any action taken, or any
failure to take any action, as a Director.
(b) This Section 8.02 shall not apply to any action, suit or
proceeding filed prior to January 27, 1987 nor to any breach of
performance of duty of any failure of performance of duty by a
Director of the Corporation occurring prior to January 27, 1987.
The provisions of this Section shall be deemed to be a contract
with each Director of the Corporation who serves as such at any
time while this Section is in effect, and each such Director
shall be deemed to be so serving in reliance on the provisions of
this Section. Any amendment or repeal of this section or adoption
of any other Bylaws or any provision of the Articles of the
Corporation which has the effect of increasing director liability
shall operate prospectively only and shall not effect any action
taken, or any failure to act, prior to the adoption of such
amendment, repeal, other Bylaw or provision.
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ARTICLE IX
AMENDMENTS
Section 9.01. Amendments.
(a) Except with respect to those matters which are, by statute,
reserved exclusively to the shareholders, these Bylaws may be
amended, altered and repealed, and new Bylaws may be adopted, by
a vote of the majority of the Disinterested Directors (as defined
in Section 10.1(g) of the Restated Articles) then in office, at
any regular or special meeting of the Board.
(b) When the Bylaws are to be amended, altered or repealed, or
new Bylaws adopted by the Board of Directors, written notice of
any such proposed change shall be given to each Director at least
ten (10) days prior to the regular or special meeting at which
the proposed change is to be considered. The notice shall include
the text of the Bylaws which is to be amended, altered or
repealed, and the text of the change which is being proposed.
(c) These Bylaws may also be amended, altered and repealed, and
new Bylaws may be adopted, by the shareholders at any regular or
special meeting by the votes required by Section 8.3 of the
Restated Articles of the Corporation or, if no special vote is
required by Section 8.3 of the Restated Articles or otherwise by
law, by a majority of the votes cast thereon by all shareholders
entitled to vote on the proposal. When the Bylaws are to be
amended, altered, or repealed, or new Bylaws adopted by the
shareholders, written notice that the purpose, or one of the
purposes, of the meeting is to consider the adoption, amendment
or repeal of the Bylaws shall be given to each shareholder at
least ten (10) days prior to the regular or special meeting at
which the proposed change is to be considered. There shall be
included in, or enclosed with, the notice a copy of the proposed
amendment or a summary of the changes to be effected thereby.
(d) No provision of these Bylaws shall vest in any person any
property or (except as provided in Sections 8.01(e) and 8.02 of
these Bylaws) any contract right.
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Exhibit 10.2
KEYSTONE FINANCIAL, INC.
1988 STOCK INCENTIVE PLAN
(As Amended 1991)
The purposes of the 1988 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, none of whom has been during his service on
the Committee or within one year prior to becoming a member of the Committee
granted or awarded equity securities (as "equity security" is defined in the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and in regulations
of the Securities and Exchange Commission ("SEC") under Section 16 of the 1934
Act) pursuant to the Plan or any other plan of the Corporation or any of its
affiliates (as "affiliates" is defined in regulations of the SEC under the 1934
Act) other than (i) the Corporation's 1990 Non-Employee Directors' Stock Option
Plan or (ii) another plan under which the receipt of equity securities by a
Director would not disqualify such Director as a "disinterested person" under
regulations of the SEC under Section 16 of the 1934 Act.
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.
1
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 alternative stock appreciation rights, cash payment rights,
limited stock appreciation rights and/or limited cash payment rights) or
stand-alone stock appreciation rights (with or without limited stock
appreciation 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
alternative stock appreciation rights, cash payment rights, limited stock
appreciation rights and/or limited cash payment rights) and stand-alone stock
appreciation rights (with or without limited stock appreciation 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, stand-alone stock
appreciation rights, restricted shares, performance units or bonus shares,
whether alternative stock appreciation rights, cash payment rights, limited
stock appreciation rights and/or limited cash payment rights shall be granted in
conjunction with a stock option and whether limited stock appreciation rights
shall be granted in conjunction with stand-alone stock appreciation rights, 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 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 or
delivered and as to which grants or awards of stock options, stock appreciation
rights without related stock options ("stand-alone stock appreciation rights"),
restricted shares, performance units or bonus shares may be made under the Plan
is 500,000 shares, subject to adjustment and substitution as set forth in
Section 7. If any stock option or stand-alone stock appreciation right 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; however, solely for
the purpose of determining the number of shares of the Common Stock as to which
grants or awards of stock options, stand-alone stock appreciation rights,
restricted shares, performance units and bonus shares may be made under the
Plan, to the extent that alternative stock appreciation rights, limited stock
appreciation rights or limited cash payment rights granted in conjunction with a
stock option or limited stock appreciation rights granted in conjunction with
stand-alone stock appreciation rights are exercised and the stock option or
stand-alone stock appreciation rights surrendered unexercised, such stock option
or stand-alone stock appreciation rights shall be deemed to have been exercised
instead, and the shares of the Common Stock which otherwise would have been
issued or delivered upon the exercise of such stock option or the number of
shares covered by such stand-alone stock appreciation rights shall not again be
available for the grant or award of any other stock option, stand-alone stock
appreciation rights, restricted shares, performance units or bonus shares under
2
the Plan. If any shares of the Common Stock are forfeited to the Corporation
pursuant to the restrictions applicable to restricted shares awarded under the
Plan, the number of shares so forfeited shall again be available for purposes of
the Plan. 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 or delivered
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, Stock Appreciation Rights,
Cash Payment Rights, Limited Stock Appreciation Rights
and Limited 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 422A of the Internal Revenue Code
of 1986 (the "Code"), to grant "nonstatutory stock options" (i.e., stock options
which do not qualify under such Section 422A of the Code) or to grant both types
of stock options (but not in tandem), (b) to grant stand-alone stock
appreciation rights, (c) to award restricted shares, (d) to award performance
units and (e) to award bonus shares. The Committee also shall have the
authority, in its discretion, to grant stock appreciation rights ("alternative
stock appreciation rights") in conjunction with incentive stock options or
nonstatutory stock options with the effect provided in Section 5(D), to grant
cash payment rights in conjunction with nonstatutory stock options with the
effect provided in Section 5(E), to grant limited stock appreciation rights in
conjunction with incentive stock options, nonstatutory stock options or
stand-alone stock appreciation rights with the effect provided in Section 8(D)
and to grant limited cash payment rights in conjunction with nonstatutory stock
options with the effect provided in Section 8(E). Alternative stock appreciation
rights and limited stock appreciation 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 and limited cash payment rights may not
be granted in conjunction with incentive stock options. Alternative stock
appreciation rights, cash payment rights, limited stock appreciation rights
and/or limited 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. Limited stock
appreciation rights granted in conjunction with stand-alone stock appreciation
rights may be granted either at the time the stand-alone stock appreciation
rights are granted or at any time thereafter during the term of the stand-alone
stock appreciation rights.
No employee shall be granted stock options or stand-alone stock
appreciation rights or awarded restricted, performance or bonus shares under the
Plan (disregarding cancelled, terminated or expired stock options or stand-alone
stock appreciation rights, forfeited restricted shares or performance shares not
earned) for an aggregate number of shares in excess of ten percent (10%) of the
total number of shares which may be issued or delivered under the Plan. For the
3
purposes of this limitation, any adjustment or substitution made pursuant to
Section 7 with respect to shares which have not been issued or delivered under
the Plan shall also be made with respect to (a) shares already issued or
delivered under the Plan upon the exercise of stock options, an award of
restricted or bonus shares or the earning of performance shares, (b) shares
which would have been issued or delivered upon the exercise of stock options
under the Plan but for the exercise of alternative stock appreciation rights,
limited stock appreciation rights or limited cash payment rights in lieu of the
exercise of stock options prior to such adjustment or substitution and (c)
shares covered by previously exercised stand-alone stock appreciation rights or
by previously exercised limited stock appreciation rights granted in conjunction
with stand-alone stock appreciation rights.
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, for incentive
stock options granted after December 31, 1986, as required by Section 422A(b)(7)
of the Code as enacted by the Tax Reform Act of 1986, the aggregate fair market
value, determined as provided in Section 5(I) on the date of grant of such
incentive stock options, of the shares with respect to which such 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 or an amendment thereto, and the acceleration of such exercise date
would result in a violation of the restriction required by Section 422A(b)(7) of
the Code set forth in the preceding sentence, then, notwithstanding any such
provision, but subject to the provisions of the next succeeding sentence, the
exercise date of such incentive stock options shall be accelerated only to the
extent, if any, that does not result in a violation of such restriction and, in
such event, the exercise date of the incentive stock options with the lowest
option price shall be accelerated first. If legislation is enacted modifying or
removing the $100,000 restriction required by Section 422A(b)(7) of the Code as
enacted by the Tax Reform Act of 1986, as of the effective date of such
legislation the Committee may in its discretion modify or waive in accordance
with such legislation the $100,000 restriction set forth above for incentive
stock options granted (and to be granted) after December 31, 1986 and authorize
the acceleration, if any, of the exercise date of incentive stock options up to
the maximum extent permitted by such legislation (even if such incentive stock
options are converted in part to nonstatutory stock options).
SECTION 5
Terms and Conditions of Stock Options,
Stock Appreciation Rights and Cash Payment Rights
Stock options, stand-alone stock appreciation rights, alternative stock
appreciation rights and cash payment rights granted under the Plan shall be
subject to the following terms and conditions (stand-alone stock appreciation
rights and alternative stock appreciation rights being herein sometimes referred
to collectively as "stock appreciation rights"):
4
(A) The purchase price at which each stock option may be
exercised (the "option price") and the base price for stand-alone stock
appreciation rights (the "base 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 or stand-alone stock
appreciation rights 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. If alternative stock appreciation rights
are granted in conjunction with a stock option, the base price of the
alternative stock appreciation rights shall equal the option price of
the related stock option. 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); 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 one year may be delivered in payment of the option price of a
stock option. 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 or delivered under the Plan as provided in
Section 3.
(C) No stock option or stock appreciation right 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 incentive stock option shall be
exercisable after the expiration of ten years (five years in the case
of a Ten Percent Employee) from the date of grant. No nonstatutory
stock option or stand-alone stock appreciation rights shall be
exercisable after the expiration of ten years and six months from the
date of grant. A stock option or stock appreciation rights to the
extent exercisable at any time may be exercised in whole or in part.
Except as provided in the last sentence of the next to last paragraph
of Section 8(D), alternative stock appreciation rights granted in
conjunction with a stock option may only be exercised when and to the
extent the stock option may be exercised and only by the same person
who is entitled to exercise the stock option except that alternative
stock appreciation rights granted in conjunction with an incentive
stock option shall not be exercisable unless the fair market value of
the Common Stock on the date of exercise exceeds the option price of
the shares subject to the incentive stock option.
(D) A person exercising stock appreciation rights shall be
entitled to receive from the Corporation that number of shares of the
Common Stock having an aggregate fair market value on the date of
exercise of the stock appreciation rights equal to the excess of the
fair market value of one share of the Common Stock on such date of
exercise over the base price per share times the number of shares
covered by the stock appreciation rights, or portion thereof, which are
exercised, except that cash shall be paid by the Corporation in lieu of
5
a fraction of a share. At the time alternative stock appreciation
rights are exercised, the stock option or portion thereof related
thereto shall be surrendered unexercised to the Corporation. To the
extent that alternative stock appreciation rights are exercised, the
stock option, or portion thereof, which is surrendered unexercised and
any limited stock appreciation rights or limited cash payment rights
granted in conjunction with such stock option, or portion thereof,
shall automatically terminate. To the extent that stand-alone stock
appreciation rights are exercised, any limited stock appreciation
rights granted in conjunction with such stand-alone stock appreciation
rights, or the portion thereof which is exercised, shall automatically
terminate. The Committee shall have the authority, in its discretion,
to determine whether the obligation of the Corporation upon exercise of
stock appreciation rights shall be paid in cash or partly in cash and
partly in shares, except that the Corporation shall not pay to any
person who is subject to the provisions of Section 16(b) of the 1934
Act at the time of exercise of stock appreciation rights any portion of
the obligation of the Corporation in cash (except cash in lieu of a
fraction of a share) unless and until at least six months have elapsed
from the date of grant of the stock appreciation rights and unless such
stock appreciation rights are exercised during the period beginning on
the third and ending on the twelfth business day following the date of
release for publication of the quarterly or annual summary statements
of sales and earnings of the Corporation. The date of exercise of stock
appreciation rights shall be determined under procedures established by
the Committee, and payment under this Section 5(D) shall be made by the
Corporation as soon as practicable after the date of exercise. As of
the date of exercise, the person exercising the stock appreciation
rights shall be considered for all purposes to be the owner of any
shares which are to be issued or delivered upon the exercise of the
stock appreciation rights. To the extent that the stock option in
conjunction with which alternative stock appreciation rights have been
granted is exercised, cancelled, terminates or expires, the alternative
stock appreciation rights shall be cancelled. 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 (or on the alternative date provided for in the
following sentence) 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. If any such person is subject to the
provisions of Section 16(b) of the 1934 Act at the time of exercise of
the stock option, the amount of such cash payment shall be determined
as of an alternative date which shall be the day on which the
restrictions imposed by Section 16(b) of the 1934 Act no longer apply
for purposes of Section 83 of the Code. 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. 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 or stock appreciation rights 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 and
stock appreciation rights 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 422A(c)(7) 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;
6
(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 or stand-alone stock
appreciation rights 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 stand-alone stock appreciation rights 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 or stand-alone stock appreciation rights 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 stand-alone stock
appreciation rights 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 or stand-alone stock
appreciation rights 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 stand-alone stock appreciation rights
or shall die intestate, by the legal representative of the
grantee at any time prior to the expiration date of such stock
option or stand-alone stock appreciation rights 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 or
stand-alone stock appreciation rights are exercisable, any
outstanding stock option or stand-alone stock appreciation
rights 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 or stand-alone stock appreciation
rights were 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 stand-alone stock appreciation
rights or within one year after the date of death, whichever
is the shorter period; and
(vi) Unless the exercise period of a stock option or
stand-alone stock appreciation rights 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 and stand-alone stock appreciation rights held by the
grantee at the time of such termination of employment shall
automatically terminate.
7
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, stock appreciation 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 and stock appreciation rights 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 or stock appreciation rights 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(F) or if a performance unit has been deemed to have
been earned as provided in Section 8(G). Whether a grantee has engaged in the
operation or management of a business which is in competition with the
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, stock appreciation 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.
8
(J) The obligation of the Corporation to issue or deliver
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 or stock appreciation rights 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
(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.
9
(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.
9
(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 or delivered in payment of earned performance units.
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
10
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(G), 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.
10
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.
(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.
11
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, stock appreciation rights or
restricted share, performance unit or bonus share awards and the number of
shares of the Common Stock which may be issued or delivered under the Plan but
are not then subject to outstanding stock options, stock appreciation rights or
restricted share, performance unit or bonus share 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.
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, stock
appreciation rights or restricted share, performance unit or bonus share award,
and for each share of the Common Stock which may be issued or delivered under
the Plan but which is not then subject to any outstanding stock option, stock
appreciation rights or restricted share, performance unit or bonus share 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.
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 and the aggregate base price for all shares subject to each then
outstanding grant of stock appreciation rights prior to such adjustment or
substitution shall be the aggregate option price or base 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 or base 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 shall be
treated in the same manner as the Corporation treats owners of its Common Stock
with respect to fractional shares created by an adjustment or substitution of
shares, except that any property or cash 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 425 of the Code, the Committee
may elect that such adjustment or substitution not be made but rather shall use
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 425 of the Code) of such incentive stock option.
12
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 25% or
more of the Voting Power of the Corporation;
(b) (i) A Tender Offer is made to acquire securities
of the Corporation entitling the holders thereof to 50% or
more of the Voting Power of the Corporation; or (ii) Voting
Shares are first purchased pursuant to any other Tender Offer;
or
(c) At any time less than 60% of the members of the
Board of Directors shall be individuals who were either (i)
Directors on the effective date of the Plan or (ii)
individuals whose election, or nomination for election, was
approved by a vote (including a vote approving a merger or
other agreement providing for the membership of such
individuals on the Board of Directors) of at least two-thirds
of the Directors then still in office who were Directors on
the effective date of the Plan or who were so approved.
(B) Acceleration of the Exercise Date of Stock Options and Stock Appreciation
Rights.
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 (i) all outstanding stock
options and stock appreciation rights shall become immediately and fully
exercisable whether or not otherwise exercisable by their terms, (ii) payment by
the Corporation upon exercise of stock appreciation rights held by a person who
is subject to the provisions of Section 16(b) of the 1934 Act (which stock
appreciation rights have been held less than six months at the time of exercise
following a Section 8 Event) shall be made by the Corporation in shares of
Common Stock (except that cash may be paid in lieu of a fraction of a share) and
(iii) payment by the Corporation upon exercise of stock appreciation rights held
by such a person (which stock appreciation rights have been held at least six
months on the date of exercise following a Section 8 Event) shall be made in
cash if the date of exercise is within sixty (60) days following a Section 8
Event, whether or not the date of exercise is within one of the ten (10) day
periods provided for in Section 5(D).
(C) Extension of the Expiration Date of Stock Options and Stock Appreciation
Rights.
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 and stock appreciation rights held by a grantee
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.
13
(D) Limited Stock Appreciation Rights.
Limited stock appreciation rights granted in conjunction with a stock
option or in conjunction with stand-alone stock appreciation rights shall be
exercisable for a period of sixty (60) days following any Section 8 Event by the
same person who is entitled to exercise the stock option or stand-alone stock
appreciation rights. Limited stock appreciation rights entitle such person to
surrender the stock option or stand-alone stock appreciation rights, or any
portion thereof, unexercised and to receive from the Corporation in exchange
therefor cash in the amount provided for below in this Section 8(D). To the
extent that limited stock appreciation rights are exercised, the stock option or
stand-alone stock appreciation rights, or portion thereof, which is surrendered
unexercised and any alternative stock appreciation rights or limited cash
payment rights granted in conjunction with such stock option, or portion
thereof, shall automatically terminate.
Notwithstanding the foregoing, limited stock appreciation rights may not be
exercised by a person who is subject to the provisions of Section 16(b) of the
1934 Act at the time of exercise of the limited stock appreciation rights unless
and until at least six months have elapsed from the date of grant of the limited
stock appreciation rights; provided, however, that if limited stock appreciation
rights are granted in conjunction with a stock option as to which alternative
stock appreciation rights have previously been granted, the limited stock
appreciation rights shall be deemed to have been granted at the time of grant of
such alternative stock appreciation rights, and if limited stock appreciation
rights are granted in conjunction with stand-alone stock appreciation rights,
the limited stock appreciation rights shall be deemed to have been granted at
the time of grant of such stand-alone stock appreciation rights. Limited stock
appreciation rights granted in conjunction with an incentive stock option shall
also not be exercisable unless the then fair market value of the Common Stock,
determined as provided in Section 5(I), exceeds the option price of such
incentive stock option and unless such incentive stock option is exercisable.
Cash is payable to a person who is subject to the provisions of Section 16(b) of
the 1934 Act at the time of exercise of limited stock appreciation rights
whether or not the date of exercise is within one of the ten (10) day periods
provided for in Section 5(D).
14
The person exercising limited stock appreciation rights granted in
conjunction with a nonstatutory stock option or in conjunction with stand-alone
stock appreciation rights shall receive cash in respect of each share of the
Common Stock subject to the stock option or stand-alone stock appreciation
rights, or portion thereof, which is surrendered unexercised in an amount equal
to the excess of the fair market value of such share on the date of exercise
over the option price of such stock option or the base price of such stand-alone
stock appreciation rights, as the case may be. For this purpose, fair market
value shall mean the highest closing sale price of the Common Stock quoted by
such reliable source as the Committee, in its discretion, may rely upon during
the period beginning on the 90th day prior to the date on which the limited
stock appreciation rights are exercised and ending on such date (or if no such
sale price quotation is available, the highest mean between the bona fide bid
and asked prices on any date during such period) (such closing sale price or
such mean, as applicable, being hereinafter referred to as "such closing sale
price"), except that (i) in the event any Person acquires Beneficial Ownership,
directly or indirectly, of securities of the Corporation entitling such Person
to 25% or more of the Voting Power of the Corporation within the meaning of
Section 8(A)(5)(a), fair market value shall mean the greater of such closing
sale price or the highest price per share paid for the Common Stock shown on the
Statement on Schedule 13D, or any amendment thereto, filed by the Person
acquiring such beneficial ownership and (ii) in the event of a Tender Offer,
fair market value shall mean the greater of such closing sale price or the
highest price paid for the Common Stock pursuant to any Tender Offer in effect
at any time beginning on the 90th day prior to the date on which the limited
stock appreciation rights are exercised and ending on such date. In the event
such value cannot be determined on the date of exercise of the limited stock
appreciation rights, such value shall be determined by the Committee as promptly
as practicable after such exercise and payment by the Corporation shall be made
as promptly as practicable after such determination. Any non-cash consideration
received by the holders of any shares of the Common Stock in a Tender Offer
shall be valued at the higher of (i) the valuation placed thereon by the Person
making the Tender Offer and (ii) the valuation placed thereon by the Committee.
The person exercising limited stock appreciation rights granted in
conjunction with an incentive stock option shall receive cash in respect of each
share of the Common Stock subject to the stock option, or portion thereof, which
is surrendered unexercised in an amount equal to the excess of the fair market
value of such share on the date of exercise, determined as provided in Section
5(I), over the option price of such stock option.
The date of exercise of limited stock appreciation rights shall be
determined under procedures established by the Committee, and payment under this
Section 8(D) shall be made by the Corporation as soon as practicable after the
date of exercise. To the extent that the stock option or stand-alone stock
appreciation right in conjunction with which the limited stock appreciation
rights shall have been granted is exercised, cancelled, terminates or expires,
the limited stock appreciation rights shall be cancelled. If limited stock
appreciation rights are granted in conjunction with a stock option as to which
alternative stock appreciation rights also have been granted or in conjunction
with stand-alone stock appreciation rights, the alternative stock appreciation
rights or stand-alone stock appreciation rights may not be exercised during any
period during which the limited stock appreciation rights may be exercised.
All limited stock appreciation 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. Subject to the foregoing provisions of this
15
Section 8(D) and the other provisions of the Plan, limited stock appreciation
rights granted under the Plan shall be subject to such other terms and
conditions 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.
(E) Limited Cash Payment Rights.
Limited cash payment rights granted in conjunction with a nonstatutory
stock option shall be exercisable for a period of sixty (60) days following any
Section 8 Event by the person who is entitled to exercise the nonstatutory stock
option and shall entitle such person to surrender the nonstatutory stock option,
or any portion thereof, unexercised and to receive from the Corporation in
exchange therefor cash in an amount equal to two (2) times the amount provided
for in the third paragraph of Section 8(D) multiplied by such percentage not
greater than 100% as the Committee, in its discretion, shall determine. For
purposes of the third paragraph of Section 8(D), the words "limited cash payment
rights" shall be deemed to be substituted for "limited stock appreciation
rights." To the extent that limited cash payment rights are exercised, the
nonstatutory stock option, or portion thereof, which is surrendered unexercised
and any alternative stock appreciation rights or limited stock appreciation
rights granted in conjunction with such stock option, or portion thereof, shall
automatically terminate. Notwithstanding the foregoing, limited cash payment
rights may not be exercised by a person who is subject to the provisions of
Section 16(b) of the 1934 Act at the time of exercise unless and until at least
six months have elapsed from the date of grant of the limited cash payment
rights.
The date of exercise of limited cash payment rights shall be determined
under procedures established by the Committee, and payment of the cash provided
for in this Section 8(E) shall be made by the Corporation as soon as practicable
after the date of exercise. To the extent that the nonstatutory stock option in
respect of which limited cash payment rights shall have been granted is
exercised, cancelled, terminates or expires, the limited cash payment rights
shall be cancelled.
All limited 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. Subject to the foregoing provisions of this
Section 8(E) and the other provisions of the Plan, limited cash payment rights
granted under the Plan shall be subject to such other terms and conditions 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.
(F) 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, all such
restrictions shall lapse upon the occurrence of any such "Section 8 Event"
regardless of the scheduled lapse of such restrictions.
(G) 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 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.
16
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 alternative stock appreciation
rights, cash payment rights, limited stock appreciation rights and/or limited
cash payment rights) or stand-alone stock appreciation rights (with or without
limited stock appreciation rights) or to be awarded restricted shares,
performance units or bonus shares under the Plan. Nothing in the Plan, in any
stock option, stock appreciation rights, cash payment rights, limited stock
appreciation rights or limited 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 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 always that no such revocation or termination shall
terminate any outstanding stock options, stock appreciation rights, cash payment
rights, limited stock appreciation rights or limited cash payment rights granted
under the Plan or cause a revocation or a forfeiture of any restricted share,
performance unit or bonus share award under the Plan; and provided further that
no such alteration or amendment of the Plan shall, without shareholder approval
(a) increase the total number of shares which may be issued or delivered under
the Plan, (b) increase the total number of shares which may be covered by any
stock options, stand-alone stock appreciation rights or restricted share,
performance unit or bonus share awards granted to any one person, (c) change the
minimum option price or base price, (d) make any changes in the class of
employees eligible to receive incentive stock options or (e) extend any period
set forth in the Plan during which stock options (with or without alternative
stock appreciation rights, cash payment rights, limited stock appreciation
rights and/or limited cash payment rights) or stand-alone stock appreciation
rights (with or without limited stock appreciation rights) may be granted or
restricted, performance or bonus shares may be awarded. No alteration,
amendment, revocation or termination of the Plan shall, without the written
consent of the holder of a stock option, stock appreciation rights, cash payment
rights, limited stock appreciation rights, limited 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 31,
1988, the date of adoption of the Plan by the Board, provided that such adoption
of the Plan by the Board is approved by the affirmative vote of the holders of
at least a majority of the outstanding shares of voting stock of the Corporation
represented in person or by proxy at a meeting of such holders duly called,
convened and held on or prior to March 30, 1989. No stock option, stock
appreciation rights, limited stock appreciation rights or limited cash payment
rights 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, stock appreciation rights, cash payment
rights, limited stock appreciation rights or limited 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 30, 1998.
17
<PAGE>
EXHIBIT 10.3
AUGUST 1997
KEYSTONE FINANCIAL, INC.
MANAGEMENT INCENTIVE COMPENSATION PLAN
AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1993
Working Copy - Includes First Amendment, effective 7/1/96
- - --------------------------------------------------------------------------------
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<PAGE>
KEYSTONE FINANCIAL, INC.
MANAGEMENT INCENTIVE COMPENSATION PLAN
TABLE OF CONTENTS
Page
ARTICLE I OBJECTIVES........................................... 1
Section 1.01 Objectives........................................... 1
Section 1.02 Application of this Amended and Restated Plan........ 1
ARTICLE II DEFINITIONS.......................................... 2
Section 2.01 Definitions.......................................... 2
ARTICLE III ADMINISTRATION OF THE PLAN........................... 4
Section 3.01 Committee and Agents................................. 4
Section 3.02 Rules and Regulations................................ 4
Section 3.03 Quorum............................................... 4
Section 3.04 Plan Interpretation.................................. 4
Section 3.05 Notice of Participation.............................. 4
Section 3.06 Costs................................................ 4
Section 3.07 Unsecured Creditor................................... 4
Section 3.08 Authority of Board and Committee..................... 5
Section 3.09 Amendment, Modification or Termination............... 5
Section 3.10 Claim and Appeal Procedure........................... 5
ARTICLE IV PARTICIPANT ELIGIBILITY.............................. 7
Section 4.01 Designation of Groups................................ 7
Section 4.02 Participants......................................... 7
Section 4.03 New Participating Entities........................... 7
Section 4.04 Termination of Employment............................ 7
Section 4.05 Death, Retirement, Disability, Leave of Absence
or Transfer...................................... 7
Section 4.06 Directors............................................ 7
1
<PAGE>
ARTICLE V DETERMINATION OF INCENTIVE COMPENSATION
AWARD AND DESCRETIONARY BONUS........................ 8
Section 5.01 Required Financial Performance Levels................ 8
Section 5.02 Performance Criteria................................. 8
Section 5.03 Determination of Salary Percentage and Allocation of
Performance Criteria............................. 9
Section 5.04 Determination of Incentive Compensation Award........ 9
Section 5.05 Determination of Discretionary Bonus................. 9
ARTICLE VI PAYMENT TO PARTICIPANTS AND DEFERRALS................10
Section 6.01 Timing of Payment....................................10
Section 6.02 Payment in Common Stock..............................10
Section 6.03 Beneficiary Designation..............................11
Section 6.04 Deferral of Payment..................................11
Section 6.05 Deferral Account.....................................12
Section 6.06 Deemed Investment Elections..........................13
Section 6.07 Payment of Deferred Amounts..........................14
Section 6.08 Amount of Deferred Payment...........................15
Section 6.09 Automatic Cash Out...................................15
Section 6.10 Hardship Withdrawal..................................16
Section 6.11 Tax Withholding......................................16
ARTICLE VII MISCELLANEOUS PROVISIONS.............................18
Section 7.01 No Recourse..........................................18
Section 7.02 Expense..............................................18
Section 7.03 Merger or Consolidation..............................18
Section 7.04 Legal Costs..........................................18
Section 7.05 Gender and Number....................................18
Section 7.06 Construction.........................................18
Section 7.07 Non-alienation.......................................18
Section 7.08 No Employment Rights.................................19
Section 7.09 Minor or Incompetent.................................19
Section 7.10 Illegal or Invalid Provision.........................19
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<PAGE>
ARTICLE I
OBJECTIVES
Section 1.01 Objectives. The Plan was originally adopted, and was and
continues to be, designed to achieve the following objectives:
(a) Increase the profitability and growth of Keystone
Financial in a manner which is consistent with the
goals of Keystone, its stockholders and its
employees.
(b) Provide executive compensation which is competitive
with other bank holding companies and banks and
provide the potential for payment of meaningful cash
awards.
(c) Attract and retain personnel of outstanding ability
and encourage excellence in the performance of
individual responsibilities.
(d) Motivate and reward those members of management who
contribute to the success of Keystone.
(e) Allow the flexibility which permits revision and
strengthening from time to time to reflect changing
organizational goals and objectives.
(f) The intent of this amended and restated Plan, which
is effective as of January 1, 1993, is profit
enhancement through quality performance.
Section 1.02 - Application of this Amended and Restated Plan. The amended
and restated Plan set forth herein is generally effective as of January 1, 1993.
Certain provisions are effective on January 1, 1994 or later dates. To the
extent there is any inconsistency between this amended and restated Plan and a
Deferral Election filed with the Committee, or the time of payment provisions of
the prior Plan, with respect to deferred Incentive Compensation Awards for Award
Years which began prior to January 1, 1994, the Deferral Election or prior Plan
time of payment provisions shall control.
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<PAGE>
ARTICLE II
DEFINITIONS
Section 2.01 - Definitions. As used herein, the following words and phrases
shall have the meanings below, unless the context clearly indicates otherwise:
(a) "Award Year" shall mean a calendar year beginning on
or after January 1, 1993.
(b) "Beneficiary" shall mean the person or persons,
natural or legal, designated in writing by the
Participant to receive any benefits under the Plan
which may become payable in the event of the
Participant's death or, if none is designated or
surviving at the time of the Participant's death, the
Participant's surviving spouse shall be the
Beneficiary or, if there is no surviving spouse, then
the estate of the Participant shall be the
Beneficiary.
(c) "Board" shall mean the Board of Directors of Keystone
(d) "Committee" shall mean the Human Resources Committee
of the Board.
(e) "Deferral Account" shall mean the bookkeeping account
established on the books and records of Keystone or a
Participating Entity, as applicable, for a Partici-
pant to reflect the deferred Incentive Compensation
Award credited to the Participant for an Award Year
and adjustments thereto under the various provisions
of the Plan. The use of the term Deferral Account
shall not mean, under any circumstances, that a
Participant or Beneficiary, or the Participant's
estate, shall have title to any specific assets of
Keystone or a Participating Entity.
(f) "Deferral Election" shall mean the written notice, in
the form prescribed by the Committee or its delegate,
filed with the Committee, which indicates the portion
of an Incentive Compensation Award which the
Participant elects to defer in accordance with the
terms of the Plan. No Deferral Election shall be
effective until it is received and acknowledged by
the Committee or its delegate.
(g) "Disability" shall mean the total and permanent
disability of a Participant, as defined by any
Long-Term Disability Plan, maintained by Keystone or
a Participating Entity which is applicable to the
Participant, as in effect at the time of
determination.
(h) "Employee" shall mean any common law employee of
Keystone or a Participating Entity.
(i) "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended from time to time.
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(j) "Fair Market Value" shall mean the fair market value
of one share of Keystone Financial, Inc. Common Stock
as determined pursuant to Section 6.02.
(k) "Financial Performance" shall mean the financial
performance of Keystone and/or a Participating Entity
as determined from time to time by the Committee or
its delegate.
(l) "Group" shall mean the group to which a Participant
is assigned in accordance with Section 4.01.
(m) "Incentive Compensation Award" shall mean the dollar
amount of compensation awarded to a Participant for
an Award Year as determined under Article V of the
Plan.
(n) "Keystone" shall mean Keystone Financial, Inc.
(o) "Participant" shall mean an Employee who has been
designated by the Committee to be a participant in
the Plan in accordance with Section 3.05, and only
for as long as such designation remains in effect.
(p) "Participating Entity" shall mean National Bank of
the Main Line, Northern Central Bank, Mid-State Bank,
Pennsylvania National Bank; American Trust Bank and
American Trust Bank of West Virginia as of a date to
be established by Keystone's Executive Vice President
of Banking Group; and any other subsidiary of
Keystone, affiliate bank of Keystone, or other
affiliated entity of Keystone, which elects to
participate in the Plan with respect to its Employees
and is approved by the Board or the Committee to
participate in the Plan, with such status as a Parti-
cipating Entity and participation in the Plan ceasing
automatically on the date the subsidiary or affiliate
ceases to be a subsidiary or affiliate of Keystone.
(q) "Plan" shall mean the Keystone Financial, Inc.
Management Incentive Compensation Plan, amended and
restated effective January 1, 1993, as set forth
herein, and as it may be amended from time to time
hereafter.
(r) "Salary" shall mean the Participant's base salary
from Keystone or a Participating Entity.
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<PAGE>
ARTICLE III
ADMINISTRATION OF THE PLAN
Section 3.01 - Committee and Agents. Full power and authority to administer
the Plan shall be vested in the Committee. The Committee may appoint a secretary
who may, but need not be, a member of the Committee. The Committee may also
employ such other agents as it deems appropriate to assist it with the
administration of the Plan.
Section 3.02 - Rules and Regulations. The Committee shall, from time to
time, establish rules, forms and procedures of general application for the
administration of the Plan.
Section 3.03 - Quorum. A majority of the members of the Committee shall
constitute a quorum for purposes of transacting business relating to the Plan.
The acts of a majority of the members present (in person, or by conference
telephone) at any meeting of the Committee at which there is a quorum shall be
valid acts of the Committee. Acts reduced to and approved unanimously in writing
by all of the Committee members shall also be valid acts.
Section 3.04 - Plan Interpretation. The Committee shall have the full power
and authority to construe and interpret the Plan, and make all determinations of
Incentive Compensation Awards under the Plan, approve all Employees who are to
participate in the Plan, determine the Group to which a Participant is assigned
under Section 4.01, and determine all facts and other issues relating to claims
and appeals under the Plan.
Section 3.05 - Notice of Participation. The Committee shall send a written
notice, in the form prescribed by the Committee or its delegate, informing the
Employee that he or she has been selected to be a Participant in the Plan and
specifying the period for which such designation is to remain in effect. No
Employee shall have the right to become a Participant and shall not be a
Participant until the date specified in the notice. Furthermore, being
designated a Participant does not guarantee an Employee that an Incentive
Compensation Award will be earned or that such Employee will be permitted to
defer receipt of an Incentive Compensation Award pursuant to Section 6.04.
Section 3.06 - Costs. All costs and expenses involved in the administration
of the Plan shall be borne by Keystone or the Participating Entity.
Section 3.07 - Unsecured Creditor. The Plan constitutes a mere promise by
Keystone or the Participating Entity to make benefit payments in the future.
Keystone's and the Participating Entities' obligations under the Plan shall be
unfunded and unsecured promises to pay. Keystone and the Participating Entities
shall not be obligated under any circumstance to fund their respective financial
obligations under the Plan. Any of them may, in its discretion, set aside funds
in a trust or other vehicle, subject to the claims of its creditors, in order to
assist it in meeting its obligations under the Plan, if such arrangement will
not cause the Plan to be considered a funded deferred compensation plan under
ERISA, or the Internal Revenue Code of 1986, as amended, and provided, further,
-4-
that any trust created by Keystone or a Participating Entity and any assets held
by such trust to assist Keystone or the Participating Entity in meeting its
obligations under the Plan will conform to the terms of the model trust, as
described in Rev. Proc. 92-64, 1992-2 C.B. 422 or any successor. The
Participants and their Beneficiaries shall have the status of, and their rights
to receive payments of earned Incentive Compensation Awards shall be no greater
than the rights of, general unsecured creditors of Keystone or the applicable
Participating Entity.
Section 3.08 - Authority of Board and Committee. Any determination or
action of the Committee or the Board and the records of the Committee shall be
final, conclusive and binding on all Participants and Beneficiaries, and their
beneficiaries, heirs, personal representatives, executors and administrators,
and upon Keystone, the Participating Entities and all other persons having or
claiming to have any right or interest in or under the Plan. No Participant
shall participate in any decision of the Board or the Committee which directly
or indirectly affects the Participant's Deferral Election or Deferral Account.
Section 3.09 - Amendment, Modification or Termination. The Board, in its
sole discretion, may amend, modify or terminate the Plan at any time and from
time to time, provided that no such amendment, modification, or termination
shall reduce the Participant's or Beneficiary's vested interest in the Deferral
Account as of the day before any such amendment, modification or termination,
unless consented to by the affected Participant or by the Beneficiary if the
Participant is deceased.
Section 3.10 - Claim and Appeal Procedure.
(a) In the event of a claim by a Participant or a Part-
cipant's Beneficiary for or in respect of any benefit
under the Plan or the method of payment thereof, such
Participant or Beneficiary shall present the reason
for his claim in writing to the Committee, in c/o
Keystone HR Administration, Williamsport, or such
other person or entity designated and communicated by
the Committee. The Committee shall, within ninety
(90) days after the receipt of such written claim
send written notification to the Participant or
Beneficiary as to its disposition, unless special
circumstances require an extension of time for
processing the claim. If such an extension of time
for processing is required, written notice of the
extension shall be furnished to the claimant prior
to the termination of the initial ninety (90) day
period. In no event shall such extension exceed a
period of ninety (90) days from the end of such
initial period. The extension notice shall indicate
the special circumstances requiring an extension of
time and the date by which the Committee expects to
render the final decision.
(b) In the event the claim is wholly or partially denied,
the written notification shall state the specific
reason or reasons for the denial, include specific
references to pertinent Plan provisions on which the
denial is based, provide an explanation of any addi-
tional material or information necessary for the
Participant or Beneficiary to perfect the claim and a
statement of why such material or information is
necessary, and set forth the procedure by which the
Participant or Beneficiary may appeal the denial of
the claim. If the claim has not been granted and
notice is not furnished within the time period speci
fied in the preceding paragraph, the claim shall be
deemed denied for the purpose of proceeding to appeal
in accordance with paragraph (b) below.
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(c) In the event a Participant or Beneficiary wishes to
appeal the denial of his claim, he may request a
review of such denial by making written application
to the Committee, in c/o Keystone HR Administration,
Williamsport, or such other person or entity desig-
nated and communicated by the Committee, within
sixty (60) days after receipt of the written notice
of denial (or the date on which such claim is deemed
denied if written notice is not received within the
applicable time period specified in paragraph (a)
above). Such Participant or Beneficiary (or his duly
authorized representative) may, upon written request
to the Committee, review documents which are perti-
nent to such claim, and submit in writing issues and
comments in support of his position. Within sixty
(60)days after receipt of the written appeal (unless
an extension of time is necessary due to special
circumstances or is agreed to by the parties, but in
no event more than one hundred and twenty (120) days
after such receipt), the Committee shall notify the
Participant or Beneficiary of its final decision.
Such final decision shall be in writing and shall
include specific reasons for the decision, written
in a manner calculated to be understood by the
claimant, and specific references to the pertinent
Plan provisions on which the decision is based. If
an extension of time for review is required because
of special circumstances, written notice of the
extension shall be furnished to the claimant prior to
the commencement of the extension. If the claim has
not been granted and written notice is not provided
within the time period specified above, the appeal
shall be deemed denied.
(d) If a Participant or Beneficiary does not follow the
procedures set forth in paragraphs (a) and (b) above,
he shall be deemed to have waived his right to appeal
benefit determinations under the Plan. In addition,
the decisions, actions and records of the Committee
shall be conclusive and binding upon Keystone, the
Participating Entities and all persons having or
claiming to have any right or interest in or under
the Plan.
<PAGE>
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ARTICLE IV
PARTICIPANT ELIGIBILITY
Section 4.01 - Designation of Groups. An Employee who is designated by the
Committee as a Participant for an Award Year shall be a member of a Group, as
determined from time to time by the Committee or its delegate. With respect to a
Participant who moves from one Group to another during an Award Year, such
Participant shall be treated as a member of each Group for the period of time in
that Group during the Award Year and the Participant's actual Salary for the
period in each Group shall be used to calculate the Incentive Compensation Award
applicable for the period of time in each Group.
Section 4.02 - Participants. Except as otherwise provided in this Section
4.02, an Employee who is not a Participant as of the first day of an Award Year
shall not be a Participant for that Award Year. A new Employee of Keystone or a
Participating Entity hired during an Award Year, and an Employee promoted to a
Group during the Award Year who was not a Participant at the beginning of the
Award Year, may become a Participant during an Award Year and participate in the
Plan for such Award Year on a pro-rata basis.
Section 4.03 - New Participating Entities. Except as otherwise provided in
this Section 4.03, a Participating Entity may only join the Plan as of the first
day of an Award Year. An entity which becomes a subsidiary, affiliate bank, or
other affiliate of Keystone during an Award Year or for other reasons is not
participating in the Plan at the beginning of the Award Year may become a
Participating Entity during an Award Year and participate in the Plan for such
Award Year on a pro-rata basis, or other basis specified by the Committee, if
the Participating Entity joins the Plan effective not later than six (6) months
after the beginning of the Award Year. Notwithstanding the above, the Committee,
in its sole discretion, may provide in writing that a Participating Entity shall
join the Plan more than six (6) months after the beginning of an Award Year and
shall specify in such writing the basis on which the Participating Entity's
Participants shall be eligible for an Incentive Compensation Award for the first
Award Year.
Section 4.04 - Termination of Employment. A Participant who voluntarily or
involuntarily terminates employment with Keystone and all Participating Entities
prior to the end of an Award Year will forfeit any right to an Incentive
Compensation Award for the Award Year during which termination occurs, except as
otherwise provided in Section 4.05 below or as otherwise determined by the
Committee or its delegate.
Section 4.05 - Death, Retirement, Disability, Leave of Absence or Transfer.
If, during an Award Year, a Participant dies, retires, terminates employment
because of Disability, is granted a leave of absence, or is transferred to a
non-Participating Entity or out of all Groups, the Committee may, at its
discretion or under such uniform rules as it may prescribe, make a partial or
full Incentive Compensation Award to the Participant for the Award Year.
Section 4.06 - Directors. A member of the Board who is not an Employee in
one of the Groups may not participate in the Plan.
<PAGE>
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ARTICLE V
DETERMINATION OF INCENTIVE COMPENSATION AWARD
AND DISCRETIONARY BONUS
Section 5.01 - Required Financial Performance Levels. In order for an
Incentive Compensation Award to be made for an Award Year, the following
performance levels must be met:
(a) The minimum level of Financial Performance
established by the Committee for an Award Year for
Keystone or a Participating Entity must be met before
any Incentive Compensation Award based on Keystone's
or such Participating Entity's Financial Performance
can be made.
(b) Keystone's Financial Performance for the Award Year
must be at least two-thirds (or such other percentage
established by the Committee) of the minimum level of
Financial Performance established for Keystone under
(a) above.
(c) The Committee shall establish from time to time and
communicate to Participants the performance rating
required to apply the minimum, maximum and other
intermediate percentages within the performance
criteria established under Section 5.02 for purposes
of calculating the Incentive Compensation Award for
an Award Year; provided, however, that, notwith-
standing any other provision of the Plan to the
contrary, any Participant who receives a rating of
"unsatisfactory" on any performance appraisal report
during an Award Year shall be ineligible for an
Incentive Compensation Award for that Award Year,
and any Participant who receives a rating of "meets
minimal expectations" on any performance appraisal
report during an Award Year shall be eligible for
all or part of any Incentive Compensation Award for
that Award Year only if approved by the Committee
upon recommendation of Keystone executive management.
Section 5.02 - Performance Criteria.
(a) The Incentive Compensation Award for a Participant
may be calculated in part on the basis of Keystone's
Financial Performance and in part on the basis of the
Financial Performance of the Participating Entity who
employs the Participant.
(b) Effective beginning with the 1994 Award Year, in
addition to the Financial Performance criteria refer-
red to in paragraph (a) above, the Incentive Compen-
sation Award for a Participant may be calculated in
part based on the Participant's individual perfor-
mance and/or performance of the Participant's job
unit, the levels of which will be measured by general
criteria (e.g., revenues, margins, cost management,
quality, customer service, etc.) and in part may
consist of a discretionary piece based on the
Participant's individual performance measured by
personal behavioral criteria (e.g. attitude, team-
work, etc.). Guidelines for determining the require-
ments for achieving the various performance levels
(e.g., Outstanding, Meets Expectations, etc.) will be
developed by the Committee or its delegate and
communicated to Participants from time to time during
the Award Year.
-8-
(c) The Committee may, in its sole discretion, change or
eliminate the performance criteria referred to in
paragraphs (a) or (b) above, and may establish new or
additional performance criteria, from time to time,
provided that the applicable performance criteria are
communicated to affected Participants.
Section 5.03 - Determination of Salary Percentage and Allocation of
Performance Criteria. The Committee shall determine and, itself or through its
delegate, communicate to Participants from time to time the percentage of a
Participant's Salary to be taken into account for purposes of determining a
Participant's Incentive Compensation Award for an Award Year. The Committee
shall also determine and, itself or through its delegate, communicate to Parti-
cipants the percentages of the performance criteria established under Section
5.02 above which are applicable to Participants in each Group, and for this
purpose may subdivide each Group into Keystone Participants and Participating
Entity Participants, or such other subgroups as it may determine.
Section 5.04 - Determination of Incentive Compensation Award. The amount of
a Participant's Incentive Compensation Award for an Award Year, if any, shall be
determined by the Committee or its delegate in accordance with the terms of the
Plan and shall be communicated in writing to the Participant on or before March
15th of the next year.
Section 5.05 - Determination of Discretionary Bonus. The Committee may
grant, from time to time in its sole discretion, a bonus to any Participant
based on any criteria it determines. Such bonus, if specifically designated by
the Committee as payable under this Plan, shall be subject to such provisions of
the Plan as it shall specify; provided, however, that such bonus may not be
subject to the provisions of Section 6.04 regarding elective deferrals or the
provisions of Section 6.07 regarding the Participant's election of the form of
payment.
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<PAGE>
ARTICLE VI
PAYMENT TO PARTICIPANTS AND DEFERRALS
Section 6.01 - Timing of Payment. An Incentive Compensation Award for an
Award Year shall be paid to the Participant, or in the case of death to the
Participant's Beneficiary, on or before March 15th of the next year, unless the
Participant has made an election to defer receipt until a later date by filing a
Deferral Election with the Committee which is effective for the Award Year in
accordance with Section 6.04.
Section 6.02 - Payment in Common Stock. At the discretion of the committee
which administers the Keystone Financial, Inc. 1992 Stock Incentive Plan (the
"SIP Committee") or any similar plan in effect from time to time (the "SIP"),
Incentive Compensation Awards payable on or after January 1, 1994 under any
Section of this Article VI may be paid in whole or in part in shares of Keystone
Financial, Inc. Common Stock, provided, however, that with respect to
Participants subject to Section 16 of the Securities Exchange Act of 1934, such
shares must be paid in a manner consistent with the provisions of and as
provided in the SIP. The number of shares of Common Stock to be paid would be
determined by dividing the cash payment which would otherwise be made by the
Fair Market Value on the date on which the payment is to be made. Any fractional
share shall be paid in cash. A Participant shall be considered, on the date as
of which Fair Market Value is determined for purposes of the stock distribution,
as a shareholder of Keystone with respect to the shares to be distributed.
For purposes of this Section 6.02, Fair Market Value is 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 SIP Committee or its delegate, 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 the New York
Stock 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
Securities Exchange Act of 1934 on which the Common
Stock is listed, or
(c) if the Common Stock is not listed on any exchange
referred to in paragraphs (a) or (b) above, 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
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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 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 in the manner described above in this Section 6.02.
If the Fair Market Value of the Common Stock cannot be determined on the
basis previously set forth in this Section 6.02 on the date as of which Fair
Market Value is to be determined, the SIP Committee or its delegate 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.
Section 6.03 - Beneficiary Designation. A Participant may file with the
Committee or its delegate a completed designation of Beneficiary Form as
prescribed by the Committee or its delegate. Such designation may be made,
revoked or changed by the Participant at any time before death or receipt of the
balance of the Deferral Account, but such designation of Beneficiary will not be
effective and supersede all prior designations until it is received and
acknowledged by the Committee or its delegate. If the Committee has any doubt as
to the proper Beneficiary to receive payments hereunder, the Committee shall
have the right to withhold such payments until the matter is finally
adjudicated. However, any payment made in good faith shall fully discharge the
Committee, Keystone, the Participating Entities and the Board from all further
obligations with respect to that payment.
Section 6.04 - Deferral of Payment. A Participant who is determined by the
Committee or its delegate to be in the group of Participants constituting a
select group of management or highly compensated employees of Keystone and
Participating Entities for purposes of Title I of ERISA may elect to defer
receipt of all or part (but not less than $1,000) of his or her Incentive
Compensation Award for an Award Year, with payment of deferred amounts to be
made following termination of employment or death as provided in Section 6.07.
In order for a Deferral Election to be effective, a Participant must complete
and file the appropriate forms provided the Committee, in accordance with
procedures established by the Committee, prior to the beginning of the Award
Year or not more than thirty (30) days from the date of becoming a Participant
if after the beginning of an Award Year. A Deferral Election will be effective
with respect to Incentive Compensation Awards attributable to services performed
by the Participant after the election becomes effective and shall continue in
effect for future Award Years until rescinded by the Participant in writing on a
form provided by and delivered to the Committee prior to January 1 of the Award
Year for which the recission is to be effective. Notwithstanding the foregoing,
no election to defer an Incentive Compensation Award shall be effective for a
Participant who has made a hardship withdrawal from the Keystone Financial
401(k) Savings Plan (the "401(k) Plan") (a) for a period of 12 months from the
date of such hardship withdrawal, if the hardship withdrawal has been made in
reliance on Treasury Regulation ss. 1.401(k)-1(d)(2)(iv)(B) and the deferred
Incentive Compensation Award would constitute an employee elective contribution
or employee contribution under an employer plan within the meaning of Treasury
Regulation ss. 1.401(k)-1(d)(2)(iv)(B)(4) or any successor regulation or (b) for
such other period as required for suspension of deferrals under this Plan
pursuant to the provisions of the 401(k) Plan.
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Section 6.05 - Deferral Account. The Committee shall cause a Deferral
Account to be established and maintained only on the books of Keystone or the
Participating Entity for each Participant who elects to defer payment of all or
part of his or her Incentive Compensation Award pursuant to Section 6.04. Such
account shall be credited with the portion of each Incentive Compensation Award
deferred, adjusted quarterly as provided below, and shall be debited for any
payment to the Participant or the Participant's Beneficiary. A separate
subaccount within the Deferral Account shall be maintained for each Award Year
with respect to which a Participant's Deferral Election provides for a number of
installment payments which is different from the Participant's Deferral Election
applicable to other Award Years, and as otherwise determined by the Committee.
(a) The amount in the Participant's Deferral Account
shall be adjusted on a quarterly basis as of the last
day of each calendar quarter to reflect net earnings,
gains or losses for the quarter. The adjustment for
earnings, gains or losses for each quarter shall be
equal to the amount determined under (1) or (2) below
as follows:
(1) Moody's Long-Term Corporate Bond Rates. The
total amount determined by multiplying (A)
one hundred and five percent (105%) of the
average of the Moody's Long-Term Corporate
Bond Rates for the three (3) months in the
preceding calendar quarter (current calendar
quarter, effective January 1, 1994) divided
by twelve, by (B) the balance in the
Participant's Deferral Account as of the end
of each month in the current quarter; or
(2) Other Options. The total amount determined
by multiplying the rate earned (positive or
negative) by each fund available under
paragraph (b) below (taking into account
earnings distributed and share appreciation
(gains) or depreciation (losses) on the
value of shares of the fund) for each month
of the current calendar quarter by the
portion of the balance in the Participant's
Deferral Account as of the end of each such
month, respectively, which is deemed to be
invested in the fund pursuant to Section
6.06 below.
(b) Deemed Investment Options. Subject to elimination,
modification or addition by the Committee, the fol-
lowing shall be the funds available for the Parti-
cipant's election of deemed investments pursuant to
Section 6.06 below:
(1) Balanced Fund. This fund is a Keystone
managed fund and consists of a mix of 30% to
60% in the common stock of large, highly
capitalized companies, 40% to 70% in
short-term to intermediate-term fixed income
investments, and 0% to 10% in money market
securities. The goal is to provide a balance
of long-term growth and current income. The
Balanced Fund shall be the same as the
Balanced Fund used from time to time by the
Keystone Financial 401(k) Savings Plan.
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(2) Fixed Income Fund. This fund is a Keystone
managed fund and uses primarily money market
investments, government obligations,
corporate bonds, and other high-quality
fixed-income securities. The maturities of
the fixed-income investments will not exceed
10 years or, in the case of asset-backed
securities, an average life of 5 years. The
goal is to provide an acceptable rate of
return while maintaining moderately stable
principal value. The Fixed Income Fund shall
be the same as the Fixed Income Fund used
from time to time by the Keystone Financial
401(k) Savings Plan.
(3) Core Equity Fund. This fund is a Keystone
managed fund and is designed for principal
growth through investment in the common
stock of primarily large, highly capitalized
companies. The Core Equity Fund shall be the
same as the Core Equity Fund used from time
to time by the Keystone Financial 401(k)
Savings Plan.
(4) Aggressive Equity Fund. This fund is a
Keystone managed fund designed to provide
growth of principal over time consistent
with the growth and risk characteristics of
common stocks of smaller capitalized comp-
anies (with market caps between $100
million and $1 billion) by investing in
diversified common stocks of corporations
traded on the major U.S. and non-U.S.
exchanges. The Aggressive Equity Fund shall
be the same as the Aggressive Equity Fund
used by the Keystone Financial 401 (k)
Savings Plan.
(5) Global Fund. This fund is intended to prov-
ide investment opportunity to participate in
the growth characteristics of non-U.S.
oriented investments. The fund is a Keystone
managed fund which invests in diversified
common stocks of foreign corporations,
collective trust and mutual funds. The
Global Fund shall be the same as the Global
Fund used from time to time under the
Keystone Financial 401(k) Savings Plan.
(6) Other Options. In addition to, or in lieu
of, the investment options described above,
other funds may be established from time to
time, as determined by the Committee, and
the Committee may provide any other form of
investment option it determines to be advis-
able; provided, however, that such funds and
options shall be made available and com-
municated to all Participants on a uniform
basis.
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Section 6.06 - Deemed Investment Elections.
(a) The Participant shall designate, on a form provided by the
Committee, the percentage, in ten percent (10%) multiples (or
such other percentage as permitted from time to time by the
Committee), of the deferred Incentive Compensation Award that is
to be deemed to be invested in the available funds under Section
6.05(b), with the balance of the deferred Incentive Compensation
Award to receive interest credit according to Section 6.05(a)(1)
above. Said designation shall be effective on a date specified by
the Committee or its delegate and remain in effect and apply to
all subsequent deferred Incentive Compensation Awards until
changed as provided below.
(b) A Participant may elect to change, on a calendar quarter basis,
the deemed investment election under paragraph (a) above with
respect to future deferred Incentive Compensation Awards among
one or more of the options then available by written notice to
the Committee, on a form provided by the Committee (or by voice
or other form of notice permitted by the Committee), at least 30
days before the first day of the calendar quarter as of which the
change is to be effective, with such change to be effective for
amounts credited to the Deferral Account on or after the
effective date.
(c) A Participant may elect to reallocate the balance of the Deferral
Account, subject to any limitations imposed by the Committee or
its delegate, on a calendar quarter basis, in ten percent (10%)
multiples (or such other percentage as permitted from time to
time by the Committee) among the deemed investment options then
available. A Participant may make such an election by written
notice to the Committee, on a form provided by the Committee (or
by voice or other form of notice permitted by the Committee), at
least 30 days before the first day of the calendar quarter as of
which the transfer election is to be effective, with such
transfer to be based on the value of the Deferral Account on the
last day of the preceding quarter.
(d) The election of deemed investments among the options provided
above shall be the sole responsibility of each Participant.
Keystone, the Participating Entities, Employees, and Committee
members are not authorized to make any recommendation to any
Participant with respect to such election. Each Participant
assumes all risk connected with any adjustment to the value of
his Deferral Account. Neither the Committee, Keystone, nor the
Participating Entities in any way guarantees against loss or
depreciation.
(e) All payments from the Plan shall be made from the portion of the
Participant's Deferral Account (or of the applicable subaccount)
which is deemed to be invested in the Moody's Long-Term Corporate
Bond Rates first, the Fixed Income Fund next, the Balanced Fund
next, the Core Equity Fund next, the Aggressive Equity Fund next,
the Global Fund next, and last from all other funds in the order
established by the Committee.
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Section 6.07 - Payment of Deferred Amounts.
(a) Deferred Incentive Compensation Awards shall be paid in a lump
sum or annual installments, for a period not to exceed ten years,
to the Participant as indicated on the Participant's Deferral
Election form. The first payment to the Participant shall be made
on March 30 (or if March 30 is not a business day, on the first
preceding business day) of the calendar year following the
calendar year during which the Participant's termination of
employment with Keystone and all Participating Entities occurs.
For this purpose, termination of employment includes voluntary or
involuntary termination of employment due to retirement or any
other reason other than death, including disability, and shall be
the date reflected on Keystone's or the Participating Entity's
records as the Participant's termination date.
(b) In the event of the Participant's death prior to
commencement of installment payments due under the Plan, the
first installment payment to the Beneficiary shall be made
on March 30 (or if March 30 is not a business day, on the
first preceding business day) of the calendar year following
the calendar year during which the Participant's death
occurs and shall be paid in the same form of payment as
would have been applicable to the Participant had the
Participant survived.
(c) In the event of the Participant's death after commencement
of installment payments to the Participant but prior to full
payment of the installments due, the remaining installments
due under the Plan in respect of the Participant shall
continue to the Beneficiary on the same basis as they would
have been paid to the Participant. The first payment to the
Beneficiary shall be made on the later of the date payment
would otherwise be made or the last day of the second month
following the month in which the Participant's death occurs
and shall include all payments due to the Beneficiary
following death and prior to the first payment.
Section 6.08 - Amount of Deferred Payment. If a lump sum payment is
elected for a deferred Incentive Compensation Award for an Award Year, such
payment shall be equal to the value of the Participant's Deferral Account as
adjusted on the last day of the calendar quarter prior to the date the lump sum
payment is to be made. If annual installments are elected as the payment method
for a deferred Incentive Compensation Award, the amount of the first installment
shall be calculated by dividing the lump sum value of the Participant's Deferral
Account, as determined above, by the number of installments to be paid. Each
later installment shall be determined on the same basis as the first installment
except that the value shall be divided by the number of installments remaining
to be paid. Amounts held pending distribution from the Plan shall continue to be
credited with earnings, gains or losses on a quarterly basis pursuant to Section
6.05.
Section 6.09 - Automatic Cash Out. The Plan is intended to constitute an
unfunded plan for tax purposes and for purposes of Title I of ERISA and is
intended to be maintained primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated employees of
Keystone and Participating Entities and to qualify for the exclusions from Title
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I of ERISA which are provided for in Sections 201(2), 301(a)(3) and 401(a)(1) of
ERISA. Notwithstanding any provision in this Plan to the contrary, in the event
that the Department of Labor, or any other regulatory or other body, issues
final regulations which provide, or a court issues a final determination, that
the Plan does not qualify for any of such exclusions under ERISA, the Board may
amend Section 6.04 of the Plan to change the deferral eligibility provisions,
and the Committee or the Board may revoke the designation of all or some
Employees as Participants for the current or future Award Years, and the
Committee or the Board may take such other action as it determines to be
appropriate in order for the Plan to qualify for such exclusions. In addition,
Participants who are precluded from participating in the deferral provisions of
Section 6.04 because of this Section 6.09 shall have the balance in their
Deferral Account, determined as of the end of the preceding calendar quarter,
plus the amount of any Incentive Compensation Award deferred during the current
calendar quarter, distributed in a single lump sum as soon as practicable after
it is determined that their deferrals should cease, and such Participant's
Deferral Elections shall be void and of no further effect. Keystone, the
Participating Entities, the Committee and the Board shall have no liability to
any Participant who receives a distribution from the Plan or whose participation
is otherwise affected by reason of this Section 6.09.
Section 6.10 - Hardship Withdrawal. Notwithstanding the terms of any
Deferral Election made by a Participant hereunder, the Committee may, in its
sole discretion, permit on or after January 1, 1994 the withdrawal of all or a
portion of the amounts credited to a Participant's Deferral Account, upon the
request of the Participant or the Participant's representative, or following the
death of a Participant upon the request of a Participant's Beneficiary or such
Beneficiary's representative, if the Committee determines that the Participant
or Beneficiary, as the case may be, is confronted with an unforeseeable
emergency. For this purpose, an unforeseeable emergency is an unanticipated
emergency caused by an event that is beyond the control of the Participant or
Beneficiary and that would result in severe financial hardship to the
Participant or Beneficiary if an early hardship withdrawal were not permitted.
The Participant or Beneficiary shall provide to the Committee such evidence as
the Committee may require to demonstrate that such emergency exists and
financial hardship would occur if the withdrawal were not permitted. Any
withdrawal under this Section 6.10 shall be limited to the amount necessary to
meet the emergency. For purposes of the Plan, a hardship shall be considered to
constitute an immediate and unforeseen financial hardship if the Participant has
an unexpected need for cash to pay for expenses incurred by him or a member of
his immediate family (spouse and/or natural or adopted children) such as those
arising from illness, casualty loss, or death. Cash needs arising from
foreseeable events, such as the purchase or building of a house or education
expenses will not be considered to be the result of an unforeseeable financial
emergency. Payment shall be made, as soon as practicable after the Committee
approves the payment and determines the amount of the payment, in a single lump
sum from the portion of the Deferral Account representing Award Years beginning
on or after January 1, 1994 with the longest number of installment payments
being first, and then from the portion of the Deferral Account representing
Award Years beginning prior to January 1, 1994 with the latest payment
commencement dates first, and then from the portion of a Deferral Account, in
each case in accordance with Section 6.06(e).
Section 6.11 - Tax Withholding. All Incentive Compensation Awards, whether
or not deferred under the Plan, shall be subject to Federal income, FICA, and
other tax withholding as required by applicable law. At the time that tax
withholding is required, if an amount is payable in cash under the Plan to the
Participant the amount of the required tax withholding shall be withheld from
and reduce such cash payment. If, however, an amount is not then payable in cash
or the cash payable under the Plan to the Participant is less than the required
withholding, the Participant shall pay, by check or money order payable to
Keystone or the Participant Entity employing the Participant, not later than the
date such withholding is required, the amount of the required tax withholding
or, at the sole election of Keystone or such Participating Entity, the amount of
required tax withholding shall be withheld from other compensation or amounts
payable to the Participant. The Participant shall hold Keystone or such
Participating Entity harmless in acting to satisfy the withholding obligation in
this manner.
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<PAGE>
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.01 - No Recourse. If the Financial Performance taken into
account for determination of an Incentive Compensation Award is found to be
incorrect by Keystone's independent certified public accountants at any time
during the following calendar year and was more than the correct amount, there
shall be no recourse by Keystone directly against any person or estate. However,
Keystone shall have the right to correct such error by reducing by the entire
excess amount any subsequent payments yet to be made under the Plan for all
Award Years. Any underpayments as a result of such error in the Financial
Performance taken into account shall be corrected within six (6) months after
the accountants report the error to the Committee provided that the Committee
confirms the error.
Section 7.02 - Expense. For purposes of determining Financial
Performance, Incentive Compensation Awards shall be treated as an expense for
book purposes in the fiscal year of Keystone or the Participating Entity, as
applicable, in which the Incentive Compensation Award is earned by a
Participant, as opposed to subsequent fiscal year(s) during which the Incentive
Compensation Award is paid, except as determined otherwise by the Committee or
its delegate.
Section 7.03 - Merger or Consolidation. All obligations for amounts
earned but not yet paid under this Plan shall survive any merger, consolidation
or sale of all or substantially all of Keystone's or a Participating Entity's
assets to any entity, and be the liability of the successor to the merger or
consolidation or the purchaser of assets, unless otherwise agreed to by the
parties thereto.
Section 7.04 - Legal Costs. A Participant will be reimbursed by
Keystone (or its successor) or the Participating Entity (or its successor) for
any and all expenses incurred in successfully enforcing, by judgment of a court
of competent jurisdiction and after all appeals have been exhausted, the
Participant's right to receive payments under the terms of this Plan.
Section 7.05 - Gender and Number. The masculine pronoun whenever used
in the Plan shall include the feminine and vice versa. The singular shall
include the plural and the plural shall include the singular whenever used
herein unless the context requires otherwise.
Section 7.06 - Construction. The provisions of the Plan shall be
construed, administered and governed by the laws of the Commonwealth of
Pennsylvania, including its statute of limitations provisions, to the extent not
preempted by ERISA or other applicable Federal law. Titles of Articles and
Sections of the Plan are for convenience of reference only and are not to be
taken into account when construing and interpreting the provisions of the Plan.
Section 7.07 - Non-alienation. Except as may be required by law, neither
the Participant nor any Beneficiary shall have the right to, directly or
indirectly, alienate, assign, transfer, pledge, anticipate or encumber (except
by reason of death) any amount that is or may be payable hereunder, including in
respect of any liability of a Participant or Beneficiary for alimony or other
-17-
payments for the support of a spouse, former spouse, child or other dependent,
prior to actually being received by the Participant or Beneficiary hereunder,
nor shall the Participant's or Beneficiary's rights to benefit payments under
the Plan be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, attachment, or garnishment by creditors of the
Participant or Beneficiary or to the debts, contracts, liabilities, engagements,
or torts of any Participant or Beneficiary, or transfer by operation of law in
the event of bankruptcy or insolvency of the Participant or any Beneficiary, or
any legal process. Notwithstanding the foregoing, the Committee may, in its sole
discretion, recognize and establish procedures for administering a domestic
relations or other family court order providing for the Plan to pay all or a
portion of a Participant's Deferral Account to or for the benefit of a
Participant's spouse, former spouse or children, provided that such order does
not require the Plan to make payment prior to the time payment would otherwise
be made to the Participant pursuant to the terms of the Plan as in effect from
time to time and that it meets such other requirements as the Committee shall
specify.
Section 7.08 - No Employment Rights. Neither the adoption of the Plan
nor any provision of the Plan shall be construed as a contract of employment
between Keystone or a Participating Entity and any Employee or Participant, or
as a guarantee or right of any Employee or Participant to future or continued
employment with Keystone or a Participating Entity, or as a limitation on the
right of Keystone or a Participating Entity to discharge any of its Employees
with or without cause. Specifically, designation as a Participant does not
create any rights, and no rights are created under the Plan, with respect to
continued or future employment or conditions of employment.
Section 7.09 - Minor or Incompetent. If the Committee determines that
any Participant or Beneficiary entitled to a payment under the Plan is a minor
or incompetent by reason of physical or mental disability, it may, in its sole
discretion, cause any payment thereafter becoming due to such person to be made
to any other person for his benefit, without responsibility to follow
application of amounts so paid. Payments made pursuant to this provision shall
completely discharge Keystone, the Participating Entities, the Plan, the
Committee and the Board.
Section 7.10 - Illegal or Invalid Provision. In case any provision of
the Plan shall be held illegal or invalid for any reason, such illegal or
invalid provision shall not affect the remaining parts of the Plan, but the Plan
shall be construed and enforced without regard to such illegal or invalid
provision.
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Exhibit 10.4
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is made on the ____ day of ______________, 1998 between KEYSTONE
FINANCIAL, INC. (the "Corporation"), a Pennsylvania corporation with its
principal office at One Keystone Plaza, Harrisburg, PA 17105 and Carl L.
Campbell (the "Executive"), residing at 4717 Pine Ridge Road, Harrisburg, PA
17110.
WHEREAS, the Corporation desires to employ the Executive as the Chief Executive
Officer of the Corporation under the terms and conditions set forth in this
Agreement; and
WHEREAS, the Executive desires to serve the Corporation as the Chief Executive
Officer under the terms and conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the mutual covenant and agreement set forth
herein and intending to be legally bound hereby, the parties agree as follows:
1. DEFINITIONS. The following definitions shall apply in this Agreement:
a) "Anniversary Date" shall mean January 1, 1999 and the January 1 of
each successive year.
b) "Annual Salary" shall be the stated base cash compensation
defined in Section 5(a) without regard to any elective deferral
or salary reduction plan or program of the Corporation.
c) "Board of Directors" shall mean the Board of Directors of the
Corporation as constituted from time to time.
d) "Change of Control" shall be as defined in Section 14 of this
Agreement.
e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
f) "Disability" shall be as defined in Section 10(b) of this
Agreement.
g) "Early Retirement" shall be that age stipulated from time to time
by the Human Resources Committee of the Board of Directors as the
age at which key management personnel may elect to take early
retirement.
h) "LTD" means the Corporation's long-term disability insurance for
key management personnel as in effect from time to time.
1
i) "MICP" means the Corporation's Management Incentive Compensation
Plan as in effect from time to time, or any successor plan
thereto.
j) "Normal Retirement" shall be that age stipulated from time to
time by the Human Resources Committee of the Board of Directors
as the age at which key management personnel are required to take
mandatory retirement.
k) "Senior Executive" shall mean any key management employee of the
Corporation or a Subsidiary whose employment relationship is gov-
erned by a contract or agreement.
l) "Subsidiary" shall mean any bank, corporation or other entity of
which the Corporation owns, directly or indirectly through one or
more Subsidiaries, a majority of each class of equity security
having ordinary voting power in an election of directors.
2. TERM OF AGREEMENT; RENEWAL.
a) This Agreement shall be initially effective for a
fifty-three-month period beginning August 1, 1998 and ending
on December 31, 2002. Except as provided in Section 2(b),
the term of this Agreement will automatically renew on
January 1, 1999 and on each subsequent Anniversary Date for
an additional five-year period unless, prior to the first
day of October preceding the first Anniversary Date within
the then current term, either party shall give written
notice of nonrenewal to the other, in which event this
Agreement shall terminate at the end of the five-year period
then in effect. For example, the initial contract period is
August 1, 1998 through December 31, 2002. On January 1,
1999, the term of this Agreement extends to December 31,
2003. On January 1, 2000, the term of this Agreement extends
to December 31, 2004 unless one of the parties provides a
written notice of intent not to renew the Agreement prior to
October 1, 1999.
b) In the event of a Change of Control, if the Corporation
provides the Executive with timely notice of nonrenewal
pursuant to Section 2(a) prior to the first Anniversary Date
following the Change of Control, the Corporation's decision
not to renew this Agreement shall not constitute "good
reason" for purposes of Section 10(d)(ii). Any subsequent
decision by the Corporation not to renew this Agreement
shall, however, constitute good reason for purposes of
Section 10(d)(ii).
3. POSITION AND DUTIES. The Executive shall serve as Chief Executive
Officer reporting to the Board of Directors and shall have supervision
and control over, and responsibility for, the general management and
operation of the Corporation, and shall have such other powers and
duties as may from time to time be prescribed by the Board of
Directors, provided that such duties are consistent with the position
of a Senior Executive.
2
4. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall devote
substantially all his working time, ability and attention to the
business of the Corporation during the term of this Agreement. The
Executive shall notify the Board of Directors in writing before the
Executive engages in any other business or commercial activities,
duties or pursuits, including, but not limited to, directorships of
other companies. Under no circumstances may the Executive engage in
any business or commercial activities, duties or pursuits which
compete with the business or commercial activities of the Corporation
or any of its Subsidiaries, nor may the Executive serve as a director
or officer or in any other capacity with any business entity unless
he shall have received advance written approval from the Board of
Directors.
5. COMPENSATION.
a) ANNUAL SALARY. For services rendered under this Agreement, the
Executive shall be entitled to receive as base compensation an
Annual Salary at an initial rate of $400,000 per year. The
Executive's Annual Salary shall be reviewed thereafter by the
Board of Directors at least once annually and may be adjusted at
the discretion of the Board of Directors in accordance with the
Corporation's then-current compensation policies and practices and
other factors deemed relevant by the Board of Directors; provided,
that at no time shall the Annual Salary be less than the Execu-
tive's Annual Salary in the prior calendar year. Annual Salary
shall be subject to withholding and other applicable taxes and
payroll deductions and payable in substantially equal monthly
installments or such other more frequent intervals as may be
determined by the Board of Directors as payroll policy for Senior
Executives.
b) INCENTIVE COMPENSATION. The Executive shall be eligible for annual
incentive awards under and in accordance with the MICP, based on
achievement of annual performance goals and other criteria set
forth in the MICP. Subject to the terms and conditions of the MICP
and all rules and regulations pertaining thereto, any incentive
award to which the Executive becomes entitled will be paid to the
Executive within ninety (90) days following the end of the fiscal
year in question. In addition to the MICP, the Executive will be
eligible to participate in any stock option, stock bonus, or other
incentive plan available generally to other Senior Executives from
time to time.
6. BENEFITS, VACATION TIME, EXPENSES AND PERQUISITES.
a) EMPLOYEE BENEFIT PLANS. During the term of this Agreement, the
Executive shall be entitled to participate in all employee benefit
3
plans made available from time to time by the Corporation to its
Senior Executives, including, but not limited to, pension,
profit-sharing, savings, supplemental retirement income, medical
and health-and-accident plans and arrangements, subject to and on
a basis consistent with the terms and conditions of, and the
Corporation rules and regulations pertaining to such plans and
arrangements, and any limitations or qualifications imposed by any
applicable governmental body. Subject to the foregoing, the
benefit plans and arrangements provided to the Executive shall
include, but not be limited to, the following:
i) Retirement Income Plans: The Executive shall be entitled to
participate in any nonqualified supplemental retirement income
plans available from time to time to the Corporation's Senior
Executives, and shall become vested in such plans according to
the schedules provided in the plan documents. Benefits to be
received by the Executive pursuant to such plans will be
calculated under the formulas utilized in such plans as in
effect from time to time; provided, however, that in the event
of a Change of Control, the involuntary termination of the
Executive's employment other than for cause or the termination
of the Executive's employment for good reason (in either case,
whether or not in conjunction with a Change of Control), the
benefits to be provided to the Executive pursuant to such
plans shall be calculated under the formulas utilized by such
plans as in effect from time to time but in no event shall
such benefits be less than the benefits calculated under the
formulas utilized in such plans as in effect on the date of
the Change of Control (as defined in Section 14(g)) or the
effective date of the Executive's termination of employment ,
respectively.
ii) Life Insurance: Subject to satisfaction of conditions
imposed by the applicable insurance company for additional
coverage, the Corporation shall maintain for the Executive
during the term of this Agreement the insurance coverage
established for the Executive effective January 1, 1994, under
and in accordance with the Keystone Financial Executive Split
Dollar Agreement with Executive; provided, and notwithstanding
any contrary provisions therein, the Corporation shall have no
unilateral right to terminate or modify such Split Dollar
Agreement with the Executive.
iii) Disability Insurance: In addition to standard group
benefit provisions, the Corporation shall make available a
supplemental LTD insurance policy for purchase by the
Executive, provided the Executive qualifies as a medically
acceptable risk to the issuing company on a standard
underwriting basis. Such policy shall provide that in the
event the Executive becomes disabled in accordance with the
terms of such policy, he shall be entitled to receive benefits
from all sources (e.g., Social Security, group LTD and
4
supplemental LTD) equal to 67% of his Annual Salary as in
effect at the time of disability until he reaches the age of
65 or dies, whichever occurs first. The Corporation shall
continue to pay to the Executive his Annual Salary during any
applicable "elimination" (waiting) period under the
supplemental LTD policy, not to exceed one hundred and eighty
(180) days. Notwithstanding the foregoing, supplemental LTD
coverage shall be required only if and to the extent that the
Corporation's group LTD insurance policy benefit limit is such
that it does not permit the Executive to receive the
above-stated percentage (i.e., 67%) of income replacement at
the time of said disability.
b) VACATION. During the term of this Agreement, the Executive shall
be entitled to the number of paid vacation days in each calendar
year determined by the Corporation from time to time for its
Senior Executives, but not less than four (4) weeks in any
calendar year. Such vacation entitlement shall be subject to all
rules and policies concerning vacation time as shall be applicable
to Senior Executives from time to time. The Executive shall also
be entitled to all paid holidays given by the Corporation to its
Senior Executives.
c) REIMBURSABLE GENERAL EXPENSES. During the term of this Agreement,
the Executive shall be entitled to receive prompt reimbursement
for all reasonable expenses incurred by him (in accordance with
the policies and procedures established from time to time by the
Board of Directors for its Senior Executives) in performing
services hereunder, provided that the Executive first properly
accounts therefor in accordance with such policies and procedures.
d) REIMBURSABLE AUTO EXPENSES. During the term of this Agreement, the
Executive shall be entitled to receive a monthly payment under the
Corporation's Automobile Capital Cost Reimbursement Plan (the
"ACCRP") for selected executives. Such payments shall be treated
as current income and be subject to regular payroll tax
withholding and deductions. The Executive shall also be entitled
to reimbursement for operating expenses of the automobile
associated with business travel at the established corporate
mileage rate.
5
e) MISCELLANEOUS. The Executive shall be entitled to receive such
other perquisites, e.g. club memberships and "fringe benefits", as
the Board of Directors shall deem appropriate in its sole
direction.
7. INDEMNIFICATION. The Corporation shall indemnify the Executive, to the
fullest extent permitted from time to time by Pennsylvania law, with
respect to any threatened, pending or contemplated action, suit or
proceeding, brought against him by reason of the fact that he is or was
a director, officer, employee or agent of the Corporation or is or was
serving at the written request of the Corporation as a director,
officer, employee or agent of another person or entity. To the fullest
extent permitted by Pennsylvania law, the Corporation shall in advance
of final disposition pay any and all expenses incurred by the Executive
in connection with any threatened, pending or completed action, suit or
proceeding with respect to which the Executive may be entitled to indem-
nification hereunder. The Executive's right to indemnification provided
herein is not exclusive of any other rights of indemnification to which
the Executive may be entitled under any bylaw, agreement, vote of
shareholders or otherwise, and shall continue beyond the term of this
Agreement. The Corporation shall use its best efforts to obtain
insurance coverage for the Executive under an insurance policy covering
officers and directors of the Corporation against lawsuits, arbitrations
or other proceedings; however, nothing herein shall be construed to
require the Corporation to obtain such insurance if the Board of
Directors determines that such coverage cannot be obtained at a commer-
cially reasonable price. Notwithstanding the foregoing, the Executive
shall be entitled to indemnification from the Subsidiary which is his
actual employer if such indemnification is available and provides more
extensive coverage than the ndemnification provided under this Agree-
ment.
8. UNAUTHORIZED DISCLOSURE. During the term of this Agreement or at any
later time, the Executive shall not, without the written consent of a
duly authorized executive officer of the Corporation, disclose to any
person (including an employee of the Corporation or a Subsidiary),
other than a person to whom disclosure is reasonably necessary or
appropriate in connection with the performance by the Executive of his
duties as an executive of the Corporation, any material confidential
information obtained by him while in the employ of the Corporation or
any Subsidiary or operating unit with respect to any of the services,
products, improvements, formulas, designs or styles, processes, custo-
mers, methods of distribution or business practices, the disclosure of
which reasonably would be expected to materially damage the Corporation;
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 the
Executive) or any information of a type not otherwise considered confi-
dential by persons engaged in the same business or a business similar to
that conducted by the Corporation.
9. RESTRICTIVE COVENANTS. Except as otherwise provided below, upon termi-
nation of his employment hereunder regardless of the circumstances or
reasons for such termination, the Executive covenants and agrees as
follows:
a) NONCOMPETITION. The Executive shall not, directly or indirectly,
within the marketing area of the Corporation and its Subsidiaries
(defined as all areas within 100 miles of the work location to
which the Executive was assigned for the majority of time during
6
the twelve months preceding the termination of his employment
where the Corporation has established an active and material
market presence) enter into or engage generally in direct or
indirect competition with the Corporation 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 year after the date of termination of his
employment, except where the termination occurs in conjunction
with a Change of Control as described in Section 11(d). The
existence of any material claim or cause of action of the
Executive against the Corporation, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the
enforcement by the Corporation of this covenant. The Executive
acknowledges and agrees that enforcement of this covenant not to
compete will not prevent him from earning a livelihood and that
any breach of the restrictions set forth in this paragraph will
result in irreparable injury to the Corporation for which it shall
have no adequate remedy at law, and that the Corporation shall be
entitled to injunctive relief in order to enforce the provisions
hereof. In the event that this paragraph shall be determined by
any court of competent jurisdiction to be unenforceable in part by
reason of it 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.
b) RETURN OF MATERIALS. Upon termination of employment with the
Corporation for any reason, including a termination of employment
in conjunction with a Change of Control as described in Section
11(d), the Executive shall immediately deliver to the Corporation
all correspondence, manuals, letters, notes, notebooks, reports
and any other documents and tangible items containing or
constituting confidential information about the Corporation
maintained at his office and shall promptly deliver all said
materials held by him at other locations.
c) NONSOLICITATlON OF EMPLOYEES. The Executive shall not entice or
solicit, directly or indirectly, any other executives or key
management personnel of the Corporation to leave the employ of the
Corporation or its Subsidiaries to work with the Executive or any
entity with which the Executive has affiliated for a period of one
year following the Executive's termination of employment with the
Corporation for any reason, including a termination of employment
in conjunction with a Change of Control as described in Section
11(d).
d) NONSOLICITATION OF CUSTOMERS. The Executive shall not entice or
solicit, directly or indirectly, any client or customer of the
Corporation or any Subsidiary for a period of one year following
the Executive's termination of employment with the Corporation for
any reason, including a termination of employment in conjunction
with a Change of Control as described in Section 11(d).
7
e) REMEDY. The Executive acknowledges and agrees that any breach of
the restrictions set forth in Sections 8 and 9 will result in
irreparable injury to the Corporation for which it shall have no
meaningful remedy in law and the Corporation shall be entitled to
injunctive relief in order to enforce provisions hereof. Upon
obtaining such injunction, the Corporation shall be entitled to
pursue reimbursement from the Executive and/or the Executive's
employer of costs incurred in securing a qualified replacement for
any employee enticed away from the Corporation by the Executive.
Further, the Corporation shall be entitled to set off against or
obtain reimbursement from the Executive of any payments owed or
made to the Executive by the Corporation hereunder.
10. TERMINATION.
a) GENERALLY. The Executive's employment hereunder shall terminate
upon his Early Retirement, Normal Retirement or death.
b) TERMINATION DUE TO PERMANENT DISABILITY. If the Executive becomes
permanently disabled because of sickness, physical or mental
disability, or any other reason, and is unable to perform or
complete his duties under this Agreement for a period anti-
cipated to extend for a period of at least one hundred eighty
(180)consecutive calendar days (or such other length of time that
is equal to any applicable elimination period provided for in an
LTD insurance policy), the Corporation shall have the option to
terminate this Agreement by giving written notice of termination
to the Executive. Such termination shall be without prejudice to
any right the Executive may have under the LTD insurance program
maintained by the Corporation. Such disability shall be certified
by the Corporation's group LTD carrier, in conjunction with the
Executive's supplemental LTD carrier if such supplemental policy
is in effect; in the event these carriers cannot agree, they
shall designate a licensed physician whose decision shall be
binding for purposes of this Agreement.
c) TERMINATION FOR CAUSE. The Corporation may terminate the Execu-
tive's employment hereunder for cause. For the purposes of this
Agreement, the Corporation shall have "cause" to terminate the
Executive's employment hereunder upon (i) the willful failure by
the Executive to substantially perform his duties hereunder,
other than any such failure resulting from the Executive's
incapacity due to physical or mental illness, (ii) the willful
engaging by the Executive in gross misconduct materially injur-
ious to the Corporation, (iii) the willful violation by the
Executive of the provisions of Sections 4 or 8 hereof, after
notice from Corporation and a failure to cure such violation
within 30 days of said notice, or if said violation cannot be
cured within 30 days, within a reasonable time thereafter if the
8
Executive is diligently attempting to cure the violation, (iv)
the gross negligence of the Executive in the performance of his
duties, or (v) receipt of a final written directive or order of
any governmental body or entity having jurisdiction over the
Corporation or any of its Subsidiaries requiring termination or
removal of the Executive. The determination of the existence of
cause shall be made in the reasonable judgment of the Board of
Directors or its delegee.
d) TERMINATION BY EMPLOYEE UPON GOOD REASON. The Executive may
terminate his employment for good reason. The term "good reason"
shall mean (i) a reduction in the Executive's Annual Salary
in violation of Section 5 hereof, or his total cash compensation
opportunities (e.g. annual incentive awards under the Corpora-
tion's MICP or equity participation awards) or benefits (except
any reductions in compensation which may be applied broadly among
all executives because of adverse financial conditions for the
Corporation or as part of a restructuring of the Corporation's
executive compensation program), (ii) the Corporation's decision
not to renew the Agreement (except as otherwise provided in Sec-
tion 2(b)), (iii) the Corporation's failure to remedy a material
breach of this Agreement within thirty (30) days following
written notice of the breach from the Executive, (iv) the
Executive's position is eliminated and he is not offered a
comparable position within thirty (30) days or (v) the lessening
of the Executive's job responsibilities or an unacceptable relo-
cation (defined as more than thirty-five (35) miles from the
Executive's prior work site).
e) SALE OF SUBSIDIARY.
i) If the entity which is the actual employer of the Executive
is a Subsidiary of the Corporation (the "Employer
Subsidiary"), the disposition of equity securities or assets
of the Employer Subsidiary by the Corporation or by another
Subsidiary such that the Employer Subsidiary ceases to qualify
as a Subsidiary for purposes of this Agreement shall not
constitute a termination of the Executive's employment
hereunder.
ii) If the Executive remains employed by the Employer
Subsidiary following its sale, the Executive shall remain
eligible to receive the payments and benefits specified in
Section 11(d) for the periods of time specified therein and
the provision of such payments and benefits shall remain the
obligation of the Corporation.
iii) If the Executive is employed by the Corporation or
another Subsidiary following the sale of the Employer
Subsidiary, the Executive shall not be eligible to receive the
payments and benefits specified in Section 11(d)
notwithstanding the fact that the sale of the Employer
Subsidiary constituted a Change of Control as defined in
Section 14. Unless the Executive and the Corporation agree
otherwise, the Executive shall, however, remain eligible to
receive the payments and benefits specified in Sections 11(a)
and 11(b).
9
11. PAYMENTS UPON TERMINATION.
a) If the Executive's employment shall be terminated because of
Early Retirement, Normal Retirement, death, Disability or for
cause, the Corporation shall pay the Executive or his guardian
or estate his full Annual Salary through the date of termi-
nation at the rate in effect at the time of termination and any
other amounts owing to the Executive at the date of termination.
Further, should termination occur because of Early Retirement,
Normal Retirement, death, or Disability, the Corporation may
elect to pay the Executive, or his guardian or estate, at the end
of the fiscal year in which the termination occurred, a prorated
award under the MICP, and also may elect to accelerate vesting
of restricted stock, stock option and performance share awards to
provide a full or prorated compensation opportunity for the
retired or disabled Executive or the deceased Executive's guar-
dian or estate. Notwithstanding the foregoing, the Corporation
shall have no obligation to provide payments of benefits beyond
what the Executive is entitled to under the terms and conditions
of the various compensation and benefit plans and arrangements
maintained by the Corporation.
b) If (i) the Executive's employment is terminated by the Corpora-
tion other than for the reasons or circumstances set forth under
Sections 10(a), (b) or (c) hereof or (ii) if the Executive termi-
nates his employment within 90 days following the occurrence of
any of the events constituting "good reason" as defined in
Section 10(d), then the Corporation shall make a lump-sum cash
payment to the Executive equal to two times his highest Annual
Salary during the three-calendar-year period ending before the
effective date of the termination. In such event the Corporation
shall also maintain in full force and effect (and the Executive
shall remain a participant in), for a minimum period of twenty-
four (24) months, all employee benefit plans and programs to
which the Executive was entitled prior to the date of termina-
tion, including but not limited to, pension, profit-sharing,
savings, supplemental retirement income, medical and health-and-
accident plans and arrangements, but specifically excluding the
ACCRP and the Performance Unit Plan (the "PUP"), if the Execu-
tive's continued participation is permitted under the general
terms and conditions and rules and regulations of such plans
and programs. In the event that the Executive's continued
participation in any such plan or program is prohibited, the
Executive shall be entitled to receive an amount equal to the
annual contribution, payments, premiums, credits or allocations
made by the Corporation to him, to his account or on his behalf
under such plans and programs from which his continued parti-
cipation is barred, except that if the Executive's participation
10
in any health, medical, life insurance, or disability plan or
program is barred, the Corporation shall use its best efforts to
obtain and pay for, on the Executive's behalf, individual
insurance plans, policies or programs which provide to the
Executive health, medical, life and disability insurance coverage
which is equivalent to the insurance coverage to which the
Executive was entitled prior to the date of termination. In the
event of a termination of the Executive's employment described in
this Section 11(b), the termination will be deemed to have been a
voluntary termination of employment with the consent of the
Corporation for purposes of any stock option plan maintained by
the Corporation.
c) If termination occurs as a result of expiration of the Agreement,
the Executive will not be entitled to receive any severance
payments or continuation of benefit coverages except as provided
under law (COBRA). The Executive will be permitted to exercise
vested stock options and grants as prescribed in the agreements
covering those options and grants.
d) If, within the period beginning on the date of the Change of
Control (as defined in Section 14(g)) and ending on the date that
is twenty-four (24) months following the later of (i) the date
of the Change of Control or (ii) in the case of a Change of
Control described in Sections 14(c) or (d), the date on which the
transaction resulting in the Change of Control was consummated,
(i) the Executive terminates his employment within ninety (90)
days following the occurrence of any of the events constituting
"good reason" as described in Section 10(d) or (ii) the
Executive terminates employment for any reason during the thirty
(30)-day period beginning on the later of (A) the date that is
twelve (12) months following the date of the Change of Control
(as defined in Section 14(g)) or (B) in the case of a Change of
Control described in Sections 14(c) or (d), the date that is
twelve (12) months following the date on which the transaction
resulting in the Change of Control is consummated, then the
Corporation shall (i) make a lump-sum payment to the Executive
equal to two and one-half times the sum of (A) his highest Annual
Salary during the three-calendar-year period ending before the
effective date of the termination and (B) an amount equal to the
highest annual MICP award earned during the three-complete-plan-
year period ending before the effective date of the termination,
(ii) maintain benefit coverages for the Executive as specified
in Section 11(b) (such coverages shall, however, include the
PUP and the ACCRP) for a period of twenty-four (24) months; (iii)
release its collateral assignment under the Split Dollar Agree-
ment with Executive without reimbursement of premiums paid for
that policy; and (iv) provide to the Executive outplacement and
career counseling services as may be requested by the Executive,
provided that the costs of such services may not exceed 15% of
the Executive's highest Annual Salary during the three-calendar
-year period ending before the effective date of the termination.
Further, notwithstanding the terms of any restricted stock, stock
option and/or performance share award or grant made to the
Executive, such award or grant will become fully vested and the
Executive will have a six-month period from date of termination
in which to exercise available stock options.
11
12. GROSS-UP PROVISION. In the event any payments made to the Executive upon
termination of employment in conjunction with a Change of Control
(pursuant to this Agreement and any other plans, programs and
arrangements maintained by the Corporation) would constitute "excess
parachute payments" within the meaning of Code Section 280G, the
Corporation will make an additional payment to the Executive in an
amount such that after the payment of all income and excise taxes, the
Executive will be in the same after-tax position as if no excise tax had
been imposed on any excess parachute payments made by the Corporation to
the Executive pursuant to this Agreement or otherwise.
13. DAMAGES FOR BREACH OF CONTRACT. In the event of a breach of this
Agreement by either the Corporation or Executive resulting in damages to
either party, that party may recover from the party breaching the
Agreement any and all damages that may be sustained.
14. DEFINITION OF CHANGE OF CONTROL. For purposes of this Agreement, "Change
of Control" shall mean the occurrence of any one of the following
events:
a) The Corporation acquires actual knowledge that any Person (other
than the Corporation, any Subsidiary of the Corporation, any
employee benefit plan of the Corporation or any of its
Subsidiaries or any entity holding securities for or pursuant to
the terms of any such plan) has acquired the Beneficial Ownership,
directly or indirectly, of securities of the Corporation entitling
such Person to a majority of the voting power of the Corporation's
Voting Stock.
b) A majority of the Board of Directors of the Corporation shall
consist of persons other than (i) persons who were members of
the Board of Directors on the date first written above, or (ii)
persons (A) whose nomination or election as directors of the
Corporation was approved by at least two-thirds of the then
members of the Board of Directors (excluding any director
referred to in clause (B) of this paragraph) who either were
directors of the Corporation on the date first above written or
whose nomination or election as a director was so approved and
(B) who are not nominees or representatives of (1) any Person
having Beneficial Ownership, directly or indirectly, of securi-
ties of the Corporation entitling such Person to 10% or more of
the voting power of the Corporation's Voting Stock or (2) any
"participant," as defined in Rule 14a-11 under the Securities
Exchange Act of 1934 or any successor rule, in any actual or
threatened solicitation (other than a solicitation by the
Corporation) subject to Rule 14a-11 or any successor rule
relating to the election or removal of any directors of the
Corporation;
12
c) The Corporation and/or any Subsidiary of the Corporation shall be
a party to any merger, consolidation, division, share exchange,
transfer of assets or any other transaction or series of related
transactions outside the ordinary course of business (a "Business
Combination") as a result of which the shareholders of the
Corporation immediately prior to such Business Combination
(excluding any party, other than the Corporation or a Subsidiary,
to the Business Combination or any Affiliate or Associate of any
such party) shall not hold immediately following such transaction
a majority of the voting power of the Voting Stock of a Person or
Persons immediately thereafter holding, directly or indirectly
through Subsidiaries, assets of the Corporation and its consol-
idated subsidiaries immediately prior to the Business Combination
constituting at least sixty-five percent (65%) of Total Assets;
or
d) If the entity which is the actual employer of the Executive
hereunder (the "Employer Company") is other than the Corporation,
either (i) the Employer Company shall cease to be a Subsidiary
of the Corporation or (ii) the Employer Company and/or any Subsi-
diary of the Employer Company shall be a party to any Business
Combination as a result of which the Corporation shall not hold
immediately following such transaction a majority of the voting
power of the Voting Stock of a Person or Persons immediately
thereafter holding, directly or indirectly through Subsidiaries,
assets of the Employer Company and its consolidated subsidiaries
immediately prior to the Business Combination constituting at
least seventy-five percent (75%) of the Employer Company's Total
Assets.
e) In the case of a Change of Control defined in Section 14(c)
hereof, following such Change of Control the term "Employer
Company" as used herein shall mean the Person which following
such Change of Control holds the largest percentage of Employer
Company's Total Assets, including for this purpose Total Assets
which are held by such Person directly or indirectly through one
or more Subsidiaries. Employer Company shall not enter into any
transaction involving such a Change of Control unless at or prior
to the consummation thereof such Person assumes the obligations
of Employer Company hereunder.
f) For purposes of this Section 14, "Person," "Affiliate,"
"Associate," "Voting Stock" and "Total Assets" shall have the
definitions contained in, and "Beneficial Ownership" shall be
determined as provided in, Article 10 of Keystone's Restated
Articles of Incorporation, as in effect on the date first written
above.
g) For purposes of Sections 14(a) and (b), the date of the "Change
of Control" is the date on which the Change of Control occurs.
For purposes of Sections 14(c) and (d), the date of the "Change
of Control" is the date on which the transaction resulting in a
Change of Control is first evidenced in writing and executed by
an authorized officer of the Corporation and/or Subsidiary
including, without limitation, any letter of intent, sale or
purchase agreement and/or agreement of merger, or, in the case of
a series of Business Combination transactions resulting in a
Change of Control, the date the earliest of such transactions is
first evidenced in writing and executed by an authorized officer
of the Corporation and/or Subsidiary.
13
15. NOTICE. For the purposes of this Agreement, notices and all other
communications shall be in writing and shall be deemed to have been duly
given when delivered or mailed by United States certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Executive: Carl L. Campbell
4717 Pine Ridge Road
Harrisburg, PA 17110
If to the Corporation: Keystone Financial, Inc.
One Keystone Plaza
Harrisburg, PA 17101
Attn: Board of Directors
or to such other address as either party may have furnished to the other
in writing in accordance herewith, except that notices of change of
address shall be effective only upon actual receipt.
16. BINDING EFFECT. This Agreement shall inure to the benefit of and be
binding upon the Executive and his heirs and personal representatives,
and the Corporation and any successor to the Corporation.
17. ENFORCEMENT OF SEPARATE PROVISIONS. Should any provision of this Agree-
ment be ruled unenforceable for any reason, the remaining provisions of
this Agreement shall be unaffected thereby and shall remain in full
force and effect.
18. AMENDMENT. This Agreement may be amended or canceled only by mutual
agreement of the parties in writing without the consent of any other
person.
19. ARBITRATION. In the event that any disagreement or dispute shall arise
between the parties concerning this Agreement, the issue(s) will be
submitted to binding arbitration in the City of Harrisburg, PA pursuant
to the rules of the American Arbitration Association. Any award entered
shall be final and binding upon the parties hereto and judgment upon the
award may be entered in any court having jurisdiction thereof.
Attorneys' fees and administrative court costs associated with such
actions shall be paid by the Corporation.
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20. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. If the Executive dies prior to
the expiration of his term of employment hereunder, any moneys that may
be due him from the Corporation under this Agreement as of the date of
death shall be paid to the executor, administrator, or other personal
representative of the Executive's estate.
21. LAW GOVERNING. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
22. CAPTIONS; PRONOUNS. All captions are for convenience only and do not
form a substantive part of this Agreement. All pronouns and any vari-
ations thereof shall be deemed to refer to the masculine, feminine,
neuter, singular or plural, as the identity of the person or persons may
require.
23. ENTIRE AGREEMENT. This Agreement supersedes any and all agreements,
either oral or in writing, between the parties with respect to the
employment by the Executive by the Corporation, and this Agreement
contains all the covenants and agreements between the parties with
respect to such employment.
ATTEST: KEYSTONE FINANCIAL, INC.
_________________________________ By:_______________________________
Secretary Uzal H. Martz, Jr.
WITNESS: EXECUTIVE
- - ---------------------------------- ---------------------------------
Carl L. Campbell
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Exhibit 10.5
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is made on the ____ day of ______________, 1998 between KEYSTONE
FINANCIAL, INC. (the "Corporation"), a Pennsylvania corporation with its
principal office at One Keystone Plaza, Harrisburg, PA 17105 and Mark L. Pulaski
(the "Executive"), residing at 13 Fieldstone Drive, Mechanicsburg, PA 17055.
WHEREAS, the Corporation desires to employ the Executive in a Senior Executive
position with the Corporation or a Subsidiary under the terms and conditions set
forth in this Agreement; and
WHEREAS, the Executive desires to serve the Corporation or a Subsidiary in a
Senior Executive position under the terms and conditions set forth in this
Agreement.
NOW THEREFORE, in consideration of the mutual covenant and agreement set forth
herein and intending to be legally bound hereby, the parties agree as follows:
1. DEFINITIONS. The following definitions shall apply in this Agreement:
a) "Anniversary Date" shall mean January 1, 1999 and the January 1
of each successive year.
b) "Annual Salary" shall be the stated base cash compensation
defined in Section 5(a) without regard to any elective deferral
or salary reduction plan or program of the Corporation.
c) "Board of Directors" shall mean the Board of Directors of the
Corporation as constituted from time to time.
d) "Change of Control" shall be as defined in Section 14 of this
Agreement.
e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
f) "Disability" shall be as defined in Section 10(b) of this
Agreement.
g) "Early Retirement" shall be that age stipulated from time to time by
the Human Resources Committee of the Board of Directors as the age at
which key management personnel may elect to take early retirement.
h) "LTD" means the Corporation's long-term disability insurance for
key management personnel as in effect from time to time.
i) "MICP" means the Corporation's Management Incentive Compensation
Plan as in effect from time to time, or any successor plan
thereto.
j) "Normal Retirement" shall be that age stipulated from time to time by
the Human Resources Committee of the Board of Directors as the age at
which key management personnel are required to take mandatory
retirement.
k) "Senior Executive" shall mean any key management employee of the
Corporation or a Subsidiary whose employment relationship is
governed by a contract or agreement.
1
l) "Subsidiary" shall mean any bank, corporation or other entity of which
the Corporation owns, directly or indirectly through one or more
Subsidiaries, a majority of each class of equity security having
ordinary voting power in an election of directors.
2. TERM OF AGREEMENT; RENEWAL.
a) This Agreement shall be initially effective for a twenty-nine-month
period beginning August 1, 1998 and ending on December 31, 2000.
Except as provided in Section 2(b), the term of this Agreement will
automatically renew on January 1, 1999 and on each subsequent
Anniversary Date for an additional three-year period unless, prior to
the first day of October preceding the first Anniversary Date within
the then current term, either party shall give written notice of
nonrenewal to the other, in which event this Agreement shall terminate
at the end of the three-year period then in effect. For example, the
initial contract period is August 1, 1998 through December 31, 2000.
On January 1, 1999, the term of this Agreement extends to December 31,
2001. On January 1, 2000, the term of this Agreement extends to
December 31, 2002 unless one of the parties provides a written notice
of intent not to renew the Agreement prior to October 1, 1999.
b) In the event of a Change of Control, if the Corporation provides the
Executive with timely notice of nonrenewal pursuant to Section 2(a)
prior to the first Anniversary Date following the Change of Control,
the Corporation's decision not to renew this Agreement shall not
constitute "good reason" for purposes of Section 10(d)(ii). Any
subsequent decision by the Corporation not to renew this Agreement
shall, however, constitute good reason for purposes of Section
10(d)(ii).
3. POSITION AND DUTIES. The Executive shall serve initially as President and
Chief Operating Officer of the Corporation reporting to the Chairman and Chief
Executive Officer of the Corporation and shall have supervision and control
over, and responsibility for, the general management and operation of the
Corporation, and shall have such other powers and duties as may from time to
time be prescribed by the Chairman and Chief Executive Officer of the
Corporation, provided that such duties are consistent with the position of a
Senior Executive.
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4. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall devote substantially all
his working time, ability and attention to the business of the Corporation
during the term of this Agreement. The Executive shall notify the Board of
Directors in writing before the Executive engages in any other business or
commercial activities, duties or pursuits, including, but not limited to,
directorships of other companies. Under no circumstances may the Executive
engage in any business or commercial activities, duties or pursuits which
compete with the business or commercial activities of the Corporation or any of
its Subsidiaries, nor may the Executive serve as a director or officer or in any
other capacity with any business entity unless he shall have received advance
written approval from the officer of the Corporation to whom he reports as
provided in Section 3 of this Agreement.
5. COMPENSATION.
a) ANNUAL SALARY. For services rendered under this Agreement, the
Executive shall be entitled to receive as base compensation an Annual
Salary at an initial rate of $300,000 per year. The Executive's Annual
Salary shall be reviewed thereafter by the Board of Directors at least
once annually and may be adjusted at the discretion of the Board of
Directors in accordance with the Corporation's then-current
compensation policies and practices and other factors deemed relevant
by the Board of Directors; provided, that at no time shall the Annual
Salary be less than the Executive's Annual Salary in the prior
calendar year. Annual Salary shall be subject to withholding and other
applicable taxes and payroll deductions and payable in substantially
equal monthly installments or such other more frequent intervals as
may be determined by the Board of Directors as payroll policy for
Senior Executives.
b) INCENTIVE COMPENSATION. The Executive shall be eligible for annual
incentive awards under and in accordance with the MICP, based on
achievement of annual performance goals and other criteria set forth
in the MICP. Subject to the terms and conditions of the MICP and all
rules and regulations pertaining thereto, any incentive award to which
the Executive becomes entitled will be paid to the Executive within
ninety (90) days following the end of the fiscal year in question. In
addition to the MICP, the Executive will be eligible to participate in
any stock option, stock bonus, or other incentive plan available
generally to other Senior Executives from time to time.
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6. BENEFITS, VACATION TIME, EXPENSES AND PERQUISITES.
a) EMPLOYEE BENEFIT PLANS. During the term of this Agreement, the
Executive shall be entitled to participate in all employee benefit
plans made available from time to time by the Corporation to its
Senior Executives, including, but not limited to, pension,
profit-sharing, savings, supplemental retirement income, medical and
health-and-accident plans and arrangements, subject to and on a basis
consistent with the terms and conditions of, and the Corporation rules
and regulations pertaining to such plans and arrangements, and any
limitations or qualifications imposed by any applicable governmental
body. Subject to the foregoing, the benefit plans and arrangements
provided to the Executive shall include, but not be limited to, the
following:
i) Retirement Income Plans: The Executive shall be entitled to
participate in any nonqualified supplemental retirement income
plans available from time to time to the Corporation's Senior
Executives, and shall become vested in such plans according to
the schedules provided in the plan documents. Benefits to be
received by the Executive pursuant to such plans will be
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calculated under the formulas utilized in such plans as in
effect from time to time; provided, however, that in the event
of a Change of Control, the involuntary termination of the
Executive's employment other than for cause or the termination
of the Executive's employment for good reason (in either case,
whether or not in conjunction with a Change of Control), the
benefits to be provided to the Executive pursuant to such
plans shall be calculated under the formulas utilized by such
plans as in effect from time to time but in no event shall
such benefits be less than the benefits calculated under the
formulas utilized in such plans as in effect on the date of
the Change of Control (as defined in Section 14(g)) or the
effective date of the Executive's termination of employment ,
respectively.
ii) Life Insurance: Subject to satisfaction of
conditions imposed by the applicable insurance company for
additional coverage, the Corporation shall maintain for the
Executive during the term of this Agreement the insurance
coverage established for the Executive effective January 1,
1994, under and in accordance with the Keystone Financial
Executive Split Dollar Agreement with Executive; provided, and
notwithstanding any contrary provisions therein, the
Corporation shall have no unilateral right to terminate or
modify such Split Dollar Agreement with the Executive.
iii) Disability Insurance: In addition to standard group
benefit provisions, the Corporation shall make available a
supplemental LTD insurance policy for purchase by the
Executive, provided the Executive qualifies as a medically
acceptable risk to the issuing company on a standard
underwriting basis. Such policy shall provide that in the
event the Executive becomes disabled in accordance with the
terms of such policy, he shall be entitled to receive benefits
from all sources (e.g., Social Security, group LTD and
supplemental LTD) equal to 67% of his Annual Salary as in
effect at the time of disability until he reaches the age of
65 or dies, whichever occurs first. The Corporation shall
continue to pay to the Executive his Annual Salary during any
applicable "elimination" (waiting) period under the
supplemental LTD policy, not to exceed one hundred and eighty
(180) days. Notwithstanding the foregoing, supplemental LTD
coverage shall be required only if and to the extent that the
Corporation's group LTD insurance policy benefit limit is such
that it does not permit the Executive to receive the
above-stated percentage (i.e., 67%) of income replacement at
the time of said disability.
b) VACATION. During the term of this Agreement, the Executive shall be
entitled to the number of paid vacation days in each calendar year
determined by the Corporation from time to time for its Senior
Executives, but not less than four (4) weeks in any calendar year.
Such vacation entitlement shall be subject to all rules and policies
concerning vacation time as shall be applicable to Senior Executives
from time to time. The Executive shall also be entitled to all paid
holidays given by the Corporation to its Senior Executives.
c) REIMBURSABLE GENERAL EXPENSES. During the term of this Agreement, the
Executive shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred by him (in accordance with the policies
and procedures established from time to time by the Board of Directors
for its Senior Executives) in performing services hereunder, provided
that the Executive first properly accounts therefor in accordance with
such policies and procedures.
d) REIMBURSABLE AUTO EXPENSES. During the term of this Agreement, the
Executive shall be entitled to receive a monthly payment under the
Corporation's Automobile Capital Cost Reimbursement Plan (the "ACCRP")
for selected executives. Such payments shall be treated as current
income and be subject to regular payroll tax withholding and
deductions. The Executive shall also be entitled to reimbursement for
operating expenses of the automobile associated with business travel
at the established corporate mileage rate.
e) MISCELLANEOUS. The Executive shall be entitled to receive such other
perquisites, e.g. club memberships and "fringe benefits", as the Board
of Directors shall deem appropriate in its sole direction.
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7. INDEMNIFICATION. The Corporation shall indemnify the Executive, to the
fullest extent permitted from time to time by Pennsylvania law, with respect to
any threatened, pending or contemplated action, suit or proceeding, brought
against him by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation or is or was serving at the written request
of the Corporation as a director, officer, employee or agent of another person
or entity. To the fullest extent permitted by Pennsylvania law, the Corporation
shall in advance of final disposition pay any and all expenses incurred by the
Executive in connection with any threatened, pending or completed action, suit
or proceeding with respect to which the Executive may be entitled to
indemnification hereunder. The Executive's right to indemnification provided
herein is not exclusive of any other rights of indemnification to which the
Executive may be entitled under any bylaw, agreement, vote of shareholders or
otherwise, and shall continue beyond the term of this Agreement. The Corporation
shall use its best efforts to obtain insurance coverage for the Executive under
an insurance policy covering officers and directors of the Corporation against
lawsuits, arbitrations or other proceedings; however, nothing herein shall be
construed to require the Corporation to obtain such insurance if the Board of
Directors determines that such coverage cannot be obtained at a commercially
reasonable price. Notwithstanding the foregoing, the Executive shall be entitled
to indemnification from the Subsidiary which is his actual employer if such
indemnification is available and provides more extensive coverage than the
indemnification provided under this Agreement.
8. UNAUTHORIZED DISCLOSURE. During the term of this Agreement or at any later
time, the Executive shall not, without the written consent of a duly authorized
executive officer of the Corporation, disclose to any person (including an
employee of the Corporation or a Subsidiary), other than a person to whom
disclosure is reasonably necessary or appropriate in connection with the
performance by the Executive of his duties as an executive of the Corporation,
any material confidential information obtained by him while in the employ of the
Corporation or any Subsidiary or operating unit 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 the Corporation;
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 the Executive) 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 the Corporation.
9. RESTRICTIVE COVENANTS. Except as otherwise provided below, upon termination
of his employment hereunder regardless of the circumstances or reasons for such
termination, the Executive covenants and agrees as follows:
a) NONCOMPETITION. The Executive shall not, directly or indirectly,
within the marketing area of the Corporation and its Subsidiaries
(defined as all areas within 100 miles of the work location to which
the Executive was assigned for the majority of time during the twelve
months preceding the termination of his employment where the
Corporation has established an active and material market presence)
enter into or engage generally in direct or indirect competition with
the Corporation in the business of banking or any banking or trust
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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 year after the date of termination
of his employment, except where the termination occurs in conjunction
with a Change of Control as described in Section 11(d) . The existence
of any material claim or cause of action of the Executive against the
Corporation, whether predicated on this Agreement or otherwise, shall
not constitute a defense to the enforcement by the Corporation of this
covenant. The Executive acknowledges and agrees that enforcement of
this covenant not to compete will not prevent him from earning a
livelihood and that any breach of the restrictions set forth in this
paragraph will result in irreparable injury to the Corporation for
which it shall have no adequate remedy at law, and that the
Corporation shall be entitled to injunctive relief in order to enforce
the provisions hereof. In the event that this paragraph shall be
determined by any court of competent jurisdiction to be unenforceable
in part by reason of it 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.
b) RETURN OF MATERIALS. Upon termination of employment with the
Corporation for any reason, including a termination of employment in
conjunction with a Change of Control as described in Section 11(d),
the Executive shall immediately deliver to the Corporation all
correspondence, manuals, letters, notes, notebooks, reports and any
other documents and tangible items containing or constituting
confidential information about the Corporation maintained at his
office and shall promptly deliver all said materials held by him at
other locations.
c) NONSOLICITATlON OF EMPLOYEES. The Executive shall not entice or
solicit, directly or indirectly, any other executives or key manage-
ment personnel of the Corporation to leave the employ of the
Corporation or its Subsidiaries to work with the Executive or any
entity with which the Executive has affiliated for a period of one
year following the Executive's termination of employment with the
Corporation for any reason, including a termination of employment in
conjunction with a Change of Control as described in Section 11(d).
d) NONSOLICITATION OF CUSTOMERS. The Executive shall not entice or
solicit, directly or indirectly, any client or customer of the
Corporation or any Subsidiary for a period of one year following the
Executive's termination of employment with the Corporation for any
reason, includin a termination of employment in conjunction with a
Change of Control as described in Section 11(d).
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e) REMEDY. The Executive acknowledges and agrees that any breach of
the restrictions set forth in Sections 8 and 9 will result in
irreparable injury to the Corporation for which it shall have no
meaningful remedy in law and the Corporation shall be entitled to
injunctive relief in order to enforce provisions hereof. Upon
obtaining such injunction, the Corporation shall be entitled to
pursue reimbursement from the Executive and/or the Executive's
employer of costs incurred in securing a qualified replacement for any
employee enticed away from the Corporation by the Executive. Further,
the Corporation shall be entitled to set off against or obtain
reimbursement from the Executive of any payments owed or made to the
Executive by the Corporation hereunder.
10. TERMINATION.
a) GENERALLY. The Executive's employment hereunder shall terminate upon
his Early Retirement, Normal Retirement or death.
b) TERMINATION DUE TO PERMANENT DISABILITY. If the Executive becomes
permanently disabled because of sickness, physical or mental
disability, or any other reason, and is unable to perform or complete
his duties under this Agreement for a period anticipated to extend for
a period of at least one hundred eighty (180) consecutive calendar
days (or such other length of time that is equal to any applicable
elimination period provided for in an LTD insurance policy), the
Corporation shall have the option to terminate this Agreement by
giving written notice of termination to the Executive. Such
termination shall be without prejudice to any right the Executive may
have under the LTD insurance program maintained by the Corporation.
Such disability shall be certified by the Corporation's group LTD
carrier, in conjunction with the Executive's supplemental LTD carrier
if such supplemental policy is in effect; in the event these carriers
cannot agree, they shall designate a licensed physician whose decision
shall be binding for purposes of this Agreement.
c) TERMINATION FOR CAUSE. The Corporation may terminate the Executive's
employment hereunder for cause. For the purposes of this Agreement,
the Corporation shall have "cause" to terminate the Executive's
employment hereunder upon (i) the willful failure by the Executive to
substantially perform his duties hereunder, other than any such
failure resulting from the Executive's incapacity due to physical or
mental illness, (ii) the willful engaging by the Executive in gross
misconduct materially injurious to the Corporation, (iii) the willful
violation by the Executive of the provisions of Sections 4 or 8
hereof, after notice from Corporation and a failure to cure such
violation within 30 days of said notice, or if said violation cannot
be cured within 30 days, within a reasonable time thereafter if the
Executive is diligently attempting to cure the violation, (iv) the
gross negligence of the Executive in the performance of his duties, or
(v) receipt of a final written directive or order of any governmental
body or entity having jurisdiction over the Corporation or any of its
Subsidiaries requiring termination or removal of the Executive. The
determination of the existence of cause shall be made in the
reasonable judgment of the Board of Directors or its delegee.
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d) TERMINATION BY EMPLOYEE UPON GOOD REASON. The Executive may terminate
his employment for good reason. The term "good reason" shall mean
(i) a reduction in the Executive's Annual Salary in violation of
Section 5 hereof, or his total cash compensation opportunities (e.g.
annual incentive awards under the Corporation's MICP or equity partic-
ipation awards) or benefits (except any reductions in compensation
which may be applied broadly among all executives because of adverse
financial conditions for the Corporation or as part of a restructuring
of the Corporation's executive compensation program), (ii) the
Corporation's decision not to renew the Agreement (except as otherwise
provided in Section 2(b)), (iii) the Corporation's failure to remedy a
material breach of this Agreement within thirty (30) days following
written notice of the breach from the Executive, (iv) the Executive's
position is eliminated and he is not offered a comparable position
within thirty (30) days or (v) the lessening of the Executive's job
responsibilities or an unacceptable relocation (defined as more than
thirty-five (35) miles from the Executive's prior work site).
e) SALE OF SUBSIDIARY.
i) If the entity which is the actual employer of the Executive
is a Subsidiary of the Corporation (the "Employer
Subsidiary"), the disposition of equity securities or assets
of the Employer Subsidiary by the Corporation or by another
Subsidiary such that the Employer Subsidiary ceases to qualify
as a Subsidiary for purposes of this Agreement shall not
constitute a termination of the Executive's employment
hereunder.
ii) If the Executive remains employed by the Employer
Subsidiary following its sale, the Executive shall remain
eligible to receive the payments and benefits specified in
Section 11(d) for the periods of time specified therein and
the provision of such payments and benefits shall remain the
obligation of the Corporation.
iii) If the Executive is employed by the Corporation or
another Subsidiary following the sale of the Employer
Subsidiary, the Executive shall not be eligible to receive the
payments and benefits specified in Section 11(d)
notwithstanding the fact that the sale of the Employer
Subsidiary constituted a Change of Control as defined in
Section 14. Unless the Executive and the Corporation agree
otherwise, the Executive shall, however, remain eligible to
receive the payments and benefits specified in Sections 11(a)
and 11(b).
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11. PAYMENTS UPON TERMINATION.
a) If the Executive's employment shall be terminated because of Early
Retirement, Normal Retirement, death, Disability or for cause, the
Corporation shall pay the Executive or his guardian or estate his full
Annual Salary through the date of termination at the rate in effect at
the time of termination and any other amounts owing to the Executive
at the date of termination. Further, should termination occur because
of Early Retirement, Normal Retirement, death, or Disability, the
Corporation may elect to pay the Executive, or his guardian or estate,
at the end of the fiscal year in which the termination occurred, a
prorated award under the MICP, and also may elect to accelerate
vesting of restricted stock, stock option and performance share awards
to provide a full or prorated compensation opportunity for the retired
or disabled Executive or the deceased Executive's guardian or estate.
Notwithstanding the foregoing, the Corporation shall have no
obligation to provide payments of benefits beyond what the Executive
is entitled to under the terms and conditions of the various
compensation and benefit plans and arrangements maintained by the
Corporation.
b) If (i) the Executive's employment is terminated by the Corporation
other than for the reasons or circumstances set forth under Sections
10(a), (b) or (c) hereof or (ii) if the Executive terminates his
employment within 90 days following the occurrence of any of the
events constituting "good reason" as defined in Section 10(d), then
the Corporation shall make a lump-sum cash payment to the Executive
equal to one and one-half times his highest Annual Salary during the
three-calendar-year period ending before the effective date of the
termination. In such event the Corporation shall also maintain in full
force and effect (and the Executive shall remain a participant in),
for a minimum period of eighteen (18) months, all employee benefit
plans and programs to which the Executive was entitled prior to the
date of termination, including but not limited to, pension,
profit-sharing, savings, supplemental retirement income, medical and
health-and-accident plans and arrangements, but specifically excluding
the ACCRP and the Performance Unit Plan (the "PUP"), if the
Executive's continued participation is permitted under the general
terms and conditions and rules and regulations of such plans and
programs. In the event that the Executive's continued participation in
any such plan or program is prohibited, the Executive shall be
entitled to receive an amount equal to the annual contribution,
payments, premiums, credits or allocations made by the Corporation to
him, to his account or on his behalf under such plans and programs
from which his continued participation is barred, except that if the
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Executive's participation in any health, medical, life insurance, or
disability plan or program is barred, the Corporation shall use its
best efforts to obtain and pay for, on the Executive's behalf,
individual insurance plans, policies or programs which provide to the
Executive health, medical, life and disability insurance coverage
which is equivalent to the insurance coverage to which the Executive
was entitled prior to the date of termination. In the event of a
termination of the Executive's employment described in this Section
11(b), the termination will be deemed to have been a voluntary
termination of employment with the consent of the Corporation for
purposes of any stock option plan maintained by the Corporation.
c) If termination occurs as a result of expiration of the Agreement, the
Executive will not be entitled to receive any severance payments or
continuation of benefit coverages except as provided under law
(COBRA). The Executive will be permitted to exercise vested stock
options and grants as prescribed in the agreements covering those
options and grants.
d) If, within the period beginning on the date of the Change of Control
(as defined in Section 14(g)) and ending on the date that is
twenty-four (24) months following the later of (i) the date of the
Change of Control or (ii) in the case of a Change of Control described
in Sections 14(c) or (d), the date on which the transaction resulting
in the Change of Control was consummated, (i) the Executive terminates
his employment within ninety (90) days following the occurrence of any
of the events constituting "good reason" as described in Section 10(d)
or (ii) the Executive terminates employment for any reason during the
thirty (30)-day period beginning on the later of (A) the date that is
twelve (12) months following the date of the Change of Control (as
defined in Section 14(g)) or (B) in the case of a Change of Control
described in Sections 14(c) or (d), the date that is twelve (12)
months following the date on which the transaction resulting in the
Change of Control is consummated, then the Corporation shall (i) make
a lump-sum payment to the Executive equal to two and one-half times
the sum of (A) his highest Annual Salary during the
three-calendar-year period ending before the effective date of the
termination and (B) an amount equal to the highest annual MICP award
earned during the three-complete-plan-year period ending before the
effective date of the termination; (ii) maintain benefit coverages for
the Executive as specified in Section 11(b) (such coverages shall,
however, include the PUP and the ACCRP) for a period of twenty-four
(24) months; (iii) release its collateral assignment under the Split
Dollar Agreement with Executive without reimbursement of premiums paid
for that policy; and (iv) provide to the Executive outplacement and
career counseling services as may be requested by the Executive,
provided that the costs of such services may not exceed 15% of the
Executive's highest Annual Salary during the three-calendar-year
period ending before the effective date of the termination. Further,
notwithstanding the terms of any restricted stock, stock option and/or
performance share award or grant made to the Executive, such award or
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grant will become fully vested and the Executive will have a six-month
period from date of termination in which to exercise available stock
options.
12. GROSS-UP PROVISION. In the event any payments made to the Executive
upon termination of employment in conjunction with a Change of Control (pursuant
to this Agreement and any other plans, programs and arrangements maintained by
the Corporation) would constitute "excess parachute payments" within the meaning
of Code Section 280G, the Corporation will make an additional payment to the
Executive in an amount such that after the payment of all income and excise
taxes, the Executive will be in the same after-tax position as if no excise tax
had been imposed on any excess parachute payments made by the Corporation to the
Executive pursuant to this Agreement or otherwise.
13. DAMAGES FOR BREACH OF CONTRACT. In the event of a breach of this
Agreement by either the Corporation or Executive resulting in damages to either
party, that party may recover from the party breaching the Agreement any and all
damages that may be sustained.
14. DEFINITION OF CHANGE OF CONTROL. For purposes of this Agreement,
"Change of Control" shall mean the occurrence of any one of the following
events:
a) The Corporation acquires actual knowledge that any Person (other
than the Corporation, any Subsidiary of the Corporation, any
employee benefit plan of the Corporation or any of its
Subsidiaries or any entity holding securities for or pursuant to
the terms of any such plan) has acquired the Beneficial
Ownership, directly or indirectly, of securities of the
Corporation entitling such Person to a majority of the voting
power of the Corporation's Voting Stock.
b) A majority of the Board of Directors of the Corporation shall
consist of persons other than (i) persons who were members of the
Board of Directors on the date first written above, or (ii)
persons (A) whose nomination or election as directors of the
Corporation was approved by at least two-thirds of the then
members of the Board of Directors (excluding any director
referred to in clause (B) of this paragraph) who either were
directors of the Corporation on the date first above written or
whose nomination or election as a director was so approved and
(B) who are not nominees or representatives of (1) any Person
having Beneficial Ownership, directly or indirectly, of
securities of the Corporation entitling such Person to 10% or
more of the voting power of the Corporation's Voting Stock or (2)
any "participant," as defined in Rule 14a-11 under the Securities
Exchange Act of 1934 or any successor rule, in any actual or
threatened solicitation (other than a solicitation by the
Corporation) subject to Rule 14a-11 or any successor rule
relating to the election or removal of any directors of the
Corporation;
12
<PAGE>
c) The Corporation and/or any Subsidiary of the Corporation shall be
a party to any merger, consolidation, division, share exchange,
transfer of assets or any other transaction or series of related
transactions outside the ordinary course of business (a "Business
Combination") as a result of which the shareholders of the
Corporation immediately prior to such Business Combination
(excluding any party, other than the Corporation or a Subsidiary,
to the Business Combination or any Affiliate or Associate of any
such party) shall not hold immediately following such transaction
a majority of the voting power of the Voting Stock of a Person or
Persons immediately thereafter holding, directly or indirectly
through Subsidiaries, assets of the Corporation and its
consolidated subsidiaries immediately prior to the Business
Combination constituting at least sixty-five percent (65%) of
Total Assets; or
d) If the entity which is the actual employer of the Executive
hereunder (the "Employer Company") is other than the Corporation,
either (i) the Employer Company shall cease to be a Subsidiary of
the Corporation or (ii) the Employer Company and/or any
Subsidiary of the Employer Company shall be a party to any
Business Combination as a result of which the Corporation shall
not hold immediately following such transaction a majority of the
voting power of the Voting Stock of a Person or Persons
immediately thereafter holding, directly or indirectly through
Subsidiaries, assets of the Employer Company and its consolidated
subsidiaries immediately prior to the Business Combination
constituting at least seventy-five percent (75%) of the Employer
Company's Total Assets.
e) In the case of a Change of Control defined in Section 14(c)
hereof, following such Change of Control the term "Employer
Company" as used herein shall mean the Person which following
such Change of Control holds the largest percentage of Employer
Company's Total Assets, including for this purpose Total Assets
which are held by such Person directly or indirectly through one
or more Subsidiaries. Employer Company shall not enter into any
transaction involving such a Change of Control unless at or prior
to the consummation thereof such Person assumes the obligations
of Employer Company hereunder.
f) For purposes of this Section 14, "Person," "Affiliate,"
"Associate," "Voting Stock" and "Total Assets" shall have the
definitions contained in, and "Beneficial Ownership" shall be
determined as provided in, Article 10 of Keystone's Restated
Articles of Incorporation, as in effect on the date first written
above.
g) For purposes of Sections 14(a) and (b), the date of the "Change
of Control" is the date on which the Change of Control occurs.
13
<PAGE>
For purposes of Sections 14(c) and (d), the date of the "Change
of Control" is the date on which the transaction resulting in a
Change of Control is first evidenced in writing and executed by
an authorized officer of the Corporation and/or Subsidiary
including, without limitation, any letter of intent, sale or
purchase agreement and/or agreement of merger, or, in the case of
a series of Business Combination transactions resulting in a
Change of Control, the date the earliest of such transactions is
first evidenced in writing and executed by an authorized officer
of the Corporation and/or Subsidiary.
15. NOTICE. For the purposes of this Agreement, notices and all other
communications shall be in writing and shall be deemed to have been duly given
when delivered or mailed by United States certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Executive: Mark L. Pulaski
13 Fieldstone Drive,
Mechanicsburg, PA 17055
If to the Corporation: Keystone Financial, Inc.
One Keystone Plaza
Harrisburg, PA 17101
Attn: Chairman of the Board
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon actual receipt.
16. BINDING EFFECT. This Agreement shall inure to the benefit of and be
binding upon the Executive and his heirs and personal representatives, and the
Corporation and any successor to the Corporation.
17. ENFORCEMENT OF SEPARATE PROVISIONS. Should any provision of this
Agreement be ruled unenforceable for any reason, the remaining provisions of
this Agreement shall be unaffected thereby and shall remain in full force and
effect.
18. AMENDMENT. This Agreement may be amended or canceled only by mutual
agreement of the parties in writing without the consent of any other person.
19. ARBITRATION. In the event that any disagreement or dispute shall arise
between the parties concerning this Agreement, the issue(s) will be submitted to
binding arbitration in the City of Harrisburg, PA pursuant to the rules of the
American Arbitration Association. Any award entered shall be final and binding
upon the parties hereto and judgment upon the award may be entered in any court
having jurisdiction thereof. Attorneys' fees and administrative court costs
associated with such actions shall be paid by the Corporation.
14
<PAGE>
20. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. If the Executive dies prior
the expiration of his term of employment hereunder, any moneys that may be due
him from the Corporation under this Agreement as of the date of death shall be
paid to the executor, administrator, or other personal representative of the
Executive's estate.
21. LAW GOVERNING. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
22. CAPTIONS; PRONOUNS. All captions are for convenience only and do not
form a substantive part of this Agreement. All pronouns and any variations
thereof shall be deemed to refer to the masculine, feminine, neuter, singular or
plural, as the identity of the person or persons may require.
23. ENTIRE AGREEMENT. This Agreement supersedes any and all agreements,
either oral or in writing, between the parties with respect to the employment by
the Executive by the Corporation, and this Agreement contains all the covenants
and agreements between the parties with respect to such employment.
KEYSTONE FINANCIAL, INC.
ATTEST:
______________________________ By:____________________________
Secretary Carl L. Campbell
Chief Executive Officer
WITNESS: EXECUTIVE
- - ------------------------------- --------------------------------
Mark L. Pulaski
15
<PAGE>
Exhibit 10.8
KEYSTONE FINANCIAL, INC.
SUPPLEMENTAL RETIREMENT INCOME PLAN
EFFECTIVE JANUARY 1, 1994
<PAGE>
KEYSTONE FINANCIAL, INC.
SUPPLEMENTAL RETIREMENT INCOME PLAN
TABLE OF CONTENTS
Page
PREAMBLE.............................................. i
ARTICLE 1. DEFINITIONS........................................... 1
Section 1.01 Actual Death Benefit.................................. 1
Section 1.02 Actual Pension........................................ 1
Section 1.03 Beneficiary........................................... 1
Section 1.04 Board................................................. 1
Section 1.05 Code.................................................. 1
Section 1.06 Committee............................................. 1
Section 1.07 Effective Date........................................ 1
Section 1.08 ERISA................................................. 1
Section 1.09 Excluded Compensation................................. 1
Section 1.10 Keystone.............................................. 1
Section 1.11 Participant........................................... 1
Section 1.12 Participating Entity.................................. 2
Section 1.13 Pension Plan.......................................... 2
Section 1.14 Plan.................................................. 2
ARTICLE 2. BENEFITS.............................................. 3
Section 2.01 Retirement Benefits................................... 3
Section 2.02 Death Benefits........................................ 4
Section 2.03 Beneficiary Designation............................... 5
ARTICLE 3. ADMINISTRATION........................................ 6
Section 3.01 Committee and Agents.................................. 6
Section 3.02 Rules and Regulations................................. 6
Section 3.03 Quorum................................................ 6
Section 3.04 Plan Interpretation................................... 6
Section 3.05 Notice of Participation............................... 6
Section 3.06 Costs................................................. 6
Section 3.07 Unsecured Creditor.................................... 6
Section 3.08 Authority of Board and Committee...................... 7
Section 3.09 Amendment, Modification or
Termination......................................... 7
Section 3.10 Claim and Appeal Procedure............................ 7
Section 3.11 Status of Plan........................................ 8
Section 3.12 Tax Withholding....................................... 9
ARTICLE 4. MISCELLANEOUS PROVISIONS.............................. 10
Section 4.01 Merger or Consolidation............................... 10
Section 4.02 Gender and Number..................................... 10
Section 4.03 Construction.......................................... 10
Section 4.04 Non-alienation........................................ 10
Section 4.05 No Employment Rights.................................. 11
Section 4.06 Minor or Incompetent.................................. 11
Section 4.07 Illegal or Invalid Provision.......................... 11
<PAGE>
PREAMBLE
The purpose of the Keystone Financial, Inc. Supplemental Retirement
Income Plan is to supplement retirement benefits payable from the Keystone
Financial, Inc. Pension Plan which have been limited by various Internal
Revenue Code provisions and the exclusion of deferred compensation from the
definition of compensation under the Pension Plan.
The Plan is designed to provide supplemental retirement benefits
because of the following limitations:
(Degree) The maximum benefit limitations under Internal Revenue Code
Section 415.
(Degree) The maximum compensation limitations under Internal Revenue
Code Section 401(a)(17).
(Degree) The provisions of the Pension Plan which exclude from the
definition of compensation under the Pension Plan certain amounts earned or
deferred under the Keystone Financial, Inc. Savings Restoration Plan and
the Keystone Financial, Inc. Management Incentive Compensation Plan and any
other nonqualified plan maintained by Keystone or a subsidiary or affiliate
which participates in this Plan.
<PAGE>
ARTICLE 1. DEFINITIONS
As used herein, the following words and phrases shall have the meanings
below, unless the context clearly indicates otherwise:
1.01 "Actual Death Benefit" shall mean the death benefit which is paid or
is to be paid from the Pension Plan following the death of a Participant.
1.02 "Actual Pension" shall mean the pension benefit which is paid or is to
be paid from the Pension Plan to a Participant.
1.03 "Beneficiary" shall mean the person or persons, natural or legal,
designated in writing by the Participant in accordance with Section 2.03 to
receive any benefits under the Plan which may become payable in the event of the
Participant's death, or if none is designated or surviving at the time of the
Participant's death, the Participant's surviving spouse shall be the Beneficiary
or, if there is no surviving spouse, then the estate of the Participant shall be
the Beneficiary.
1.04 "Board" shall mean the Board of Directors of Keystone.
1.05 "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
1.06 "Committee" shall mean the Human Resources Committee of the Board.
1.07 "Effective Date" shall mean January 1, 1994.
1.08 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
1.09 "Excluded Compensation" shall mean the amount of elective deferrals
made by a Participant and benefits payable pursuant to the provisions of the
Keystone Financial, Inc. Savings Restoration Plan, the Keystone Financial, Inc.
Management Incentive Compensation Plan, and any other nonqualified deferred
compensation plan of Keystone or a Participating Entity which is excluded from
the calculation of the Actual Pension or Actual Death Benefit.
<PAGE>
1.10 "Keystone" shall mean Keystone Financial, Inc.
1.11 "Participant" shall mean any participant in the Pension Plan whose
Actual Pension is limited or with respect to whom the Actual Death Benefit is
limited by reason of Code Section 415, Code Section 401(a)(17) or Excluded
Compensation.
1.12 "Participating Entity" shall mean National Bank of the Main Line,
Northern Central Bank, Mid-State Bank, Pennsylvania National Bank; American
Trust Bank and American Trust Bank of West Virginia as of a date to be estab-
lished by Keystone's Executive Vice President of Banking Group; and any
subsidiary of Keystone, affiliate bank of Keystone, or other affiliated entity
of Keystone, which elects to participate in the Plan with respect to its
Participants and is approved by the Board or the Committee to participate in the
Plan, with such status as a Participating Entity hereunder and participation in
the Plan ceasing automatically on the date the subsidiary or affiliate ceases to
be a subsidiary or affiliate of Keystone.
1.13 "Pension Plan" shall mean the Keystone Financial, Inc. Pension Plan in
effect from time to time.
1.14 "Plan" shall mean the Keystone Financial, Inc. Supplemental Retirement
Income Plan, as set forth herein or as it may be amended hereafter.
<PAGE>
ARTICLE 2. BENEFITS
2.01 Retirement Benefits.
(a) A Participant who is determined by the Committee to be a member of a
select group of management or highly compensated employees of Keystone
or a Participating Entity for purposes of Title I of ERISA and is 100%
vested in his Actual Pension under the Pension Plan at the time
payment is to commence hereunder after the Effective Date shall
receive a pension from the Plan which is equal to the difference
between the Participant's Actual Pension and what the Actual Pension
would have been without regard to the limitations of Code Sections 415
and 401(a)(17) and taking into account Excluded Compensation. The
amount payable under the Plan shall be determined on the basis of the
Actual Pension payable in the form of a single life annuity beginning
as of the first day of the month on or after the later of the
Participant's 65th birthday or termination of employment with Keystone
and all Participating Entities.
(b) A Participant who is not covered by (a) above and is 100% vested in
his Actual Pension under the Pension Plan at the time payment is to
commence hereunder on or after the Effective Date shall receive a
pension from the Plan which is equal to the difference between the
Participant's Actual Pension and what the Actual Pension would have
been without regard to the limitations of Code Sections 415. The
amount payable under the Plan shall be determined on the basis of the
Actual Pension payable in the form of a single life annuity beginning
as of the first day of the month on or after the later of the
Participant's 65th birthday or termination of employment with Keystone
and all Participating Entities.
(c) Subject to (d) below, payment of amounts payable from the Plan under
(a) or (b) above shall commence to the Participant, if then living, as
of the later of the first day of the month on or following the
Participant's termination of employment which entitles the Participant
to an Actual Pension or the first day of the month following the
Participant's 65th birthday, with such payment to begin not later than
30 days thereafter in the form of a single life annuity if the
Participant is not then married or adjusted on the same basis as under
the Pension Plan and paid in the form of a Qualified Joint and
Survivor Annuity (as defined in the Pension Plan) if the Participant
is then married.
(d) Notwithstanding (c) above, if the present value actuarial equivalent
of the amount to be paid under (a) or (b) above is not more than
$5,000, determined as of the first day of the month following the
Participant's termination of employment which entitles the Participant
to an Actual Pension on the basis of the assumptions used for
calculating similar lump sums under the Pension Plan, such lump sum
amount shall be paid to the Participant, if then living, on March 30
of the calendar year following the calendar year in which the
Participant's termination of employment occurs and shall be in lieu of
all other payments to the Participant under the Plan.
2.02 Death Benefits.
(a) In the event of the death of the Participant after payments from the
Plan have begun in the form of a Qualified Joint and Survivor Annuity,
the Participant's spouse shall receive the payments due based on that
form of payment commencing with the month following the month of the
Participant's death, and no other payments shall be due from the Plan
with respect to the Participant.
(b) In the event of the death of the Participant after payment from the
Plan has been made in the form of a lump sum or commenced in the form
of a single life annuity, no further payments shall be due from the
Plan with respect to the Participant.
(c) In the event of the death of the Participant prior to the date on
which a lump sum would have been made under Section 2.01(d) above, the
payment shall be made on the scheduled payment date to the
Participant's Beneficiary and no other payments shall be due from the
Plan with respect to the Participant.
(d) In the event a Participant who is determined by the Committee to be a
member of a select group of management or highly compensated employees
of Keystone or a Participating Entity for purposes of Title I of ERISA
at the time of death on or after the Effective Date is 100% vested
under the Pension Plan and dies prior to any payments commencing under
the Plan, and if (c) above does not apply, in lieu of all other
payments from the Plan, the person(s) receiving or entitled to receive
the Actual Death Benefit under the Pension Plan with respect to the
Participant shall receive a death benefit from the Plan which is equal
to the difference between the Actual Death Benefit and what the Actual
Death Benefit would have been without regard to the limitations of
Code Sections 415 and 401(a)(17) and taking into account Excluded
Compensation. The amount payable under the Plan shall be determined on
the basis of the Actual Death Benefit which would be payable in the
form of a single life annuity beginning as of the first day of the
month on or after the Participant's death, or as of the earliest date
thereafter as of which the Actual Death Benefit can be paid.
(e) In the event a Participant dies on or after the Effective Date and
prior to any payments commencing to him under the Plan, and is 100%
vested under the Pension Plan, and if (c) and (d) above do not apply,
in lieu of all other payments from the Plan, the person(s) receiving
or entitled to receive the Actual Death Benefit under the Pension Plan
with respect to the Participant shall receive a death benefit from the
Plan which is equal to the difference between the Actual Death Benefit
and what the Actual Death Benefit would have been without regard to
the limitations of Code Section 415. The amount payable under the Plan
shall be determined on the basis of the Actual Death Benefit which
would be payable in the form of a single life annuity beginning as of
the first day of the month on or after the Participant's death, or the
earliest date thereafter as of which the Actual Death Benefit can be
paid.
(f) Subject to (g) below, payment of amounts payable from the Plan under
(d) or (e) above shall commence as of the later of the first day of
the month following the Participant's death or the earliest date
thereafter as of which the Actual Death Benefit can be paid, with such
payment to be in the form of a single life annuity beginning not later
than 30 days thereafter.
(g) Notwithstanding (f) above, if the present value actuarial equivalent
of the amount to be paid under (d) or (e) above is not more than
$5,000, determined as of the date the benefit payment would otherwise
commence under (f) above on the basis of the assumptions used for
calculating similar lump sums under the Pension Plan, such lump sum
amount shall be paid on such date, or within 30 days thereafter, in
lieu of all payments which would otherwise be made under the Plan.
2.03 Beneficiary Designation. A Participant may file with the Committee or
its delegate a completed designation of Beneficiary Form as prescribed by the
Committee or its delegate. Such designation may be made, revoked or changed by
the Participant at any time before death or receipt of all payments due under
the Plan, but such designation of Beneficiary will not be effective and
supersede all prior designations until it is received and acknowledged by the
Committee or its delegate. If the Committee has any doubt as to the proper
Beneficiary to receive payments hereunder, the Committee shall have the right to
withhold such payments until the matter is finally adjudicated. However, any
payment made in good faith shall fully discharge the Committee, Keystone, the
Participating Entities and the Board from all further obligations with respect
to that payment.
<PAGE>
ARTICLE 3. ADMINISTRATION
3.01 Committee and Agents. Full power and authority to administer the Plan
shall be vested in the Committee. The Committee may appoint a secretary who may,
but need not be, a member of the Committee. The Committee may also employ such
other agents as it deems appropriate to assist it with the administration of the
Plan.
3.02 Rules and Regulations. The Committee shall adopt such rules and
regulations of general application as are beneficial for the administration of
the Plan.
3.03 Quorum. A majority of the members of the Committee shall constitute a
quorum for purposes of transacting business relating to the Plan. The acts of a
majority of the members present at any meeting (in person, or by conference
telephone) of the Committee at which there is a quorum shall be valid acts of
the Committee. Acts reduced to and approved unanimously in writing by all of the
Committee members shall also be valid acts.
3.04 Plan Interpretation. The Committee shall have the full power and
authority to construe and interpret the Plan, and make all determinations of
benefits under the Plan, approve all Participants, and determine all facts and
other issues relating to claims and appeals under the Plan.
3.05 Notice of Participation. Following a Participant's termination of
employment which entitles the Participant to an Actual Pension, or following the
death of the Participant, the Committee shall send a written notice informing
the Participant or other person entitled to a benefit under the Plan that he or
she is entitled to a benefit under the Plan. Being a Participant from time to
time does not guarantee that a benefit will be payable under the Plan.
3.06 Costs. All costs and expenses involved in the administration of the
Plan shall be borne by Keystone or the Participating Entity.
3.07 Unsecured Creditor. The Plan constitutes a mere promise by Keystone or
the Participating Entity to make benefit payments in the future. Keystone's and
the Participating Entities' obligations under the Plan shall be unfunded and
unsecured promises to pay. Keystone and the Participating Entities shall not be
obligated under any circumstance to fund their respective financial obligations
under the Plan. Any of them may, in its discretion, set aside funds in a trust
or other vehicle, subject to the claims of its creditors, in order to assist it
in meeting its obligations under the Plan, if such arrangement will not cause
the Plan to be considered a funded deferred compensation plan under ERISA or the
Code and provided, further, that any trust created by Keystone or a
Participating Entity and any assets held by such trust to assist Keystone or the
Participating Entity in meeting its obligations under the Plan will conform to
the terms of the model trust, as described in Rev. Proc. 92-64, 1992-2 C.B. 422
or any successor. The Participants and their Beneficiaries shall have the status
of, and their rights to receive payments under the Plan shall be no greater than
the rights of, general unsecured creditors of Keystone or the applicable
Participating Entity.
3.08 Authority of Board and Committee. Any determination or action of the
Committee or the Board shall be final, conclusive and binding on all
Participants and other recipients, and their beneficiaries, heirs, personal
representatives, executors and administrators. No Participant shall participate
in any decision of the Board or the Committee which directly or indirectly
affects the Participant's benefits under the Plan.
3.09 Amendment, Modification or Termination. The Board, in its sole
discretion, may amend, modify or terminate the Plan at any time and from time to
time, provided that no such amendment, modification, or termination shall reduce
the benefit then being paid to the Participant or other person from the Plan or
which would be payable if the Participant retired or died on the day before any
such amendment, modification or termination, unless consented to by the affected
Participant or by such other person if the Participant is deceased.
<PAGE>
3.10 Claim and Appeal Procedure.
(a) In the event of a claim by a Participant or other person for or in
respect of any benefit under the Plan, such Participant or other
person shall present the reason for the claim in writing to the
Committee, in c/o Keystone HR Administration, Williamsport, or to such
other person or entity designated and communicated by the Committee.
The Committee shall, within ninety (90) days after the receipt of such
written claim, send written notification to the Participant or other
person as to its disposition, unless special circumstances require an
extension of time for processing the claim. If such an extension of
time for processing is required, written notice of the extension shall
be furnished to the claimant prior to the termination of the initial
ninety (90) day period. In no event shall such extension exceed a
period of ninety (90) days from the end of such initial period. The
extension notice shall indicate the special circumstances requiring an
extension of time and the date by which the Committee expects to
render the final decision.
In the event the claim is wholly or partially denied, the written
notification shall state the specific reason or reasons for the
denial, include specific references to pertinent Plan provisions on
which the denial is based, provide an explanation of any additional
material or information necessary for the Participant or other person
to perfect the claim and a statement of why such material or
information is necessary, and set forth the procedure by which the
Participant or other person may appeal the denial of the claim. If the
claim has not been granted and notice is not furnished within the time
period specified in the preceding paragraph, the claim shall be deemed
denied for the purpose of proceeding to appeal in accordance with
paragraph (b) below.
(b) In the event a Participant or other person wishes to appeal the claim
denial, he or she may request a review of such denial by making
written application to the Committee, in c/o Keystone HR
Administration, Williamsport, or to such other person or entity
designated and communicated by the Committee, within sixty (60) days
after receipt of the written notice of denial (or the date on which
such claim is deemed denied if written notice is not received within
the applicable time period specified in paragraph (a) above). Such
Participant or other person (or his or her duly authorized
representative) may, upon written request to the Committee, review
documents which are pertinent to such claim, and submit in writing
issues and comments in support of his or her position. Within sixty
(60) days after receipt of the written appeal (unless an extension of
time is necessary due to special circumstances or is agreed to by the
parties, but in no event more than one hundred and twenty (120) days
after such receipt), the Committee shall notify the Participant or
other person of its final decision. Such final decision shall be in
writing and shall include specific reasons for the decision, written
in a manner calculated to be understood by the claimant, and specific
references to the pertinent Plan provisions on which the decision is
based. If an extension of time for review is required because of
special circumstances, written notice of the extension shall be
furnished to the claimant prior to the commencement of the extension.
If the claim has not been granted and written notice is not provided
within the time period specified above, the appeal shall be deemed
denied.
(c) If a Participant or other person does not follow the procedures set
forth in paragraphs (a) and (b) above, he or she shall be deemed to
have waived the right to appeal benefit determinations under the Plan.
In addition, all determinations by and decisions of the Committee
under this Section shall be binding on and conclusive as to the
Participant or other person.
3.11 Status of Plan. The Plan is intended to constitute an unfunded plan
for tax purposes and for purposes of Title I of ERISA and is intended to be
maintained primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees of Keystone and
Participating Entities and to qualify for the exclusions from Title I of ERISA
which are provided for in Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA.
Notwithstanding any provision in this Plan to the contrary, in the event that
the Department of Labor, or any other regulatory or other body, issues final
regulations which provide, or a court issues a final determination, that the
Plan does not qualify for any of such exclusions under ERISA, the Board may
amend the Plan and the Committee may revoke the designation of all or some
Participants as members of a select group of management or highly compensated
employees, and the Committee and the Board may take such other action as it
determines to be appropriate in order for the Plan to qualify for such
exclusions.
3.12 Tax Withholding. All benefits under the Plan shall be subject to
Federal income, FICA, and other tax withholding as required by applicable law.
At the time that tax withholding is required, if an amount is payable in cash
under the Plan to the Participant the amount of the required tax withholding
shall be withheld from and reduce such cash payment. If, however, an amount is
not then payable in cash or the cash payable under the Plan to the Participant
is less than the required withholding, the Participant shall pay, by check or
money order payable to Keystone or the Participant Entity employing the
Participant, not later than the date such withholding is required, the amount of
the required tax withholding or, at the sole election of Keystone or such
Participating Entity, the amount of required tax withholding shall be withheld
from other compensation or amounts payable to the Participant. The Participant
shall hold Keystone or such Participating Entity harmless in acting to satisfy
the withholding obligation in this manner.
<PAGE>
ARTICLE 4. MISCELLANEOUS PROVISIONS
4.01 Merger or Consolidation. All obligations for amounts earned but not
yet paid under this Plan shall survive any merger, consolidation or sale of all
or substantially all of Keystone's or a Participating Entity's assets to any
entity, and be the liability of the successor to the merger or consolidation or
the purchaser of assets, unless otherwise agreed to by the parties thereto.
4.02 Gender and Number. The masculine pronoun whenever used in the Plan
shall include the feminine and vice versa. The singular shall include the plural
and the plural shall include the singular whenever used herein unless the
context requires otherwise.
4.03 Construction. The provisions of the Plan shall be construed,
administered and governed by the laws of the Commonwealth of Pennsylvania,
including its statute of limitations provisions, to the extent not preempted by
ERISA or other applicable Federal law. Titles of Articles and Sections of the
Plan are for convenience of reference only and are not to be taken into account
when construing and interpreting the provisions of the Plan.
4.04 Non-alienation. Except as may be required by law, neither the
Participant or other person shall have the right to, directly or indirectly,
alienate, assign, transfer, pledge, anticipate or encumber any amount that is or
may be payable hereunder, including in respect of any liability of a Participant
or other person for alimony or other payments for the support of a spouse,
former spouse, child or other dependent, prior to actually being received by the
Participant or other person hereunder, nor shall the Participant's or other
person's rights to benefit payments under the Plan be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors of the Participant or other person or to
the debts, contracts, liabilities, engagements, or torts of any Participant or
other person, or transfer by operation of law in the event of bankruptcy or
insolvency of the Participant or other person, or any legal process.
Notwithstanding the foregoing, the Committee may, in its sole discretion,
recognize and establish procedures for administering a domestic relations or
other family court order providing for the Plan to pay all or a portion of a
Participant's benefit to or for the benefit of a Participant's spouse, former
spouse or children, provided that such order does not require the Plan to make
payment prior to the time payment would otherwise be made to the Participant
pursuant to the terms of the Plan as in effect from time to time and that it
meets such other requirements as the Committee shall specify.
4.05 No Employment Rights. Neither the adoption of the Plan nor any
provision of the Plan shall be construed as a contract of employment between
Keystone or a Participating Entity and any Participant, or as a guarantee or
right of any Participant to future or continued employment with Keystone or a
Participating Entity, or as a limitation on the right of Keystone or a
Participating Entity to discharge any of its employees with or without cause.
Specifically, being a Participant does not create any rights, and no rights are
created under the Plan, with respect to continued or future employment or
conditions of employment.
4.06 Minor or Incompetent. If the Committee determines that any Participant
or other person entitled to a payment under the Plan is a minor or incompetent
by reason of physical or mental disability, it may, in its sole discretion,
cause any payment thereafter becoming due to such person to be made to any other
person for his or her benefit, without responsibility to follow application of
amounts so paid. Payments made pursuant to this provision shall completely
discharge Keystone, the Participating Entities, the Plan, the Committee, and the
Board.
4.07 Illegal or Invalid Provision. In case any provision of the Plan shall
be held illegal or invalid for any reason, such illegal or invalid provision
shall not affect the remaining parts of the Plan, but the Plan shall be
construed and enforced without regard to such illegal or invalid provision.
<PAGE>
Exhibit 10.9
KEYSTONE FINANCIAL, INC.
1990 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
(as amended through March 25, 1993)
The purposes of the 1990 Non-Employee Directors' Stock Option Plan (the
"Plan") are to promote the long-term success of Keystone Financial, Inc. (the
"Corporation") by creating a long-term mutuality of interests between the
non-employee Directors and shareholders of the Corporation, to provide an
additional inducement for such Directors to remain with the Corporation and to
provide a means through which the Corporation may attract able persons to serve
as Directors of the Corporation.
SECTION 1
Administration
The Plan shall be administered by a Committee (the "Committee")
appointed by the Board of Directors of the Corporation and consisting of not
less than two members of the Board.
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.
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. All questions of interpretation and
application of the Plan, or as to stock options granted under the Plan, shall be
subject to the determination of the Committee, which shall be final and binding.
No discretion concerning decisions regarding the Plan shall be exercised by any
person other than the Committee.
Notwithstanding the above, the selection of the Directors to whom stock
options are to be granted, the timing of such grants, the number of shares
subject to any stock option, the exercise price of any stock option, the periods
during which any stock option may be exercised and the term of any stock option
shall be as hereinafter provided, and the Committee shall have no discretion as
to such matters.
SECTION 2
Shares Available under the Plan
The total number of shares which may either be issued pursuant to or be
subject to outstanding stock options (including both stock options granted under
Section 3 and reload options) granted under the Plan is limited to 1,234,375
shares of Common Stock, par value $2.00 per share, of the Corporation (the
"Common Stock"), subject to adjustment and subsititution as set forth in Section
5. Of such total authorized shares, no more than 234,375 shares of Common Stock,
subject to adjustment and substitution as set forth in Section 5, may either be
issued pursuant to or be subject to outstanding stock options (not including
reload options) granted under Section 3 of the Plan. 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. 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 3
Grant of Stock Options
On January 2 or, if January 2 is not a day on which the principal market
for the Common Stock is open for trading, then on the first such trading day, of
each of the years 1991 through 1995, each person who is then a member of the
Board of Directors of the Corporation and who is not then an employee of the
Corporation or any of its subsidiaries (a "non-employee Director") shall be
granted a "nonstatutory stock option" (i.e., a stock option which does not
qualify under Section 422A of the Internal Revenue Code of 1986) to purchase
1,875 shares of Common Stock. If the number of shares then remaining available
for the grant of stock options under the Plan is not sufficient for each
non-employee Director to be granted an option for 1,875 shares, then each
non-employee Director shall be granted an option for a number of whole shares
equal to the number of shares then remaining available divided by the number of
non-employee Directors, disregarding any fractions of a share.
SECTION 4
Terms and Conditions of Stock Options
Stock options 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 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, determined as provided in Section 4(G).
(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); provided, however, that in
lieu of such cash the person exercising the stock option may 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 4(G), 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 one year may be delivered in payment of the
option price of a stock option. 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
2.
(C) No stock option shall be exercisable by a grantee while a
Director prior to the second anniversary of the date of grant, and no
stock option shall be exercisable in any event during the first six
months of its term except in case of death or disability as provided in
Section 4(E). No stock option shall be exercisable after the expiration
of ten years from the date of grant. A stock option to the extent
exercisable at any time may be exercised in whole or in part.
(D) 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 or the grantee's guardian or
legal representative.
(E) If a grantee ceases to be a Director of the Corporation
for any reason, any outstanding stock options held by the grantee shall
be exercisable and shall terminate according to the following
provisions:
(i) If a grantee ceases to be a Director of the
Corporation for any reason other than resignation, removal for
cause or death, any then outstanding stock option held by such
grantee (whether or not exercisable by the grantee immediately
prior to ceasing to be a Director) shall be exercisable by the
grantee at any time prior to the expiration date of such stock
option or within one year after the date the grantee ceases to
be a Director, whichever is the shorter period, provided that,
except in the case of a grantee who is disabled within the
meaning of Section 422A(c)(7) of the Code (a "Disabled
Grantee"), in no event shall the option be exercisable during
the first six months of its term;
(ii) If during his term of office as a Director a
grantee resigns from the Board or is removed from office for
cause, any outstanding stock option held by the grantee which
is not exercisable by the grantee immediately prior to
resignation or removal shall terminate as of the date of
resignation or removal, and any outstanding stock option held
by the grantee which is exercisable by the grantee immediately
prior to resignation or removal shall be exercisable by the
grantee at any time prior to the expiration date of such stock
option or within 90 days after the date of resignation or
removal, whichever is the shorter period;
(iii) Following the death of a grantee during service
as a Director of the Corporation, any outstanding stock option
held by the grantee at the time of death (whether or not
exercisable by the grantee immediately prior to death) shall
be exercisable 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;
(iv) Following the death of a grantee after ceasing to
be a Director and 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.
A stock option held by a grantee who has ceased to be
a Director of the Corporation shall terminate upon the
expiration of the applicable exercise period, if any,
specified in this Section 4(E). Whether a grantee is a
Disabled Grantee shall be determined, in its discretion, by
the Committee, and any such determination by the Committee
shall be final and binding.
(F) All stock options 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.
(G) 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 4(G). If the fair market value of
the Common Stock cannot be determined on the basis previously set forth
in this Section 4(G) for 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.
(H) 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.
(I) Subject to the approval of the shareholders of the
Corporation at its 1993 Annual Meeting, each stock option outstanding
under the Plan as of March 25, 1993 and each stock option thereafter
granted under the Plan (including reload options) shall have reload
option rights as provided in this Section 4(I). Reload option rights
shall entitle the original grantee of a stock option (and 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 equal to the number of full shares delivered in payment of the
option price of the original option, (ii) having an option price equal
to one hundred percent (100%) of the fair market value per share
(determined as provided in Section 4(G)) of the Common Stock covered by
the reload option on such date of grant, (iii) having the same
expiration date as the stock option so exercised and (iv) otherwise
having the same terms and conditions as a stock option granted under
Section 3 of the Plan. Reload option rights shall entitle a grantee to
be granted a reload option only if the underlying option or reload
option to which it relates is exercised by the original grantee during
service as a director of the Corporation. 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 authorized 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.
Subject to the foregoing provisions of this Section 4 and the other
provisions of the Plan, any stock option granted under the Plan may 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 4(F), or an amendment thereto.
SECTION 5
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, the number of shares of the
Common Stock to be subject to any stock option thereafter granted 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 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.
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, for each
share of the Common Stock which would otherwise be subject to any stock option
thereafter granted 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,
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.
In case of any adjustment or substitution as provided for in this
Section 5, 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 5 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.
SECTION 6
Additional Rights in Certain Events
(A) Definitions.
For purposes of this Section 6, the following terms shall have the
following meanings:
(1) "Affiliate," "Associate" and "Parent" shall have the
respective meanings set forth in Rule 12b-2 under the 1934 Act as in
effect on the effective date of the Plan.
(2) The term "Person" shall be used as that term is used in
Sections 13(d) and 14(d) of the 1934 Act.
(3) 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.
(4) "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).
(5) "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.
(6) "Subsidiary" shall mean 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.
(7) "Section 6 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 25% or
more of the Voting Power of the Corporation;
(b) (i) A Tender Offer is made to acquire securities
of the Corporation entitling the holders thereof to 50% or
more of the Voting Power of the Corporation; or (ii) Voting
Shares are first purchased pursuant to any other Tender Offer;
or
(c) At any time less than 60% of the members of the
Board of Directors shall be individuals who were either (i)
Directors on the effective date of the Plan or (ii)
individuals whose election, or nomination for election, was
approved by a vote (including a vote approving a merger or
other agreement providing for the membership of such
individuals on the Board of Directors) of at least two-thirds
of the Directors then still in office who were Directors on
the effective date of the Plan or who were so approved.
(B) Acceleration of the Exercise Date of Stock Options
Notwithstanding any other provision contained in the Plan, in case any
"Section 6 Event" occurs all outstanding stock options shall become immediately
and fully exercisable whether or not otherwise exercisable by their terms,
provided that, except as provided in Section 4(E), in no event shall a stock
option be exercisable during the first six months of its term.
SECTION 7
Effect of the Plan on the Rights of Corporation and Shareholders
Nothing in the Plan, in any stock option granted under the Plan, or in
any stock option agreement shall confer any right to any person to continue as a
Director of the Corporation or interfere in any way with the rights of the
shareholders of the Corporation or the Board of Directors to elect and remove
Directors.
SECTION 8
Amendment and Termination
The right to amend the Plan at any time and from time to time and the
right to terminate the Plan at any time are hereby specifically reserved to the
Board; provided always that no such termination shall terminate any outstanding
stock options granted under the Plan; and provided further that no amendment of
the Plan shall (a) be made without shareholder approval if shareholder approval
of the amendment is at the time required for stock options under the Plan to
qualify for the exemption from Section 16(b) of the 1934 Act provided by Rule
16b-3 or by the rules of the NASDAQ National Market System or any stock exchange
on which the Common Stock may then be listed, (b) amend more than once every six
months the provisions of the Plan relating to the selection of the Directors to
whom stock options are to be granted, the timing of such grants, the number of
shares subject to any stock option, the exercise price of any stock option, the
periods during which any stock option may be exercised and the term of any stock
option other than to comport with changes in the Internal Revenue Code or the
rules and regulations thereunder or (c) otherwise amend the Plan in any manner
that would cause stock options under the Plan not to qualify for the exemption
provided by Rule 16b-3. No amendment or termination of the Plan shall, without
the written consent of the holder of a stock option theretofore awarded under
the Plan, adversely affect the rights of such holder with respect thereto.
Notwithstanding anything contained in the preceding paragraph or any
other provision of the Plan or any stock option agreement, the Board shall have
the power to amend the Plan in any manner deemed necessary or advisable for
stock options granted under the Plan to qualify for the exemption provided by
Rule 16b-3 (or any successor rule relating to exemption from Section 16(b) of
the 1934 Act), and any such amendment shall, to the extent deemed necessary or
advisable by the Board, be applicable to any outstanding stock options
theretofore granted under the Plan notwithstanding any contrary provisions
contained in any stock option agreement. In the event of any such amendment to
the Plan, the holder of any stock option outstanding under the Plan shall, upon
request of the Committee and as a condition to the exercisability of such
option, execute a conforming amendment in the form prescribed by the Committee
to the stock option agreement referred to in Section 4(F) within such reasonable
time as the Committee shall specify in such request.
SECTION 9
Effective Date and Duration of Plan
The effective date and date of adoption of the Plan shall be March 29,
1990, the date of adoption of the Plan by the Board, provided that on or prior
to December 31, 1992 such adoption of the Plan by the Board is approved by the
affirmative vote of the holders of at least a majority of the outstanding shares
of voting stock of the Corporation represented in person or by proxy at a duly
called and convened meeting of such holders. Notwithstanding any other provision
contained in the Plan, no stock option granted under the Plan may be exercised
until after such shareholder approval. No stock option may be granted under
Section 3 of the Plan subsequent to January 3, 1995. After January 3, 1995,
reload options may continue to be granted during the terms of stock options then
outstanding.
<PAGE>
Exhibit 10.16
KEYSTONE FINANCIAL, INC.
1997 STOCK INCENTIVE PLAN
The purposes of the 1997 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 both (1) a "non-employee director" as then defined under
Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or any successor rule and (2) an "outside director" as then defined in
the regulations under Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), or any successor provision.
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 all members 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 share or other stock 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), restricted shares, performance
shares and other stock awards as described herein and to determine the employees
to whom any such grant shall be made and the number of shares to be covered
thereby. In determining the eligibility of any employee, as well as in
determining the number of shares covered by each grant of a stock option,
restricted shares, performance shares or other stock award 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 and/or potential
contribution to the success of the Corporation or a Subsidiary and such other
factors as the Committee may deem relevant.
1
<PAGE>
SECTION 3
Shares Available under the Plan
The aggregate net number of shares of Common Stock which may be issued
and as to which grants of stock options (including reload options), restricted
shares, performance shares or other stock awards may be made under the Plan is
2,500,000 shares, subject to adjustment and substitution as set forth in Section
7. If any stock option is exercised by delivering previously owned shares in
payment of the option price, the number of shares so delivered to the
Corporation shall again be available for purposes of the Plan. If any stock
option 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 or under the terms of any other stock award, the shares so
forfeited shall again be available for purposes of the Plan. To the extent any
award of performance shares or any other stock award 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.
The maximum aggregate number of shares of Common Stock which shall be
available for the grant of stock options, restricted shares and performance
shares to any one individual under the Plan during any calendar year shall be
limited to 200,000 shares. The limitation in the preceding sentence shall be
interpreted and applied in a manner consistent with Section 162(m) of the Code.
To the extent consistent with Section 162(m) of the Code, in applying this
limitation a reload option (a) shall be deemed to have been granted at the same
time as the original underlying stock option and (b) shall not be deemed to
increase the number of shares covered by the original underlying stock option
grant.
SECTION 4
Grant of Stock Options, Reload Options and Cash Payment Rights and Awards
of Restricted Shares, Performance Shares and Other Stock Awards
The Committee shall have authority, in its discretion, (a) to grant "incentive
stock options" pursuant to Section 422 of 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 shares and (d) to make other
stock awards as described herein. 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
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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.
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), 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 or, in the case of nonstatutory stock options, a
certification acceptable to the Committee that is provided through a
broker and which attests to the sale of the shares covered by the stock
option and the availability of the option price to the Corporation;
provided, however, that in lieu of such cash or certification 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
Common Stock having a fair market value on the date of exercise of the
stock option 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
Common Stock which have been held for less than six months may be
delivered in payment of the option price of a stock option. Delivery of
shares of Common Stock in payment of the exercise price of a stock
option, if authorized by the Committee, may be accomplished through the
effective transfer to the Corporation of shares of Common Stock held
through a broker or other agent. 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 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 or the appropriate certification in the case of nonstatutory
stock options. 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.
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(C) Subject to Section 8(B), a stock option shall become
exercisable at such time or times and/or upon the occurrence of such
event or events as may be determined by the Committee at the time of
grant of the stock option or, in the case of a nonstatutory stock
option, at any time thereafter during the term of the stock option.
Unless otherwise determined by the Committee and reflected in the stock
option agreement or, in the case of a nonstatutory stock option, an
amendment thereto, a stock option shall be exercisable from its date of
grant. 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.
(D) Reload option rights granted in conjunction with a stock
option shall entitle the holder of the stock option, 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
full 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 or, for
reload option rights and reload options not granted in conjunction with
an incentive stock option, in an amendment to such agreement, in the
agreement relating to the reload option or in 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
holder of a stock option to be granted a reload option only if the
underlying option or reload option to which it relates is exercised
during employment with the Corporation or a Subsidiary of the original
grantee of the underlying option. 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.
(E) Cash payment rights granted in conjunction with a
nonstatutory stock option shall entitle the original grantee of the
stock option, or the person who becomes the holder of the stock option
by reason of the death of such original grantee, 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 (1) such percentage (not greater than 100%)
as the Committee, in its discretion, shall determine of the excess of
the fair market value of a share of Common Stock on the date of
exercise of the stock option over the option price per share of the
stock option, multiplied by (2) 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.
(F) No incentive stock option and, except to the extent
otherwise determined by the Committee and reflected in the stock option
agreement or an amendment thereto, no nonstatutory 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 incentive
stock options and, except to the extent otherwise determined by the
Committee and reflected in the stock option agreement or an amendment
thereto, all nonstatutory stock options shall be exercisable during the
lifetime of the grantee only by the grantee.
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(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;
(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 of such grantee (whether
or not then held by the grantee) shall be exercisable (but
only to the extent exercisable immediately prior to the
grantee's 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 of such grantee (whether or not then held by the
grantee) shall be exercisable in full (whether or not so
exercisable immediately prior to the grantee's termination of
employment) 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 stock option of the grantee outstanding at the
time of death shall be exercisable in full (whether or not so
exercisable 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 (or, in the case of a
nonstatutory stock option, if permitted under the stock option
agreement, by the grantee's inter vivos transferee) 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 stock option of the grantee outstanding at
the time of death shall be exercisable (but only to the extent
the stock option was exercisable immediately prior to the
death of the grantee) by such person entitled to do so under
the Will of the grantee or by such legal representative (or,
in the case of a nonstatutory stock option, by such inter
vivos transferee) 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 stock options of the grantee
outstanding at the time of such termination of employment
(whether or not then held by the grantee) shall automatically
terminate.
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For purposes of this Section 5(G), an involuntary termination
of the grantee's employment other than for "Cause" or any voluntary
termination of the grantee's employment shall be deemed to be a
voluntary termination of employment with the consent of the Corporation
and "Cause" shall have the same meaning as provided in Section
6(B)(vii) of the Plan. In accordance with the preceding sentence,
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, performance shares or other stock award 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 of the grantee, declare forfeited all
restricted shares of the grantee as to which the restrictions have not
yet lapsed, terminate all outstanding performance share awards of the
grantee for which the applicable Performance Period has not been
completed and declare forfeited all outstanding other stock awards of
the grantee which remain subject to restriction or which have otherwise
not yet become payable (whether or not such stock options, restricted
shares, performance shares or other stock awards are then held by the
grantee); 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 share award 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 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 by Corporation and the grantee.
(I) For all purposes under the Plan, 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 Exchange 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 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 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.
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(J) The obligation of the Corporation to issue shares of
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 Shares and Other Stock Awards
(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 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(A)), the duration of such
restrictions, the 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 in whole or in part 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 by
the Corporation and the grantee.
If so determined by the Committee at the time of an award of restricted
shares, the lapse of restrictions on restricted shares may be based on the
extent of achievement over a specified Performance Period of one or more
Performance Targets based on Performance Criteria established by the Committee
as provided in Section 6(B). In such case, the award of restricted shares and
all determinations by the Committee in respect thereto shall be made by the
Committee in accordance with the procedures applicable to performance shares as
provided in Section 6(B).
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 the 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 Shares.
The Committee may award performance shares which shall be earned by an
awardee based on the level of performance during a specified Performance Period
by the Corporation, a Subsidiary or Subsidiaries, any branch, department or
other portion thereof or the awardee individually, as determined by the
Committee. No award of performance shares shall be granted later than 90 days
after the commencement of the applicable Performance Period. For the purposes of
the grant of performance shares, the following definitions shall apply:
(i) "performance share" shall mean an award, expressed in
shares of Common Stock, granted to an awardee with respect to a
Performance Period.
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(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 Criteria" shall mean one or more
preestablished, objective measures of performance during a Performance
Period by the Corporation, a Subsidiary or Subsidiaries, any branch,
department or other portion thereof or the awardee individually,
selected by the Committee in its discretion to determine whether an
award of performance shares has been earned in whole or in part.
Performance Criteria may be based on earnings per share, earnings,
earnings growth, return on equity, return on assets, asset growth or
ratio of capital to assets. Performance Criteria based on such
performance measures may be based either on the performance of the
Corporation, Subsidiary or portion thereof under such measure for the
Performance Period and/or upon a comparison of such performance with
the performance of a peer group of corporations selected or defined by
the Committee at the time of making a performance share award. The
Committee may in its discretion also determine to use other objective
performance measures as Performance Criteria.
(iv) "Performance Target" shall mean the level or levels of
achievement of one or more Performance Criteria which must be attained
during a Performance Period for a performance share award to be fully
earned, as established by the Committee at the time of making an award
of performance shares and set forth in the award agreement.
(v) "Performance Threshold" shall mean the minimum level or
levels of achievement of the Performance Criteria applicable to a
Performance Period which must be attained for any portion of a
performance share award to be earned. If the Performance Threshold is
other than the Performance Target, the Committee shall establish and
the award agreement shall set forth, in addition to the Performance
Target, the Performance Threshold, the number of performance shares
earned if the Performance Threshold is achieved, and the manner of
determining the number of performance shares earned if the actual level
of performance is between the Performance Threshold and the Performance
Target.
(vi) "Performance Maximum" shall mean a maximum number of
performance shares which may be earned with respect to a performance
share award and the level or levels of achievement of the Performance
Criteria applicable to a Performance Period which must be attained or
exceeded for such maximum amount to be earned. If the Performance
Maximum is higher than the number of performance shares earned on
achievement of the Performance Target, the Committee shall establish
and the award agreement shall set forth the maximum number of
performance shares which may be earned, the level or levels of
achievement of the Performance Criteria applicable to the Performance
Period which must be attained for such maximum number of performance
shares to be earned, and the manner of determining the number of
performance shares earned if the actual level of performance is between
the Performance Target and the Performance Maximum.
(vii) "Cause," "Disability" and "Retirement" shall have the
meanings provided in the Corporation's 1996 Performance Unit Plan.
In granting an award of performance shares, the Committee shall
establish and cause to be set forth in writing: (a) the number of performance
shares granted to the awardee; (b) the Performance Period applicable to the
award; and (c) the Performance Criteria to be employed in determining whether
all or any part of the performance shares awarded have been earned during the
Performance Period and the method of determining the number of performance
shares earned, including the applicable Performance Target and any Performance
Threshold or Performance Maximum. The terms so established by the Committee
shall be objective such that a third party having knowledge of the relevant
facts could determine (1) whether or not the Performance Target and any
Performance Threshold or Performance Maximum has been achieved and (2) the
number of performance shares which have been earned based on such performance.
Each award of performance shares shall be evidenced by a written award agreement
executed by the awardee and the Corporation which shall set forth the aforesaid
terms of the performance share award as established by the Committee and such
other terms and conditions, not inconsistent with the provisions of the Plan,
applicable to the award as the Committee in its discretion may determine to
include therein.
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Within 75 days following the end of a Performance Period, the Committee
shall determine in accordance with the terms of the Plan and the award agreement
and shall certify in writing whether the applicable Performance Target, any
applicable Performance Threshold or Performance Maximum, and any other material
terms of a performance share award were achieved or satisfied and the number of
performance shares, if any, earned by the awardee. For this purpose, approved
minutes of the meeting of the Committee at which the certification is made shall
be sufficient to satisfy the requirement of a written certification. Payment of
earned performance shares shall be made to the awardee on or before March 15th
of the year following the end of the Performance Period. Payment in respect of
earned performance shares may be made in shares of Common Stock, in cash, or
partly in shares of Common Stock and partly in cash, as determined by the
Committee at the time of payment. For purposes of any payment in cash, earned
performance 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.
In establishing Performance Criteria and Performance Targets for any
Performance Period, the Committee may define accounting terms so as to specify
in an objectively determinable manner the effect of changes in accounting
principles, extraordinary items, discontinued operations, mergers or other
business combinations, acquisitions or dispositions of assets and the like.
Unless otherwise so determined by the Committee and reflected in the award
agreement, accounting terms used by the Committee in establishing Performance
Criteria and Performance Targets shall be defined, and the results based thereon
shall be measured, in accordance with generally accepted accounting principles
as applied by the Corporation in preparing its consolidated financial statements
and related financial disclosures for the Performance Period, as included in its
reports filed with the Securities and Exchange Commission.
If during any Performance Period (a) a dividend or other distribution
shall be declared upon the Common Stock payable in shares of Common Stock, (b)
the outstanding shares of Common Stock shall be changed into or exchangeable for
a different number or kind or shares of stock or other securities of the
Corporation or another corporation, whether through reorganization,
reclassification, stock split-up, combination of shares, merger or
consolidation, (c) there shall be a change in the capitalization of the
Corporation resulting from the separation from the Corporation of any
corporation or business through a spin-off or other distribution of stock or
property to the shareholders of the Corporation, a reorganization or a partial
or complete liquidation, an appropriate and proportionate adjustment shall be
made by the Committee with respect to any Performance Target, Performance
Threshold and Performance Maximum to be calculated by reference to earnings per
share or other stock-based Performance Criteria so as to preserve as nearly as
may be practicable the intended effect of such performance measures as
originally established by the Committee. Any such adjustment made by the
Committee shall be final, binding and conclusive as to all awardees,
notwithstanding the provisions of any award agreement. In any such event, the
number of performance shares subject to any award shall also be adjusted as
provided in Section 7.
Unless otherwise determined by the Committee at the time of making an
award of performance shares and reflected in the applicable award agreement, if
all employment of an awardee with the Corporation and its Subsidiaries
terminates prior to the end of a Performance Period for any reason other than
death, Disability, Retirement or an involuntary termination by the Corporation
or a Subsidiary not for Cause, then all performance shares of the awardee for
which the applicable Performance Period has not been completed as of the date of
such termination of employment shall be deemed forfeited. In the case of a
termination of employment prior to the end of the applicable performance Period
due to death, Disability, Retirement or involuntary termination not for Cause,
the award agreement may specify the manner of determining the number of
performance shares, if any, which shall be deemed earned based on the extent to
which the applicable Performance Target has been achieved as of the date of
termination of employment, the percentage of the Performance Period elapsed
and/or such other factors as the Committee may deem relevant. In the absence of
such specification, the determination of whether any performance shares shall be
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deemed earned if the employment of the awardee terminates prior to the end of
the applicable Performance Period due to death, Disability, Retirement or
involuntary termination not for Cause, and the number of performance shares
earned and the timing of payment thereof, shall be made by the Committee in its
sole and absolute discretion. Payment in respect of any earned performance
shares following a termination of employment as provided in this paragraph shall
be made to the awardee, or in the event of death to his or her estate, as
promptly as practicable after the number of performance shares earned has been
determined by the Committee, which shall make such determination within 75 days
after termination of employment. If the Committee determines that all or any
part of the performance share award shall be paid, payment may be made in shares
of Common Stock, in cash, or partly in cash and partly in shares of Common
Stock, as determined by the Committee at the time of payment. For purposes of
any payment in cash, performance 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.
Any determination by the Committee on any matter with respect to
performance shares shall be final and binding on both the Corporation and the
awardee.
(C) Other Stock Awards.
The Committee shall have the authority in its discretion to grant to
eligible employees such other awards that are denominated or payable in, valued
in whole or in part by reference to, or otherwise based on or related to, shares
of Common Stock as deemed by the Committee to be consistent with the purposes of
the Plan, including, without limitation, purchase rights, shares awarded without
restrictions or conditions, or securities or other rights convertible or
exchangeable into shares of Common Stock. In the discretion of the Committee,
such other stock awards, including shares of Common Stock, or other types of
awards authorized under the Plan, may be used in connection with, or to satisfy
obligations of the Corporation or a Subsidiary to eligible employees under,
other compensation or incentive plans, programs or arrangements of the
Corporation or a Subsidiary, including without limitation the 1996 Performance
Unit Plan, the Management Incentive Compensation Plan and the Savings
Restoration Plan. The Committee shall determine the terms and conditions, if
any, of any other stock awards made under the Plan.
SECTION 7
Adjustment and Substitution of Shares
If a dividend or other distribution shall be declared upon the Common
Stock payable in shares of Common Stock, the number of shares of Common Stock
then subject to any outstanding stock options, performance share or other stock
awards and the number of shares of 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 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 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, or cash or other property,
whether through reorganization, reclassification, recapitalization, stock
split-up, combination of shares, merger or consolidation, then there shall be
substituted for each share of Common Stock subject to any then outstanding stock
option, performance share or other stock award, and for each share of 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 (and in the case of outstanding options or awards, the cash or
other property) 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.
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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), cash or other property to which such shares shall have been
adjusted or which shall have been substituted for such shares. Any new option
price per share or other unit 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
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 Exchange Act.
(2) Beneficial Ownership shall be determined as provided in
Rule 13d-3 under the Exchange 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.
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(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
Exchange 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;
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 Exchange 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.
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(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)), then
unless the agreement referred to in Section 6(A), or an amendment thereto, shall
otherwise provide, 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 Shares.
If any "Section 8 Event" occurs prior to the end of any Performance
Period, then unless otherwise provided in the applicable award agreement, all
performance shares 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 without
regard to actual performance, and as of the date of the Section 8 Event there
shall be due and payable to the awardee with respect thereto the maximum number
of performance shares which could have been earned during the Performance Period
through achievement of the Performance Maximum, if any, or if none, the
Performance Target.
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), restricted shares, performance shares or other stock awards
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 share or other stock award under the Plan or in any agreement
providing for any of the foregoing shall 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 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 amendment of the Plan shall be made without shareholder
approval (1) if the effect of the amendment is (a) to make any changes in the
class of employees eligible to receive incentive stock options under the Plan,
(b) to increase the number of shares with respect to which incentive stock
options may be granted under the Plan or (2) if shareholder approval of the
amendment is at the time required (a) by the rules of the NASDAQ National Market
System or any stock exchange on which the Common Stock may then be listed or (b)
for nonstatutory stock options or performance shares granted under the Plan to
qualify as "performance based compensation" as then defined in the regulations
under Section 162(m) of the Code. 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 shares or other stock award 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 27,
1997, 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
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held meeting of shareholders held on or prior to March 26, 1998 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,
performance shares or other stock award may be payable, until after and
contingent upon such approval. No stock option, reload option rights, cash
payment rights, restricted shares, performance shares or other stock award may
be granted under the Plan subsequent to March 26, 2007, except that reload
options and associated cash payment rights may be granted pursuant to reload
option rights then outstanding.
SECTION 12
Withholding
Income or employment taxes may be required to be withheld by the
Corporation or a Subsidiary in connection with the exercise of a stock option,
upon a "disqualifying disposition" of the shares acquired upon exercise of an
incentive stock option, at the time restricted shares are granted or vest or
performance shares are earned or upon the receipt by the grantee of cash in
payment of cash payment rights or dividends on restricted stock which has not
vested. Except as provided below, the grantee shall pay the Corporation in cash
the amount required to be withheld.
A grantee may elect to have any withholding obligation at the time of
the exercise of a nonstatutory stock option or at the time restricted shares
vest or performance shares are earned satisfied by the Corporation withholding
from the shares of Common Stock the grantee would otherwise receive full shares
of Common Stock having a fair market value, determined as provided in Section
5(I), on the date that the amount of tax to be withheld is determined equal to,
or as nearly equal as possible to but less than, the amount required to be
withheld. The Corporation will request that the grantee pay any additional
amount required to be withheld directly to the Corporation in cash and the
grantee's election may be subject to any requirements imposed by the Committee.
Any income or employment taxes required to be withheld by the Corporation or any
of its Subsidiaries upon the receipt by the grantee of cash in payment of cash
payment rights or dividends will be satisfied by the Corporation by withholding
the taxes required to be withheld from the cash the grantee would otherwise
receive.
If a grantee does not pay any income or employment taxes required to be withheld
by the Corporation or any of its Subsidiaries within ten days after a request
for the payment of such taxes, the Corporation or such Subsidiary may withhold
such taxes from any other compensation to which the grantee is entitled from the
Corporation or any of its subsidiaries.
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Exhibit 10.18
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is made on the ____ day of ______________, 1997 between
KEYSTONE FINANCIAL, INC. (the "Corporation"), a Pennsylvania corporation with
its principal office at One Keystone Plaza, Harrisburg, PA, and JAMES M. DEITCH
(the "Executive"), residing at 3405 Pebble Ridge Road, York, PA l7405,
WHEREAS, said Executive Employment Agreement shall become effective on
January l, l997; and
WHEREAS, the Corporation desires to employ the Executive in a Senior
Executive position with the Corporation or a Subsidiary under the terms and
conditions set forth herein; and
WHEREAS, the Executive desires to serve the Corporation in a Senior
Executive position under the terms and conditions set forth in this Agreement;
NOW THEREFORE, in consideration of the mutual covenant and agreement
set forth herein and intending to be legally bound hereby, the parties agree as
follows:
1. DEFINITIONS. The following definitions shall apply in this Agreement:
(a) "Anniversary Date" shall mean January 1, 1997 and the January 1
of each successive year.
(b) "Annual Salary" shall be the base cash compensation defined in
Section 5(a) without regard to any elective deferral or salary
reduction plan or program of the Corporation.
(c) "Board of Directors" shall mean the Board of Directors of the
Corporation as constituted from time to time.
(d) "Change of Control" shall be as defined in paragraph 14 of this
Agreement.
(e) "Disability" shall be as defined in paragraph 10(b) of this
Agreement.
(f) "Early Retirement" shall be that age stipulated from time to time
by the Human Resources Committee of the Board of Directors as the
age at which key management personnel may elect to take early
retirement.
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(g) "LTD" means the corporation's long-term disability insurance for
key management personnel as in effect from time to time.
(h) "MICP" means the Corporation's Management Incentive Compensation
Plan as in effect from time to time, or any successor plan
thereto.
(i) "Normal Retirement" shall be that age stipulated from time to
time by the Human Resources Committee of the Board of Directors
as the age at which key management personnel are required to take
mandatory retirement.
(j) "Senior Executive" shall mean any key management employee of the
Corporation or a Subsidiary whose employment relationship is
governed by a contract or agreement.
(k) "Subsidiary" shall mean any bank, corporation or other entity of
which the Corporation owns, directly or indirectly, through one
or more Subsidiaries, a majority of each class of equity security
having ordinary voting power in an election of directors.
2. TERM OF AGREEMENT; RENEWAL. This Agreement shall be initially effective
for a three-year period beginning January l, l997. The term of this Agreement
will automatically renew on January 1, 1998 and each subsequent Anniversary Date
for an additional three-year period unless, prior to the first day of October
preceding the first Anniversary Date within the then current term, either party
shall give written notice of nonrenewal to the other, in which event this
Agreement shall terminate at the end of the three-year period then in effect.
For example, the initial contract period is January l, 1997 through December 31,
1999. On January 1, 1998, the term of this Agreement extends to December 31,
2000, unless one of the parties provides written notice of his intent not to
renew the Agreement prior to October 1, l997.
3. POSITION AND DUTIES. The Executive shall serve initially as
President/Chief Executive Officer of Keystone National Bank, reporting to the
Senior Executive Vice President and Chief Banking Officer of the Corporation,
and shall have supervision and control over, and responsibility for, the general
management and operation of Keystone National Bank, and shall have such other
powers and duties as may from time to time be prescribed by the Senior Executive
Vice President and Chief Banking Officer of the Corporation, provided that such
duties are consistent with the position of a Senior Executive.
4. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall devote substantially
all his working time, ability and attention to the business of the Corporation
during the term of this Agreement. The Executive shall notify the Board of
Directors in writing before the Executive engages in any other business or
commercial activities, duties or pursuits, including, but not limited to,
directorships of other companies. Under no circumstances may the Executive
engage in any business or commercial activities, duties or pursuits which
compete with the business or commercial activities of the Corporation or any of
its Subsidiaries, nor may the Executive serve as a director or officer or in any
other capacity with any business entity unless he shall have received advance
written approval from the officer of the Corporation to whom he reports as
provided in paragraph 3 of this Agreement.
5. COMPENSATION.
(a) ANNUAL SALARY. For services rendered under this Agreement, the
Executive shall be entitled to receive as base compensation for
the period through December 31, 1997, an Annual Salary at an
initial rate of $175,000 per year. The Executive's Annual Salary
shall be reviewed thereafter by the Board of Directors at least
once annually and may be adjusted at the discretion of the Board
of Directors in accordance with the Corporation's then-current
compensation policies and practices and other factors deemed
relevant by the Board; provided, that at no time shall the Annual
Salary be less than the Executive's Annual Salary in the prior
calendar year. Annual Salary shall be subject to withholding and
other applicable taxes and payroll deductions and payable in
substantially equal monthly installments or such other more
frequent intervals as may be determined by the Board of Directors
as payroll policy for Senior Executives.
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(b) INCENTIVE COMPENSATION. The Executive shall be eligible for
annual incentive awards under and in accordance with the MICP,
based on achievement of annual performance goals and other
criteria set forth in the MICP. Subject to the terms and
conditions of the MICP and all rules and regulations pertaining
thereto, any incentive award to which the Executive becomes
entitled will be paid to the Executive within ninety (90) days
following the end of the fiscal year in question. In addition to
the MICP, the Executive will be eligible to participate in any
stock option, stock bonus, or other incentive plan available
generally to other Senior Executives from time to time.
6. BENEFITS, VACATION TIME, EXPENSES AND PERQUISITES.
(a) EMPLOYEE BENEFIT PLANS. During the term of this Agreement the
Executive shall be entitled to participate in all Corporate
employment benefit plans made available from time to time by the
Corporation to its Senior Executives, including but not limited
to pension, profit-sharing, savings, supplemental retirement
income, medical and health-and-accident plans and arrangements,
subject to and on a basis consistent with the terms and
conditions of, and the Corporation rules and regulations
pertaining to,such plans and arrangements, and any limitations or
qualifications imposed by any applicable governmental body.
Subject to the foregoing, the benefit plans and arrangements
provided to the Executive shall include, but not be limited to,
the following:
(i) Retirement Income Plans: The Executive shall be entitled to
participate in any nonqualified supplemental retirement
income plans available from time to time to the
Corporation's "highly compensated employees" as defined by
Section 414(q) of the Internal Revenue Code, and shall
become vested in such plans according to the schedules
provided in the plan documents. Benefits to be received by
the Executive upon retirement will be calculated under
formulas utilized in such plans as in effect (A) upon the
effective date of this Agreement, and (B) at the time of the
Executive's retirement, and actual payments will be the
greater (higher) of two benefit amounts calculated under the
formulas.
(ii) Life Insurance: Subject to satisfaction of conditions
imposed by the applicable insurance company for additional
coverage, the Corporation shall continue to maintain for the
Executive during the term of this Agreement the insurance
coverage established for the Executive effective January l,
l994 (and as amended January 1, 1997) under and in
accordance with the Keystone Financial Executive Split
Dollar Agreement with Executive; provided, and
notwithstanding any contrary provisions therein, the
Corporation shall have no unilateral right to terminate or
modify such Split Dollar Agreement with Executive.
(iii)Disability Insurance: In addition to standard group benefit
provisions, the Corporation shall make available a
supplemental LTD insurance policy for purchase by the
Executive, provided the Executive qualifies as a medically
acceptable risk to the issuing company on a standard
underwriting basis. Such policy shall provide that in the
event the Executive becomes disabled in accordance with the
terms of such policy, he shall be entitled to receive
benefits from all sources (e.g., Social Security, group LTD
and supplemental LTD) equal to 67% of his Annual Salary as
in effect at the time of disability until he reaches the age
of 65 or dies, whichever occurs first. The Corporation shall
continue to pay to the Executive his Annual Salary during
any applicable "elimination" (waiting) period under the
supplemental LTD policy, not to exceed one hundred and
eighty (180) days. Notwithstanding the foregoing,
supplemental LTD coverage shall be required only if and to
the extent that the Corporation's group LTD insurance policy
benefit limit is such that it does not permit the Executive
to receive the above-stated percentage (i.e., 67%) of income
replacement at the time of said disability.
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(b) VACATION. During the term of this Agreement, the Executive shall be
entitled to the number of paid vacation days in each calendar year
determined by the Corporation from time to time for its Senior
Executives, but not less than four (4) weeks in any calendar year.
Such vacation entitlement shall be subject to all rules and policies
concerning vacation time as shall be applicable to Senior Executives
from time to time. The Executive shall also be entitled to all paid
holidays given by the Corporation to its Senior Executives.
(c) REIMBURSABLE GENERAL EXPENSES. During the term of this Agreement, the
Executive shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred by him (in accordance with the policies
and procedures established from time to time by the Board of Directors
of the Corporation for its Senior Executives) in performing services
hereunder, provided that the Executive first properly accounts
therefor in accordance with such policies and procedures.
(d) REIMBURSABLE AUTO EXPENSES. During the term of this Agreement, the
Executive shall be entitled to receive a monthly payment under the
Corporation's Automobile Capital Cost Reimbursement Plan for selected
executives. Such payments shall be treated as current income and be
subject to regular payroll tax withholding and deductions. The
Executive shall also be entitled to reimbursement for operating
expenses of the automobile associated with business travel at the
established corporate mileage rate.
(e) MISCELLANEOUS. The Executive shall be entitled to receive such other
perquisites, e.g. club memberships, and "fringe benefits" as the Board
of Directors shall deem appropriate in its sole direction.
7. INDEMNIFICATION. The Corporation shall indemnify the Executive, to the
fullest extent permitted from time to time by Pennsylvania law, with respect to
any threatened pending or contemplated action, suit or proceeding, brought
against him by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation or is or was serving at the written request
of the Corporation as a director, officer, employee or agent of another person
or entity. To the fullest extent permitted by Pennsylvania law, the Corporation
shall in advance of final disposition pay any and all expenses incurred by
Executive in connection with any threatened, pending or completed action, suit
or proceeding with respect to which Executive may be entitled to indemnification
hereunder. Executive's right to indemnification provided herein is not exclusive
of any other rights of indemnification to which Executive may be entitled under
any bylaw, agreement, vote of shareholders or otherwise, and shall continue
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beyond the term of this Agreement. The Corporation shall use its best efforts to
obtain insurance coverage for the Executive under an insurance policy covering
officers and directors of the Corporation against lawsuits, arbitrations or
other proceedings; however, nothing herein shall be construed to require the
Corporation to obtain such insurance if the Board of Directors of the
Corporation determines that such coverage cannot be obtained at a commercially
reasonable price. Notwithstanding the foregoing, the Executive shall be entitled
to indemnification from the Subsidiary which is his actual employer if such
indemnification is available and provides more extensive coverage than the
indemnification provided under this Agreement.
8. UNAUTHORIZED DISCLOSURE. During the term of this Agreement or at any
later time, the Executive shall not, without the written consent of a duly
authorized executive officer of the Corporation, disclose to any person, other
than a person (including an employee of the Corporation or a Subsidiary) to whom
disclosure is reasonably necessary or appropriate in connection with the
performance by the Executive of his duties as an executive of the Corporation,
any material confidential information obtained by him while in the employ of the
Corporation or any Subsidiary or operating unit 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 the Corporation;
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 the Executive) 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 the Corporation.
9. RESTRICTIVE COVENANTS. Except as otherwise provided below, upon
termination of his employment hereunder regardless of the circumstances or
reasons for such termination, the Executive covenants and agrees as follows:
(a) NONCOMPETITION. The Executive shall not, directly or indirectly,
within the marketing area of the Corporation and its Subsidiaries
(defined as all areas within 100 miles of the work location to which
the Executive was assigned for the majority of time during the twelve
months preceding termination of his employment where the Corporation
has established an active and material market presence) enter into or
engage generally in direct or indirect competition with the
Corporation 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 year after the date of termination of his
employment, except where the termination occurs within twenty-four
(24) months following a Change of Control as defined herein. The
existence of any material claim or cause of action of the Executive
against the Corporation, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the
Corporation of this covenant. The Executive acknowledges and agrees
that enforcement of this covenant not to compete will not prevent him
from earning a livelihood and that any breach of the restrictions set
forth in this paragraph will result in irreparable injury to the
Corporation for which it shall have no adequate remedy at law, and
that therefore the Corporation shall be entitled to injunctive relief
in order to enforce the provisions hereof. In the event that this
paragraph shall be determined by any court of competent jurisdiction
to be unenforceable in part by reason of it 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.
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(b) RETURN OF MATERIALS. Upon termination of employment with the
Corporation, the Executive shall immediately deliver to the
Corporation all correspondence, manuals, letters, notes, notebooks,
reports and any other documents and tangible items containing or
constituting confidential information about the Corporation maintained
at his office and shall promptly deliver all said materials held by
him at other locations.
(c) NONSOLICITATlON OF EMPLOYEES. The Executive shall not entice or
solicit, directly or indirectly, any other executives or key
management personnel of the Corporation to leave the employ of the
Corporation or its Subsidiaries to work with the Executive or any
entity with which the Executive has affiliated for a period of one
year following the Executive's termination of employment with the
Corporation. The Executive acknowledges and agrees that any breach of
the restrictions set forth in this paragraph will result in
irreparable injury to the Corporation for which it shall have no
meaningful remedy in law and the Corporation shall be entitled to
injunctive relief in order to enforce provisions hereof. Upon
obtaining such injunction, the Corporation shall be entitled to pursue
reimbursement from the Executive and/or the Executive's employer of
costs incurred in securing a qualified replacement for any employee
enticed away from the Corporation by the Executive. Further, the
Corporation shall be entitled to set off against or obtain
reimbursement from the Executive of any payments owed or made to the
Executive by the Corporation hereunder.
10. TERMINATION.
(a) GENERALLY. The Executive's employment hereunder shall terminate upon
his Early Retirement, Normal Retirement or death.
(b) TERMINATION DUE TO PERMANENT DISABILITY. If the Executive becomes
permanently disabled because of sickness, physical or mental
disability, or any other reason, and is unable to perform or complete
his duties under this Agreement for a period anticipated to extend for
a period of at least one hundred eighty (180) consecutive calendar
days (or such other length of time that is equal to any applicable
elimination period provided for in an LTD insurance policy), the
Corporation shall have the option to terminate this Agreement by
giving written notice of termination to the Executive. Such
termination shall be without prejudice to any right the Executive may
have under the LTD insurance program maintained by the Corporation.
Such disability shall be certified by the Corporation's group LTD
carrier, in conjunction with the Executive's supplemental LTD carrier
if such supplemental policy is in effect; in the event these carriers
cannot agree, they shall designate a licensed physician whose decision
shall be binding for purposes of this Agreement.
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(c) TERMINATION FOR CAUSE. The Corporation may terminate the Executive's
employment hereunder for cause. For the purposes of this Agreement,
the Corporation shall have "cause" to terminate the Executive's
employment hereunder upon (i) the willful failure by the Executive to
substantially perform his duties hereunder, other than any such
failure resulting from the Executive's incapacity due to physical or
mental illness, or (ii) the willful engaging by the Executive in gross
misconduct materially injurious to the Corporation, or (iii) the
willful violation by the Executive of the provisions of paragraphs 4
or 8 hereof, after notice from Corporation and a failure to cure such
violation within 30 days of said notice, or if said violation cannot
be cured within 30 days, within a reasonable time thereafter if the
Executive is diligently attempting to cure the violation, or (iv) the
gross negligence of the Executive in the performance of his duties, or
(v) receipt of a final written directive or order of any governmental
body or entity having jurisdiction over the Corporation or any of its
Subsidiaries requiring termination or removal of the Executive. The
determination of the existence of cause shall be made in the
reasonable judgment of the Board of Directors or its delegee.
(d) TERMINATION BY EMPLOYEE UPON GOOD REASON. The Executive may terminate
his employment for good reason. The term "good reason" shall mean (i)
a reduction in the Executive's Annual Salary in violation of Section 5
hereof, or his total cash compensation opportunities (e.g. annual
incentive awards under the Corporation's MICP, equity participation
awards) or benefits (except any reductions in compensation which may
be applied broadly among all executives because of adverse financial
conditions for the Corporation or as part of a restructuring of the
Corporation's executive compensation program), (ii) the Corporation's
decision not to renew the Agreement, (iii) the Corporation's failure
to remedy a material breach of this Agreement within thirty (30) days
following written notice of the breach from the Executive, or (iv) any
of the circumstances described in paragraph 11(d) following a Change
of Control.
11. PAYMENTS UPON TERMINATION.
(a) If the Executive's employment shall be terminated because of Early
Retirement, Normal Retirement, death, Disability or for cause, the
Corporation shall pay the Executive or his guardian or Estate his full
Annual Salary through the date of termination at the rate in effect at
the time of termination and any other amounts owing to Executive at
the date of termination. Further, should termination occur because of
Early Retirement, Normal Retirement, death, or Disability, the
Corporation may elect to pay the Executive, or his guardian or estate,
at the end of the fiscal year in which the termination occurred, a
prorated award under the MICP, and also may elect to accelerate
vesting of restricted stock, stock option and performance share awards
to provide a full or prorated compensation opportunity for the retired
or disabled Executive or the deceased Executive's guardian or estate.
Notwithstanding the foregoing, the Corporation shall have no
obligation to provide payments of benefits beyond what the Executive
is entitled to under the terms and conditions of the various
compensation and benefit plans and arrangements maintained by the
Corporation.
(b) If the Executive's employment is terminated by the Corporation other
than for the reasons or circumstances set forth under paragraph 10(a),
(b) or (c) hereof, or if the Executive terminates employment within 90
days following the Corporation's decision not to renew his employment
agreement or if the Executive terminates his employment for any of the
"Good Reasons" defined in paragraph 10(d), then the Corporation shall
make a lump-sum cash payment to the Executive equal to one and
one-half times his highest Annual Salary during the three years
preceding the termination. In such event the Corporation shall also
maintain in full force and effect, for a minimum period of eighteen
(18) months, all employee benefit plans and programs to which the
Executive was entitled prior to the date of termination, including but
not limited to pension, profit-sharing, savings, supplemental
retirement income, medical and health-and-accident plans and
arrangements, if the Executive's continued participation is permitted
under the general terms and conditions and rules and regulations of
such plans and programs. In the event that the Executive's continued
participation in any such plan or program is prohibited, the Executive
shall be entitled to receive an amount equal to the annual
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contribution, payments, premiums, credits or allocations made by the
Corporation to him, to his account or on his behalf under such plans
and programs from which his continued participation is barred, except
that if Executive's participation in any health, medical, life
insurance, or disability plan or program is barred the Corporation
shall use its best efforts to obtain and pay for, on Executive's
behalf, individual insurance plans, policies or programs which provide
to Executive health, medical, life and disability insurance coverage
which is equivalent to the insurance coverage to which Executive was
entitled prior to the date of termination.
(c) If termination occurs as a result of expiration of the Agreement, the
Executive will not be entitled to receive any severance payments or
continuation of benefit coverages except as provided under law
(COBRA). The Executive will be permitted to exercise vested stock
options and grants as prescribed in the agreements covering those
options and grants.
(d) If, within twenty-four (24) months following a Change of Control as
defined herein, the Executive's position is eliminated and he is not
offered a comparable position within thirty (30) days, or the
Executive terminates employment due to a lessening of job
responsibilities or an unacceptable relocation (defined as more than
35 miles from the Executive's prior work site), or there is a
reduction in the Executive's compensation, compensation opportunities
or benefits as described in Paragraph 10(d)(i) hereof, or the
Executive terminates employment for any reason during the thirty (30)
day period following the first anniversary of the Change of Control,
then the Corporation shall (i) make a lump-sum payment to the
Executive equal to two and one-half times the sum of (A) his highest
Annual Salary and (B) an amount equal to the highest annual MICP award
earned during the three year period preceding the termination; (ii)
maintain benefit coverages for the Executive as specified in paragraph
11(b) above for a period of twenty-four (24) months; (iii) release its
collateral assignment under the Split Dollar Agreement with Executive
without reimbursement of premiums paid for that policy; and (iv)
provide to the Executive outplacement and career counseling services
as may be requested by the Executive, provided that the costs of such
services may not exceed 15% of the Executive's highest Annual Direct
Salary during the three years preceding the termination. Further,
notwithstanding the terms of any restricted stock, stock option and/or
performance share award or grant made to the Executive, such award or
grant will become fully vested and the Executive will have a six month
period from date of termination in which to exercise available stock
options.
12. GROSS-UP PROVISION ON CHANGE OF CONTROL PAYMENTS. Should the total of
payments made to the Executive upon termination following a Change of Control
exceed the amount allowed under Internal Revenue Code Section 4999, the
Corporation will make an additional payment to the Executive in an amount such
that after the payment of all income and excise taxes the Executive will be in
the same after-tax position as if no excise tax had been imposed.
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13. DAMAGES FOR BREACH OF CONTRACT. In the event of a breach of this
Agreement by either the Corporation or Executive resulting in damages to either
party, that party may recover from the party breaching the Agreement any and all
damages that may be sustained.
14. DEFINITION OF CHANGE OF CONTROL. For purposes of this Agreement "Change
of Control" shall mean the occurrence of any one of the following events:
(a) A majority of the Board of Directors of the Corporation shall consist
of persons other than (i) persons who were members of the Board of
Directors of Keystone on the date first written above, or (ii) persons
(A) whose nomination or election as directors of the Corporation was
approved by at least two-thirds of the then members of the Board of
Directors of the Corporation (excluding any director referred to in
clause (B) of this paragraph) who either were directors of the
Corporation on the date first above written or whose nomination or
election as a director was so approved and (B) who are not nominees or
representatives of (1) any Person having Beneficial Ownership,
directly or indirectly, of securities of the Corporation entitling
such Person to 10% or more of the voting power of the Corporation's
Voting Stock or (2) any "participant," as defined in Rule 14a-11 under
the Securities Exchange Act of 1934 (the "Exchange Act") or any
successor rule, in any actual or threatened solicitation (other than a
solicitation by the Corporation) subject to Rule 14a-11 or any
successor rule relating to the election or removal of any directors of
the Corporation;
(b) The Corporation and/or any Subsidiary of the Corporation shall be a
party to any merger, consolidation, division, share exchange, transfer
of assets or any other transaction or series of related transactions
outside the ordinary course of business (a "Business Combination") as
a result of which the shareholders of the Corporation immediately
prior to such Business Combination (excluding any party, other than
the Corporation or a Subsidiary, to the Business Combination or any
Affiliate or Associate of any such party) shall not hold immediately
following such transaction a majority of the voting power of the
Voting Stock of a Person or Persons immediately thereafter holding,
directly or indirectly through Subsidiaries, assets of the Corporation
and its consolidated subsidiaries immediately prior to the Business
Combination constituting at least sixty-five percent (65%) of Total
Assets; or
(c) If the entity which is the actual employer of the Executive hereunder
(the "Employer Company") is other than the Corporation, either (i) the
Employer Company shall cease to be a Subsidiary of the Corporation or
(ii) the Employer Company and/or any Subsidiary of the Employer
Company shall be a party to any Business Combination as a result of
which the Corporation shall not hold immediately following such
transaction a majority of the voting power of the Voting Stock of a
Person or Persons immediately thereafter holding, directly or
indirectly through Subsidiaries, assets of the Employer Company and
its consolidated subsidiaries immediately prior to the Business
Combination constituting at least seventy-five percent (75%) of
Company's Total Assets.
(d) In the case of a Change of Control defined in paragraph 14(b) or
paragraph 14(c)(ii) hereof, following such Change of Control the term
"Employer Company" as used herein shall mean the Person which
following such Change of Control holds the largest percentage of
Employer Company's Total Assets, including for this purpose Total
Assets which are held by such Person directly or indirectly through
one or more Subsidiaries. Employer Company shall not enter into any
transaction involving such a Change of Control unless at or prior to
the consummation thereof such Person assumes the obligations of
Employer Company hereunder.
(e) For purposes of this Section 14, "Person," "Affiliate," "Associate,"
"Voting Stock" and "Total Assets" shall have the definitions contained
in, and "Beneficial Ownership" shall be determined as provided in,
Article 10 of Keystone's Restated Articles of Incorporation, as in
effect on the date first written above.
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(f) For purposes of this Section 14, the date of the "Change of Control"
is the date on which the "Change of Control" occurs or, in the case of
a series of Business Combination Transactions resulting in a Change of
Control, the date the earliest of such transactions is consummated.
15. NOTICE. For the purposes of this Agreement, notices and all other
communications shall be in writing and shall be deemed to have been duly given
when delivered or mailed by United States certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Executive: James M. Deitch
3405 Pebble Ridge Road
York, PA 17405
If to the Corporation: Keystone Financial. Inc.
One Keystone Plaza
Harrisburg, PA 17101
Attn: Chairman of the Board
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon actual receipt.
16. BINDING EFFECT. This Agreement shall inure to the benefit of and be
binding upon the Executive and his heirs and personal representatives, and the
Corporation and any successor to the Corporation.
17. ENFORCEMENT OF SEPARATE PROVISIONS. Should any provision of this
Agreement be ruled unenforceable for any reason, the remaining provisions of
this Agreement shall be unaffected thereby and shall remain in full force and
effect.
18. AMENDMENT. This Agreement may be amended or cancelled only by mutual
agreement of the parties in writing without the consent of any other person.
19. ARBITRATION. In the event that any disagreement or dispute shall arise
between the parties concerning this Agreement, the issue(s) will be submitted to
binding arbitration in the City of Harrisburg, PA pursuant to the rules of the
American Arbitration Association. Any award entered shall be final and binding
upon the parties hereto and judgment upon the award may be entered in any court
having jurisdiction thereof. Attorneys' fees and administrative court costs
associated with such actions shall be paid by the Corporation.
20. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. If the Executive dies prior
the expiration of his term of employment hereunder, any moneys that may be due
him from the Corporation under this Agreement as of the date of death shall be
paid to the executor, administrator, or other personal representative of the
Executive's estate.
21. LAW GOVERNING. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
22. CAPTIONS; PRONOUNS. All captions are for convenience only and do not
form a substantive part of this Agreement. All pronouns and any variations
thereof shall be deemed to refer to the masculine, feminine, neuter, singular or
plural, as the identity of the person or persons may require.
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23. ENTIRE AGREEMENT. This Agreement supersedes any and all agreements,
either oral or in writing, between the parties with respect to the employment by
the Executive by the Corporation, and this Agreement contains all the covenants
and agreements between the parties with respect to such employment.
KEYSTONE FINANCIAL, INC.
ATTEST:
__________________________ By:______________________________
Secretary President and CEO
WITNESS: EXECUTIVE
- - -------------------------- -------------------------------
James M. Deitch
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Exhibit 10.19
MANAGEMENT COMMITTEE
CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT is made on the ____ day of ______________, 1997 between
KEYSTONE FINANCIAL, INC. (the "Corporation"), a Pennsylvania corporation with
its principal office at One Keystone Plaza, Harrisburg, PA, and
____________________ (the "Executive"), residing
at________________________________.
WHEREAS, the Executive has substantial knowledge, ability and
experience which are beneficial to the successful operation of the Corporation;
and
WHEREAS, the Corporation desires to secure for itself the benefit of
the Executive's knowledge, ability and experience and be assured of the
Executive's continued active participation in the business operations of the
Corporation; and
WHEREAS, the Executive has acquired and uses and will continue to
acquire and use extensive knowledge and information about the Corporation's
operations, much of which is confidential and proprietary in nature; and
WHEREAS, the Corporation wishes to protect its confidential and
proprietary information as well as its general business interests; and
WHEREAS, the Corporation has adopted the Keystone Financial, Inc.
Severance Plan Following Change of Control, effective as of September 30, 1994
(the "Severance Plan"), which provides severance benefits to eligible employees
who lose their jobs under certain circumstances set forth in the Severance Plan;
and
WHEREAS, the Executive and the Corporation wish to enter into this
Agreement in order to protect the confidential and proprietary interests of the
Corporation and to induce the Executive to remain actively involved in the
business operations of the Corporation by providing the Executive with the
opportunity to receive benefits in excess (and in lieu) of the benefits that
would be available to the Executive under the Severance Plan in the event of his
termination of employment in conjunction with a Change of Control (as defined
herein).
NOW THEREFORE, in consideration of the mutual covenant and agreement
set forth herein and intending to be legally bound hereby, the parties agree as
follows:
1. DEFINITIONS. The following definitions shall apply in this Agreement:
(a) "Annual Salary" shall be the stated annual base cash compensation
payable to the Executive by the Corporation without regard to any
elective deferral or salary reduction plan or program of the
Corporation.
(b) "Board of Directors" shall mean the Board of Directors of the
Corporation, as constituted from time to time.
(c) "Cause" shall be (I) the willful failure by the Executive to
substantially perform his duties other than any such failure resulting
from the Executive's incapacity due to physical or mental illness,
(ii) the willful engaging by the Executive in gross misconduct
materially injurious to the Corporation or a Subsidiary, (iii) the
willful violation by the Executive of the provisions of Section 3
hereof, (iv) the gross negligence of the Executive in the performance
of his duties or (v) receipt of a final written directive or order of
any governmental body or entity having jurisdiction over the
Corporation or any of its Subsidiaries requiring termination or
removal of the Executive. The determination of the existence of Cause
shall be made in the reasonable judgment of the office of the Chief
Executive Officer (or its successor) .
(d) "Change of Control" shall be as defined in Section 8 of this
Agreement.
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(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(f) "Good Reason" shall mean (I) within the period beginning on the date
of the Change of Control (as defined in Section 8(g)) and ending on
the date that is twenty-four (24) months following the later of (A)
the date of the Change of Control or (B) in the case of a Change of
Control described in Sections 8(c) or (d), the date on which the
transaction resulting in the Change of Control was consummated, there
is a reduction in the Executive's Annual Salary or his total cash
compensation opportunities (e.g. annual incentive awards under the
MICP, equity participation awards) or benefits (except any reductions
in compensation which may be applied broadly among all executives
because of adverse financial conditions for the Corporation or as part
of a restructuring of the Corporation's executive compensation
program), or the Executive's position is eliminated and he is not
offered a comparable position within thirty (30) days following the
effective date of the elimination of the position, or the Executive
terminates employment due to a lessening of job responsibilities or an
unacceptable relocation (defined as more than 35 miles from the
Executive's prior work site), or (ii) the Executive terminates
employment for any reason during the thirty (30)-day period beginning
on the later of (A) the date that is twelve (12) months following the
date of the Change of Control (as defined in Section 8(g)) or (B) in
the case of a Change of Control described in Sections 8(c) or (d), the
date that is twelve (12) months following the date on which the
transaction resulting in the Change of Control was consummated.
(g) "Management Committee" means the individuals designated by the
executive management of the Corporation from time to time. The members
of the Management Committee are listed in Exhibit A hereto.
(h) "MICP" means the Corporation's Management Incentive Compensation Plan
as in effect from time to time, or any successor plan thereto.
(I) "Subsidiary" shall mean any bank, corporation or other entity of which
the Corporation owns, directly or indirectly through one or more
Subsidiaries, a majority of each class of equity security having
ordinary voting power in an election of directors.
2. DURATION OF AGREEMENT. This Agreement shall remain in effect only while
the Executive is a member of the Management Committee (or such other covered
position as designated by executive management of the Corporation, in which case
the Corporation shall have an affirmative obligation to inform the Executive in
writing that this Agreement shall remain in effect notwithstanding the change in
the Executive's position; the absence of notice expressly provides notice to the
Executive that the Agreement is no longer in effect); provided however, that if
the Executive ceases to be a member of the Management Committee as a result of a
Change of Control, Sections 3 and 4 of the Agreement shall no longer remain in
effect but the Corporation and the Executive shall otherwise be obligated to
abide by the terms of this Agreement.
3. UNAUTHORIZED DISCLOSURE. During the term of this Agreement or at any
later time, the Executive shall not, without the written consent of a duly
authorized executive officer of the Corporation, disclose to any person
(including an employee of the Corporation or a Subsidiary), other than a person
to whom disclosure is reasonably necessary or appropriate in connection with the
performance by the Executive of his duties as an executive of the Corporation,
any material confidential information obtained by him while in the employ of the
Corporation or any Subsidiary or operating unit 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 the Corporation;
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 the Executive) 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 the Corporation.
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4. RESTRICTIVE COVENANTS. Except as otherwise provided below and in Section
2, upon termination of his employment with the Corporation (or a Subsidiary),
regardless of the circumstances or reasons for such termination, the Executive
covenants and agrees as follows:
(a) NONCOMPETITION. The Executive shall not, directly or indirectly,
within the marketing area of the Corporation and its Subsidiaries
(defined as all areas within 100 miles of the work location to which
the Executive was assigned for the majority of time during the twelve
months preceding termination of his employment where the Corporation
has established an active and material market presence) enter into or
engage generally in direct or indirect competition with the
Corporation 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 year after the date of termination of his
employment, except where the termination is in conjunction with a
Change of Control as described in Section 5(c), in which case this
restrictive covenant shall not be imposed upon the Executive. The
existence of any material claim or cause of action of the Executive
against the Corporation, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the
Corporation of this covenant. The Executive acknowledges and agrees
that enforcement of this covenant not to compete will not prevent him
from earning a livelihood and that any breach of the restrictions set
forth in this paragraph will result in irreparable injury to the
Corporation for which it shall have no adequate remedy at law, and
that therefore the Corporation shall be entitled to injunctive relief
in order to enforce the provisions hereof. In the event that this
paragraph shall be determined by any court of competent jurisdiction
to be unenforceable in part by reason of it 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.
(b) RETURN OF MATERIALS. Upon termination of employment with the Corpora-
for any reason, including termination in conjunction with a Change of
Control as described in Section 5(c), the Executive shall immediately
deliver to the Corporation all corrrespondence, manuals, letters,
notes, notebooks, reports and any other documents and tangible items
containing or constituting confidential information about the Corpora-
tion maintained at his office and shall promptly deliver all said
materials held by him at other locations.
(c) NONSOLICITATlON OF EMPLOYEES. The Executive shall not entice or
solicit, directly or indirectly, any other executives or key
management personnel of the Corporation to leave the employ of the
Corporation or its Subsidiaries to work with the Executive or any
entity with which the Executive has affiliated for a period of one
year following the Executive's termination of employment with the
Corporation for any reason, including a termination of employment in
conjunction with a Change of Control as described in Section 5(c).
(d) NONSOLICITATION OF CUSTOMERS. The Executive shall not entice or
solicit, directly or indirectly, any client or customer of the
Corporation or any Subsidiary for a period of one year following the
Executive's termination of employment with the Corporation for any
reason, including a termination of employment in conjunction with a
Change of Control as described in Section 5(c).
(e) REMEDY. The Executive acknowledges and agrees that any breach of the
restrictions set forth in Sections 3 and 4 will result in irreparable
injury to the Corporation for which it shall have no meaningful remedy
in law and the Corporation shall be entitled to injunctive relief in
order to enforce provisions hereof. Upon obtaining such injunction,
the Corporation shall be entitled to pursue reimbursement from the
Executive and/or the Executive's employer of costs incurred in
securing a qualified replacement for any employee enticed away from
the Corporation by the Executive. Further, the Corporation shall be
entitled to set off against or obtain reimbursement from the Executive
of any payments owed or made to the Executive by the Corporation
hereunder.
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5. PAYMENTS UPON TERMINATION OF EMPLOYMENT.
(a) The Executive shall be entitled to the benefits described in Section
5(c) only in the event that his employment with the Corporation is
terminated in conjunction with a Change of Control as described in
Section 5(c).
(b) If the Executive's employment is terminated by the Corporation for
Cause or if the Executive terminates his employment other than for
Good Reason, the Executive shall not be entitled to the benefits set
forth in Section 5(c) but the restrictions set forth in Sections 3 and
4 hereof shall continue in full force and effect.
(c) If the Executive's employment is terminated by the Corporation other
than for Cause within the period beginning on the date of the Change
of Control (as defined in Section 8(g)) and ending on the date that is
twenty-four (24) months following the later of (I) the date of the
Change of Control or (ii) in the case of a Change of Control described
in Sections 8(c) or (d), the date on which the transaction resulting
in the Change of Control was consummated, or if the Executive
terminates his employment for Good Reason, then the Corporation shall
make a lump-sum cash payment to the Executive equal to one and
one-half times the sum of (A) his highest Annual Salary during the
three-calendar-year period ending before the effective date of the
termination and (B) an amount equal to the highest annual MICP award
earned during the three-complete-plan-year period ending before the
effective date of the termination. The lump sum payment shall be made
no later than thirty (30) days following the effective date of the
termination. In such event, the Corporation shall also maintain in
full force and effect (and the Executive shall remain a participant
in), for a minimum period of eighteen (18) months following the
termination, all employee benefit plans and programs to which the
Executive was entitled prior to the date of termination, including,
but not limited to, pension, profit-sharing, savings, supplemental
retirement income, medical and health-and-accident plans and
arrangements and the Corporation's Automobile Capital Cost
Reimbursement Plan, if the Executive's continued participation is
permitted under the general terms and conditions and rules and
regulations of such plans and programs. In the event that the
Executive's continued participation in any such plan or program is
prohibited, the Executive shall be entitled to receive an amount equal
to the annual contribution, payments, premiums, credits or allocations
made by the Corporation to him, to his account or on his behalf under
such plans and programs from which his continued participation is
barred, except that if Executive's participation in any health,
medical, life insurance, or disability plan or program is barred, the
Corporation shall use its best efforts to obtain and pay for, on
Executive's behalf, individual insurance plans, policies or programs
which provide to Executive health, medical, life and disability
insurance coverage which is equivalent to the insurance coverage to
which Executive was entitled prior to the date of termination.
6. GROSS-UP PROVISION. In the event any payments made to the Executive upon
termination in conjunction with a Change of Control (pursuant to this Agreement
and any other plans, programs and arrangements maintained by the Corporation)
would constitute "excess parachute payments" within the meaning of Code Section
280G, the Corporation will make an additional payment to the Executive in an
amount such that after the payment of all income and excise taxes, the Executive
will be in the same after-tax position as if no excise tax had been imposed.
7. DAMAGES FOR BREACH OF CONTRACT. In the event of a breach of this
Agreement by either the Corporation or Executive resulting in damages to either
party, that party may recover from the party breaching the Agreement any and all
damages that may be sustained.
8. DEFINITION OF CHANGE OF CONTROL. For purposes of this Agreement, "Change
of Control" shall mean the occurrence of any one of the following events:
(a) The Corporation acquires actual knowledge that any Person (other than
the Corporation, any Subsidiary of the Corporation, any employee
benefit plan of the Corporation or any of its Subsidiaries or any
entity holding securities for or pursuant to the terms of any such
plan) has acquired the Beneficial Ownership, directly or indirectly,
of securities of the Corporation entitling such Person to a majority
of the voting power of the Corporation's Voting Stock.
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(b) A majority of the Board of Directors shall consist of persons other
than (I) persons who were members of the Board of Directors on the
date first written above, or (ii) persons (A) whose nomination or
election as directors of the Corporation was approved by at least
two-thirds of the then members of the Board of Directors (excluding
any director referred to in clause (B) of this paragraph) who either
were directors of the Corporation on the date first above written or
whose nomination or election as a director was so approved and (B) who
are not nominees or representatives of (1) any Person having
Beneficial Ownership, directly or indirectly, of securities of the
Corporation entitling such Person to 10% or more of the voting power
of the Corporation's Voting Stock or (2) any "participant," as defined
in Rule 14a-11 under the Securities Exchange Act of 1934 or any
successor rule, in any actual or threatened solicitation (other than a
solicitation by the Corporation) subject to Rule 14a-11 or any
successor rule relating to the election or removal of any directors of
the Corporation;
(c) The Corporation and/or any Subsidiary of the Corporation shall be a
party to any merger, consolidation, division, share exchange, transfer
of assets or any other transaction or series of related transactions
outside the ordinary course of business (a "Business Combination") as
a result of which the shareholders of the Corporation immediately
prior to such Business Combination (excluding any party, other than
the Corporation or a Subsidiary, to the Business Combination or any
Affiliate or Associate of any such party) shall not hold immediately
following such transaction a majority of the voting power of the
Voting Stock of a Person or Persons immediately thereafter holding,
directly or indirectly through Subsidiaries, assets of the Corporation
and its consolidated subsidiaries immediately prior to the Business
Combination constituting at least sixty-five percent (65%) of Total
Assets; or
(d) If the entity which is the actual employer of the Executive hereunder
(the "Employer Company") is other than the Corporation, either (I) the
Employer Company shall cease to be a Subsidiary of the Corporation or
(ii) the Employer Company and/or any Subsidiary of the Employer
Company shall be a party to any Business Combination as a result of
which the Corporation shall not hold immediately following such
transaction a majority of the voting power of the Voting Stock of a
Person or Persons immediately thereafter holding, directly or
indirectly through Subsidiaries, assets of the Employer Company and
its consolidated subsidiaries immediately prior to the Business
Combination constituting at least seventy-five percent (75%) of the
Employer Company's Total Assets.
(e) In the case of a Change of Control defined in Section 8(c), hereof,
following such Change of Control the term "Corporation" as used herein
shall mean the Person which following such Change of Control holds the
largest percentage of Corporation's Total Assets, including for this
purpose Total Assets which are held by such Person directly or
indirectly through one or more Subsidiaries. The Corporation shall not
enter into any transaction involving such a Change of Control unless
at or prior to the consummation thereof such Person assumes the
obligations of the Corporation hereunder.
(f) For purposes of this Section 8, "Person," "Affiliate," "Associate,"
"Voting Stock" and "Total Assets" shall have the definitions contained
in, and "Beneficial Ownership" shall be determined as provided in,
Article 10 of the Corporation's Restated Articles of Incorporation, as
in effect on the date first written above.
(g) For purposes of Sections 8(a) and (b), the date of the "Change of
Control" is the date on which the Change of Control occurs. For
purposes of Sections 8(c) and (d), the date of the "Change of Control"
is the date on which the transaction resulting in a Change of Control
is first evidenced in writing and executed by an authorized officer of
the Corporation and/or Subsidiary including, without limitation, any
letter of intent, sale or purchase agreement and/or agreement of
merger, or, in the case of a series of Business Combination
transactions resulting in a Change of Control, the date the earliest
of such transactions is first evidenced in writing and executed by an
authorized officer of the Corporation and/or Subsidiary.
9. COORDINATION WITH SEVERANCE PLAN. It is the intent of the parties that
the benefits provided to the Executive hereunder shall be in lieu of the
benefits that would be available to the Executive under the Severance Plan. If
the Executive would be eligible to receive benefits under the Severance Plan,
however, he shall elect in writing within ten (10) days of his last day of
employment whether to receive the benefits under the Severance Plan or those
provided under this Agreement. The Executive's decision in this regard shall be
irrevocable. If the Executive fails to make an election, the terms of this
Agreement shall be controlling and the Executive shall not be entitled to any
benefits under the Severance Plan.
5
<PAGE>
10. NOTICE. For the purposes of this Agreement, notices and all other
communications shall be in writing and shall be deemed to have been duly given
when delivered or mailed by United States certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Executive:
If to the Corporation: Keystone Financial, Inc.
One Keystone Plaza
Harrisburg, PA 17101
Attn: Chief Executive Officer
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon actual receipt.
11. BINDING EFFECT. This Agreement shall inure to the benefit of and be
binding upon the Executive and his heirs and personal representatives, and the
Corporation and any successor to the Corporation.
12. ENFORCEMENT OF SEPARATE PROVISIONS. Should any provision of this
Agreement be ruled unenforceable for any reason, the remaining provisions of
this Agreement shall be unaffected thereby and shall remain in full force and
effect.
13. AMENDMENT. Except as otherwise provided herein, this Agreement may be
amended or canceled only by mutual agreement of the parties in writing without
the consent of any other person. In the event the Corporation wishes to
terminate this Agreement or reduce the benefits available to the Executive
hereunder, the Corporation may unilaterally effectuate any such action, provided
that the Corporation provides the Executive with written notice of such action
at least two (2) years in advance of the effective date of any such termination
or reduction in benefits. This two-year notice requirement may be reduced or
waived by the Executive. This Agreement may be amended to enhance the benefits
available to the Executive hereunder at any time, provided the Executive
consents in writing to any such amendment.
14. ARBITRATION. In the event that any disagreement or dispute shall arise
between the parties concerning this Agreement, the issue(s) will be submitted to
binding arbitration in the City of Harrisburg, PA pursuant to the rules of the
American Arbitration Association. Any award entered shall be final and binding
upon the parties hereto and judgment upon the award may be entered in any court
having jurisdiction thereof. Attorneys' fees and administrative court costs
associated with such actions shall be paid by the Corporation.
15. EMPLOYMENT. Nothing contained herein shall be construed as conferring
upon the Executive the right to continue in the employ of the Corporation.
16. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. If the Executive dies prior
the payment of any moneys that may be due him from the Corporation under this
Agreement as of the date of death, such moneys shall be paid to the executor,
administrator, or other personal representative of the Executive's estate.
17. LAW GOVERNING. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
6
<PAGE>
18. CAPTIONS; PRONOUNS. All captions are for convenience only and do not
form a substantive part of this Agreement. All pronouns and any variations
thereof shall be deemed to refer to the masculine, feminine, neuter, singular or
plural, as the identity of the person or persons may require.
KEYSTONE FINANCIAL, INC.
ATTEST:
__________________________ By:______________________________
Secretary
WITNESS: EXECUTIVE
- - -------------------------- ---------------------------------
<PAGE>
EXHIBIT A
August 1997
Members of KFI Management Committee (those noted are members who do not have
employment agreements) for purposes of a Change of Control (COC) Agreement:
The following positions are those positions designated by Executive Management
to be offered a COC Agreement:
NOTE: Positions set forth in this list are subject to change
at any time in the sole discretion of the Office of
the CEO.
Corporate Controller
Deputy General Counsel
Director of Audit and Risk Assessment
Director of Human Resources
Director of Information Services
Director of Investments & ALCO Support
Director of KeyCall Center
Director of Marketing Services
Director of Operation Services
President & CEO of Dealer Center Division
7
<PAGE>
Exhibit 12.1 - Computation of Ratios
Ratio of Earnings to Fixed Charges:
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31,
1998 1997 1996
- - ------------------------------------------------ ------------ ---------- ----------
<C> <C> <C> <C>
1. Income before taxes $145,439 $126,870 $126,686
2. Fixed charges:
a. Interest expense 240,684 232,494 211,301
b. Interest component of rent expense 2,734 2,459 2,652
- - ------------------------------------------------ ------------ ---------- ----------
c. Total fixed charges (line 2a+line 2b) 243,418 234,953 213,953
d. Interest on deposits 193,087 194,898 186,257
- - ------------------------------------------------ ------------ ---------- ----------
e. Fixed charges excluding interest on deposits
(line 2c - line 2d) 50,331 40,055 27,696
- - ------------------------------------------------ ------------ ---------- ----------
3. Income before taxes plus fixed charges:
a. Including interest on deposits
(line 1 + line 2c) 388,857 361,823 340,639
b. Excluding interest on deposits
(line 1 + line 2e) $195,770 $166,925 $154,382
- - ------------------------------------------------ ------------ ---------- ----------
4. Ratio of earnings to fixed charges:
a. Including interest on deposits
(Line 3a divided by line 2c) 1.60x 1.54x 1.59x
b. Excluding interest on deposits
(line 3b divided by line 2e) 3.89x 4.17x 5.57x
- - ------------------------------------------------ ------------ ---------- ----------
</TABLE>
1
<PAGE>
EXHIBIT 13.1
Selected Financial Data
<TABLE>
<CAPTION>
(in thousands except per share data) Year Ended December 31,
1998 1997 1996 1995 1994
- - ---------------------------------------------------------------------------------------------------
Operations:
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 517,649 $ 510,738 $ 473,420 $ 446,786 $ 386,894
Interest expense 240,684 232,494 211,301 200,775 152,463
- - ---------------------------------------------------------------------------------------------------
Net interest income 276,965 278,244 262,119 246,011 234,431
Provision for credit losses 17,150 15,316 10,713 8,568 10,324
Noninterest income 108,813 89,932 71,525 58,137 51,921
Noninterest expense 223,189 225,990* 196,245 182,130 182,333
Income tax expense 45,692 38,953 37,180 34,001 25,907
- - ---------------------------------------------------------------------------------------------------
Net Income $ 99,747 $ 87,917* $ 89,506 $ 79,449 $ 67,788
- - ---------------------------------------------------------------------------------------------------
Pre-tax security gains, included above $ 11,018 $ 6,071 $ 871 $ 1,789 $ 978
- - ---------------------------------------------------------------------------------------------------
Net interest spread 3.71% 3.87% 3.87% 3.90% 4.11%
Impact of noninterest funds .71 .72 .74 .71 .57
- - ---------------------------------------------------------------------------------------------------
Net interest margin 4.42% 4.59% 4.61% 4.61% 4.68%
- - ---------------------------------------------------------------------------------------------------
Per Share:
- - -----------------------------------------------------------------------------------------------------
Net income:
Basic $1.94 $1.70* $1.72 $1.60 $1.38
Diluted 1.92 1.68* 1.70 1.59 1.37
Dividends 1.13 1.06 0.98 0.93 0.86
Dividend payout ratio 58.25% 63.65% 56.98% 58.13% 54.85%
Average shares outstanding 51,446,436 51,692,534 52,118,819 49,557,082 49,188,961
- - -----------------------------------------------------------------------------------------------------
Balances at December 31:
- - -----------------------------------------------------------------------------------------------------
Loans & leases $ 4,459,783 $ 4,712,566 $ 4,336,470 $ 4,096,866 $ 3,900,900
Allowance for credit losses (60,274) (65,091) (56,256) (55,415) (53,708)
Total assets 6,968,227 6,841,337 6,450,579 6,213,222 5,796,576
Deposits 5,231,718 5,233,165 5,059,721 4,993,608 4,726,842
FHLB borrowings & long-term debt 557,266 349,943 226,776 168,564 155,752
Shareholders' equity 661,665 685,485 660,406 621,766 533,643
Ratios:
- - -----------------------------------------------------------------------------------------------------
Return on average assets 1.45% 1.33% 1.44% 1.35% 1.23%
Return on average equity 14.63 13.27 14.09 14.00 12.90
Equity to assets, average 9.92 9.99 10.19 9.66 9.53
Risk adjusted capital ratios:
Leverage ratio 8.66% 9.15% 10.03% 10.12% 9.59%
"Tier 1" 12.59 12.50 14.43 14.48 13.75
"Total" capital 13.84 13.75 15.66 15.67 15.00
Loans to deposits, year-end 85.25% 90.05% 85.71% 82.04% 82.53%
Allowance for credit losses to loans 1.35 1.38 1.30 1.35 1.38
Nonperforming assets to loans 0.65% 0.55% 0.65% 0.72% 0.87%
Loans 90 days past due 0.64 0.70 0.46 0.41 0.25
- - -----------------------------------------------------------------------------------------------------
Total risk elements to loans 1.29% 1.25% 1.11% 1.13% 1.12%
- - ---------------------------------------------------------------------------------------------------
*Merger-related special charges in 1997 reduced net income by $8.6 million or
$0.17 per share and increased noninterest expenses by $11.4 million.
</TABLE>
20
<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). The review will include comparisons of financial performance
for 1998, 1997, and 1996. Results for 1997 were influenced by the impact of
special charges incurred in connection with a merger that was completed in that
year. Unless otherwise indicated, all year-to-year comparisons will be presented
exclusive of these special charges. Throughout this review, net interest income
and the yield on earning assets are presented on a fully-tax equivalent basis.
Additionally, balances represent average daily balances unless otherwise
indicated.
1998 Summary
Performance Results
Keystone's 1998 performance, like that of many financial institutions, reflected
underlying strength despite forces which constrained the rate of performance
improvement. Results were influenced by both changes in national and
international economic conditions and by Keystone's strategic evolution as a
diversified financial services company. On the economic front, low inflation,
reduced interest rates, higher consumer confidence, and strong consumer spending
all contributed to a continuation of our national economic expansion. On the
other hand, the third quarter stock market correction, rising consumer
delinquencies, the fallout from the Asian crisis, and the possibility of an
inverted yield curve all combined to increase the possibility of recessionary
pressures beyond 1998.
In much the same way, Keystone's 1998 performance was influenced by these
contrasting conditions. Net income reached $99.7 million during 1998, a modest
3.4% improvement over core 1997 performance results of $96.5 million. Likewise,
EPS rose to $1.94 versus core EPS of $1.87, or 3.7% growth. Keystone's ROA and
ROE were 1.45% and 14.63%, respectively, compared to 1.46% and 14.54% in 1997.
Comparable peer group ratios for Keefe, Bruyette, and Woods, Inc. financial
institutions with assets between and $5 and $10 billion were 1.33% and 14.43%.
The three major essentials of improved profit performance for a financial
institution are increased revenues, management of credit quality, and control
over operating expenses. Keystone's revenue base expanded during 1998, including
the impact of strong growth in noninterest revenue sources such as asset
management, mortgage banking, and electronic banking. Conversely, Keystone
experienced a slight decline in its largest source of revenue, net interest
income. Low interest rates, which helped create conditions wherein asset
management and mortgage banking activities have flourished, also created more
competitive conditions that reduced the spread between earning asset yields and
funding costs, and compressed net interest income. Similarly, while consumer
spending and lower rates spurred increases in the consumption of credit, the
number of consumer defaults also increased, raising Keystone's charge-off levels
and loan loss provision. Finally, management's efforts in controlling overhead
expenses combined with the successful integration of 1997 merger partners
resulted in only modest growth in operating expenses and contributed to improved
overall performance in 1998.
Strategic Evolution
Keystone's desire for improved performance, combined with its ongoing evolution
into a diversified provider of financial services within the communities it
serves, was the catalyst for the decision to combine its seven separate banking
charters at the end of 1998. Effective December 31, 1998, Keystone's seven banks
operate under one name: Keystone Financial Bank, N.A. This change will represent
a significant adjustment within Keystone's internal operations. Customers,
however, will continue to be served under the banner of "Relationship Banking",
with a corporate culture emphasizing community banking and localized service.
Externally, the change will provide Keystone with a common platform from which
to serve customers throughout its markets, expanding delivery channel
capabilities while linking product lines through a common branding strategy.
21
<PAGE>
Internally, the changes will increase the focus on customer needs, and will
simplify and standardize work processes for Keystone associates.
External Issues and Economic Conditions
The U.S. economy began 1998 under the cloud of potential fallout from the
collapse of the Asian economy. Though the conditions in Asia had little direct
effect on Keystone or the customers it serves, the ripple effect on the national
economy effected some erosion of consumer confidence and raised concerns over
the ability to sustain the largest expansion in U.S. history.
Throughout 1998, interest rates exhibited a steady decline, which had a direct
impact on financial institutions. Since rates began the year at what were
thought to be historically low levels, further declines in interest rates during
1998 had a multi-faceted influence on bank performance. The declines reduced the
amount of interest that financial institutions could pay to depositors, making
growth in traditional funding sources difficult. Furthermore, meaningful
reductions in deposit rates as a means to lower funding costs were less
practicable given the already low rates being paid. The steady decline in rates
also became a catalyst for businesses and consumers to refinance or renegotiate
existing debt, which reduced asset yields and increased competitive pressures.
Finally, the rate decline was accompanied by a flattening of the yield curve,
creating little opportunity to increase asset yields by extending maturities. In
summary, the trends in interest rates during 1998 served to create conditions
which, over the course of the year, compressed net interest margin and
constrained growth in net interest income.
Interest rate trends were more conducive to improvements in revenues from both
asset management activities and mortgage banking. Asset management provides fee
income from investment management services, personal trust, employee benefit
plan management, mutual funds, annuities, and employee benefits record keeping.
Employee benefit plan sponsors, as well as individual consumers of investment
products, were proactive in seeking higher returns through these product
offerings during the low interest rate environment. The proliferation of
employer-sponsored plans and Keystone's proven ability to provide competitive
services through specialized subsidiaries such as Martindale Andres (investment
services) and MMC&P (benefits administration and consulting) contributed to
revenue growth. Keystone also provided competitive and convenient access to
consumer investment product offerings that included brokerage services, mutual
funds, annuities, and other programs. Similarly, interest rate trends played a
key role in the expansion of revenues from mortgage banking activities.
Keystone's success in this area has been historically driven by the purchased
money mortgage business, with less dependence on the refinancing segment of the
market. Like many mortgage banking companies, Keystone was favorably affected by
the influence of lower rates on home purchases and refinancing activity, which
contributed to the highest level of mortgage loan volume in its history.
External issues and economic conditions went beyond the trend toward lower
interest rates. During the third quarter, concerns over the unprecedented growth
in stock market valuations led to a significant market correction. Concern over
the third quarter correction, accompanied by the threat of a protracted bear
market, was allayed somewhat by the fourth quarter revival in stock prices.
Nonetheless, consumer confidence was shaken by the potential for increased
recessionary risk.
Adding to the complexity of economic trends was the looming Year 2000 (Y2K)
deadline. During 1998, Keystone completed the vast majority of programming
changes necessary to achieve Y2K readiness, with final testing scheduled for
completion in mid 1999. Keystone has incurred substantial costs to ensure Y2K
readiness. Despite these incremental costs, overhead levels were controlled by
effective management of the workforce, success with merger integration
initiatives, and low inflation. At the same time, Keystone continued to make the
appropriate investment in technology necessary for revenue expansion, including
the electronic banking network and process improvement initiatives.
22
<PAGE>
Outlook for 1999
External issues and economic conditions will continue to be factors in
Keystone's 1999 performance results. These factors, combined with Keystone's
efforts to evolve its seven banks into a single financial services company, will
provide substantial challenges. In connection therewith, Keystone has announced
a first quarter 1999, restructuring charge of approximately $15 million, which
will help to facilitate its reorganization under the single bank charter. This
change, together with the commitment of Keystone's capable team of associates,
will allow Keystone to simplify, standardize, and improve the efficiency of
internal processes. More importantly, these changes will set the stage for
Keystone's continuing emergence as the premier financial institution in its
market place. This emergence will manifest itself through focused,
highly-trained, financial consultants and associates capable of understanding
customer needs, making recommendations, delivering solutions, and deepening
relationships with businesses and consumers. It will emanate from the continued
development and expansion of Keystone's product mix including both conventional
banking products, as well as new and improved offerings such as Keystone's
proprietary mutual funds, now known as the "Governor Funds". Finally, Keystone's
emergence will be revealed in its ongoing commitment to relationship banking
with a local, community-based emphasis. The year will bring significant
challenges and unprecedented opportunities that will allow Keystone to
successfully position itself closer to its goal of becoming the financial
institution of choice in the Mid-Atlantic region.
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
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.
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 74%
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.
23
<PAGE>
The following table compares net interest income and net interest margin
components between 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997 Change
Yield/ Yield/ Yield/
Amount Rate Amount Rate Amount Rate
- - -------------------------- ---------- --------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income $526,218 8.15% $519,598 8.32% $6,620 (0.17)
Interest expense 240,684 4.44 232,494 4.45 (8,190) 0.01
- - -------------------------- ---------- --------- ----------- -------- ----------- --------
Net interest income $285,534 $287,104 $(1,570)
- - -------------------------- ---------- --------- ----------- -------- ----------- --------
Interest spread 3.71% 3.87% (0.16)
Impact of noninterest 0.71 0.72 (0.01)
funds
- - -------------------------- ---------- --------- ----------- -------- ----------- --------
Net interest margin 4.42% 4.59% (0.17)
- - -------------------------- ---------- --------- ----------- -------- ----------- --------
*The change in net interest income consisted of unfavorable volume variances
totaling $961,000 and unfavorable rate variances totaling $609,000.
</TABLE>
Interest Rates
While efforts to improve net interest margin and net interest income are
influenced by pricing, product mix and customer preferences, the general level
of interest rates and the shape of the overall yield curve are also major
factors. By the end of 1997, it was the general consensus that rates were not
likely to experience dramatic easing, though some downward pressure was expected
if the economy cooled and inflation remained under control. In fact, economic
growth did slow during 1998 and inflation remained largely in check. Overall
interest rates, however, declined more significantly than most observers would
have predicted at the beginning of the year. The decline was particularly
notable given the more dramatic drop in longer term interest rates, which served
to flatten the slope of the U.S. Treasury yield curve. The average difference
between the most extreme points on the curve, the 3-month T-bill and 30-year
bond rates, was 142 basis points in 1997, and dropped to 67 basis points in
1998. This trend, if it were to continue, would reduce the opportunity for
financial institutions to improve their net interest margins.
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 extent of rate declines and the corresponding
change in the yield curve between 1998 and 1997.
<TABLE>
<CAPTION>
Three Six One Two Three Five Ten Thirty
Months Months Year Years Years Years Years Years
- - ------ --------- --------- --------- --------- --------- --------- --------- ---------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 4.91% 5.02% 5.05% 5.13% 5.14% 5.15% 5.26% 5.58%
1997 5.18% 5.37% 5.60% 5.96% 6.07% 6.21% 6.34% 6.60%
</TABLE>
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.
24
<PAGE>
Interest Income/Earning Assets
Interest income grew slightly during the year from $519.6 million in 1997 to
$526.2 million in 1998, an increase of 1.3%. Pricing trends and product mix
played significant roles in the determination of interest income performance.
Businesses and consumers, sensitized to the steady decline in interest rates,
exhibited a higher propensity to renegotiate or refinance existing borrowings.
Consequently, asset yields and interest income came under measurable pressure.
While Keystone exhibited growth in its core "Relationship Banking" credit
activities, absolute growth in the loan portfolio was mitigated by a number of
factors. As announced late in 1997, Keystone undertook a strategic curtailment
of its indirect lending activities to reduce funding pressures and increase the
capacity for more relationship-oriented lending. While commercial loans,
commercial real estate loans, and consumer credits exhibited stable growth,
aggregate loan growth abated in the later stages of 1998. The run-off of the
remaining portfolio of indirect automobile loans and leases began to outpace the
growth in relationship-based credit activities. Likewise, the ongoing and
successful execution of Keystone's mortgage banking operation, which has
resulted in a substantial volume of fixed-rate loans that are sold in the
secondary market, has served to accelerate the run-off of the existing balance
sheet portfolio of variable-rate mortgage loans. On a combined basis, these
factors served to moderate both absolute growth in loan volumes as well as
increases in interest income.
Reduced aggregate loan volumes also influenced the yield on the investment
portfolio. During the course of the year, the loan to deposit ratio eased
somewhat resulting in a higher relative level of investments. Interest rate
trends, including the impact of both steadily declining rates and the flatter
yield curve, provided less opportunity to price these higher volumes of
investments at more favorable rates.
Improvement in earning asset yields during 1998 presented many challenges.
During 1998, the earning asset yield was 8.15%, a decline of 17 basis points
from the yield of 8.32% recorded in 1997. Keystone will continue to focus on its
relationship banking approach, balancing customer needs with an appropriate
value-added pricing strategy.
Interest Expense/Funding Sources
Improvement in net interest income is achieved by maximizing interest income and
minimizing interest expense, while simultaneously moderating the exposure to
interest rate risk factors. Like most financial institutions, Keystone's ability
to both attract funding through deposit vehicles and calibrate the impact of
lower rates with customer desire for higher returns, made substantial increases
in the deposit funding base difficult. Keystone achieved deposit growth in its
more competitive product offerings such as free checking, the index money market
account (IMMA), and variable rate certificates of deposit. Consumer preferences
for products which meet the dual objectives of responsiveness to liquidity needs
and competitive returns sustained growth in these funding sources. As expected,
these same consumer preferences contributed to a decline in more conventional
core deposit vehicles, such as savings deposits, mitigating the overall growth
in deposit funding. While the lower rate environment contributed to reduced
yield on earning assets, funding costs were virtually unchanged. This trend was
driven by two primary factors. First, the reduced mix of lower cost core
deposits, accompanied by the migration into higher priced competitive deposit
vehicles such as IMMAs and variable rate CDs, exerted upward pressure on funding
costs. Though both IMMAs and variable rate CDs reflected lower rates than in
25
<PAGE>
1997, the increased mix of these deposit sources, combined with the lower mix of
less expensive core deposits, mitigated the potential for more measurable cost
reductions. Secondly, Keystone experienced a slightly higher dependency on other
funding sources such as FHLB advances and medium-term notes. Consequently,
funding costs decreased only slightly, from 4.45% in 1997 to 4.44% in 1998.
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 rate
indices, and product 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 1998, Keystone experienced a compression in interest rate spread due to a
more competitive loan pricing environment, and the impact of higher cost funding
sources. Interest spread declined from 3.87% in 1997 to 3.71% in 1998. Lower
interest rates reduced the impact of noninterest funding sources one basis point
from .72% in 1997 to .71% in 1998. Consequently, net interest margin dropped
from 4.59% to 4.42%.
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 1998 and
1997 (in thousands):
1998
Fourth Third Second First
Quarter Quarter Quarter Quarter
- - ------------------------------ ----------- ---------- ---------- ----------
Asset yield 7.93% 8.14% 8.24% 8.22%
Funding cost 4.29 4.47 4.48 4.52
- - ------------------------------ ----------- ---------- ---------- ----------
Interest spread 3.64% 3.67% 3.76% 3.70%
- - ------------------------------ ----------- ---------- ---------- ----------
Net interest margin 4.33% 4.39% 4.48% 4.43%
- - ------------------------------ ----------- ---------- ---------- ----------
Net interest income $70,258 $71,584 $72,377 $71,315
- - ------------------------------ ----------- ---------- ---------- ----------
1997
Fourth Third Second First
Quarter Quarter Quarter Quarter
- - ------------------------------ ----------- ---------- ---------- ----------
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
- - ------------------------------ ----------- ---------- ---------- ----------
The steady decline in rates during 1998 had less dramatic impact on reducing
quarterly funding costs, but influenced a more measurable drop in earning asset
yields. This trend, combined with the influence of rapid run-off of the
curtailed commodity-based indirect loan and lease products, reduced the
potential for growth in net interest income, particularly since mid year.
Keystone's strategic focus on expanding and deepening customer relationships
through delivery of more value-added products is expected to provide
opportunities to mitigate the impact of these trends during 1999.
PROVISION FOR CREDIT LOSSES
The provision for credit losses grew in 1998 to $17.2 million from $15.3 million
in 1997, an increase of 12%. The conditions which influenced the level of credit
quality erosion were linked to the residual effect of the late 1997 curtailment
of indirect lending activities combined with the higher level of defaults and
personal bankruptcies within the consumer sector. These factors culminated in an
increased provision and associated charge-offs which occurred during the second
quarter. While erosion of credit quality in the consumer sector has been
influenced by unfavorable national trends, no similar trends have emerged within
the commercial sector. In fact, the credit quality trends and standards within
Keystone's overall commercial portfolio have remained stable. The allowance for
credit losses expressed as a percentage of loans, was 1.35% at December 31, 1998
versus 1.38% one year earlier. The coverage of nonperforming credits provided by
the allowance was 242% compared to the prior year ratio of 310%. Credit quality
has always been a cornerstone of Keystone's performance and remains one of its
highest priorities. See the allowance for credit loss and asset quality section
of this review for additional information.
NONINTEREST INCOME
At the end of 1993, noninterest income (exclusive of security gains) comprised
17% of Keystone's total revenue stream. By the end of 1998, the noninterest
income component of revenues grew to almost 26%. The evolution of Keystone into
a diversified provider of financial services has dramatically influenced the
growth potential of the service and fee income component of revenues. From 1997
to 1998, aggregate noninterest revenues (exclusive of security gains) grew 16.6%
from $83.9 million to $97.8 million. This followed 18.7% growth in 1997.
Efforts to expand and deepen customer relationships by developing a
comprehensive slate of financial products has enhanced the rate of growth in
revenues from asset management activities, mortgage banking, and electronic
banking. These changes have included the expansion of the menu of services
combined with strategic delivery channel advances that have been designed to be
more responsive to customer's preferences.
Asset Management
Keystone's asset management activities provide an effective illustration of the
adaptive strategies that have fueled the growth in noninterest revenues.
Keystone banks historically provided personal and employee benefit trust
services. In 1995, Keystone acquired Martindale Andres to both expand asset
management capabilities and leverage recognized investment advisory expertise
throughout Keystone. Similar advances occurred with the 1997 introduction of
proprietary mutual funds, now known as "Governor Funds", as well as the
acquisition of MMC&P, a retirement benefit consulting firm. Furthermore, it was
during these periods that Keystone also added enhanced brokerage services and
annuity sales and introduced, on a limited basis in 1998, insurance
capabilities. These strategies have all influenced the related expansion in fees
and made Keystone one of a limited number of institutions in its marketplace
with the competence to deliver a diverse menu of asset management services. The
growth in the individual fee income categories included an 8% increase in trust
fees, 44% increase in investment management, a more than doubling of benefit
services, and an overall increase of 22% in total trust and investment advisory
fees. Total fees grew from $21.3 million in 1997 to $25.9 million in 1998.
Mortgage Banking
Similar to the experience in asset management, Keystone's successful expansion
of mortgage banking activities combined the benefits of innovative product
development, rapid customer turnaround processes, and the convenience of
26
<PAGE>
Keystone's extensive network of community offices. Keystone's mortgage banking
unit completed its most successful year in 1998, originating nearly $500 million
of mortgage loans, including approximately $333 million which were sold in the
secondary market. Keystone now services $1.7 billion of loans, of which
approximately $957 million is "serviced for others". Following a 31% increase in
mortgage banking fees in 1997, Keystone produced a 29% increase during 1998 as
mortgage banking revenues grew to $12.4 million or 12.7% of total noninterest
revenues. Growth in this area of the business has been generated by a
consistently innovative approach during a period of unprecedented opportunity.
The low interest rate environment and the consistently strong consumer demand
for housing has expanded opportunities, and Keystone has been responsive. For
example, Keystone became a recognized specialist in the area of construction
lending and has also carved a niche in the self-build log home financing
business. Additionally, Keystone gained access to another consistent source of
increased volume and high quality loans through its correspondent network.
In summary, Keystone successfully managed the business opportunities presented
to its mortgage banking unit by understanding customer needs and preferences and
meeting these needs through innovative and responsive product design and
delivery.
Electronic Banking
Electronic banking has also had a major strategic impact on the growth in
noninterest revenues. Keystone's electronic banking network includes traditional
and advanced function ATMs and is composed of both internal ATM sites as well as
those sites available through Keystone's alliance with major convenience store
chains. Keystone's electronic banking strategy has been responsive to changing
consumer preferences for convenient and strategically located sites to obtain
cash, conduct transactions, and access payment systems.
With nearly 500 ATMs throughout its network, Keystone now has the 45th largest
network of automatic teller machines in the United States. Overall access
through electronic means includes conventional ATM transactions, advanced-
function ATM capability, point of sale services utilizing Keystone's Visa Check
Card services, and telephone banking which is now fully operational within
Keystone's Telephone Banking Center. Keystone continuously evaluates its entire
electronic banking network in order to minimize unproductive services or
locations and emphasize redeployment of electronic services into markets with
higher transaction and fee potential. Keystone also has enhanced its electronic
network through new and innovative products and services including its
electronic checking account services and preferred provider status for ATM
placements within colleges or universities located within its markets.
During 1998, Keystone achieved a 25% increase in the aggregate ATM and point of
service activity including nearly a 60% increase in its Keystone Visa Check Card
transactions. Keystone's usage rate for its Visa Check Card exceeds the national
average based upon number of transactions per card. Additionally, the Telephone
Banking Center calls increased nearly three-fold from the activity levels as of
the end of 1997. In total, electronic banking fees increased 57% including an
approximately $2 million increase from the impact of surcharging.
Service Charges and Other
Fees from service charges on deposits have historically been a major and
important source of noninterest revenues. Such revenues grew 6% to $18.4 million
in 1998 from $17.4 million in 1997 and were reflective of both fee adjustments
and the expansion of customer services. Other income increased by $1.2 million
in 1998 as income from bank-owned life insurance and the gain on the sale of an
insignificant subsidiary exceeded branch sale gains recognized in 1997. During
1998, Keystone realized approximately $11 million in security gains, the
majority of which related to the disposition of its minority interest in a
financial institution that was acquired by another company.
27
<PAGE>
Noninterest Expenses
Core noninterest expenses, exclusive of the charges associated with the 1997
merger, rose 4.0% from $214.6 million to $223.2 million, an increase of $8.5
million. For the most part, core expense growth was negligible, as most of the
1998 increase reflected the first full year impact of the mid-year 1997
purchases of MMC&P and a Maryland-based thrift. Additionally, expenses in 1998
included the current year impact of incremental expenses necessary to achieve
Y2K readiness. Growth in controllable expenses reflected ongoing efforts
associated with expense management. Keystone's decision to unify its banks under
a single charter should accelerate expense reduction opportunities. We
anticipate that this unification will reduce operating expenses by 10% beginning
with the Year 2000. Expense management efforts, however, also reflected
investment in those areas of the business which demonstrate superior potential
for revenue expansion and in technological initiatives which achieved a more
efficient leverage of Keystone's human capital.
Salaries and Benefits
Effective and efficient delivery of a broad menu of financial services begins
with attracting and retaining a motivated, experienced and well-trained team of
associates. Over the past several years, Keystone has embarked on a structured
program to attract and retain a skilled workforce and to provide a financial
reward system linked to execution of revenue-enhancing activities. These
programs include Keystone's "targeted selection" initiative, which is an
interview process for prospective associates designed to identify and attract
candidates with demonstrated potential to succeed in a consultative selling
environment. Additional programs include the variable compensation program which
is linked to preestablished "pay-for-performance" criteria. Such programs have
been designed to increase the amount of compensation for those associates more
directly responsible for customer responsiveness and revenue growth. While these
programs tend to elevate the "at risk" component of employee compensation, they
also provide associates with greater incentive and opportunity for personal
financial reward. Most of these programs are in the second or third year of
implementation and have now become an integral part of Keystone's reward system.
Keystone will continue to prospectively adjust and adapt compensation systems to
ensure that these programs provide the most effective link between reward-based
compensation and meeting customers' financial needs.
In 1998, salary expense grew 5.1% from $92.6 million to $97.4 million. This
growth related primarily to the first full year of activity for businesses that
had been acquired in 1997, and, to a lesser extent, merit increases and
increased variable compensation. The increase was mitigated by the offsetting
influence of a reduced workforce. Efficiency gains, some of which relate to the
benefits of technology, were linked to the reduction in full-time equivalent
employees from 3,114 at the end of 1997 to 2,965 at the end of 1998.
Benefits expense levels have also stabilized, due to the favorable impacts of
both a reduced workforce and effective management of Keystone's benefit costs,
primarily its employee health care plan. Benefit expenses rose only slightly
from $17.3 million in 1997 to $17.5 million in 1998. Keystone's efforts to
provide high quality health care through its company-sponsored managed care
program has mitigated increases in this vital component of employee
compensation. More recent national trends portend possible increases in benefit
costs after 1998 as the health care industry continues to evolve and
consolidate. Keystone's effort to manage its workforce levels is expected to
offset the potential for meaningful increases in these projected expenses.
Occupancy and Equipment Expenses
Changing customer needs and preferences continue to be the primary stimulus for
the evolution and enhancement of Keystone's customer delivery systems and
related internal processes. While these initiatives have increased both
occupancy and
28
<PAGE>
equipment expense in the near term, such expenses are critically evaluated to
ensure appropriate leverage of Keystone's skilled team of financial consultants.
Investments included the costs associated with the Telephone Banking Center, an
ever-expanding network of ATM and electronic banking enhancements, and
infrastructure improvements to internal processes. In 1998, occupancy expenses
rose 5.5% to $17.3 million while equipment expenses rose 9.8% to $20.6 million.
Results for 1997 included comparable expenses of $16.4 and $18.7 million,
respectively.
At the same time, Keystone has constantly and consistently worked to revamp and
revitalize its network of community offices. Late in 1998 and early in 1999,
Keystone finalized its planning efforts to enhance the community office delivery
system. Such efforts will include more precise assessments of market potential
and ongoing evaluations of optimum service levels within Keystone's community
office systems. The results of these efforts, which were an integral component
of Keystone's reorganization strategy, will begin to be reflected in early 1999.
Other Expenses
Other expenses, which include items such as marketing, insurance, audit and
legal fees, consulting expenses, bank shares tax, and postage expenses
aggregated $70.3 million in 1998 and $69.5 million in 1997. This increase of
1.2% is reflective of Keystone's ongoing effort to achieve efficiencies in its
expense structure. Notably, Keystone achieved substantial reductions in
categories such as marketing, recruiting, professional fees, and problem loan
expense, which served to overcome increased expenses in areas more affected by
corresponding improvement in fee income, such as reinsurance and merchant
interchange activities.
Income Taxes
Income tax expense was $45.7 million in 1998 versus $38.9 million in 1997. The
increase in taxes was reflective of higher levels of taxable income as the
effective tax rate was approximately 31% in both years.
Year 2000
There are few individual topics which have engendered as much discussion and
wide-spread media attention as the issue of Year 2000 (Y2K) readiness and its
many associated concerns. Given its potentially significant impact on business
in general and financial institutions in particular, Y2K readiness has been a
subject of intense management focus. The level of awareness and attention has
been particularly acute within the financial services industry with its many
layers of regulatory oversight and perceived influence on the overall flow of
commerce. The fundamental issue associated with Y2K readiness stems from the
fact that historically, most computer systems were written with two digits
rather than four digits to designate the applicable year. Accordingly, it is
anticipated that 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.
Keystone's computer systems are managed by its information technology (IT)
division, which has the primary responsibility to meet information processing
needs through the acquisition, operation, and customization of software and
hardware acquired from major providers. A limited portion of data processing
needs, estimated at approximately 15%, is met by various third party service
providers. Keystone's formal plan to resolve issues attendant to the approach of
the Y2K consists of four major phases: inventory; assessment; distribution; and
implementation. The four phases of the plan are primarily being performed using
internal resources.
The initial or inventory phase of Keystone's Y2K Plan identified all
information technology and significant non-IT components. The inventory of
components, which was identified during this phase, serves as the
29
<PAGE>
foundation for assessment of all potential Y2K issues. Keystone has
completed this step. However, we recognize that as a part of doing
business, new items will be added to the inventory as needed and these
items will be exposed to the process.
The second, or assessment phase of the plan evaluated the need for
modification, upgrade or replacement of either internally managed or
service-based systems to meet Y2K readiness standards. Ten corporate
critical IT systems were identified to be the highest level of execution
risk if not adequately safeguarded for failure or malfunction. Assessment
of all identified components is complete. In the process of completing this
phase, Keystone has determined it has no significant exposure due to non-IT
components with embedded technology.
During the third, or distribution phase, decisions were made about how to
remedy Y2K problems detected by the assessment. Decisions were made for all
components to either retire, replace, update or convert each software or
hardware item that is not year 2000 compliant.
The final, or implementation phase includes installation, system testing
and transition to a production environment. Of the ten corporate critical
systems, three systems are in production with testing complete; six systems
are in production and require only minor additional testing; the remaining
system is scheduled for production by the end of the second quarter of
1999.
It has been determined that all identified corporate critical replacement or
updated systems meet the standards necessary for Y2K readiness. The risk
associated with Y2K readiness, therefore, is primarily associated with the
implementation of these systems and can be remedied, if necessary, via standard
vendor support channels or by redirecting internal or external resources.
Management's current risk assessment is that should difficulties be encountered
with implementation, only minor delays in transaction processing or information
availability will occur. If delays in either transaction processing or
information availability would occur for extended periods for corporate critical
systems, or if timely modification could not be made, Y2K issues could have a
material effect on both customers and on the operations of Keystone. In a worst
case scenario, which management does not consider to be likely, Keystone may be
unable to clear checks, process payments, or obtain customer account
information. In addition, customers' access to funds could be delayed. Failure
to achieve Y2K readiness could also subject Keystone or its subsidiaries to
potential sanctions or directives from various regulatory agencies responsible
for supervisory oversight of financial institutions.
The impact of Year 2000 issues on Keystone will depend not only on steps taken
by Keystone to address and prevent potential Y2K problems but also on the way in
which Y2K issues are addressed by governmental agencies, businesses and other
third parties that provide services or data to, or receive services or data
from, Keystone, or whose financial condition or operational capability is
important to Keystone. Keystone is engaged in an effort to survey the readiness
of such third party suppliers, vendors, and major customers, and to date,
Keystone is not aware of any third party problems which would materially impact
Keystone's results of operations, liquidity or capital resources. However,
Keystone has no means to determine with absolute assurance that external parties
will by Y2K ready, or that such parties failure to be Y2K ready would not have a
material impact on Keystone.
Expenditures since the inception of the project have aggregated $5.6 million, of
which $3 million were capitalized. During 1999, Keystone expects to spend an
additional $2 million, of which $.5 million will be capitalized and amortized
over a three- to five-year period. All expenditures will be funded through
operating cash flows.
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<PAGE>
Keystone's estimate of costs and the time required to complete Y2K
modifications, as well as the assessment of readiness to deal with Y2K issues,
are based on forward-looking information and are dependent upon assumptions
regarding future events. There can be no guarantee that estimates of costs or
completion dates will be achieved or that all risk has been appropriately
identified and assessed. Specific factors that might cause differences include,
but are not limited to, the availability and cost of personnel, satisfactory Y2K
upgrade execution, the ability to identify all issues, and similar
uncertainties.
BALANCE SHEET OVERVIEW
Keystone's total assets reached $6.97 billion at the end of 1998, a slight
increase over the total of $6.84 billion reported at the end of 1997. Growth was
constrained by a number of factors including the run-off of curtailed credit
products, such as indirect loans and leases, and the securitization of mortgage
products. Period end loan balances declined as growth in relationship- based
product offerings was not sufficient to offset this run-off. In addition,
balance sheet expansion was also constrained by sluggish deposit growth.
LOANS
During 1998, Keystone experienced less than robust growth in aggregate loan
balances despite strong increases in relationship-based activities. Growth
trends within Keystone's loan portfolio resulted directly from the execution of
its core business strategy, meeting customer needs through relationship banking.
First, Keystone seeks to preserve precious funding sources to ensure credit
availability for creditworthy customers that exhibit demonstrated potential and
desire for more expanded relationships. At the same time, Keystone also seeks
ways to more appropriately meet credit needs through the delivery of commodity-
based products that have the potential to create opportunities for expanded
relationships. A prime example of this effort is mortgage banking, which also
combines balance sheet risk management strategies and accessability to funding
through the secondary market. Finally, Keystone has curtailed those activities
which tend to absorb funding with little or no opportunity to profitably expand
relationships, such as indirect lending and leasing.
The following summary reflects the impact of these strategies on specific loan
balances through 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997 Change
- - ------------------------ --------------------- ------------------- --------------------
Amount % Amount % Amount %
- - ------------------------ ------------- ------- ------------ ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Commercial $663,415 14% $622,569 14% $40,846 7 %
Floor plan financing 171,872 4 186,737 4 (14,865) (8)
Commercial-real estate
secured 1,496,526 33 1,294,933 28 201,593 16
Consumer mortgages 774,388 17 944,731 21 (170,343) (18)
Direct consumer 919,952 20 856,225 19 63,727 7
Indirect consumer 248,942 5 293,013 6 (44,071) (15)
Lease financing 314,749 7 374,421 8 (59,672) (16)
- - ------------------------ ------------- ------- ------------ ------ ----------- --------
$4,589,844 100% $4,572,629 100% $17,215 --- %
- - ------------------------ ------------- ------- ------------ ------ ----------- --------
</TABLE>
Though declines in commodity-based indirect loan and lease categories were
anticipated, the actual pace of runoff exceeded expectations and offset the
31
<PAGE>
growth that was achieved in relationship-based categories. Growth in commercial
real estate (16%), commercial loan (7%) and direct consumer credit (7%) was
strong, however, and reflected Keystone's stated commitment to maximize
relationship banking opportunities.
The changes in Keystone's organizational structure announced near the end of
1998 were designed to build on this foundation and identify service delivery
enhancements through an intense and skillful focus through a line of business
approach. Coincident with the implementation of its proprietary business
analysis tools, Keystone has divided its commercial business into three broad
segments: commercial banking, business banking, and emerging business banking.
Pursuant to this stratification, Keystone examined and identified more common
financial needs and attributes of customers included therein, and will seek to
tailor its approach to meeting individual financial needs through its financial
consultancy model. For example, Keystone has a demonstrated familiarity with the
nuances of automobile dealer floor plan financing and has constantly evaluated
and improved service delivery features to this important business segment.
Despite this focus on floor plan financing, outstanding balances declined during
1998 due to the mid-year strike of a major auto manufacturer.
Likewise, the formal restructuring of Keystone under one charter, with its
regional focus and local market teams, has been designed to ensure high touch
delivery and local market knowledge combined with the benefits of focused
business line management. This restructuring is a logical evolution of
Keystone's relationship banking culture. The growing demand for direct lending
coupled with the strategic effort to make Keystone the premier lender in its
community markets, are expected to accelerate both lending and other financial
service delivery opportunities within the retail sector.
ALLOWANCE FOR CREDIT LOSSES AND ASSET QUALITY
Keystone's ratio of the allowance for credit losses to loans was 1.35% at
December 31, 1998, versus 1.38% at the end of 1997. The absolute level of the
allowance was $60.3 million at the end of 1998 compared to $65.1 million at the
end of the previous year. This reduction was directly attributed to lower loan
balances and risk exposure for commodity and securitized loan products.
<PAGE>
The following table sets forth five years of activity within the allowance for
loan losses beginning January 1, 1994 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- - ----------------------------------------- --------- -------------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, $65,091 $56,256 $55,415 $53,708 $51,084
Loans charged off:
Commercial (2,326) (1,930) (1,936) (874) (4,417)
Real estate-secured:
Commercial (2,543) (1,234) (1,646) (1,971) (4,265)
Consumer (885) (1,116) (651) (708) (638)
Consumer (14,442) (10,010) (6,702) (5,498) (2,932)
Lease financing (3,862) (2,987) (1,330) (786) (198)
- - ----------------------------------------- --------- -------------------- --------- ----------
Total loans charged off (24,058) (17,277) (12,265) (9,837) (12,450)
- - ----------------------------------------- --------- -------------------- --------- ----------
Recoveries:
Commercial 303 501 461 281 528
Real estate-secured:
Commercial 675 410 465 538 849
Consumer 444 219 152 164 280
Consumer 1,302 1,104 1,138 900 968
Lease financing 244 251 177 158 29
- - ----------------------------------------- --------- -------------------- --------- ----------
Total recoveries 2,968 2,485 2,393 2,041 2,654
- - ----------------------------------------- --------- -------------------- --------- ----------
Net loans charged off (21,090) (14,792) (9,872) (7,796) (9,796)
Provision charged to operations 17,150 15,316 10,713 8,568 10,324
Other (877) 8,311 ---- 935 2,096
- - ----------------------------------------- --------- -------------------- --------- ----------
Balance at December 31, $60,274 $65,091 $56,256 $55,415 $53,708
- - ----------------------------------------- --------- -------------------- --------- ----------
Ratio of allowance to year-end loans 1.35% 1.38% 1.30% 1.35% 1.38%
Ratio to Average Loans:
Provision .37% .33% .26% .21% .29%
Net charge-offs .46% .32% .24% .20% .27%
- - ----------------------------------------- --------- -------------------- --------- ----------
</TABLE>
The most significant credit risk issue affecting Keystone during 1998 was the
impact of rising consumer delinquencies, consumer bankruptcies, and related net
charge-off activity. Keystone's most substantial credit exposures involved those
loans that had been originated through indirect automobile lending and leasing
activities. Although Keystone curtailed this line of business near the end of
1997, absolute levels of problem credits associated with these loans and leases
grew during the first half of 1998. Approximately 20% of the $14.4 million
consumer charge-offs incurred during 1998 and all of the lease financing
charge-offs related to the indirect business.
<PAGE>
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 nonperforming
assets (NPA's)and loans past due more than 90 days. 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 1998
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>
1998 1997 1996 1995 1994
- - --------------------------------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $24,675 $20,520 $19,350 $19,142 $26,701
Restructurings 264 489 393 503 144
- - --------------------------------- --------- --------- --------- ---------- ----------
Nonperforming loans 24,939 21,009 19,743 19,645 26,845
Other real estate 3,982 5,028 8,305 9,777 7,028
- - --------------------------------- --------- --------- --------- ---------- ----------
Nonperforming assets 28,921 26,037 28,048 29,422 33,873
Loans past due 90 days or more 28,549 33,062 20,141 16,798 10,062
- - --------------------------------- --------- --------- --------- ---------- ----------
Total risk elements $57,470 $59,099 $48,189 $46,220 $43,935
- - --------------------------------- --------- --------- --------- ---------- ----------
</TABLE>
Substantially all of the loans in the nonaccrual category at December 31, 1998,
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>
1998 1997 1996 1995 1994
- - ------------------------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Ratio to Year-End Loans:
Nonperforming assets 0.65% 0.55% 0.65% 0.72% 0.87%
90 days past due 0.64 0.70 0.46 0.41 0.25
- - ------------------------------------------- ------- ------- ------- ------- -------
Total risk elements 1.29% 1.25% 1.11% 1.13% 1.12%
- - ------------------------------------------- ------- ------- ------- ------- -------
Coverage Ratios:
Ending allowance to nonperforming loans 242% 310% 285% 282% 200%
Ending allowance to risk elements* 113% 120% 141% 152% 146%
Ending allowance to net charge-offs 2.9x 4.4x 5.7x 7.1x 5.5x
- - ------------------------------------------- ------- ------- ------- ------- -------
* Excludes ORE.
</TABLE>
The relative level of nonperforming assets continues to moderate within rather
narrow boundaries and has been influenced by the ebb and flow of broad economic
trends. Total risk elements expressed as a percentage of loans grew only
<PAGE>
slightly during the year from 1.25% at the end of 1997 to 1.29% at the end of
1999. The migration of a single large commercial credit from the 90-days past
due category at the end of 1997 into nonaccrual status during 1998 increased the
ratio of nonperforming assets to loans while decreasing the ratio of 90-days
past due to loans. During this period, Keystone's credit risk exposure has not
been substantially influenced by any systemic deterioration in commercial or
commercial real estate categories but more by the broad trends within the
consumer sector. As the relative mix of indirect credit is reduced, the
proclivity for more relationship-based lending is expected to introduce a higher
density of loans with more favorable credit attributes.
Management has identified approximately $12.2 million of loans outstanding at
December 31, 1998 were 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 1998. Such loans totaled $8.3 million at
the end of 1997.
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>
- - -------------------------------- ---------------------------------------------------
1998 1997 1996 1995 1994
- - -------------------------------- ---------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Commercial $10,066 $4,550 $4,340 $4,833 $5,651
Commercial real estate:
Construction and development 1,941 220 764 1,951 5,690
Permanent 8,640 11,960 12,196 10,919 10,597
Residential real estate 960 1,465 1,014 1,173 4,486
Consumer 3,332 2,814 1,429 769 421
- - -------------------------------- ---------- --------- --------- --------- ----------
Nonperforming loans 24,939 21,009 19,743 19,645 26,845
Other real estate 3,982 5,028 8,305 9,777 7,028
- - -------------------------------- ---------- --------- --------- --------- ----------
Total nonperforming assets $28,921 $26,037 $28,048 $29,422 $33,873
- - -------------------------------- ---------- --------- --------- --------- ----------
</TABLE>
Keystone also reviews trends with respect to less severe categories of past due
loans, including loans which are 30 to 90 days past due.
The following is a comparative summary of past due loans at the end of 1998 and
1997 (in thousands):
% of Total % of Total
1998 Loans 1997 Loans
- - ------------------ ---------- ------------ ----------- --------------
30-59 days $47,899 1.1% $53,320 1.1%
60-89 days 12,451 0.3 15,807 0.4
Over 90 days 28,549 0.6 33,062 0.7
- - ------------------ ---------- ------------ ----------- --------------
$88,899 2.0% $102,189 2.2%
- - ------------------ ---------- ------------ ----------- --------------
The level of past due loans expressed as a percentage of total loans at December
31, 1998 was consistent with the same period in 1997.
<PAGE>
Allocation of Allowance
In determining the adequacy of the allowance for loan losses, management makes
allocations to specific problem commercial loans based on the present value of
expected future cash flows or the fair value of the underlying collateral for
impaired loans and to pools of other commercial loans based on various credit
risk factors. Allocations to loan pools are developed by internal risk rating
and are based on management's judgment concerning historical loss trends and
other relevant factors. Installment and residential mortgage loan allocations
are made at a total portfolio level based on historical loss experience adjusted
for portfolio activity and current conditions. While allocations are made to
specific loans and pools of loans, the allowance is available for all loan
losses.
The following table summarizes the allocation of the allowance for credit losses
at December 31, for each of the past five years (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- - ------------------------ ------------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Commercial $13,436 $11,266 $9,944 $11,450 $11,168
Real Estate secured:
Commercial 8,813 12,630 11,922 11,969 12,104
Consumer 2,064 1,849 2,324 2,251 2,563
Consumer 15,574 16,844 12,693 7,724 7,036
General Risk 20,387 22,502 19,373 22,021 20,837
- - ------------------------ ------------ ----------- ----------- ----------- ---------
$60,274 $65,091 $56,256 $55,415 $53,708
- - ------------------------ ------------ ----------- ----------- ----------- ---------
</TABLE>
During 1998, the portion of the allowance specifically allocated to commercial
loans increased, while conversely, the portion allocated to commercial real
estate decreased to reflect changes in management's risk ratings for these
categories of loans. Similarly, the level of nonperforming commercial loans
increased during 1998 while the level of nonperforming commercial real estate
decreased.
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, local
market conditions, various estimates, and other information that requires
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, 1998 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,
<PAGE>
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, 1998, Keystone's investments represented 25.7% of total assets.
The following is a summary of the carrying values of investments at December 31,
1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
- - ------------------------------ ------------------------- ----------------------------
Available Held to Available Held to
for Sale Maturity for Sale Maturity
- - ------------------------------ ------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Negotiable money market
investments $290,975 $----- $178,404 $-----
U.S. Treasury securities 123,388 ----- 194,120 -----
U.S. Government agency
obligations 548,572 500,418 503,078 366,238
Obligations of states and
political subdivisions 57,692 146,018 74,171 143,910
Corporate and other 109,126 13,100 141,627 18,240
- - ------------------------------ ------------ ------------ --------------- ------------
$1,129,753 $659,536 $1,091,400 $528,388
============================== ============ ============ =============== ============
</TABLE>
The weighted average duration of Keystone's fixed rate investments was 2.33
years at December 31, 1998. 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 1998, the portion of all state and municipal holdings
rated "AAA" was 89.8% and the portion of all corporate issues rated "A" or
better was 98.2%. The relationship of market value to the amortized cost of
investments at December 31, 1998, was 101.1% compared to 101.4% at the end of
1997. At December 31, 1998, investments "held-to-maturity", which are carried at
amortized cost, contained gross unrealized gains and losses of $11.7 million and
$0.3 million, respectively. Unrealized gains and losses included in the carrying
value of the "available-for-sale" investments of $11.5 million and $1.8 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.
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 but has
made 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 to reduce the market risk associated with interest rate
fluctuations in fixed consumer mortgages. Further disclosures of these
activities are included in the footnotes to the financial statements.
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
<PAGE>
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
Agency holdings.
In June of 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement provides new accounting treatment for derivatives transactions and
hedging activities. The standard will be effective for Keystone beginning on
January 1, 2000. Adoption of the standard is not expected to have a significant
impact on Keystone's financial condition or results of operations.
DEPOSITS
Financial institutions continue to rely heavily on deposit balances as the
primary source of funding for credit activities. Customer desires for higher
returns, the lure of increased stock market valuations, higher consumer risk
tolerance, and more accessible investment distribution channels, such as on-line
investing, have all served as impediments to growth in this important funding
source. Despite these trends, Keystone has been able to preserve its funding
base through product development initiatives designed to meet these competitive
challenges. Though aggregate deposit funding remained relatively static from
1997 to 1998, the mix of deposits reflect the influence of competitive pressures
and Keystone's proactive strategy to meet customers' needs. Deposit composition
consisted of the following for 1998 and 1997:(in thousands):
<TABLE>
<CAPTION>
Change
-----------
1998 1997 Amount %
- - ------------------------------------------ ------------ ------------ ------------ -------
<S> <C> <C> <C> <C>
Noninterest-bearing demand $637,533 $606,907 30,626 5%
NOW 309,238 330,514 (21,276) (6)
Savings 514,226 600,759 (86,533) (14)
Money market 740,086 650,082 90,004 14
Variable-rate CD 719,165 575,025 144,140 25
Other time deposits less than $100,000 1,958,919 2,114,231 (155,312) (7)
Time deposits $100,000 or more 310,137 278,181 31,956 11
- - ------------------------------------------ ------------ ------------ ------------ -------
$5,189,304 $5,155,699 33,605 1%
- - ------------------------------------------ ------------ ------------ ------------ -------
</TABLE>
Keystone's deposit mix was most significantly affected by initiatives in three
major areas. First, Keystone's earlier introduction and continued promotion of
its free-checking and electronic checking products, combined with a corporate
cash management product, contributed to 5% growth in noninterest-bearing demand
deposit balances. Secondly, Keystone developed and expanded its indexed money
market account (IMMA) in order to provide customers with a competitive
alternative to retail products now available through a variety of financial
intermediaries. The rate provided on this account has been indexed to short-term
Treasury rates rather than to administered rates, providing added assurance to
Keystone customers that they are achieving competitive returns combined with
convenient access. Finally, the variable rate certificate of deposit, with its
indexed rate and flexible liquidity options, has been a formidable and
competitive product offering. Each of these products has been successful in
blending the security of deposit insurance with competitive features in pricing.
<PAGE>
Keystone's preemptive approach to providing its customers with competitive
product offerings has facilitated some internal disintermediation of more
established deposit products such as savings and NOW accounts. More importantly,
Keystone believes that this approach provides consumers with assurance that, in
its role as a financial services provider, the foremost objective is to meet
customer needs.
BORROWED FUNDS
While deposits continue to be the primary source of funding, Keystone has
augmented its funding needs through other sources based on its overall funding
strategy. The composition of other borrowed funds is presented in the following
table (in thousands):
Change
1998 1997 Amount %
- - ---------------------------- ----------- ----------- ------------- ----------
Short-term borrowings $375,131 $371,645 $3,486 1%
FHLB borrowings 372,097 240,533 131,564 55
Long-term debt 119,313 64,016 55,297 86
- - ---------------------------- ----------- ----------- ------------- ----------
$866,541 $676,194 $190,347 28%
- - ---------------------------- ----------- ----------- ------------- ----------
Strategic leverage efforts, including investment initiatives and share
repurchase programs, have 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
customers. FHLB borrowings, which are collateralized by residential mortgages or
other qualified securities, reflect a variety of credit products available to
Keystone through its membership in the Federal Home Loan Bank. In May of 1998,
Keystone issued $30 million of senior medium-term notes under a shelf
registration executed in 1997, at a coupon rate of 6.50% and a maturity date of
2008. The proceeds were used to fund the common stock repurchase program and
other general funding needs. Remaining aggregate funding available under this
registration was $270 million. Keystone will continue to access this funding
source for general corporate purposes on an as needed basis.
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 1998, shareholders' equity was $662 million versus $685 million at
December 31, 1997, resulting in an equity to assets ratio of 9.50%.
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 1998 equated to an 8.6%
payout on year-end 1997 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
<PAGE>
base. Two capital management strategies contributing to the equity contraction
experienced in 1998 included the acquisition of treasury stock and the increased
annual dividend to shareholders. In formulating these capital management
initiatives, a multitude of additional external factors are considered,
including regulatory implications and the desire to preserve
pooling-of-interests accounting.
In November 1998, the Board of Directors approved a share repurchase program
which authorized the repurchase from that date of up to 3,000,000 common shares.
Under the program, the shares are to be repurchased from time to time in the
open market or through negotiated transactions. Under a separate 1997
authorization, one million common shares were repurchased in the first half of
1998 and retired. The 1 million shares held at December 31, 1998, were acquired
under the November, 1998, authorization and are expected to be reissued over
time in connection with employee stock purchase, 401(k), stock option and
dividend reinvestment plans as well as other corporate purposes.
Banking industry regulators have set forth capital adequacy guidelines based on
capital ratios for bank holding companies and their banking subsidiaries. Based
on risk-adjusted capital rules and definitions prescribed by the regulators, the
regulatory guidelines establish 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 Currency, operate
under a risk-based supervisory approach designed to encourage management focus
on the most effective use of capital commensurate with its risk profile in
generating a return to stockholders, while serving depositors, creditors, and
regulatory needs.
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 1998 and a comparison to the various regulatory capital requirements.
"Well Minimum
Keystone Capitalized" Requirements
- - ------------------------- ------------- --------------- ---------------
Leverage ratio 8.66% 5.00% 4.00%
"Tier 1" capital ratio 12.59% 6.00% 4.00%
"Total" capital ratio 13.84% 10.00% 8.00%
- - ------------------------- ------------- --------------- ---------------
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 $62 million at
December 31, 1998 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 through the prudent control of market risk, liquidity, interest
<PAGE>
rate risk, and capital. Two important barometers of performance 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 governed by the Board of Directors (the Board). The Board delegates the
responsibility of asset/liability management to the corporate Asset/Liability
Management Committee (ALCO) whose representation includes both bank and holding
company personnel. ALCO sets forth strategic directives which guide day-to-day
asset/liability management initiatives. ALCO also reviews and approves all
significant market risk, liquidity, long-term funding opportunities, and capital
management programs.
Interest Rate Risk
Interest rate risk 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 ALCO policy sets forth guidelines that
limit the level of interest rate risk within specified tolerance ranges.
Keystone utilizes 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 of 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. 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, 1998 for the
ensuing twelve month and twenty-four month periods have measured potential
reductions in net interest income of approximately 3% and 2%, respectively, well
within Keystone's defined tolerance levels. Comparable measures as of December
31, 1997 were 1% for the twelve-month period and 2% for the twenty-four month
period. 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, cash flows, 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, 1998.
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
<PAGE>
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, has several limitations including: the intrinsic value of
assets, liabilities and off-balance sheet instruments does not necessarily
represent the fair value of the financial instruments since it does not include
credit risk and liquidity; estimated cash flows are required for nonmaturity
financial instruments; and the future structure of Keystone's balance sheet does
not include ongoing loan and deposit activities from core business within the
present value assessment.
The following table provides an analysis of Keystone's interest rate sensitivity
as measured under GAP at December 31, 1998 compared to 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
December 31, 1998 December 31,1997
1 month 3 months 6 months 1 year 1 year
- - ------------------------------------------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C>
Assets $1,383,118 $1,704,278 $2,029,396 $2,567,125 $3,017,875
Liabilities 1,703,836 2,592,327 2,996,943 3,514,717 3,313,948
Cumulative GAP (320,718) (888,049) (967,547) (947,592) (296,073)
As a percent of total assets (4.60%) (12.74%) (13.89%) (13.60%) (4.33)%
Gap ratio 0.81 0.66 0.68 0.73 0.91
- - ------------------------------------------------------------------ ----------------------------
</TABLE>
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.
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. Failure to meet the
prescribed minimum standards for these ratios requires that management identify
tactics which will ensure compliance with policy guidelines. 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, medium term notes, or
other forms of term borrowings. For example, Keystone had $270 million available
<PAGE>
for the issuance of senior or subordinated debt securities at December 31, 1998
under an existing shelf registration filed with the Securities and Exchange
Commission (SEC). Keystone's ability to access the capital markets was
demonstrated in 1998 through the issuance of $30 million in senior medium-term
notes near mid-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. The parent company relies primarily on the bank subsidiary to
provide funding for dividends to its shareholders and unallocated corporate
expenses. The amount of dividends from the bank to the parent company is
constrained by federal regulations, which have not historically limited
Keystone's practices. Periodically, the parent company may also access other
forms of funding to facilitate strategic corporate initiatives. Based upon the
inherent strength and profitability of its bank subsidiary, holding company
liquidity is deemed adequate.
REGULATORY MATTERS
Keystone and its affiliates are subject to periodic examinations by one or more
of the various regulatory agencies. During 1998, examinations were conducted at
the holding company and at Keystone's 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.
Reviews specifically designed to assess the status of Keystone's Y2K readiness
were also conducted on a regular basis during the year by regulatory examiners.
No comments were received from the various regulatory bodies which would have a
material adverse effect on Keystone's liquidity, capital resources, or
operations.
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 pressures over the last several years have been
modest, although the potential for future inflationary pressure is always
present given changing trends in the economy. Management will continue to
monitor the impact of these trends on the pricing of its products and services
and on the control of overhead expenses.
SEGMENT REPORTING
Keystone's business segments are community banking, mortgage banking, and asset
management services. These segments are managed separately because they offer
distinctly different products distributed through different delivery channels.
No customer of Keystone individually represents 10% or more of consolidated
revenue and revenues from foreign customers are negligible. The community
banking segment constituted over 90% of Keystone's revenue, profit, and assets
for the years ended December 31, 1998, 1997 and 1996 and was the only reportable
segment. As such, financial information for this segment does not differ
materially from the information provided in the consolidated financial
statements.
<PAGE>
1997 vs 1996
Summary
Performance during 1997 was significantly influenced by the expansion of
Keystone's franchise during the year. The merger of Financial Trust Corp. (FTC)
added another strategic partner in Keystone's expanding financial services
marketplace while the acquisition of First Financial Corp of Western Maryland
(FFWM) added important market share to Keystone's existing franchise in Maryland
and West Virginia. The merger of FTC was accounted for as a pooling of interests
and all prior periods were 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.
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 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) 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.
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 earning 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.
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 the allowance to loans of 1.38% at December 31, 1997 compared
with 1.30% at the end of 1996.
Operating expenses were influenced by 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.
Interest Income
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. Interest income was influenced by expanded middle market businesses and
retail customers, and included growth in commercial real estate loans and direct
consumer credits of 23% and 27%, respectively.
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 focus on relationship banking, responsiveness to interest rates, and
prudent liquidity management enabled it to achieve an increase in earning asset
yields of 8.32% versus 8.20% in 1996. The 12 basis points improvement in yields,
combined with a 6% increase in earning assets, allowed Keystone to sustain
steady revenue growth.
<PAGE>
Interest Expense
Improvement in net interest income must include increased levels of interest
income combined with prudent management of both funding cost and capacity. While
competitive pressures constrained 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 points increase which was equal to the improvement in asset
yields.
Net Interest Income
Combining the impact of yield on earning assets with the cost of funding sources
results in interest spread. 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. 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.
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%.
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 markets in which it operates. This focus has manifested itself in
an increasing higher 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.
Trust and investment advisory services, the largest single source of fee-based
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. and the
expansion of revenue sources through the acquisition of MMC&P.
Keystone has been equally successful in enhancing its mortgage banking strategy.
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.
Deposit account service charges in 1997 were flat as compared to the prior year.
In late 1996, Keystone had introduced its free checking option. This strategic
initiative, which provided Keystone with a competitive position in its
marketplace, constrained the rate of growth in deposit fee income.
Similar to the strategies employed within both asset management and mortgage
banking, Keystone has successfully leveraged its electronic banking
configuration to improve related fee income growth. Growing demand for access to
funds and
<PAGE>
technological innovations contributed to a $2.3 million increase in ATM and
debit card fees. Surcharge fees also enabled Keystone to charge noncustomers who
access their banks through Keystone's ATM network. These factors, along with
other fee-based initiatives, resulted in growth to aggregate fee income of
26.5%.
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% 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.
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. Other factors influencing the
increase included average salary increases approximating 4% and Keystone's sales
compensation program. This program was designed to provide additional incentive
opportunities and manage compensation expenses at levels commensurate with
revenue improvement.
The cost control features of managed care have constrained the growth in benefit
expenses while providing high-quality health care services. Keystone's ability
to efficiently and effectively absorb employees through its merger and
acquisition strategies has also enabled it to leverage its health care structure
over a more substantial employee base.
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
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.
Other expenses grew to $69.5 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 communications-related costs, each of which were influenced by
revenue-related activities or expansions of customer-focused product or service
capabilities.
Income Taxes
Income tax expense reached $39 million in 1997, reflecting an effective tax rate
of 30.7% versus 29.3% in 1996.
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, 1998 and 1997, 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,
1998. 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 net interest income constituting 20% of the related consolidated totals.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and, for 1996, 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, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Pittsburgh, Pennsylvania
January 29, 1999
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Condition December 31,
(in thousands, except share data) 1998 1997
- - ------------------------------------------------- -------------- --------------
ASSETS
- - ------------------------------------------------- -------------- --------------
<S> <C> <C>
Cash and due from banks $190,622 $206,223
Federal funds sold 141,700 25,300
Interest-bearing deposits with banks 5,978 1,928
Investment securities available for sale 1,129,753 1,091,400
Investment securities held to maturity
(fair values 1998 - $670,934; 1997- $538,218) 659,536 528,388
Loans held for resale 76,423 43,055
Loans and leases 4,459,783 4,712,566
Allowance for credit losses (60,274) (65,091)
- - ------------------------------------------------- -------------- --------------
Net loans 4,399,509 4,647,475
Premises and equipment 124,080 116,615
Other assets 240,626 180,953
- - ------------------------------------------------- -------------- --------------
TOTAL ASSETS $6,968,227 $6,841,337
- - ------------------------------------------------- -------------- --------------
LIABILITIES
- - ------------------------------------------------- -------------- --------------
Noninterest-bearing deposits $710,161 $637,164
Interest-bearing deposits 4,521,557 4,596,001
- - ------------------------------------------------- -------------- --------------
Total deposits 5,231,718 5,233,165
Federal funds purchased and security repurchase
agreements 363,739 399,730
Other short-term borrowings 11,306 26,160
- - ------------------------------------------------- -------------- --------------
Total short-term borrowings 375,045 425,890
Federal Home Loan Bank Borrowings 427,027 248,150
Long-term debt 130,239 101,793
Other liabilities 142,533 146,854
- - ------------------------------------------------- -------------- --------------
TOTAL LIABILITIES 6,306,562 6,155,852
- - ------------------------------------------------- -------------- --------------
SHAREHOLDERS' EQUITY
- - ------------------------------------------------- -------------- --------------
Preferred stock; $1.00 par value, authorized
8,000,000 shares; none issued or outstanding ----- -----
Common stock: $2.00 par value, authorized 100,000,000
shares; issued 51,448,335 - 1998 and 52,029,017 - 1997 102,897 104,058
Surplus 162,350 155,430
Retained earnings 424,873 418,605
Deferred KSOP benefit expense (553) (1,150)
Treasury stock: 1,013,600 shares at cost - 1998 (34,186) -----
Accumulated other comprehensive income 6,284 8,542
- - ------------------------------------------------- -------------- --------------
TOTAL SHAREHOLDERS' EQUITY 661,665 685,485
- - ------------------------------------------------- -------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,968,227 $6,841,337
- - ------------------------------------------------- -------------- --------------
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Year Ended December 31,
(in thousands except per share data) 1998 1997 1996
- - --------------------------------------------- ----------- ----------- ----------
INTEREST INCOME
- - --------------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Loans and fees on loans $401,949 $404,096 $370,364
Investments - taxable 93,955 82,664 79,977
Investments - tax-exempt 11,366 12,230 12,723
Federal funds sold and other 4,820 5,340 5,668
Loans held for resale 5,559 6,408 4,688
- - --------------------------------------------- ----------- ----------- ----------
517,649 510,738 473,420
INTEREST EXPENSE
- - --------------------------------------------- ----------- ----------- ----------
Deposits 193,087 194,898 186,257
Short-term borrowings 17,486 18,134 14,506
FHLB borrowings 21,507 14,677 10,175
Long-term debt 8,604 4,785 363
- - --------------------------------------------- ----------- ----------- ----------
240,684 232,494 211,301
- - --------------------------------------------- ----------- ----------- ----------
NET INTEREST INCOME 276,965 278,244 262,119
Provision for credit losses 17,150 15,316 10,713
- - --------------------------------------------- ----------- ----------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 259,815 262,928 251,406
- - --------------------------------------------- ----------- ----------- ----------
NONINTEREST INCOME
- - --------------------------------------------- ----------- ----------- ----------
Trust and investment advisory fees 25,906 21,291 17,597
Service charges on deposit accounts 18,443 17,356 17,234
Fee income 24,548 20,029 15,840
Mortgage banking income 12,412 9,633 7,334
Reinsurance income 3,167 3,512 2,864
Other income 13,319 12,040 9,785
Net gains - equity securities 10,306 5,754 529
Net gains - debt securities 712 317 342
- - --------------------------------------------- ----------- ----------- ----------
108,813 89,932 71,525
- - --------------------------------------------- ----------- ----------- ----------
NONINTEREST EXPENSE
- - --------------------------------------------- ----------- ----------- ----------
Salaries 97,443 92,650 81,894
Employee benefits 17,535 17,311 16,508
Occupancy expense, net 17,302 16,407 15,916
Furniture and equipment expense 20,567 18,732 16,156
Special charges ----- 11,410 -----
Other expense 70,342 69,480 65,771
- - --------------------------------------------- ----------- ----------- ----------
223,189 225,990 196,245
- - --------------------------------------------- ----------- ----------- ----------
Income before income taxes 145,439 126,870 126,686
Income tax expense 45,692 38,953 37,180
- - --------------------------------------------- ----------- ----------- ----------
NET INCOME $99,747 $87,917 $89,506
- - --------------------------------------------- ----------- ----------- ----------
PER SHARE DATA
- - --------------------------------------------- ----------- ----------- ----------
Net income:
Basic $1.94 $1.70 $1.72
Diluted 1.92 1.68 1.70
Dividends 1.13 $1.06 $0.98
- - --------------------------------------------- ----------- ----------- ----------
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
- - -----------------------------------------------------------------------------------------------------------------------------------
Issued and Deferred
Outstanding KSOP Net Unrealized
(in thousands) Common Common Retained Benefit Treasury Securities Shareholders'
Shares Stock Surplus Earnings Expense Stock Gains Equity
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT
JANUARY 1, 1996 38,069 $76,139 $139,886 $401,448 ($1,750) $ --- $6,043 $621,766
Net income --- --- --- 89,506 --- --- --- 89,506
Change in unrealized gain on
available-for-sale securities --- --- --- --- --- --- (1,847) (1,847)
-------
Comprehensive income 87,659
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
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1996 51,986 $104,640 $139,213 $422,018 ($1,249) ($8,412) $4,196 $660,406
Net income --- --- --- 87,917 --- --- --- 87,917
Change in unrealized gain on
available-for-sale securities --- --- --- --- --- --- 4,346 4,346
-------
Comprehensive income 92,263
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
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1997 52,029 $104,058 $155,430 $418,605 ($1,150) $ --- $8,542 $685,485
Net income --- --- --- 99,747 --- --- --- 99,747
Change in unrealized gain on
available-for-sale securities --- --- --- --- --- --- (2,258) (2,258)
-------
Comprehensive income 97,489
Dividends --- --- --- (58,195) --- --- --- (58,195)
Stock issued:
Benefit plans 255 511 4,570 --- --- --- --- 5,081
KSOP 20 40 637 --- --- --- --- 677
Dividend reinvestment 144 288 4,840 --- --- --- --- 5,128
Deferred KSOP benefit expense --- --- --- --- 597 --- --- 597
Acquisition of treasury stock (2,014) --- --- --- --- (74,597) --- (74,597)
Retirement of treasury stock --- (2,000) (3,127) (35,284) --- 40,411 --- ---
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1998 50,434 $102,897 $162,350 $424,873 ($553) ($34,186) $6,284 $661,665
- - -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Year Ended December 31,
(in thousands) 1998 1997 1996
- - ------------------------------------------------ -------------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $99,747 $87,917 $89,506
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 17,150 15,316 10,713
Provision for depreciation and amortization 21,653 18,062 15,840
Deferred income taxes 4,770 14,537 14,880
Sale of loans held for resale 244,103 203,887 441,716
Origination of loans held for resale (285,974) (240,325) (365,209)
(Increase) decrease in interest receivable 4,437 (4,459) (3,964)
Increase (decrease) in interest payable 125 (567) (1)
Other (31,669) 20,660 (6,391)
- - ------------------------------------------------ -------------- ----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 74,342 115,028 197,090
- - ------------------------------------------------ -------------- ----------- ------------
INVESTING ACTIVITIES:
Net cash received in bank acquisitions ----- 35,646 -----
Net increase in interest-bearing deposits w/ banks (4,050) (25,363) (3,121)
Available for sale securities:
Sales 224,089 176,606 98,724
Maturities 1,174,685 855,464 1,208,804
Purchases (1,423,334) (891,694) (1,368,734)
Held to maturity securities:
Maturities 177,096 91,370 108,438
Purchases (308,589) (192,900) (103,268)
Net (increase) decrease in loans 238,686 (343,350) (367,093)
Proceeds from sales of loans 12,372 302,840 52,013
Purchases of loans (12,666) (11,947) (1,986)
Purchases of bank-owned life insurance (50,230) ----- -----
Purchases of premises and equipment (24,366) (23,641) (16,870)
Other (10,959) (6,404) (1,025)
- - ------------------------------------------------ -------------- ----------- ------------
NET CASH USED IN INVESTING ACTIVITIES ( 7,266) (33,373) (394,118)
- - ------------------------------------------------ -------------- ----------- ------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits (1,447) (99,242) 66,113
Net increase (decrease) in short-term borrowings (50,845) 27,926 64,593
Proceeds from FHLB borrowings 273,000 242,313 420,892
Repayments of FHLB borrowings (94,122) (253,418) (360,715)
Issuance of long-term debt 30,000 100,000 ----
Repayment of long-term debt (1,554) (780) (1,962)
Acquisition of treasury stock (74,597) (72,586) (9,915)
Cash dividends (58,195) (55,964) (46,998)
Other 11,483 10,147 7,894
- - ------------------------------------------------ -------------- ----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 33,723 (101,604) 139,902
- - ------------------------------------------------ -------------- ----------- ------------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 100,799 (19,949) (57,126)
Cash and cash equivalents at beginning of year 231,523 251,472 308,598
- - ------------------------------------------------ -------------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $332,322 $231,523 $251,472
- - ------------------------------------------------ -------------- ----------- ------------
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<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.
Nature of Operations: Keystone provides a wide range of financial services to a
diverse client base through its bank and nonbank 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, 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 various 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
differences 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 subsidiary, Keystone Financial Bank, N.A., and its subsidiaries, ATB
Real Estate Investment Trust, Inc., Keystone Brokerage, Inc, 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 Retirement Benefit
Services, Inc. and two community development corporations. On December 31, 1998,
Keystone combined its former seven separate banks into a single charter,
Keystone Financial Bank, N.A. The seven former banks were 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. 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.
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).
<PAGE>
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. Amounts capitalized are amortized in
proportion to, and over the period of, estimated net servicing income. 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.
<PAGE>
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
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
<PAGE>
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, had been 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. New lease activity
since the beginning of 1998 has been limited pursuant to the curtailment of the
indirect automobile leasing program and the sale of the business equipment
leasing operation.
Allowance for Loan Losses:
The allowance for loan losses is established through provisions charged against
income. Loans deemed to be uncollectible are charged against the allowance and
recoveries of previously charged-off loans are credited to the allowance.
Management's determination of the adequacy of the allowance is based on periodic
evaluations of the loan portfolio and other relevant factors. This evaluation is
inherently subjective as it requires material estimates, including, but not
limited to, the amounts and timing of expected future cash flows or the fair
value of collateral on impaired loans, estimated losses on installment and
residential mortgage loans, and general amounts for historical loss experience,
economic conditions, known deterioration in certain classes of loans or
collateral, trends in delinquencies, uncertainties in estimating losses, and
inherent risks in the various portions of the loan portfolio, all of which may
be susceptible to significant change.
In determining the adequacy of the allowance for loan losses, management makes
allocations to specific problem commercial loans based on the present value of
expected future cash flows or the fair value of the underlying collateral for
impaired loans and to pools of other commercial loans based on various credit
risk factors. Allocations to loan pools are developed by internal risk rating
and are based on management's judgment concerning historical loss trends and
other relevant factors. Installment and residential mortgage loan allocations
are made at a total portfolio level based on historical loss experience adjusted
for portfolio activity and current conditions. While allocations are made to
specific loans and pools of loans, the allowance is available for all loan
losses.
While the Company's allowance methodology strives to reflect all risk factors,
there continues to be a certain element of risk arising in part from, but not
limited to, potential for estimation or judgmental errors, charge-off
volatility, rapid declines in the credit quality of assets arising from such
factors as fraud, portfolio management risks, or sudden economic or industry
shifts. Unallocated amounts of the allowance provide coverage for such risks.
The level of total allowance is evaluated based on the facts known about the
individual components and certain asset quality coverage ratios.
Financial Derivatives and other Hedging Activity:
Interest rate swap contracts are utilized to hedge specific credit and/or
funding activities, and the differential of interest paid or received is
reflected in the
<PAGE>
interest income or expense of the hedged item. 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, and other hedging vehicles have been used to
reduce the market risk associated with interest rate fluctuations, most notably
in connection with the hedge of the pipeline of fixed rate consumer mortgages.
Changes in the market value of the forward mortgage commitments, are recognized
in income when the related changes in the fair values of the loans being hedged
are recognized.
In June of 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement provides new accounting treatment for derivatives transactions and
hedging activities. The standard will be effective for Keystone on January 1,
2000. Adoption of the standard is not expected to have a significant impact on
Keystone's financial condition or results of operations.
Transfers and Servicing of Financial Assets and Extinguishment 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 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.
On January 1, 1998, Keystone adopted Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use". This
statement requires the capitalization of certain computer software costs
incurred during the application development stage of internal use software. The
adoption of this statement did not have a material impact on Keystone's
financial condition or results of operations.
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.
Intangible assets are reviewed periodically for impairment.
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.
<PAGE>
Pensions: In 1998, Keystone adopted Financial Accounting Standards Board
Statement No. 132, "Employers' Disclosures about Pensions and Other Post-
retirement Benefits". This statement requires revised disclosures about pension
and other post-retirement benefit plans but does not impact the measurement or
recognition of those plans. As such, adoption of this statement did not impact
Keystone's financial condition or results of operations. Disclosures for 1997
and 1996 were restated in accordance with this new statement.
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: During 1998, Keystone adopted Financial Accounting
Standards Board Statement 130, "Reporting Comprehensive Income", which required
reclassification of financial statements for earlier periods. Sources of
comprehensive income not included in net income are limited to unrealized gains
and losses on certain investments in debt and equity securities.
Reclassifications: Certain amounts reported in the 1997 annual report have been
reclassified to conform with the 1998 presentation. These reclassifications did
not impact Keystone's financial condition or results of operations.
Per Share Information: 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 1998, Keystone adopted Financial Accounting Standards
Board Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information". This statement established standards for reporting
information about operating segments and related disclosures about products and
services, geographic areas, and major customers. The adoption of this new
standard did not affect Keystone's financial condition or results of operations.
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 $240,888,000, $233,061,000, and $211,302,000, in 1998,
1997, and 1996, respectively. Cash payments for income taxes approximated
$39,830,000, $19,253,000, and $23,898,000 for 1998, 1997, and 1996,
respectively.
<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>
1998
Available-for-Sale
- - -------------------------------------- ------------------------------------------------
Amortized Unrealized
Cost Gains Losses Fair Value
- - -------------------------------------- ------------ ---------------------- ------------
<S> <C> <C> <C> <C>
Negotiable money market investments $290,954 $ 103 $82 $290,975
U.S. Treasury securities 122,155 1,234 1 123,388
U.S. Government agency obligations 546,452 3,737 1,617 548,572
Obligations of states and political
subdivisions 55,991 1,703 2 57,692
Corporate and other securities 104,533 4,712 119 109,126
- - -------------------------------------- ------------ ---------- ----------- ------------
Total $1,120,085 $11,489 $1,821 $1,129,753
- - -------------------------------------- ------------ ---------- ----------- ------------
1998
Held-to-Maturity
- - -------------------------------------- ------------------------------------------------
Amortized Unrealized
Cost Gains Losses Fair Value
- - -------------------------------------- ------------ ---------------------- ------------
U.S. Government agency obligations $500,418 $5,936 $135 $506,219
Obligations of states and political
subdivisions 146,018 5,333 158 151,193
Corporate and other securities 13,100 422 --- 13,522
- - -------------------------------------- ------------ ---------- ----------- ------------
Total $659,536 $11,691 $293 $670,934
- - -------------------------------------- ------------ ---------- ----------- ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997
Available-for-Sale
- - -------------------------------------- ----------------------------------------------
Amortized Unrealized
Cost Gains Losses Fair Value
- - --------------------------------------- ------------ ------------------- ------------
<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 72,487 1,688 4 74,171
subdivisions
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
Cost Gains Losses Fair Value
- - --------------------------------------- ------------ ------------------- ------------
U.S. Government agency obligations $366,238 $4,928 $150 $371,016
Obligations of states and political 143,910 4,845 5 148,750
subdivisions
Corporate and other securities 18,240 230 18 18,452
- - --------------------------------------- ------------ --------- --------- ------------
Total $528,388 $10,003 $173 $538,218
- - --------------------------------------- ------------ --------- --------- ------------
</TABLE>
<TABLE>
<CAPTION>
1996
Available-for-Sale
- - -------------------------------------- ------------------------------------------------
Amortized Unrealized
Cost Gains Losses Fair Value
- - -------------------------------------- ------------- --------------------- ------------
<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 101,992 1,669 141 103,520
subdivisions
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
Cost Gains Losses Fair Value
- - -------------------------------------- ------------- --------------------- ------------
U.S. Government agency obligations $230,402 $1,997 $1,680 $230,719
Obligations of states and political 134,194 3,308 135 137,367
subdivisions
Corporate and other securities 15,362 156 78 15,440
- - -------------------------------------- ------------- ----------- --------- ------------
Total $379,958 $5,461 $1,893 $383,526
- - -------------------------------------- ------------- ----------- --------- ------------
</TABLE>
Investment securities having a carrying value of $893,097,000 at December 31,
1998, were pledged to secure public and trust deposits, treasury tax and loan
activity, discount window and FHLB borrowings, and security repurchase
agreements.
<PAGE>
Pre-tax security gains and losses included in operating results from 1996
through 1998 were as follows (in thousands):
1998 1997 1996
- - -------------------- --------------- -------------- ---------------
Gains $11,148 $6,847 $980
Losses (130) (776) (109)
- - -------------------- --------------- -------------- ---------------
Net $11,018 $6,071 $871
- - -------------------- --------------- -------------- ---------------
<PAGE>
The following tables display at December 31, 1998, the contractual maturities,
amortized costs, related fair values, and the weighted average yield (tax-
equivalent basis) available thereon, of investment securities (in thousands):
<TABLE>
<CAPTION>
Available for Sale
- - --------------------------------------------------------------------------------------------------------------
After One,
Within One Year But Within Five Years
Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Negotiable money market investments $290,954 $290,975 4.99% $ --- $ --- ---%
U.S. Treasury securities 54,577 54,821 6.25 67,578 68,567 5.67
Government agency obligations 31,191 31,349 6.44 312,514 313,773 5.82
Obligations of states and political subdivisions 4,612 4,676 5.54 23,557 24,185 4.92
Corporate and other securities 6,769 6,831 6.45 14,760 14,929 6.31
- - --------------------------------------------------------------------------------------------------------------
Total $388,103 $388,652 5.32% $418,409 $421,454 5.77%
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity
- - --------------------------------------------------------------------------------------------------------------
After One,
Within One Year But Within Five Years
Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Government agency obligations $ 2,086 $ 2,106 6.23% $191,297 $193,698 6.37%
Obligations of states and political subdivisions 8,015 8,137 5.68 14,275 14,868 5.61
Corporate and other securities - - - 12,964 13,386 6.63
- - --------------------------------------------------------------------------------------------------------------
Total $ 10,101 $ 10,243 5.79% $218,536 $221,952 6.34%
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Available for Sale
- - ---------------------------------------------------------------------------------------------------------------
After Five,
But Within Ten Years After Ten Years
Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Negotiable money market investments $ --- $ --- ---% $ --- $ --- ---%
U.S. Treasury securities --- --- --- --- --- ---
Government agency obligations 36,305 36,505 6.37 166,442 166,945 6.39
Obligations of states and political subdivisions 18,306 19,007 5.18 9,516 9,824 5.34
Corporate and other securities 250 250 7.54 82,754 87,116 6.68
- - --------------------------------------------------------------------------------------------------------------
Total $ 54,861 $ 55,762 5.97% $258,712 $263,885 6.45%
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity
- - --------------------------------------------------------------------------------------------------------------
After Five,
But Within Ten Years After Ten Years
Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Government agency obligations $123,659 $125,438 6.50% $183,376 $184,977 6.47%
Obligations of states and political subdivisions 15,714 16,423 5.50 108,014 111,765 5.33
Corporate and other securities 136 136 9.00 --- --- ---
- - --------------------------------------------------------------------------------------------------------------
Total $139,509 $141,997 6.39% $291,390 $296,742 6.05%
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Loans and Leases
The composition of loans and leases was as follows at December 31, (in
thousands):
<TABLE>
<CAPTION>
1998 1997
- - ----------------------------------------------------------- ------------ --- ------------
Consumer financings:
- - ----------------------------------------------------------- ------------ --- ------------
<S> <C> <C>
Direct loans $904,178 $884,226
Indirect loans 187,818 334,504
Net investment in direct lease financing receivables 235,884 335,017
- - ----------------------------------------------------------- ------------ --- ------------
1,327,880 1,553,747
Loans secured by real estate:
Consumer 754,280 862,227
Commercial 1,530,449 1,384,923
- - ----------------------------------------------------------- ------------ --- ------------
2,284,729 2,247,150
Commercial 679,412 708,480
Floor plan financing 167,762 203,189
- - ----------------------------------------------------------- ------------ --- ------------
Total $4,459,783 $4,712,566
- - ----------------------------------------------------------- ------------ --- ------------
</TABLE>
At December 31, 1998, 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 concentrations exist.
Activity within the allowance for credit losses was summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- - --------------------------------------------- ---------- - ---------- - ----------
<S> <C> <C> <C> <C>
Balance at January 1 $65,091 $56,256 $55,415
Recoveries on loans previously charged off 2,968 2,485 2,393
Loans charged off (24,058) (17,277) (12,265)
Net loans charged off (21,090) (14,792) (9,872)
Provision charged to operations 17,150 15,316 10,713
Other (877) 8,311 -----
- - --------------------------------------------- ---------- - ---------- - -----------
Balance at December 31 $60,274 $65,091 $56,256
- - --------------------------------------------- ---------- - ---------- - -----------
</TABLE>
<PAGE>
Total nonaccrual and restructured loan balances and related annual interest data
were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- - --------------------------------------- --------- --- ------------ --- ----------
<S> <C> <C> <C>
Nonaccrual $24,675 $20,520 $19,350
Restructured 264 489 393
- - --------------------------------------- --------- --- ------------ --- ----------
Total $24,939 $21,009 $19,743
- - --------------------------------------- --------- --- ------------ --- ----------
Interest computed at original terms $2,385 $2,144 $1,896
Interest recognized 361 473 598
- - --------------------------------------- --------- --- ------------ --- ----------
</TABLE>
At December 31, 1998, 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:
- - ------------------------------------------------------------- --------- --------
At December 31, 1998 1997 1996
- - ------------------------------------------------------------- --------- --------
Recorded investment in impaired loans $20,647 $16,730 $17,300
Impaired loans for which an allowance exists 5,091 12,805 7,375
Amount of allowance specifically
allocated to impaired loans 3,131 1,540 1,560
For the years ended December 31, 1998 1997 1996
- - ------------------------------------------------------------- -------- ---------
Average recorded investment in impaired loans $18,689 $17,015 $17,501
- - ------------------------------------------------------------- -------- ---------
Certain directors and executive officers of Keystone and its subsidiaries, and
their associates, were indebted to the bank subsidiaries during 1998. Such loans
were made in the ordinary course of business and on customary terms. Loan
activity during 1998 with these related parties was as follows (in thousands):
Beginning Balance Additions Repayments Ending Balance
- - --------------------- ------------------ ----------------- -----------------
$179,377 $201,889 $202,529 $178,737
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 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.
In managing net interest income, Keystone uses interest rate swaps to offset the
difference or mismatch in repricing indices of core banking assets and related
funding. The risk associated with potential reductions in net interest income
attributable to this mismatch is broadly defined as "basis risk". At December
31, 1998, interest rate swaps totaling $250,000,000 (notional amount) were used
to manage this component of risk to net interest income performance.
<PAGE>
Another form of interest rate risk managed through specific hedging activity at
December 31, 1998, related to outstanding forward mortgage commitments and put
options related to the mortgage banking pipeline. 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, 1998, Keystone had entered
into commitments to deliver approximately $95,064,000 of mortgage loans for sale
into the secondary market. The fair value of these commitments at December 31,
1998, was $826,000 and was considered in the lower of cost or market evaluation
of loans held for sale. The delivery dates for these commitments are short-term
in nature and will expire at various dates in the first half of 1999.
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
counter party 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 counter
party.
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.
Outstanding commitments for loans and standby letters of credit were as follows
as December 31 (in thousands):
1998 1997
- - --------------------------- ------------ ------------
Loan commitments $1,091,657 $1,027,782
Standby letters of credit 73,843 75,574
- - --------------------------- ------------ ------------
<PAGE>
Premises and Equipment
The following summarizes premises and equipment at December 31, (in thousands):
1998 1997
- - ---------------------------------------------- ----------- ------------
Land $12,562 $12,801
Buildings 99,702 97,298
Equipment 120,564 108,169
Leasehold improvements 15,544 15,741
- - ---------------------------------------------- ----------- ------------
248,372 234,009
Accumulated depreciation and amortization (124,292) (117,394)
- - ---------------------------------------------- ----------- ------------
Total $124,080 $116,615
- - ---------------------------------------------- ----------- ------------
Depreciation and amortization expense related to premises and equipment amounted
to $16,056,000 in 1998, $14,554,000 in 1997, and $13,058,000 in 1996.
Keystone and its subsidiaries lease various equipment and buildings under
operating lease agreements. In 1998, 1997, and 1996, total rent expense amounted
to $8,203,000, $7,377,000, and $7,956,000, respectively. Future annual minimum
lease payments do not significantly exceed historic levels.
Federal Home Loan Bank Borrowings
Keystone Financial Bank, N.A. is a member of the Federal Home Loan Bank (FHLB)
of Pittsburgh and, as such, can take advantage of the FHLB program for overnight
and term advances at published daily rates. 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, 1998, Keystone's member bank could borrow an
additional $826,684,000 based on qualifying collateral. Such additional
borrowing would require that the bank increase its investment in FHLB stock by
approximately $90,000,000. Outstanding borrowings from the Federal Home Loan
Bank are summarized as follows (in thousands):
December 31,
1998 1997
- - ------------------------------------ -------------- ------------
Due 1998, 5.45% to 7.71% $------ $57,957
Due 1999, 4.75% to 6.51% 64,268 49,286
Due 2000, 4.77% to 6.51% 80,831 70,830
Due 2001, 4.73% to 6.80% 67,000 6,000
Due 2002, 5.25% to 6.08% 60,550 60,550
Due 2003, 5.71% to 7.23% 7,768 2,893
After 2003, 1.00% to 7.20% 146,610 634
- - ------------------------------------ -------------- ------------
$427,027 $248,150
- - ------------------------------------ -------------- ------------
<PAGE>
Of the December 31, 1998 outstanding balance, $307,400,000 was either adjustable
or subject to conversion. Of this amount, $10,000,000 was adjustable with LIBOR.
The remaining $297,400,000 are advances which are subject to conversion to
adjustable rates at the option of the FHLB at various dates in 2001 and 2003. 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):
1998 1997
- - --------------------------------------------------- --------- ------------
Senior medium-term notes:
Interest at 7.3%, mature 2004 $99,812 $99,777
Interest at 6.5%, mature 2008 29,876 ---
Other 551 2,016
- - -------------------------------------------------- ---------- ------------
Total $130,239 $101,793
- - -------------------------------------------------- ---------- ------------
Keystone Financial Mid-Atlantic Funding Corp., a wholly-owned funding subsidiary
of Keystone, issued $100 million of senior medium term notes in 1997 and an
additional $30 million in 1998 under a $400 million shelf registration
statement. The notes provide for semi-annual interest payments at a fixed rate
and are unconditionally guaranteed by Keystone. The proceeds from the issuance
of the notes were used primarily for general corporate purposes.
Contingencies
Keystone and its subsidiaries are subject to various legal proceedings that
arise in the ordinary course of business. In late 1997, an investment advisor
not affiliated with Keystone ("investment advisor") was accused by the
Securities and Exchange Commission of defrauding its clients, which were
primarily school districts and municipalities, resulting in losses alleged to
approximate $70 million. A Keystone subsidiary had been previously engaged to
maintain custody of certain funds and investments of the unaffiliated investment
advisor. In an effort to recover the alleged losses, legal proceedings were
subsequently initiated by the court-appointed trustee for the investment advisor
and by its clients. These proceedings included individual and class actions
against Keystone, its subsidiaries, and some of its employees alleging that
these entities or individuals were responsible for, and contributed to, the
loss. Management is vigorously contesting these actions. The loss, if any, to
Keystone or its subsidiaries resulting from the actions cannot be reasonably
estimated at this time. Because of the complexity of these actions, it is
expected that final resolution of these matters will not occur for a number of
years.
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
<PAGE>
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 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 2,572,000 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.
Weighted
Average
Exercise Common
Price Shares
- - ---------------------------- ------------ ------------
January 1, 1996 $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
- - ---------------------------- ------------ ------------
Granted $40.03 244,651
Exercised 15.66 (221,845)
Terminated 33.23 (27,552)
- - ---------------------------- ------------ ------------
December 31, 1998 $22.62 1,840,012
- - ---------------------------- ------------ ------------
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
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 - $10.50 159,252 2.58 $8.71 159,252 $8.71
$11.13 - $16.74 187,703 2.49 $14.71 177,567 $14.63
$18.03 - $24.75 991,268 5.26 $21.53 991,225 $21.52
$25.00 - $29.87 272,114 8.02 $25.40 22,576 $25.00
$34.44 - $41.06 229,675 8.66 $40.13 9,823 $37.82
- - -------------------------------------------------------------------------------
$4.95 - $41.06 1,840,012 5.58 $22.62 1,360,443 $19.30
- - -------------------------------------------------------------------------------
Options exercisable at the end of 1997 and 1996 were 1,192,657 and 1,333,422,
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. Keystone has reserved 750,000 shares of
common stock, of which 459,000 remain available for future purchases. The amount
of common shares issued under this program in 1998, 1997, and 1996 were as
follows:
Price Shares
Per Share Issued
- - -------------------------- ------------------ ------------
1998 $26.24 99,980
1997 $19.20 94,195
1996 $15.79 97,196
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.
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
- - ------------------------------ ------------------------ --------- ---------- ----------
<S> <C> <C> <C>
Net Income (in thousands): As reported $99,747 $87,917 $89,506
Pro forma 97,773 86,457 88,348
Diluted earnings per share: As reported $1.92 $1.68 $1.70
Pro forma 1.88 1.65 1.68
- - ------------------------------ ------------------------ --------- ---------- ----------
</TABLE>
Information regarding the weighted-average grant-date fair values for stock
options and purchase rights granted in 1998, 1997, and 1996 were as follows:
Assumptions
-------------------------------------
Grant Date
Fair Value
(Per Option Dividend Expected Interest
/Share) Yield Volatility Rates Life
- - ------------------------------ -------------------------------------------------
Stock option plans:
1998 $7.95 2.8% 15% 5.63% 7yrs
1997 $4.20 4.2% 15% 6.37% 7yrs
1996 $3.01 4.6% 15% 5.50% 7yrs
Employee stock purchase plan:
1998 $7.62 3.5% 15% 5.63% 1yr
1997 $6.30 4.5% 15% 5.63% 1yr
1996 $4.28 4.1% 12% 5.75% 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
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. At December 31,
1998 and 1997, the amount executives participating in the Program owed Keystone
for financed purchases totaled $2,064,000 and $1,709,000, respectively.
<PAGE>
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 192,000 shares remain
unissued. The following number of shares of Keystone common stock were purchased
pursuant to this plan: 144,000 in 1998, 130,000 in 1997, and 98,000 in 1996.
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.
The following table summarizes the activity in the pension plan for the years
ended December 31, (in thousands):
1998 1997
- - -------------------------------------------------------- ----------- -----------
Projected benefit obligation, beginning of year $84,890 $75,060
Service cost 3,268 2,907
Interest cost 5,780 5,458
Benefits paid (4,028) (4,243)
Change in assumptions 1,309 4,500
Amendments (566) (97)
Experience loss 717 1,305
- - -------------------------------------------------------- ----------- -----------
Projected benefit obligation, end of year $91,370 $84,890
- - -------------------------------------------------------- ----------- -----------
Fair value of plan assets at beginning of year $106,239 $89,560
Actual return on assets (2,766) 20,922
Benefits paid (4,028) (4,243)
- - -------------------------------------------------------- ----------- -----------
Fair value of plan assets at end of year $99,445 $106,239
- - -------------------------------------------------------- ----------- -----------
Funded status at end of year $8,075 $21,349
Unrecognized net assets at transition (2,510) (3,137)
Unrecognized net gain (111) (12,839)
Unrecognized prior service cost (1,702) (1,497)
- - -------------------------------------------------------- ----------- -----------
Prepaid benefit expense at end of year $3,752 $3,876
- - -------------------------------------------------------- ----------- -----------
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
- - -------------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Service cost benefits earned during the period $3,268 $2,907 $2,793
Interest cost on projected benefit obligation 5,780 5,458 5,166
Expected return on plan assets (7,692) (7,120) (6,666)
Net amortization:
Net transition asset (627) (725) (668)
Prior service cost (181) (137) (115)
Net (gain) loss (424) --- 24
- - -------------------------------------------------- ---------- ---------- -----------
Pension expense $124 $383 $534
- - -------------------------------------------------- ---------- ---------- -----------
</TABLE>
Actuarial assumptions used in the determination of the projected benefit
obligation were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- - --------------------------------------------------- --------- ---------- ----------
<S> <C> <C> <C>
Rate of increase in future compensation levels 5.00% 5.50% 5.50%
Expected long-term rate of return on plan assets 8.00 8.50 8.50
Weighted average discount rate 6.75 7.00 7.50
- - --------------------------------------------------- --------- ---------- ----------
</TABLE>
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 employees 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. Expense recognized for the
employer contributions was $ 1,984,000 in 1998, $ 1,580,000 in 1997, and
$1,303,000 in 1996.
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):
<PAGE>
December 31,
Deferred tax assets: 1998 1997
- - ----------------------------------------- ------------ ------------
Allowance for credit losses $19,598 $20,717
Deferred liabilities 1,850 1,879
Compensation accruals 4,259 3,229
Deferred tax liabilities:
- - ----------------------------------------- ------------ ------------
Lease financing activities (47,742) (47,672)
Net unrealized gains on securities
available-for-sale (3,383) (4,600)
Premises and equipment (3,088) (3,862)
Intangible assets (4,668) (4,044)
Other (2,961) 287
- - ----------------------------------------- ------------ ------------
Net deferred tax liability ($36,135) ($34,066)
- - ----------------------------------------- ------------ ------------
The provision for income taxes consisted of the following components (in
thousands):
1998 1997 1996
- - --------------------------------- --------- ---- ----------- --- ----------
Deferred provision $4,770 $14,537 $14,880
Current provision:
Federal taxes 39,642 23,229 21,441
State taxes 1,280 1,187 859
- - --------------------------------- --------- ---- ----------- --- ----------
Total $45,692 $38,953 $37,180
- - --------------------------------- --------- ---- ---------- ---- ----------
A reconciliation of income tax expense and the amounts which would have been
recorded based upon statutory rates (35%) is as follows (in thousands):
1998 1997 1996
- - ------------------------------------ ---------- ---- ---------- ---- ----------
Provision on pre-tax income at
statutory rates $50,904 $44,405 $44,340
Tax exempt interest income (5,448) (5,089) (6,212)
Other 236 (363) (948)
- - ------------------------------------ ---------- ---- ----------- --- ----------
Total $45,692 $38,953 $37,180
- - ------------------------------------ ---------- ---- ---------- ---- ----------
Effective Rate 31.4% 30.7% 29.3%
- - ------------------------------------ ---------- ---- ---------- ---- ----------
Income taxes attributable to investment security gains were $3,856,000 in 1998,
$2,125,000 in 1997, and $305,000 in 1996.
Comprehensive Income
During 1998, Keystone adopted Financial Accounting Standards Board Statement
130, "Reporting Comprehensive Income", which required reclassification of
financial statements for earlier periods. Sources of comprehensive income not
included in net income are limited to unrealized gains and losses on certain
investments in debt and equity securities. The disclosure of comprehensive
income is as follows (in thousands):
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
- - ----------------------------- -------------------------------------------------------------
1998 1997 1996
- - ----------------------------- ------------------- -------------------- --------------------
Before Net of Before Net of Before Net of
Tax Tax Tax Tax Tax Tax
- - ----------------------------- --------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Income $99,747 $87,917 $89,506
Unrealized gains(losses)
on securities:
Unrealized holding gains
(losses) arising during
the period 7,544 4,904 12,757 8,292 (1,971) (1,281)
Less: Reclassification
adjustment for gains
included in net income 11,018 7,162 6,071 3,946 871 566
- - ----------------------------- --------- --------- ---------- --------- --------- ----------
(3,474) (2,258) 6,686 4,346 (2,842) (1,847)
- - ----------------------------- --------- --------- ---------- --------- --------- ----------
Comprehensive Income $97,489 $92,263 $87,659
============================= ========= ========= ========== ========= ========= ==========
</TABLE>
Earnings Per Share
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):
<TABLE>
<CAPTION>
1998 1997 1996
- - ------------------------------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Numerator - Net Income $99,747 $87,917 $89,506
Denominators:
Average Basic shares outstanding 51,446 51,693 52,119
Average Dilutive option effect 596 627 362
- - ------------------------------------------- -------------- --------------- ---------------
Average Dilutive shares outstanding 52,042 52,320 52,481
- - ------------------------------------------- -------------- --------------- ---------------
EPS:
Basic $1.94 $1.70 $1.72
Diluted $1.92 $1.68 $1.70
- - ------------------------------------------- -------------- --------------- ---------------
</TABLE>
Segment Reporting
In June of 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which was effective for fiscal years beginning after December 15, 1997. Under
the terms of this new statement, a segment is defined as a revenue producing
component of the enterprise for which separate financial information is produced
internally and is subject to evaluation by the chief operating decision maker in
deciding how to allocate resources to segments. Operating segments with a
reported measure of revenue, profit or loss, or assets, that is 10% or more of
combined revenue, profit or loss, or assets, respectively of all operating
segments must be reported separately. Keystone considered the nature of its
products and services offered to customers in order to identify its business
segments, which are community banking, mortgage banking, and asset management
services. These segments are managed separately because they offer distinctly
different products distributed through different delivery channels. No customer
of Keystone individually represents 10% or more of consolidated revenue and
revenues with customers of foreign countries are minimal. The segment of
community banking constituted over 90% of Keystone's revenue, profit, and assets
<PAGE>
for the years ended December 31, 1998, 1997, and 1996 and was the only
reportable segment. As such, financial information for this segment does not
differ materially from the information provided in the consolidated financial
statements.
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 consolidated risk-based capital position
at the end of 1998 and 1997 and a comparison to the various regulatory capital
requirements (in thousands):
<TABLE>
<CAPTION>
1998 1997 Well-
---- ---- Capitalized Minimum
Amount Ratio Amount Ratio Ratio Ratio
- - ----------------------- ---------- ---------- ---------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted
assets) $653,664 13.84% $675,575 13.75% 10% 8%
Tier 1 capital
(to risk-weighted
assets) 594,623 12.59% 614,172 12.50% 6% 4%
Tier 1 capital (to
average assets) 594,623 8.66% 614,172 9.15% 5% 4%
- - ----------------------- ---------- ---------- ---------- --------- ------------- -----------
</TABLE>
At December 31, 1998, Keystone Financial Bank, N.A. 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, 1998, each predecessor
bank to Keystone Financial Bank, N.A. has been categorized as "well-capitalized"
by its primary regulator at its most recent examination.
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, 1998, Keystone's bank subsidiary maintained
average reserve balances of approximately $56,033,000.
Dividends that may be paid to Keystone by its subsidiary bank are limited by
state and federal regulations. The related amount available for dividends
aggregated $87,226,000 at December 31, 1998. Federal Reserve regulations also
limit the subsidiary bank as to the amount it may loan its affiliates, including
Keystone. At December 31, 1998, 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
<PAGE>
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. The following
schedule displays at December 31, the carrying values and related estimated fair
values for financial instruments (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- - --------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $190,622 $190,622 $206,223 $206,223
Federal funds sold and other 147,678 147,678 27,228 27,228
Investment securities
available for sale 1,129,753 1,129,753 1,091,400 1,091,400
Investment securities held
to maturity 659,536 670,934 528,388 538,218
Loans held for resale 76,423 76,423 43,055 43,055
Loans, net of allowance for
credit losses 4,163,938 4,313,572 4,275,218 4,447,413
Leases 235,571 243,242 372,257 380,855
- - --------------------------------------------- ------------------------------------
Financial Liabilities:
Time deposits $2,923,751 $2,952,578 $3,023,702 $3,048,175
Other deposits 2,307,967 2,307,967 2,209,463 2,209,463
Short-term borrowings 375,045 375,045 425,890 425,890
FHLB borrowings 427,027 431,470 248,150 249,629
Long-term debt 130,239 136,707 101,793 101,793
- - --------------------------------------------- ------------------------------------
Off-Balance Sheet Instruments:
Lending commitments and
letters of credit $----- $(800) $----- $(684)
All other $----- $596 $----- $(217)
- - --------------------------------------------- ------------------------------------
</TABLE>
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
<PAGE>
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
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.
The results of operations of Financial Trust were combined with Keystone for the
year ended December 31, 1996 as follows (in thousands):
Financial Consolidated
Keystone Trust Keystone
- - --------------------------------------- ------------ ------------ --------------
Net interest income $209,763 $52,356 $262,119
Net income 69,475 20,031 89,506
- - --------------------------------------- ------------ ------------ --------------
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, 1997, 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
<PAGE>
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 are being 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.
<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,
1998 1997
- - ----------------------------------------------- ------------ ------------
Assets:
Cash $271 $1,489
Investment securities 14,876 65,024
Investments in:
Subsidiary banks 585,189 630,102
Other subsidiaries 88,723 115,624
Other assets 726 889
- - ----------------------------------------------- ------------ ------------
TOTAL ASSETS $689,785 $813,128
- - ----------------------------------------------- ------------ ------------
Liabilities:
Long-term debt $3,556 $100,106
Other liabilities 24,564 27,537
- - ----------------------------------------------- ------------ ------------
TOTAL LIABILITIES 28,120 127,643
Shareholders' Equity 661,665 685,485
- - ----------------------------------------------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $689,785 $813,128
- - ----------------------------------------------- ------------ ------------
Statements of Income
Year Ended December 31,
1998 1997 1996
- - -------------------------------------------- ---------- ----------- -----------
Income:
Dividends from subsidiaries:
Bank subsidiaries $60,068 $67,305 $71,891
Other subsidiaries 21,997 ---- 134
Net securities gains 9,301 ---- ----
- - -------------------------------------------- ---------- ----------- -----------
Expenses:
Net interest expense(income) 6,981 2,144 (299)
Operating expense 2,759 9,483 3,233
- - -------------------------------------------- ---------- ----------- -----------
Income before taxes and undistributed 81,626 55,678 69,091
earnings of subsidiaries
Income taxes (benefit) (1,506) (3,712) (799)
Equity in undistributed earnings
of subsidiaries 16,615 28,527 19,616
- - -------------------------------------------- ---------- ----------- -----------
NET INCOME $99,747 $87,917 $89,506
- - -------------------------------------------- ---------- ----------- -----------
<PAGE>
Statements of Cash Flows
Year Ended December 31,
1998 1997 1996
- - ------------------------------------------ ----------- ----------- -----------
OPERATING ACTIVITIES:
Net income $99,747 $87,917 $89,506
Equity in undistributed earnings (16,615) (28,527) (19,616)
Other (2,810) 14,729 1,042
- - ------------------------------------------ ----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 80,322 74,119 70,932
- - ------------------------------------------ ----------- ----------- -----------
INVESTING ACTIVITIES:
Net (increase) decrease in investments 50,148 (38,529) (13,030)
(Investments in) distributions from
subsidiaries 88,429 (24,459) (8,451)
- - ------------------------------------------ ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 138,577 (62,988) (21,481)
- - ------------------------------------------ ----------- ----------- -----------
FINANCING ACTIVITIES:
Cash dividends declared (58,195) (55,964) (46,998)
KSOP activity:
Common stock proceeds 677 819 302
Payment of debt (597) (523) (569)
Proceeds of long-term debt 30,928 98,960 ---
Repayment of long-term debt (125,735) --- ---
Acquisition of treasury stock (74,597) (72,586) (9,915)
Proceeds from issuance of common stock
under benefits plans 10,211 12,908 7,190
Other (2,809) 5,717 34
- - ------------------------------------------ ----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (220,117) (10,669) (49,956)
- - ------------------------------------------ ----------- ----------- -----------
Increase (decrease) in cash (1,218) 462 (505)
Cash at beginning of year 1,489 1,027 1,532
- - ------------------------------------------ ----------- ----------- -----------
CASH AT END OF YEAR $271 $1,489 $1,027
- - ------------------------------------------ ----------- ----------- -----------
<PAGE>
Supplemental Financial Information
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, 1998 (in thousands):
1998
- - -------------------------------------------------------------------------------
Average Yield/
(in thousands) Balance Interest Rate
- - -------------------------------------------------------------------------------
ASSETS
Federal funds sold and other $89,247 $4,820 5.40%
Investment securities:
Negotiable money market investments 160,214 8,713 5.44
Taxable investment securities 1,338,147 85,399 6.38
Nontaxable investment securities(1) 209,119 16,692 7.98
Loans held for resale 68,926 5,559 8.07
Consumer loans (2) (3) 1,483,643 135,934 9.16
Real estate loans (1) (2) (3) 2,270,914 196,516 8.65
Commercial loans (1) (2) (3) 835,287 72,585 8.69
- - -------------------------------------------------------------------------------
Total earning assets $6,455,497 $526,218 8.15%
Allowance for credit losses (63,600)
Other assets 482,419
- - -------------------------------------------------------------------------------
Total Assets $6,874,316
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW/Savings deposits $823,463 $12,737 1.55%
Money market deposits 740,086 20,649 2.79
Time deposits 2,988,222 159,702 5.34
Short-term borrowings 375,131 17,486 4.66
FHLB borrowings 372,097 21,506 5.78
Long-term debt 119,313 8,604 7.21
- - -------------------------------------------------------------------------------
Total interest-bearing liabilities $5,418,312 $240,684 4.44%
Demand deposits 637,533
Other liabilities 136,659
Shareholders' equity 681,812
- - -------------------------------------------------------------------------------
Total Liabilities and Equity $6,874,316
Interest rate spread 3.71%
Net interest income and net interest margin $285,534 4.42%
Tax-equivalent adjustment (8,569)
- - -------------------------------------------------------------------------------
Net interest income $276,965
- - -------------------------------------------------------------------------------
1997
- - -------------------------------------------------------------------------------
(in thousands) Average Yield/
Balance Interest Rate
- - -------------------------------------------------------------------------------
ASSETS
Federal funds sold and other $84,032 $5,340 6.35%
Investment securities:
Negotiable money market investments 108,278 6,155 5.68
Taxable investment securities 1,174,674 77,034 6.56
Nontaxable investment securities(1) 225,384 17,557 7.79
Loans held for resale 77,330 6,408 8.29
Consumer loans (2) (3) 1,523,659 136,257 8.94
Real estate loans (1) (2) (3) 2,239,664 196,964 8.79
Commercial loans (1) (2) (3) 809,306 73,883 9.13
- - -------------------------------------------------------------------------------
Total earning assets $6,242,327 $519,598 8.32%
Allowance for credit losses (61,800)
Other assets 449,475
- - -------------------------------------------------------------------------------
Total Assets $6,630,002
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW/Savings deposits $931,273 $15,930 1.71%
Money market deposits 650,082 16,306 2.51
Time deposits 2,967,437 162,662 5.48
Short-term borrowings 371,645 18,134 4.88
FHLB borrowings 240,533 14,677 6.10
Long-term debt 64,016 4,785 7.47
- - --------------------------------------------------------------------------------
Total interest-bearing liabilities $5,224,986 $232,494 4.45%
Demand deposits 606,907
Other liabilities 135,789
Shareholders' equity 662,320
- - -------------------------------------------------------------------------------
Total Liabilities and Equity $6,630,002
Interest rate spread 3.87%
Net interest income and net interest margin $287,104 4.59%
Tax-equivalent adjustment (8,860)
- - -------------------------------------------------------------------------------
Net interest income $278,244
- - -------------------------------------------------------------------------------
1996
- - -------------------------------------------------------------------------------
(in thousands) Average Yield/
Balance Interest Rate
- - -------------------------------------------------------------------------------
ASSETS
Federal funds sold and other $106,374 $5,668 5.33%
Investment securities:
Negotiable money market investments 153,631 8,583 5.59
Taxable investment securities 1,143,073 71,458 6.25
Nontaxable investment securities(1) 235,731 18,953 8.04
Loans held for resale 53,656 4,688 8.74
Consumer loans (2) (3) 1,271,662 113,377 8.92
Real estate loans (1) (2) (3) 2,209,179 196,152 8.88
Commercial loans (1) (2) (3) 708,328 63,514 8.97
- - -------------------------------------------------------------------------------
Total earning assets $5,881,634 $482,393 8.20%
- - -------------------------------------------------------------------------------
Allowance for credit losses (56,211)
Other assets 407,225
- - -------------------------------------------------------------------------------
Total Assets $6,232,648
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW/Savings deposits $1,102,294 $20,404 1.85%
Money market deposits 536,237 12,732 2.37
Time deposits 2,759,973 153,121 5.55
Short-term borrowings 323,938 14,506 4.48
FHLB borrowings 159,503 10,175 6.38
Long-term debt 3,569 363 10.17
- - -------------------------------------------------------------------------------
Total interest-bearing liabilities $4,885,514 $211,301 4.33%
Demand deposits 604,536
Other liabilities 107,247
Shareholders' equity 635,351
- - -------------------------------------------------------------------------------
Total Liabilities and Equity $6,232,648
Interest rate spread 3.87%
Net interest income and net interest margin $271,092 4.61%
Tax-equivalent adjustment (8,973)
- - -------------------------------------------------------------------------------
Net interest income $262,119
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 change from 1997 1997 change from 1996
--------------------- ---------------------
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 ($520) ($1,160) $640 ($328) ($1,400) $1,072
Investment securities(1) 10,060 12,643 (2,583) 1,752 (156) 1,908
Loans held for resale (849) (681) (168) 1,720 1,973 (253)
Loans and leases (1)(2)(3) (2,071) 4,881 (6,952) 34,061 39,782 (5,721)
- - -----------------------------------------------------------------------------------------------------------------------------
6,620 15,683 (9,063) 37,205 40,199 (2,994)
Interest expense on: NOW deposits 265 316 (51) 3,024 2,973 51
Savings deposits 2,928 1,480 1,448 1,450 (652) 2,102
Money market deposits (4,344) (4,526) 182 (3,574) (3,968) 394
Time deposits 2,961 (2,110) 5,071 (9,541) (2,623) (6,918)
Short-term borrowings 648 (169) 817 (3,628) (2,255) (1,373)
FHLB borrowings (6,829) (7,641) 812 (4,502) (4,962) 460
Long-term debt (3,819) (3,993) 174 (4,422) (4,543) 121
- - -----------------------------------------------------------------------------------------------------------------------------
(8,190) (16,643) 8,453 (21,193) (16,030) (5,163)
- - -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income Change - Tax Equivalent ($1,570) ($960) ($610) $16,012 $24,169 ($8,157)
- - -----------------------------------------------------------------------------------------------------------------------------
(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 $7,056,000 in 1998, $6,523,000
in 1997, and $5,954,000 in 1996.
(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.
</TABLE>
<PAGE>
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, 1998, into rate sensitive periods
based on the repricing or maturity dates of the various cash-flow streams.
<TABLE>
<CAPTION>
Rate Sensitive Period
As of December 31, 1998(in thousands) 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>
ASSETS
Federal funds sold and other $147,678 - - - - $147,678
Investment securities 346,933 51,133 57,806 136,218 1,197,199 1,789,289
Loans held for resale 76,423 - - - - 76,423
Consumer loans 332,093 110,750 200,839 307,972 376,226 1,327,880
Consumer mortgages 176,690 106,730 162,319 179,040 129,501 754,280
Commercial real estate loans 172,183 38,571 77,717 114,482 1,127,496 1,530,449
Commercial loans 452,277 17,935 39,048 71,524 266,390 847,174
- - ---------------------------------------------------------------------------------------------------------------------
Total earning assets 1,704,277 325,119 537,729 809,236 3,096,812 6,473,173
Other assets - - - - 495,054 495,054
- - ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,704,277 $325,119 $537,729 $809,236 $3,591,866 $6,968,227
- - ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
NOW deposits $236,270 - - - $402,298 $638,568
Savings deposits 57,768 - - - 141,431 199,199
Money market deposits 537,448 - - - 220,609 758,057
Time deposits 1,375,483 378,114 489,810 401,578 280,748 2,925,733
Short-term borrowings 374,418 313 314 - - 375,045
FHLB borrowings 10,790 26,041 27,602 81,005 281,589 427,027
Long-term debt 149 149 48 96 129,797 130,239
- - ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,592,326 404,617 517,774 482,679 1,456,472 5,453,868
Demand deposits - - - - 710,161 710,161
Other liabilities - - - - 142,533 142,533
Shareholders' equity - - - - 661,665 661,665
- - ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,592,326 $404,617 $517,774 $482,679 $2,970,831 $6,968,227
- - ---------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity ($888,049) ($79,498) $19,955 $326,557 $621,035
Cumulative GAP ($888,049) ($967,547) ($947,592) ($621,035)
- - ---------------------------------------------------------------------------------------------------------------------
<PAGE>
</TABLE>
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
53% 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, 1998(in thousands):
<TABLE>
<CAPTION>
After
One But Within
Within Five After Five
One Year Years Years Total
- - ------------------------------------ ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Commercial $464,622 $198,857 $183,695 $847,174
Commercial real estate 307,400 376,642 846,407 1,530,449
- - ------------------------------------ ----------- ---------- ------------- ------------
$772,022 $575,499 $1,030,102 $2,377,623
- - ------------------------------------ ----------- ---------- ------------- ------------
Loans maturing after one year with:
Fixed interest rates:
Commercial $124,143 $77,676
Commercial real estate 240,241 606,192
Variable interest rates:
Commercial 74,714 106,019
Commercial real estate 136,401 240,215
- - ------------------------------------ ----------- ---------- ------------- ------------
Total $575,499 $1,030,102
==================================== =========== ========== ============= ============
</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, 1998 (in thousands):
Certificates of Other Time
Deposit of Deposits of
$100,000 or more $100,000 or more
- - ----------------------------------- ------------------ ------------------
3 months or less $193,455 $5,899
Over 3 months through 6 months 65,952 4,666
Over 6 months through 12 months 93,563 5,374
Over 12 months 44,668 22,640
- - ----------------------------------- ------------------ ------------------
Total $397,638 $38,579
=================================== ================== ==================
<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>
1998 1997 1996
- - -------------------------------------------------- ---------- ------------ -----------
<S> <C> <C> <C>
Balance at December 31, $363,739 $399,730 $368,886
Weighted average interest rate at year end 4.67% 4.75% 4.75%
Maximum amount outstanding at any month end $395,635 $405,268 $377,727
Average amount outstanding during the year $357,090 $367,102 $307,225
Weighted average interest rate during the year 4.62% 4.78% 4.58%
- - -------------------------------------------------- ---------- ------------ -----------
</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 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 financial 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 bank 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 counter party and sets an aggregate
limit on the notional value of interest rate swaps as a percentage 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 desegregated into groupings
which more accurately define the extent of mortgage extension or prepayment
risk,
<PAGE>
and include PAC's (planned amortization class), SEQ PAY (sequential pay class),
VADM's (very accurately defined maturity), TAC's (targeted amortization class)
and others. Other more volatile forms of CMO's include interest-only, principal-
only, inverse floating bonds, and residuals, all of which are specifically
designated as prohibited investments under Keystone's investment policy.
At December 31, 1998, Keystone had $156,844,000 in collateralized mortgage
obligations, compared to $61,477,000 at December 31, 1997. The CMO securities
held by Keystone are primarily shorter-maturity class bonds that were structured
to have more predictable cash flows, by being less sensitive to prepayments
during periods of changing interest rates than other longer-term class bonds
similarly available. Substantially all of the CMO's held by Keystone were issued
or backed by Federal Agencies.
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 $9,972,000 at the end of 1998.
<PAGE>
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, 1998
- - -------------------------------------- ----------------------------------------
Amortized Market Unrealized
Cost Value Gain/(Loss)
- - -------------------------------------- ------------- ------------ -------------
U.S. Government Agency Obligations:
Conventional $561,198 $565,846 $4,648
Mortgage-backed 318,856 322,186 3,330
CMO's:
PAC's1 102,777 102,443 (334)
Seq Pay's2 25,374 25,231 (143)
VADM's3 6,254 6,293 39
TAC's4 2,494 2,495 1
Other 19,945 20,184 239
Structured notes 9,972 10,113 141
- - -------------------------------------- ------------- ------------ -------------
Subtotal 1,046,870 1,054,791 7,921
- - -------------------------------------- ------------- ------------ -------------
Negotiable money market instruments 290,954 290,975 21
U.S. Treasury securities 122,155 123,388 1,233
State and political subdivision
obligations 202,009 208,885 6,876
Corporate and other 117,633 122,648 5,015
- - -------------------------------------- ------------- ------------ -------------
Total $1,779,621 $1,800,687 $21,066
- - -------------------------------------- ------------- ------------ -------------
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 SEQ PAY (sequential pay class) allocates collateral principal payments
sequentially to a series of bonds. Principal payments are directed
initially only to the first tranche until it is completely retired. Once
the first tranche is retired, the principal payments are applied to the
second tranche until it is retired, and so on.
3. A VADM(very accurately defined maturity) has a stated final payment date
which provides protection from mortgage payment extension risk.
4. 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.
<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 that determines adherence to
credit policies, assesses the effectiveness of the credit process, and
objectively evaluates 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):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- - --------------------------- ------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Commercial:
Commercial and industrial $615,925 $637,617 $547,153 $487,843 $426,434
Floor plan financing 167,762 203,189 172,248 167,504 150,066
Obligations of political
subdivisions 63,487 70,863 73,749 64,677 60,160
- - --------------------------- ------------ ------------- ------------ ------------ -------------
847,174 911,669 793,150 720,024 636,660
- - --------------------------- ------------ ------------- ------------ ------------ -------------
Commercial Real Estate:
Commercial and industrial 1,299,052 1,080,776 843,746 828,508 840,910
Multi-family residential 76,752 130,148 99,074 92,544 84,548
Obligations of political
subdivisions 47,493 40,930 29,686 33,010 31,023
Construction and land
development 95,279 117,503 91,755 86,983 68,652
Agricultural 11,873 15,566 12,756 13,363 14,364
- - --------------------------- ------------ ------------- ------------ ------------ -------------
1,530,449 1,384,923 1,077,017 1,054,408 1,039,497
- - --------------------------- ------------ ------------- ------------ ------------ -------------
Consumer:
Real estate 754,280 862,227 1,186,663 1,206,547 1,184,346
Installment 543,513 704,242 626,573 631,584 655,163
Home equity 508,729 473,365 311,086 256,505 227,110
Personal lines of credit 39,754 41,123 40,498 43,244 46,392
Leases 235,884 335,017 301,483 184,554 111,732
- - --------------------------- ------------ ------------- ------------ ------------ -------------
2,082,160 2,415,974 2,466,303 2,322,434 2,224,743
- - --------------------------- ------------ ------------- ------------ ------------ -------------
Total $4,459,783 $4,712,566 $4,336,470 $4,096,866 $3,900,900
- - --------------------------- ------------ ------------- ------------ ------------ -------------
</TABLE>
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.
<PAGE>
o The largest group of customers in a single industry to whom Keystone provides
credit extensions is automobile dealers. At December 31, 1998 credit
extensions totaling $191,392,000 were outstanding, and consisted of floor
plan and related commercial loans and mortgages.
o Keystone has no dependence on a single customer. The ten largest credit
relationships account for only 3% of the total loans outstanding at the end
of 1998.
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 monitors its exposure to commercial and commercial real estate loans.
This includes 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, 1998
Balance
Relationship Average
- - ----------------------------- ------------ -- --------------
Commercial loans $847,174
Commercial real estate 1,530,449
- - ----------------------------- ------------ -- --------------
$2,377,623 $150
- - ----------------------------- ------------ -- --------------
At December 31, 1998, approximately 23% 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
$93,304,000 and $83,757,000, respectively.
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.
<PAGE>
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):
1998 1997 1996 1995 1994
- - -------------------------- --------- ---------- --------- ---------- ----------
Commercial $13,436 $11,266 $9,944 $11,450 $11,168
Real estate secured:
Commercial 8,813 12,630 11,922 11,969 12,104
Consumer 2,064 1,849 2,324 2,251 2,563
Consumer 15,574 16,844 12,693 7,724 7,036
General risk 20,387 22,502 19,373 22,021 20,837
- - -------------------------- --------- ---------- --------- ---------- ----------
$60,274 $65,091 $56,256 $55,415 $53,708
- - -------------------------- --------- ---------- --------- ---------- ----------
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. The percentage allocation of allowance to any given category of
loans may change disproportionately to the percentage of total loans in that
category due primarily to changes in internal risk ratings of the various
categories. At December 31, the following comparison is provided:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- - ------------------------------ ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Commercial:
% of Total loans 19% 19% 18% 18% 16%
% Allocation of allowance 22% 17% 18% 21% 21%
Commercial real estate:
% of Total loans 33% 29% 25% 26% 27%
% Allocation of allowance 15% 19% 21% 22% 23%
Consumer real estate:
% of Total loans 18% 18% 27% 29% 30%
% Allocation of allowance 3% 3% 4% 4% 5%
Consumer:
% of Total loans 30% 34% 30% 27% 27%
% Allocation of allowance 26% 26% 23% 14% 13%
General Risk:
% Allocation of allowance 34% 35% 34% 39% 38%
- - ------------------------------ ---------- ---------- --------- ---------- ---------
Total loans 100% 100% 100% 100% 100%
- - ------------------------------ ---------- ---------- --------- ---------- ---------
Allocation of allowance 100% 100% 100% 100% 100%
- - ------------------------------ ---------- ---------- --------- ---------- ---------
</TABLE>
<PAGE>
Quarterly Information
Income Performance
<TABLE>
<CAPTION>
1998
- - ------------------------------------------- -----------------------------------------------------
Fourth Third Second First
(in thousands, except per share data) Quarter Quarter Quarter Quarter
- - ------------------------------------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Interest income $126,957 $130,808 $130,825 $129,059
Interest expense 58,748 61,402 60,629 59,905
- - ------------------------------------------- ------------ ------------ -------------- ------------
Net interest income 68,209 69,406 70,196 69,154
Provision for credit losses 3,633 3,081 6,679 3,757
- - ------------------------------------------- ------------ ------------ -------------- ------------
Net interest income after provision 64,576 66,325 63,517 65,397
Noninterest income 26,830 24,310 23,979 22,676
Security transactions 661 3,444 5,382 1,531
Noninterest expense 55,484 56,130 55,468 56,107
- - ------------------------------------------- ------------ ------------ -------------- ------------
Income before income taxes 36,583 37,949 37,410 33,497
Income taxes 11,834 12,368 12,129 9,361
- - ------------------------------------------- ------------ ------------ -------------- ------------
Net income $24,749 $25,581 $25,281 $24,136
- - ------------------------------------------- ------------ ------------ -------------- ------------
Tax effect of security transactions $231 $1,205 $1,884 $536
- - ------------------------------------------- ------------ ------------ -------------- ------------
Earnings per share:
Basic $0.48 $0.50 $0.49 $0.47
Diluted $0.48 0.50 0.48 0.46
Dividends per share $0.29 $0.28 $0.28 0.28
Average shares outstanding 51,169,117 51,368,296 51,429,023 51,827,402
- - ------------------------------------------- ------------ ------------ -------------- ------------
</TABLE>
<TABLE>
<CAPTION>
1997
- - ------------------------------------------- -----------------------------------------------------
Fourth Third Second First
(in thousands, except per share data) Quarter Quarter Quarter Quarter
- - ------------------------------------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Interest income $131,273 $132,215 $126,804 $120,446
Interest expense 60,650 60,446 57,341 54,057
- - ------------------------------------------- ------------ ------------ -------------- ------------
Net interest expense 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
- - ------------------------------------------- ------------ ------------ -------------- ------------
</TABLE>
<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 29, 1999, there were approximately 15,027 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
1998
- - -------------------- ------------ ------------ ------------
I $42.00 $36.00 $0.28
II 41.53 34.00 0.28
III 37.13 27.88 0.28
IV 37.00 25.72 0.29
- - -------------------- ------------ ------------ ------------
$1.13
- - -------------------- ------------ ------------ ------------
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
- - -------------------- ------------ ------------ ------------
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.
<PAGE>
Exhibit 21.1
Jurisdiction of
Incorporation
------------------
First Tier Subsidiaries of Registrant:
Financial Trust Services Company Pennsylvania
Keystone Financial Bank, N.A. United States
Keystone Financial Unlimited, Inc. Pennsylvania
Key Trust Company Pennsylvania
Keystone CDC, Inc. Pennsylvania
Keystone Financial Community Development Corporation I 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 Retirement Benefit Services, Inc. Pennsylvania
Second Tier Subsidiaries of Registrant:
Keystone Financial Mortgage Corporation Pennsylvania
Keystone Brokerage, Inc. Pennsylvania
ATB Holding Company, Inc. Delaware
ATB Real Estate Investment Trust, Inc. Maryland
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Keystone Financial, Inc. of our report dated January 29, 1999, included in
the 1998 Annual Report to Shareholders of Keystone Financial, Inc.
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 1995 Non-Employee
Director's Stock Option Plan (File # 333-04281).
13) Registration Statement on Form S-3 relating to the Senior/
Subordinated Medium-Term Notes (File #333-25393).
14) Registration Statement on Form S-8 relating to the Financial Trust
Corp Stock Option Plan of 1992 (File #333-49325).
15) Registration Statement on Form S-8 relating to the Financial Trust
Corp Non-Employee Director Stock Option Plan of 1994
(File #333-49323).
We also consent to the incorporation by reference in the above listed Registra-
tion Statements of our report dated January 29, 1999, 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, 1998.
/s/ ERNST & YOUNG LLP
-------------------------
Pittsburgh, Pennsylvania
March 29 , 1999
<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
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 1995 Non-Employee
Director's Stock Option Plan (File # 333-04281).
13) Registration Statement on Form S-3 relating to the Senior/
Subordinated Medium-Term Notes (File #333-25393).
14) Registration Statement on Form S-8 relating to the Financial Trust
Corp Stock Option Plan of 1992 (File #333-49325).
15) Registration Statement on Form S-8 relating to the Financial Trust
Corp Non-Employee Director Stock Option Plan of 1994
(File #333-49323).
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, 1998.
/s/ BEARD & COMPANY, INC
-------------------------
Reading, Pennsylvania
March 26, 1999
<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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 190,622
<INT-BEARING-DEPOSITS> 5,978
<FED-FUNDS-SOLD> 141,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,129,753
<INVESTMENTS-CARRYING> 659,536
<INVESTMENTS-MARKET> 670,934
<LOANS> 4,459,783
<ALLOWANCE> 60,274
<TOTAL-ASSETS> 6,968,227
<DEPOSITS> 5,231,718
<SHORT-TERM> 375,045
<LIABILITIES-OTHER> 142,533
<LONG-TERM> 557,266
0
0
<COMMON> 102,897
<OTHER-SE> 558,768
<TOTAL-LIABILITIES-AND-EQUITY> 6,968,227
<INTEREST-LOAN> 401,949
<INTEREST-INVEST> 105,321
<INTEREST-OTHER> 10,379
<INTEREST-TOTAL> 517,649
<INTEREST-DEPOSIT> 193,087
<INTEREST-EXPENSE> 240,684
<INTEREST-INCOME-NET> 276,965
<LOAN-LOSSES> 17,150
<SECURITIES-GAINS> 11,018
<EXPENSE-OTHER> 223,189
<INCOME-PRETAX> 145,439
<INCOME-PRE-EXTRAORDINARY> 99,747
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99,747
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.92
<YIELD-ACTUAL> 3.71
<LOANS-NON> 24,675
<LOANS-PAST> 28,549
<LOANS-TROUBLED> 264
<LOANS-PROBLEM> 12,200
<ALLOWANCE-OPEN> 65,091
<CHARGE-OFFS> 24,058
<RECOVERIES> 2,968
<ALLOWANCE-CLOSE> 60,274
<ALLOWANCE-DOMESTIC> 60,274
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
