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, 1999
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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 29, 2000:
Common Stock $2.00 Par Value -- $749,052,000.
The number of shares outstanding of the registrant's class of common stock as of
February 29, 2000:
Common Stock $2.00 Par Value - 48,821,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholder report for the year ended December 31, 1999,
are incorporated by reference into Parts I, II and IV and portions of the Proxy
Statement of Keystone Financial, Inc. for the 2000 annual shareholders meeting
are incorporated by reference into Part III.
1
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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
Market Risk 10
Item 8 Financial Statements and Supplementary Data 10
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 10
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
2
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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 fourth largest financial institution 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. Nonbank subsidiaries
offer a variety of financial services including discount brokerage services,
sales of mutual funds and annuities, 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, 1999,
Keystone and its subsidiaries had 2,553 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 is organized around, and manages its
business through twenty local market teams in the areas in which it operates.
These market teams are grouped into five geographic regions, each of which is
managed by a regional president. These regions are aggregated into one operating
segment since each region offers similar products and services through similar
distribution channels. 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 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. Since 1982, amendments
to the Pennsylvania Banking Code have eliminated geographical branching
restrictions on Pennsylvania banks, eliminated limitations on the number of
Pennsylvania banks a bank holding company could own and provided for the
implementation of interstate banking. Effective March 4, 1990, Pennsylvania
banks may establish or acquire branch offices anywhere in the state, there are
no limitations on the number of Pennsylvania banks a bank holding company may
own and a bank holding company located in any state or the District of Columbia
could, initially subject to a reciprocity requirement, acquire a Pennsylvania
bank or bank holding company.
The Federal Interstate Banking and Branching Efficiency Act of 1994 extended to
a nationwide basis the process of removing the legal barriers to interstate
banking which formerly existed under various state laws. Effective September 29,
1995, the Act permits bank holding companies in any state to acquire bank
holding companies or banks located in any other state. Effective June 1, 1997,
the Act permits a bank in one state to merge with a bank in another state as
long as neither state had enacted legislation prior to that date to prohibit
interstate branching. 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. 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 trend towards deregulation gained added momentum with enactment of the
Gramm-Leach-Bliley Act on November 12, 1999. Effective March 11, 2000, the
Gramm-Leach-Bliley Act allows bank holding companies meeting management, capital
and Community Reinvestment Act ("CRA") standards to become "financial holding
companies" authorized to engage in a substantially broader range of nonbanking
activities than was previously permissible, including insurance underwriting,
securities underwriting, and making merchant banking investments in commercial
and financial companies. The Act further allows insurers and other financial
services companies to acquire banks, removes various restrictions that
previously applied to bank holding company ownership of securities firms and
mutual fund advisory companies, and reorganizes the overall regulatory structure
applicable to financial holding companies that also engage in insurance and
securities operations.
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 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.
As amended by the Gramm-Leach-Bliley Act, the Bank Holding Company Act
authorizes a bank holding company that elects to become a financial holding
company to engage in a significantly expanded range of activities. In order for
a bank holding company to become a financial holding company (1) all of its
depository institutions must be well-capitalized and well-managed and (2) it
must file a declaration with the Federal Reserve Board that it elects to be a
financial holding company. In addition, to commence any new activity permitted
by the Gramm-Leach-Bliley Act and to acquire any company engaged in any new
activities permitted by the Gramm-Leach-Bliley Act, each insured depository
institution of the financial holding company must have received at least a
"satisfactory" CRA rating in its most recent examination. Keystone currently
meets the requirements for eligibility to become a financial holding company but
has no present intention to become a financial holding company.
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 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.
National banks historically have been authorized to establish operating
subsidiaries that engage in activities generally permissible for the bank
itself. In addition to preserving national bank authority to own operating
subsidiaries, the Gramm-Leach-Bliley Act authorizes national banks to establish
"financial subsidiaries," which may engage in financial activities permissible
for financial holding companies, except for insurance underwriting, real estate
investment and development and, for at least 5 years, merchant banking
investments. In contrast to treatment of operating subsidiaries, equity
investments in a financial subsidiary may not count towards the assets and
tangible equity of the bank, and transactions between the bank and its financial
subsidiary are subject to certain restrictions imposed by the Federal Reserve
Act on extensions of credit to, and other business dealings with, affiliates.
To be eligible to own, or expand the activities of, a financial subsidiary, a
national bank and each of its depository institution affiliates (1) must be
well-capitalized and well-managed and (2) must have at least a "satisfactory"
CRA rating. In addition, the national bank must make an advance filing with the
OCC, certifying that it meets these requirements and giving notice that it will
acquire, or start a new activity in, a financial subsidiary. Keystone Financial
Bank, N.A., the national bank subsidiary of Keystone, currently meets the
eligibility requirements to own a financial subsidiary and intends to establish
one or more financial subsidiaries.
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.
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".
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 56 Chairman (May 1998), President (December 1986-May
1998; November 1999 to date) and Chief Executive
Officer.
Mark L. Pulaski 46 President, Wealth Management Division (November
1999).
From May 1998 until November 1999, Mr. Pulaski
served as President and Chief Operating Officer.
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 50 Executive Vice President, Vice Chairman (May
1998), General Counsel and Secretary.
George R. Barr, Jr. 48 Executive Vice President (December 1998) and
Deputy General Counsel.
Prior to December 1998, Mr. Barr served as Senior
Vice President.
Edwin R. Eckberg 54 Executive Vice President (December 1998).
Prior to December 1998, Mr. Eckberg served as
Senior Vice President.
Donald F. Holt 43 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).
ITEM 2 - PROPERTIES
The headquarters of Keystone Financial, Inc. and Keystone Financial Bank, N.A.
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 178 branches located throughout
Pennsylvania, Maryland and West Virginia. Of these 178 branches, 125 are owned
and the remainder are leased.
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, Pennsylvania, 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.
ITEM 3 - LEGAL PROCEEDINGS
There are no pending legal proceedings required to be described under this item.
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 1999.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information for this item is incorporated herein by reference to the section of
Exhibit No. 13.1 entitled "Market Prices and Dividends".
ITEM 6 - SELECTED FINANCIAL DATA
The section entitled "Selected Financial Data" of Exhibit No. 13.1 is
incorporated herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The section entitled "Financial Review" of Exhibit No. 13.1 is incorporated
herein by reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following sections of Exhibit No. 13.1 are incorporated herein by reference:
"Financial Review-Investments", "Financial Review-Asset/Liability Management and
Market Risk", "Summarized Accounting Policies-Financial Derivatives and Other
Hedging Activity", "Notes to Consolidated Financial Statements-Financial
Derivatives, Hedging Activity, and Commitments".
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The sections of Exhibit No. 13.1 entitled "Report of Independent Auditors",
"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 2000 Annual Meeting of Shareholders:
- -- Introduction
- -- Management Proposal - Election of Directors
- -- Executive Compensation
- -- Other Information Concerning Directors and Executive Officers
The other information appearing in such Proxy Statement, including without
limitation that information appearing under the captions "Human Resources
Committee 1999 Report on Executive Compensation" and "Stock Price Performance
Graph", is not incorporated herein.
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a)(1)(2) The response to this portion of Item 14 is listed below.
(a)(3) Listing of Exhibits-The exhibits are listed on the Exhibit Index
beginning on page 13 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
13 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,
1999, are incorporated by reference in Item 8:
Report of independent auditors
Consolidated statements of condition - December 31, 1999, and 1998
Consolidated statements of income - Years ended December 31, 1999, 1998,and 1997
Consolidated statements of changes in shareholders' equity - Years ended
December 31, 1999, 1998, and 1997
Consolidated statements of cash flows - Years ended December 31, 1999, 1998,
and 1997
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.
Item 14(b) Reports on Form 8-K
During the quarter ended December 31, 1999, the registrant filed the following
reports on Form 8-K:
Filing Date Item Description
- -------------------- ----- ------------------------------------
December 08, 1999 5 Press release announcing litigation settlement
November 30, 1999 5 Press release announcing strategic realignment
November 22, 1999 5 Press release announcing dividend declaration
October 18, 1999 5 Press release announcing earnings for the third
quarter
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
(Registrant) Keystone Financial, Inc.
By: /s/ Carl L. Campbell
__________________________
Chief Executive Officer
Date: March 23, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on March 23, 2000, by the following persons on behalf of the
registrant and in the capacities indicated.
/s/ Carl L. Campbell /s/ Donald F. Holt
_______________________ _______________________
Chief Executive Officer Executive Vice President and
President & Chairman Chief Financial Officer
(Principal Accounting Officer)
/s/ A. Joseph Antanavage /s/ Harold L. Brake
_______________________ _______________________
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/ Ronald C. Unterberger
_______________________ _______________________
Director Director
/s/ G. William Ward /s/ Ray L. Wolfe
_______________________ _______________________
Director Director
<PAGE>
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit Description and Method
No. of Filing
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3.1 Restated Articles of Incorporation of Keystone Financial, Inc., as
amended through May 19, 1997, incorporated by reference to Exhibit 3
of Form 10-Q of Keystone Financial, Inc. for the quarter ended March 31,
1999.
3.2 By-Laws of Keystone Financial, Inc., as amended November 19, 1998,
incorporated by reference to Exhibit 3.2 of Form 10-K of Keystone
Financial, Inc. for the year ended December 31, 1998.
10.1* Keystone Financial, Inc., Corporate Directors Deferred Compensation
Plans, originally filed as Exhibit 10.1 of Form 10-K of Keystone
Financial, Inc. for the year ended December 31, 1994, filed herewith.
10.2* Keystone Financial, Inc. 1988 Stock Incentive Plan, incorporated by
reference to Exhibit 10.2 of Form 10-K of Keystone Financial, Inc., for
the year ended December 31, 1998.
10.3* Keystone Financial, Inc. Management Incentive Compensation Plan as
amended and restated, incorporated by reference to Exhibit 10.3 of
Form 10-K of Keystone Financial, Inc., for the year ended December 31,
1998.
10.4* Form of employment agreement between Keystone Financial, Inc. and
Executive Officer Campbell, incorporated by reference to Exhibit 10.4
of Form 10-K of Keystone Financial, Inc. for the year ended December 31,
1998.
10.5* Form of employment agreement between Keystone Financial, Inc. and
Executive Officers Pulaski and Rooke, incorporated by reference to
Exhibit 10.5 of Form 10-K of Keystone Financial, Inc. for the year
ended December 31, 1998.
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,
originally filed as Exhibit 10.7 of Form 10-K of Keystone Financial,
Inc., for the year ended December 31, 1994, filed herewith.
10.8* Keystone Financial, Inc. Supplemental Retirement Income Plan,
incorporated by reference to Exhibit 10.8 of Form 10-K of Keystone
Financial, Inc., for the year ended December 31, 1998.
10.9* Keystone Financial, Inc. 1990 Non-Employee Directors' Stock Option Plan,
as amended, incorporated by reference to Exhibit 10.9 of Form 10-K of
Keystone Financial, Inc. for the year ended December 31, 1998.
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.
<PAGE>
Exhibit Description and Method
No. of Filing
- ------------------------------------------------------------------------
10.11* Keystone Financial, Inc. 1992 Director Fee Plan, as amended through May
20, 1999, filed herewith.
10.12* Keystone Financial, Inc. form of Executive Split Dollar Agreements,
filed herewith.
10.13* Keystone Financial, Inc. 1995 Non-Employee Directors' Stock Option
Plan, incorporated 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, incorporated by reference to Exhibit 10.16 of Form
10-K of Keystone Financial, Inc., for the year ended December 31, 1998.
10.17* Keystone Financial, Inc. Supplemental Deferred Compensation Plan,
incorporated 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 change of control agreement between Keystone Financial, Inc.
and executive officers Barr, Eckberg, and Holt, incorporated by
reference to Exhibit 10.19 of Form 10-K of Keystone Financial, Inc.,
for the year ended December 31, 1998.
10.19* 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, 1999, filed herewith.
21.1 Subsidiaries of Registrant, filed herewith.
23.1 Consent of Ernst & Young LLP, 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.
EXHIBIT 10.1
KEYSTONE FINANCIAL, INC.
DIRECTOR DEFERRED COMPENSATION PLAN
March 31, 1988
<PAGE>
ARTICLE I
PURPOSE
The purpose of the Keystone Financial, Inc. Director Deferred
Compensation Plan (hereinafter referred to as the "Plan") is to provide funds
for Retirement or death for directors (or their Beneficiaries) of Keystone
Financial, Inc. and its operating companies. It is intended that the Plan will
aid in retaining and attracting directors by providing a method of accumulating
capital for Retirement.
<PAGE>
ARTICLE II
DEFINITIONS
For the purposes of this Plan, the following words and phrases shall
have the meanings indicated, unless the context clearly indicates otherwise:
Section 2.01 Beneficiary. "Beneficiary" means the person, persons or
entity designated by the Participant to receive any benefits payable under the
Plan. Any Participant Beneficiary designation shall be made in a written
instrument filed with the Company and shall become effective only when received,
accepted and acknowledge in writing by the Company.
Section 2.02 Board. "Board" means the Board of Directors of the
Company.
Section 2.03 Committee. "Committee" means the Human Resources Committee
of the Board.
Section 2.04 Company. "Company" means Keystone Financial, Inc., its
successors, any subsidiary or affiliated organizations authorized by the Board
of Directors of Keystone Financial, Inc. or the Committee to participate in the
Plan and any organization into with which the Company may merge or consolidate
or to which all or substantially all of its assets may be transferred.
Section 2.05 Deferral Benefit. "Deferral Benefit" means the benefit
payable to a Participant on his retirement, death, disability, or termination of
employment as calculated in Article VII hereof.
Section 2.06 Deferred Benefit Account. "Deferred Benefit Account" means
the accounts maintained on the books of account of the Company for each
Participant pursuant to Article VI. Separate Deferred Benefit Accounts shall be
maintained for each Participant. More than one Deferred Benefit Account may be
maintained for each Participant as necessary to reflect (a) various interest
credits, (b) separate year deferral elections, and/or (c) Account A and Account
B elections. A Participant's Deferred Benefit Accounts shall be utilized solely
as a device for the measurement and determination of the amounts to be paid to
the Participant pursuant to this Plan. A Participant's Deferred Benefit Account
shall not constitute or be treated as a trust fund of any kind.
Section 2.07 Determination Date. "Determination Date" means the date on
which the amount of a Participant's Deferred Benefit Account is determined as
provided in Article VI hereof. The last day of April shall be the Determination
Date.
Section 2.08 Moody's Bond Index. "Moody's Bond Index" means the average
annual composite yield on Moody's Seasoned Corporate Bond Yield Index for the
preceding year as determined from Moody's Bond Record published by Moody's
Investors Services, Inc. (or any successor thereto), or, if such yield is no
longer published, a substantially similar average selected by the Company.
Section 2.09 Participant. "Participant" means any individual who is
designated by the Company to participate in this Plan and who elects to parti-
cipate by filing a Participation Agreement as provided in Article IV.
Section 2.10 Participation Agreement. "Participation Agreement" means
the agreement filed by a Participant prior to the beginning of the first period
for which the Participant's Compensation is to be deferred pursuant to the Plan
and the Participation Agreement. A new Participation Agreement shall be filed by
the Participant for each separate deferral election.
Section 2.11 Plan Administrator. "Plan Administrator" means the
General Counsel for the Company.
Section 2.12 Plan Year. "Plan Year" means a twelve-month period
commencing May 1 and ending the following April 30. The first Plan Year shall
commence on May 1, 1988.
Section 2.13 Retirement. "Retirement" means the attainment of age 70.
<PAGE>
ARTICLE III
ADMINISTRATION
Section 3.01 Plan Administrator; Company and Committee; Duties: This
Plan shall be administered by the Plan Administrator. Decisions of the Plan
Administrator shall be reviewable by the Committee. The Committee shall also
have the authority to make, amend, interpret, and enforce all appropriate rules
and regulations for the administration of this Plan and decide or resolve any
and all questions including interpretations of this Plan, as may arise in
connection with the Plan.
Section 3.02 Binding Effect of Decisions. The decision or action of the
Committee in respect to any question arising out of or in connection with the
administration, interpretation and application of the Plan and the rules and
regulations promulgated hereunder shall be final, conclusive and binding upon
all persons having any interest in the Plan, unless a written appeal is received
by the Committee within sixty days of the disputed action. The appeal will be
reviewed by the Committee and the decision of the Committee shall be final,
conclusive and binding on the Participant and all persons claiming by, through
or under the Participant.
<PAGE>
ARTICLE IV
PARTICIPATION
Section 4.01 Participation. Participation in the Plan shall be limited
to directors who elect to participate in the Plan by filing a Participation
Agreement with the Company. A Participation Agreement must be filed prior to
April 1 immediately preceding the Plan Year in which the Participant's
participation under the agreement will commence, and the election to participate
shall be effective on the first day of May following receipt by the Company of a
properly completed and executed Participation Agreement.
Section 4.02 Minimum and Maximum Deferral. A Participant may elect in
any Participation Agreement to defer all or a portion of his director
compensation. The minimum and maximum amounts that may be deferred under any
single Participation Agreement shall be in $1,000 units and shall be as follows:
MINIMUM DEFERRAL MAXIMUM DEFERRAL
---------------- ----------------
Account A $ 8,000 $ 8,000
Account B $12,000 100% of compensation
Section 4.02(a) From time to time, the Company may increase or decrease
the minimum and maximum deferrals set forth above, as well as the period for
which the deferrals are effective by giving reasonable written notice to the
affected Participants. Such changes shall be effective for all Participation
Agreements filed thereafter.
Section 4.02(b) A Participant's election to defer his compensation
shall be irrevocable upon the filing of the respective Participation Agreement;
provided, however, that the deferral under any Participation Agreement may be
suspended or amended as provided in paragraph 9.01.
Section 4.03 Additional Participation Agreement. A Participant may
enter into additional Participation Agreements if authorized to do so by the
Committee by filing a Participation Agreement with the Company prior to April 1
of any calendar year, stating the amount that the Participant elects to have
deferred.
<PAGE>
ARTICLE V
DEFERRED COMPENSATION
Section 5.01 Deferred Compensation. The amount of Compensation that a
Participant elects to defer in the Participation Agreement executed by the
Participant, with respect to each Plan Year of participation in the Plan, shall
be credited by the Company to the Participant's Deferred Benefit Account. To the
extent that the Company is required to withhold any taxes or other amounts from
the employee's deferred wages pursuant to any state, federal or local law, such
amounts shall be taken out of the portion of the Participant's compensation
which is not deferred under this Plan, or the Participant shall be required to
submit a check to the Company in an amount equal to any taxes required to be
withheld.
Section 5.02 Vesting of Deferred Benefit Account. A Participant shall
be 100% vested in his Deferred Benefit Account.
<PAGE>
ARTICLE VI
DEFERRED BENEFIT ACCOUNT
Section 6.01 Determination of Account. Each Participant's Deferred
Benefit Account, as of each Determination Date, shall consist of the balance of
the Participant's Deferred Benefit Account as of the immediately preceding
Determination Date. The Deferred Benefit Account of each Participant shall be
reduced by the amount of all distributions, if any, made from such Deferred
Benefit Account since the preceding Determination Date, and increased by the
amount of any compensation deferred and interest earned since the preceding
Determination Date.
Section 6.02 Type of Deferral. A Participant may elect to have a
portion of the amount deferred credited to either Account A or to Account B. The
election shall be made by a properly executed Participation Agreement. A
separate Deferred Benefit Account shall be maintained for a Participant's
Account A and for a Participant's Account B. Account A may be selected only one
time; thereafter, all subsequent deferrals shall be credited to Account B.
Section 6.03 Account A. As of each Determination Date, the
Participant's Deferred Benefit Account A shall be increased by the amount of
interest earned since the preceding Determination Date. The Account A Deferred
Benefit shall be maintained and increased by the percentage of Moody's Bond
Index specified in the Participant's Participation Agreement until the
Participant's Retirement. Subsequent to the Participant's Retirement, however,
Moody's Bond Index shall no longer be determined annually and shall be deemed to
be the average Moody's Bond Index rate in effect during the five years
immediately preceding the Participant's Retirement.
Section 6.04 Account B. As of each Determination Date, the
Participant's Deferred Benefit Account B shall be increased by the amount of
interest earned since the preceding Determination Date. The Account B Deferred
Benefit shall be maintained and increased by the percentage of Moody's Bond
Index specified in the Participant's Participation Agreement until the
Participant's Retirement. Subsequent to the Participant's Retirement, however,
Moody's Bond Index shall no longer be determined annually and shall be deemed to
be the average Moody's Bond Index rate in effect during the five years
immediately preceding the Participant's Retirement.
Section 6.05 Alternate Rate. The interest credit rates in Sections 6.03
and 6.04 may be amended in the Company's sole discretion if marginal corporate
tax rates are changed or if any investment vehicle being utilized is no longer
appropriate. The Plan Administrator shall retain the services of an outside
advisor to determine an appropriate alternate rate.
Section 6.06 Statement of Accounts. The Company shall submit to each
Participant, within 120 days after the close of each Plan Year, a statement in
such form as the Company deems desirable, setting forth the balance to the
credit of such Participant in his Deferred Benefit Account A and in his Deferred
Benefit Account B, in each case as of the last day of the preceding Plan Year.
<PAGE>
ARTICLE VII
BENEFITS
Section 7.01 Benefit Upon Retirement. Subject to Section 7.05, upon a
Participant's Retirement, he shall be entitled to a Deferral Benefit equal to
the amount of his Deferred Benefit Account determined under Section 6.01 and
payable under Section 7.03 as of the Determination Date coincidental with or
immediately following such event.
Section 7.02 Death. If a Participant dies after the commencement of
payments of his Deferral Benefit, his Beneficiary shall receive the remaining
installments of his Deferred Benefit Account. If a Participant dies prior to any
payments of a Deferral Benefit, his Beneficiary shall receive a lump sum payment
equal to his Deferred Benefit Account as of the Determination Date coincidental
with or immediately following such death.
Section 7.03 Form of Benefit Payment. The Company shall pay to the
Participant or his Beneficiary, the amount specified in ten equal annual
installments or as a lump sum as provided in Section 7.02. Annual Payments shall
be a fixed amount which amortizes the Deferred Benefit Account balance in equal
annual payments of principal and interest over a period of ten years. For
purposes of determining the amount of the annual payment, the assumed rate of
interest shall be the post-retirement rate under the terms of Sections 6.03 and
6.04.
Section 7.04 Lump Sum Payment. Notwithstanding Section 7.03, in its
sole discretion the Committee may make a lump sum payment.
Section 7.05 Commencement of Payments. Unless otherwise provided,
commencement of payments under this Plan shall begin within 60 days following
receipt of notice by the Plan Administrator of an event which entitles a
Participant (or a Beneficiary) to payments under this Plan, or at such earlier
date as may be determined by the Company. All payments shall be made as soon as
practicable after the last day of April.
<PAGE>
ARTICLE VIII
BENEFICIARY DESIGNATION
Section 8.01 Beneficiary Designation. Each Participant shall have the
right, at any time, to designate any person or persons as his Beneficiary or
Beneficiaries (both principal as well as contingent) to whom payment under this
Plan shall be paid in the event of his death prior to complete distribution to
Participant of the benefits due him under the Plan.
Section 8.02 Amendments. Any Beneficiary designation may be changed by
a Participant by the written filing of such change on a form prescribed by the
Company. The filing of a new Beneficiary designation form will cancel all
Beneficiary designations previously filed.
Section 8.03 No Beneficiary Designation. If a Participant fails to
designate a Beneficiary as provided above, or if all designated Beneficiaries
predecease the Participant, then any amounts to be paid to the Participant's
Beneficiary shall be paid to the Participant's estate.
Section 8.04 Effect of Payment. The payment to the deemed Beneficiary
shall completely discharge Company's obligations under this Plan.
<PAGE>
ARTICLE IX
AMENDMENT AND TERMINATION OF PLAN
Section 9.01 Amendment. The Board or the Committee may at any time
amend the Plan in whole or in part; provided, however, that no amendment shall
be effective to decrease or restrict any Deferred Benefit Account at the time of
such amendment, except as provided in Section 6.05.
Section 9.02 Company's Right to Terminate. The Board or the Committee
may at any time terminate the Plan with respect to new elections to defer if, in
its judgment, the continuance of the Plan, the tax, accounting, or other effects
thereof, or potential payments thereunder would not be in the best interests of
the Company. The Board or the Committee may also terminate the Plan in its
entirety at any time, and upon any such termination, each Participant (a) who is
then receiving a Deferral Benefit shall be paid in a lump sum, or over such
period of time as determined by the Company (not to exceed 10 years), the then
remaining balance in his Deferred Benefit Account and (b) who has not received a
Deferral Benefit shall be paid in a lump sum, or over such period of time as
determined by the Company (not to exceed 10 years), the balance in his Deferred
Benefit Account.
<PAGE>
ARTICLE X
MISCELLANEOUS
Section 10.01 Unsecured General Creditor. Participants and their
Beneficiaries shall have no legal or equitable rights, interest or claims in any
property or assets of the Company, nor shall they be Beneficiaries of, or have
any rights, claims or interests in any life insurance policies, annuity
contracts or the proceeds therefrom owned or which may be acquired by the
Company ("Policies"). Such Policies or other assets of the Company shall not be
held under any trust for the benefit of Participants or their Beneficiaries or
held in any way as collateral security for the fulfilling of the obligations of
the Company under this Plan. Any and all of the Company's assets and Policies
shall be, and remain, the general, unpledged, unrestricted assets of the
Company, and obligations under the Plan shall be merely that of an unfunded and
unsecured promise of the Company to pay money in the future.
Section 10.02 Nonassignability. Neither a Participant nor any other
person shall have any right to commute, sell, assign, transfer, pledge,
anticipate, mortgage or otherwise encumber, transfer hypothecate or convey in
advance of actual receipt the amounts, if any, payable hereunder, or any part
thereof, which are, and all rights to which are, expressly declared to be
unassignable and non-transferable. No part of the amounts payable shall, prior
to actual payment, be subject to seizure or sequestration for the payment of any
debts, judgments, alimony or separate maintenance owed by a Participant or any
other person, nor be transferable by operation of law in the event of a
Participant's or any other person's bankruptcy or insolvency.
Section 10.03 Protective Provisions. A Participant will cooperate with
the Company by furnishing any and all information requested by the Company, in
order to facilitate the payment of benefits hereunder, and by taking such
physical examinations as the Company may deem necessary and taking such other
action as may be requested by the Company.
<PAGE>
KEYSTONE FINANCIAL, INC.
DIRECTOR DEFERRED COMPENSATION PLAN
SUMMARY OF PLAN A AND PLAN B
1988
PLAN A - LEVERAGED INSURANCE UTILIZED
I. PURPOSE
The purpose of this plan is to permit directors to utilize the
maximum amount of tax leveraged insurance as an investment vehicle
for pre-tax deferrals of director fees. Plan A will not be offered
in the future if tax laws adversely affecting tax leveraged
insurance are enacted.
II. PARTICIPATION
All Bank and Holding Company directors who are not currently
participating in an insurance funded plan may participate.
III. AMOUNT
Each participant must defer $8,000. For ease of administration, it
is preferable that this deferral be made in one year.
o However, two $4,000 deferrals or deferring $2,000 annually for
four consecutive years will be permitted.
A participant's election to defer his compensation is irrevocable.
IV. VESTING
Participants will be 100% vested in their deferred benefit account.
V. INTEREST CREDITS
Deferral accounts will be credited annually with interest at a rate
equal to a percentage of Moody's Long-Term Corporate Bond Index.
o The rate will be determined by a participant's entry age and
will range from 120% of Moody's for a 45-year old to 240% of
Moody's for a 66-year old.
o Interest crediting rates and projected benefits assuming a
10% Moody's rate are shown on Exhibit 1 on the following
page.
<PAGE>
EXHIBIT 1
DIRECTORS DEFERRAL PLAN
INTEREST CREDITING RATE
FOR NEW PARTICIPANTS
TOTAL DEFERRAL = $8,000
LEVERAGED INSURANCE
INTEREST CREDITING PROJECTED ANNUAL
RATE AS A % BENEFIT -
AGE OF MOODY'S MOODY'S = 10%
--- ----------------- ---------------------
45 120% $18,277
46 120
47 122
48 124
49 127 13,422
50 129
51 132
52 135
53 138 10,022
54 141
55 144
56 147
57 150 7,000
58 154
59 161
60 169
61 179 5,261
62 190
63 202
64 214
65 227
66 240 3,088
o Assumes the purchase of Great West Life.
o Projected annual benefit payable at age 70 for 10 years assuming an
average Moody's of 10%. Actual benefits depend upon actual Moody's
rates.
<PAGE>
VI. COMMENCEMENT OF BENEFIT PAYMENTS
Benefits shall be paid annually for ten years commencing at age 70.
o In the event of death prior to age 70, the participant's
beneficiary shall be entitled to a lump sum payment equal to his
account balance.
o In the event of total and permanent disability prior to age 70,
the participant may elect to have benefit payments commence
earlier than age 70.
VII. STATEMENT OF ACCOUNT
Within the first quarter of each year, the Company will provide a
statement to each participant showing his deferred benefit account
balance.
VIII. INSURANCE POLICIES
Insurance policies are owned by Keystone. Directors remain an
unsecured general creditor of the company.
<PAGE>
PLAN B - NONLEVERAGED INSURANCE UTILIZED
I. PURPOSE
The purpose of this plan is to permit the investment of deferred
director fees in a nonleveraged insurance product as an alternative
to using a money market rate.
II. PARTICIPATION
All Bank and Holding Company directors may participate.
III. AMOUNT
Participants must defer a minimum of $12,000 during a four-year
period ($3,000 annually). However, the deferral period can be
shortened and/or larger amounts can be deferred. A participant's
election to defer is irrevocable.
IV. VESTING
Participants will be 100% vested in their deferred benefit account.
V. INTEREST CREDITS
Deferred accounts will be credited annually with interest at a rate
equal to a percentage of Moody's Long-Term Corporate Bond Index.
o The rate will be determined by a participant's age in 1988
and will be equal to 110% of Moody's. This rate will not vary
by age.
o Projected benefits for sample ages assuming a 10% Moody's
rate are shown on Exhibit 2 on the following page. These
benefits are compared to the projected benefit if an equal
amount were invested after tax at a comparable interest rate.
<PAGE>
EXHIBIT 2
KEYSTONE FINANCIAL, INC.
PROPOSED DIRECTORS DEFERRAL PLAN
INTEREST CREDITING RATE ON
NON-LEVERAGED INSURANCE (ACCOUNT B)
EXAMPLE OF ANNUAL BENEFIT
TOTAL DEFERRAL = $12,000
($3,000 for 4 years)
PROJECTED
PROJECTED ANNUAL(1) ANNUAL BENEFIT
INTEREST CREDITING BENEFIT IF MOODY'S IF $12,000 IS
RATE AS A % OF RATE IS 10% NOT DEFERRED % INCREASE IN
MOODY'S BOND (10% x 110% = 11% AND INVESTED BENEFIT IF PRE-TAX
AGE INDEX CREDIT RATE) AT 11% DEFERRAL UTILIZED
- --------------------------------------------------------------------------------
45 110% $21,471 $8,636 149%
49 110% 14,144 6,497 118%
53 110% 9,317 4,888 91%
57 110% 6,137 3,678 67%
61 110% 4,043 2,767 46%
66 110% 2,399 1,940 24%
(1) Projected benefit payable at age 70 for 10 years assuming an average Moody's
rate of 10%. Actual benefits depend on actual Moody's rates.
(2) Projected benefit payable at age 70 for 10 years if this same $12,000 is not
deferred and (1) the after-tax amount is invested at 11% (110% of Moody's), (2)
income is taxed annually and reinvested at 11%, (3) assuming individual tax rate
of 33%.
<PAGE>
VI. COMMENCEMENT OF BENEFIT PAYMENTS
Benefits shall be paid annually for ten years commencing at age 70.
o In the event of death prior to age 70, the participant's
beneficiary shall be entitled to a lump sum payment equal to
his account balance.
o In the event of total and permanent disability prior to age
70, the participant may elect to have benefit payments
commence earlier than age 70.
VII. STATEMENT OF ACCOUNT
Within the first quarter of each year, the Company will provide a
statement to each participant showing his deferred benefit account
balance.
VIII. INSURANCE POLICIES
Insurance policies are owned by Keystone. Directors remain an
unsecured general creditor of the company.
<PAGE>
KEYSTONE FINANCIAL, INC.
AGREEMENT
This Agreement is made and entered into as of this __________ day of
____________________, 19____, by and between Keystone Financial, Inc., a
corporation ("the Company"), and __________________________________, a Director
of the Company ("the Director") and shall be effective beginning with the
_________ day of ____________________, 19____ ("Effective Date").
WHEREAS, the Company maintains a Plan for Deferred Payment of Directors'
Fees, and
WHEREAS, the Director agreed to defer a portion of his fees earned as a
Director of the Company and the Company agreed to pay interest on such deferred
amounts equal to the rate of interest payable by Mid-State Bank and Trust
Company on its Insured Money Market Savings Account, and
WHEREAS, the Company is willing to prospectively credit interest on such
deferred amounts at a rate equal to the rate payable under "Account B" of the
Keystone Financial, Inc. Director Deferred Compensation Plan effective March 31,
1988 and any amendments thereto;
NOW, THEREFORE, the Company and the Director hereby agree as follows:
(1) The Director's Deferred Compensation Account maintained by the
Company under the terms of the Plan for Deferred Payment of
Director Fees shall be ascertained as of March 31, 1988.
(2) Thereafter, the Deferred Compensation Account balance shall
be treated as though it were invested under "Account B" of the
Keystone Financial, Inc. Director Deferred Compensation Plan.
(3) The Director agrees to defer future Director compensation into
"Account B" of the Director Deferred Compensation Plan as required
to meet an aggregate minimum allowable deferral of $12,000.
(4) This agreement shall constitute an amendment to the Plan for
Payment of Deferred Director Fees Notice of Election entered into
between the Company and the Director. Such amendment shall apply
only to the method and timing of interest credits. All other terms
of said Plan including, but not limited to, Manner of Payment,
Payment Commencement Date, Beneficiary Designation,
Non-Alienability of Benefits, Administration and Governing Law
shall remain in effect under the original Agreement.
(5) This Agreement shall inure to the benefit of and be binding upon
the Company, its successors and assigns, and the Director and his
Beneficiaries.
IN WITNESS WHEREOF, the parties hereto have signed and entered into
this Agreement on and as of the date first above written.
KEYSTONE FINANCIAL, INC.
By
- ------------------------------------ --------------------------------------
Director's Name Plan Administrator
- ------------------------------------
Director's Signature
<PAGE>
KEYSTONE FINANCIAL, INC.
AGREEMENT
This Agreement is made and entered into as of this _________ day of
____________________, 19____, by and between Keystone Financial, Inc., a
corporation ("the Company"), and _________________________________, a Director
of the Company ("the Director") and shall be effective beginning with the
_______ day of ___________________, 19____ ("Effective Date").
WHEREAS, the Company had previously entered into a Director's Deferred
Compensation Agreement with the Director whereby the Director agreed to defer a
portion of his current income earned as a Director of the Company and the
Company agreed to pay a specified monthly benefit to the Director commencing on
his 70th birthday, and
WHEREAS, reduced tax rates and long-term interest rates have caused the
Company to incur significant additional costs to pay these benefits and these
costs were not foreseen or anticipated by either party to the Agreement;
NOW, THEREFORE, the Company and the Director hereby agree as follows:
(1) The Director will defer $8,000
________ (a) as soon as possible, or
________ (b) in periodic installments during the next 24 months.
(2) The Director shall receive deferred compensation in an amount no
less than 80% of the amount specified in his Director's Deferred
Compensation Agreement.
<PAGE>
(3) The original deferred compensation will be credited with interest
annually (from the date of the deferral) at a rate equal to
________% of the most recent annual Moody's Corporate Bond Index
rate. Upon commencement of benefits, the interest crediting rate
will be fixed at the previous 5-year average Moody's Corporate
Bond Index rate. This 5-year average rate will be credited as
interest on the deferred account balance during the benefit
payment period and will result in equal benefit installments.
(4) The Director shall be entitled to receive the higher of the
benefit as calculated in paragraphs (2) or (3) above.
(5) In the event of the death of the Director prior to age 70, the
Director's beneficiary shall be entitled to receive the death
benefit payable under the terms of the Director Deferred
Compensation Agreement.
(6) This Agreement shall constitute an amendment to the Director
Deferred Compensation Agreement as provided under the terms of
that Agreement upon the Company, its successors and assigns, and
the Director and his Beneficiaries.
IN WITNESS WHEREOF, the parties hereto have signed and entered into
this Agreement on and as of the date first above written.
KEYSTONE FINANCIAL, INC.
By
- -------------------------------------- --------------------------------
Director's Name Plan Administrator
- --------------------------------------
Director's Signature
<PAGE>
KEYSTONE FINANCIAL, INC.
DIRECTOR DEFERRED COMPENSATION PLAN
PARTICIPATION AGREEMENT
This Agreement is made and entered into as of this _________ day of
____________________, 19____, by and between Keystone Financial, Inc., a
corporation ("Company"), and _________________________________, a
("Participant") and shall be effective beginning with the _______ day of
___________________, 19____ ("Effective Date").
WHEREAS, the Company has adopted the Keystone Financial, Inc. Director
Deferred Compensation Plan (the "Plan"), and
WHEREAS, the Plan requires that an agreement be entered into between
the Company and Participant;
NOW, THEREFORE, the Company and the Participant hereby agree as
follows:
1. PLAN. The Plan, a copy of which is enclosed, is hereby
incorporated into and made a part of this Agreement as though set
forth in full herein. The parties shall be bound by, and have the
benefit of, each and every provision of the Plan. By executing
this Agreement, the Participant acknowledges receipt of a copy of
the Plan and confirms his understanding and acceptance of all of
the terms, provisions and conditions thereof.
2. MINIMUM AND MAXIMUM DEFERRAL. All amounts must be in $1,000 units.
The minimum deferral for Account A is $8,000 and the minimum
deferral for Account B is $12,000. The maximum deferral for
Account A is $8,000.
Check the appropriate blank(s) to the left of each election item
if you wish it to apply. Also fill in the blanks with the dollar
amounts:
3. DEFERRAL ELECTION.
Account A
________ The Participant hereby elects to defer receipt of
$____________ of his Director income for the next
_______ year(s). (Must be equal annual amounts over a
period of not to exceed four years for a total
deferral of $8,000). The rate of interest paid on this
deferral shall be ______% of Moody's Bond Index.
Account B
________ The Participant hereby elects to defer receipt of
$____________ of his Director income for the next
______ year(s). (Must be equal annual amounts over a
period not to exceed four years for a total deferral
of $8,000). The rate of interest paid on this deferral
shall be ______% of Moody's Bond Index.
4. BENEFIT. This Agreement shall inure to the benefit of, and be
binding upon the Company, its successors and assigns,
and the Participant and his Beneficiaries.
5. GOVERNING LAW. This Agreement shall be construed under and governed
by the laws of the state of Pennsylvania.
IN WITNESS WHEREOF, the parties hereto have signed and entered into
this Agreement on and as of the date first above written.
KEYSTONE FINANCIAL, INC.
______________________________________ BY_____________________________________
Participant's Name Plan Administrator
______________________________________
Participant's Signature
<PAGE>
KEYSTONE FINANCIAL, INC.
DIRECTOR DEFERRED COMPENSATION PLAN
BENEFICIARY DESIGNATION
- --------------------------------------- ------------------------------------
Name in Full Social Security No.
I have designated my Beneficiary or Beneficiaries and the method of
payment to such on the lower half of this form. Such designation of Beneficiary
shall be applicable to the sums, if any, payable to my Beneficiaries under the
Keystone Financial, Inc. Director Deferred Compensation Plan.
DESIGNATION OF BENEFICIARY
I designate the following as Beneficiary or Beneficiaries to receive,
in accordance with the method indicated, any payments to which my Beneficiary or
Beneficiaries may be entitled under the Keystone Financial, Inc. Director
Deferred Compensation Plan, in the event of my death either prior to or after my
Retirement, subject to my right at any time to change such Beneficiary or
Beneficiaries as provided under the Plan. (Note: If your Beneficiary is a Trust,
please state the name and address of the Trustee.)
________ Method A - Designation of a primary Beneficiary and one or
more contingent Beneficiaries. The person first named
receives all benefits if surviving; if not, the remaining
person or persons designated receive benefits in the
proportions indicated. In the event of the death of a
contingent Beneficiary, the share of such person shall be
allocated to the listed Beneficiaries then living in pro-
portion to the shares provided to each. (If this method is
used, name each of the Beneficiaries and show a 100% "Share
of Payment" for the primary Beneficiary. Also show the
"Share of Payment" for each contingent Beneficiary if the
primary Beneficiary is not surviving.)
________ Method B - Designation of two or more Beneficiaries in the
proportions indicated. In the event of the death of any
Beneficiary prior to receipt of all death benefits, the
share of such person shall be allocated to the listed
Beneficiaries still living in proportion to the share
provided to each. (If this method is used, name each of the
Beneficiaries and show the "Share of Payment" for each
Beneficiary.)
BENEFICIARIES SHARE OF PAYMENT
- ---------------------------------------- ---------------------------------%
Name
- ----------------------------------------------------------------------------
Street Address City State
- ---------------------------- --------------- ----------------------------
Social Security No.* Date of Birth* Relationship to Participant
- ---------------------------------------- ---------------------------------%
Name
- ----------------------------------------------------------------------------
Street Address City State
- ---------------------------- --------------- ----------------------------
Social Security No.* Date of Birth* Relationship to Participant
- ---------------------------------------- ---------------------------------%
Name
- ----------------------------------------------------------------------------
Street Address City State
- ---------------------------- --------------- ----------------------------
Social Security No.* Date of Birth* Relationship to Participant
* Will not be applicable for corporate trustee or in certain other cases.
KEYSTONE FINANCIAL, INC.
____________________________ By ________________________________
Participant's Name Committee of the Board
____________________________
Participant's Signature
____________________________
Date
KEYSTONE FINANCIAL, INC.
SAVINGS RESTORATION PLAN
As Amended and Restated Effective January 1, 1994
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I TITLE AND EFFECTIVE DATE........................ 1
Section 1.01 Title........................................... 1
Section 1.02 Effective Date.................................. 1
Section 1.03 Application of this Amended
and Restated Plan............................. 1
ARTICLE II DEFINITIONS..................................... 2
Section 2.01 Beneficiary..................................... 2
Section 2.02 Board........................................... 2
Section 2.03 Bookkeeping Account............................. 2
Section 2.04 Code............................................ 2
Section 2.05 Code Limits..................................... 2
Section 2.06 Committee....................................... 2
Section 2.07 Compensation.................................... 2
Section 2.08 Deferral Agreement.............................. 3
Section 2.09 Deferred Compensation........................... 3
Section 2.10 Election Date................................... 3
Section 2.11 Eligible Executive.............................. 3
Section 2.12 Employer Matching Contributions................. 3
Section 2.13 ERISA........................................... 3
Section 2.14 Executive....................................... 3
Section 2.15 401(k) Plan..................................... 3
Section 2.16 Keystone........................................ 4
Section 2.17 Matching Contribution Credits................... 4
Section 2.18 Maximum Employer Matching Contributions......... 4
Section 2.19 Maximum Pre-Tax Savings......................... 4
Section 2.20 Participant..................................... 4
Section 2.21 Participating Entity............................ 4
Section 2.22 Plan............................................ 5
Section 2.23 Plan Year....................................... 5
Section 2.24 Pre-Tax Savings................................. 5
ARTICLE III ELIGIBILITY AND PARTICIPATION................... 6
Section 3.01 Eligibility..................................... 6
Section 3.02 Participation................................... 6
<PAGE>
ARTICLE IV DEFERRED COMPENSATION AND MATCHING
CONTRIBUTION CREDITS.......................... 7
Section 4.01 Deferred Compensation........................... 7
Section 4.02 Deferral Agreement.............................. 7
Section 4.03 No Deferral Without Agreement................... 7
Section 4.04 Duration of Deferral Agreement.................. 8
Section 4.05 Change of Deferrals............................. 8
Section 4.06 Matching Contribution Credits................... 8
Section 4.07 Exception....................................... 8
ARTICLE V BOOKKEEPING ACCOUNT............................. 9
Section 5.01 Bookkeeping Account............................. 9
Section 5.02 Earnings and Losses............................. 9
Section 5.03 Deemed Investment Options....................... 9
Section 5.04 Deemed Investment Elections..................... 11
ARTICLE VI DISTRIBUTIONS................................... 13
Section 6.01 Distribution of Bookkeeping Account............. 13
Section 6.02 Vesting of Deferred Compensation................ 13
Section 6.03 Vesting of Matching Contribution
Credits....................................... 13
Section 6.04 Amount of Payment............................... 13
Section 6.05 Distributions in Cash or Common Stock........... 13
Section 6.06 Loans........................................... 15
Section 6.07 Automatic Cash Out.............................. 15
Section 6.08 Hardship Withdrawal............................. 15
Section 6.09 Withholding for Taxes........................... 16
ARTICLE VII BENEFICIARY..................................... 17
Section 7.01 Beneficiary Designation......................... 17
Section 7.02 Proper Beneficiary.............................. 17
Section 7.03 Minor or Incompetent Beneficiary................ 17
ARTICLE VIII ADMINISTRATION OF THE PLAN...................... 18
Section 8.01 Majority Vote................................... 18
Section 8.02 Rules, Regulations and Plan
Interpretation................................ 18
Section 8.03 Certificates and Reports........................ 18
Section 8.04 Expenses........................................ 18
<PAGE>
ARTICLE IX CLAIMS PROCEDURE................................ 19
Section 9.01 Written Claim................................... 19
Section 9.02 Denied Claim.................................... 19
Section 9.03 Review Procedure................................ 19
Section 9.04 Committee Review................................ 20
Section 9.05 Claims Procedure Mandatory and Binding.......... 20
ARTICLE X NATURE OF OBLIGATION............................ 21
Section 10.01 Obligation...................................... 21
Section 10.02 Creditor Status................................. 21
ARTICLE XI MISCELLANEOUS................................... 22
Section 11.01 Written Notice.................................. 22
Section 11.02 Change of Address............................... 22
Section 11.03 Merger, Consolidation or Acquisition............ 22
Section 11.04 Amendment and Termination....................... 22
Section 11.05 Nonalienation .................................. 22
Section 11.06 Legal Fees...................................... 23
Section 11.07 Construction.................................... 23
Section 11.08 Gender and Number............................... 23
Section 11.09 No Employment Rights ........................... 23
Section 11.10 Illegal or Invalid Provision.................... 23
<PAGE>
KEYSTONE FINANCIAL, INC.
SAVINGS RESTORATION PLAN
The purpose of the Keystone Financial, Inc. Savings Restoration Plan is
to permit a select group of management or highly compensated employees to defer
current compensation which cannot be deferred under the Keystone Financial
401(k) Savings Plan and to receive matching contributions which were not but
otherwise could have been credited under the 401(k) Plan with respect to such
deferrals or deferrals under the 401(k) Plan.
This Plan is primarily designed to provide compensation deferral
opportunities and matching contributions which are lost because of the following
limitations imposed on the 401(k) Savings Plan:
(Degree) The Code Section 402(g) limits which restrict the amount of
Pre-Tax Savings under the 401(k) Plan (e.g., $8,994 for 1993;
$9,240 for 1994).
(Degree) The Code Section 401(a)(17) limits which specify a maximum
amount of compensation that can be taken into account for
purposes of deferrals and matching contributions under the
401(k) Plan (e.g., $235,840 for 1993; $150,000 for 1994).
(Degree) Limitations imposed by the non-discrimination requirements of
Code Sections 401(k) (the ADP test) and 401(m) (the ACP test).
(Degree) The Code Section 415 limits which restrict the amount of
Pre-Tax Savings and Employer Matching Contributions which can
be allocated to a participant's account under the 401(k) Plan.
<PAGE>
ARTICLE I
TITLE AND EFFECTIVE DATE
Section 1.01 Title. This Plan shall be known as the Keystone Financial,
Inc. Savings Restoration Plan.
Section 1.02 Effective Date. The original effective date of this Plan shall
be January 1, 1990. The effective date of this amendment and restatement shall
be January 1, 1994.
Section 1.03 Application of this Amended and Restated Plan. The amended and
restated Plan set forth herein is generally effective as of January 1, 1994. To
the extent there is any inconsistency between this amended and restated Plan and
a Deferral Agreement filed with the Committee, or the time of payment provisions
of the prior Plan, with respect to Deferred Compensation for Plan Years which
began prior to January 1, 1994, the Deferral Agreement or prior Plan time of
payment provisions shall control.
<PAGE>
ARTICLE II
DEFINITIONS
As used herein, the following words and phrases shall have the
meanings specified below unless a different meaning is clearly required by the
context:
Section 2.01 Beneficiary. "Beneficiary" shall mean the person or
persons, natural or legal, designated in writing by the Participant in
accordance with Article VII 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.
Section 2.02 Board. The term "Board" shall mean the Board of
Directors of Keystone.
Section 2.03 Bookkeeping Account. "Bookkeeping Account" shall mean
the bookkeeping account established on the books and records of Keystone or a
Participating Entity, as applicable, for a Participant to reflect the amounts
credited to the Participant and adjustments thereto under the various provisions
of the Plan. The use of the term "Bookkeeping 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.
Section 2.04 Code. "Code" shall mean the Internal Revenue Code of
1986, as amended from time to time.
Section 2.05 Code Limits. "Code Limits" shall mean the limitation
on Pre-Tax Savings for a Plan Year because of Code Sections 401(a)(17), 402(g)
or 415, or because of the average deferral percentage test under Code Section
401(k), or the limitation on Employer Matching Contributions for a Plan Year
because of Code Section 401(a)(17), 415 or the average contribution percentage
test of Code Section 401(m), as applicable.
Section 2.06 Committee. "Committee" shall mean the Human Resources
Committee of the Board which shall manage and administer the Plan.
Section 2.07 Compensation. "Compensation" shall mean the
Participant's compensation from Keystone or a Participating Entity which is used
for purposes of determining a Participant's contributions to the 401(k) Plan,
without regard to any maximum limitations imposed under Code Section 401(a)(17),
plus Deferred Compensation.
Section 2.08 Deferral Agreement. "Deferral Agreement" shall mean
the written form provided by the Committee or its delegate which the Participant
files with the Committee before the relevant Election Date to indicate the
portion of the Participant's Compensation which the Participant elects to defer
in accordance with the terms of the Plan. No Deferral Agreement shall be
effective until it is received and acknowledged by the Committee or its
delegate.
Section 2.09 Deferred Compensation. "Deferred Compensation" shall
mean the portion of a Participant's Compensation for a Plan Year that has been
deferred according to the Participant's Deferral Agreement and the provisions of
the Plan.
Section 2.10 Election Date. "Election Date" shall mean the date
before which a Participant must file a valid Deferral Agreement with the
Committee or its delegate in order to defer future Compensation. The applicable
Election Date for a Plan Year is as follows: (a) 30 days after the employee is
notified of his status as an Executive pursuant to Section 3.01 if not an
Executive on the first day of the Plan Year, or (b) December 31 of the preceding
Plan Year if (a) above does not apply.
Section 2.11 Eligible Executive. "Eligible Executive" shall mean an
Executive who as of January 1 of a Plan Year (or as of the later Election Date
for a Plan Year in which an employee becomes an Executive after January 1 of a
Plan Year) has elected a percentage of Pre-Tax Savings which constitutes Maximum
Pre-Tax Savings or will result in a dollar amount of Maximum Pre-Tax Savings for
the Plan Year.
Section 2.12 Employer Matching Contributions. "Employer Matching
Contributions" shall mean Employer Matching Contributions on behalf of an
Executive under, and as defined in, the 401(k) Plan.
Section 2.13 ERISA. "ERISA" shall mean the Employee Retirement
Income Security Act of 1974, as amended from time to time.
Section 2.14 Executive. "Executive" shall mean any common law
employee of Keystone or a Participating Entity who is designated by the
Committee as a member of the group of management or highly compensated employees
of Keystone or a Participating Entity and is notified by the Committee or its
delegate in writing of such designation, but only for as long as such
designation remains in effect.
Section 2.15 401(k) Plan. "401(k) Plan" shall mean the Keystone
Financial 401(k) Savings Plan in effect from time to time.
Section 2.16 Keystone. "Keystone" shall mean Keystone Financial,
Inc.
Section 2.17 Matching Contribution Credits. "Matching Contribution
Credits" shall mean credits to a Participant's Bookkeeping Account for
contributions which would have been Employer Matching Contributions but could
not be made by Keystone or a Participating Entity to the 401(k) Plan because of
a Code Limit.
Section 2.18 Maximum Employer Matching Contributions. "Maximum
Employer Matching Contributions" shall mean the lesser of the maximum percentage
of Employer Matching Contributions permitted to be made under the 401(k) Plan
for a pay period (e.g., 3% in 1993) or the maximum amount of Employer Matching
Contributions permitted to be credited to a Participant's account under the
401(k) Plan for the Plan Year by a Code Limit applicable to Employer Matching
Contributions or other applicable law.
Section 2.19 Maximum Pre-Tax Savings. "Maximum Pre-Tax Savings"
shall mean the lesser of the maximum percentage of Pre-Tax Savings permitted to
be made under the 401(k) Plan on behalf of a Highly Compensated Employee (as
defined in the 401(k) Plan) for a pay period (e.g., 5% in 1993) or the maximum
amount of Pre-Tax Savings permitted to be credited to a Participant's account
under the 401(k) Plan for the Plan Year by a Code Limit applicable to Pre-Tax
Savings or other applicable law.
Section 2.20 Participant. "Participant" shall mean an Executive or
former Executive with a Bookkeeping Account.
Section 2.21 Participating Entity. "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 subsidiary of Keystone, affiliate bank of Keystone, or
other affiliated entity of Keystone, which elects to participate in the Plan
with respect to its Executives, and is approved by the Board of Keystone or the
Committee to participate in the Plan, with such status as a Participating Entity
and participation in the Plan ceasing automatically on the date the subsidiary
or affiliate ceases to be a subsidiary or affiliate of Keystone.
<PAGE>
Section 2.22 Plan. "Plan" shall mean the Keystone Financial, Inc.
Savings Restoration Plan, as amended and restated effective January 1, 1994, as
set forth herein and as it may be amended from time to time hereafter.
Section 2.23 Plan Year. "Plan Year" shall mean a calendar year
beginning on or after January 1, 1994.
Section 2.24 Pre-Tax Savings. "Pre-Tax Savings" shall mean Pre-Tax
Savings under, and as defined in, the 401(k) Plan.
<PAGE>
ARTICLE III
ELIGIBILITY AND PARTICIPATION
Section 3.01 Eligibility. The determination of whether or not an
employee of Keystone or a Participating Entity is an Executive shall be made by
the Committee, in its sole discretion, on an individual basis. An employee who
has been determined by the Committee to be an Executive in accordance with this
Section shall receive written notice of the date as of which such designation is
effective and the duration of such designation and shall submit such information
and execute such documents as may be required by the Committee for participation
in the Plan.
Section 3.02 Participation. An Eligible Executive shall
automatically become a Participant as of the first Election Date applicable to
the Executive and shall continue as a Participant until the Bookkeeping Account
has been fully distributed or forfeited.
<PAGE>
ARTICLE IV
DEFERRED COMPENSATION AND MATCHING CONTRIBUTION CREDITS
Section 4.01 Deferred Compensation. Each Participant who is an
Eligible Executive may have Compensation for a pay period deferred as provided
in the Deferral Agreement, but not for any pay period during a Plan Year
following the effective date of the Participant's voluntary election under the
401(k) Plan of a percentage of Pre-Tax Savings which is less than the Maximum
Pre-Tax Savings percentage, unless the dollar amount of Maximum Pre-Tax Savings
for the Plan Year has previously been credited to the Participant's account
under the 401(k) Plan. The percentage of Compensation to be deferred under the
Plan shall be a whole percentage not more than 15% (or such other maximum
percentage of Pre-Tax Savings then permitted under the 401(k) Plan without
regard to any limitation on Pre-Tax Savings because of the Code Limits), of
Compensation less the percentage of Compensation represented by the dollars of
Pre-Tax Savings for such pay period.
Section 4.02 Deferral Agreement. In order to defer Compensation
pursuant to Section 4.01, a Participant must submit a written Deferral Agreement
to the Committee or its delegate on or before the applicable Election Date.
Valid Deferral Agreements filed by the applicable Election Date as defined in
Section 2.10(a) shall apply to Compensation earned on and after the Election
Date. Valid Deferral Agreements filed by the applicable Election Date as defined
in Section 2.10(b) shall apply to Compensation earned on or after January 1 of
the Plan Year beginning after the Election Date. Notwithstanding anything to the
contrary, no Deferral Agreement shall be effective for a Participant who has
made a hardship withdrawal from 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 Compensation 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 Deferred Compensation pursuant
to the provisions of the 401(k) Plan.
Section 4.03 No Deferral Without Agreement. A Participant who has
not submitted a valid Deferral Agreement to the Committee or its delegate before
the relevant Election Date may not defer any Compensation for the applicable
Plan Year under this Plan.
<PAGE>
Section 4.04 Duration of Deferral Agreement. Deferral Agreements
remain in effect until revoked or modified by the filing of a new Deferral
Agreement in accordance with Section 4.05, except that a Deferral Agreement
shall become void for a Plan Year with respect to which the Participant is not
an Eligible Executive.
Section 4.05 Change of Deferrals. A new Deferral Agreement must be
filed by the Election Date as defined in Section 2.10(b) if the Participant
wishes to increase or decrease (including to zero) the amount of Deferred
Compensation. An election to cease Deferred Compensation will become effective
with respect to Compensation earned on and after the first pay period which
begins after the date that the election is received by the Committee or its
delegate. All other Deferral Agreements which change the amount of Deferred
Compensation will become effective with respect to Compensation earned on and
after January 1 of the Plan Year beginning after the Election Date, except that
a Deferral Agreement shall be void if the Participant is not an Eligible
Executive on January 1 of such Plan Year.
Section 4.06 Matching Contribution Credits. A Participant, while an
Executive and receiving a percentage of Employer Matching Contributions under
the 401(k) Plan which is the Maximum Employer Matching Contributions percentage
or for any pay period after the Employer Matching Contributions credited to the
Participant's account under the 401(k) Plan cease or are limited because of a
Code Limit, shall be entitled to Matching Contribution Credits for each pay
period in an amount equal to the difference between the amounts described in
4.06(a) and 4.06(b) below:
Section 4.06(a) The amount equal to what the Employer Matching
Contribution would have been for the pay period taking into account the Eligible
Executive's Pre-Tax Savings and Deferred Compensation as though it had all been
Pre-Tax Savings and without regard to the Code Limits.
Section 4.06(b) The actual Employer Matching Contribution for such
pay period.
Section 4.07 Exception. Notwithstanding the foregoing, in no event
shall amounts corrected as a result of the application of the discrimination
tests under Code Sections 401(k) or 401(m) (ADP or ACP tests) to the 401(k) Plan
be contributed to the Plan.
<PAGE>
ARTICLE V
BOOKKEEPING ACCOUNT
Section 5.01 Bookkeeping Account. The Committee shall cause a
Bookkeeping Account to be established and maintained only on the books of
Keystone or the Participating Entity for each Participant who has Deferred
Compensation or Matching Contribution Credits. Such account shall be credited
with the dollar amount of the Participant's Deferred Compensation and Matching
Contribution Credits as of the date on which such amounts would have been
credited to the Participant's account under the 401(k) Plan if treated as
Pre-Tax Savings and Employer Matching Contributions, respectively. A separate
sub-account within the Bookkeeping Account shall be maintained for each Plan
Year with respect to which a Participant's Deferral Agreement provides for a
number of installment payments which is different from the Participant's
Deferral Agreement applicable to other Plan Years, and as otherwise determined
by the Committee.
Section 5.02 Earnings and Losses. The amount in the Participant's
Bookkeeping 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 and losses for each quarter shall be equal to
the amount determined under Section 5.02(a) or Section 5.02(b) below as follows:
Section 5.02(a) 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 current calendar quarter divided by twelve, by (B) the balance in the
Participant's Bookkeeping Account as of the end of each month in the current
quarter; or
Section 5.02(b) Other Options. The total amount determined by
multiplying the rate earned (positive or negative) by each fund available 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
Bookkeeping Account as of the end of each such month, respectively, which is
deemed to be invested in the fund pursuant to paragraph Section 5.03 below.
Section 5.03 Deemed Investment Options. Subject to elimination,
modification or addition by the Committee, the following shall be the funds
available for the Participant's election of deemed investments pursuant to
Section 5.04 below:
Section 5.03(a) 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 401(k)
Plan.
Section 5.03(b) 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 401(k) Plan.
Section 5.03(c) 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 401(k) Plan.
Section 5.03(d) 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
companies (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 from time to time by the 401(k) Plan.
Section 5.03(e) Global Fund. This fund is intended to provide
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 by the 401(k) Plan.
<PAGE>
Section 5.03(f) 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 advisable; provided, however, that
such funds and options shall be made available and communicated to all Partici-
pants on a uniform basis.
Section 5.04 Deemed Investment Elections.
------------ ----------------------------
Section 5.04(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
Compensation and Matching Contribution Credits that are to be deemed to be
invested in the available funds under Section 5.03, with the balance of the
Deferred Compensation and Matching Contribution Credits to receive interest
credit according to Section 5.02(a) 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 Compensation and Matching Contribution Credits
until changed as provided below.
Section 5.04(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 Compensation and Matching Contribution Credits 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 Bookkeeping Account on or after the effective date.
Section 5.04(c) A Participant may elect to reallocate the balance
of the Bookkeeping 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 Corporation), 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
Bookkeeping Account on the last day of the preceding quarter.
Section 5.04(d) The election of deemed investments among the
options provided above shall be the sole responsibility of each Participant.
Keystone, the Participating Entities, Executives, and Committee members and 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 Bookkeeping Account. Neither the Committee, Keystone, nor
the Participating Entities in any way guarantees against loss or depreciation.
Section 5.04(e) All payments from the Plan shall be made from the
portion of the Participant's Bookkeeping Account 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.
<PAGE>
ARTICLE VI
DISTRIBUTIONS
Section 6.01 Distribution of Bookkeeping Account. Distribution of
the vested balance of a Participant's Bookkeeping Account, determined pursuant
to Sections 6.02 and 6.03 below, shall be made in a lump sum or annual
installments, for a period not to exceed ten years, as indicated on the
Participant's Deferral Agreement. The first payment to the Participant, or
Beneficiary in the event of the Participant's death, 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 occurs. For this purpose, termination of employment
includes voluntary or involuntary termination of employment for any reason,
including disability or death, and shall be the date reflected on Keystone's
records as the Participant's termination date.
Section 6.02 Vesting of Deferred Compensation. Subject to Section
10.02, the Participant shall at all times be fully vested and have a
nonforfeitable interest in the portion of his Bookkeeping Account attributable
to Deferred Compensation.
Section 6.03 Vesting of Matching Contribution Credits. Subject to
Section 10.02, the Participant shall at all times be fully vested and have a
nonforfeitable interest in the portion of his Bookkeeping Account attributable
to Matching Contribution Credits.
Section 6.04 Amount of Payment. If a lump sum payment is elected
for a Plan Year, such payment shall be based on the value of the Bookkeeping
Account 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,
the amount of the first installment shall be calculated by dividing the lump sum
value, 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
5.02.
Section 6.05 Distributions in Cash or 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"), amounts 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 (as defined below) 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 6.05, "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
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 6.05.
If the fair market value of the Common Stock cannot be determined
on the basis previously set forth in this Section 6.05 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.
All distributions of a Participant's Bookkeeping Account shall be
made in cash if not made in Keystone Financial, Inc. Common Stock.
Section 6.06 Loans. No loans to Participants of amounts credited
to a Participant's Bookkeeping Account shall be permitted.
Section 6.07 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
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 Committee
or the Board may revoke the designation of all or some employees as Executives
for the current or future Plan 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 determined not to
be Executives because of this Section 6.07 shall have the balance in their
Bookkeeping Account, determined as of the end of the preceding calendar quarter,
plus the amount of any Deferred Compensation and Matching Contribution Credits
during the current calendar quarter, distributed in a single lump sum as soon as
practicable after it is determined that they are no longer an Executive, and
such Participant's Deferral Agreement 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 6.07.
Section 6.08 Hardship Withdrawal. Notwithstanding the terms of any
Deferral Agreement 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 Bookkeeping 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 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 first from the portion of the Bookkeeping Account for Plan Years beginning
on or after January 1, 1994 with the longest number of installment payments
being first (from Pre-Tax Savings first and then from Matching Contribution
Credits for the same Plan Year), and then from the portion of the Bookkeeping
Account representing Plan Years beginning prior to January 1, 1994 with the
latest payment commencement dates first (from Pre-Tax Savings first and then
from Matching Contribution Credits for the same Plan Year), in each case in
accordance with Section 5.04(e).
Section 6.09 Withholding for Taxes. All Deferred Compensation and
Matching Contribution Credits 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 VII
BENEFICIARY
Section 7.01 Beneficiary Designation. A Participant may file with
the Committee or its delegate a completed designation of Beneficiary form
provided 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 Bookkeeping 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.
Section 7.02 Proper Beneficiary. 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 7.03 Minor or Incompetent Beneficiary. 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.
<PAGE>
ARTICLE VIII
ADMINISTRATION OF THE PLAN
Section 8.01 Majority Vote. 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 8.02 Rules, Regulations and Plan Interpretation. The
Committee shall, from time to time, establish rules, forms and procedures of
general application for the administration of the Plan. The Committee shall have
the full power and authority to construe and interpret the Plan, and make all
determinations of Deferred Compensation and Matching Contribution Credits under
the Plan, designate all Executives, and determine all facts and other issues
relating to claims and appeals under the Plan. 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 Deferred Compensation, Matching
Contribution Credits or Bookkeeping Account.
Section 8.03 Certificates and Reports. The members of the Committee
and the officers and directors of Keystone and the Participating Entities shall
be entitled to rely on all certificates and reports made by any accountants, and
on all opinions given by legal counsel which, legal counsel may be counsel for
Keystone or a Participating Entity.
Section 8.04 Expenses. The costs and expenses involved in the
administration of the Plan shall be borne by Keystone or the Participating
Entity.
<PAGE>
ARTICLE IX
CLAIMS PROCEDURE
Section 9.01 Written Claim. The value of a Participant's
Bookkeeping Account shall be paid in accordance with the provisions of the Plan.
In the event of a claim by a Participant or a Participant'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.
Section 9.02 Denied Claim. 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. 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 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 specified in the preceding paragraph, the claim shall be deemed
denied for the purpose of proceeding to appeal in accordance with Section 9.03
below.
Section 9.03 Review Procedure. 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 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
Section 9.02 above). Such Participant or Beneficiary (or his 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 position.
Section 9.04 Committee Review. 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.
Section 9.05 Claims Procedure Mandatory and Binding. If a
Participant or Beneficiary does not follow the procedures set forth above, he
shall be deemed to have waived his right to appeal benefit determinations under
the Plan. In addition, all determinations by and decisions of the Committee
under this Article IX shall be binding on and conclusive as to the Participant
or Beneficiary.
<PAGE>
ARTICLE X
NATURE OF OBLIGATION
Section 10.01 Obligation. The Plan constitutes a mere promise by
Keystone or the Participating Entity to make benefit payments in the future.
Keystone 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 this 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.
Section 10.02 Creditor Status. Neither Keystone nor the
Participating Entities nor this Plan gives the Participant any beneficial
ownership interest in any asset of Keystone or the Participating Entity. The
Participants and their Beneficiaries shall have the status of, and their rights
to receive payments from a Bookkeeping Account shall be no greater than the
rights of, general unsecured creditors of Keystone or the applicable
Participating Entity.
<PAGE>
ARTICLE XI
MISCELLANEOUS
Section 11.01 Written Notice. Any notice to the Committee which
shall be or may be given under the Plan and Deferral Agreements shall be in
writing and delivered to the Committee or its delegate. Notice to a Participant
shall be addressed to the address shown on such Participant's Deferral
Agreement.
Section 11.02 Change of Address. Any party may, from time to time,
change the address to which notices shall be mailed by giving written notice of
such new address.
Section 11.03 Merger, Consolidation or Acquisition. All obligations
for amounts vested but not yet paid under the Plan shall survive any merger,
consolidation or sale of 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 purchaser of assets, unless otherwise agreed to by
the parties thereto.
Section 11.04 Amendment and 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 Bookkeeping 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 11.05 Nonalienation. 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
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 Bookkeeping 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 11.06 Legal Fees. A Participant or Beneficiary will be
reimbursed by Keystone (or its successor) or the Participating Entity (or its
successor) for any and all reasonable legal fees incurred in successfully
enforcing, by judgment of a court of competent jurisdiction and after all
appeals have been exhausted, the Participant's or Beneficiary's right to receive
payments under the terms of the Plan.
Section 11.07 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 11.08 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 11.09 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 Executive or
Participant, or as a guarantee or right of any Executive 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 an
Executive or 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.
Section 11.10 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.
KEYSTONE FINANCIAL, INC.
1992 DIRECTOR FEE PLAN
(as amended through Amendment No. 4 adopted May 20, 1999)
SECTION 1
Purpose; Reservation of Shares
The purposes of the 1992 Director Fee Plan (the "Plan") are to provide
Directors (as hereinafter defined) of Keystone Financial, Inc. (the
"Corporation") and its Subsidiaries with payment alternatives for fees payable
for services as a member of a Board (as hereinafter defined) or any committee
thereof ("Director Fees") and to increase the identification of interests
between such Directors and the shareholders of the Corporation by providing
Directors the opportunity to elect to receive payment of Director Fees in shares
of Common Stock, par value $2.00 per share, of the Corporation ("Common Stock").
For 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 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. For each
calendar year, the aggregate number of shares of Common Stock which may be
issued under Current Stock Elections or credited to Deferred Stock Compensation
Accounts for subsequent issuance under the Plan is limited to 75,000 shares,
subject to adjustment and substitution as set forth in Section 5(b).
SECTION 2
Eligibility
Any Director of the Corporation or a Subsidiary who is separately
compensated for services on a Board or on any committee of a Board shall be
eligible to participate in the Plan. The term "Director" shall include, in
addition to actual Directors of the Corporation or a Subsidiary, individuals
holding the status of advisory directors (as that term is used in applicable
regulations of the Office of the Comptroller of the Currency) for a Subsidiary
and to whom the Corporation may refer as "consulting directors," "business
development directors," "non-bank board directors" or such other term as the
Corporation may deem appropriate. The term "Board" shall include, in addition to
the Board of Directors of the Corporation or a Subsidiary, any regional or
advisory Board of a Subsidiary to which the Corporation may refer as a "Business
Development Board," "Associate Board," "Regional Board" or such other term as
the Corporation may deem appropriate.
SECTION 3
Elections
(a) General. Each Director may elect to receive current payment of
Director Fees (on the date on which the Director Fees are payable) either in
cash or in shares of Common Stock. Each Director also may elect to defer payment
of Director Fees for a calendar year and to receive such deferred payment either
in cash or in shares of Common Stock. The election by a Director to receive
payment of Director Fees other than in cash on the date on which the Director
Fees are otherwise payable is made by filing with the Secretary of the
Corporation a Notice of Election in the form prescribed by the Corporation (an
"Election"). Director Fees earned at any time for which an Election is not
effective shall be paid in cash on the date when the Director Fees are otherwise
payable. Subject to the terms of the Plan, an Election may be changed, modified
or terminated by filing with the Secretary of the Corporation a new Notice of
Election, with respect to a change or modification, or a Notice of Termination
in the form prescribed by the Corporation, with respect to a termination. Any
Election shall terminate on the date a Director ceases to be a member of all
Boards. Any Notice of Election or Notice of Termination shall become irrevocable
when filed, except by the filing of a new Notice of Election or a Notice of
Termination which thereafter becomes effective in accordance with the provisions
of this Section 3. Notwithstanding the provisions set forth below regarding the
effective date of an Election, no Election filed which changes or modifies an
existing Election shall become effective until the existing Election is
terminated or modified by the new Election under the provisions set forth below.
(b) Current Stock Payment. Subject to the provisions of Sections 3(c)
and 3(d), an Election to receive payment of Director Fees in shares of Common
Stock on the date on which the Director Fees are payable (a "Current Stock
Election") shall be effective on the date on which the Notice of Election is
filed. The Current Stock Election may be terminated (i) by filing a Notice of
Termination, in which case the termination shall be effective on the date the
Notice of Termination is filed or (ii) by filing a Notice of Election changing
the method of payment, in which case the termination shall be effective when the
new Election becomes effective as provided in Section 3(c) or 3(d). During the
period a Current Stock Election is effective, all Director Fees payable shall be
paid by the issuance to the Director of a number of whole shares of Common Stock
equal to the Director Fees payable divided by the Fair Market Value of one share
of the Common Stock, as defined in Section 11 hereof, on the date on which such
Director Fees are payable. Any amount of Director Fees which is not paid in
Common Stock on the date otherwise payable because less than the Fair Market
Value of a whole share shall be accumulated in cash without interest and added
to the amount used in computing the number of shares of Common Stock issuable on
the next succeeding date on which Director Fees are payable under the Current
Stock Election. Any such accumulated fractional amount remaining as of the
effective date of any termination of a Current Stock Election or of the
termination of the Plan shall be paid to the Director in cash on the next
succeeding date on which Director Fees would have been payable to the Director
under the Current Stock Election. The Corporation shall issue share certificates
to the Director for the shares of Common Stock acquired or, if requested in
writing by the Director, the shares acquired shall be added to the Director's
account under the Corporation's Dividend Reinvestment Plan. As of the date on
which the Director Fees are payable in shares of Common Stock, the Director
shall be a shareholder of the Corporation with respect to such shares.
(c) Deferred Cash Payment. Subject to the next succeeding sentence, an
Election to defer the receipt of all or a portion of Director Fees and to
receive eventual payment of such Director Fees in cash (a "Cash Deferral
Election") shall be effective on January 1 of the year following the date on
which the Notice of Election is filed. A Cash Deferral Election shall be
effective on the date the Notice of Election is filed with respect to Director
Fees payable for any portion of a calendar year which remains at the time of a
person's initial election to the office of Director, or any subsequent
re-election if immediately prior thereto such person was not serving as a
Director, provided the Director files such Notice of Election within 30 days
subsequent to being elected or re-elected as a Director. If only a portion of
Director's Fees otherwise payable during a calendar year are deferred pursuant
to a Cash Deferral Election, the Director Fees deferred shall be the first
Director Fees paid during such year after the Cash Deferral Election becomes
effective up to the amount of the Director Fees subject to such Cash Deferral
Election, and any later Director Fees with respect to such calendar year shall
be paid to the Director currently in cash. A Cash Deferral Election may not be
modified or terminated with respect to Director Fees payable for the calendar
year or for any portion of a calendar year for which such Cash Deferral Election
is effective, and such Cash Deferral Election, unless modified or terminated by
filing a new Notice of Election or a Notice of Termination on or before December
31 immediately preceding the calendar year for which such modification or
termination is to be effective, shall be effective for and apply to Director
Fees payable with respect to each subsequent calendar year.
(d) Deferred Stock Payment. Subject to the next succeeding sentence, an
Election to defer the receipt of Director Fees and to receive eventual payment
of such Director Fees in shares of Common Stock (a "Stock Deferral Election")
shall be effective on January 1 of the year following the date on which the
Notice of Election is filed. A Stock Deferral Election shall be effective on the
date the Notice of Election is filed with respect to Director Fees payable for
any portion of a calendar year which remains at the time of a person's initial
election to the office of Director, or any subsequent re-election if immediately
prior thereto such person was not serving as a Director, provided the Director
files such Notice of Election within 30 days subsequent to being elected or
re-elected as a Director. A Stock Deferral Election shall apply to all Director
Fees otherwise payable while such Stock Deferral Election is effective. A Stock
Deferral Election may not be modified or terminated with respect to Director
Fees payable for the calendar year or for any portion of a calendar year for
which such Stock Deferral Election is effective. A Stock Deferral Election may
be modified or terminated with respect to future Director Fees payable, but such
modification or termination shall not be effective until January 1 of the year
following the date on which a new Notice of Election or a Notice of Termination
is filed. A Stock Deferral Election shall continue in effect until the effective
date of any modification or termination.
(e) Transition Provision. To the extent there is any inconsistency
between the provisions of the Plan as amended by Amendment No. 2 and a deferral
election or the time of payment provisions of the Plan prior to such Amendment
No. 2, with respect to deferrals of Director Fees for periods prior to January
1, 1994, the deferral election or prior Plan payment provisions shall control.
(f) Retainer Fees. Notwithstanding any other provision contained in
this Section 3, effective on the date provided in Section 3(f)(3), all retainer
fees payable to Directors who are members of the Board of Directors of the
Corporation or a Subsidiary for service in such capacity ("Retainer Fees")
shall, to the extent shares remain available for such purpose under Section 1,
be payable in shares of Common Stock on a current or deferred basis as provided
in this Section 3(f). As used in this Section 3(f), the term "Director" shall
include only persons who are actual members of the Board of Directors of the
Corporation or a Subsidiary and shall not include any advisory, consulting,
business development or similar directors.
(1) Current Payment. Unless a Retainer Deferral Election is
effective for a Director as provided in Section 3(f)(2) or as otherwise
provided in Section 3(f)(3), Retainer Fees shall be payable in the same
manner as if a Current Stock Election had been made and become effective
with respect to such Director Fees under Section 3(b).
(2) Deferred Payment. Subject to the next succeeding sentence,
an Election to defer the receipt of Retainer Fees and to receive
eventual payment of such Director Fees in shares of Common Stock (a
"Retainer Deferral Election") shall be effective on January 1 of the
year following the date on which the Notice of Election is filed. A
Retainer Deferral Election shall be effective on the date the Notice of
Election is filed with respect to Retainer Fees payable during any
portion of a calendar year which remains at the time of a person's
initial election to the office of Director or any subsequent
re-election, if immediately prior thereto such person was not eligible
to participate in the Plan, provided the Director files such Notice of
Election prior to or within 30 days subsequent to being elected or
re-elected as a Director. A Retainer Deferral Election shall apply to
all Retainer Fees otherwise payable while such Retainer Deferral
Election is effective, except that until January 1, 2000, a Retainer
Deferral Election filed on or before December 31, 1998 shall apply only
to Retainer Fees payable for services as a member of the Board of
Directors of the Corporation. A Retainer Deferral Election may not be
modified or terminated with respect to Retainer Fees payable for the
calendar year or for any portion of a calendar year for which such
Retainer Deferral Election is effective. A Retainer Deferral Election
may be modified or terminated with respect to future Retainer Fees
payable, but such modification or termination shall not be effective
until January 1 of the year following the date on which a new Notice of
Election or a Notice of Termination is filed. A Retainer Deferral
Election shall continue in effect until the effective date of any
modification or termination. For all purposes of the Plan other than
this Section 3, a Retainer Deferral Election shall be considered and
treated in the same manner as a Stock Deferral Election under Section
3(d).
(3) Effective Dates; Transition Provisions. This Section 3(f)
is effective for Retainer Fees for services as a Director of the
Corporation payable on or after May 16, 1995 and will be effective for
Retainer Fees for services as a Director of a Subsidiary payable on or
after May 20, 1999. The remaining provisions of this Section 3 and of
the Plan shall continue to apply to all Director Fees other than
Retainer Fees payable for services as a member of the Board of Directors
of the Corporation or a Subsidiary. When this Section 3(f) becomes
effective for a type of Retainer Fees and thereafter, all Elections
other than Retainer Deferral Elections shall be deemed automatically
modified to exclude such Retainer Fees, except that until January 1,
2000, a Stock Deferral Election filed on or before December 31, 1998
shall continue to apply to Retainer Fees payable for services as a
Director of a Subsidiary.
SECTION 4
Deferred Cash Compensation Account
(a) General. The amount of any Director Fees deferred in accordance
with a Cash Deferral Election shall be credited on the date on which such
Director Fees are otherwise payable to a deferred cash compensation account
maintained by the Corporation or a Subsidiary in the name of the Director (a
"Deferred Cash Compensation Account"). A separate Deferred Cash Compensation
Account shall be maintained for each calendar year for which a Director has
elected a different number of payment installments or as otherwise determined by
the Board of the Corporation.
(b) Adjustment for Earnings or Losses. The amount in the Director's
Deferred Cash Compensation 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 current calendar quarter divided by twelve, by (B)
the balance in the Director's Deferred Cash Compensation Account as of
the end of each month in the current quarter; or
(2) Deemed Investment Funds. The total amount determined by
multiplying the rate earned (positive or negative) by each fund
available under the Plan (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 Director's Deferred Cash Compensation
Account as of the end of each such month, respectively, which is deemed
to be invested in the fund pursuant to paragraph (3) below. Subject to
elimination, modification or addition by the Corporation's Board of
Directors, the funds available under the Plan for the Director's
election of deemed investments pursuant to paragraph (3) below shall be
the same as the funds (other than the Keystone Stock Fund) which are
available from time to time for actual investment of participants'
contributions under the Corporation's 401(k) Savings Plan.
(3) Deemed Investment Elections.
---------------------------
(A) The Director shall designate, on a form
prescribed by the Corporation, the percentage, in ten percent
(10%) multiples (or such other percentage as permitted from
time to time by the Board of the Corporation), of the deferred
Director Fees that are to be deemed to be invested in the
available funds under paragraph (2) above, with the balance of
the deferred Director Fees to receive interest credit
according to paragraph (1) above. Said designation shall be
effective on a date specified by the Board of the Corporation
and remain in effect and apply to all subsequent deferred
Director Fees until changed as provided below.
(B) A Director may elect to change, on a calendar
quarter basis, the deemed investment election under paragraph
(A) above with respect to future deferred Director Fees among
one or more of the options then available by written notice to
the Secretary of the Corporation, on a form prescribed by the
Corporation (or by voice or other form of notice permitted by
the Corporation), 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 deferred Director Fees
credited to the Deferred Cash Compensation Account on or after
the effective date.
(C) A Director may elect to reallocate the balance of
his Deferred Cash Compensation Account, subject to limitations
imposed by the Board of the Corporation, on a calendar quarter
basis, in ten percent (10%) multiples (or such other
percentage as permitted from time to time by the Board of the
Corporation), among the deemed investment options then
available. A Director may make such an election by written
notice to the Secretary of the Corporation, on a form
prescribed by the Corporation (or by voice or other form of
notice permitted by the Corporation), 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 Deferred Cash Compensation 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 Director. The Corporation, the Subsidiaries, Directors,
and Board members are not authorized to make any
recommendation to any Director with respect to such election.
Each Director assumes all risk connected with any adjustment
to the value of his Deferred Cash Compensation Account.
Neither the Board, the Corporation, nor any Subsidiary in any
way guarantees against loss or depreciation.
(E) All payments from the Plan shall be made from the
portion of the Director's Deferred Cash Compensation Account
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 Board of the
Corporation.
(4) 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 Corporation's Board of Directors,
and such Board may provide any other form of investment option it
determines to be advisable; provided, however, that such funds and
options shall be made available and communicated to all Directors on a
uniform basis.
(c) Manner of Payment. The balance of a Director's Deferred Cash
Compensation Account will be paid to the Director or, in the event of the
Director's death, to the Director's designated beneficiary, in accordance with
the Cash Deferral Election. A Director may elect at the time of filing of the
Notice of Election for a Cash Deferral Election to receive payment of the
Director Fees in annual installments rather than a lump sum, provided that the
payment period for installment payments shall not exceed ten years following the
Payment Commencement Date, as described in Section 6 hereof. The amount of any
installment shall be determined by multiplying (i) the balance in the Director's
Deferred Cash Compensation Account on the date of such installment by (ii) a
fraction, the numerator of which is one and the denominator of which is the
number of remaining unpaid installments. The balance of the Deferred Cash
Compensation Account shall be appropriately reduced on the date of payment to
the Director or the Director's designated beneficiary to reflect the installment
payments made hereunder. Amounts held pending distribution pursuant to this
Section 4(c) shall continue to be credited with the earnings, gains or losses on
a quarterly basis as described in Section 4(b) hereof. Notwithstanding the
provisions of any Cash Deferral Election, if the balance in any Deferred Cash
Compensation Account (including any separate Account maintained for a Director
as referred to in the second sentence of Section 4(a)) as of the Payment
Commencement Date is less than $5,000, the Corporation may in its discretion pay
the balance of the Account to the Director or the Director's designated
beneficiary in a single lump sum.
SECTION 5
Deferred Stock Compensation Account
(a) General. The amount of any Director Fees deferred in accordance
with a Stock Deferral Election shall be credited to a deferred stock
compensation account maintained by the Corporation or a Subsidiary in the name
of the Director (a "Deferred Stock Compensation Account"). A separate Deferred
Stock Compensation Account shall be maintained for each calendar year for which
a Director has elected a different number of payment installments or as
otherwise determined by the Board of the Corporation. On each date on which
Director Fees are otherwise payable and a Stock Deferral Election is effective
for a Director, the Director's Deferred Stock Compensation Account for that
calendar year shall be credited with a number of shares of Common Stock
(including fractional shares) equal to the Director Fees payable divided by the
Fair Market Value of one share of the Common Stock, as defined in Section 11
hereof, on the date on which such Director Fees are payable. If a dividend or
distribution is paid on the Common Stock in cash or property other than Common
Stock, on the date of payment of the dividend or distribution to holders of the
Common Stock each Deferred Stock Compensation Account shall be credited with a
number of shares of Common Stock (including fractional shares) equal to the
number of shares of Common Stock credited to such Account on the date fixed for
determining the shareholders entitled to receive such dividend or distribution
times the amount of the dividend or distribution paid per share of Common Stock
divided by the Fair Market Value of one share of the Common Stock, as defined in
Section 11 hereof, on the date on which the dividend or distribution is paid. If
the dividend or distribution is paid in property, the amount of the dividend or
distribution shall equal the fair market value of the property on the date on
which the dividend or distribution is paid. The Deferred Stock Compensation
Account of a Director shall be charged on the date of distribution with any
distribution of shares of Common Stock made to the Director from such Account
pursuant to Section 5(c) hereof.
(b) Adjustment and Substitution. The number of shares of Common Stock
credited to each Deferred Stock Compensation Account, and the number of shares
of Common Stock available for issuance or crediting under the Plan in each
calendar year in accordance with Section 1 hereof, shall be proportionately
adjusted to reflect any dividend or other distribution on the outstanding Common
Stock payable in shares of Common Stock or any split or consolidation of the
outstanding shares of Common Stock. If the outstanding Common Stock shall, in
whole or in part, be changed into or exchangeable for a different class or
classes of securities of the Corporation or securities of another corporation or
cash or property other than Common Stock, whether through reorganization,
reclassification, recapitalization, merger, consolidation or otherwise, the
Board of the Corporation shall adopt such amendments to the Plan as it deems
necessary to carry out the purposes of the Plan, including the continuing
deferral of any amount of any Deferred Stock Compensation Account.
(c) Manner of Payment. The balance of a Director's Deferred Stock
Compensation Account will be paid in shares of Common Stock to the Director or,
in the event of the Director's death, to the Director's designated beneficiary,
in accordance with the Stock Deferral Election. A Director may elect at the time
of filing of the Notice of Election for a Stock Deferral Election to receive
payment of the shares of Common Stock credited to the Director's Deferred Stock
Compensation Account in annual installments rather than a lump sum, provided
that the payment period for installment payments shall not exceed ten years
following the Payment Commencement Date as described in Section 6 hereof. The
number of shares of Common Stock distributed in each installment shall be
determined by multiplying (i) the number of shares of Common Stock in the
Deferred Stock Compensation Account on the date of payment of such installment,
by (ii) a fraction, the numerator of which is one and the denominator of which
is the number of remaining unpaid installments, and by rounding such result down
to the nearest whole number of shares. The balance of the number of shares of
Common Stock in the Deferred Stock Compensation Account shall be appropriately
reduced in accordance with Section 5(a) hereof to reflect the installment
payments made hereunder. Shares of Common Stock remaining in a Deferred Stock
Compensation Account pending distribution pursuant to this Section 5(c) shall
continue to be credited with respect to dividends or distributions paid on the
Common Stock pursuant to Section 5(a) hereof and shall be subject to adjustment
pursuant to Section 5(b) hereof. If a lump sum payment or the final installment
payment hereunder would result in the issuance of a fractional share of Common
Stock, such fractional share shall not be issued and cash in lieu of such
fractional share shall be paid to the Director based on the Fair Market Value of
a share of Common Stock, as defined in Section 11 hereof, on the date
immediately preceding the date of such payment. The Corporation shall issue
share certificates to the Director, or the Director's designated beneficiary,
for the shares of Common Stock distributed hereunder, or if requested in writing
by the Director, the shares to be distributed shall be added to the Director's
account under the Corporation's Dividend Reinvestment Plan. As of the date on
which the Director is entitled to receive payment of shares of Common Stock, a
Director shall be a shareholder of the Corporation with respect to such shares.
Notwithstanding the provisions of any Stock Deferral Election, if the Fair
Market Value of any Deferred Stock Compensation Account (including any separate
Account maintained for a Director as referred to in the second sentence of
Section 5(a)) as of the Payment Commencement Date is less than $5,000, the
Corporation may in its discretion pay the balance of the Account to the Director
or the Director's designated beneficiary in a single lump sum.
SECTION 6
Payment Commencement Date
Payment of amounts in a Deferred Cash Compensation Account or a
Deferred Stock Compensation Account shall commence 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 Director ceases to be a member of
all Boards for any reason, including death or disability.
SECTION 7
Beneficiary Designation
A Director may designate, in the Beneficiary Designation form
prescribed by the Corporation, any person to whom payments of cash or shares of
Common Stock are to be made if the Director dies before receiving payment of all
amounts due hereunder. A beneficiary designation will be effective only after
the signed beneficiary designation form is filed with the Secretary of the
Corporation while the Director is alive and will cancel all beneficiary
designations signed and filed earlier. If the Director fails to designate a
beneficiary, or if all designated beneficiaries of the Director die before the
Director or before complete payment of all amounts due hereunder, any remaining
unpaid amounts shall be paid in one lump sum to the estate of the last to die of
the Director or the Director's designated beneficiaries, if any.
SECTION 8
Non-Alienability of Benefits
Neither the Director nor any beneficiary designated by the Director
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, nor shall any such amount be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors of the Director or the Director's designated
beneficiary or to the debts, contracts, liabilities, engagements, or torts of
any Director or designated beneficiary, or transfer by operation of law in the
event of bankruptcy or insolvency of the Director or any beneficiary, or any
legal process.
SECTION 9
Nature of Deferred Accounts
Any Deferred Cash Compensation Account or Deferred Stock Compensation
Account and any cash fractional amount accumulated under Section 3(c) shall be
established and maintained only on the books and records of the Corporation or a
Subsidiary, and no assets or funds of the Corporation, a Subsidiary or the Plan
or shares of Common Stock of the Corporation shall be removed from the claims of
the Corporation's or a Subsidiary's general or judgment creditors or otherwise
made available until such amounts are actually payable to Directors or their
designated beneficiaries as provided herein. The Plan constitutes a mere promise
by the Corporation or a Subsidiary to make payments in the future. The Directors
and their designated beneficiaries shall have the status of, and their rights to
receive a payment of cash or shares of Common Stock under the Plan shall be no
greater than the rights of, general unsecured creditors of the Corporation or
the applicable Subsidiary. No person shall be entitled to any voting rights with
respect to shares credited to a Deferred Stock Compensation Account and not yet
payable to a Director or the Director's designated beneficiary. The Corporation
and Subsidiaries shall not be obligated under any circumstance to fund their
respective financial obligations under the Plan and the Plan is intended to
constitute an unfunded plan for tax purposes. However, the Corporation or any
Subsidiary 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 the Internal Revenue Code
of 1986, as amended, and provided, further, that any trust created by the
Corporation or a Subsidiary, and any assets held by such trust to assist the
Corporation or the Subsidiary 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.
SECTION 10
Administration of Plan; Hardship Withdrawal
Full power and authority to construe, interpret, and administer the
Plan shall be vested in the Board of the Corporation. Decisions of such Board
shall be final, conclusive, and binding upon all parties. Notwithstanding the
terms of a Cash Deferral Election or a Stock Deferral Election made by a
Director hereunder, the Board of the Corporation may, in its sole discretion,
permit the withdrawal of amounts credited to a Deferred Cash Compensation
Account or shares credited to a Deferred Stock Compensation Account with respect
to Director Fees previously payable, upon the request of a Director or the
Director's representative, or following the death of a Director upon the request
of a Director's beneficiary or such beneficiary's representative, if such Board
determines that the Director or the Director's 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 Director or the Director's beneficiary and that would
result in severe financial hardship to the Director or the Director's
beneficiary if an early hardship withdrawal were not permitted. The Director or
the Director's beneficiary shall provide to such Board such evidence as the
Board, in its discretion may require to demonstrate that such emergency exists
and financial hardship would occur if the withdrawal were not permitted. The
withdrawal shall be limited to the amount or to the number of shares, as the
case may be, 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 Director 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 Board of the Corporation approves the payment and determines the
amount of the payment or number of shares which shall be withdrawn, in a single
lump sum from the portion of the Deferred Cash Compensation Account or Deferred
Stock Compensation Account, as applicable, for calendar years beginning on or
after January 1, 1994 with the longest number of installment payments first, and
then from the portion of the same account representing calendar years beginning
prior to January 1, 1994 with the latest Payment Commencement Dates first, in
each case in accordance with Section 4(b)(3)(E) if the distribution is from the
Deferred Cash Compensation Account. No Director shall participate in any
decision of such Board regarding such Director's request for a withdrawal under
this Section 10.
SECTION 11
Fair Market Value
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 Board of the Corporation 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 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
Securities Exchange Act of 1934 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 11. If the fair market value of the Common Stock
cannot be determined on the basis previously set forth in this Section 11 on the
date as of which fair market value is to be determined, the Board of the
Corporation 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 12
Securities Laws; Issuance of Shares
The obligation of the Corporation to issue or credit 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. If, on the date on
which any shares of Common Stock would be issued pursuant to a Current Stock
Election or credited to a Deferred Stock Compensation Account, sufficient shares
of Common Stock are not available under the Plan or the Corporation is not
obligated to issue shares pursuant to this Section 12, then no shares of Common
Stock shall be issued or credited but rather, in the case of a Current Stock
Election, cash shall be paid in payment of the Director Fees payable, and in the
case of a Deferred Stock Compensation Account, Director Fees and dividends which
would otherwise have been credited in shares of Common Stock shall be credited
in cash to a Deferred Cash Compensation Account in the name of the Director. The
Board of the Corporation shall adopt appropriate rules and regulations to carry
out the intent of the immediately preceding sentence if the need for such rules
and regulations arises.
SECTION 13
Governing Law
The provisions of this Plan shall be interpreted and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
SECTION 14
Effective Date; Amendment and Termination
The Plan was adopted by the Board of Directors of the Corporation on
March 26, 1992 and became effective on May 14, 1992, the date of approval
approval of the Plan by the shareholders of the Corporation at its 1992 Annual
Meeting. The Board of Directors of the Corporation may amend or terminate the
Plan at any time, provided that no such amendment or termination shall adversely
affect rights with respect to amounts or shares then credited to any Deferred
Cash Compensation Account or Deferred Stock Compensation Account.
KEYSTONE FINANCIAL, INC. / (Bank)
EXECUTIVE SPLIT DOLLAR AGREEMENT
THIS AGREEMENT is made and entered into effective this 1st day of January, 1998,
by and between KEYSTONE FINANCIAL, INC. ("Sponsor) through one of its
affililated companies _________________________ , ("Employer"), a Pennsylvania
corporation, and _______________ ("Executive") an employee of the Employer, and
represents the final understanding of the parties regarding the benefits
provided hereunder.
W I T N E S S E T H
WHEREAS, the Executive is insured under Policy Number _________________ (the
"Policy") issued by Metropolitan Life Insurance Company ("Metropolitan"); and
WHEREAS, the owner of the Policy (the "Owner") shall be the Executive or the
person or other entity to whom the Executive assigns the Policy pursuant to
Section 4; and
WHEREAS, Sponsor and Employer highly values Executive's efforts, abilities, and
accomplishments; and
WHEREAS, Executive is deemed a member of a select group of management and/or one
of the highly compensated employees of the Employer; and
WHEREAS, Employer wishes to provide Executive with permanent life insurance as
an additional employment benefit and is willing to assist in the payment of
premiums under the Policy as provided in this Agreement; and
WHEREAS, the Executive has agreed to assign an interest in the Policy to Sponsor
as collateral security for such premium payments, at the time of the first
premium payment, on a form of agreement approved by Metropolitan (the
"Collateral Assignment Agreement"); and
WHEREAS, in order to be eligible for such benefit, Executive agrees to the terms
hereinafter provided;
NOW, THEREFORE, Employer and Executive ("Parties"), in consideration of the
mutual covenants and agreements described below, hereby agree as follows:
<PAGE>
SECTION 1
Payment of Premiums
1.1 The Employer shall pay the premiums on the Policy, less the amount paid by
the Executive pursuant to Section 1.4, until the termination of this Agreement,
pursuant to Section 5. The Employer may increase or decrease the scheduled
premium for any year after the first year. Each premium for the Policy following
execution of this Agreement will be remitted by the Employer to Metropolitan
within thirty-one (31) days following the anniversary date of the Policy.
1.2 The premium payment periods may also be changed by the Employer to the
extent necessary to maintain compliance of the Policy with Sections 7702 and
7702A of the Internal Revenue Code and the regulations thereunder.
1.3 No payment of interest by the Executive will be due on the premium amounts
paid by the Employer.
1.4 The Executive shall pay that portion of the premium in amount that for
federal income tax purposes is equal to the value of the "economic benefit" of
the life insurance protection enjoyed by the Executive each year. The "economic
benefit" is to be determined by reference to IRS Rev. Ruls. 64-328 and 66-110,
or any rulings which may substitute, supercede, replace, or amend them,
governing the federal income tax consequences of split dollar arrangements. The
Executive has been rated by Metropolitan Life Insurance Company less favorably
than "standard non-smoker". Since the Employer is contributing to the premium
based on a standard non-smoker classification, if the rating continues, the
policy at program maturity date will likely not have sufficient cash value to
realize the objective described in Section 1.7B below. Therefore, if the
Executive wishes to attain this objective, Executive may, in his or her
discretion, make additional premium payments in amounts as may be indicated from
time to time by Metropolitan Life Insurance Company as necessary to create the
augmented value in the policy to realize such objective.
1.5 The Employer shall continue to pay its portion of the premium if the Execu-
tive is disabled while actively employed.
1.6 "Disability", for the purpose of this Agreement means, that the Executive
has met the requirements for disability under the Employer's Long Term
Disability Plan, is not eligible for full retirement, and is incapable of
fulfilling job duties due to mental or physical disability.
<PAGE>
1.7 "Premium", for the purpose of this Agreement, means the sum paid to
Metropolitan Life Insurance Company as consideration for the individual
Universal Life Policy specifically referred to in this Agreement. Premiums paid
are scheduled to be in an amount so as to accumulate policy values at the
program maturity date as if the Executive were to receive a standard nonsmoker
classification sufficient to:
A. Provide total death benefits equal to at least two times the Executive's
annual base salary plus the accumulated premiums paid by the Employer during the
Executive's active employment and equal to at least one (1) times the
Executive's final annual base salary plus accumulated premiums paid by the
Employer after the Executive's active employment and prior to termination of
this Agreement;
B. Keep the policy in force after the program maturity date with a death
benefit equal to one (1) times the Executive's final annual base salary until
the Executive attains the age of ninety-five (95); and
C. Prior to the program maturity date, withdraw an amount to be paid to the
Employer equal to the accumulated premiums paid by the Employer.
The sufficiency of the amount needed to meet the provisions above shall
be determined as of the program maturity date and shall be based on the
insurer's current interest crediting and mortality rates as of that same date.
The Employer shall not be responsible for events occurring subsequent to the
program maturity date which may result in an insufficient level of funding to
meet the provisions above.
SECTION 2
Policy Beneficiary Designation
2.1 The right to designate and change the beneficiary of the Policy and to
elect an optional mode of settlement is reserved to the person who would be the
Owner of the Policy in the absence of the Collateral Assignment Agreement. Such
Owner of the Policy shall have the right to designate and change the
beneficiaries and contingent beneficiaries and to elect an optional mode of
settlement subject to the interest of the Employer as Assignee under the
Collateral Assignment Agreement, and the Employer will make the Policy available
to the Owner, if required, for endorsement of a change of beneficiary.
<PAGE>
SECTION 3
Payment of Policy Proceeds in Event of Death of Employee
3.1 If the Executive dies (other than by suicide within two (2) years from the
Policy issue date) while the Policy and this Agreement are in force, the
proceeds of the Policy shall be payable as follows:
A. Part shall be payable to the Employer; this part shall be equal to the
proceeds of the Policy not payable to the beneficiary pursuant to paragraph B or
paragraph C of this section.
B. The designated beneficiary of the Executive shall be paid an amount
equal to two (2) times the Executive's annual base salary if the Executive dies
while actively employed by Employer, subject, however, to satisfying any
applicable underwriting restrictions or guidelines existing at the time of
adjustment.
C. The designated beneficiary of the Executive shall be paid an amount
equal to one (1) times annual base salary, subject, however, to satisfying any
applicable underwriting restrictions or guidelines at the time of adjustment if
the Executive dies after terminating active employment with Employer due to
Disability or Normal Retirement, provided that the termination of active
employment occurs prior to the termination of this Agreement.
(1) The benefit paid if the Executive dies after terminating active
employment with Employer due to Disability is based on the Executive's
annual base salary at the time the Disability occurred.
3.2 Insurance proceeds will not be paid if the Executive commits suicide, while
sane or insane, within two (2) years from the date of the policy. Instead, an
amount equal to all premiums paid, without interest, will be paid under the
terms of this Agreement.
3.3 "Normal Retirement", for the purpose of this Agreement, means attaining the
age of sixty-five (65).
3.4 "Annual Base Salary", for the purpose of this Agreement, means the
Executive's regular salary, without bonus, as of the date Executive was actively
at work.
<PAGE>
SECTION 4
Exercise of Rights
4.1 The Employer, during the lifetime of the Executive and prior to the
termination of this Agreement, may exercise any of its rights as Assignee of the
Policy only upon thirty (30) days written notice to the Executive. Such notice
shall be given to the Executive either in person or by mailing as provided for
in Section 8.1 of this Agreement.
4.2 Subject to the Employer's rights as Assignee, the Owner retains all rights
as Owner of the Policy. Notwithstanding the aforementioned, neither the Owner
nor the Employer shall withdraw, surrender, borrow against, or pledge as
security for a loan any portion of the Policy while this Agreement is in effect.
SECTION 5
Termination of Agreement
5.1 This Agreement shall terminate if any of the following takes place:
A. Termination of the Executive's employment with the Employer prior to
the Executive's becoming eligible for disability benefits under a Disability
plan of the Employer or for a Normal Retirement benefit under any qualified
pension plan maintained by the Employer; or
B. Demotion of the Executive to a position which is not part of the group
of Employees eligible to participate in the Employer's Split Dollar Insurance
Program as determined by the Employer; or
C. The bankruptcy of the Employer; or
D. The failure of the Employer or the Executive to pay their respective
share of the premium under Section 1 of this Agreement; or
E. Payment to the Employer of the aggregate amount of the premiums paid
either directly by the Executive or by a withdrawal from the Policy.
F. Termination of this Agreement pursuant to Section 12.3; or
G. The death of the Executive; or
H. Program Maturity Date. This occurs the year in which sufficient funds
will have accumulated in the Policy to sustain the projected death benefit
amount as if the Executive were to have received a standard nonsmoker classifi-
cation, or when the Executive attains the age of sixty-five (65), whichever
occurs later.
5.2 In the event of termination of this Agreement, the lesser of the aggregate
of the premiums paid by the Employer pursuant to this Agreement, or the net cash
value in the Policy, shall become due and payable to the Employer, except as
provided for herein. Upon payment of such amount from the Policy, from the
Executive, or from whatever other source, the Employer shall execute a release
of the Collateral Assignment Agreement and deliver such release and the Policy
to the Owner.
5.3 In the event of a Change of Control, as defined in the written severance
policy in effect at that time, such severance policy shall thereafter remain in
force for purposes of this Agreement. In the event of a Change of Control and
the Executive is entitled to benefits for termination of employment under such
severance policy, then, in addition, he shall have no obligation to repay
premiums to the Employer as stated in Section 5.2.
SECTION 6
Taxation
6.1 All income taxes attributable to the Executive which are relevant to the
Policy or this Agreement, whether federal, state or local, which may be due or
may become due, are the sole responsibility of the Executive, or the Executive's
beneficiary, while this Agreement is in force and after it has terminated for
any reason.
SECTION 7
Insurer Not a Party
7.1 Metropolitan shall not be deemed to be a party to this Agreement for any
purpose nor shall it be deemed in any way responsible for its validity.
Metropolitan shall not be obligated to inquire as to the distribution or
application of any monies payable or paid by it under the Policy, and Payments
or other performance of its contract obligations in accordance with the terms of
the Policy shall fully discharge Metropolitan from any and all liability under
the Policy.
<PAGE>
SECTION 8
Notices
8.1 Any notices required or permitted to be given under this Agreement shall be
in writing and shall be deemed properly given if sent by registered or certified
mail, addressed as follows:
(1) Notices to Executive:
(2) Notices to Employer: _____________________________ (Bank)
c/o G. E. Aumiller
Keystone Financial, Inc.
P.O. Box 3660
Harrisburg, PA 17105-3660
Either party may, from time to time, change the address to which
notices shall be mailed by giving notice of such address in the manner provided
herein.
SECTION 9
Other Benefits
9.1 Participation in this Program is designed to supersede and render void the
group term life insurance currently provided to the Executive. In all other
respects, the benefits described herein are in addition to any other benefits
the Executive may have under any plan or program of the Employer, and, except as
aforementioned or otherwise expressly provided for herein, shall supplement and
shall not supersede any other agreement between the Employer and the Executive
or any provision contained therein.
<PAGE>
SECTION 10
Named Fiduciary
10.1 The Employer is hereby designated as the Named Fiduciary of this Split
Dollar Insurance Program, in accordance with the Employee Retirement Income
Security Act of 1974. The business address and telephone number of the Named
Fiduciary are:
___________________________ (Bank)
c/o G. E. Aumiller
Keystone Financial, Inc.
One Keystone Plaza
Front & Market Streets
P.O. Box 3660
Harrisburg, PA 17105-3660
The Named Fiduciary shall have the authority to control and manage the
operation and administration of this Program. However, the Named Fiduciary may
allocate its responsibilities for the operation and administration of this
Program, including the designation of persons who are not Named Fiduciaries, to
carry out fiduciary responsibilities.
The Named Fiduciary of this Program shall be responsible for making
timely delivery of any required premiums to the Insurer.
All pertinent documents shall be retained by the Named Fiduciary and
made available for examination at the above indicated business address. Upon
written request, the Program document and other information shall be provided to
the Parties of this Program.
SECTION 11
Claims Procedure
11.1 Benefits shall be payable in accordance with the Agreement provisions.
Should the Executive or beneficiary fail to receive benefits to which such
Executive or beneficiary believes he or she is entitled, a claim may be filed.
Any claim for a Program benefit hereunder shall be filed by the Executive or
beneficiary (claimant) of this Program by written communication, which is made
by the claimant or the claimant's authorized representative, which is reasonably
calculated to bring the claim to the attention of the Named Fiduciary.
If a claim for a Program benefit is wholly or partially denied, a
written notice of the decision shall be furnished to the claimant by the Named
Fiduciary or his designee within a reasonable period of time after receipt of
the claim by the Program, which notice shall include the following information:
(A) The specific reason or reasons for the denial;
(B) Specific reference to the pertinent Agreement provisions upon which the
denial is based;
(C) A description of any additional material or information necessary for the
claimant to perfect the claim and an explanation of why such material or
information is necessary; and
(D) An explanation of the Program's claim review procedures.
In order that a claimant may appeal a denial of a claim, a claimant or
his duly authorized representative:
(A) May request a review by written application to the Named Fiduciary or his
designee not later than 60 days after receipt by the claimant of written
notification of denial of a claim;
(B) May review pertinent documents; and
(C) May submit issues and comments in writing.
A decision of review of a denied claim shall be made not later than 60
days after the Program's receipt of a request for review, unless special
circumstances require an extension of time for processing, in which case a
decision shall be rendered within a reasonable period of time, but not later
than 120 days after receipt of a request for review. The decision on review
shall be in writing and shall include the specific reason(s) for the decision
and the specific reference(s) to the pertinent Agreement provisions on which the
decision is based.
Notwithstanding anything contained in this Section to the contrary, any
claim for a death benefit under an insurance policy under this Program shall be
filed with the Insurer by the claimant or the claimant's authorized
representative on the form or forms prescribed for such purpose by the Insurer.
The Insurer shall have sole authority for determining whether a death claim
shall or shall not be paid, either in whole or in part, in accordance with the
terms of such insurance contract which may have been purchased on the life of
the Executive.
<PAGE>
SECTION 12
Amendment and Assignment of Agreement
12.1 This Agreement shall not be modified or amended except in writing signed by
the Parties hereto.
12.2 This Agreement is binding upon the heirs, administrators or assigns of each
Party.
12.3 Subject to provisions of any written Employment Agreement, this Agreement
may be terminated by either Party with thirty (30) days' written notice to the
other.
SECTION 13
Employment
13.1 This Agreement shall not in any way constitute an employment agreement
between the Executive and the Employer and shall in no way obligate the Employer
to continue the employment of Executive with the Employer, nor shall this
Agreement limit the right of the Employer to terminate Executive's employment
with the Employer for any reason.
SECTION 14
Jurisdiction
14.1 The Parties hereto consent to the exclusive jurisdiction of the courts of
the Commonwealth of Pennsylvania in any and all actions arising hereunder.
SECTION 15
State Law
15.1 This Agreement, all matters involving its validity, effect and
interpretation, and the rights of the Parties hereunder, shall be governed by
and construed pursuant to the laws of the Commonwealth of Pennsylvania.
SECTION 16
Interpretation
16.1 Where appropriate, words used in the singular shall include the plural and
words used in the masculine shall include the feminine and vice versa.
IN WITNESS WHEREOF, the Parties hereto intending to be legally bound, have
executed this Agreement as of the day and year first above written.
KEYSTONE FINANCIAL, INC.
By: ____________________________
Authorized Representative
(Bank)
By: _____________________________
WITNESS: Authorized Representative
- ------------------------------ -----------------------------------------
Employee
KEYSTONE FINANCIAL, INC./(Bank)
EXECUTIVE SPLIT DOLLAR AGREEMENT
THIS AGREEMENT is made and entered into effective this 1st day of January, 1998,
by and between KEYSTONE FINANCIAL,INC. ("Sponsor") through one of its affiliated
companies __________________ , ("Employer"), a Pennsylvania corporation, and
___________________ ("Executive") an employee of the Employer, and represents
the final understanding of the parties regarding the benefits provided
hereunder.
W I T N E S S E T H
WHEREAS, the Executive is insured under Policy Number ________________ (the
"Policy") issued by Metropolitan Life Insurance Company ("Metropolitan"); and
WHEREAS, the owner of the Policy (the "Owner") shall be the Executive or the
person or other entity to whom the Executive assigns the Policy pursuant to
Section 4; and
WHEREAS, Sponsor and Employer highly values Executive's efforts, abilities, and
accomplishments; and
WHEREAS, Executive is deemed a member of a select group of management and/or one
of the highly compensated employees of the Employer; and
WHEREAS, Employer wishes to provide Executive with permanent life insurance as
an additional employment benefit and is willing to assist in the payment of
premiums under the Policy as provided in this Agreement; and
WHEREAS, the Executive has agreed to assign an interest in the Policy to Sponsor
as collateral security for such premium payments, at the time of the first
premium payment, on a form of agreement approved by Metropolitan (the
"Collateral Assignment Agreement"); and
WHEREAS, in order to be eligible for such benefit, Executive agrees to the terms
hereinafter provided;
NOW, THEREFORE, Employer and Executive ("Parties"), in consideration of the
mutual covenants and agreements described below, hereby agree as follows:
SECTION 1
Payment of Premiums
1.1 The Employer shall pay the premiums on the Policy, less the amount paid by
the Executive pursuant to Section 1.4, until the termination of this Agreement,
pursuant to Section 5. The Employer may increase or decrease the scheduled
premium for any year after the first year. Each premium for the Policy following
execution of this Agreement will be remitted by the Employer to Metropolitan
within thirty-one (31) days following the anniversary date of the Policy.
1.2 The premium payment periods may also be changed by the Employer to the
extent necessary to maintain compliance of the Policy with Sections 7702 and
7702A of the Internal Revenue Code and the regulations thereunder.
1.3 No payment of interest by the Executive will be due on the premium amounts
paid by the Employer.
1.4 The Executive shall pay that portion of the premium in amount that for
federal income tax purposes is equal to the value of the "economic benefit" of
the life insurance protection enjoyed by the Executive each year. The "economic
benefit" is to be determined by reference to IRS Rev. Ruls. 64-328 and 66-110,
or any rulings which may substitute, supercede, replace, or amend them,
governing the federal income tax consequences of split dollar arrangements. The
Executive has been rated by Metropolitan Life Insurance Company less favorably
than "standard non-smoker". Since the Employer is contributing to the premium
based on a standard non-smoker classification, if the rating continues, the
policy at program maturity date will likely not have sufficient cash value to
realize the objective described in Section 1.7B below. Therefore, if the
Executive wishes to attain this objective, Executive may, in his or her
discretion, make additional premium payments in amounts as may be indicated from
time to time by Metropolitan Life Insurance Company as necessary to create the
augmented value in the policy to realize such objective.
1.5 The Employer shall continue to pay its portion of the premium if the
Executive is disabled while actively employed.
1.6 "Disability", for the purpose of this Agreement means, that the Executive
has met the requirements for disability under the Employer's Long Term
Disability Plan, is not eligible for full retirement, and is incapable of
fulfilling job duties due to mental or physical disability.
<PAGE>
1.7 "Premium", for the purpose of this Agreement, means the sum paid to
Metropolitan Life Insurance Company as consideration for the individual
Universal Life Policy specifically referred to in this Agreement. Premiums paid
are scheduled to be in an amount so as to accumulate policy values at the
program maturity date as if the Executive were to receive a standard nonsmoker
classification sufficient to:
A. Provide total death benefits equal to at least two times the
Executive's annual base salary plus the accumulated premiums paid by the
Employer during the Executive's active employment and equal to at least two (2)
times the Executive's final annual base salary plus accumulated premiums paid by
the Employer after the Executive's active employment and prior to termination of
this Agreement;
B. Keep the policy in force after the program maturity date with a death
benefit equal to two (2) times the Executive's final annual base salary until
the Executive attains the age of ninety-five (95); and
C. Prior to the program maturity date, withdraw an amount to be paid to
the Employer equal to the accumulated premiums paid by the Employer.
The sufficiency of the amount needed to meet the provisions above shall
be determined as of the program maturity date and shall be based on the
insurer's current interest crediting and mortality rates as of that same date.
The Employer shall not be responsible for events occurring subsequent to the
program maturity date which may result in an insufficient level of funding to
meet the provisions above.
SECTION 2
Policy Beneficiary Designation
2.1 The right to designate and change the beneficiary of the Policy and to
elect an optional mode of settlement is reserved to the person who would be the
Owner of the Policy in the absence of the Collateral Assignment Agreement. Such
Owner of the Policy shall have the right to designate and change the
beneficiaries and contingent beneficiaries and to elect an optional mode of
settlement subject to the interest of the Employer as Assignee under the
Collateral Assignment Agreement, and the Employer will make the Policy available
to the Owner, if required, for endorsement of a change of beneficiary.
<PAGE>
SECTION 3
Payment of Policy Proceeds in Event of Death of Employee
3.1 If the Executive dies (other than by suicide within two (2) years from the
Policy issue date) while the Policy and this Agreement are in force, the
proceeds of the Policy shall be payable as follows:
A. Part shall be payable to the Employer; this part shall be equal to the
proceeds of the Policy not payable to the beneficiary pursuant to paragraph B or
paragraph C of this section.
B. The designated beneficiary of the Executive shall be paid an amount
equal to two (2) times the Executive's annual base salary if the Executive dies
while actively employed by Employer, subject, however, to satisfying any
applicable underwriting restrictions or guidelines existing at the time
of adjustment.
C. The designated beneficiary of the Executive shall be paid an amount
equal to two (2) times annual base salary, subject, however, to satisfying any
applicable underwriting restrictions or guidelines at the time of adjustment if
the Executive dies after terminating active employment with Employer due to
Disability or Normal Retirement, provided that the termination of active
employment occurs prior to the termination of this Agreement.
(1) The benefit paid if the Executive dies after terminating active
employment with Employer due to Disability is based on the Executive's annual
base salary at the time the Disability occurred.
3.2 Insurance proceeds will not be paid if the Executive commits suicide, while
sane or insane, within two (2) years from the date of the policy. Instead, an
amount equal to all premiums paid, without interest, will be paid under the
terms of this Agreement.
3.3 "Normal Retirement", for the purpose of this Agreement, means attaining the
age of sixty-five (65).
3.4 "Annual Base Salary", for the purpose of this Agreement, means the
Executive's regular salary, without bonus, as of the date Executive was actively
at work.
<PAGE>
SECTION 4
Exercise of Rights
4.1 The Employer, during the lifetime of the Executive and prior to the
termination of this Agreement, may exercise any of its rights as Assignee of the
Policy only upon thirty (30) days written notice to the Executive. Such notice
shall be given to the Executive either in person or by mailing as provided for
in Section 8.1 of this Agreement.
4.2 Subject to the Employer's rights as Assignee, the Owner retains all rights
as Owner of the Policy. Notwithstanding the aforementioned, neither the Owner
nor the Employer shall withdraw, surrender, borrow against, or pledge as
security for a loan any portion of the Policy while this Agreement is in effect.
SECTION 5
Termination of Agreement
5.1 This Agreement shall terminate if any of the following takes place:
A. Termination of the Executive's employment with the Employer prior to
the Executive's becoming eligible for disability benefits under a Disability
plan of the Employer or for a Normal Retirement benefit under any qualified
pension plan maintained by the Employer; or
B. Demotion of the Executive to a position which is not part of the group
of Employees eligible to participate in the Employer's Split Dollar Insurance
Program as determined by the Employer; or
C. The bankruptcy of the Employer; or
D. The failure of the Employer or the Executive to pay their respective
share of the premium under Section 1 of this Agreement; or
E. Payment to the Employer of the aggregate amount of the premiums paid
either directly by the Executive or by a withdrawal from the Policy.
F. Termination of this Agreement pursuant to Section 12.3; or
G. The death of the Executive; or
H. Program Maturity Date. This occurs the year in which sufficient funds
will have accumulated in the Policy to sustain the projected death benefit
amount as if the Executive were to have received a standard nonsmoker
classification, or when the Executive attains the age of sixty-five (65),
whichever occurs later.
5.2 In the event of termination of this Agreement, the lesser of the aggregate
of the premiums paid by the Employer pursuant to this Agreement, or the net cash
value in the Policy, shall become due and payable to the Employer, except as
provided for herein. Upon payment of such amount from the Policy, from the
Executive, or from whatever other source, the Employer shall execute a release
of the Collateral Assignment Agreement and deliver such release and the Policy
to the Owner.
5.3 In the event of a Change of Control as defined in the Executive's written
Employment Agreement then in effect and the Executive is entitled to benefits
for termination of employment as a result of a Change of Control, then in
addition, he shall have no obligation to repay premiums to the Employer as
stated in Section 5.2.
SECTION 6
Taxation
6.1 All income taxes attributable to the Executive which are relevant to the
Policy or this Agreement, whether federal, state or local, which may be due or
may become due, are the sole responsibility of the Executive, or the Executive's
beneficiary, while this Agreement is in force and after it has terminated for
any reason.
SECTION 7
Insurer Not a Party
7.1 Metropolitan shall not be deemed to be a party to this Agreement for any
purpose nor shall it be deemed in any way responsible for its validity.
Metropolitan shall not be obligated to inquire as to the distribution or
application of any monies payable or paid by it under the Policy, and Payments
or other performance of its contract obligations in accordance with the terms of
the Policy shall fully discharge Metropolitan from any and all liability under
the Policy.
SECTION 8
Notices
8.1 Any notices required or permitted to be given under this Agreement shall be
in writing and shall be deemed properly given if sent by registered or certified
mail, addressed as follows:
(1) Notices to Executive:
(2) Notices to Employer: ________________________ (Bank)
c/o G. E. Aumiller
Keystone Financial, Inc.
P.O. Box 3660
Harrisburg, PA 17105-3660
Either party may, from time to time, change the address to which
notices shall be mailed by giving notice of such address in the manner provided
herein.
SECTION 9
Other Benefits
9.1 Participation in this Program is designed to supersede and render void the
group term life insurance currently provided to the Executive. In all other
respects, the benefits described herein are in addition to any other benefits
the Executive may have under any plan or program of the Employer, and, except as
aforementioned or otherwise expressly provided for herein, shall supplement and
shall not supersede any other agreement between the Employer and the Executive
or any provision contained therein.
SECTION 10
Named Fiduciary
10.1 The Employer is hereby designated as the Named Fiduciary of this Split
Dollar Insurance Program, in accordance with the Employee Retirement Income
Security Act of 1974. The business address and telephone number of the Named
Fiduciary are:
________________________ (Bank)
c/o G. E. Aumiller
Keystone Financial, Inc.
One Keystone Plaza
Front & Market Streets
P.O. Box 3660
Harrisburg, PA 17105-3660
The Named Fiduciary shall have the authority to control and manage the
operation and administration of this Program. However, the Named Fiduciary may
allocate its responsibilities for the operation and administration of this
Program, including the designation of persons who are not Named Fiduciaries, to
carry out fiduciary responsibilities.
The Named Fiduciary of this Program shall be responsible for making
timely delivery of any required premiums to the Insurer.
All pertinent documents shall be retained by the Named Fiduciary and
made available for examination at the above indicated business address. Upon
written request, the Program document and other information shall be provided to
the Parties of this Program.
SECTION 11
Claims Procedure
11.1 Benefits shall be payable in accordance with the Agreement provisions.
Should the Executive or beneficiary fail to receive benefits to which such
Executive or beneficiary believes he or she is entitled, a claim may be filed.
Any claim for a Program benefit hereunder shall be filed by the Executive or
beneficiary (claimant) of this Program by written communication, which is made
by the claimant or the claimant's authorized representative, which is reasonably
calculated to bring the claim to the attention of the Named Fiduciary.
If a claim for a Program benefit is wholly or partially denied, a
written notice of the decision shall be furnished to the claimant by the Named
Fiduciary or his designee within a reasonable period of time after receipt of
the claim by the Program, which notice shall include the following information:
(A) The specific reason or reasons for the denial;
(B) Specific reference to the pertinent Agreement provisions upon which the
denial is based;
(C) A description of any additional material or information necessary for
the claimant to perfect the claim and an explanation of why such material or
information is necessary; and
(D) An explanation of the Program's claim review procedures.
<PAGE>
In order that a claimant may appeal a denial of a claim, a claimant or
his duly authorized representative:
(A) May request a review by written application to the Named Fiduciary or
his designee not later than 60 days after receipt by the claimant of written
notification of denial of a claim;
(B) May review pertinent documents; and
(C) May submit issues and comments in writing.
A decision of review of a denied claim shall be made not later than 60
days after the Program's receipt of a request for review, unless special
circumstances require an extension of time for processing, in which case a
decision shall be rendered within a reasonable period of time, but not later
than 120 days after receipt of a request for review. The decision on review
shall be in writing and shall include the specific reason(s) for the decision
and the specific reference(s) to the pertinent Agreement provisions on which the
decision is based.
Notwithstanding anything contained in this Section to the contrary, any
claim for a death benefit under an insurance policy under this Program shall be
filed with the Insurer by the claimant or the claimant's authorized
representative on the form or forms prescribed for such purpose by the Insurer.
The Insurer shall have sole authority for determining whether a death claim
shall or shall not be paid, either in whole or in part, in accordance with the
terms of such insurance contract which may have been purchased on the life of
the Executive.
SECTION 12
Amendment and Assignment of Agreement
12.1 This Agreement shall not be modified or amended except in writing signed by
the Parties hereto.
12.2 This Agreement is binding upon the heirs, administrators or assigns of each
Party.
12.3 Subject to provisions of any written Employment Agreement, this Agreement
may be terminated by either Party with thirty (30) days' written notice to the
other.
<PAGE>
SECTION 13
Employment
13.1 This Agreement shall not in any way constitute an employment agreement
between the Executive and the Employer and shall in no way obligate the Employer
to continue the employment of Executive with the Employer, nor shall this
Agreement limit the right of the Employer to terminate Executive's employment
with the Employer for any reason.
SECTION 14
Jurisdiction
14.1 The Parties hereto consent to the exclusive jurisdiction of the courts of
the Commonwealth of Pennsylvania in any and all actions arising hereunder.
SECTION 15
State Law
15.1 This Agreement, all matters involving its validity, effect and
interpretation, and the rights of the Parties hereunder, shall be governed by
and construed pursuant to the laws of the Commonwealth of Pennsylvania.
<PAGE>
SECTION 16
Interpretation
16.1 Where appropriate, words used in the singular shall include the plural and
words used in the masculine shall include the feminine and vice versa.
IN WITNESS WHEREOF, the Parties hereto intending to be legally bound, have
executed this Agreement as of the day and year first above written.
KEYSTONE FINANCIAL, INC.
By: _____________________________________
Authorized Representative
(Bank)
By: ___________________________________
WITNESS: Authorized Representative
- ------------------------------ -----------------------------------------
Employee
KEYSTONE FINANCIAL, INC. / (Bank)
EXECUTIVE SPLIT DOLLAR AGREEMENT
THIS AGREEMENT made and entered into effective this 1st day of January, 1998, by
and between KEYSTONE FINANCIAL, INC. ("Sponsor") through one of its affiliated
companies ________________ , ("Employer"), a Pennsylvania corporation, and
____________ ("Executive") an employee of the Employer, and represents the final
understanding of the parties regarding the benefits provided hereunder.
W I T N E S S E T H
WHEREAS, the Executive is insured under Policy Number_______________ (the
"Policy") issued by Metropolitan Life Insurance Company ("Metropolitan"); and
WHEREAS, the owner of the Policy (the "Owner") shall be the Executive or the
person or other entity to whom the Executive assigns the Policy pursuant to
Section 4; and
WHEREAS, Sponsor and Employer highly values Executive's efforts, abilities, and
accomplishments; and
WHEREAS, Executive is deemed a member of a select group of management and/or one
of the highly compensated employees of the Employer; and
WHEREAS, Employer wishes to provide Executive with permanent life insurance as
an additional employment benefit and is willing to assist in the payment of
premiums under the Policy as provided in this Agreement; and
WHEREAS, the Executive has agreed to assign an interest in the Policy to Sponsor
as collateral security for such premium payments, at the time of the first
premium payment, on a form of agreement approved by Metropolitan (the
"Collateral Assignment Agreement"); and
WHEREAS, in order to be eligible for such benefit, Executive agrees to the terms
hereinafter provided;
NOW, THEREFORE, Employer and Executive ("Parties"), in consideration of the
mutual covenants and agreements described below, hereby agree as follows:
<PAGE>
SECTION 1
Payment of Premiums
1.1 The Employer shall pay the premiums on the Policy, less the amount paid by
the Executive pursuant to Section 1.4, until the termination of this Agreement,
pursuant to Section 5. The Employer may increase or decrease the scheduled
premium for any year after the first year. Each premium for the Policy following
execution of this Agreement will be remitted by the Employer to Metropolitan
within thirty-one (31) days following the anniversary date of the Policy.
1.2 The premium payment periods may also be changed by the Employer to the
extent necessary to maintain compliance of the Policy with Sections 7702 and
7702A of the Internal Revenue Code and the regulations thereunder.
1.3 No payment of interest by the Executive will be due on the premium amounts
paid by the Employer.
1.4 The Executive shall pay a portion of the premium in an amount that for
federal income tax purposes is equal to the value of the "economic benefit" of
the life insurance protection enjoyed by the Executive each year. The "economic
benefit" is to be determined by reference to IRS Rev. Ruls. 64-328 and 66-110,
or any rulings which may substitute, supercede, replace, or amend them,
governing the federal income tax consequences of split dollar arrangements. At
the inception of this Agreement, Metropolitan Life Insurance Company has rated
the Executive as "standard non-smoker". The Agreement provides that if the
Annual Base Salary of the Executive increases, there will be a corresponding
adjustment to the benefit hereunder. Depending on the amount of increase and
frequency of such, the placement of the additional coverage may require new
underwriting. If this occurs, and if at that time, Metropolitan Life Insurance
Company rates the Executive less favorably than "standard non-smoker", the
Employer will contribute to the additional premium as herein provided, however,
based on a standard non-smoker classification. Consequently, if the rating
continues as to such excess, the policy at program maturity date may not have
sufficient cash value to realize the objective described in Section 1.7B below.
Therefore, if the Executive wishes to attain this objective, Executive may, in
his or her discretion, make additional premium payments in amounts as may be
indicated from time to time by Metropolitan Life Insurance Company as necessary
to create the augmented value in the policy to realize such objective.
1.5 The Employer shall continue to pay its portion of the premium if the
Executive is disabled while actively employed.
1.6 "Disability", for the purpose of this Agreement means, that the Executive
has met the requirements for disability under the Employer's Long Term
Disability Plan, is not eligible for full retirement, and is incapable of
fulfilling job duties due to mental or physical disability.
1.7 "Premium", for the purpose of this Agreement, means the sum paid to
Metropolitan Life Insurance Company as consideration for the individual
Universal Life Policy specifically referred to in this Agreement. Premiums paid
are scheduled to be in an amount, assuming that the Executive has underwriting
status of "standard non-smoker", so as to accumulate policy values at the
program maturity date sufficient to:
A. Provide total death benefits equal to at least two times the Executive's
annual base salary plus the accumulated premiums paid by the Employer during
the Executive's active employment and equal to at least one (1) times the
Executive's final annual base salary plus accumulated premiums paid by the
Employer after the Executive's active employment and prior to termination of
this Agreement;
B. Keep the policy in force after the program maturity date with a death
benefit equal to one (1) times the Executive's final annual base salary until
the Executive attains the age of ninety-five (95); and
C. Prior to the program maturity date, withdraw an amount to be paid to the
Employer equal to the accumulated premiums paid by the Employer.
The sufficiency of the amount needed to meet the provisions above shall
be determined as of the program maturity date and shall be based on the
insurer's current interest crediting and mortality rates as of that same date.
The Employer shall not be responsible for events occurring subsequent to the
program maturity date which may result in an insufficient level of funding to
meet the provisions above.
SECTION 2
Policy Beneficiary Designation
2.1 The right to designate and change the beneficiary of the Policy and to
elect an optional mode of settlement is reserved to the person who would be the
Owner of the Policy in the absence of the Collateral Assignment Agreement. Such
Owner of the Policy shall have the right to designate and change the
beneficiaries and contingent beneficiaries and to elect an optional mode of
settlement subject to the interest of the Employer as Assignee under the
Collateral Assignment Agreement, and the Employer will make the Policy available
to the Owner, if required, for endorsement of a change of beneficiary.
<PAGE>
SECTION 3
Payment of Policy Proceeds in Event of Death of Employee
3.1 If the Executive dies (other than by suicide within two (2) years from the
Policy issue date) while the Policy and this Agreement are in force, the
proceeds of the Policy shall be
payable as follows:
A. Part shall be payable to the Employer; this part shall be equal to the
proceeds of the Policy not payable to the beneficiary pursuant to paragraph B or
paragraph C of this section.
B. The designated beneficiary of the Executive shall be paid an amount
equal to two (2) times the Executive's annual base salary if the Executive dies
while actively employed by Employer, subject, however, to satisfying any
applicable underwriting restrictions or guidelines existing at the time of
adjustment.
C. The designated beneficiary of the Executive shall be paid an amount
equal to one (1) times annual base salary, subject, however, to satisfying any
applicable underwriting restrictions or guidelines existing at the time of
adjustment, if the Executive dies after terminating active employment with
Employer due to Disability or Normal Retirement, provided that the termination
of active employment occurs prior to the termination of this Agreement.
(1) The benefit paid if the Executive dies after terminating active
employment with Employer due to Disability is based on the Executive's annual
base salary at the time the Disability occurred.
3.2 Insurance proceeds will not be paid if the Executive commits suicide, while
sane or insane, within two (2) years from the date of the policy. Instead, an
amount equal to all premiums paid, without interest, will be paid under the
terms of this Agreement.
3.3 "Normal Retirement", for the purpose of this Agreement, means attaining the
age of sixty-five (65).
3.4 "Annual Base Salary", for the purpose of this Agreement, means the
Executive's regular salary, without bonus, as of the date Executive was actively
at work.
<PAGE>
SECTION 4
Exercise of Rights
4.1 The Employer, during the lifetime of the Executive and prior to the
termination of this Agreement, may exercise any of its rights as Assignee of the
Policy only upon thirty (30) days written notice to the Executive. Such notice
shall be given to the Executive either in person or by mailing as provided for
in Section 8.1 of this Agreement.
4.2 Subject to the Employer's rights as Assignee, the Owner retains all rights
as Owner of the Policy. Notwithstanding the aforementioned, neither the Owner
nor the Employer shall withdraw, surrender, borrow against, or pledge as
security for a loan any portion of the Policy while this Agreement is in effect.
SECTION 5
Termination of Agreement
5.1 This Agreement shall terminate if any of the following takes place:
A. Termination of the Executive's employment with the Employer prior to the
Executive's becoming eligible for disability benefits under a Disability plan of
the Employer or for a Normal Retirement benefit under any qualified pension plan
maintained by the Employer; or
B. Demotion of the Executive to a position which is not part of the group
of Employees eligible to participate in the Employer's Split Dollar Insurance
Program as determined by the Employer; or
C. The bankruptcy of the Employer; or
D. The failure of the Employer or the Executive to pay their respective
share of the premium under Section 1 of this Agreement; or
E. Payment to the Employer of the aggregate amount of the premiums paid
either directly by the Executive or by a withdrawal from the Policy.
F. Termination of this Agreement pursuant to Section 12.3; or
G. The death of the Executive; or
H. Program Maturity Date. This occurs the year in which sufficient funds
will have, or should have, accumulated assuming that the Executive has at all
times been classified as standard non-smoker, whether or not so classified, in
the Policy to sustain the projected death benefit amount, or when the Executive
attains the age of sixty-five (65), whichever occurs later.
5.2 In the event of termination of this Agreement, the lesser of the aggregate
of the premiums paid by the Employer pursuant to this Agreement, or the net cash
value in the Policy, shall become due and payable to the Employer, except as
provided for herein. Upon payment of such amount from the Policy, from the
Executive, or from whatever other source, the Employer shall execute a release
of the Collateral Assignment Agreement and deliver such release and the Policy
to the Owner.
5.3 In the event of a Change of Control, as defined in the written severance
policy in effect at that time, such severance policy shall thereafter remain in
force for purposes of this Agreement. In the event of a Change of Control and
the Executive is entitled to benefits for termination of employment under such
severance policy, then, in addition, he shall have no obligation to repay
premiums to the Employer as stated in Section 5.2
SECTION 6
Taxation
6.1 All income taxes attributable to the Executive which are relevant to the
Policy or this Agreement, whether federal, state or local, which may be due or
may become due, are the sole responsibility of the Executive, or the Executive's
beneficiary, while this Agreement is in force and after it has terminated for
any reason.
SECTION 7
Insurer Not a Party
7.1 Metropolitan shall not be deemed to be a party to this Agreement for any
purpose nor shall it be deemed in any way responsible for its validity.
Metropolitan shall not be obligated to inquire as to the distribution or
application of any monies payable or paid by it under the Policy, and Payments
or other performance of its contract obligations in accordance with the terms of
the Policy shall fully discharge Metropolitan from any and all liability under
the Policy.
<PAGE>
SECTION 8
Notices
8.1 Any notices required or permitted to be given under this Agreement shall be
in writing and shall be deemed properly given if sent by registered or certified
mail, addressed as follows:
(1) Notices to Executive:
(2) Notices to Employer: _______________________ (Bank)
c/o G. E. Aumiller
Keystone Financial, Inc.
P.O. Box 3660
Harrisburg, PA 17105-3660
Either party may, from time to time, change the address to which
notices shall be mailed by giving notice of such address in the manner provided
herein.
SECTION 9
Other Benefits
9.1 Participation in this Program is designed to supersede and render void the
group term life insurance currently provided to the Executive. In all other
respects, the benefits described herein are in addition to any other benefits
the Executive may have under any plan or program of the Employer, and, except as
aforementioned or otherwise expressly provided for herein, shall supplement and
shall not supersede any other agreement between the Employer and the Executive
or any provision contained therein.
<PAGE>
SECTION 10
\Named Fiduciary
10.1 The Employer is hereby designated as the Named Fiduciary of this Split
Dollar Insurance Program, in accordance with the Employee Retirement Income
Security Act of 1974. The business address and telephone number of the Named
Fiduciary are:
________________________ (Bank)
c/o G. E. Aumiller
Keystone Financial, Inc.
One Keystone Plaza
Front & Market Streets
P.O. Box 3660
Harrisburg, PA 17105-3660
The Named Fiduciary shall have the authority to control and manage the
operation and administration of this Program. However, the Named Fiduciary may
allocate its responsibilities for the operation and administration of this
Program, including the designation of persons who are not Named Fiduciaries, to
carry out fiduciary responsibilities.
The Named Fiduciary of this Program shall be responsible for making
timely delivery of any required premiums to the Insurer.
All pertinent documents shall be retained by the Named Fiduciary and
made available for examination at the above indicated business address. Upon
written request, the Program document and other information shall be provided to
the Parties of this Program.
SECTION 11
Claims Procedure
11.1 Benefits shall be payable in accordance with the Agreement provisions.
Should the Executive or beneficiary fail to receive benefits to which such
Executive or beneficiary believes he or she is entitled, a claim may be filed.
Any claim for a Program benefit hereunder shall be filed by the Executive or
beneficiary (claimant) of this Program by written communication, which is made
by the claimant or the claimant's authorized representative, which is reasonably
calculated to bring the claim to the attention of the Named Fiduciary.
If a claim for a Program benefit is wholly or partially denied, a
written notice of the decision shall be furnished to the claimant by the Named
Fiduciary or his designee within a reasonable period of time after receipt of
the claim by the Program, which notice shall include the following information:
(A) The specific reason or reasons for the denial;
(B) Specific reference to the pertinent Agreement provisions upon which the
denial is based;
(C) A description of any additional material or information necessary for
the claimant to perfect the claim and an explanation of why such material or
information is necessary; and
(D) An explanation of the Program's claim review procedures.
In order that a claimant may appeal a denial of a claim, a claimant or
his duly authorized representative:
(A) May request a review by written application to the Named Fiduciary or
his designee not later than 60 days after receipt by the claimant of written
notification of denial of a claim;
(B) May review pertinent documents; and
(C) May submit issues and comments in writing.
A decision of review of a denied claim shall be made not later than 60
days after the Program's receipt of a request for review, unless special
circumstances require an extension of time for processing, in which case a
decision shall be rendered within a reasonable period of time, but not later
than 120 days after receipt of a request for review. The decision on review
shall be in writing and shall include the specific reason(s) for the decision
and the specific reference(s) to the pertinent Agreement provisions on which the
decision is based.
Notwithstanding anything contained in this Section to the contrary, any
claim for a death benefit under an insurance policy under this Program shall be
filed with the Insurer by the claimant or the claimant's authorized
representative on the form or forms prescribed for such purpose by the Insurer.
The Insurer shall have sole authority for determining whether a death claim
shall or shall not be paid, either in whole or in part, in accordance with the
terms of such insurance contract which may have been purchased on the life of
the Executive.
<PAGE>
SECTION 12
Amendment and Assignment of Agreement
12.1 This Agreement shall not be modified or amended except in writing signed by
the Parties hereto.
12.2 This Agreement is binding upon the heirs, administrators or assigns of each
Party.
12.3 Subject to provisions of any written severance policy then in existence,
this Agreement may be terminated by either Party with thirty (30) days' written
notice to the other.
SECTION 13
Employment
13.1 This Agreement shall not in any way constitute an employment agreement
between the Executive and the Employer and shall in no way obligate the Employer
to continue the employment of Executive with the Employer, nor shall this
Agreement limit the right of the Employer to terminate Executive's employment
with the Employer for any reason.
SECTION 14
Jurisdiction
14.1 The Parties hereto consent to the exclusive jurisdiction of the courts of
the Commonwealth of Pennsylvania in any and all actions arising hereunder.
SECTION 15
State Law
15.1 This Agreement, all matters involving its validity, effect and
interpretation, and the rights of the Parties hereunder, shall be governed by
and construed pursuant to the laws of the Commonwealth of Pennsylvania.
<PAGE>
SECTION 16
Interpretation
16.1 Where appropriate, words used in the singular shall include the plural and
words used in the masculine shall include the feminine and vice versa.
IN WITNESS WHEREOF, the Parties hereto intending to be legally bound, have
executed this Agreement as of the day and year first above written.
KEYSTONE FINANCIAL, INC.
By: __________________________________
Authorized Representative
(Bank)
By: ___________________________________
WITNESS: Authorized Representative
- ------------------------------ -----------------------------------------
Employee
KEYSTONE FINANCIAL, INC. / (Bank)
EXECUTIVE SPLIT DOLLAR AGREEMENT
THIS AGREEMENT is made and entered into effective this 1st day of January, 1998,
by and between KEYSTONE FINANCIAL, INC.("Sponsor") through one of its affiliated
companies _____________________ , ("Employer"), a Pennsylvania corporation, and
____________________ ("Executive") an employee of the Employer, and represents
the final understanding of the parties regarding the benefits provided
hereunder.
W I T N E S S E T H
WHEREAS, the Executive is insured under Policy Number _______________ (the
"Policy") issued by Metropolitan Life Insurance Company ("Metropolitan"); and
WHEREAS, the owner of the Policy (the "Owner") shall be the Executive or the
person or other entity to whom the Executive assigns the Policy pursuant to
Section 4; and
WHEREAS, Sponsor and Employer highly values Executive's efforts, abilities, and
accomplishments; and
WHEREAS, Executive is deemed a member of a select group of management and/or one
of the highly compensated employees of the Employer; and
WHEREAS, Employer wishes to provide Executive with permanent life insurance as
an additional employment benefit and is willing to assist in the payment of
premiums under the Policy as provided in this Agreement; and
WHEREAS, the Executive has agreed to assign an interest in the Policy to Sponsor
as collateral security for such premium payments, at the time of the first
premium payment, on a form of agreement approved by Metropolitan (the
"Collateral Assignment Agreement"); and
WHEREAS, in order to be eligible for such benefit, Executive agrees to the terms
hereinafter provided;
NOW, THEREFORE, Employer and Executive ("Parties"), in consideration of the
mutual covenants and agreements described below, hereby agree as follows:
<PAGE>
SECTION 1
Payment of Premiums
1.1 The Employer shall pay the premiums on the Policy, less the amount paid by
the Executive pursuant to Section 1.4, until the termination of this Agreement,
pursuant to Section 5. The Employer may increase or decrease the scheduled
premium for any year after the first year. Each premium for the Policy following
execution of this Agreement will be remitted by the Employer to Metropolitan
within thirty-one (31) days following the anniversary date of the Policy.
1.2 The premium payment periods may also be changed by the Employer to the
extent necessary to maintain compliance of the Policy with Sections 7702 and
7702A of the Internal Revenue Code and the regulations thereunder.
1.3 No payment of interest by the Executive will be due on the premium amounts
paid by the Employer.
1.4 The Executive shall pay a portion of the premium in an amount that for
federal income tax purposes is equal to the value of the "economic benefit" of
the life insurance protection enjoyed by the Executive each year. The "economic
benefit" is to be determined by reference to IRS Rev. Ruls. 64-328 and 66-110,
or any rulings which may substitute, supercede, replace, or amend them,
governing the federal income tax consequences of split dollar arrangements. At
the inception of this agreement, Metropolitan Life Insurance Company has rated
the Executive as "standard non-smoker". The Agreement provides that if the
Annual Base Salary of the Executive increases, there will be a corresponding
adjustment to the benefit hereunder. Depending on the amount of the increase and
frequency of such, the placement of the additional coverage may require new
underwriting. If this occurs, and if at that time, Metropolitan Life Insurance
Company rates the Executive less favorably than "standard non-smoker", the
Employer will contribute to the additional premium as herein provided, however,
based on a standard non-smoker classification. Consequently, if the rating
continues as to such excess, the policy at program maturity date may not have
sufficient cash value to realize the objective described in Section 1.7B below.
Therefore, if the Executive wishes to attain this objective, Executive may, in
his or her discretion, make additional premium payments in amounts as may be
indicated from time to time by Metropolitan Life Insurance Company as necessary
to create the augmented value in the policy to realize such objective.
1.5 The Employer shall continue to pay its portion of the premium if the
Executive is disabled while actively employed.
1.6 "Disability", for the purpose of this Agreement means, that the Executive
has met the requirements for disability under the Employer's Long Term
Disability Plan, is not eligible for full retirement, and is incapable of
fulfilling job duties due to mental or physical disability.
1.7 "Premium", for the purpose of this Agreement, means the sum paid to
Metropolitan Life Insurance Company as consideration for the individual
Universal Life Policy specifically referred to in this Agreement. Premiums paid
are scheduled to be in an amount, assuming that the Executive has the
underwriting status of "standard non-smoker", so as to accumulate policy values
at the program maturity date sufficient to:
A. Provide total death benefits equal to at least two times the
Executive's annual base salary plus the accumulated premiums paid by the
Employer during the Executive's active employment and equal to at least two (2)
times the Executive's final annual base salary plus accumulated premiums paid by
the Employer after the Executive's active employment and prior to termination of
this Agreement;
B. Keep the policy in force after the program maturity date with a death
benefit equal to two (2) times the Executive's final annual base salary until
the Executive attains the age of ninety-five (95); and
C. Prior to the program maturity date, withdraw an amount to be paid to
the Employer equal to the accumulated premiums paid by the Employer.
The sufficiency of the amount needed to meet the provisions above shall
be determined as of the program maturity date and shall be based on the
insurer's current interest crediting and mortality rates as of that same date.
The Employer shall not be responsible for events occurring subsequent to the
program maturity date which may result in an insufficient level of funding to
meet the provisions above.
SECTION 2
Policy Beneficiary Designation
2.1 The right to designate and change the beneficiary of the Policy and to
elect an optional mode of settlement is reserved to the person who would be the
Owner of the Policy in the absence of the Collateral Assignment Agreement. Such
Owner of the Policy shall have the right to designate and change the
beneficiaries and contingent beneficiaries and to elect an optional mode of
settlement subject to the interest of the Employer as Assignee under the
Collateral Assignment Agreement, and the Employer will make the Policy available
to the Owner, if required, for endorsement of a change of beneficiary.
<PAGE>
SECTION 3
Payment of Policy Proceeds in Event of Death of Employee
3.1 If the Executive dies (other than by suicide within two (2) years from the
Policy issue date) while the Policy and this Agreement are in force, the
proceeds of the Policy shall be payable as follows:
A. Part shall be payable to the Employer; this part shall be equal to the\
proceeds of the Policy not payable to the beneficiary pursuant to paragraph B or
paragraph C of this section.
B. The designated beneficiary of the Executive shall be paid an amount
equal to two (2) times the Executive's annual base salary if the Executive dies
while actively employed by Employer, subject, however, to satisfying any
applicable underwriting restrictions or guidelines existing at the time of
adjustment.
C. The designated beneficiary of the Executive shall be paid an amount
equal to two (2) times annual base salary, subject, however, to satisfying any
applicable underwriting restrictions or guidelines at the time of adjustment if
the Executive dies after terminating active employment with Employer due to
Disability or Normal Retirement, provided that the termination of active
employment occurs prior to the termination of this Agreement.
(1) The benefit paid if the Executive dies after terminating active
employment with Employer due to Disability is based on the Executive's annual
base salary at the time the Disability occurred.
3.2 Insurance proceeds will not be paid if the Executive commits suicide, while
sane or insane, within two (2) years from the date of the policy. Instead, an
amount equal to all premiums paid, without interest, will be paid under the
terms of this Agreement.
3.3 "Normal Retirement", for the purpose of this Agreement, means attaining the
age of sixty-five (65).
3.4 "Annual Base Salary", for the purpose of this Agreement, means the
Executive's regular salary, without bonus, as of the date Executive was actively
at work.
SECTION 4
Exercise of Rights
4.1 The Employer, during the lifetime of the Executive and prior to the
termination of this Agreement, may exercise any of its rights as Assignee of the
Policy only upon thirty (30) days written notice to the Executive. Such notice
shall be given to the Executive either in person or by mailing as provided for
in Section 8.1 of this Agreement.
4.2 Subject to the Employer's rights as Assignee, the Owner retains all rights
as Owner of the Policy. Notwithstanding the aforementioned, neither the Owner
nor the Employer shall withdraw, surrender, borrow against, or pledge as
security for a loan any portion of the Policy while this Agreement is in effect.
SECTION 5
Termination of Agreement
5.1 This Agreement shall terminate if any of the following takes place:
A. Termination of the Executive's employment with the Employer prior to the
Executive's becoming eligible for disability benefits under a Disability plan of
the Employer or for a Normal Retirement benefit under any qualified pension plan
maintained by the Employer; or
B. Demotion of the Executive to a position which is not part of the group
of Employees eligible to participate in the Employer's Split Dollar Insurance
Program as determined by the Employer; or
C. The bankruptcy of the Employer; or
D. The failure of the Employer or the Executive to pay their respective
share of the premium under Section 1 of this Agreement; or
E. Payment to the Employer of the aggregate amount of the premiums paid
either directly by the Executive or by a withdrawal from the Policy.
F. Termination of this Agreement pursuant to Section 12.3; or
G. The death of the Executive; or
H. Program Maturity Date. This occurs the year in which sufficient funds
will have, or should have, accumulated assuming that the Executive has at all
times been classified as standard non-smoker, whether or not so classified in
the Policy to sustain the projected death benefit amount, or when the Executive
attains the age of sixty-five (65), whichever occurs later.
5.2 In the event of termination of this Agreement, the lesser of the aggregate
of the premiums paid by the Employer pursuant to this Agreement, or the net cash
value in the Policy, shall become due and payable to the Employer, except as
provided for herein. Upon payment of such amount from the Policy, from the
Executive, or from whatever other source, the Employer shall execute a release
of the Collateral Assignment Agreement and deliver such release and the Policy
to the Owner.
5.3 In the event of a Change of Control as defined in the Executive's written
Employment Agreement then in effect and the Executive is entitled to benefits
for termination of employment as a result of a Change of Control, then in
addition, he shall have no obligation to repay premiums to the Employer as
stated in Section 5.2.
SECTION 6
Taxation
6.1 All income taxes attributable to the Executive which are relevant to the
Policy or this Agreement, whether federal, state or local, which may be due or
may become due, are the sole responsibility of the Executive, or the Executive's
beneficiary, while this Agreement is in force and after it has terminated for
any reason.
SECTION 7
Insurer Not a Party
7.1 Metropolitan shall not be deemed to be a party to this Agreement for any
purpose nor shall it be deemed in any way responsible for its validity.
Metropolitan shall not be obligated to inquire as to the distribution or
application of any monies payable or paid by it under the Policy, and Payments
or other performance of its contract obligations in accordance with the terms of
the Policy shall fully discharge Metropolitan from any and all liability under
the Policy.
SECTION 8
Notices
8.1 Any notices required or permitted to be given under this Agreement shall be
in writing and shall be deemed properly given if sent by registered or certified
mail, addressed as follows:
(1) Notices to Executive:
<PAGE>
(2) Notices to Employer: _________________ (Bank)
c/o G. E. Aumiller
Keystone Financial, Inc.
P.O. Box 3660
Harrisburg, PA 17105-3660
Either party may, from time to time, change the address to which
notices shall be mailed by giving notice of such address in the manner provided
herein.
SECTION 9
Other Benefits
9.1 Participation in this Program is designed to supersede and render void the
group term life insurance currently provided to the Executive. In all other
respects, the benefits described herein are in addition to any other benefits
the Executive may have under any plan or program of the Employer, and, except as
aforementioned or otherwise expressly provided for herein, shall supplement and
shall not supersede any other agreement between the Employer and the Executive
or any provision contained therein.
SECTION 10
Named Fiduciary
10.1 The Employer is hereby designated as the Named Fiduciary of this Split
Dollar Insurance Program, in accordance with the Employee Retirement Income
Security Act of 1974. The business address and telephone number of the Named
Fiduciary are:
________________________ (Bank)
c/o G. E. Aumiller
Keystone Financial, Inc.
One Keystone Plaza
Front & Market Streets
P.O. Box 3660
Harrisburg, PA 17105-3660
The Named Fiduciary shall have the authority to control and manage the
operation and administration of this Program. However, the Named Fiduciary may
allocate its responsibilities for the operation and administration of this
Program, including the designation of persons who are not Named Fiduciaries, to
carry out fiduciary responsibilities.
The Named Fiduciary of this Program shall be responsible for making
timely delivery of any required premiums to the Insurer.
All pertinent documents shall be retained by the Named Fiduciary and
made available for examination at the above indicated business address. Upon
written request, the Program document and other information shall be provided to
the Parties of this Program.
SECTION 11
Claims Procedure
11.1 Benefits shall be payable in accordance with the Agreement provisions.
Should the Executive or beneficiary fail to receive benefits to which such
Executive or beneficiary believes he or she is entitled, a claim may be filed.
Any claim for a Program benefit hereunder shall be filed by the Executive or
beneficiary (claimant) of this Program by written communication, which is made
by the claimant or the claimant's authorized representative, which is reasonably
calculated to bring the claim to the attention of the Named Fiduciary.
If a claim for a Program benefit is wholly or partially denied, a
written notice of the decision shall be furnished to the claimant by the Named
Fiduciary or his designee within a reasonable period of time after receipt of
the claim by the Program, which notice shall include the following information:
(A) The specific reason or reasons for the denial;
(B) Specific reference to the pertinent Agreement provisions upon which the
denial is based;
(C) A description of any additional material or information necessary for
the claimant to perfect the claim and an explanation of why such material or
information is necessary; and
(D) An explanation of the Program's claim review procedures.
In order that a claimant may appeal a denial of a claim, a claimant or
his duly authorized representative:
(A) May request a review by written application to the Named Fiduciary or
his designee not later than 60 days after receipt by the claimant of written
notification of denial of a claim;
(B) May review pertinent documents; and
(C) May submit issues and comments in writing.
A decision of review of a denied claim shall be made not later than 60
days after the Program's receipt of a request for review, unless special
circumstances require an extension of time for processing, in which case a
decision shall be rendered within a reasonable period of time, but not later
than 120 days after receipt of a request for review. The decision on review
shall be in writing and shall include the specific reason(s) for the decision
and the specific reference(s) to the pertinent Agreement provisions on which the
decision is based.
Notwithstanding anything contained in this Section to the contrary, any
claim for a death benefit under an insurance policy under this Program shall be
filed with the Insurer by the claimant or the claimant's authorized
representative on the form or forms prescribed for such purpose by the Insurer.
The Insurer shall have sole authority for determining whether a death claim
shall or shall not be paid, either in whole or in part, in accordance with the
terms of such insurance contract which may have been purchased on the life of
the Executive.
SECTION 12
Amendment and Assignment of Agreement
12.1 This Agreement shall not be modified or amended except in writing signed by
the Parties hereto.
12.2 This Agreement is binding upon the heirs, administrators or assigns of each
Party.
12.3 Subject to provisions of any written Employment Agreement, this Agreement
may be terminated by either Party with thirty (30) days' written notice to the
other.
SECTION 13
Employment
13.1 This Agreement shall not in any way constitute an employment agreement
between the Executive and the Employer and shall in no way obligate the Employer
to continue the employment of Executive with the Employer, nor shall this
Agreement limit the right of the Employer to terminate Executive's employment
with the Employer for any reason.
SECTION 14
Jurisdiction
14.1 The Parties hereto consent to the exclusive jurisdiction of the courts of
the Commonwealth of Pennsylvania in any and all actions arising hereunder.
SECTION 15
State Law
15.1 This Agreement, all matters involving its validity, effect and
interpretation, and the rights of the Parties hereunder, shall be governed by
and construed pursuant to the laws of the Commonwealth of Pennsylvania.
SECTION 16
Interpretation
16.1 Where appropriate, words used in the singular shall include the plural and
words used in the masculine shall include the feminine and vice versa.
IN WITNESS WHEREOF, the Parties hereto intending to be legally bound, have
executed this Agreement as of the day and year first above written.
KEYSTONE FINANCIAL, INC.
By:_____________________________________
Authorized Representative
(Bank)
By: ___________________________________
WITNESS: Authorized Representative
_________________________________ _______________________________________
Employee
KEYSTONE FINANCIAL, INC.
COLLATERAL ASSIGNMENT AGREEMENT
1. For value received, the undersigned (the "Policyowner"), as owner of Policy
Number 200950011U (the "Policy") issued by Metropolitan Life Insurance
Company (the "Insurer"), hereby assigns, sets over and transfers the Policy
to Keystone Financial, Inc. and its affiliated companies (the Assignee"),
a corporation organized under the laws of the Commonwealth of Pennsylvania,
as collateral security for those liabilities as may arise under the terms
of the Split Dollar Agreement between the Policyowner and Assignee dated as
of January 1, 2000 (the "Split Dollar Agreement"), subject to the terms and
conditions in the Policy and to all superior liens, if any, which the
Insurer has or may have against the Policy.
2. The collateral assignment being made pursuant to this Agreement is solely
for the purpose of assuring the Assignee of payment of the liabilities
under the terms of the Split Dollar Agreement.
3. The Policyowner and the Assignee expressly agree, without detracting from
the generality of the foregoing, that the following rights are included in
this Agreement and pass to the Assignee by virtue hereof:
A. The right to collect the proceeds of the Policy, up to its interest,
from the Insurer when the Policy becomes a claim by death or becomes
due in accordance with the Split Dollar Agreement.
B. The right to surrender the Policy and receive the cash surrender value,
up to its interest, pursuant to the Policy
provisions and in accordance with Paragraph 5(D) of this Agreement.
C. The right to assign, sell or convey only the amount of its interest in
the Policy, subject to the interest of the Policyowner, to a successor
company in the event of a Change of Control as defined in the Split
Dollar Agreement. In the event of such assignment, sale or conveyance
Assignee must provide the Policyowner with written notice at least
thirty (30) days prior to said assignment, sale or conveyance, either
in person or by mail as provided for in the Split Dollar Agreement.
4. The Policyowner and the Assignee expressly agree that as long as the Policy
has not been surrendered, the following rights are reserved by the
Policyowner and excluded from this assignment, and do not pass by virtue
hereof.
A. The sole right to designate and change the beneficiary.
B. The sole right to elect any Optional Mode of Settlement permitted by
the Policy or permitted by the Insurer
5. The Assignee covenants and agrees with the Policyowner:
A. That the Insurer, in the event of a death claim, shall be authorized
to issue separate checks to pay the amounts due to each party, up to
their interests, and in accordance with this Agreement and the Split
Dollar Agreement.
B. That any amounts due to be paid by the Insurer pursuant to the terms
of the Policy and this Agreement in excess of the then existing
liabilities of the Policyowner under the Split Dollar Agreement shall
be paid by the Insurer to the persons entitled thereto under the
Policy had this Agreement not been executed, provided however, any
amount in excess of the entitlement of the policyowner under the Split
Dollar Agreement shall be paid to the assignee.
C. In the event any amounts are paid to the Assignee by the Insurer to
which the Assignee is not entitled pursuant to the terms of the Policy
and this Agreement, said amounts are to be immediately forwarded to
the persons entitled thereto. If this is not done within ten (10) days
the persons so entitled to the benefits may initiate legal action in a
court of competent jurisdiction as provided for in the Split Dollar
Agreement. Any and all reasonable legal fees and expenses incurred by
the entitled persons to enforce their rights to receive such benefits
shall be the sole responsibility of the Assignee.
D. That the Assignee will not exercise either the right to surrender or
withdraw from the Policy unless and until there has been an occurrence
of some event specifically stated in the Split Dollar Agreement which
calls for the Assignee to recover amounts to which the Assignee is
entitled under the Policy. In any event, the Assignee shall not
exercise any of its rights under the Policy until thirty (30) days
after the Assignee shall have mailed, by registered or certified mail,
to the Policyowner at the address last supplied to the Assignee,
specifically referring to this assignment, notice of intention to
exercise such right.
Upon the full payment of all liabilities under the Split Dollar Agreement by the
Policyowner to the Assignee, the Assignee shall execute an appropriate
instrument of release of this assignment .
The Insurer shall be fully protected and discharged from further obligation by
paying in reliance upon the terms of the Policy and/or the terms of this
Agreement. The Insurer shall not be bound by the terms of the Split Dollar
Agreement and may rely on any written assurance concerning such Agreement
provided to the Insurer by the Policyowner or the Assignee. Any conflicts
between this assignment and any other agreement, with respect to the rights of
the Assignee under the Policy, shall be resolved in accordance with the terms of
this assignment.
By their signatures to this Agreement, the parties acknowledge that (1) neither
the Insurer which is the issuer of the Policy, nor any agent thereof, nor any
person acting on its behalf, has given any legal or tax advice concerning this
Agreement; and (2) that the execution of this document has legal and tax
consequences and should not be signed without the advice of their own attorneys.
ATTEST: KEYSTONE FINANCIAL, INC.
__________________________________ By: _________________________________
WITNESS:
__________________________________ _________________________________
Executive
Exhibit 12.1 - Computation of Ratios
Ratio of Earnings to Fixed Charges:
(in thousands) Year Ended December 31,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
1. Income before taxes $48,668 $145,439 $126,870
2. Fixed charges:
a. Interest expense 228,658 240,684 232,494
b. Interest component of rent expense 2,808 2,734 2,459
c. Total fixed charges (line 2a+line 2b) 231,466 243,418 234,953
d. Interest on deposits 173,942 193,087 194,898
e. Fixed charges excluding interest
on deposits (line 2c-line 2d) 57,524 50,331 40,055
2c-line 2d)
3. Income before taxes plus fixed charges:
a. Including interest on deposits
(line 1 + line 2c) 280,134 388,857 361,823
b. Excluding interest on deposits
(line 1 + line 2e) $106,192 $195,770 $166,925
4. Ratio of earnings to fixed charges:
a. Including interest on deposits
(line 3a divided by line 2c) 1.21x 1.60x 1.54x
b. Excluding interest on deposits
(line 3b divided by line 2e) 1.85x 3.89x 4.17x
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Selected Financial Data Year Ended December 31
(in thousands except per share data)
- ------------------------------------------------------------------------------------------------
1999* 1998 1997* 1996 1995
- ------------------------------------------------------------------------------------------------
Operations:
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $486,031 $517,649 $510,738 $473,420 $446,786
Interest expense 228,658 240,684 232,494 211,301 200,775
- ------------------------------------------------------------------------------------------------
Net interest income 257,373 276,965 278,244 262,119 246,011
Provision for credit losses 23,376 17,150 15,316 10,713 8,568
Noninterest income 104,345 108,813 89,932 71,525 58,137
Noninterest expense 289,674 223,189 225,990 196,245 182,130
Income tax expense 11,592 45,692 38,953 37,180 34,001
- -------------------------------------------------------------------------------------------------
Net income $37,076 $99,747 $87,917 $89,506 $79,449
- -------------------------------------------------------------------------------------------------
Pre-tax security gains
(losses), included above $(338) $11,018 $6,071 $871 $1,789
- -------------------------------------------------------------------------------------------------
Net interest spread 3.57% 3.71% 3.87% 3.87% 3.90%
Impact of noninterest funds .64 .71 .72 .74 .71
- -------------------------------------------------------------------------------------------------
Net interest margin 4.21% 4.42% 4.59% 4.61% 4.61%
- -------------------------------------------------------------------------------------------------
Per Share:
- -------------------------------------------------------------------------------------------------
Net income:
Basic $0.76 $1.94 $1.70 $1.72 $1.60
Diluted 0.75 1.92 1.68 1.70 1.59
Dividends 1.16 1.13 1.06 0.98 0.93
Dividend payout ratio 152.6% 58.25% 63.65% 56.98% 58.13%
Average shares outstanding 48,856,092 51,446,436 51,692,534 52,118,819 49,557,082
Balances at December 31:
- -------------------------------------------------------------------------------------------------
Loans & leases $4,459,546 $4,459,783 $4,712,566 $4,336,470 $4,096,866
Allowance for credit losses (59,975) (60,274) (65,091) (56,256) (55,415)
Total assets 6,887,508 6,968,227 6,841,337 6,450,579 6,213,222
Deposits 4,960,334 5,231,718 5,233,165 5,059,721 4,993,608
FHLB borrowings &
long-term debt 858,696 557,266 349,943 226,776 168,564
Shareholders' equity 550,025 661,665 685,485 660,406 621,766
Ratios:
- -----------------------------------------------------------------------------------------------
Return on average assets 0.55% 1.45% 1.33% 1.44% 1.35%
Return on average equity 6.33 14.63 13.27 14.09 14.00
Equity to assets, average 8.64 9.92 9.99 10.19 9.66
Risk adjusted capital ratios:
Leverage ratio 7.48% 8.66% 9.15% 10.03% 10.12%
Tier 1 10.54 12.59 12.50 14.43 14.48
Total capital 11.78 13.84 13.75 15.66 15.67
Loans to deposits, year-end 89.90% 85.25% 90.05% 85.71% 82.04%
Allowance for credit losses
to loans 1.35 1.35 1.38 1.30 1.35
Nonperforming assets to loans 0.70% 0.65% 0.55% 0.65% 0.72%
Loans 90-days past due to loans 0.50 0.64 0.70 0.46 0.41
- ------------------------------------------------------------------------------------------------
Total risk elements to loans 1.20% 1.29% 1.25% 1.11% 1.13%
- ------------------------------------------------------------------------------------------------
* School districts' settlement expense and restructuring-related charges in 1999
reduced net income by $46.6 million or $0.95 per share and increased noninterest
expense by $70.6 million. Merger-related special charges in 1997 reduced net
income by $8.6 million or $0.17 per share and increased noninterest expense by
$11.4 million.
</TABLE>
<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 includes comparisons of financial performance for
1999, 1998, and 1997. Results for 1999 were affected by the expenses associated
with the settlement of significant litigation and by the restructuring expenses
incurred to accommodate the unification of Keystone's seven bank charters.
Expense levels in 1997 included expenses associated with merger-related special
charges. 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.
1999 Summary
Performance Results
During 1999, Keystone sought to aggressively address the organizational and
structural changes necessary to more efficiently and effectively meet the needs
of its customers. Throughout the year, Keystone incurred expenses totaling $26.9
million to accommodate the unification of its seven separate banks into a single
national bank charter. These expenses included severance and job placement costs
for displaced employees, costs to effect the centralization of facilities,
requisite professional fees, and marketing fees associated with the introduction
of the "Keystone Financial" brand. With the finalization of the restructuring in
the fourth quarter of 1999, Keystone is poised to begin a new era as a more
streamlined and efficient financial services provider.
During the fourth quarter of 1999, Keystone announced a $51 million settlement
of litigation that had arisen out of investment losses suffered by school
districts throughout Pennsylvania (hereafter referred to as the "school
districts' settlement"). Although the investment manager responsible for these
losses, who later pleaded guilty to federal charges in this matter, was
unrelated to Keystone, the school districts' settlement was reached to avoid the
uncertainty of protracted litigation and the negative publicity associated
therewith.
Exclusive of the expenses associated with both the restructuring and the school
districts' settlement, Keystone's earnings per diluted share were $1.70 versus
$1.92 in 1998. Such results reflected a return on average assets and return on
average equity of 1.23% and 13.72% in 1999, compared with 1.45% and 14.63% for
1998. The decline in core operating performance was largely influenced by a $6
million increase in the 1999 loan loss provision, attributed primarily to a
single commercial credit that was charged off in the fourth quarter of 1999.
Performance was also influenced by a narrowing net interest margin and improved
levels of noninterest revenue including asset management, ATM, and sales of
financial products. Substantial improvement in the level of Keystone's operating
expenses was achieved as a consequence of the restructuring, with the majority
of this improvement to be realized in the year 2000 and beyond.
Despite the effect of the school districts' settlement and restructuring
expenses, Keystone's capital base remained in excess of the regulatory threshold
required to be classified as a "well-capitalized" financial institution and
continued to provide competitive dividend payouts to its shareholders. Similar
to much of the industry, Keystone experienced a decline of 43% in its share
price during 1999, causing its market capitalization to decline from $1.9
billion at December 31, 1998 to $1.0 billion at December 31, 1999.
External Issues and the Economy
One of the primary factors affecting the intermediation business of a financial
institution is the interest rate environment. In the latter half of 1999, a
measurable trend of interest rate increases began to emerge. The Federal
Reserve, seeing the potential for inflationary pressures, began to incrementally
2
<PAGE>
raise interest rates. Furthermore, the Federal Reserve has continued to increase
interest rates in early 2000 in order to forestall the influence of tight labor
markets and the inflationary pressure of the U.S. economy. These changes have
had the immediate impact of both increasing funding costs and compressing net
interest margin. Effective management of the effect of these rate changes on
both earning asset yields and funding cost remains a critical management
responsibility.
Local Economy
The economies in Keystone's core market should be expected to experience
moderate growth. Growth in the service sectors are expected to lead in overall
job growth, including strong construction employment trends. While some housing
markets in the region are likely to cool following a banner performance in 1998
and the first half of 1999, any decline in housing construction is likely to
fall back into a more sustainable long-term range. Manufacturing employment is
expected to rebound slightly. The economy in much of Keystone's market exhibits
more diversification and, thus, a more stable environment. As an example,
Pennsylvania now ranks eighth nationwide in technology employment, due to a
recent emphasis on technology-oriented growth. Another favorable trend involves
Pennsylvania's personal bankruptcy rates, which remain well below the national
trends.
In summary, while the economies within Keystone's geographic footprint are not
ordinarily considered high-growth markets, these markets have exhibited
diversification, stability, and resiliency, as such markets are playing a vital
role in the area's migration from a production to a service economy and are
actively participating in technology-oriented growth.
Outlook for 2000
The completion of plans and processes undertaken in 1999 have positioned
Keystone to be more competitive in the marketplace. The major events of 1999,
the restructuring and reorganization of Keystone, the settlement of potentially
harmful litigation, and the diligent preparation for Y2K, have paved the way for
a successful year 2000. While Keystone's asset quality has shown signs of
improvement, Keystone must remain vigilant in its mandate to continue to make
asset quality nonnegotiable. Keystone must continue to sustain positive growth
trends in noninterest revenue and its quest to be a full-service financial
services company. Finally, while great strides were made in controlling the
level of future cost increases, cost control is a never-ending process as
associates must continually search for ways to more efficiently and effectively
service Keystone's customer base.
Forward-Looking Statements
From time to time, Keystone has and will continue to make statements which may
include forward-looking information. Keystone cautions that forward-looking
information disseminated through financial presentations should not be construed
as guarantees of future performance. Furthermore, actual results may differ from
expectations contained in such forward-looking information as a result of
factors which are not predictable. Financial institution performance can be
affected by any number of factors, many of which are outside of management's
direct control. Examples include, but are not limited to, the effect of
prevailing economic conditions; the overall direction of government policies;
unforeseen changes in the general interest rate environment; the actions and
policy directives of the Federal Reserve Board; competitive factors in the
marketplace, and business 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 make up noninterest income. Net interest income continues to be
3
<PAGE>
the most significant component of revenue, comprising nearly 72% 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.
4
<PAGE>
The following table compares net interest income and net interest margin
components between 1999 and 1998 (in thousands):
<TABLE>
- ----------------------------------------------------------------------------------------
1999 1998 Change
- ----------------------------------------------------------------------------------------
Yield/ Yield/ Yield/
Amount Rate Amount Rate Amount Rate
- ---------------------------- ----------- -------- ---------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income $494,688 7.83% $526,218 8.15% $(31,530) (0.32)
Interest expense 228,658 4.26 240,684 4.44 12,026 0.18
- ---------------------------- ----------- -------- ---------- ------- ---------- ---------
Net interest income $266,030 $285,534 $(19,504)*
- ---------------------------- ----------- -------- ---------- ------- ---------- ---------
Interest spread 3.57% 3.71% (0.14)
Impact of noninterest funds 0.64 0.71 (0.07)
- ---------------------------- ----------- -------- ---------- ------- ---------- ---------
Net interest margin 4.21% 4.42% (0.21)
- ---------------------------- ----------- -------- ---------- ------- ---------- ---------
*The change in net interest income consisted of unfavorable volume variances
totaling $9.6 million and unfavorable rate variances totaling $9.9 million.
</TABLE>
Interest Rates and Changing Trends
For several years prior to 1999, interest rates had been in a continuous
decline. During 1999, this trend began to reverse, particularly in the second
half of the year. Such increases, however, were not yet sufficient to produce
higher earning asset yields or higher overall funding costs than those
experienced in 1998. The reversal of the trend of continuously declining
interest rates has had an initial impact of compressing the difference between
earning asset yields and funding costs, thus compressing net interest margin.
In order to illustrate the change in interest rates between 1998 and 1999, the
following comparison of the average yield curve for the U.S. Treasury for
specific intervals between three months and thirty years is provided.
5
<PAGE>
Three Six One Two Three Five Ten Thirty
Months Months Year Years Years Years Years Years
- --------------------------------------------------------------------------------
1999 4.78% 4.95% 5.08% 5.43% 5.49% 5.55% 5.65% 5.87%
1998 4.91% 5.02% 5.05% 5.13% 5.14% 5.15% 5.26% 5.58%
While interest rates played an important role in the absolute level of net
interest income in 1999, performance was also influenced by other factors
including the volume and mix of both earning assets and funding sources. For
example, Keystone's exit from indirect lending activity in late 1997 had the
impact of steadily amortizing loan balances over the past two years without the
benefit of offsetting replacement volumes. Another factor which served to
depress earning asset growth trends related to Keystone's share repurchase
activity. The absolute volume of earning assets declined from the end of 1998 as
Keystone aggressively executed on its share repurchase program as approved by
its Board of Directors. While such plans have favorably influenced both
operating earnings per share and return on equity performance, utilization of
asset liquidity to effect share repurchase has had the immediate impact of
reducing the earning asset base. On the funding side, financial institutions
have been challenged to more effectively manage their funding base. Mix changes,
6
<PAGE>
including the level of dependence on sources such as FHLB advances to offset
core deposit declines, have influenced funding costs. While no single factor is
responsible for compression of net interest margin from 1998 to 1999, interest
rates as well as volume and mix changes in both earning assets and funding
sources have all influenced changes in this important revenue stream.
Interest Income/Earning Assets
The characterization of 1999 as a transitional year for Keystone was readily
apparent in most aspects of performance, including the level of interest income
derived from Keystone's earning asset base. Interest income actually declined
from 1998, aggregating $495 million compared with $526 million in the previous
year. Performance was influenced by lower earning asset volumes and by lower
yields. Earning asset volumes declined from $6.46 billion in 1998 to $6.31
billion in 1999, a decline of over $141 million or 2%. Major items which
influenced the decline in earning assets included the aforementioned runoff in
commodity-based indirect loan and lease products, the sale of the commercial
lease portfolio in late 1998, and investment in bank-owned life insurance.
Furthermore, the purchase of Keystone common stock pursuant to its share buyback
plan in late 1998 and early 1999 served to reduce earning asset levels and,
therefore, overall interest income.
Interest income performance was also influenced by the decline in interest rates
during the first half of 1999. Overall asset yields declined from 8.15% in 1998
to 7.83% in 1999, a reduction of 32 basis points. While such declines could be
expected during a period of declining short-term interest rates, the reduction
of 32 basis points in earning asset yields exceeded the reduction of 18 basis
points in funding costs. Consequently, a decline in net interest spread, and
therefore net interest income, was experienced.
Asset yields were not only influenced by changes in the absolute volume, but
also the relative mix of earning assets. These dynamics were especially notable
within the loan portfolio mix. The amortization of approximately $185 million of
the remaining indirect loan and lease balances and the sale of the commercial
lease business, which accounted for an additional reduction of $33 million,
caused higher-yielding loan balances to decline. These declines were partially
recovered through favorable volume trends in commercial and commercial real
estate loans which were originated at lower yields than the loans they replaced.
While Keystone experienced some growth in retail lending activity, efforts to
capture an increased market share during 1999 fell short of corporate
objectives. Such trends were influenced, in part, by the disruption in
Keystone's distribution network as a consequence of the restructuring effort.
This trend began to reverse in the latter half of 1999, though not at a level
adequate to offset the unfavorable trends in the first half of the year.
Interest Expense/Funding Sources
While management of the trends affecting earning asset components of the balance
sheet presented significant challenges, the management of the funding component
represented an equally daunting task. This challenge was exacerbated in the
second half of the year as interest rates began to climb and were accompanied by
increases in the cost of funds. This rise in funding costs included the impact
of both competitively-priced product offerings and changing customer prefer-
ences. At the same time, the ever-changing investment opportunities now avail-
able to commercial, retail, and other traditional users of bank deposit products
has posed a considerable challenge to absolute growth in deposit volumes.
Notwithstanding the challenges associated with maintaining or growing certain
deposit products, Keystone has been proactive in identifying ways in which to
access funding sources. For example, Keystone has promoted both its indexed
money market product and variable rate CD product. The key distinction in these
product lines is that they provide customers with a market-based indexed rate,
while simultaneously providing customers more flexible access to liquidity.
Likewise, Keystone continues to be innovative in monitoring customer trends and
preferences in transitional certificate of deposit categories to ensure
competitive profit offerings as to term, rate, and withdrawal privileges.
Keystone has also experienced growth in its demand deposit categories due to a
variety of product offerings customized to meet the needs of different
7
<PAGE>
demographic strata including senior citizen accounts, electronic delivery
channel users, and other focused product offerings.
In order to augment deposit sources of funding, Keystone has also made strategic
use of FHLB advances. These advances, which are collaterialized by mortgage
receivables, have been an important auxiliary source of liquidity for Keystone.
Keystone maintains appropriate levels of borrowing capacity with the FHLB, as
well as its national CD program and its medium-term note borrowings, all of
which are accessed on an as-needed basis.
As with earning assets, the cost of funds during 1999 was influenced not only by
overall rate trends but also by the relative mix of funding sources. While the
1999 cost of funds of 4.26% was below the 4.44% recorded in 1998, the reduction
did not keep pace with the reduction of earning asset yields, resulting in
margin compression.
Net Interest Spread and Net Interest Margin
Combining the impact of yield on earning assets with the cost of funding sources
results in net 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 1999, Keystone experienced
compression in interest rate spread due to the dynamics of interest rate changes
and the relative impact of these changes on funding sources and earning asset
yields. Interest spread declined from 3.71% in 1998 to 3.57% in 1999. Lower
short-term interest rates reduced the impact of noninterest funding sources from
.71% in 1998 to .64% in 1999. Consequently, net interest margin dropped from
4.42% to 4.21%.
<TABLE>
<CAPTION>
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 1999 and
1998 (in thousands):
1999
- ------------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset yield 7.91% 7.83% 7.83% 7.77%
Funding cost 4.46 4.20 4.13 4.22
- -------------------------------------------------------------------------------
Interest spread 3.45% 3.63% 3.70% 3.55%
- -------------------------------------------------------------------------------
Net interest margin 4.08% 4.26% 4.31% 4.22%
- -------------------------------------------------------------------------------
Net interest income $65,047 $67,359 $66,924 $66,700
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
</TABLE>
While interest rates did decline during the first half of 1999, the second half
exhibited upward interest-rate pressures. Throughout the year, net interest
spread and net interest margin narrowed. In the first half, the narrowing
resulted more from the decline in earning asset levels as a result of share
repurchase and commodity loan amortization. Conversely, second half performance
8
<PAGE>
was influenced more by the impact of upward pressures on funding costs relative
to the inability to immediately reprice earning assets. Keystone's ability to
manage the impact of rates and trends is influenced by its asset/liability
management initiatives.
PROVISION FOR CREDIT LOSSES
The provision for credit losses in 1999 grew to $23.3 million from $17.2 million
in 1998. The increase from 1998 performance was substantially attributable to a
single commercial credit which was charged off in the fourth quarter of 1999.
Keystone continuously monitored both the commercial and consumer credit sectors
to assess the emergence of any major credit quality trends. Despite the
unfavorable impact of isolated charge-offs, there appears to be no emerging
unfavorable credit quality trends. While the ratio of nonperforming assets to
loans increased slightly to .70% from .65% at the end of 1998, the level of
loans that were 90 days past due to total loans was reduced to .50% from .64% at
the end of the prior year. Keystone remains committed to a corporate philosophy
of credit quality as "non-negotiable". See the allowance for credit losses and
asset quality sections of this review for additional information.
NONINTEREST INCOME
The diversification of Keystone's revenue stream has been an evolutionary
process that has increased the noninterest income portion of total revenue to
28.2% in 1999 versus 18.1% five years earlier. Growth in noninterest sources of
revenue is deemed critical to profit performance improvement. Conventional
wisdom suggests that these sources of revenue are less susceptible to the effect
of unfavorable changes in external factors such as the interest rate environment
or a slowdown in the overall economy. As financial institutions seek to become
more complete purveyors of financial services, the strategy to diversify the
revenue stream meets the dual objectives of reducing earnings volatility while
providing a framework for meeting the more expansive financial services needs of
customers.
Although Keystone has successfully demonstrated its ability to grow certain
nontraditional sources of revenue, it is clear that such revenues are not
totally immune to increases in interest rates or a slowdown in the economy. For
example, a prolonged period of rising interest rates or a prolonged economic
slowdown could reduce refinancing activity in the mortgage banking area.
Likewise, a major correction in stock market valuations would likely influence
certain wealth development fee income or bring about a reduction in brokerage
activity and mutual fund sales. In summary, while expansion of fee-based
activities has expanded customer relationships and improved revenue
diversification, such revenues are likely to continue to be affected by general
economic conditions and trends. Keystone's challenge, not unlike that of other
financial institutions, is to conduct its business to ensure ongoing profitable
operations under a variety of economic conditions.
Trust and Investment Advisory Fees
The largest single category of noninterest revenue is trust and investment
advisory fees which represent nearly 27% of noninterest revenue and
approximately 8% of aggregate revenue. During 1999, such fees grew to $27.8
million, an increase of $1.8 million or approximately 7% over the $25.9 million
recorded in 1998. This source of revenue includes not only traditional trust
income but also investment management fees, brokerage fees, and mutual fund
revenues. While the foundation of Keystone's wealth development business is
linked primarily to personal and employee benefit trust revenues, the more
significant growth opportunities in recent years have occurred in areas such as
brokerage fees and fees derived from services provided by Keystone's Martindale
Andres subsidiary. Keystone has been able to blend the opportunities presented
through its substantial distribution channel with its objective to meet the
expanded financial services needs of its customers in the wealth development
arena.
9
<PAGE>
Service Charges
Service charges on deposits represent another important source of noninterest
income in financial institutions. Income from deposit service fees grew 4% from
$18.4 million in 1998 to $19.2 million in 1999. While this source of revenue is
integral to a financial institution's overall revenue stream, Keystone has been
careful to balance its needs with those of its customer base by attempting to
strike a balance in achieving a price/value equilibrium for such services. At
the same time, Keystone was cognizant of its conversion to a single charter and
its impact on customer perceptions. Accordingly, Keystone attempted to minimize
the potentially disruptive customer impact of system conversions by not linking
these changes with substantial fee increases.
Mortgage Banking Activity
One of the more significant and fast growing components of Keystone's
noninterest revenue performance has materialized within Keystone's mortgage
banking group. Keystone has, for the last several years, managed its mortgage
banking activity on a centralized basis, but within the context of its expansive
community office delivery system. The mortgage needs of the customers within
Keystone's geographic footprint represent the core of Keystone's mortgage
banking business. However, Keystone has embarked on a number of successful niche
specialties to augment its core business, including luxury log homes,
construction lending, and correspondent banking relationships. While Keystone's
mortgage banking business has undergone continuous expansion and improvement,
this business is directly influenced by changes in the interest rate
environment. While Keystone has not historically had significant dependence on
the more volatile refinancing segment of this business, changes in rates will
necessarily influence all mortgage activity. Keystone's mortgage banking revenue
in 1999 was $11.5 million, a reduction from the $12.4 million recorded in 1998.
While mortgage banking revenues in the first half of 1999 exceeded the pace in
the first half of 1998, upward pressure on rates in the second half of the year
depressed volumes slightly, resulting in reduced revenues.
Other Income
Revenue from the sale of financial products, which grew 27% to $6.8 million
during 1999, reflected another benefit of the diversification of Keystone's
revenue stream and demonstrated more effective leverage of Keystone's community
office distribution channel. Financial products include a variety of investment
vehicles not ordinarily provided within more traditional community offices such
as proprietary mutual funds (Governor Funds), other mutual funds, and annuity
products from third-party providers.
In addition to sales of financial products, other income is derived from a
variety of sources, the most significant of which are fees from merchant bank
card activities, ATM and debit card revenues, and income from insurance-based
activities. Keystone has been proactive in expanding its fee-generation
capabilities through initiatives such as housing ATM machines in convenience
stores and increasing usage and distribution of debit cards. During 1999,
Keystone also recognized a $3.5 million pension curtailment gain recorded during
the second and third quarters, which was coincident with the departure of
employees associated with Keystone's internal restructuring.
Noninterest Expense
Noninterest expense levels during 1999 were significantly impacted by both the
school districts' settlement and Keystone's internal restructuring program
initiated in late 1998. Keystone recognized expense of $43.7 million in the
fourth quarter of 1999 for the school districts' settlement. This amount was net
of probable insurance recoveries totaling $8 million. In addition, Keystone
incurred special charges of $26.9 million throughout 1999 that were primarily
associated with the unification of the seven former banks under a single bank
charter. Keystone does not expect to incur any significant additional costs
related to the bank unification or the school districts' settlement.
10
<PAGE>
The components of special charges in 1999 were as follows (in thousands):
----------------------------------------------------
Employee/director separation $10,605
Asset disposition 6,652
Customer communications 3,360
Professional fees 2,756
Lease termination 1,001
Other 2,543
----------------------------------------------------
$26,917
----------------------------------------------------
Substantially all amounts associated with these costs have been paid by December
31, 1999.
As a result of the efficiencies gained through the internal restructuring
program, core operating expenses declined from 1998 to 1999. Such expenses
totaled $219.1 million in 1999 compared with $223.2 million in 1998. The seven
bank conversions occurred as scheduled from May to October of 1999. Staffing
reductions were timed to coincide with the bank conversions. As such, while the
restructuring was completed in 1999, a full year impact of efficiencies gained
will not be realized until 2000.
While core expenses declined in 1999, slight growth occurred in nonpersonnel
categories of expense as Keystone continued to make technological investments to
better serve its customers, increased branding and other marketing efforts, and
incurred the final expenses associated with Y2K preparations.
Salaries and Benefits
Salaries expense decreased $8.3 million or 9% in 1999 compared with 1998, as the
average number of full-time equivalent employees (FTEs) declined by 14%. The
restructuring enabled Keystone to cut back in staffing most dramatically in the
support areas. Various functions that had been duplicated under the multiple
charter organization were streamlined during the course of 1999. Variable
compensation paid to mortgage originators and investment counselors increased in
1999 and was attributable to the effected employees' abilities to obtain a 12%
increase in originations and a 27% increase in sales of financial products.
Benefits expense in 1999 remained at a level stable with 1998. Most categories
of benefits expense declined due to the reduced number of FTEs. Conversely, two
of Keystone's most significant benefit costs, pension and health care, increased
in 1999. While staffing reductions limited the increase in the service cost
component of pension expense, increased interest costs drove the overall
increase in pension expense in 1999. In accordance with Keystone's severance
policy, employees terminated as a result of the restructuring remained eligible
for health care coverage during their severance eligibility periods. Eligibility
periods varied based on employees' levels and lengths of service. This extended
coverage delayed the benefit of reduced health care expenses that Keystone
should realize from FTE reductions. Claims per FTE also increased in 1999, as
severed employees demonstrated a tendency to ensure all health related issues
were addressed prior to the lapsing of their medical coverage.
Occupancy and Equipment Expenses
Expenses related to occupancy and furniture and equipment increased a total of
$1.4 million or 4% in 1999 compared with 1998. Such expenses were impacted by
Keystone's continued investment in its delivery channels as a means of enhancing
customer convenience, and continued technological investments in software as a
means of increasing both efficiency and customer profiling capabilities. This
area of expense was also impacted by costs to ensure all hardware and software
were Y2K compliant.
11
<PAGE>
Other Expenses
Other expenses increased a total of $2.6 million or 4% in 1999. Reductions
attributable to the restructuring were more than offset by increases in
marketing, processing fees, telephone costs and problem loan expense. Collection
efforts related to a limited number of commercial loans drove the increase in
problem loan expense. The increases that occurred in the remaining categories
were primarily related to revenue improvement initiatives, which included
numerous advertising campaigns (both brand awareness and product specific), and
expanded outbound sales calls from the telephone banking center.
Income Taxes
Keystone reported a significantly lower effective tax rate for 1999 than in 1998
(24% compared with 31%). This reduction is related to the decline in pre-tax
income in 1999 associated with litigation resolution and restructuring-related
special charges. As a result of the reduction in pre-tax income, tax-free
sources of revenue became a larger relative portion of income before taxes. When
pre-tax income and tax expense are adjusted to include the tax impact of
tax-free revenue, the effective tax rate was 35% for both 1999 and 1998, as
shown below.
- --------------------------------------------------------------------------------
1999 1998
Reported Adjusted Reported Adjusted
- --------------------------------------------------------------------------------
Income before income taxes $48,668 $48,668 $145,439 $145,439
Tax-equivalent adjustment ---- 8,657 ---- 8,569
- --------------------------------------------------------------------------------
$48,668 $57,325 $145,439 $154,008
- --------------------------------------------------------------------------------
Income tax expense $11,592 $11,592 $45,692 $45,692
Tax-equivalent adjustment ---- 8,657 ---- 8,569
- --------------------------------------------------------------------------------
$11,592 $20,249 $45,692 $54,261
- --------------------------------------------------------------------------------
Effective tax rate 24% 35% 31% 35%
- --------------------------------------------------------------------------------
YEAR 2000
By the end of 1999, Keystone had completed all phases of its Year 2000 (Y2K)
readiness plan. No significant problems were experienced as a result of the
changeover to the year 2000. Total expenditures associated with Y2K preparations
since the inception of Keystone's readiness plan are estimated to have
aggregated $7.2 million, of which $4 million were capitalized and will be
amortized over a five-year period. Management is not aware of any continued
exposure to Y2K problems and does not expect to incur additional expense of any
significance associated with this issue.
BALANCE SHEET OVERVIEW
Keystone's assets totaled $6.89 billion at the end of 1999, a decrease from the
total of $6.97 billion reported at the end of 1998. Growth was constrained
primarily due to runoff of curtailed credit products, such as indirect loans and
leases. Loan balances declined as growth in relationship-based product offerings
was not sufficient to offset this runoff. In addition, balance sheet growth was
also constrained by the lack of deposit balance increases.
LOANS
During 1999, Keystone experienced a decline in aggregate loan balances despite
measureable 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. Keystone
continues to preserve vital funding sources to ensure credit availability for
creditworthy customers that exhibit demonstrated potential and desire for more
expanded relationships. A prime example of this effort is Keystone's continued
commitment to curtail those activities which tend to absorb funding with little
or no opportunity to profitably expand relationships, such as indirect lending
and leasing.
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<PAGE>
The following summary reflects the impact of these strategies on specific loan
balances through 1999 and 1998 (in thousands):
- --------------------------------------------------------------------------------
1999 1998 Change
- --------------------------------------------------------------------------------
Amount % Amount % Amount %
- --------------------------------------------------------------------------------
Commercial $675,280 15% $663,415 14% $11,865 2%
Floor plan financing 172,853 4 171,872 4 981 1
Commercial-real estate
secured 1,607,968 36 1,496,526 33 111,442 7
Consumer mortgages 711,159 16 774,388 17 (63,229) (8)
Direct consumer 907,559 21 919,952 20 (12,393) (1)
Indirect consumer 135,765 3 248,942 5 (113,177) (45)
Lease financing 209,295 5 314,749 7 (105,454) (34)
- --------------------------------------------------------------------------------
$4,419,879 100% $4,589,844 100% $(169,965) (4)%
- --------------------------------------------------------------------------------
Though declines in commodity-based indirect loan and lease categories were
anticipated, the actual pace of runoff offset the growth that was achieved in
certain relationship-based categories. Growth in commercial lending activities
including commercial real estate (7%), commercial loan (2%) and dealer floor
plans (1%) reflects Keystone's stated commitment to maximize relationship
banking opportunities.
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<PAGE>
ALLOWANCE FOR CREDIT LOSSES AND ASSET QUALITY
The following table sets forth five years of activity within the allowance for
credit losses beginning January 1, 1995 (in thousands):
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Balance at January 1 $60,274 $65,091 $56,256 $55,415 $53,708
Loans charged off:
Commercial (8,114) (2,326) (1,930) (1,936) (874)
Real estate-secured:
Commercial (3,194) (2,543) (1,234) (1,646) (1,971)
Consumer (2,516) (885) (1,116) (651) (708)
Consumer (10,303) (14,442) (10,010) (6,702) (5,498)
Lease financing (1,859) (3,862) (2,987) (1,330) (786)
- --------------------------------------------------------------------------------
Total loans charged off (25,986) (24,058) (17,277) (12,265) (9,837)
- --------------------------------------------------------------------------------
Recoveries:
Commercial 331 303 501 461 281
Real estate-secured:
Commercial 488 675 410 465 538
Consumer 346 444 219 152 164
Consumer 977 1,302 1,104 1,138 900
Lease financing 169 244 251 177 158
- --------------------------------------------------------------------------------
Total recoveries 2,311 2,968 2,485 2,393 2,041
- --------------------------------------------------------------------------------
Net loans charged off (23,675) (21,090) (14,792) (9,872) (7,796)
Provision charged to operations 23,376 17,150 15,316 10,713 8,568
Other --- (877) 8,311 --- 935
- --------------------------------------------------------------------------------
Balance at December 31, $59,975 $60,274 $65,091 $56,256 $55,415
- --------------------------------------------------------------------------------
Ratio of allowance to
year-end loans 1.35% 1.35% 1.38% 1.30% 1.35%
Ratio to average loans:
Provision 0.53% 0.37% 0.33% 0.26% 0.21%
Net charge-offs 0.54% 0.46% 0.32% 0.24% 0.20%
- --------------------------------------------------------------------------------
Net charge-offs increased 12% in 1999 compared with 1998. While increases in
1996 through 1998 were primarily associated with indirect loan and lease
activities, the charge-off of a single commercial credit drove the majority of
the increase in 1999. Consumer and lease financing charge-offs declined in 1999
as a result of Keystone's decision to curtail indirect lending activity
beginning in late 1997.
The allowance for credit losses expressed as a percentage of loans remained at
1.35% at the end of 1999, and reflected the comparability of Keystone's loan
composition and risk profile to conditions that existed at December 31, 1998.
14
<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 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 1999
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):
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Nonaccrual loans $27,183 $24,675 $20,520 $19,350 $19,142
Restructurings 841 264 489 393 503
- --------------------------------------------------------------------------------
Nonperforming loans 28,024 24,939 21,009 19,743 19,645
Other real estate 3,170 3,982 5,028 8,305 9,777
- --------------------------------------------------------------------------------
Nonperforming assets 31,194 28,921 26,037 28,048 29,422
Loans past due 90 days
or more 22,508 28,549 33,062 20,141 16,798
- --------------------------------------------------------------------------------
Total risk elements $53,702 $57,470 $59,099 $48,189 $46,220
- --------------------------------------------------------------------------------
While nonaccrual loans reflected an absolute increase from 1998 levels, that
increase was not attributable to any underlying trend or change in risk profile.
Alternatively, a marked reduction in loans 90 days or more past due served to
reduce aggregate risk elements below levels noted in 1998 and 1997.
Substantially all of the loans in the nonaccrual category at December 31, 1999
were contractually past due as to principal or interest.
15
<PAGE>
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.
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Ratio to Year-End Loans:
- --------------------------------------------------------------------------------
Nonperforming assets 0.70% 0.65% 0.55% 0.65% 0.72%
90 days past due 0.50 0.64 0.70 0.46 0.41
- --------------------------------------------------------------------------------
Total risk elements 1.20% 1.29% 1.25% 1.11% 1.13%
- --------------------------------------------------------------------------------
Coverage Ratios:
Ending allowance to
nonperforming loans 214% 242% 310% 285% 282%
Ending allowance to
risk elements* 119% 113% 120% 141% 152%
Ending allowance to
net charge-offs 2.5x 2.9x 4.4x 5.7x 7.1x
- --------------------------------------------------------------------------------
*Excludes ORE.
The relative level of risk elements declined from 1998 and 1997 levels.
Expressed as a percentage of loans, total risk elements decreased from 1.29% at
the end of 1998 to 1.20% at the end of 1999. The migration of a limited number
of commercial credits from the 90 days past due category at the end of 1998 into
nonaccrual status during 1999 increased the ratio of nonperforming assets to
loans while decreasing the ratio of loans 90 days past due to total loans.
Management has identified approximately $12.5 million of loans outstanding at
December 31, 1999, where concern exists as to the potential for future
classification into one of the risk element categories. Substantially all of
these loans were current at the end of 1999. Such loans totaled $12.2 million at
the end of 1998.
16
<PAGE>
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):
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Commercial $7,641 $10,066 $4,550 $4,340 $4,833
Commercial real estate:
Construction and development 3,470 1,941 220 764 1,951
Permanent 11,738 8,640 11,960 12,196 10,919
Residential real estate 103 960 1,465 1,014 1,173
Consumer 5,072 3,332 2,814 1,429 769
- --------------------------------------------------------------------------------
Nonperforming loans 28,024 24,939 21,009 19,743 19,645
Other real estate 3,170 3,982 5,028 8,305 9,777
- --------------------------------------------------------------------------------
Total nonperforming assets $31,194 $28,921 $26,037 $28,048 $29,422
- --------------------------------------------------------------------------------
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 1999 and
1998 (in thousands):
- ------------------------------------------------------------------------------
% of Total % of Total
1999 Loans 1998 Loans
- ------------------------------------------------------------------------------
30-59 days $41,363 0.9% $47,899 1.1%
60-89 days 13,391 0.3 12,451 0.3
Over 90 days 22,508 0.5 28,549 0.6
- ------------------------------------------------------------------------------
$77,262 1.7% $88,899 2.0%
- ------------------------------------------------------------------------------
The level of past due loans expressed as a percentage of total loans at December
31, 1999, reflected improvement from the same period in 1998.
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.
17
<PAGE>
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, 1999 was adequate
to absorb potential losses within the loan portfolio.
INVESTMENTS
Keystone has established corporate investment policies that address various
aspects of portfolio management including, but not limited to, quality
standards, liquidity and maturity limits, investment concentrations, and
regulatory guidelines. Compliance with these policies is reported regularly to
the Board of Directors. Keystone's objectives with respect to investment
management include maintenance of appropriate asset liquidity, facilitation of
asset/liability management strategies, and maximization of return.
At December 31, 1999, Keystone's investments represented 24.1% of total assets.
The following is a summary of the carrying values of investments at December 31,
1999 and 1998 (in thousands):
1999 1998
- ------------------------------------------------------------------------------
Available Held to Available Held to
for Sale Maturity for Sale Maturity
- ------------------------------------------------------------------------------
Negotiable money market
investments $72,470 $ ----- $290,975 $-----
U.S. Treasury securities 80,967 ----- 123,388 -----
U.S. Government agency
obligations 722,614 385,163 548,572 500,418
Obligations of states and
political subdivisions 62,012 189,993 57,692 146,018
Corporate and other 135,275 13,045 109,126 13,100
- ------------------------------------------------------------------------------
$1,073,338 $588,201 $1,129,753 $659,536
- ------------------------------------------------------------------------------
The weighted average duration of Keystone's fixed rate investments was 3.75
years at December 31, 1999. 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 1999, the portion of all state and municipal holdings
rated "AAA" was 92.4% and the portion of all corporate issues rated "A" or
better was 98.0%.
The relationship of market value to the amortized cost of investments at
December 31, 1999 was 97.8% compared to 101.1% at the end of 1998. At December
31, 1999, investments held-to-maturity, which are carried at amortized cost,
contained gross unrealized gains of $2.5 million and losses of $15.3 million. On
an after-tax basis, the net unrealized loss of $12.8 million was less than 2% of
total shareholders' equity at December 31, 1999. Unrealized losses included in
the carrying value of available-for-sale investments of approximately $25
million 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.
18
<PAGE>
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 and caps. These derivatives,
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 and made use of floors to
reduce market risk associated with mortgage servicing rights. 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
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.
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 declined from 1998 to 1999, the mix
of deposits reflected the influence of competitive pressures and Keystone's
proactive strategy to meet customers' needs. Deposit composition consisted of
the following for 1999 and 1998(in thousands):
Change
- --------------------------------------------------------------------------------
1999 1998 Amount %
- --------------------------------------------------------------------------------
Noninterest-bearing demand $678,218 $637,533 $40,685 6 %
NOW 328,420 309,238 19,182 6
Savings 464,918 514,226 (49,308) (10)
Money market 786,567 740,086 46,481 6
Variable-rate CD 765,321 719,165 46,156 6
Other time deposits less
than $100,000 1,734,278 1,958,919 (224,641) (11)
Time deposits $100,000
or more 295,478 310,137 (14,659) (5)
- --------------------------------------------------------------------------------
$5,053,200 $5,189,304 $(136,104) (3)%
- --------------------------------------------------------------------------------
Keystone's 1999 deposit mix was impacted by four significant developments.
First, Keystone's continued promotion of its free-checking and electronic
checking products, combined with a corporate cash management product,
contributed to 6% growth in noninterest-bearing demand deposit balances.
Secondly, Keystone continues to promote 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, providing added
assurance to Keystone customers that they are achieving competitive returns
combined with convenient access. Thirdly, the variable rate certificate of
19
<PAGE>
deposit, with its indexed rate and flexible liquidity options, continues to be 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. 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
customers with assurance that, in its role as a financial services provider, the
foremost objective is to meet customer needs. Finally, time deposits decreased
due to Keystone's efforts to maintain a competitive cost structure to offset the
continued migration of customer interest-bearing accounts to higher yielding
investment products.
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
- --------------------------------------------------------------------------------
1999 1998 Amount %
- --------------------------------------------------------------------------------
Short-term borrowings $352,565 $375,131 $(22,566) (6)%
FHLB borrowings 515,396 372,097 143,299 39
Long-term debt 130,024 119,313 10,711 9
- --------------------------------------------------------------------------------
$997,985 $866,541 $131,444 15 %
- --------------------------------------------------------------------------------
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, include a variety of credit products available to
Keystone through its membership in the Federal Home Loan Bank. At December 31,
1999, Keystone could borrow an additional $654 million based on qualifying
collateral. Keystone also has $270 million available funding under a shelf
registration executed in 1997 for senior medium-term notes.
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 1999, shareholders' equity was $550 million versus $662 million at
December 31, 1998, resulting in an equity to assets ratio of 7.99%. The decline
was primarily attributable to share repurchase activity.
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 1999 equated to an 8.8%
payout on year-end 1998 book value. Keystone's 1999 earnings, as set forth in
this report, did include several nonrecurring items which curtailed the earnings
retention levels for the current year. However, Keystone's capital management
practices are based on the long-term sustainability of core earnings which
management believes to be financially sound and secure.
20
<PAGE>
Under guidelines set forth in its capital management policies, Keystone has
proactively sought to execute strategies and tactics which would moderate the
capital growth rate relative to earning asset levels. Two capital management
strategies contributing to the equity contraction experienced in 1999 were the
acquisition of treasury stock and the 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 accordance with share repurchase programs authorized by the Board of
Directors, Keystone repurchased 2.5 million shares in the open market in 1999 at
a total cost of $89 million. These shares, along with 1 million repurchased in
1998, were retired in 1999. Keystone's programs allow for the shares to be
repurchased from time to time in the open market or through negotiated
transactions. Keystone has current board authorization to repurchase an
additional 500,000 shares, as appropriate.
Banking industry regulators have set forth capital adequacy guidelines in the
form of required capital ratios for bank holding companies and their banking
subsidiaries. Based on risk-adjusted capital rules and definitions prescribed by
the regulators, the 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 and 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 1999 and a comparison to the various regulatory capital requirements.
- --------------------------------------------------------------------------------
Well Minimum
Keystone Capitalized Requirements
- --------------------------------------------------------------------------------
Leverage ratio 7.48% 5.00% 4.00%
Tier 1 capital ratio 10.54% 6.00% 4.00%
Total capital ratio 11.78% 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 capital standards. Intangible assets, consisting primarily of core
deposit intangibles, mortgage servicing rights and goodwill, totaled $64 million
at December 31, 1999 or 10% of Tier 1 capital.
21
<PAGE>
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
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 initiatives, 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 project 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, 1999 for the
ensuing twelve-month and twenty-four month periods have measured potential
reductions in net interest income of approximately 5%, which is within
Keystone's defined tolerance levels. Comparable measures as of December 31, 1998
were 3% 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, 1999.
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 or two years. 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
22
<PAGE>
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 policy, intrinsic value must exceed regulatory capital
requirements for "well capitalized" institutions. Keystone's MVPE computation
yielded intrinsic values well in excess of these limits, under both a 200 basis
point increase or 100 basis point 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
consider future 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, 1999 compared to 1998 (dollars in
thousands):
December 31, 1999 December 31,1998
- --------------------------------------------------------------------------------
1 month 3 months 6 months 1 year 1 year
- --------------------------------------------------------------------------------
Assets $988,620 $1,187,812 $1,463,880 $1,932,256 $2,567,125
Liabilities 1,676,618 2,394,671 2,738,429 3,164,414 3,514,717
Off-balance sheet
transactions 150,000 150,000 150,000 ----- -----
Cumulative GAP (537,998) (1,056,859) (1,124,549) (1,232,158) (947,592)
As a percent of
total assets (7.81)% (15.34)% (16.33)% (17.89)% (13.60)%
GAP ratio 0.68 0.56 0.59 0.61 0.73
- --------------------------------------------------------------------------------
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 sources of liquidity include funds derived through earnings and
deposit balances. Liquidity is also provided by scheduled maturities of loans
23
<PAGE>
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
for the issuance of senior or subordinated debt securities at December 31, 1999
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 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. These examinations include, but are not
limited to, procedures designed to review lending practices, credit quality,
liquidity, compliance, and capital adequacy. 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 is organized around, and manages its business through local market
teams in the areas in which it operates. These market teams are grouped into
five geographic regions, each of which is managed by a regional president. These
regions are aggregated into one operating segment since each region offers
similar products and services through similar distribution channels.
Keystone has three major product and service lines that are offered to its
customers through the local market teams. These lines consist of Commercial
Banking, Retail Banking, and Wealth Development. The Commercial Banking line
consists of numerous products and services provided primarily to a diverse group
of emerging and mid-size businesses. Products and services include secured and
unsecured loans, Small Business Administration loans, commercial mortgages,
lines of credit, deposits and cash management services.
The Retail Banking line consists of various products and services offered to
consumers. Products include residential mortgages, home equity loans,
installment loans, lines of credit and automobile loans and leases. Deposit
offerings include interest and free checking, fixed and variable-rate CDs, and
24
<PAGE>
indexed money market accounts. This product line also offers credit reinsurance,
electronic banking, and the sale of mortgages in the secondary market, both with
and without servicing retained.
Wealth Development products and services include administration of trusts and
estates, discount brokerage, full-service investment management, administration
of retirement and other employee benefit plans, as well as financial planning.
Customers include individuals and businesses.
The following chart demonstrates the relative contribution of each product line
to Keystone's consolidated revenue for 1999 (in thousands):
<TABLE>
<CAPTION>
Banking Division
---------------------------------------
Wealth
Commercial Retail Development Other(2) Total
- -------------------------------------------------------------------------------------------------------------------
% of % of % of % of
$ Total $ Total $ Total $ Total $
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income(1) $96,788 36% $128,367 48% $ - -% $40,875 15% $266,030
Noninterest income (3) 12,129 12 49,203 47 34,480 33 8,871 8 104,683
- --------------------------------------------------------------------------------------------------------------------
Total revenue(1) $108,917 29% $177,570 48% $34,480 9% $49,746 13% $370,713
- --------------------------------------------------------------------------------------------------------------------
(1) Net interest income includes a fully taxable equivalent adjustment of $8.7 million.
(2) The other column represents revenue not specifically allocated to products. Nonallocated items relate
primarily to the treasury function.
(3) Noninterest income excludes securities gains (losses).
</TABLE>
25
<PAGE>
1998 vs 1997
Summary
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. Note that 1997
results, as presented herein, exclude merger-related special charges that
totaled $11.4 million.
Keystone's revenue base expanded during 1998 as a result 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
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.
Interest Income
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 interest income performance. Businesses and
consumers, sensitized to the steady decline in interest rates, exhibited a
higher proclivity to renegotiate or refinance existing borrowings. During 1998,
the earning asset yield was 8.15%, a decline of 17 basis points from the yield
of 8.32% recorded in 1997.
While Keystone exhibited growth in its core credit activities, absolute growth
in the loan portfolio was mitigated by Keystone's strategic decisions to curtail
indirect lending activity and sell fixed-rate mortgages in the secondary market.
Reduced aggregate loan volumes resulted in a lower loan-to-deposit ratio. As a
consequence, Keystone experienced a higher relative level of investments which
yielded lower rates than loans. 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.
Interest Expense
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 in 1998. Keystone achieved deposit growth in its more competitive
product offerings such as free checking, the indexed money market account(IMMA),
and variable-rate certificates of deposit. While the lower rate environment
contributed to reduced yield on earning assets, the rate paid for total funding
costs was 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. Secondly, Keystone experienced
greater dependency on other higher-cost nondeposit funding sources such as FHLB
advances and medium-term notes. Consequently, the total rate paid on funding
costs decreased only slightly, from 4.45% in 1997 to 4.44% in 1998. Despite the
slight decline in the total rate, interest expense increased $8 million, from
$232.5 million in 1997, to $240.7 million in 1998, due to growth in overall
funding levels.
26
<PAGE>
Net Interest Income
In 1998, Keystone experienced 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%.
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%. A higher level of defaults and personal
bankruptcies within the consumer sector culminated in an increased provision and
associated charge-offs. 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%.
Noninterest Income
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.
Asset management fees in 1998 were improved due to expansion of the product
line. Growth included an 8% increase in trust fees, a 44% increase in investment
management revenues, 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.
Keystone's mortgage banking unit originated nearly $500 million of mortgage
loans in 1998, including approximately $333 million which were sold in the
secondary market. The low interest rate environment and consistently strong
consumer demand for housing provided opportunities for expansion. 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.
Electronic banking also had a major impact on the growth in noninterest revenues
in 1998. Keystone achieved a 25% increase in aggregate ATM and point-of-service
activity including a nearly 60% increase in its debit card transactions.
Additionally, Telephone Banking Center calls increased nearly threefold 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.
Fees from service charges on deposits 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 a
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 investment interest in a financial institution
that was acquired by another company.
Noninterest Expense
Core noninterest expenses, exclusive of charges associated with the 1997 merger,
rose 4.0% from $214.6 million in 1997 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 purchase
acquisitions of MMC&P and a Maryland-based thrift. Additionally, expenses in
1998 included the impact of incremental expenses necessary to achieve Y2K
readiness.
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 in salary expense 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 stabilized, due to the favorable impacts of both a
reduced workforce and effective management of benefit costs, primarily the
employee health care plan.
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 million and $18.7 million, respectively. The increase was attributable to
costs associated with the Telephone Banking Center, an expanding network of
ATMs, electronic banking enhancements, and infrastructure improvements to
internal processes.
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, consistent with 1997. Keystone achieved
notable 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.
27
<PAGE>
Report of 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, 1999 and 1998, 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,
1999. 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 conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Keystone
Financial, Inc. and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ersnt & Young LLP
----------------------
Pittsburgh, Pennsylvania
January 28, 2000
28
<PAGE>
Consolidated Statements of Condition December 31,
- --------------------------------------------------------------------------------
(in thousands, except share data) 1999 1998
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Cash and due from banks $334,273 $190,622
Federal funds sold ----- 141,700
Interest-bearing deposits with banks 877 5,978
Investment securities available for sale 1,073,338 1,129,753
Investment securities held to maturity
(fair values: 1999 - $575,368; 1998 - $670,934) 588,201 659,536
Loans held for resale 110,203 76,423
Loans and leases 4,459,546 4,459,783
Allowance for credit losses (59,975) (60,274)
- --------------------------------------------------------------------------------
Net loans 4,399,571 4,399,509
Premises and equipment 118,762 124,080
Other assets 262,283 240,626
- --------------------------------------------------------------------------------
TOTAL ASSETS $6,887,508 $6,968,227
- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------
Noninterest-bearing deposits $652,613 $710,161
Interest-bearing deposits 4,307,721 4,521,557
- --------------------------------------------------------------------------------
Total deposits 4,960,334 5,231,718
Federal funds purchased and security
repurchase agreements 316,130 363,739
Other short-term borrowings 50,000 11,306
- --------------------------------------------------------------------------------
Total short-term borrowings 366,130 375,045
FHLB borrowings 728,776 427,027
Long-term debt 129,920 130,239
Other liabilities 152,323 142,533
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 6,337,483 6,306,562
- --------------------------------------------------------------------------------
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
48,731,057 - 1999 and 51,448,335 - 1998 97,462 102,897
Surplus 167,939 162,350
Retained earnings 301,118 424,873
Deferred KSOP benefit expense (207) (553)
Treasury stock: 1,013,600 shares at cost - 1998 ------ (34,186)
Other comprehensive income (16,287) 6,284
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 550,025 661,665
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,887,508 $6,968,227
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE>
Consolidated Statements of Income
Year Ended December 31,
- --------------------------------------------------------------------------------
(in thousands except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------
INTEREST INCOME
- --------------------------------------------------------------------------------
Loans and fees on loans $371,527 $401,949 $404,096
Investments - taxable 89,357 93,955 82,664
Investments - tax-exempt 12,105 11,366 12,230
Federal funds sold and other 5,031 4,820 5,340
Loans held for resale 8,011 5,559 6,408
- --------------------------------------------------------------------------------
486,031 517,649 510,738
- --------------------------------------------------------------------------------
INTEREST EXPENSE
- --------------------------------------------------------------------------------
Deposits 173,942 193,087 194,898
Short-term borrowings 15,844 17,486 18,134
FHLB borrowings 29,547 21,507 14,677
Long-term debt 9,325 8,604 4,785
- --------------------------------------------------------------------------------
228,658 240,684 232,494
- --------------------------------------------------------------------------------
NET INTEREST INCOME 257,373 276,965 278,244
Provision for credit losses 23,376 17,150 15,316
- --------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 233,997 259,815 262,928
- --------------------------------------------------------------------------------
NONINTEREST INCOME
- --------------------------------------------------------------------------------
Trust and investment advisory fees 27,766 25,906 21,291
Service charges on deposit accounts 19,173 18,443 17,356
Fee income 26,989 24,548 20,029
Mortgage banking income 11,461 12,412 9,633
Reinsurance income 3,113 3,167 3,512
Other income 16,181 13,319 12,040
Net gains-equity securities 714 10,306 5,754
Net gains (losses)-debt securities (1,052) 712 317
- --------------------------------------------------------------------------------
104,345 108,813 89,932
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
Salaries 89,149 97,443 92,650
Employee benefits 17,701 17,535 17,311
Occupancy expense, net 18,169 17,302 16,407
Furniture and equipment expense 21,103 20,567 18,732
School districts' settlement expense 43,658 ----- -----
Special charges 26,917 ----- 11,410
Other expense 72,977 70,342 69,480
- --------------------------------------------------------------------------------
289,674 223,189 225,990
- --------------------------------------------------------------------------------
Income before income taxes 48,668 145,439 126,870
Income tax expense 11,592 45,692 38,953
- --------------------------------------------------------------------------------
NET INCOME $37,076 $99,747 $87,917
- --------------------------------------------------------------------------------
PER SHARE DATA
- --------------------------------------------------------------------------------
Net income:
Basic $0.76 $1.94 $1.70
Diluted 0.75 1.92 1.68
Dividends 1.16 1.13 1.06
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE>
<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(lossses) Equity
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
JANUARY 1, 1997 51,986 $104,640 $139,213 $422,018 ($1,249) ($8,412) $4,196 $660,406
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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) $0 $8,542 $685,485
- ---------------------------------------------------------------------------------------------------------------------------------
Net income - - - 99,747 - - - 99,747
Change in unrealized gain
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
- ---------------------------------------------------------------------------------------------------------------------------------
Net income - - - 37,076 - - - 37,076
Change in unrealized loss on
available-for-sale securities - - - - - - (22,571) (22,571)
------
Comprehensive income 14,505
Dividends - - (56,433) - - - (56,433)
Stock issued:
Benefit plans 564 1,127 11,128 - - - - 12,255
KSOP 51 102 1,316 - - - - 1,418
Dividend reinvestment 168 336 4,633 - - - - 4,969
Deferred KSOP benefit expense - - - - 346 - - 346
Acquisition of treasury stock (2,486) - - - - (88,701) - (88,701)
Retirement of treasury stock - (7,000) (11,488) (104,398) - 122,887 - 1
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1999 48,731 $97,462 $167,939 $301,118 ($207) $ - ($16,287) $550,025
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Year Ended December 31,
- -------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $37,076 $99,747 $87,917
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 23,376 17,150 15,316
Provision for depreciation and amortization 22,647 21,653 18,062
School districts' settlement accrual 25,735 ----- -----
Deferred income taxes (18,919) 4,770 14,537
Sale of loans held for resale 296,901 244,103 203,887
Origination of loans held for resale (330,301) (285,974) (240,325)
(Increase) decrease in interest receivable 2,559 4,437 (4,459)
Increase (decrease) in interest payable (899) 125 (567)
Other 4,950 (31,669) 20,660
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 63,125 74,342 115,028
- -------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Net cash received in bank acquisitions ----- ----- 35,646
Net (increase) decrease in interest-bearing deposits 5,101 (4,050) (25,363)
Available for sale securities:
Sales 70,884 224,089 176,606
Maturities 1,059,385 1,174,685 855,464
Purchases (1,103,709) (1,423,334) (891,694)
Held to maturity securities:
Maturities 132,410 177,096 91,370
Purchases (61,342) (308,589) (192,900)
Net (increase) decrease in loans (44,688) 238,686 (343,350)
Proceeds from sales of loans 26,947 12,372 302,840
Purchases of loans (5,378) (12,666) (11,947)
Purchases of bank-owned life insurance (25,000) (50,230) -----
Purchases of premises and equipment (10,738) (24,366) (23,641)
Other (29) (10,959) (6,404)
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 43,843 ( 7,266) (33,373)
- -------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net decrease in deposits (271,384) (1,447) (99,242)
Net increase (decrease) in short-term borrowings (8,915) (50,845) 27,926
Proceeds from FHLB borrowings 438,190 273,000 242,313
Repayments of FHLB borrowings (136,444) (94,122) (253,418)
Issuance of long-term debt ----- 30,000 100,000
Repayment of long-term debt (319) (1,554) (780)
Acquisition of treasury stock (88,701) (74,597) (72,586)
Cash dividends (56,433) (58,195) (55,964)
Other 18,989 11,483 10,147
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (105,017) 33,723 (101,604)
- -------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 1,951 100,799 (19,949)
Cash and cash equivalents at beginning of year 332,322 231,523 251,472
- -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $334,273 $332,322 $231,523
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
32
<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, and money market
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,
Keystone Financial Mortgage Real Estate Investment Trust, Inc., Keystone
Brokerage, Inc., Keystone Financial Mortgage Corporation, and other nonbanking
subsidiaries of Keystone consisting of 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 Keystone Financial Community Development Corporation.
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).
33
<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. Mortgage
servicing rights totaled $9,794,000 at December 31, 1999, and $7,509,000 at
December 31, 1998. Related amortization totaled $1,304,000, $1,223,000 and
$492,000 for 1999, 1998, and 1997, respectively.
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 is amortized as an adjustment of the related loan yield over
the estimated contractual life of the related loans.
Keystone places loans and leases on nonaccrual when collection of principal is
in doubt, or when interest is 90 days past due, unless the loan is well-secured
and in the process of collection. Classification of a loan as nonaccrual is also
considered when the financial condition of the borrower is in a state of
significant deterioration. When loans are placed on nonaccrual, including those
identified as impaired, loan interest receivable is reversed. Interest payments
received on these loans and leases are applied as a reduction of the principal
balance when concern exists as to the ultimate collectability of principal;
otherwise such payments are recognized as interest income. Loans and leases are
removed from nonaccrual when they have performed in accordance with contract
terms for a reasonable period of time and when concern no longer exists as to
their collectability.
Impaired Loans: Impaired loans are defined as those loans for which it is
probable that contractual amounts due will not be received. Impaired loans are
reported at the present value of expected future cash flows using the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. The determination of impairment requires judgment 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.
34
<PAGE>
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
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. Commercial loans, including impaired
loans, are charged-off when they are deemed to be substantially uncollectable.
Consumer loans are charged-off when they reach 120 days past due unless they are
in the process of collection and/or adequately collaterialized.
Direct Lease Financing: Automobile leases are accounted for as direct financing
leases and are reported in the consolidated statements of condition under the
loan caption as a net amount, consisting of the aggregate of lease payments
receivable and estimated residual values, less unearned income. Income is
recognized in a manner which results in an approximate level yield over the
lease term.
Allowance for Loan Losses: The allowance for loan losses is established through
provisions charged against income. Loans deemed to be uncollectable 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 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 Keystone'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
35
<PAGE>
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, cap and floor contracts are utilized to hedge specific
credit, funding or servicing activities, and the differential of interest paid
or received is reflected in the income or expense of the hedged item. The fair
values of these 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 derivative transactions and
hedging activities. FASB Statement No. 137 amended Statement No. 133 to delay
the effective date until fiscal years beginning after June 15, 2000. Thus, the
standard will be effective for Keystone on January 1, 2001. Management has not
yet determined what effect this statement will have on Keystone's financial con-
dition or results of operations.
Premises and Equipment: Bank premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed generally on
the straight-line method over the estimated useful lives of the related assets.
Intangible Assets: Intangible assets, consisting primarily of goodwill and core
deposit intangibles, are stated at cost, less accumulated amortization.
Amortization of goodwill is generally recognized on the straight-line method
over periods ranging from 15-25 years. Amortization of core deposit intangibles
is recognized on an accelerated basis, generally over a ten-year period.
Intangible assets are reviewed periodically for impairment. If such impairment
is indicated, recoverability of the asset is assessed based on expected
discounted cash flows.
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: 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
36
<PAGE>
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.
Pension: 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: Sources of comprehensive income not included in net income
are limited to unrealized gains and losses on certain investments in debt and
equity securities.
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: Keystone is organized around, and manages its business
through, local market teams, which are grouped into five geographic regions.
These regions are grouped into one operating segment since each region offers
similar products and services through similar distribution channels.
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 $229,558,000, $240,888,000, and $233,061,000, in 1999,
1998, and 1997, respectively. Cash payments for income taxes approximated
$31,735,000, $39,830,000, and $19,253,000, for 1999, 1998, and 1997,
respectively.
37
<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):
- --------------------------------------------------------------------------------
1999
Available-for-Sale
- --------------------------------------------------------------------------------
Amortized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------
Negotiable money market investments $72,543 $ 21 $94 $72,470
U.S. Treasury securities 81,020 63 116 80,967
U.S. Government agency obligations 743,742 8 21,136 722,614
Obligations of states and political
subdivisions 62,314 423 725 62,012
- --------------------------------------------------------------------------------
Corporate and other securities 138,777 282 3,784 135,275
- --------------------------------------------------------------------------------
Total $1,098,396 $797 $25,855 $1,073,338
- --------------------------------------------------------------------------------
1999
Held-to-Maturity
- --------------------------------------------------------------------------------
Amortized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Government agency obligations $385,163 $567 $8,185 $377,545
Obligations of states and political
subdivisions 189,993 1,908 7,043 184,858
Corporate and other securities 13,045 20 100 12,965
- --------------------------------------------------------------------------------
Total $588,201 $2,495 $15,328 $575,368
- --------------------------------------------------------------------------------
38
<PAGE>
- --------------------------------------------------------------------------------
1998
Available-for-Sale
- --------------------------------------------------------------------------------
Amortized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------
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 Fair
Cost Gains Losses 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
- --------------------------------------------------------------------------------
1997
Available-for-Sale
- --------------------------------------------------------------------------------
Amortized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------
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 Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Government agency obligations $366,238 $4,928 $150 $371,016
Obligations of states and political
subdivisions 143,910 4,845 5 148,750
Corporate and other securities 18,240 230 18 18,452
- --------------------------------------------------------------------------------
Total $528,388 $10,003 $173 $538,218
- --------------------------------------------------------------------------------
39
<PAGE>
Investment securities having a carrying value of $786,005,000 at December 31,
1999, were pledged to secure public and trust deposits, treasury tax and loan
activity, discount window and FHLB borrowings, and security repurchase
agreements.
Pre-tax security gains and losses included in operating results from 1997
through 1999 were as follows (in thousands):
- -------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Gains $1,270 $11,148 $6,847
Losses (1,608) (130) (776)
- -------------------------------------------------------------------------------
Net $ (338) $11,018 $6,071
- -------------------------------------------------------------------------------
40
<PAGE>
The following tables display at December 31, 1999, the contractual maturities,
amortized costs, related fair values, and 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> <C> <C>
Negotiable money market investments $ 72,543 $72,470 5.78% $- $- -%
U.S. Treasury securities 59,717 59,746 5.62 21,303 21,221 6.01
Government agency obligations 12,141 12,102 6.04 314,004 305,852 5.93
Obligations of states
& political subdivisions 3,477 3,492 7.71 23,667 23,837 7.59
Corporate and other securities 2,814 2,811 6.36 6,446 6,392 6.33
- -------------------------------------------------------------------------------------------
Total $150,692 $150,621 5.79% $365,420 $357,302 6.05%
- -------------------------------------------------------------------------------------------
After Five,
But Within Ten Years After Ten Years
- -------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield
- -------------------------------------------------------------------------------------------
Government agency obligations $152,036 $148,705 6.96% $265,561 $255,955 6.45%
Obligations of states
& political subdivisions 14,031 14,187 7.99 21,139 20,496 8.24
Corporate and other securities 150 150 7.37 129,367 125,922 7.94
- --------------------------------------------------------------------------------------------
$166,217 $163,042 7.05% $416,067 $402,373 7.01%
- --------------------------------------------------------------------------------------------
</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>
Governnment agency obligations $ 7 $ 7 8.79% $166,155 $163,063 6.30%
Obligations of states
& political subdivisions 5,669 5,706 8.97 10,010 10,257 8.65
Corporate and other securities - - - 12,976 12,896 6.63
- ------------------------------------------------------------------------------------------------
Total $ 5,676 $5,713 8.97% $189,141 $186,216 6.45%
- ------------------------------------------------------------------------------------------------
After Five,
But Within Ten Years After Ten Years
- ------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield
- ------------------------------------------------------------------------------------------------
Government agency obligations $92,364 $90,329 6.49% $126,637 $124,146 6.36 %
Obligations of states 19,655 19,861 8.43 154,659 149,034 7.90
& political subdivisions
Corporate and other securities 69 69 9.00 - - -
-----------------------------------------------------------------------------------------------
Total $112,088 $110,259 6.83% $281,296 $273,180 7.20 %
---------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
Loans and Leases
The composition of loans and leases was as follows at December 31 (in
thousands):
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Consumer financings:
Direct loans $939,661 $904,178
Indirect loans 86,119 187,818
Net investment in direct
lease financing receivables 199,029 235,884
- --------------------------------------------------------------------------------
1,224,809 1,327,880
Loans secured by real estate:
Consumer 739,198 754,280
Commercial 1,640,301 1,530,449
- --------------------------------------------------------------------------------
2,379,499 2,284,729
Commercial 671,881 679,412
Floor plan financing 183,357 167,762
- --------------------------------------------------------------------------------
Total $4,459,546 $4,459,783
- --------------------------------------------------------------------------------
At December 31, 1999, 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 as follows (in thousands):
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Balance at January 1 $60,274 $65,091 $56,256
Recoveries on loans previously charged off 2,311 2,968 2,485
Loans charged off (25,986) (24,058) (17,277)
- --------------------------------------------------------------------------------
Net loans charged off (23,675) (21,090) (14,792)
Provision charged to operations 23,376 17,150 15,316
Other ----- (877) 8,311
- --------------------------------------------------------------------------------
Balance at December 31 $59,975 $60,274 $65,091
- --------------------------------------------------------------------------------
42
<PAGE>
Total nonaccrual and restructured loan balances and related annual interest data
were as follows (in thousands):
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Nonaccrual $27,183 $24,675 $20,520
Restructured 841 264 489
- --------------------------------------------------------------------------------
Total $28,024 $24,939 $21,009
- --------------------------------------------------------------------------------
Interest computed at original terms $2,817 $2,385 $2,144
Interest recognized 1,326 361 473
- --------------------------------------------------------------------------------
At December 31, 1999, 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 1999 1998 1997
- --------------------------------------------------------------------------------
Recorded investment in impaired loans $22,849 $20,647 $16,730
Impaired loans for which an allowance exists 11,236 5,091 12,805
Amount of allowance specifically
allocated to impaired loans 5,254 3,131 1,540
- --------------------------------------------------------------------------------
For the years ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Average recorded investment in impaired loans $21,748 $18,689 $17,015
- --------------------------------------------------------------------------------
Certain directors and executive officers of Keystone and its subsidiaries, and
their associates, were indebted to the bank during 1999. Such loans were made in
the ordinary course of business and on customary terms. Loan activity during
1999 with these related parties was as follows (in thousands):
- --------------------------------------------------------------------------------
Beginning Balance Additions Repayments Ending Balance
- --------------------------------------------------------------------------------
$78,415 $128,970 $111,104 $96,281
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, cap
and floor 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,
as well as, loan commitments and standby letters of credit made in the ordinary
course of its banking business.
43
<PAGE>
In managing net interest income, Keystone uses interest rate swap, cap and
floors to offset the difference, or mismatch, in repricing indices of core
banking assets and related funding. The major source of interest rate risk is
the difference in the repricing characteristics of core banking assets and
liabilities - loans and deposits. This difference, or mismatch, is a risk to net
interest income. In managing net interest income, Keystone uses interest rate
swaps and caps to offset the general liability sensitivity of the core bank.
Additionally, the corporation uses interest rate swaps to offset basis risk,
including the specific exposure to changes in the 91-day Treasury Bill.
A second source of interest rate risk is the sensitivity of the organization's
mortgage servicing rights to prepayments. The mortgage borrower has the option
to prepay the mortgage loan at any time. When mortgage interest rates decline,
borrowers have a greater incentive to prepay mortgage loans through refinancing.
To mitigate the risk of declining long-term interest rates, higher-than-expected
mortgage prepayments, and the potential impairment of the servicing rights,
Keystone has purchased interest rate floors.
The following table presents the notional amount and fair value of financial
hedging instruments at December 31 (in thousands):
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Notional Fair Notional Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
Interest Rate Risk Management Instruments:
Pay-fixed/receive-variable swaps $150,000 $437 $--- $---
Basis Swaps 250,000 280 250,000 (229)
Interest Rate Cap 60,000 109 --- ---
Mortgage Banking Risk Management Instruments:
Interest Rate Floor 100,000 49 --- ---
- --------------------------------------------------------------------------------
Total Risk Management Instruments $560,000 $875 $250,000 (229)
- --------------------------------------------------------------------------------
Another form of interest rate risk managed through specific hedging activity at
December 31, 1999, 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, 1999, Keystone had entered
into commitments to deliver approximately $56,118,000 of mortgage loans for sale
into the secondary market. The fair value of these commitments at December 31,
1999, was $704,000 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 2000.
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.
44
<PAGE>
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
at December 31 (in thousands):
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Loan commitments $1,023,712 $1,091,657
- --------------------------------------------------------------------------------
Standby letters of credit 69,939 73,843
- --------------------------------------------------------------------------------
Premises and Equipment
The following summarizes premises and equipment at December 31 (in thousands):
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Land $12,548 $12,562
Buildings 98,849 99,702
Equipment 116,755 120,564
Leasehold improvements 18,475 15,544
- --------------------------------------------------------------------------------
246,627 248,372
Accumulated depreciation and amortization (127,865) (124,292)
- --------------------------------------------------------------------------------
Total $118,762 $124,080
- --------------------------------------------------------------------------------
Depreciation and amortization expense related to premises and equipment amounted
to $16,537,000 in 1999, $16,056,000 in 1998, and $14,554,000 in 1997.
45
<PAGE>
Keystone and its subsidiaries lease various equipment and buildings under
operating lease agreements. In 1999, 1998, and 1997, total rent expense amounted
to $8,424,000, $8,203,000, and $7,377,000, respectively. Future annual minimum
lease payments do not significantly exceed historic levels.
Deposits
At December 31, 1999, time deposits individually in excess of $100,000 totaled
$427,342,000.
Federal Funds Purchased and Security Repurchase Agreements
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):
1999 1998 1997
- -------------------------------------------------------------------------------
Balance at December 31 $316,130 $363,739 $399,730
- -------------------------------------------------------------------------------
Weighted average interest rate at year end 5.17% 4.67% 4.75%
Maximum amount outstanding at any month end $354,266 $395,635 $405,268
Average amount outstanding during the year $319,776 $357,090 $367,102
Weighted average interest rate during the year 4.45% 4.62% 4.78%
- -------------------------------------------------------------------------------
Federal Home Loan Bank Borrowings
Keystone Financial Bank, N.A. is a member of the Federal Home Loan Bank (FHLB)
of Pittsburgh. As such, the bank can take advantage of the FHLB program for
overnight and term advances at published daily rates, which are advantageous to
members as compared to issuing notes directly in the market. Under the terms of
a blanket collateral agreement, advances from the FHLB are collateralized by
first mortgage loans and securities. Advances available under this agreement are
limited by available and qualifying collateral and the amount of FHLB stock held
by the borrower. At December 31, 1999, Keystone Financial Bank, N.A. could
borrow an additional $654,062,000 based on qualifying collateral. Such
additional borrowing would require that the bank increase its investment in FHLB
stock by approximately $7,214,400. Outstanding borrowings from the Federal Home
Loan Bank are summarized as follows at December 31(in thousands):
- ----------------------------------------------------------
1999 1998
- ----------------------------------------------------------
Due 1999, 4.75% to 6.51% $----- $ 64,268
Due 2000, 4.77% to 6.51% 143,331 80,831
Due 2001, 4.73% to 6.80% 71,000 67,000
Due 2002, 5.25% to 6.10% 80,000 60,550
Due 2003, 5.42% to 7.23% 88,636 7,768
Due 2004, 5.40% to 6.62% 130,000 -----
Due after 2004, 1.00% to 7.20% 215,809 146,610
- ----------------------------------------------------------
$728,776 $427,027
- ----------------------------------------------------------
46
<PAGE>
Of the December 31, 1999 outstanding balance, $525,300,000 was either adjustable
or subject to conversion. Of this amount, $35,000,000 was adjustable with LIBOR.
The remaining $490,300,000 are convertible select advances, which are subject to
conversion to adjustable rates at the option of the FHLB at various dates
through 2004. In the event the FHLB elects to convert the convertible select
borrowings 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):
- ----------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------
Senior medium-term notes:
Interest at 7.3%, mature 2004 $99,848 $99,812
Interest at 6.5%, mature 2008 29,889 29,876
Other 183 551
- ----------------------------------------------------------------
Total $129,920 $130,239
- ----------------------------------------------------------------
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
During 1999, Keystone entered into an agreement in principle to settle a
class-action lawsuit filed in 1998 against its former subsidiary, Mid-State
Bank. Under the terms of the agreement, Keystone will pay a total of
approximately $30 million to the members of the class-action suit by a tentative
date of March 16, 2000. Keystone recorded an additional loss of $21 million in
1999, which represented the anticipated payment in the event the additional
plaintiffs, that had excluded themselves from the class-action suit, agreed to
settle on terms proportionate to those of the class-action settlement. Those
additional plaintiffs subsequently did agree to proportionate terms. Of the $21
million Keystone paid to those plaintiffs, approximately $17.9 million was paid
out by December 31, 1999, and the balance was paid out in January, 2000. The
payouts totaling $51 million were reduced for probable insurance recoveries to
result in net expense of $43.7 million recorded in 1999. The agreement reached
with the members of the class-action suit was approved by the court, subject to
appeal. There is continuing litigation by the plaintiffs against other parties,
in which Keystone may be required to participate, however, Keystone believes the
settlement resolves its financial exposure related to this matter.
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) had been established in
connection with the adoption of a Shareholders' Rights Plan (Rights Plan). Under
the Rights Plan, 200,000 shares of Preferred Stock were reserved for issuance on
the exercise of rights attached to the outstanding common stock. The rights were
47
<PAGE>
exercisable only if a person or group acquired or announced a tender or exchange
offer to acquired 20% or more of Keystone's common stock. In the event a person
or group acquired a 20% position, each right not owned by the person or group
entitled its holder to purchase at the exercise price of $70.00, a number of
shares of common stock, 5.333 one-thousandths (0.005333) of a share of Preferred
Stock, or other securities or assets of Keystone or common shares of the
acquiring company having a market value equal to twice the exercise price. At
any time after a person or group acquired 20% or more (but less than 50%) of the
outstanding common stock, the Board of Directors were entitled to 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 was entitled to redeem the rights at
any time before a 20% position had been acquired. These rights expired 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 1,747,000 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 Price Common Shares
- ------------------------------------------------------
January 1, 1997 $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
- ------------------------------------------------------
Granted 37.99 866,654
Exercised 18.50 (353,526)
Terminated 36.82 (49,499)
- ------------------------------------------------------
December 31, 1999 $28.71 2,303,641
- ------------------------------------------------------
48
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
- ---------------------------------------------------------- ---------------------
Options Outstanding Options Exercisable
- ---------------------------------------------------------- ---------------------
Weighted-Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercisable Number Exercise
Prices Outstanding Life (years) Price Exercisable Price
- ---------------------------------------------------------- ---------------------
$7.26 - $12.07 122,706 1.64 $8.53 122,706 $8.53
$13.89 - $18.03 97,550 2.09 $15.75 94,176 $15.71
$19.58 - $24.00 813,836 4.29 $21.59 808,548 $21.60
$24.75 - $30.31 224,922 7.01 $25.41 224,912 $25.41
$32.91 - $36.00 76,634 8.63 $35.27 9,634 $35.75
$36.41 - $41.06 967,993 8.84 $38.80 4,073 $39.60
- ---------------------------------------------------------- ---------------------
$7.26 - $41.06 2,303,641 6.37 $28.71 1,264,049 $20.74
- ---------------------------------------------------------- ---------------------
Options exercisable at the end of 1998 and 1997 were 1,360,000 and 1,193,000,
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 355,000 remain available for future purchases. The amount
of common shares issued under this program in 1999, 1998, and 1997 were as
follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Price per Share $25.50 $26.24 $19.20
Shares Issued 103,712 99,980 94,195
- --------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------
Net income (in thousands):
As reported $37,076 $99,747 $87,917
Pro forma 33,198 97,773 86,457
- -------------------------------------------------------------------------
Diluted earnings per share:
As reported $0.75 $1.92 $1.68
Pro forma 0.67 1.88 1.65
- -------------------------------------------------------------------------
49
<PAGE>
Information regarding the weighted-average grant-date fair values for stock
options and purchase rights granted in 1999, 1998, and 1997 was as follows:
- --------------------------------------------------------------------------------
Assumptions
-----------------------------------------------
Grant Date
Fair Value
(Per Option Dividend Expected Interest
/Share) Yield Volatility Rate Life
- --------------------------------------------------------------------------------
Stock option plans:
1999 $7.90 3.1% 23% 4.68% 7yrs
1998 7.95 2.8 15 5.63 7yrs
1997 4.20 4.2 15 6.37 7yrs
Employee stock purchase plan:
1999 $8.69 3.9% 23% 5.06% 1yr
1998 7.62 3.5 15 5.63 1yr
1997 6.30 4.5 15 5.63 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,
1999 and 1998, the amount executives participating in the Program owed Keystone
for financed purchases totaled $5,014,000 and $2,064,000, respectively.
Keystone has a dividend reinvestment plan for shareholders under which
additional shares of Keystone common stock may be purchased at market value with
reinvested dividends and voluntary cash payments. Keystone has reserved 1.4
million shares of common stock for this Plan, and approximately 402,000 shares
remain unissued. The following number of shares of Keystone common stock were
purchased pursuant to this plan: 168,000 in 1999, 144,000 in 1998, and 130,000
in 1997.
50
<PAGE>
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):
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Projected benefit obligation, beginning of year $91,370 $84,890
Service cost 3,302 3,268
Interest cost 6,155 5,780
Benefits paid (4,320) (4,028)
Change in assumptions (10,350) 1,309
Change due to curtailment (3,227) -----
Amendments ----- (566)
Experience loss 5,095 717
- --------------------------------------------------------------------------------
Projected benefit obligation, end of year $88,025 $91,370
- --------------------------------------------------------------------------------
Fair value of plan assets, beginning of year $99,445 $106,239
Actual return on assets 16,086 (2,766)
Benefits paid (4,320) (4,028)
- --------------------------------------------------------------------------------
Fair value of plan assets, end of year $111,211 $99,445
- --------------------------------------------------------------------------------
Funded status, end of year $23,186 $8,075
Unrecognized net assets at transition (1,882) (2,510)
Unrecognized net gain (13,555) (111)
Unrecognized prior service cost (1,313) (1,702)
- --------------------------------------------------------------------------------
Prepaid benefit expense, end of year $6,436 $3,752
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Service cost benefits earned during the period $3,302 $3,268 $2,907
Interest cost on projected benefit obligation 6,155 5,780 5,458
Expected return on plan assets (7,898) (8,116) (7,120)
Net amortization:
Net transition asset (627) (627) (725)
Prior service cost (162) (181) (137)
- --------------------------------------------------------------------------------
Pension expense $770 $124 $383
- --------------------------------------------------------------------------------
51
<PAGE>
Actuarial assumptions used in the determination of the projected benefit
obligation were as follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Rate of increase in future compensation levels 5.00% 5.00% 5.50%
Expected long-term rate of return on plan assets 8.00 8.00 8.50
Weighted average discount rate 7.25 6.75 7.00
- -------------------------------------------------------------------------------
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 $1,936,000 in 1999, $1,984,000 in 1998, and
$1,580,000 in 1997.
Special Charges
During 1999, Keystone incurred special charges of $26.9 million that were
primarily associated with the unification of its seven former banks under a
single charter. These charges consisted of employee and director termination
costs, asset disposition losses, professional fees, and contract termination
costs. Substantially all accrued amounts had been paid by December 31, 1999.
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 at December 31 were as follows (in thousands):
- -------------------------------------------------------------
December 31,
- -------------------------------------------------------------
1999 1998
- -------------------------------------------------------------
Deferred tax assets:
Allowance for credit losses $19,508 $19,598
Deferred liabilities 13,863 1,850
Compensation accruals 3,955 4,259
Unrealized securities losses 8,770 ------
Deferred tax liabilities:
Lease financing activities (39,682) (47,742)
Unrealized securities gains ---- (3,383)
Premises and equipment (3,935) (3,088)
Intangible assets (5,033) (4,668)
Other (3,229) (2,961)
- -------------------------------------------------------------
Net deferred tax liability ($5,783) ($36,135)
- -------------------------------------------------------------
52
<PAGE>
The provision for income taxes consisted of the following components (in
thousands):
- -------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------
Deferred provision $(18,199) $4,770 $14,537
Current provision 29,791 40,922 24,416
- -------------------------------------------------------------
Total $11,592 $45,692 $38,953
- -------------------------------------------------------------
A reconciliation of income tax expense and the amounts which would have been
recorded based upon statutory rates (35%) is as follows (in thousands):
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Provision on pre-tax income at statutory rates $17,034 $50,904 $44,405
Tax exempt interest income (5,535) (5,448) (5,089)
Other 93 236 (363)
- --------------------------------------------------------------------------------
Total $11,592 $45,692 $38,953
- --------------------------------------------------------------------------------
Effective Rate 23.8% 31.4% 30.7%
- --------------------------------------------------------------------------------
Income taxes attributable to investment security gains (losses) were $(118,000)
in 1999, $3,856,000 in 1998, and $2,125,000 in 1997.
Comprehensive Income
Sources of comprehensive income not included in net income are limited to
unrealized gains and losses on certain investments in debt and equity
securities. The disclosure of comprehensive income is as follows (in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Year Ended December 31
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Before Tax Net of Tax Before Tax Net of Tax Before Tax Net of Tax
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income $37,076 $99,747 $87,917
Unrealized securities gains (losses)
arising during the period (35,063) (22,791) 7,544 4,904 12,757 8,292
Less: Reclassification adjustment for
securities gains (losses) included in
net income (338) (220) 11,018 7,162 6,071 3,946
- ---------------------------------------------------------------------------------------------------------------
(34,725) (22,571) (3,474) (2,258) 6,686 4,346
- ---------------------------------------------------------------------------------------------------------------
Comprehensive Income $14,505 $97,489 $92,263
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
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):
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Numerator - Net Income $37,076 $99,747 $87,917
Denominators:
Average basic shares outstanding 48,856 51,446 51,693
Average dilutive option effect 330 596 627
- --------------------------------------------------------------------------------
Average dilutive shares outstanding 49,186 52,042 52,320
- --------------------------------------------------------------------------------
EPS:
Basic $0.76 $1.94 $1.70
Diluted $0.75 $1.92 $1.68
- --------------------------------------------------------------------------------
Segment Reporting
Keystone is organized around, and manages its business through twenty local
market teams in the areas in which it operates. These market teams are grouped
into five geographic regions, each of which is managed by a regional president.
These regions are aggregated into one operating segment since each region offers
similar products and services through similar distribution channels. No customer
of Keystone individually represents 10% or more of consolidated revenues and
revenues with customers of foreign countries are minimal.
Keystone has three major product and service lines that are offered to its
customers through the local market teams. These lines consist of Commercial
Banking, Retail Banking, and Wealth Development. The Commercial Banking line
consists of numerous products and services provided primarily to a diverse group
of emerging and mid-size businesses. Products and services include secured and
unsecured loans, Small Business Administration loans, commercial mortgages,
lines of credit, deposits and cash management services.
The Retail Banking line consists of various products and services offered to
consumers. Products include residential mortgages, home equity loans,
installment loans, lines of credit and automobile loans and leases. Deposit
offerings include interest and free checking, fixed and variable-rate CDs, and
indexed money market accounts. This product line also offers credit reinsurance,
electronic banking, and the sale of mortgages in the secondary market, both with
and without servicing retained.
Wealth Development products and services include administration of trusts and
estates, discount brokerage, full-service investment management, administration
of retirement and other employee benefit plans, as well as financial planning.
Customers include individuals and businesses.
Revenue for each product line is provided below for 1999. It is not practicable
to provide product line information for periods prior to 1999 as such
information was not available.
54
<PAGE>
- --------------------------------------------------------------------------------
Banking Division Wealth
(in thousands) Commercial Retail Development
- --------------------------------------------------------------------------------
Net interest income(1) $ 96,788 $128,367 $ ----
Noninterest income 12,129 49,203 34,480
- --------------------------------------------------------------------------------
Total revenue $108,917 $177,570 $ 34,480
- --------------------------------------------------------------------------------
(1) Net interest income includes a fully taxable equivalent adjustment of $8.7
million.
Various estimates and allocation methodologies are used in the preparation of
product line financial information. The net interest income contribution for
each product line includes a funding credit or expense allocated through the use
of a funds transfer pricing (FTP) system. The FTP system matches the duration of
the funding related to each product line to the duration of the assets and
liabilities allocated to the product line.
Regulatory Capital Requirements
The following table provides Keystone's consolidated risk-based capital position
at the end of 1999 and 1998 and a comparison to the various regulatory capital
requirements (in thousands):
- --------------------------------------------------------------------------------
Well-
1999 1998 Capitalized Minimum
Amount Ratio Amount Ratio Ratio Ratio
- --------------------------------------------------------------------------------
Total capital
(to risk-weighted assets) $570,742 11.78% $653,664 13.84% 10% 8%
Tier 1 capital
(to risk-weighted assets) 510,767 10.54% 594,623 12.59% 6% 4%
Tier 1 capital (to average
assets 510,767 7.48% 594,623 8.66% 5% 4%
- --------------------------------------------------------------------------------
At December 31, 1999, Keystone Financial Bank, N.A. maintained capital levels at
or above the "well-capitalized" level for each of the three ratios and had been
categorized as "well-capitalized" by its primary regulator at its most recent
examination.
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.
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, 1999, Keystone's bank subsidiary maintained
average reserve balances of approximately $70,849,000.
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 $51,283,000 at December 31, 1999. Federal Reserve regulations also
limit the subsidiary bank as to the amount it may loan its affiliates, including
Keystone. At December 31, 1999, the maximum amount available for loans to
affiliates approximated 10% of consolidated net assets.
55
<PAGE>
Fair Value of Financial Instruments
FASB Statement No. 107 requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value. In cases where quoted market prices
are not available, fair value is based on estimates using present value or other
valuation techniques. These techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison with independent markets, and, in many cases, could not be
realized in immediate settlement of the instrument. Statement No. 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of Keystone Financial, Inc.
The following schedule displays at December 31 the carrying values and related
estimated fair values for financial instruments (in thousands):
1999 1998
- --------------------------------------------------------------------------------
Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
Financial Assets:
Cash and due from banks $334,273 $334,273 $190,622 $190,622
Federal funds sold and other 877 877 147,678 147,678
Investment securities
available for sale 1,073,338 1,073,338 1,129,753 1,129,753
Investment securities held
to maturity 588,201 575,368 659,536 670,934
Loans held for resale 110,203 110,203 76,423 76,423
Loans, net of allowance for
credit losses 4,200,799 4,242,438 4,163,938 4,313,572
Leases 198,772 208,238 235,571 243,242
- --------------------------------------------------------------------------------
Financial Liabilities:
Time deposits $2,774,765 $2,768,268 $2,923,751 $2,952,578
Other deposits 2,185,569 2,185,569 2,307,967 2,307,967
Short-term borrowings 366,130 366,130 375,045 375,045
FHLB borrowings 728,776 727,510 427,027 431,470
Long-term debt 129,920 125,578 130,239 136,707
- --------------------------------------------------------------------------------
Off-Balance Sheet Instruments:
Lending commitments and
letters of credit $----- $ ( 530) $ ----- $(800)
All other $----- $ 875 $ ----- $ (229)
- --------------------------------------------------------------------------------
56
<PAGE>
The following methods and assumptions were used to estimate fair market value
disclosures for financial instruments:
Cash and short-term instruments: The carrying amounts reported in the balance
sheet for cash and short-term instruments approximate those assets' fair values.
Investment securities (including mortgage-backed securities): Fair values for
investment securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and have no
significant changes in credit risk, fair values are based on carrying values.
The fair values for other loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of comparable credit quality. The carrying amount of accrued
interest approximates its fair value.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, savings, and certain types of money market
accounts) are reported at a value equal to the amount payable on demand at the
reporting date. The carrying amounts for variable-rate, fixed-term money market
accounts and certificates of deposit approximate their fair market value at the
reporting date. Fair values for fixed-rate certificates of deposit are estimated
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. The merger was accounted for under the
pooling-of-interests method of accounting, and, as such, all prior period
information has been restated.
57
<PAGE>
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. The transaction was
accounted for as a purchase and 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.
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
- -------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------
Assets:
Cash $1,006 $271
Investment securities 4,099 14,876
Investments in:
Subsidiary banks 558,472 585,189
Other subsidiaries 70,598 88,723
Other assets 5,595 726
- -------------------------------------------------------------------------------
TOTAL ASSETS $639,770 $689,785
- -------------------------------------------------------------------------------
Liabilities:
Long-term debt $67,480 $3,556
Other liabilities 22,265 24,564
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 89,745 28,120
Shareholders' Equity 550,025 661,665
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $639,770 $689,785
- -------------------------------------------------------------------------------
58
<PAGE>
Statements of Income
Year Ended December 31
- -------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Income:
Dividends from subsidiaries:
Bank subsidiaries $71,575 $60,068 $67,305
Other subsidiaries ---- 21,997 ----
Other income 3,459 74 4
Net securities gains 319 9,301 ----
- -------------------------------------------------------------------------------
Expenses:
Net interest expense 5,308 6,981 2,144
Operating expense 4,082 2,833 9,487
- -------------------------------------------------------------------------------
Income before taxes and undistributed
earnings of subsidiaries 65,963 81,626 55,678
Income taxes benefit (2,004) (1,506) (3,712)
Equity in undistributed earnings
of subsidiaries (30,891) 16,615 28,527
- -------------------------------------------------------------------------------
NET INCOME $37,076 $99,747 $87,917
- -------------------------------------------------------------------------------
59
<PAGE>
Statements of Cash Flows
Year Ended December 31
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $37,076 $99,747 $87,917
Equity in undistributed earnings 27,432 (16,615) (28,527)
Other (7,168) (2,810) 14,729
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 57,340 80,322 74,119
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Net (increase) decrease in investments 10,777 50,148 (38,529)
(Investments in) distributions from
subsidiaries (5,161) 88,429 (24,459)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 5,616 138,577 (62,988)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Cash dividends declared (56,433) (58,195) (55,964)
KSOP activity:
Common stock proceeds 1,418 677 819
Payment of debt (346) (597) (523)
Proceeds of long-term debt 96,527 30,928 98,960
Repayment of long-term debt (32,257) (125,735) ----
Acquisition of treasury stock (88,701) (74,597) (72,586)
Proceeds from issuance of common stock
under benefits plans 17,224 10,211 12,908
Other 347 (2,809) 5,717
- --------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (62,221) (220,117) (10,669)
- --------------------------------------------------------------------------------
Increase (decrease) in cash 735 (1,218) 462
Cash at beginning of year 271 1,489 1,027
- --------------------------------------------------------------------------------
CASH AT END OF YEAR $1,006 $271 $1,489
- --------------------------------------------------------------------------------
60
<PAGE>
Net Interest Income
Keystone's largest source of revenue is net interest income, which is the
difference between interest income 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 (in
thousands):
1999
- --------------------------------------------------------------------------------
Average Yield/
Balance Interest Rate
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Federal funds sold and other $97,721 $5,031 5.15%
Investment securities:
Negotiable money market investments 127,474 6,277 4.92
Taxable investment securities 1,341,586 83,283 6.21
Nontaxable investment securities(1) 231,396 17,802 7.69
Loans held for resale 95,930 8,011 8.35
Consumer loans (2) (3) 1,251,467 113,610 9.08
Real estate loans (1) (2) (3) 2,319,127 190,971 8.23
Commercial loans (1) (2) (3) 849,286 69,703 8.21
- --------------------------------------------------------------------------------
Total earning assets $6,313,987 $494,688 7.83%
Allowance for credit losses (60,208)
Other assets 533,401
- --------------------------------------------------------------------------------
Total Assets $6,787,180
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
NOW/Savings deposits $793,337 $11,318 1.43%
Money market deposits 786,567 22,974 2.92
Time deposits 2,795,077 139,650 5.00
Short-term borrowings 352,565 15,844 4.49
FHLB borrowings 515,396 29,547 5.73
Long-term debt 130,024 9,325 7.17
- --------------------------------------------------------------------------------
Total interest-bearing liabilities $5,372,966 $228,658 4.26%
Demand deposits 678,218
Other liabilities 149,901
Shareholders' equity 586,095
- --------------------------------------------------------------------------------
Total Liabilities and Equity $6,787,180
- --------------------------------------------------------------------------------
Interest rate spread 3.57%
Net interest income and net
interest margin $266,030 4.21%
Tax-equivalent adjustment (8,657)
- --------------------------------------------------------------------------------
Net interest income $257,373
- --------------------------------------------------------------------------------
<PAGE>
1998
- --------------------------------------------------------------------------------
Average Yield/
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
Net interest income and net 3.71%
interest margin $285,534 4.42%
Tax-equivalent adjustment (8,569)
- --------------------------------------------------------------------------------
Net interest income $276,965
- --------------------------------------------------------------------------------
<PAGE>
1997
- --------------------------------------------------------------------------------
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
Net interest income and net 3.87%
interest margin $287,104 4.59%
Tax-equivalent adjustment (8,860)
- --------------------------------------------------------------------------------
Net interest income $278,244
- --------------------------------------------------------------------------------
The following table sets forth for the periods indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and rates (in thousands):
<PAGE>
<TABLE>
<CAPTION>
1999 Change from 1998 1998 Change from 1997
- --------------------------------------------------------------------------------------------------------
Total Change due to (4) Total Change due to (4)
Change Volume Rate Change Volume Rate
- --------------------------------------------------------------------------------------------------------
Interest income on:
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and other $211 $443 $(232) $(520) $(1,160) $640
Investment securities (1) (3,442) (454) (2,988) 10,060 12,643 (2,583)
Loans held for resale 2,452 2,248 204 (849) (681) (168)
Loans and leases (1)(2)(3) (30,751) (14,708) (16,043) (2,071) 4,881 (6,952)
- --------------------------------------------------------------------------------------------------------
(31,530) (12,471) (19,059) 6,620 15,683 (9,063)
Interest expense on:
NOW/savings deposits 1,419 1,332 87 3,193 1,796 1,397
Money market deposits (2,325) (1,332) (993) (4,344) (4,526) 182
Time deposits 20,052 10,011 10,041 2,961 (2,110) 5,071
Short-term borrowings 1,642 1,028 614 648 (169) 817
FHLB borrowings (8,041) (7,532) (509) (6,829) (7,641) 812
Long-term debt (721) (596) (125) (3,819) (3,993) 174
- -------------------------------------------------------------------------------------------------------
12,026 2,911 9,115 (8,190) (16,643) 8,453
- -------------------------------------------------------------------------------------------------------
Net Interest Income Change
- Tax Equivalent $(19,504) $(9,560) $(9,944) $(1,570) $(960) $(610)
- -------------------------------------------------------------------------------------------------------
(1) Interest income and yields are adjusted to a fully taxable-equivalent basis
using a 35% tax rate.
(2) Nonperforming loans are included in the average balances.
(3) Interest on loans includes fees on loans of $5,122,000 in 1999, $7,056,000
in 1998, and $6,523,000 in 1997.
(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, 1999 into rate sensitive periods
based on the repricing or maturity dates of the various cash-flow streams.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1-90 91-180 181-360 1-2 Beyond
Days Days Days Years 2 Years Total
- ----------------------------------------------------------------------------------------------------------
Assets
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and other $877 $--- $--- $--- $--- $877
Investment securities 159,211 20,034 34,140 114,645 1,333,509 1,661,539
Loans held for sale 31,767 23,738 47,868 6,830 0 110,203
Consumer loans 269,514 106,325 189,914 325,352 333,704 1,224,809
Consumer mortgages 52,781 50,192 96,004 150,445 389,776 739,198
Commercial real estate loans 147,195 50,124 60,729 123,192 1,259,061 1,640,301
Commercial loans 526,467 25,655 39,721 66,470 196,925 855,238
- ----------------------------------------------------------------------------------------------------------
Total earning assets $1,187,812 $276,068 $468,376 $786,934 $3,512,975 $6,232,165
- ----------------------------------------------------------------------------------------------------------
Other assets --- --- --- --- 655,343 655,343
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,187,812 $276,068 $468,376 $786,934 $4,168,318 $6,887,508
- ----------------------------------------------------------------------------------------------------------
Liabilities and Shareholders'
equity
- ----------------------------------------------------------------------------------------------------------
NOW deposits $222,350 --- --- --- $378,856 $601,206
Savings deposits 43,733 --- --- --- 107,455 151,188
Money market deposits 577,306 --- --- --- 201,000 778,306
Time deposits 1,177,707 310,265 322,375 613,460 353,214 2,777,021
Short-term borrowings 366,022 108 --- --- --- 366,130
FHLB borrowings 7,553 33,385 103,610 71,231 512,997 728,776
Long-term debt --- --- --- --- 129,920 129,920
- ----------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $2,394,671 $343,758 $425,985 $684,691 $1,683,442 $5,532,547
- ----------------------------------------------------------------------------------------------------------
Demand Deposits --- --- --- --- 652,613 652,613
Other liabilities --- --- --- --- 152,323 152,323
Shareholders' equity --- --- --- --- 550,025 550,025
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,394,671 $343,758 $425,985 $684,691 $3,038,403 $6,887,508
- ----------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET TRANSACTIONS $150,000 --- ($150,000) --- --- ---
- ----------------------------------------------------------------------------------------------------------
Interest rate sensitivity ($1,056,859) ($67,690) ($107,609) $102,243 $1,129,915
- ----------------------------------------------------------------------------------------------------------
Cumulative GAP ($1,056,859)($1,124,549)(1,232,158)($1,129,915)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Other Liquidity Elements
The predominant source of income from earning assets is derived from the loan
portfolio. Commercial loans and commercial loans secured by real estate comprise
56% 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, 1999 (in thousands):
Within After One
One But Within After Five
Year Five Years Years Total
- --------------------------------------------------------------------------------
Commercial $540,071 $144,378 $170,789 $855,238
Commercial real estate 181,990 265,111 1,193,200 1,640,301
- --------------------------------------------------------------------------------
$722,061 $409,489 $1,363,989 $2,495,539
- --------------------------------------------------------------------------------
Loans maturing after one year with:
Fixed interest rates:
Commercial $97,940 $99,445
Commercial real estate 139,249 749,732
Variable interest rates:
Commercial 46,438 71,344
Commercial real estate 125,862 443,468
- --------------------------------------------------------------------------------
Total $409,489 $1,363,989
- --------------------------------------------------------------------------------
Investment Portfolio Analysis
Keystone's asset liability management policy (ALM) 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
(CMOs) 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. ALM 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
<PAGE>
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
Keystone has purchased interest rate floors to mitigate the risk of declining
long-term interest rates and higher than expected mortgage prepayments, which
could potentially impair the value of its mortgage servicing rights. 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.
CMOs
All Keystone collateralized mortgage obligation (CMO) holdings can be
desegregated into groupings which more accurately define the extent of mortgage
extension or prepayment risk, and include PACs (planned amortization class), SEQ
PAY (sequential pay class), TACs (targeted amortization class), and others.
Other more volatile forms of CMOs including interest-only, principal-only,
inverse floating bonds, and residuals are specifically designated as prohibited
investments under Keystone's investment policy.
At December 31, 1999, Keystone had $194,393,000 in collateralized mortgage obli-
gations, compared to $156,844,000 at December 31, 1998. 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. All of the CMOs 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, which is limited by investment policy guidelines,
aggregated $2,185,000 at the end of 1999.
<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, 1999
- --------------------------------------------------------------------------------
Amortized Market Unrealized
Cost Value Gain/(Loss)
- --------------------------------------------------------------------------------
U.S. Government Agency Obligations:
Conventional $600,899 $586,579 $ (14,320)
Mortgage-backed 331,428 321,266 (10,162)
CMOs:
PACs1 105,503 102,822 (2,681)
SEQ PAY2 71,155 69,463 (1,692)
TACs3 1,444 1,419 (25)
Other 16,291 16,429 138
Structured notes 2,185 2,181 (4)
- --------------------------------------------------------------------------------
Subtotal 1,128,905 1,100,159 (28,746)
- --------------------------------------------------------------------------------
Negotiable money market instruments 72,543 72,470 (73)
U.S. Treasury securities 81,020 80,967 (53)
State and political subdivision
obligations 252,307 246,870 (5,437)
Corporate and other 151,822 148,240 (3,582)
- --------------------------------------------------------------------------------
Total $1,686,597 $1,648,706 $(37,891)
- --------------------------------------------------------------------------------
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. TAC(targeted amortization class) has a payment schedule that offers some call
protection if mortgage prepayments increase, but little to no extension protect-
ion 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 and revised as needed.
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 and presented to the Board of Directors quarterly.
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):
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Commercial:
Commercial and industrial $609,708 $615,925 $637,617 $547,153 $487,843
Floor plan financing 183,357 167,762 203,189 172,248 167,504
Obligations of political
subdivisions 62,173 63,487 70,863 73,749 64,677
- --------------------------------------------------------------------------------
855,238 847,174 911,669 793,150 720,024
- --------------------------------------------------------------------------------
Commercial Real Estate:
Commercial and industrial 1,379,520 1,299,052 1,080,776 843,746 828,508
Multi-family residential 83,725 76,752 130,148 99,074 92,544
Obligations of political
subdivisions 46,037 47,493 40,930 29,686 33,010
Construction and land
development 116,139 95,279 117,503 91,755 86,983
Agricultural 14,880 11,873 15,566 12,756 13,363
- --------------------------------------------------------------------------------
1,640,301 1,530,449 1,384,923 1,077,017 1,054,408
- --------------------------------------------------------------------------------
Consumer:
Real estate 739,198 754,280 862,227 1,186,663 1,206,547
Installment 403,580 543,513 704,242 626,573 631,584
Home equity 580,195 508,729 473,365 311,086 256,505
Personal lines of credit 42,005 39,754 41,123 40,498 43,244
Leases 199,029 235,884 335,017 301,483 184,554
- --------------------------------------------------------------------------------
1,964,007 2,082,160 2,415,974 2,466,303 2,322,434
- --------------------------------------------------------------------------------
Total $4,459,546 $4,459,783 $4,712,566 $4,336,470 $4,096,866
- --------------------------------------------------------------------------------
<PAGE>
Concentration Risk
The diversity of Keystone's loan portfolio is directly influenced by Keystone's
efforts to manage credit risk. Keystone's credit policy has established specific
limits on the level of credit to a borrower or single group of borrowers, which
serve to reduce concentration risk. This diversity is evidenced by the absence
of industry and customer concentrations.
o The largest group of customers in a single industry to whom Keystone
provides credit extensions is automobile dealers. At December 31, 1999
credit extensions totaling $197,618,000 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 4% of the total loans outstanding at the end
of 1999.
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, 1999
- --------------------------------------------------------------------------------
Average
Balance Relationship
- --------------------------------------------------------------------------------
Commercial loans $ 855,238
Commercial real estate 1,640,301
- --------------------------------------------------------------------------------
$2,495,539 $163
- --------------------------------------------------------------------------------
<PAGE>
At December 31, 1999, approximately 24% 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
$83,090,000 and $102,372,000, 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.
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):
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Commercial $12,519 $13,436 $11,266 $9,944 $11,450
Real estate secured:
Commercial 12,030 8,813 12,630 11,922 11,969
Consumer 3,491 2,064 1,849 2,324 2,251
Consumer 15,222 15,574 16,844 12,693 7,724
General risk 16,713 20,387 22,502 19,373 22,021
- --------------------------------------------------------------------------------
$59,975 $60,274 $65,091 $56,256 $55,415
- --------------------------------------------------------------------------------
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:
<PAGE>
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Commercial:
% of Total loans 19% 19% 19% 18% 18%
% Allocation of allowance 21 22 17 18 21
Commercial real estate:
% of Total loans 37 33 29 25 26
% Allocation of allowance 20 15 19 21 22
Consumer real estate:
% of Total loans 17 18 18 27 29
% Allocation of allowance 6 3 3 4 4
Consumer:
% of Total loans 27 30 34 30 27
% Allocation of allowance 25 26 26 23 14
General Risk:
% Allocation of allowance 28 34 35 34 39
- --------------------------------------------------------------------------------
Total loans 100% 100% 100% 100% 100%
- --------------------------------------------------------------------------------
Allocation of allowance 100% 100% 100% 100% 100%
- --------------------------------------------------------------------------------
<PAGE>
Income Performance
1999
- --------------------------------------------------------------------------------
(in thousands, Fourth Third Second First
except per share data) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Interest income $124,087 $121,957 $119,410 $120,577
Interest expense 61,319 56,726 54,666 55,947
- --------------------------------------------------------------------------------
Net interest income 62,768 65,231 64,744 64,630
Provision for credit losses 13,473 3,290 3,950 2,663
- --------------------------------------------------------------------------------
Net interest income after provision 49,295 61,941 60,794 61,967
Noninterest income 24,170 26,202 28,655 25,656
Security transactions (1,512) 729 20 425
Noninterest expense 102,192 56,602 54,046 76,834
- --------------------------------------------------------------------------------
Income before income taxes (30,239) 32,270 35,423 11,214
Income taxes (12,324) 9,798 11,219 2,899
- --------------------------------------------------------------------------------
Net income $(17,915) $22,472 $24,204 $8,315
- --------------------------------------------------------------------------------
Tax effect of security transactions $(529) $255 $ 7 $149
- --------------------------------------------------------------------------------
Earnings per share:
Basic $(0.36) $0.46 $0.49 $0.17
Diluted $(0.37) $0.46 $0.49 $0.17
Dividends per share $0.29 $0.29 $0.29 $0.29
Average shares outstanding 48,699,788 48,583,087 48,558,993 49,595,340
- --------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
<PAGE>
STOCK INFORMATION
Market Prices and Dividends
The common stock of Keystone Financial, Inc. trades on The Nasdaq Stock MarketSM
under the symbol KSTN. At the close of business on February 4, 2000, there were
approximately 14,641 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
- --------------------------------------------------------------------------------
1999
- --------------------------------------------------------------------------------
I $37.19 $32.25 $0.29
II 33.06 29.50 0.29
III 29.56 23.75 0.29
IV 25.34 20.00 0.29
- --------------------------------------------------------------------------------
$1.16
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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.
Exhibit 21.1
Jurisdiction of
Incorporation
---------------
First Tier Subsidiaries of Registrant:
Governors Group Advisors, Inc. Delaware
Keystone Financial Bank, N.A. United States
Keystone Financial Unlimited, Inc. Pennsylvania
Keystone CDC, Inc. 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
Keystone Financial Mortgage Holding Company, Inc. Delaware
Keystone Financial Mortgage Real Estate Investment Trust, Inc. Maryland
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 28, 2000 included in the
1999 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 #333-75583).
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 1997 Stock
Incentive Plan (File #333-75593).
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
Directors' 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).
<PAGE>
We also consent to the incorporation by reference in the above listed
Registration Statements of our report dated January 28, 2000, 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, 1999.
/s/ ERNST & YOUNG LLP
-------------------------
Pittsburgh, Pennsylvania
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the 1999
Form 10-K, and is qualified in its entirety by reference to such 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 334,273
<INT-BEARING-DEPOSITS> 877
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,073,338
<INVESTMENTS-CARRYING> 588,201
<INVESTMENTS-MARKET> 575,368
<LOANS> 4,459,546
<ALLOWANCE> 59,975
<TOTAL-ASSETS> 6,887,508
<DEPOSITS> 4,960,334
<SHORT-TERM> 366,130
<LIABILITIES-OTHER> 152,323
<LONG-TERM> 858,696
0
0
<COMMON> 97,462
<OTHER-SE> 452,563
<TOTAL-LIABILITIES-AND-EQUITY> 6,887,508
<INTEREST-LOAN> 371,527
<INTEREST-INVEST> 101,462
<INTEREST-OTHER> 13,042
<INTEREST-TOTAL> 486,031
<INTEREST-DEPOSIT> 173,942
<INTEREST-EXPENSE> 228,658
<INTEREST-INCOME-NET> 257,373
<LOAN-LOSSES> 23,376
<SECURITIES-GAINS> (338)
<EXPENSE-OTHER> 289,674
<INCOME-PRETAX> 48,668
<INCOME-PRE-EXTRAORDINARY> 37,076
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,076
<EPS-BASIC> .76
<EPS-DILUTED> .75
<YIELD-ACTUAL> 3.57
<LOANS-NON> 27,183
<LOANS-PAST> 22,508
<LOANS-TROUBLED> 841
<LOANS-PROBLEM> 12,500
<ALLOWANCE-OPEN> 60,274
<CHARGE-OFFS> 25,986
<RECOVERIES> 2,311
<ALLOWANCE-CLOSE> 59,975
<ALLOWANCE-DOMESTIC> 59,975
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
