-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, W1hC9nBd+B1sDC19+EfpBTWW6XQCI+yq2cMUQjGH2lNu8Hn/pbhk8hFPNd9HGdfj xLocJRpSWTqT9YJQxZrxaQ== 0000717809-99-000005.txt : 19990416 0000717809-99-000005.hdr.sgml : 19990416 ACCESSION NUMBER: 0000717809-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYSTONE FINANCIAL INC CENTRAL INDEX KEY: 0000717809 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 232289209 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11460 FILM NUMBER: 99578616 BUSINESS ADDRESS: STREET 1: ONE KEYSTONE PLZ - FRONT & MARKET STS STREET 2: P O BOX 3660 CITY: HARRISBURG STATE: PA ZIP: 17105-3660 BUSINESS PHONE: 7172331555 MAIL ADDRESS: STREET 1: ONE KEYSTONE PLZ STREET 2: PO BOX 3660 CITY: HARRISBURG STATE: PA ZIP: 171053660 FORMER COMPANY: FORMER CONFORMED NAME: NCB FINANCIAL CORP DATE OF NAME CHANGE: 19850115 10-K 1 KEYSTONE FINANCIAL, INC. FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (X) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1998 OR ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________to_________ - - ------------------------------------------------------------------------------ Commission File Number 0-11460 KEYSTONE FINANCIAL, INC. Pennsylvania 23-2289209 (State of Incorporation) (IRS Employer ID No.) P.O. Box 3660 One Keystone Plaza Front and Market Streets Harrisburg, PA 17105-3660 Telephone: (717) 233-1555 - - ------------------------------------------------------------------------------ Securities registered pursuant to section 12(g) of the Act: Common Stock, $2.00 par value. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 28, 1999: Common Stock $2.00 Par Value -- $1,736,637,000 The number of shares outstanding of the registrant's class of common stock as of February 28, 1999: Common Stock $2.00 Par Value -- 49,259,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual shareholder report for the year ended December 31, 1998, are incorporated by reference into Parts I and II and portions of the Proxy Statement of Keystone Financial, Inc. for the 1999 annual shareholders meeting are incorporated by reference into Part III. 1 FORM 10-K INDEX PART I - - ----------- Item 1 Business 3 Item 2 Properties 9 Item 3 Legal Proceedings 9 Item 4 Submission of Matters to a Vote of Security Holders 9 PART II - - ----------- Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 10 Item 6 Selected Financial Data 10 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation 10 Item 7A Quantitative and Qualitative Disclosures about 10 Market Risk Item 8 Financial Statements and Supplementary Data 10 Item 9 Changes in and Disagreements with Accountants on 10 Accounting and Financial Disclosure PART III - - ------------ Item 10 Directors and Executive Officers of the Registrant 10 Item 11 Executive Compensation 10 Item 12 Security Ownership of Certain Beneficial Owners and Management 10 Item 13 Certain Relationships and Related Transactions 10 PART IV - - ----------- Item 14 Exhibits, Financial Statement Schedules and Reports 11 on Form 8-K 2 PART I ITEM 1 - BUSINESS Introduction Keystone Financial, Inc. (Keystone) was formed in 1984 as a result of mergers between predecessor bank holding companies. With assets of $7 billion, Keystone is the third largest bank holding company headquartered in the Commonwealth of Pennsylvania. Keystone is the parent of Keystone Financial Bank, N.A. (the bank) and various nonbank subsidiaries. The bank operates in thirty-one Pennsylvania counties, three Maryland counties and one county in West Virginia. Prior to December 31, 1998, Keystone was the holding company for seven banks: American Trust Bank, N.A., Financial Trust Company, Keystone Bank, N.A., Keystone National Bank, Mid-State Bank and Trust Company, Northern Central Bank, and Pennsylvania National Bank and Trust Company. These seven former banks were combined on that date to form Keystone Financial Bank. Nonbank subsidiaries offer a variety of financial services including discount brokerage services, sales of mutual funds and annuities, asset management and investment advisory services, reinsurance, mortgage banking, and community development. None of the nonbank subsidiaries constitute a significant portion of Keystone's business. At December 31, 1998, Keystone and its subsidiaries had 2,965 full-time equivalent employees. Keystone and its subsidiaries do not have any portion of their business dependent upon a single or a limited number of customers, the loss of which would have a material adverse effect on their business; no substantial portion of their loans and investments are concentrated within a single industry or group of related industries. Keystone has one reportable segment - community banking. Refer to the "Notes to Consolidated Financial Statements - Segment Reporting" section of Exhibit 13.1 for additional information. The businesses of Keystone are not seasonal in nature. For a further description of the nature of Keystone's business, refer to the section entitled "Nature of Operations" contained within Exhibit 13.1. Keystone's stock is traded in the over-the-counter market under the symbol of KSTN and is included in the National Market System of NASDAQ. Legislation and Competition Changes in banking legislation since 1982 have increased the competition experienced by banks and bank holding companies and expanded the opportunities to grow geographically and offer new types of financial services. Beginning in 1982, amendments to the Pennsylvania Banking Code provided for the phased elimination of geographical branching restrictions on Pennsylvania banks and for the phased elimination of limitations on the number of Pennsylvania banks a bank holding company could own. Amendments in 1986 further provided for the phased implementation of interstate banking. Effective March 4, 1990, Pennsylvania state-chartered and national banks could establish or acquire branch offices anywhere in the state, there were no longer any limitations on the number of Pennsylvania banks a bank holding company could own and a bank holding company located in any state or the District of Columbia could, subject to a reciprocity requirement, acquire a Pennsylvania bank or bank holding company. The Federal Interstate Banking and Branching Efficiency Act of 1994 has extended to a nationwide basis the process of removing the legal barriers to interstate banking which formerly existed under various state laws. Effective September 29, 1995, the Act permits bank holding companies in any state to acquire bank holding companies or banks located in any other state. Effective June 1, 1997, the Act permits a bank in one state to merge with a bank in another state as long as neither state had enacted legislation prior to 3 that date to prohibit interstate branching. Only Texas and Montana adopted such legislation. A bank may establish a de novo branch in another state or acquire a branch in another state without acquiring the entire bank only if expressly permitted by the law of the state where the new or acquired branch is located. Pennsylvania has enacted legislation to permit de novo interstate branching, subject to a reciprocity requirement. The result of these developments has been an increased volume of merger activity involving Pennsylvania banks and bank holding companies since 1982; larger banking organizations have sought to position themselves to enter into state-wide and interstate banking; smaller banking organizations have sought to increase their size in order to remain competitive on a regional basis. At the same time, deregulation of the banking industry has increased the opportunities to offer new types of financial services and enhanced the potential for competition from savings and loan associations, insurance companies, brokerage firms, and other nonbank financial institutions. The market in which Keystone's banking subsidiaries operate is considered competitive. Banks and bank holding companies with significant operations in the Keystone market areas range in size from less than $100 million to over $150 billion in assets. In addition to commercial banks, competitors for loans, deposits, and other services include savings and loan associations, insurance companies, finance companies, credit unions, brokerage houses, direct lending by federal and state governments, and a proliferation of other types of financial institutions. Keystone differentiates itself from its financial institution competitors by combining the localness of a community bank with a diverse line of products and services typically only offered by much larger banks. Keystone operates through twenty local market teams to ensure close personal service and local decision-making. As a one-stop financial partner to customers, Keystone's offerings include investment management and estate planning, mutual funds, annuities, transaction services and insurance products. Keystone's associates are "Relationship Bankers", who emphasize long-term relationships with customers by providing superior service that results in value-added pricing. Although Keystone expects that competition will increase as a result of the factors described herein, the effects thereof, if any, on Keystone are not readily ascertainable. Regulation and Supervision The business of Keystone and its subsidiaries is subject to extensive regulation and supervision under federal and state banking laws and other federal and state laws and regulations. In general, these laws and regulations are intended for the protection of the customers and depositors of Keystone's subsidiaries and not for the protection of Keystone or its shareholders. Set forth below are brief descriptions of selected laws and regulations applicable to Keystone and its subsidiaries. These descriptions are not intended to be a comprehensive description of all laws and regulations to which Keystone and its subsidiaries are subject or to be complete descriptions of the laws and regulations discussed. The descriptions of statutory and regulatory provisions are qualified in their entirety by reference to the particular statutes and regulations. Changes in applicable statutes, regulations or regulatory policy may have a material effect on Keystone and its business. Regulation and Supervision of Bank Holding Companies Keystone is subject to regulation under the Bank Holding Company Act of 1956. A bank holding company is required to file annual reports and other information concerning its business operations and those of its subsidiaries 4 with the Board of Governors of the Federal Reserve System (Federal Reserve Board). A bank holding company and each of its subsidiaries are also subject to examination by the Federal Reserve Board. The Bank Holding Company Act requires the prior approval of the Federal Reserve Board in any case where a bank holding company proposes to acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank(unless it already owns a majority of such bank's voting shares), to merge or consolidate with any other bank holding company or to acquire all or substantially all of the assets of any bank. The Act further provides that the Federal Reserve Board shall not approve any such acquisition of voting shares or assets or any such merger or consolidation: (i) that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any part of the United States or (ii) the effect of which may be substantially to lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served. The Bank Holding Company Act prohibits a bank holding company from engaging in, or from acquiring direct or indirect ownership or control of more than 5% of the voting shares of, any company engaged in nonbanking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. The Federal Reserve Board has by regulation determined that certain activities are so closely related to banking or to managing or controlling banks as to permit bank holding companies and subsidiaries formed for the purpose to engage in such activities, subject to Board approval in certain cases. These activities include making, acquiring, brokering, or servicing loans and other extensions of credit; providing certain investment and financial advice; leasing personal property; providing certain bookkeeping or financially-oriented data processing services; acting as an insurance agent for certain types of credit related insurance, and securities brokerage. Keystone Financial, Inc., is an affiliate of its subsidiary bank within the meaning of the Federal Reserve Act (Act). As an affiliate, Keystone is subject to certain restrictions imposed by the Act on extensions of credit by the bank to Keystone, on investment in the stock or other securities of Keystone by the bank and on the taking of such stock or securities as collateral for loans to any borrower. Further, under the Bank Holding Company Act, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of any property or the furnishing of services. The Federal Reserve Board has adopted capital adequacy guidelines under which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications filed with the Board. Keystone is in compliance with all existing capital adequacy guidelines, including the risk-based guidelines. For a discussion of these capital adequacy guidelines and Keystone's capital position, reference is made to the caption "Shareholders' Equity", contained within the Financial Review section of Exhibit No. 13.1. Regulation and Supervision of Banks Keystone's federally-chartered national bank is supervised by the Office of the Comptroller of Currency (OCC), which conducts regular examinations of the bank. Deposits are federally-insured by the FDIC. In addition, the bank is subject, in certain instances, to the regulation of the Federal Reserve Board. The areas of operation of the bank which are subject to regulation by federal and state laws, regulations and regulatory agencies include, among other things, reserves against deposits, maximum interest rates for specific classes 5 of loans, truth-in-lending disclosure, permissible types of loans and investments, trust operations, issuance of securities, and payment of dividends. In addition, national banks are subject to capital adequacy and risk-based capital guidelines similar to those adopted by the Federal Reserve Board for bank holding companies, as referred to above. Keystone's subsidiary bank is in compliance with all such guidelines. National banks must obtain approval from the OCC before establishing a new branch. Any merger of financial institutions in which the resulting institution is a national bank is also subject to the prior approval of the OCC. Any other merger in which the resulting institution is a federally insured bank or thrift institution would, depending upon the nature of the merged institution, require the prior approval of the Federal Reserve Board, the FDIC or the Office of Thrift Supervision and, in the case of a resulting state-chartered institution, the applicable financial institution regulatory authority of the chartering state. As an affiliate of Keystone, the bank is subject to provisions of the Federal Reserve Act which restrict the ability of banks to extend credit to affiliates, to invest in the stock or securities thereof, or to take such stock or securities as collateral for loans to any borrower. The business and earnings of the bank are affected by the monetary policies of the Federal Reserve Board which regulate the money supply in order to influence rates of inflation and economic growth. Among the techniques used to implement these objectives are open market dealings in United States Government securities, changes in the discount rate for bank borrowings from the Federal Reserve Banks and changes in the reserve requirements against bank deposits and borrowings. Changes in these policies can influence to a significant degree the overall growth and distribution of bank loans, investments and deposits, the interest rates charged by banks on loans and the cost to banks of obtaining funds, as well as the ability of banks to compete for loans and for funds with other types of financial institutions. In 1994, Congress enacted the Riegle Community Development and Regulatory Improvement Act ("CDRIA"), a broad-based law primarily focused on ensuring that banks deliver services to financially under served communities. In that regard, CDRIA established a fund to award financial grants to community development financial institutions and to promote their partnering with banks. Beyond community development, CDRIA made numerous changes to many provisions of federal banking law, for example, stream-lining the bank holding company application process, liberalizing the makeup of national bank boards of directors, simplifying the establishment of bank service corporations, modifying management interlock rules, and tightening currency transaction reporting under the Bank Secrecy Act. CDRIA also amended an array of consumer protection laws, including the Truth in Lending Act, the Real Estate Settlement Procedures Act, The Fair Credit Reporting Act, the Consumer Leasing Act, and the Flood Disaster Protection Act. Late in 1996, Congress enacted the Economic Growth and Regulatory Paperwork Reduction Act(EGARPRA), which, like CDRIA, amended a variety of banking laws by relieving certain regulatory burdens on banks and bank holding companies. Among other things, EGARPRA eliminated per branch capital requirements for national banks, eliminated branch applications for automated teller machines, expedited procedures for bank holding companies to engage in permissible nonbanking activities, modified rules for qualification of bank directors, liberalized standards for loans to bank insiders, and streamlined the bank examination process. In addition, EGARPRA recapitalized the Savings Association Insurance Fund of FDIC through special assessments on banks and thrift institutions and prepared for the development of a common bank charter for all insured depository institutions. EGARPRA also amended the Fair Credit Reporting Act and the Home Mortgage Disclosure Act and freed banks from liability under certain circumstances for environmental cleanup of real estate taken as loan collateral. 6 Changing conditions in the economy and in the financial industry can be expected to continue to result in changes in legislation and regulatory policies which will affect the business of banks and competition between banks and among banks and other types of financial institutions. Statistical Disclosure The consolidated statistical disclosures found in the sections of Exhibit No. 13.1 entitled, "Selected Financial Data", "Financial Review", and "Supplemental Financial Information", are incorporated herein by reference. Also incorporated herein by reference are the following consolidated statistical disclosures appearing in the Notes to Consolidated Financial Statements section of Exhibit No. 13.1: the discussion of "Interest and Fees on Loans" appearing in the note captioned "Summarized Accounting Policies", the note captioned "Investments", and the table of total nonaccrual and restructured loan balances and related annual interest data appearing in the note captioned "Loans and Leases". 7 Executive Officers of the Corporation Except as otherwise noted, each executive officer has held the position indicated for at least five years, serves at the pleasure of the Board of Directors and is not elected for any specific term of office. Name Age Office with Keystone and/or Subsidiary - - ---------------- ----- ------------------------------------------- Carl L. Campbell 55 Chairman (May 1998) and Chief Executive Officer Prior to May of 1998, Mr. Campbell served as President and Chief Executive Officer. Mark L. Pulaski 45 President (May 1998) and Chief Operating Officer (November 1997) From November 1997 until May 1998, Mr. Pulaski served as Vice Chairman, Chief Operating Officer and Chief Financial Officer (CFO). From 1995 to November 1997, Mr. Pulaski was Senior Executive Vice President, CFO and Chief Administrative officer (CAO) of the Corporation. Prior to 1995, he served as Executive Vice President, CFO and CAO of the Corporation. Ben G. Rooke 49 Executive Vice President, Vice Chairman (May 1998), Counsel and Secretary George R. Barr, Jr. 47 Executive Vice President (December 1998) and Deputy General Counsel Prior to December 1998, Mr. Barr served as Senior Vice President. James M. Deitch 45 Executive Vice President (December 1998) Prior to December 1998, Mr. Deitch served as Vice Chairman and Chief Operating Officer of Financial Trust Company (a former subsidiary of Keystone) and Chairman and Chief Executive Officer of Keystone National Bank (a former subsidiary of Keystone). Edwin R. Eckberg 53 Executive Vice President (December 1998) Prior to December 1998, Mr. Eckberg served as Senior Vice President. Donald F. Holt 42 Executive Vice President (December 1998)and Chief Financial Officer (May 1998) Mr. Holt previously served as Senior Vice President (through December 1998) and Corporate Controller (through May 1998) Robert E. Leech 53 Executive Vice President (December 1998) Prior to December 1998, Mr. Leech served as President and Chief Executive Officer of Trust/Asset Management Division. 8 Name Age Office with Keystone and/or Subsidiary - - ---------------- ----- ------------------------------------------- Robert R. Wozniewicz 50 Executive Vice President (December 1998) Prior to December 1998, Mr. Wozniewicz served as Chairman, President, and Chief Executive Officer of American Trust Bank, N.A., a former subsidiary of Keystone. ITEM 2 - PROPERTIES The headquarters of Keystone Financial, Inc. and Keystone Financial Bank are located at One Keystone Plaza, Harrisburg, Pennsylvania, in a leased building. The lease expires in 2002 with three consecutive renewal options each for five years. This building also houses a full-service branch of the bank and an office for Martindale Andres & Company, a subsidiary of Keystone. Keystone Financial Bank has a total of 177 branches located throughout Pennsylvania, Maryland and West Virginia. Of these 177 branches, 127 are owned and the remainder are leased. Six of the branches are owned by Key Trust, a subsidiary of Keystone, and leased to the bank. The bank owns the premises of its automated Telephone Banking Center located in Cumberland, Maryland. The bank also owns operations centers located in the following Pennsylvania towns: Bellwood, Williamsport, and St. Clair. Keystone and the bank lease office space for various administrative and back- office functions in three buildings in Altoona, including a building owned by a partnership in which a Keystone board member is a partner. The premises for various branches include administrative offices. Keystone owns the headquarters for its Asset Management Division, which are located in Harrisburg, Pennsylvania. Of the nonbanking subsidiaries, Martindale Andres and Company and MMC&P Retirement Benefits Services are headquartered in leased facilities in Pennsylvania. In conjunction with the unification of its seven banks and related reduction in support staff, Keystone is currently reviewing its branch network and administrative offices occupancy needs. This review may result in decisions to dispose of certain properties or terminate certain leases. Such dispositions or terminations are not expected to have a material impact on Keystone's financial condition or results of operations. ITEM 3 - LEGAL PROCEEDINGS Disclosure not required. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1998. 9 PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information for this item is incorporated herein by reference to the section of Exhibit No. 13.1 entitled "Market Prices and Dividends". ITEM 6 - SELECTED FINANCIAL DATA The section entitled "Selected Financial Data" of Exhibit No. 13.1 is incorporated herein by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The section entitled "Financial Review" of Exhibit No. 13.1 is incorporated herein by reference. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following sections of Exhibit No. 13.1 are incorporated herein by reference: "Financial Review-Investments", "Financial Review - Asset/Liability Management and Market Risk", "Summarized Accounting Policies - Financial Derivatives and Other Hedging Activity", "Notes to Consolidated Financial Statements - Financial Derivatives, Hedging Activity, and Commitments". ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The sections of Exhibit No. 13.1 entitled "Consolidated Financial Statements", and notes thereto, and "Quarterly Information - Income Performance" are incorporated herein by reference. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11 - EXECUTIVE COMPENSATION ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Part III, Items 10-13, is incorporated herein by reference to the information appearing under the following captions in the Proxy Statement for Keystone's 1999 Annual Meeting of Shareholders: - - -- Introduction - - -- Management Proposal - Election of Directors - - -- Executive Compensation - - -- Other Information Concerning Directors and Executive Officers - - -- 5% Beneficial Owners of Common Stock The other information appearing in such Proxy Statement, including without limitation that information appearing under the captions "Human Resources Committee 1998 Report on Executive Compensation" and "Stock Price Performance Graph", is not incorporated herein. 10 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1)(2) The response to this portion of Item 14 is listed below. (a)(3) Listing of Exhibits - The exhibits are listed on the Exhibit Index beginning on page 14 of this Form 10-K. (b) Reports on Form 8-K are listed below. (c) Exhibits - The exhibits listed on the Exhibit Index beginning on page 14 of this Form 10-K are filed herewith or are incorporated by reference. (d) Schedules - listed under Item 14 (a)(1)(2) below. Item 14(a)(1)(2) List of Financial Statements and Financial Statement Schedules The following consolidated financial statements and report of independent auditors of Keystone Financial, Inc. and subsidiaries, included in the annual report of the registrant to its shareholders for the year ended December 31,1998, are incorporated by reference in Item 8: Report of independent auditors Consolidated statements of condition - December 31, 1998, and 1997 Consolidated statements of income - Years ended December 31, 1998, 1997, and 1996 Consolidated statements of changes in shareholders'equity - Years ended December 31, 1998, 1997, and 1996 Consolidated statements of cash flows - Years ended December 31, 1998, 1997, and 1996 Notes to consolidated financial statements Schedules to the consolidated financial statements as per Article 9 of Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted. The following report of other auditors required by Item 2-05 of Regulation S-X is filed herewith as a financial statement schedule: Report of Beard & Company, Inc. Item 14(b) Reports on Form 8-K During the quarter ended December 31, 1998, the registrant filed the following reports on Form 8-K: Filing Date Item Description - - -------------------- ----- ---------------------------------------- October 20, 1998 5 Earnings release for the third quarter November 23, 1998 5 Press release announcing unification of seven bank subsidiaries 11 INDEPENDENT AUDITOR'S REPORT Board of Directors and Shareholders Financial Trust Corp Carlisle, Pennsylvania We have audited the consolidated balance sheet of Financial Trust Corp and subsidiaries as of December 31, 1996, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended (not presented herein). These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1996 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Financial Trust Corp and subsidiaries as of December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ BEARD & COMPANY, INC. -------------------------- Reading, Pennsylvania February 28, 1997 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant)Keystone Financial, Inc. By: /s/ Carl L. Campbell --------------------------- Chief Executive Officer Date: March 25, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 25, 1999, by the following persons on behalf of the registrant and in the capacities indicated. /s/ Carl L. Campbell /s/ Mark L. Pulaski - - ----------------------- ---------------------- Chief Executive Officer President, Chief Operating Officer & Chairman & Director /s/ Donald F. Holt ---------------------- Executive Vice President and Chief Financial Officer A. Joseph Antanavage, Jr /s/ June B. Barry - - ----------------------- ---------------------- Director Director /s/ George T. Brubaker /s/ Paul I. Detwiler, Jr. - - ----------------------- ---------------------- Director Director /s/ Donald Devorris /s/ Gerald E. Field - - ----------------------- ---------------------- Director Director /s/ Philip C. Herr, II /s/ Allan W. Holman, Jr. - - ----------------------- ---------------------- Director Director /s/ Richard G. King /s/ Uzal H. Martz, Jr. - - ----------------------- ---------------------- Director Director /s/ Max A. Messenger /s/ William L. Miller - - ----------------------- ---------------------- Director Director /s/ Don A. Rosini /s/ James I. Scheiner - - ----------------------- ---------------------- Director Director /s/ F. Dale Schoeneman /s/ Molly D. Shepard - - ----------------------- ---------------------- Director Director /s/ Ronald C. Unterberger /s/ G. William Ward - - ----------------------- ----------------------- Director Director /s/ Ray L. Wolfe - - ----------------------- Director 13 EXHIBIT INDEX (Pursuant to Item 601 of Regulation S-K) Exhibit Description and Method No. of Filing - - ---------------------------------------------------------------------------- 3.1 Restated Articles of Incorporation of Keystone Financial, Inc., as amended through July 29, 1996, incorporated by reference to Exhibit 4.1 of Form S-4 of Keystone Financial, Inc. (No. 333-20283) filed on January 23, 1997. 3.2 By-Laws of Keystone Financial, Inc., as amended November 19, 1998, filed herewith. 4.1 Keystone Financial, Inc. Series A Junior Participating Preferred Stock Purchase Rights Agreement dated January 25, 1990, incorporated by reference to Exhibit 1 to Form 8-A filed on February 9, 1990. 4.2 Amendment No. 1 to Series A Junior Participating Preferred Stock Purchase Rights Agreement dated December 20, 1990, incorporated by reference to Exhibit 2 to the Form 8 Amendment dated December 20, 1990. The registrant hereby agrees to furnish to the Commission upon request copies of the instruments defining the rights of the holders of the long-term debt of the registrant and its consolidated subsidiaries. 10.1* Keystone Financial, Inc., Corporate Directors Deferred Compensation Plans, incorporated herein by reference to Exhibit 10.1 of Form 10-K of Keystone Financial, Inc. for the year ended December 31, 1994. 10.2* Keystone Financial, Inc. 1988 Stock Incentive Plan, originally filed as Exhibit 10.2 of Form 10-K of Keystone Financial, Inc., for the year ended December 31, 1993, filed herewith. 10.3* Keystone Financial, Inc. Management Incentive Compensation Plan as amended and restated, originally filed as Exhibit 10.3 of Form 10-K of Keystone Financial, Inc., for the year ended December 31, 1993, filed herewith. 10.4* Form of employment agreement between Keystone Financial, Inc. and Executive Officer Campbell, filed herewith. 10.5* Form of employment agreement between Keystone Financial, Inc. and Executive Officers, Pulaski, Rooke, and Leech, filed herewith. 10.6* Keystone Financial, Inc. 1995 Management Stock Purchase Plan, incorporated herein by reference to Exhibit C of the Proxy Statement of Keystone Financial, Inc., dated April 7, 1995. 10.7* Keystone Financial, Inc. Savings Restoration Plan, as amended and restated effective January 1, 1994, and as corrected on June 14, 1994, incorporated herein by reference to Exhibit 10.7 of Form 10-K of Keystone Financial, Inc., for the year ended December 31, 1994. 10.8* Keystone Financial, Inc. Supplemental Retirement Income Plan, originally filed as Exhibit 10.7 of Form 10-K of Keystone Financial, Inc., for the year ended December 31, 1993, filed herewith. 10.9* Keystone Financial, Inc. 1990 Non-Employee Directors' Stock Option Plan, as amended, originally filed as Exhibit 10.8 of Form 10-K of Keystone Financial, Inc. for the year ended December 31, 1993, filed herewith. 14 Exhibit Description and Method No. of Filing - - ----------------------------------------------------------------------------- 10.10* Keystone Financial, Inc. 1992 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.10 of Form 10-K of Keystone Financial, Inc., for the year ended December 31, 1997. 10.11* Keystone Financial, Inc. 1992 Director Fee Plan, as amended, incorporated herein by reference to Exhibit 10.11 of Form 10-K of Keystone Financial, Inc. for the year ended December 31, 1994. 10.12* Keystone Financial, Inc. form of Executive Split Dollar Agreements, Form A and Form B, incorporated herein by reference to Exhibit 10.1 of Form 10-K of Keystone Financial, Inc., for the year ended December 31, 1993. 10.13* Keystone Financial, Inc. 1995 Non-Employee Directors' Stock Option Plan, incorporated herein by reference to Exhibit B of the Proxy Statement of Keystone Financial, Inc., dated April 7, 1995. 10.14* Keystone Financial, Inc. Management Stock Ownership Program, incorporated herein by reference to Exhibit 10.15 of Form 10-K of Keystone Financial, Inc., for the year ended December 31, 1995. 10.15* Keystone Financial, Inc. 1996 Performance Unit Plan, incorporated herein by reference to Exhibit 99.16 of Amendment No. 1 to Form S-4 of Keystone Financial, Inc. (No. 333-20283), filed on March 10, 1997. 10.16* Keystone Financial, Inc. 1997 Stock Incentive Plan, as amended November 19, 1998, filed herewith. 10.17* Keystone Financial, Inc. Supplemental Deferred Compensation Plan, incorporated herein by reference to Exhibit 10.19 of Form 10-K of Keystone Financial, Inc., for the year ended December 31, 1997. 10.18* Form of employment agreement between Keystone Financial, Inc. and executive officer Deitch, filed herewith. 10.19* Form of change of control agreement between Keystone Financial, Inc. and executive officers Barr, Eckberg, Holt, and Wozniewicz, filed herewith. 10.20* Employment Agreement between Keystone Financial, Inc. and Director Wolfe, incorporated herein by reference to Exhibit 99.9 of Form S-4 of Keystone Financial, Inc. (No. 333-20283), filed on January 23, 1997. 11.1 The statement regarding computation of per share earnings required by this exhibit is contained in the note to the consolidated financial statements captioned "Earnings Per Share," filed as a part of Exhibit 13.1. 12.1 Statement regarding computation of ratios, filed herewith. 13.1 Portions of the Annual Report to Shareholders of Keystone Financial, Inc., for the year ended December 31, 1998, filed herewith. 21.1 Subsidiaries of Registrant, filed herewith. 23.1 Consent of Ernst & Young LLP, independent auditors, filed herewith. 23.2 Consent of Beard & Company, Inc., independent auditors, filed herewith. 27.1 Financial Data Schedule, filed herewith. *The exhibits marked by an asterisk (*) are management contracts or compensatory plans or arrangements. 15 EX-3.2 2 KEYSTONE FINANCIAL, INC. BYLAWS Exhibit 3.2 BYLAWS of KEYSTONE FINANCIAL, INC. (a Pennsylvania corporation) November 21, 1996 as amended to November 19, 1998 1 KEYSTONE FINANCIAL, INC. BYLAWS ARTICLE I SHAREHOLDERS Section 1.01. Annual Meetings. Annual meetings of the shareholders shall be held on the last Thursday of April in each year at 2:00 p.m., at the principal business office of the Corporation, or at such other date, time and place as may be fixed by the Board of Directors. Written notice of the annual meeting shall be given at least ten days prior to the meeting to each share- holder entitled to vote thereat. Any business may be transacted at the annual meeting irrespective of whether or not the notice calling such meeting shall contain a reference thereto, except otherwise expressly required herein or by law. Section 1.02. Special Meetings. Special meetings of the shareholders may be called at any time, for the purpose or purposes set forth in the call, by the Chairman of the Board, the President or the Board of Directors, by delivering a written request to the Secretary. Special meetings shall be held at the principal business office of the Corporation or at such other place as may be fixed by the Board of Directors. Written notice of special meetings shall be given at least ten days prior to the meeting to each shareholder entitled to vote thereat. No business may be transacted at any special meeting other than that stated in the notice of meeting and business which is germane thereto. Section 1.03. Organization. The Chairman of the Board, if one has been elected and is present, or in his absence, the President, or in his absence, any Vice President designated by the Board, shall preside, and the Secretary, or in his absence, any Assistant Secretary, shall take the minutes at all meetings of the shareholders. In the absence of the Secretary and an Assistant Secretary, the presiding officer at the meeting shall designate any other person to take the minutes of the meeting. Section 1.04. Notice of Business to be Presented at Shareholder Meetings. (a) Annual Meetings of Shareholders. The proposal of business to be considered by the shareholders at an annual meeting of shareholders may be made (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any shareholder of the Corporation who was a shareholder of record at the time of giving of notice provided for in this Section, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in this Section. For business to be properly brought before an annual meeting by a shareholder pursuant to clause (iii) of the preceding sentence, such business must be a proper matter for shareholder action, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation and such notice must comply with the following requirements: 2 (1) To be timely, a shareholder's notice given pursuant to this Section must be received at the principal executive offices of the Corporation, addressed to the Secretary, not less than 120 calendar days before the date of the Corporation's proxy statement released to shareholders in connection with the previous year's annual meeting or, if none, its most recent previous annual meeting. Notwithstanding the preceding sentence, (A) for business to be presented at the 1999 annual meeting of shareholders, a shareholder's notice shall be considered timely if so received by the Corporation on or before December 19, 1998 and (B) if the date of the annual meeting at which such business is to be presented has been changed by more than 30 days from the date of the most recent previous annual meeting, a shareholder's notice shall be considered timely if so received by the Corporation (i) on or before the later of (x) 150 calendar days before the date of the annual meeting at which such business is to be presented or (y) 30 days following the first public announcement by the Corporation of the date of such annual meeting and (ii) not later than 15 calendar days prior to the scheduled mailing date of the Corporation's proxy materials for such annual meeting. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a shareholder's notice as described above. (2) A shareholder's notice given pursuant to this Section shall set forth (A) the name and address of the shareholder who intends to make the proposal and the classes and numbers of shares of the Corporation's stock beneficially owned by such shareholder; (B) a representation that the shareholder is and will at the time of the annual meeting be a holder of record of stock of the Corporation entitled to vote at such meeting on the proposal(s) specified in the notice and intends to appear in person or by proxy at the meeting to present such proposal(s), (C) a description of the business the shareholder intends to bring before the meeting, including the text of any proposal or proposals to be presented for action by the shareholders, (D) the name and address of any beneficial owner(s) of the Corporation's stock on whose behalf such business is to be presented and the class and number of shares beneficially owned by each such beneficial owner and (E) the reasons for conducting such business at the meeting and any material interest in such business of such shareholder or any such beneficial owner. (b) Special Meetings of Shareholders. Only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. 3 (c) General. (i) Only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section. The Chairman of the meeting shall have the power and the duty to determine whether any business proposed to be brought before a meeting was proposed in accordance with the procedures set forth in this Section and, if any business is not in compliance with this Section, to declare that such defective proposal shall be disregarded. (ii)For purposes of this Section, (A) "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and (B) "beneficial ownership" shall be determined in accordance with Rule 13d-3 under the Exchange Act or any successor rule. Notwithstanding the foregoing provisions of this Section, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section. Nothing in this Section shall be deemed to affect any rights of a shareholder to request inclusion of a proposal in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act, or any successor rule, or to present for action at an annual meeting any proposal so included. ARTICLES II DIRECTORS Section 2.01. Number, Election and Term of Office. The number of Directors which shall constitute the full Board of Directors shall be fixed by the Board of Directors, pursuant to a resolution adopted by a majority vote of the Disinterested Directors then in office, but shall not be less than five or more than twenty-five. Between annual meetings of the shareholders, the Board of Directors by a vote of a majority of the Disinterested Directors then in office, may increase the membership of the Board, within the maximum above prescribed, by not more than three members and, by like vote, appoint qualified persons to fill the vacancies created thereby in accordance with Section 2.10 hereof. No decrease in the number of Directors constituting the full Board of Directors shall shorten the term of any incumbent Director. The Directors shall be classified with respect to the time for which they shall severally hold office by dividing them into three classes, each class being as nearly equal in number as possible. If such classes of Directors are not equal, the Board of Directors, by a majority vote of the Disinterested Directors then in office, shall determine which class shall contain an unequal number of Directors. At each annual meeting of shareholders, the shareholders shall elect Directors of the class whose term then expires, to hold office until the third succeeding annual 4 meeting. Each Director of the Corporation shall hold office for the term for which elected and until his or her successor shall be elected and shall qualify. Each Director shall hold office from the time of his election but shall be responsible as a Director from such time only if he consents to his election; otherwise from the time he accepts office or attends his first meeting of the Board. As used herein, the term "Disinterested Director" shall have the meaning provided in Article 10.1(g) of the Restated Articles. Section 2.02. Regular Meetings;Notice. Regular meetings of the Board of Directors shall be held at such time and place as shall be designated by the Board of Directors from time to time. Notice of such regular meetings of the Board shall not be required to be given, except as otherwise expressly required herein or by law. However, whenever the time or place of regular meetings shall be initially fixed and then changed, notice of such action shall be given promptly by telephone or otherwise to each Director not participating in such action. Any business may be transacted at any regular meeting. Section 2.03. Annual Meeting of the Board. The annual meeting of the Board of Directors each year shall be held immediately after the annual meeting of the shareholders at such place as may be fixed by the Board. Section 2.04. Special Meetings; Notice. Special meetings of the Board may be called at any time by the Board itself by vote at a meeting, or by the Chairman, the President, or not less than one-fourth in number of the members of the Board, to be held at such place, day, and hour as shall be specified by the person(s) calling the meeting. Notice of every special meeting of the Board of Directors stating the place, day, and hour thereof shall be given to each Director by being mailed, sent by telecopier, telex, telegraph or electronic mail or given personally or by telephone, in each case at least 24 hours before the time at which the meeting is to be held. Any business may be transacted at any special meeting regardless of whether the notice calling such meeting contains a reference thereto, except as otherwise required herein or by law. Section 2.05. Meetings by Telephone. One or more of the Directors may participate in any special meeting of the Board of Directors or any committee thereof by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting are able to hear each other. Participation in a special meeting in this manner by a Director will by considered to be attendance in person for all purposes under these Bylaws. This Section 2.05 shall not apply to the annual meting or to the regular meetings of the Board of Directors. Section 2.06. Organization. At all meetings of the Board of Directors, the presence of at least a majority of the Directors at the time in office shall be necessary and sufficient to constitute a quorum for the transaction of business. If a quorum is not present at any meeting, the meeting may be adjourned from time to time by a majority of the Directors present until a quorum as aforesaid shall be present; but notice of the time and place to which such meeting is adjourned shall be given to any Directors not present either by being sent by telecopier, telex, telegraph, or electronic mail or given personally or by telephone at least 8 hours prior to the hour of reconvening. Except as otherwise provided herein, the Restated Articles or by law, resolutions of the Board shall be adopted, and any action of the Board at a meeting upon any matter shall be valid and effective, with the affirmative vote of at least a majority of the Directors present at a meeting duly convened. The Chairman of the Board, if one has been elected and is present, or if not, the President, shall preside at each meeting of the Board. In the absence of both the Chairman and the President, the Directors present shall designate one of their number to preside at the meeting. The Secretary, or in his absence any Assistant Secretary, shall take the minutes at all meetings of the Board of Directors. In the absence of the Secretary and an Assistant Secretary, the presiding officer shall designate any person to take the minutes of the meeting. 5 Section 2.07. Director Nominations and Qualifications. (a) The Board of Directors shall establish a Nominating Committee from among its members. This Nominating Committee shall establish criteria for selection of nominees to stand for election or reelection at any annual meeting of the shareholders and shall report its recommendations to the Board for its action. Any shareholder who desires to have an individual considered for nomination must submit his recommendation in writing to the Secretary of the Corporation at least ninety (90) days prior to any annual meeting at which the election of Directors will occur. (b) Any Director or nominee who has attained the age of 70 on or prior to date of any annual meeting shall not stand for reelection or election at that annual meeting. Furthermore, the term of any Director who has attained the age of 70 on or prior to the date of any annual meeting shall expire at that annual meeting. (c) Any Director who becomes more than 50% retired from a principal occupation on or prior to the date of any annual meeting shall not stand for reelection at that annual meeting. Furthermore, the term of any Director who becomes more than 50% retired from a principal occupation on or prior to the date of any annual meeting, shall expire at that annual meeting. (d) Director who shall no longer be engaged in his usual and customary occupation on or prior to the date of any annual meeting shall not stand for reelection at that annual meeting. Furthermore, the term of any Director who shall no longer be engaged in his usual and customary occupation on or prior to the date of any annual meeting shall expire at that annual meeting. The Board may waive the application of this subsection (d) by a majority vote at any regular or special meeting of the Board. (e) Any Director who shall move his residence from the trade area of the corporation on or prior to the date of any annual meeting shall not stand for reelection at that annual meeting. Furthermore, the term of any Director who shall move his residence from the trade area of the corporation on or prior to the date of any annual meeting shall expire at that annual meeting. For the purposes of this subsection (e) "trade area" shall be defined as any county in which the Corporation or any of its banking subsidiaries has an office or branch and any county contiguous thereto. (f) Any vacancy created by virtue of this section shall be filled according to the provisions of Section 2.10 of these Bylaws. Section 2.08 Presumption of Assent. Minutes of each meeting of the Board shall be made available to each Director at or before the next succeeding regular meeting. Each Director shall be presumed to have assented to the correctness of such minutes unless his objection thereto shall be made to the Secretary within two business days after such succeeding regular meeting. Section 2.09. Resignations. Any Director may resign by submitting to the Chairman of the Board, if one has been elected, or to the President or the Secretary, his resignation which shall become effective upon its receipt by such officer or as otherwise specified herein. 6 Section 2.10. Vacancies. Vacancies in the Board of Directors, including vacancies resulting from an increase in the number of Directors, shall be filled only by a majority vote of the Disinterested Directors (as defined in Article 10.1(g) of the Restated Articles) then in office, though less than a quorum, except as otherwise required by law. All such Directors elected to fill vacancies shall hold office for a term expiring at the annual meeting of shareholders at which the term of the class to which they have been elected expires. Section 2.11. Committees. (a) General. Standing or temporary committees may be appointed from its own number by the board of Directors from time to time, and the Board may from time to time invest committees with such power and authority, subject to such conditions as it may see fit. Any action taken by any committee shall be subject to alteration or revocation by the Board of Directors; provided, however, that third parties shall not be prejudiced by such alteration or revocation. (b) Executive Committee. An Executive Committee may be appointed by a majority of the full Board; it shall have all the powers and exercise all the authority of the Board in the management of the business and affairs of the Corporation except as specifically limited by the Board and except as to matters for which action by the full Board is required by the Restated Articles or Section 1731(a)(2) of the Pennsylvania Business Corporation Law. (c) Audit Committee. An Audit Committee shall be appointed by a majority of the full Board. The Audit Committee shall be composed of Directors who are independent of management of the Corporation, are free of any relationship that, in the opinion of the Board of Directors, would interfere with their exercise of independent judgment as a Committee member and comply with the requirements of applicable laws and regulations as to the composition of Audit Committee. The Audit Committee shall assist the Board in fulfilling its oversight responsibilities in the areas of internal controls, financial reporting, the Corporation's internal and external audit programs, compliance with significant laws and regulations in areas in which it has oversight responsibility and in other related areas from time to time assigned to it. The Audit Committee shall, at least once in each year, make or cause to be made by independent certified public accountants selected by the Board or shareholders for the purpose, an audit of the books and affairs of the Corporation. Such audit shall be performed in accordance with Generally Accepted Auditing Standards. Upon completion of the audit, the Committee shall make a report thereof and its recommendations to the Board of Directors at its next regular meeting. Section 2.12. Emergency Preparedness. Notwithstanding any other provisions of law, the Articles or these Bylaws, during any emergency period caused by a national catastrophe or local disaster, a majority of the surviving members (or the sole survivor) of the Board of Directors who have not been rendered incapable of acting because of incapacity or the difficulty of communication or transportation to the place of meeting shall constitute a quorum for the sole purpose of electing Directors to fill such emergency vacancies; and a majority of the Directors present at such a meeting may act to fill such vacancies. Directors so elected shall serve until such absent Directors are able to attend meetings or until the shareholders act to elect Directors for such purpose. During such an emergency period, if the Board is unable to or fails to meet, any action appropriate to the circumstances may be taken by such officers of the Corporation as may be present and able. Questions as to the existence of a national catastrophe or local disaster and the number of surviving members capable of acting shall be conclusively determined at the time by the Board of Directors or the officers so acting. 7 ARTICLE III OFFICERS AND EMPLOYEES Section 3.01. Executive Officers. The Executive Officers of the Corporation shall be the Chairman, the President, the Secretary, the Treasurer, and one or more Vice Presidents as the Board may from time to time determine, all of whom shall be elected by the Board of Directors. Any two or more offices may be held by the same person. Each Executive Officer shall hold office at the pleasure of the Board of Directors, or until his death or resignation. Section 3.02. Additional Officers; Other Agents and Employees. The Board of Directors may from time to time appoint or hire such additional officers, assistant officers, agents, employees and independent contractors as the Board deems advisable; the Board or the President shall prescribe their duties, conditions of employment and compensation; and the Board shall have the right to dismiss them at any time, without prejudice to their contract rights, if any. Subject to the power of the Board, the President may employ from time to time such other agents, employees, and independent contractors as he may deem advisable for the prompt and orderly transaction of the business of the Corporation, and he may prescribe their duties and the conditions of their employment, fix their compensation and dismiss them at any time, without prejudice to their contract rights, if any. Section 3.03. The Chairman. The Chairman of the Board shall be elected from among the Directors. The Chairman (and in his absence, the President) shall preside at all meetings of the shareholders and of the Board and shall have such other powers and duties as from time to time may be prescribed in these Bylaws or by the Board of Directors. Section 3.04. The President. Subject to the control of the Board of Directors, the President shall have general policy supervision of and general management and executive powers over all the property, business, operations, affairs and employees of the Corporation, and shall see that the policies and programs adopted or approved by the Board are carried out. In absence of the Chairman, the President shall preside at all meetings of the shareholders and of the Board. The President shall exercise such other powers and duties as from time to time may be prescribed in these Bylaws or by the Board of Directors. In his absence for reasons other than disability, the President may designate any officer or Director of the Corporation to exercise all of the powers and duties of the President. In case of the disability of the President, the Board shall designate an officer or Director to exercise such powers. Section 3.05. The Vice Presidents. The Vice Presidents may be given by resolution of the Board general executive powers, subject to the control of the President, concerning one or more or all segments of the operations of the Corporation. The Vice Presidents shall exercise such other powers and duties as from time to time may be prescribed in these Bylaws or by the Board of Directors or by the President. 8 Section 3.06. The Secretary and Assistant Secretaries. It shall be the duty of the Secretary (a) to keep or cause to be kept at the registered office of the Corporation an original or duplicate record of the proceedings of the shareholders and the Board of Directors and a copy of the Articles and of the Bylaws; (b) to attend to the giving of notices of the Corporation as may be required by law or these Bylaws; (c) to be responsible for the corporate records and the seal of the Corporation and see that the seal is affixed to such documents as may be necessary or advisable; (d) to have charge of and keep at the registered office of the Corporation, or cause to be kept at the office of a transfer agent or registrar, the stock books of the Corporation and an original or duplicate share register, giving the names of the shareholders in alphabetical order and showing their respective addresses, the number and classes of shares held by each, the number and date of certificates issued for the shares, and the date of cancellation of every certificate surrendered for cancellation; and (e) to exercise all powers and duties incident to the office of Secretary and such other powers and duties as may be prescribed by the Board of Directors or by the President from time to time. The Secretary of his office shall be an Assistant Treasurer. The Assistant Secretaries shall assist the Secretary in the performance of his duties and shall also exercise such other powers and duties as from time to time may be assigned to them by the Board of Directors, the President or the Secretary. At the direction of the Secretary or in his absence or disability, an Assistant Secretary shall perform the duties of the Secretary. Section 3.07. The Treasurer and Assistant Treasurers. The Treasurer shall exercise all powers and duties incident to the office of Treasurer and such other duties as may be prescribed by the Board of Directors or by the President from time to time. The Treasurer, by virtue of his office, shall be an Assistant Secretary. The Assistant Treasurers shall assist the Treasurer in the performance of his duties and shall also exercise such other powers and duties as from time to time may be assigned to them by the Board of Directors, the President or the Treasurer. At the direction of the Treasurer or in his absence or disability, an Assistant Treasurer shall perform the duties of the Treasurer. Section 3.08. Compensation. The compensation of all Executive Officers, elected pursuant to Section 3.01 of these Bylaws, shall be fixed from time to time by the Board of Directors or by any committee authorized by the Board of Directors to do so. The President may fix the compensation of all other officers, agent and employees. The Board may direct that additional compensation be paid to any officers or employees for any year or years, based upon the performance of such persons during such year, or on the success of the operations of the Corporation during such year, or for any other reason deemed appropriate. Section 3.09. Vacancies. Any vacancy in any office or position by reason of death, resignation, removal, disqualification, disability or other cause, shall be filled in the manner provided in this Article III for regular election or appointment to such office. Section 3.10. Delegation of Duties. The Board of Directors may in its discretion delegate for the time being the powers and duties, or any of them, of any officer to any other person whom it may select. 9 ARTICLE IV SHARES OF CAPITAL STOCK Section 4.01. Share Certificates. Every holder of fully-paid stock of the Corporation shall be entitled to a certificate or certificates, to be in such form as the Board of Directors may from time to time prescribe, and signed (in facsimile or otherwise, as permitted by law) by the President or a Vice President and the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer which shall represent and certify the number and class of shares of stock owned by such holder. The Board may authorize the issuance of certificates for fractional shares or, in lieu thereof, scrip or other evidence of ownership, which may (or may not) as determined by the Board entitle the holder thereof to voting, dividends or other rights of shareholders. Section 4.02. Transfer of Shares. Transfers of shares of the stock of the Corporation shall be made on the books of the Corporation only upon surrender to the Corporation of the certificate or certificates for such shares properly endorsed by the shareholder or by his assignee, agent or legal representative, who shall furnish proper evidence of assignment, authority or legal succession, or by the agent of one of the foregoing thereunto duly authorized by an instrument duly executed and filed with the Corporation in accordance with regular commercial practice. Section 4.03. Lost, Stolen, Destroyed or Mutilated Certificates. New certificates for shares of stock may be issued to replace certificates lost, stolen, destroyed or mutilated upon such conditions as the Board of Directors may from time to time determine. Section 4.04. Regulations Relating to Shares. The Board of Directors shall have power and authority to make all such rules and regulations not inconsistent with these Bylaws as it may deem expedient concerning the issue, transfer and registration of certificates representing shares of the Corporation. Section 4.05. Holders of Record. The Corporation shall be entitled to treat the holder of record of any share or shares of stock of the Corporation as the holder and owner in fact thereof for all purposes and shall have express or other notice thereof, except as otherwise expressly provided by the laws of Pennsylvania. ARTICLE V MISCELLANEOUS CORPORATE TRANSACTIONS AND DOCUMENTS Section 5.01. Notes, Checks, etc. All notes, bonds, drafts, acceptances, checks, endorsements (other than for deposit) guarantees, and all evidences of indebtedness of the Corporation whatsoever, shall be signed by such officers or agents of the Corporation, subject to such requirements as to countersignature or other conditions, as the Board of Directors from time to time may determine. Facsimile signatures on checks may be used if authorized by the Board of Directors. 10 Section 5.02. Execution of Instruments Generally. Except as provided in Section 5.01, all deeds, mortgages, contracts and other instruments requiring execution by the Corporation may be signed by the President, any Vice President or the Treasurer; and authority to sign any of the foregoing, which may be general or confined to specific instances, may be conferred by the Board of Directors upon any other person or persons. Any person having authority to sign on behalf of the Corporation may delegate from time to time by instrument in writing all or any part of such authority to any other person or persons if authorized to do so by the Board of Directors, which authority may be general or confined to specific instances. Section 5.03. Voting of Investment Securities Owned by Corporation. Investment securities owned by the Corporation and having voting power in any other corporation shall be voted by the President or his designee, unless the Board confers authority to vote with respect thereto, which may be general or confined to specific investments, upon some other person. Any person authorized to vote such securities shall have the power to appoint proxies with general power of substitution. ARTICLE VI GENERAL PROVISIONS Section 6.01. Offices. The principal business office of the Corporation shall be at One Keystone Plaza, Front & Market Streets, P.O. Box 3660, Harrisburg, Pennsylvania 17105-3660. The Corporation may also have offices at such other places within or without the Commonwealth of Pennsylvania as the business of the Corporation may require. Section 6.02. Corporate Seal. The Board of Directors shall prescribe the form of a suitable corporate seal which shall contain the full name of the Corporation and the year and state of incorporation. Section 6.04. Financial Reports to Shareholders. The Board shall have discretion to determine whether financial reports shall be sent to shareholders, what such reports shall contain, and whether they shall be audited or accom- panied by the report of an independent certified public accountant. Section 6.05. Prior Board Approval of Certain Matters. The following matters or actions shall be subject to the prior consideration and approval of the Board of Directors: (1) Proposed budget of all subsidiaries of the Corporation. (2) All proposed changes in the duties or title of Executive management of Keystone Financial, Inc. (Corporate CEO, Corporate Executive Officers, Bank CEOs), including any salary adjustments, promotion or demotions related thereto. Section 6.06. Non-Applicability of Statute. Subchapter 25G (Control-Share Acquisitions) and Subchapter 25H (Disgorgement by Certain controlling shareholders Following Attempts to Acquire control) of the Pennsylvania Business Corporation Law, added by the Act of April 27, 1990 (P.L. _________ No. 36), shall not be applicable to the Corporation. (This By-Law provision was adopted by action of the Board of Directors on July 26, 1990). 11 ARTICLE VII VALIDATION OF CERTAIN CONTRACTS Section 7.01. General. A contract or transaction between the Corporation and one or more of its Directors or officers or between the Corporation and another person in which one or more Directors or officers of the Corporation are directors or officers or have a financial or other interest, shall not be void or voidable solely for that reason, or solely because the Director or officer is present at or participants in the meeting of the Board of Directors that authorizes the contract or transaction, or solely because his or their votes are counted for that purpose, if: (1) the material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors, and the Board authorizes the contract or transaction by the affirmative votes of the disinterested Directors even though the disinterested Directors are less than a quorum; (2) the material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved by vote of those shareholders; (3) or the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors or the share- holders. Common or interested Directors may be counted in determining the presence of a quorum at a meeting of the Board that authorizes a contract or transaction referred to in this Section. As used in this Section, the term "person" includes a corporation for profit or not-for-profit, partnership, joint venture, firm, association, trust or other enterprise or legal entity. ARTICLE VIII INDEMNIFICATION OF OFFICERS AND DIRECTORS Section 8.01. Indemnification of, and Advancement of Expenses to, Directors, Officers and Others. (a) Right to Indemnification. Except as prohibited by law, every Director and officer of the Corporation shall be entitled as of right to be indemnified by the Corporation against expenses and any actual or threatened claim, action, suit or proceeding, civil, criminal, administrative, investigative or other; whether brought by or in the right of the Corporation or otherwise, in which he or she may be involved in any manner, as a party, witness or otherwise, or is threatened to be made so involved, by reason of the fact that such person is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or other representative of another corporation, partnerships, joint 12 venture, trust, employee benefit plan or other entity (such claim, action, suit or proceeding hereinafter being referred to as an "Action"); provided, that no such right of indemnification shall exist with respect to an Action initiated by an indemnitee (as hereinafter defined) against the Corporation (an "Indemnitee Action") other than an Action for indemnity or advancement of expenses as provided in Subsection (c). Persons who are not Directors or officers of the Corporation may be similarly indemnified in respect of service to the Corporation or to another such entity at the request of the Corporation to the extent the Board of Directors at any time denominates such person as entitled to the benefits of this Section. As used in this Section 8.01, "indemnitee" shall include each Director and officer of the Corporation and each other person denominated by the Board of Directors as entitled to the benefits of this Section 8.01; "expenses" shall include fees and expenses of counsel selected by an indemnitee; and "liability" shall include amounts of judgments, excise taxes, finds, penalties and amounts paid in settlement. (b) Right to Advancement of Expenses. Every indemnitee shall be entitled as of right to have his or her expenses in defending any Action, or in initiating and pursuing any Indemnitee Action for indemnity or advancement of expenses under Subsection (c) of this Section 8.01, paid in advance by the Corporation prior to final disposition of such Action or Indemnitee Action, provided that the Corporation receives a written undertaking by or on behalf of the indemnitee to repay the amount advanced if it should ultimately be determined that the indemnitee is not entitled to be indemnified for such expenses. (c) Right of Indemnitee to Initiate Action. If a written claim under Subsection (a) or Subsection (b) of this Section 8.01 is not paid in full by the Corporation within thirty days after such claim has been received by the Corporation, the indemnitee may at any time thereafter initiate an Indemnitee Action to recover the unpaid amount of the claim and, if successful in whole or in part, the indemnitee shall also be entitled to be paid the expense of prosecuting such Indemnitee Action. The only defense to an Indemnitee Action to recover a claim for indemnification under Subsection(a) of this Section 8.01 shall be that the indemnitee's conduct was such that under Pennsylvania law the Corporation is prohibited from indemnifying the indemnitee for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel and its shareholders) to have made a determination prior to the commencement of such Indemnitee Action that indemnification of the indemnitee is proper in the circumstances, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its shareholders) that the indemnitee's conduct was such that indemnification is prohibited by Pennsylvania law, shall be a defense to such Indemnitee Action or create a presumption that the indemnitee's conduct was such that indemnification is prohibited by Pennsylvania's law. The only defense under Subsection (b) of this Section 8.01 shall be the indemnitee's failure to provide the undertaking required by Subsection (b) of this Section 8.01. (d) Insurance and Funding. The Corporation may purchase and maintain insurance to protect itself and any person eligible to be indemnified hereunder against any liability or expense asserted or incurred by such person in connection with any Action, whether or not the Corporation would have the power to indemnify such person against such liability or expense by law or under the provisions of this Section 8.01. The Corporation may create a trust fund, grant a security interest, cause a letter of credit to be issued or use other means (whether or not similar to the foregoing) to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. 13 (e) Non-Exclusivity; Nature and Extent of Rights. The rights to indemnification and advancement of expenses provided for in this Section 8.01 shall (I) not be deemed exclusive of any other rights, whether now existing or hereafter created, to which any indemnitee may be entitled under any agreement, bylaw, charter provision, vote of shareholders or Directors or otherwise, (ii) be deemed to create contractual rights in favor of each indemnitee who serves the Corporation at any time while this Section 8.01 is in effect (and each such indemnitee shall be deemed to be so serving in reliance on the provisions of this Section) and (iii) continue as to each indemnitee who has ceased to have the status pursuant to which he or she was entitled or was denominated as entitled to indemnification under this Section 8.01 and shall inure to the benefit of the heirs and legal representatives of each indemnitee. Any amendment or repeal of this Section 8.01 or adoption of any other Bylaw or provision of the Articles of Incorporation which limits in any way the right to indemnification or the right to advancement of expenses provided for in this Section 8.01 shall operate prospectively only and shall not affect any action taken, or failure to act, by an indemnitee prior to the adoption of such amendment, repeal, Bylaw or other provision. (f) Partial Indemnity. If an indemnitee is entitled under any provision of this Section 8.01 to indemnification by the Corporation for some or a portion of the expenses or a liability paid or incurred by the indemnitee in the preparation, investigation, defense, appeal or settlement of any Action or Indemnitee Action but not, however, for the total amount thereof, the Corporation shall indemnify the indemnitee for the portion of such expenses or liability to which the indemnitee is entitled. (g) Applicability of Section. This Section 8.01 shall apply to every Action other than an Action filed prior to January 27, 1987, except that it shall not apply to the extent that Pennsylvania law does not permit its application to any breach of performance of duty or any failure of performance of duty by an indemnitee occurring prior to January 27, 1987. Section 8.02. Personal Liability of Directors. (a) To the fullest extent that the laws of the Commonwealth of Pennsylvania, as in effect on January 27, 1987 or as thereafter amended, permit elimination or limitation of the liability of directors, no Director of the Corporation shall be personally liable for monetary damages as such for any action taken, or any failure to take any action, as a Director. (b) This Section 8.02 shall not apply to any action, suit or proceeding filed prior to January 27, 1987 nor to any breach of performance of duty of any failure of performance of duty by a Director of the Corporation occurring prior to January 27, 1987. The provisions of this Section shall be deemed to be a contract with each Director of the Corporation who serves as such at any time while this Section is in effect, and each such Director shall be deemed to be so serving in reliance on the provisions of this Section. Any amendment or repeal of this section or adoption of any other Bylaws or any provision of the Articles of the Corporation which has the effect of increasing director liability shall operate prospectively only and shall not effect any action taken, or any failure to act, prior to the adoption of such amendment, repeal, other Bylaw or provision. 14 ARTICLE IX AMENDMENTS Section 9.01. Amendments. (a) Except with respect to those matters which are, by statute, reserved exclusively to the shareholders, these Bylaws may be amended, altered and repealed, and new Bylaws may be adopted, by a vote of the majority of the Disinterested Directors (as defined in Section 10.1(g) of the Restated Articles) then in office, at any regular or special meeting of the Board. (b) When the Bylaws are to be amended, altered or repealed, or new Bylaws adopted by the Board of Directors, written notice of any such proposed change shall be given to each Director at least ten (10) days prior to the regular or special meeting at which the proposed change is to be considered. The notice shall include the text of the Bylaws which is to be amended, altered or repealed, and the text of the change which is being proposed. (c) These Bylaws may also be amended, altered and repealed, and new Bylaws may be adopted, by the shareholders at any regular or special meeting by the votes required by Section 8.3 of the Restated Articles of the Corporation or, if no special vote is required by Section 8.3 of the Restated Articles or otherwise by law, by a majority of the votes cast thereon by all shareholders entitled to vote on the proposal. When the Bylaws are to be amended, altered, or repealed, or new Bylaws adopted by the shareholders, written notice that the purpose, or one of the purposes, of the meeting is to consider the adoption, amendment or repeal of the Bylaws shall be given to each shareholder at least ten (10) days prior to the regular or special meeting at which the proposed change is to be considered. There shall be included in, or enclosed with, the notice a copy of the proposed amendment or a summary of the changes to be effected thereby. (d) No provision of these Bylaws shall vest in any person any property or (except as provided in Sections 8.01(e) and 8.02 of these Bylaws) any contract right. 15 EX-10.2 3 1988 STOCK INCENTIVE PLAN Exhibit 10.2 KEYSTONE FINANCIAL, INC. 1988 STOCK INCENTIVE PLAN (As Amended 1991) The purposes of the 1988 Stock Incentive Plan (the "Plan") are to encourage eligible employees of Keystone Financial, Inc. (the "Corporation") and its Subsidiaries to increase their efforts to make the Corporation and each Subsidiary more successful, to provide an additional inducement for such employees to remain with the Corporation or a Subsidiary, to reward such employees by providing an opportunity to acquire shares of the Common Stock, par value $2.00 per share, of the Corporation (the "Common Stock") on favorable terms and to provide a means through which the Corporation may attract able persons to enter the employ of the Corporation or one of its Subsidiaries. For the purposes of the Plan, the term "Subsidiary" means any corporation in an unbroken chain of corporations beginning with the Corporation, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing at least fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 1 Administration The Plan shall be administered by a Committee (the "Committee") appointed by the Board of Directors of the Corporation (the "Board") and consisting of not less than two members of the Board, none of whom has been during his service on the Committee or within one year prior to becoming a member of the Committee granted or awarded equity securities (as "equity security" is defined in the Securities Exchange Act of 1934, as amended (the "1934 Act"), and in regulations of the Securities and Exchange Commission ("SEC") under Section 16 of the 1934 Act) pursuant to the Plan or any other plan of the Corporation or any of its affiliates (as "affiliates" is defined in regulations of the SEC under the 1934 Act) other than (i) the Corporation's 1990 Non-Employee Directors' Stock Option Plan or (ii) another plan under which the receipt of equity securities by a Director would not disqualify such Director as a "disinterested person" under regulations of the SEC under Section 16 of the 1934 Act. The Committee shall interpret the Plan and prescribe such rules, regulations and procedures in connection with the operations of the Plan as it shall deem to be necessary and advisable for the administration of the Plan consistent with the purposes of the Plan. The Committee shall keep records of action taken at its meetings. A majority of the Committee shall constitute a quorum at any meeting, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee, shall be the acts of the Committee. 1 SECTION 2 Eligibility Those employees of the Corporation or any Subsidiary who share responsibility for the management, growth or protection of the business of the Corporation or any Subsidiary shall be eligible to be granted stock options (with or without alternative stock appreciation rights, cash payment rights, limited stock appreciation rights and/or limited cash payment rights) or stand-alone stock appreciation rights (with or without limited stock appreciation rights) and to receive restricted share, performance unit or bonus share awards as described herein. Subject to the provisions of the Plan, the Committee shall have full and final authority, in its discretion, to grant stock options (with or without alternative stock appreciation rights, cash payment rights, limited stock appreciation rights and/or limited cash payment rights) and stand-alone stock appreciation rights (with or without limited stock appreciation rights) and to award restricted shares, performance units and bonus shares as described herein and to determine the employees to whom any such grant or award shall be made and the number of shares or units to be covered thereby. In determining the eligibility of any employee, as well as in determining the number of shares or units covered by each grant or award of a stock option, stand-alone stock appreciation rights, restricted shares, performance units or bonus shares, whether alternative stock appreciation rights, cash payment rights, limited stock appreciation rights and/or limited cash payment rights shall be granted in conjunction with a stock option and whether limited stock appreciation rights shall be granted in conjunction with stand-alone stock appreciation rights, the Committee shall consider the position and the responsibilities of the employee being considered, the nature and value to the Corporation or a Subsidiary of his or her services, his or her present and/or potential contribution to the success of the Corporation or a Subsidiary and such other factors as the Committee may deem relevant. SECTION 3 Shares Available under the Plan The aggregate number of shares of the Common Stock which may be issued or delivered and as to which grants or awards of stock options, stock appreciation rights without related stock options ("stand-alone stock appreciation rights"), restricted shares, performance units or bonus shares may be made under the Plan is 500,000 shares, subject to adjustment and substitution as set forth in Section 7. If any stock option or stand-alone stock appreciation right granted under the Plan is cancelled by mutual consent or terminates or expires for any reason without having been exercised in full, the number of shares subject thereto shall again be available for purposes of the Plan; however, solely for the purpose of determining the number of shares of the Common Stock as to which grants or awards of stock options, stand-alone stock appreciation rights, restricted shares, performance units and bonus shares may be made under the Plan, to the extent that alternative stock appreciation rights, limited stock appreciation rights or limited cash payment rights granted in conjunction with a stock option or limited stock appreciation rights granted in conjunction with stand-alone stock appreciation rights are exercised and the stock option or stand-alone stock appreciation rights surrendered unexercised, such stock option or stand-alone stock appreciation rights shall be deemed to have been exercised instead, and the shares of the Common Stock which otherwise would have been issued or delivered upon the exercise of such stock option or the number of shares covered by such stand-alone stock appreciation rights shall not again be available for the grant or award of any other stock option, stand-alone stock appreciation rights, restricted shares, performance units or bonus shares under 2 the Plan. If any shares of the Common Stock are forfeited to the Corporation pursuant to the restrictions applicable to restricted shares awarded under the Plan, the number of shares so forfeited shall again be available for purposes of the Plan. To the extent any award of performance units is not earned or is paid in cash rather than shares, the number of shares covered thereby shall again be available for purposes of the Plan. The shares which may be issued or delivered under the Plan may be either authorized but unissued shares or treasury shares or partly each, as shall be determined from time to time by the Board. SECTION 4 Grant of Stock Options, Stock Appreciation Rights, Cash Payment Rights, Limited Stock Appreciation Rights and Limited Cash Payment Rights and Awards of Restricted Shares, Performance Units and Bonus Shares The Committee shall have authority, in its discretion, (a) to grant "incentive stock options" pursuant to Section 422A of the Internal Revenue Code of 1986 (the "Code"), to grant "nonstatutory stock options" (i.e., stock options which do not qualify under such Section 422A of the Code) or to grant both types of stock options (but not in tandem), (b) to grant stand-alone stock appreciation rights, (c) to award restricted shares, (d) to award performance units and (e) to award bonus shares. The Committee also shall have the authority, in its discretion, to grant stock appreciation rights ("alternative stock appreciation rights") in conjunction with incentive stock options or nonstatutory stock options with the effect provided in Section 5(D), to grant cash payment rights in conjunction with nonstatutory stock options with the effect provided in Section 5(E), to grant limited stock appreciation rights in conjunction with incentive stock options, nonstatutory stock options or stand-alone stock appreciation rights with the effect provided in Section 8(D) and to grant limited cash payment rights in conjunction with nonstatutory stock options with the effect provided in Section 8(E). Alternative stock appreciation rights and limited stock appreciation rights granted in conjunction with an incentive stock option may only be granted at the time the incentive stock option is granted. Cash payment rights and limited cash payment rights may not be granted in conjunction with incentive stock options. Alternative stock appreciation rights, cash payment rights, limited stock appreciation rights and/or limited cash payment rights granted in conjunction with a nonstatutory stock option may be granted either at the time the stock option is granted or at any time thereafter during the term of the stock option. Limited stock appreciation rights granted in conjunction with stand-alone stock appreciation rights may be granted either at the time the stand-alone stock appreciation rights are granted or at any time thereafter during the term of the stand-alone stock appreciation rights. No employee shall be granted stock options or stand-alone stock appreciation rights or awarded restricted, performance or bonus shares under the Plan (disregarding cancelled, terminated or expired stock options or stand-alone stock appreciation rights, forfeited restricted shares or performance shares not earned) for an aggregate number of shares in excess of ten percent (10%) of the total number of shares which may be issued or delivered under the Plan. For the 3 purposes of this limitation, any adjustment or substitution made pursuant to Section 7 with respect to shares which have not been issued or delivered under the Plan shall also be made with respect to (a) shares already issued or delivered under the Plan upon the exercise of stock options, an award of restricted or bonus shares or the earning of performance shares, (b) shares which would have been issued or delivered upon the exercise of stock options under the Plan but for the exercise of alternative stock appreciation rights, limited stock appreciation rights or limited cash payment rights in lieu of the exercise of stock options prior to such adjustment or substitution and (c) shares covered by previously exercised stand-alone stock appreciation rights or by previously exercised limited stock appreciation rights granted in conjunction with stand-alone stock appreciation rights. Notwithstanding any other provision contained in the Plan or in any stock option agreement, but subject to the possible exercise of the Committee's discretion contemplated in the last sentence of this Section 4, for incentive stock options granted after December 31, 1986, as required by Section 422A(b)(7) of the Code as enacted by the Tax Reform Act of 1986, the aggregate fair market value, determined as provided in Section 5(I) on the date of grant of such incentive stock options, of the shares with respect to which such incentive stock options are exercisable for the first time by an employee during any calendar year under all plans of the corporation employing such employee, any parent or subsidiary corporation of such corporation and any predecessor corporation of any such corporation shall not exceed $100,000. If the date on which one or more of such incentive stock options could first be exercised would be accelerated pursuant to any provision of the Plan or any stock option agreement or an amendment thereto, and the acceleration of such exercise date would result in a violation of the restriction required by Section 422A(b)(7) of the Code set forth in the preceding sentence, then, notwithstanding any such provision, but subject to the provisions of the next succeeding sentence, the exercise date of such incentive stock options shall be accelerated only to the extent, if any, that does not result in a violation of such restriction and, in such event, the exercise date of the incentive stock options with the lowest option price shall be accelerated first. If legislation is enacted modifying or removing the $100,000 restriction required by Section 422A(b)(7) of the Code as enacted by the Tax Reform Act of 1986, as of the effective date of such legislation the Committee may in its discretion modify or waive in accordance with such legislation the $100,000 restriction set forth above for incentive stock options granted (and to be granted) after December 31, 1986 and authorize the acceleration, if any, of the exercise date of incentive stock options up to the maximum extent permitted by such legislation (even if such incentive stock options are converted in part to nonstatutory stock options). SECTION 5 Terms and Conditions of Stock Options, Stock Appreciation Rights and Cash Payment Rights Stock options, stand-alone stock appreciation rights, alternative stock appreciation rights and cash payment rights granted under the Plan shall be subject to the following terms and conditions (stand-alone stock appreciation rights and alternative stock appreciation rights being herein sometimes referred to collectively as "stock appreciation rights"): 4 (A) The purchase price at which each stock option may be exercised (the "option price") and the base price for stand-alone stock appreciation rights (the "base price") shall be such price as the Committee, in its discretion, shall determine but shall not be less than one hundred percent (100%) of the fair market value per share of the Common Stock covered by the stock option or stand-alone stock appreciation rights on the date of grant, except that in the case of an incentive stock option granted to an employee who, immediately prior to such grant, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation or any Subsidiary (a "Ten Percent Employee"), the option price shall not be less than one hundred ten percent (110%) of such fair market value on the date of grant. If alternative stock appreciation rights are granted in conjunction with a stock option, the base price of the alternative stock appreciation rights shall equal the option price of the related stock option. For purposes of this Section 5(A), the fair market value of the Common Stock shall be determined as provided in Section 5(I). For purposes of this Section 5(A), an individual (i) shall be considered as owning not only shares of stock owned individually but also all shares of stock that are at the time owned, directly or indirectly, by or for the spouse, ancestors, lineal descendants and brothers and sisters (whether by the whole or half blood) of such individual and (ii) shall be considered as owning proportionately any shares owned, directly or indirectly, by or for any corporation, partnership, estate or trust in which such individual is a shareholder, partner or beneficiary. (B) The option price for each stock option shall be paid in full upon exercise and shall be payable in cash in United States dollars (including check, bank draft or money order); provided, however, that in lieu of such cash the person exercising the stock option may (if authorized by the Committee at the time of grant in the case of an incentive stock option, or at any time in the case of a nonstatutory stock option) pay the option price in whole or in part by delivering to the Corporation shares of the Common Stock having a fair market value on the date of exercise of the stock option, determined as provided in Section 5(I), equal to the option price for the shares being purchased; except that (i) any portion of the option price representing a fraction of a share shall in any event be paid in cash and (ii) no shares of the Common Stock which have been held for less than one year may be delivered in payment of the option price of a stock option. The date of exercise of a stock option shall be determined under procedures established by the Committee, and as of the date of exercise the person exercising the stock option shall be considered for all purposes to be the owner of the shares with respect to which the stock option has been exercised. Payment of the option price with shares shall not increase the number of shares of the Common Stock which may be issued or delivered under the Plan as provided in Section 3. (C) No stock option or stock appreciation right shall be exercisable by a grantee during employment during the first six months of its term, except that this limitation on exercise shall not apply if Section 8(B) becomes applicable. No incentive stock option shall be exercisable after the expiration of ten years (five years in the case of a Ten Percent Employee) from the date of grant. No nonstatutory stock option or stand-alone stock appreciation rights shall be exercisable after the expiration of ten years and six months from the date of grant. A stock option or stock appreciation rights to the extent exercisable at any time may be exercised in whole or in part. Except as provided in the last sentence of the next to last paragraph of Section 8(D), alternative stock appreciation rights granted in conjunction with a stock option may only be exercised when and to the extent the stock option may be exercised and only by the same person who is entitled to exercise the stock option except that alternative stock appreciation rights granted in conjunction with an incentive stock option shall not be exercisable unless the fair market value of the Common Stock on the date of exercise exceeds the option price of the shares subject to the incentive stock option. (D) A person exercising stock appreciation rights shall be entitled to receive from the Corporation that number of shares of the Common Stock having an aggregate fair market value on the date of exercise of the stock appreciation rights equal to the excess of the fair market value of one share of the Common Stock on such date of exercise over the base price per share times the number of shares covered by the stock appreciation rights, or portion thereof, which are exercised, except that cash shall be paid by the Corporation in lieu of 5 a fraction of a share. At the time alternative stock appreciation rights are exercised, the stock option or portion thereof related thereto shall be surrendered unexercised to the Corporation. To the extent that alternative stock appreciation rights are exercised, the stock option, or portion thereof, which is surrendered unexercised and any limited stock appreciation rights or limited cash payment rights granted in conjunction with such stock option, or portion thereof, shall automatically terminate. To the extent that stand-alone stock appreciation rights are exercised, any limited stock appreciation rights granted in conjunction with such stand-alone stock appreciation rights, or the portion thereof which is exercised, shall automatically terminate. The Committee shall have the authority, in its discretion, to determine whether the obligation of the Corporation upon exercise of stock appreciation rights shall be paid in cash or partly in cash and partly in shares, except that the Corporation shall not pay to any person who is subject to the provisions of Section 16(b) of the 1934 Act at the time of exercise of stock appreciation rights any portion of the obligation of the Corporation in cash (except cash in lieu of a fraction of a share) unless and until at least six months have elapsed from the date of grant of the stock appreciation rights and unless such stock appreciation rights are exercised during the period beginning on the third and ending on the twelfth business day following the date of release for publication of the quarterly or annual summary statements of sales and earnings of the Corporation. The date of exercise of stock appreciation rights shall be determined under procedures established by the Committee, and payment under this Section 5(D) shall be made by the Corporation as soon as practicable after the date of exercise. As of the date of exercise, the person exercising the stock appreciation rights shall be considered for all purposes to be the owner of any shares which are to be issued or delivered upon the exercise of the stock appreciation rights. To the extent that the stock option in conjunction with which alternative stock appreciation rights have been granted is exercised, cancelled, terminates or expires, the alternative stock appreciation rights shall be cancelled. For the purposes of this Section 5(D), the fair market value of the Common Stock shall be determined as provided in Section 5(I). (E) Cash payment rights granted in conjunction with a nonstatutory stock option shall entitle the person who is entitled to exercise the stock option, upon exercise of the stock option or any portion thereof, to receive cash from the Corporation (in addition to the shares to be received upon exercise of the stock option) equal to such percentage as the Committee, in its discretion, shall determine not greater than one hundred percent (100%) of the excess of the fair market value of a share of the Common Stock on the date of exercise of the stock option (or on the alternative date provided for in the following sentence) over the option price per share of the stock option times the number of shares covered by the stock option, or portion thereof, which is exercised. If any such person is subject to the provisions of Section 16(b) of the 1934 Act at the time of exercise of the stock option, the amount of such cash payment shall be determined as of an alternative date which shall be the day on which the restrictions imposed by Section 16(b) of the 1934 Act no longer apply for purposes of Section 83 of the Code. Payment of the cash provided for in this Section 5(E) shall be made by the Corporation as soon as practicable after the time the amount payable is determined. For purposes of this Section 5(E), the fair market value of the Common Stock shall be determined as provided in Section 5(I). (F) No stock option or stock appreciation rights shall be transferable by the grantee otherwise than by Will, or if the grantee dies intestate, by the laws of descent and distribution of the state of domicile of the grantee at the time of death. All stock options and stock appreciation rights shall be exercisable during the lifetime of the grantee only by the grantee. (G) Subject to the provisions of Section 4 in the case of incentive stock options, unless the Committee, in its discretion, shall otherwise determine: (i) If the employment of a grantee who is not disabled within the meaning of Section 422A(c)(7) of the Code (a "Disabled Grantee") is voluntarily terminated with the consent of the Corporation or a Subsidiary or a grantee retires under any retirement plan of the Corporation or a Subsidiary, any then outstanding incentive stock option held by such grantee shall be exercisable by the grantee (but only to the extent exercisable by the grantee immediately prior to the termination of employment) at any time prior to the expiration date of such incentive stock option or within three months after the date of termination of employment, whichever is the shorter period; 6 (ii) If the employment of a grantee who is not a Disabled Grantee is voluntarily terminated with the consent of the Corporation or a Subsidiary or a grantee retires under any retirement plan of the Corporation or a Subsidiary, any then outstanding nonstatutory stock option or stand-alone stock appreciation rights held by such grantee shall be exercisable by the grantee (but only to the extent exercisable by the grantee immediately prior to the termination of employment) at any time prior to the expiration date of such nonstatutory stock option or stand-alone stock appreciation rights or within one year after the date of termination of employment, whichever is the shorter period; (iii) If the employment of a grantee who is a Disabled Grantee is voluntarily terminated with the consent of the Corporation or a Subsidiary, any then outstanding stock option or stand-alone stock appreciation rights held by such grantee shall be exercisable by the grantee in full (whether or not so exercisable by the grantee immediately prior to the termination of employment) by the grantee at any time prior to the expiration date of such stock option or stand-alone stock appreciation rights or within one year after the date of termination of employment, whichever is the shorter period; (iv) Following the death of a grantee during employment, any outstanding stock option or stand-alone stock appreciation rights held by the grantee at the time of death shall be exercisable in full (whether or not so exercisable by the grantee immediately prior to the death of the grantee) by the person entitled to do so under the Will of the grantee, or, if the grantee shall fail to make testamentary disposition of the stock option or stand-alone stock appreciation rights or shall die intestate, by the legal representative of the grantee at any time prior to the expiration date of such stock option or stand-alone stock appreciation rights or within one year after the date of death, whichever is the shorter period; (v) Following the death of a grantee after termination of employment during a period when a stock option or stand-alone stock appreciation rights are exercisable, any outstanding stock option or stand-alone stock appreciation rights held by the grantee at the time of death shall be exercisable by such person entitled to do so under the Will of the grantee or by such legal representative (but only to the extent the stock option or stand-alone stock appreciation rights were exercisable by the grantee immediately prior to the death of the grantee) at any time prior to the expiration date of such stock option or stand-alone stock appreciation rights or within one year after the date of death, whichever is the shorter period; and (vi) Unless the exercise period of a stock option or stand-alone stock appreciation rights following termination of employment has been extended as provided in Section 8(C), if the employment of a grantee terminates for any reason other than voluntary termination with the consent of the Corporation or a Subsidiary, retirement under any retirement plan of the Corporation or a Subsidiary or death, all outstanding stock options and stand-alone stock appreciation rights held by the grantee at the time of such termination of employment shall automatically terminate. 7 Whether termination of employment is a voluntary termination with the consent of the Corporation or a Subsidiary and whether a grantee is a Disabled Grantee shall be determined in each case, in its discretion, by the Committee and any such determination by the Committee shall be final and binding. If a grantee of a stock option, stock appreciation rights, restricted shares or performance units engages in the operation or management of a business (whether as owner, partner, officer, director, employee or otherwise and whether during or after termination of employment) which is in competition with the Corporation or any of its Subsidiaries, the Committee may immediately terminate all outstanding stock options and stock appreciation rights held by the grantee, declare forfeited all restricted shares held by the grantee as to which the restrictions have not yet lapsed and terminate all outstanding performance unit awards held by the grantee for which the applicable Performance Period has not been completed; provided, however, that this sentence shall not apply if the exercise period of a stock option or stock appreciation rights following termination of employment has been extended as provided in Section 8(C), if the lapse of the restrictions applicable to restricted shares has been accelerated as provided in Section 8(F) or if a performance unit has been deemed to have been earned as provided in Section 8(G). Whether a grantee has engaged in the operation or management of a business which is in competition with the Corporation or any of its Subsidiaries shall also be determined, in its discretion, by the Committee, and any such determination by the Committee shall be final and binding. (H) All stock options, stock appreciation rights and cash payment rights shall be confirmed by an agreement, or an amendment thereto, which shall be executed on behalf of the Corporation by the Chief Executive Officer (if other than the President), the President or any Vice President and by the grantee. (I) Fair market value of the Common Stock shall be the mean between the following prices, as applicable, for the date as of which fair market value is to be determined as quoted in The Wall Street Journal (or in such other reliable publication as the Committee, in its discretion, may determine to rely upon): (a) if the Common Stock is listed on the New York Stock Exchange, the highest and lowest sales prices per share of the Common Stock as quoted in the NYSE-Composite Transactions listing for such date, (b) if the Common Stock is not listed on such exchange, the highest and lowest sales prices per share of Common Stock for such date on (or on any composite index including) the principal United States securities exchange registered under the 1934 Act on which the Common Stock is listed, or (c) if the Common Stock is not listed on any such exchange, the highest and lowest sales prices per share of the Common Stock for such date on the National Association of Securities Dealers Automated Quotations System or any successor system then in use ("NASDAQ"). If there are no such sale price quotations for the date as of which fair market value is to be determined but there are such sale price quotations within a reasonable period both before and after such date, then fair market value shall be determined by taking a weighted average of the means between the highest and lowest sales prices per share of the Common Stock as so quoted on the nearest date before and the nearest date after the date as of which fair market value is to be determined. The average should be weighted inversely by the respective numbers of trading days between the selling dates and the date as of which fair market value is to be determined. If there are no such sale price quotations on or within a reasonable period both before and after the date as of which fair market value is to be determined, then fair market value of the Common Stock shall be the mean between the bona fide bid and asked prices per share of Common Stock as so quoted for such date on NASDAQ, or if none, the weighted average of the means between such bona fide bid and asked prices on the nearest trading date before and the nearest trading date after the date as of which fair market value is to be determined, if both such dates are within a reasonable period. The average is to be determined in the manner described above in this Section 5(I). If the fair market value of the Common Stock cannot be determined on the basis previously set forth in this Section 5(I) on the date as of which fair market value is to be determined, the Committee shall in good faith determine the fair market value of the Common Stock on such date. Fair market value shall be determined without regard to any restriction other than a restriction which, by its terms, will never lapse. 8 (J) The obligation of the Corporation to issue or deliver shares of the Common Stock under the Plan shall be subject to (i) the effectiveness of a registration statement under the Securities Act of 1933, as amended, with respect to such shares, if deemed necessary or appropriate by counsel for the Corporation, (ii) the condition that the shares shall have been listed (or authorized for listing upon official notice of issuance) upon each stock exchange, if any, on which the Common Stock shares may then be listed and (iii) all other applicable laws, regulations, rules and orders which may then be in effect. Subject to the foregoing provisions of this Section and the other provisions of the Plan, any stock option or stock appreciation rights granted under the Plan may be exercised at such times and in such amounts and be subject to such restrictions and other terms and conditions, if any, as shall be determined, in its discretion, by the Committee and set forth in the agreement referred to in Section 5(H), or an amendment thereto. SECTION 6 Terms and Conditions of Restricted Share, Performance Unit and Bonus Share Awards (A) Restricted Shares. Restricted share awards shall be evidenced by a written agreement in the form prescribed by the Committee in its discretion, which shall set forth the number of shares of the Common Stock awarded, the restrictions imposed thereon (including, without limitation, restrictions on the right of the grantee to sell, assign, transfer or encumber such shares while such shares are subject to other restrictions imposed under this Section 6), the duration of such restrictions, events (which may, in the discretion of the Committee, include performance-based events) the occurrence of which would cause a forfeiture of the restricted shares and such other terms and conditions as the Committee in its discretion deems appropriate. Restricted share awards shall be effective only upon execution of the applicable restricted share agreement on behalf of the Corporation by the Chief Executive Officer (if other than the President), the President or any Vice President, and by the grantee. Following a restricted share award and prior to the lapse or termination of the applicable restrictions, the Committee shall deposit share certificates for such restricted shares in escrow. Upon the lapse or termination of the applicable restrictions (and not before such time), the grantee shall be issued or transferred share certificates for such restricted shares. From the date a restricted share award is effective, the grantee shall be a shareholder with respect to all the shares represented by such certificates and shall have all the rights of a shareholder with respect to all such shares, including the right to vote such shares and to receive all dividends and other distributions paid with respect to such shares, subject only to the restrictions imposed by the Committee. 9 (B) Performance Units. The Committee may award performance units which shall be earned by an awardee based on the level of performance over a specified period of time by the Corporation, a Subsidiary or Subsidiaries, any branch, department or other portion thereof or the awardee individually, as determined by the Committee. For the purposes of the grant of performance units, the following definitions shall apply: (i) "performance unit" shall mean an award, expressed in dollars or shares of Common Stock, granted to an awardee with respect to a Performance Period. Awards expressed in dollars may be established as fixed dollar amounts, as a percentage of salary, as a percentage of a pool based on earnings of the Corporation, a Subsidiary or Subsidiaries or any branch, department or other portion thereof or in any other manner determined by the Committee in its discretion, provided that the amount thereof shall be capable of being determined as a fixed dollar amount as of the close of the Performance Period. (ii) "Performance Period" shall mean an accounting period of the Corporation or a Subsidiary of not less than one year, as determined by the Committee in its discretion. (iii) "Performance Target" shall mean that level of performance established by the Committee which must be met in order for the performance unit to be fully earned. The Performance Target may be expressed in terms of earnings per share, return on assets, asset growth, ratio of capital to assets or such other level or levels of accomplishment by the Corporation, a Subsidiary or Subsidiaries, any branch, department or other portion thereof or the awardee individually as may be established or revised from time to time by the Committee. 9 (iv) "Minimum Target" shall mean a minimal level of performance established by the Committee which must be met before any part of the performance unit is earned. The Minimum Target may be the same as or less than the Performance Target in the discretion of the Committee. (v) "performance shares" shall mean shares of Common Stock issued or delivered in payment of earned performance units. An awardee shall earn the performance unit in full by meeting the Performance Target for the Performance Period. If the Minimum Target has not been attained at the end of the Performance Period, no part of the performance unit shall have been earned by the awardee. If the Minimum Target is attained but the Performance Target is not attained, the portion of the performance unit earned by the awardee shall be determined on the basis of a formula established by the Committee. At any time prior to the end of a Performance Period, the Committee may adjust downward (but not upward) the Performance Target and/or the Minimum Target as a result of major events unforseen at the time of the performance unit award, such as changes in the economy, the industry, laws affecting the operations of the Corporation or a Subsidiary or any other event the Committee determines would have a significant impact upon the probability of attaining the previously established Performance Target. Payment of earned performance units shall be made to awardees following the close of the Performance Period as soon as practicable after the time the amount payable is determined by the Committee. Payment in respect of earned performance units, whether expressed in dollars or shares, may be made in cash, in shares of 10 Common Stock, or partly in cash and partly in shares of Common Stock, as determined by the Committee at the time of payment. For this purpose, performance units expressed in dollars shall be converted to shares, and performance units expressed in shares shall be converted to dollars, based on the fair market value of the Common Stock, determined as provided in Section 5(I), as of the date the amount payable is determined by the Committee. If prior to the close of the Performance Period the employment of an awardee of performance units is voluntarily terminated with the consent of the Corporation or a Subsidiary or the awardee retires under any retirement plan of the Corporation or a Subsidiary or the awardee dies during employment, the Committee may in its absolute discretion determine to pay all or any part of the performance unit based upon the extent to which the Committee determines the Performance Target or Minimum Target has been achieved as of the date of termination of employment, retirement or death, the period of time remaining until the close of the Performance Period and/or such other factors as the Committee may deem relevant. If the Committee in its discretion determines that all or any part of the performance unit shall be paid, payment shall be made to the awardee or his or her estate as promptly as practicable following such determination and may be made in cash, in shares of Common Stock, or partly in cash and partly in shares of Common Stock, as determined by the Committee at the time of payment. For this purpose, performance units expressed in dollars shall be converted to shares, and performance units expressed in shares shall be converted to dollars, based on the fair market value of the Common Stock, determined as provided in Section 5(I), as of the date the amount payable is determined by the Committee. Except as otherwise provided in Section 8(G), if the employment of an awardee of performance units terminates prior to the close of a Performance Period for any reason other than voluntary termination with the consent of the Corporation or a Subsidiary, retirement under any retirement plan of the Corporation or a Subsidiary or death, the performance units of the awardee shall be deemed not to have been earned, and no portion of such performance units may be paid. Whether termination of employment is a voluntary termination with the consent of the Corporation or a Subsidiary shall be determined, in its discretion, by the Committee. Any determination by the Committee on any matter with respect to performance units shall be final and binding on both the Corporation and the awardee. 10 Performance unit awards shall be evidenced by a written agreement in the form prescribed by the Committee which shall set forth the amount or manner of determining the amount of the performance unit, the Performance Period, the Performance Target and any Minimum Target and such other terms and conditions as the Committee in its discretion deems appropriate. Performance unit awards shall be effective only upon execution of the applicable performance unit agreement on behalf of the Corporation by the Chief Executive Officer (if other than the President), the President or any Vice President, and by the awardee. (C) Bonus Shares. The Committee shall have the authority in its discretion to award bonus shares of Common Stock to eligible employees from time to time in recognition of the contribution of the awardee to the performance of the Corporation, a Subsidiary or Subsidiaries, or any branch, department or other portion thereof, in recognition of the awardee's individual performance or on the basis of such other factors as the Committee may deem relevant. 11 SECTION 7 Adjustment and Substitution of Shares If a dividend or other distribution shall be declared upon the Common Stock payable in shares of the Common Stock, the number of shares of the Common Stock then subject to any outstanding stock options, stock appreciation rights or restricted share, performance unit or bonus share awards and the number of shares of the Common Stock which may be issued or delivered under the Plan but are not then subject to outstanding stock options, stock appreciation rights or restricted share, performance unit or bonus share awards shall be adjusted by adding thereto the number of shares of the Common Stock which would have been distributable thereon if such shares had been outstanding on the date fixed for determining the shareholders entitled to receive such stock dividend or distribution. If the outstanding shares of the Common Stock shall be changed into or exchangeable for a different number or kind of shares of stock or other securities of the Corporation or another corporation, whether through reorganization, reclassification, recapitalization, stock split-up, combination of shares, merger or consolidation, then there shall be substituted for each share of the Common Stock subject to any then outstanding stock option, stock appreciation rights or restricted share, performance unit or bonus share award, and for each share of the Common Stock which may be issued or delivered under the Plan but which is not then subject to any outstanding stock option, stock appreciation rights or restricted share, performance unit or bonus share award, the number and kind of shares of stock or other securities into which each outstanding share of the Common Stock shall be so changed or for which each such share shall be exchangeable. In case of any adjustment or substitution as provided for in this Section 7, the aggregate option price for all shares subject to each then outstanding stock option and the aggregate base price for all shares subject to each then outstanding grant of stock appreciation rights prior to such adjustment or substitution shall be the aggregate option price or base price for all shares of stock or other securities (including any fraction) to which such shares shall have been adjusted or which shall have been substituted for such shares. Any new option price or base price per share shall be carried to at least three decimal places with the last decimal place rounded upwards to the nearest whole number. No adjustment or substitution provided for in this Section 7 shall require the Corporation to issue or sell a fraction of a share or other security. Accordingly, all fractional shares or other securities which result from any such adjustment or substitution shall be eliminated and not carried forward to any subsequent adjustment or substitution. Owners of restricted shares shall be treated in the same manner as the Corporation treats owners of its Common Stock with respect to fractional shares created by an adjustment or substitution of shares, except that any property or cash paid in lieu of a fractional share shall be subject to restrictions similar to those applicable to the restricted shares exchanged therefor. If any such adjustment or substitution provided for in this Section 7 requires the approval of shareholders in order to enable the Corporation to grant incentive stock options, then no such adjustment or substitution shall be made without the required shareholder approval. Notwithstanding the foregoing, in the case of incentive stock options, if the effect of any such adjustment or substitution would be to cause the stock option to fail to continue to qualify as an incentive stock option or to cause a modification, extension or renewal of such stock option within the meaning of Section 425 of the Code, the Committee may elect that such adjustment or substitution not be made but rather shall use reasonable efforts to effect such other adjustment of each then outstanding stock option as the Committee, in its discretion, shall deem equitable and which will not result in any disqualification, modification, extension or renewal (within the meaning of Section 425 of the Code) of such incentive stock option. 12 SECTION 8 Additional Rights in Certain Events (A) Definitions. For purposes of this Section 8, the following terms shall have the following meanings: (1) The term "Person" shall be used as that term is used in Sections 13(d) and 14(d) of the 1934 Act. (2) Beneficial Ownership shall be determined as provided in Rule 13d-3 under the 1934 Act as in effect on the effective date of the Plan. (3) "Voting Shares" shall mean all securities of a company entitling the holders thereof to vote in an annual election of Directors (without consideration of the rights of any class of stock other than the Common Stock to elect Directors by a separate class vote); and a specified percentage of "Voting Power" of a company shall mean such number of the Voting Shares as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors (without consideration of the rights of any class of stock other than the Common Stock to elect Directors by a separate class vote). (4) "Tender Offer" shall mean a tender offer or exchange offer to acquire securities of the Corporation (other than such an offer made by the Corporation or any Subsidiary), whether or not such offer is approved or opposed by the Board. (5) "Section 8 Event" shall mean the date upon which any of the following events occurs: (a) The Corporation acquires actual knowledge that any Person other than the Corporation, a Subsidiary or any employee benefit plan(s) sponsored by the Corporation has acquired the Beneficial Ownership, directly or indirectly, of securities of the Corporation entitling such Person to 25% or more of the Voting Power of the Corporation; (b) (i) A Tender Offer is made to acquire securities of the Corporation entitling the holders thereof to 50% or more of the Voting Power of the Corporation; or (ii) Voting Shares are first purchased pursuant to any other Tender Offer; or (c) At any time less than 60% of the members of the Board of Directors shall be individuals who were either (i) Directors on the effective date of the Plan or (ii) individuals whose election, or nomination for election, was approved by a vote (including a vote approving a merger or other agreement providing for the membership of such individuals on the Board of Directors) of at least two-thirds of the Directors then still in office who were Directors on the effective date of the Plan or who were so approved. (B) Acceleration of the Exercise Date of Stock Options and Stock Appreciation Rights. Subject to the provisions of Section 4 in the case of incentive stock options, unless the agreement referred to in Section 5(H), or an amendment thereto, shall otherwise provide, notwithstanding any other provision contained in the Plan, in case any "Section 8 Event" occurs (i) all outstanding stock options and stock appreciation rights shall become immediately and fully exercisable whether or not otherwise exercisable by their terms, (ii) payment by the Corporation upon exercise of stock appreciation rights held by a person who is subject to the provisions of Section 16(b) of the 1934 Act (which stock appreciation rights have been held less than six months at the time of exercise following a Section 8 Event) shall be made by the Corporation in shares of Common Stock (except that cash may be paid in lieu of a fraction of a share) and (iii) payment by the Corporation upon exercise of stock appreciation rights held by such a person (which stock appreciation rights have been held at least six months on the date of exercise following a Section 8 Event) shall be made in cash if the date of exercise is within sixty (60) days following a Section 8 Event, whether or not the date of exercise is within one of the ten (10) day periods provided for in Section 5(D). (C) Extension of the Expiration Date of Stock Options and Stock Appreciation Rights. Subject to the provisions of Section 4 in the case of incentive stock options, unless the agreement referred to in Section 5(H), or an amendment thereto, shall otherwise provide, notwithstanding any other provision contained in the Plan, all stock options and stock appreciation rights held by a grantee whose employment with the Corporation or a Subsidiary terminates within one year of any Section 8 Event for any reason other than voluntary termination with the consent of the Corporation or a Subsidiary, retirement under any retirement plan of the Corporation or a Subsidiary or death shall be exercisable for a period of three months from the date of such termination of employment, but in no event after the expiration date of the stock option. 13 (D) Limited Stock Appreciation Rights. Limited stock appreciation rights granted in conjunction with a stock option or in conjunction with stand-alone stock appreciation rights shall be exercisable for a period of sixty (60) days following any Section 8 Event by the same person who is entitled to exercise the stock option or stand-alone stock appreciation rights. Limited stock appreciation rights entitle such person to surrender the stock option or stand-alone stock appreciation rights, or any portion thereof, unexercised and to receive from the Corporation in exchange therefor cash in the amount provided for below in this Section 8(D). To the extent that limited stock appreciation rights are exercised, the stock option or stand-alone stock appreciation rights, or portion thereof, which is surrendered unexercised and any alternative stock appreciation rights or limited cash payment rights granted in conjunction with such stock option, or portion thereof, shall automatically terminate. Notwithstanding the foregoing, limited stock appreciation rights may not be exercised by a person who is subject to the provisions of Section 16(b) of the 1934 Act at the time of exercise of the limited stock appreciation rights unless and until at least six months have elapsed from the date of grant of the limited stock appreciation rights; provided, however, that if limited stock appreciation rights are granted in conjunction with a stock option as to which alternative stock appreciation rights have previously been granted, the limited stock appreciation rights shall be deemed to have been granted at the time of grant of such alternative stock appreciation rights, and if limited stock appreciation rights are granted in conjunction with stand-alone stock appreciation rights, the limited stock appreciation rights shall be deemed to have been granted at the time of grant of such stand-alone stock appreciation rights. Limited stock appreciation rights granted in conjunction with an incentive stock option shall also not be exercisable unless the then fair market value of the Common Stock, determined as provided in Section 5(I), exceeds the option price of such incentive stock option and unless such incentive stock option is exercisable. Cash is payable to a person who is subject to the provisions of Section 16(b) of the 1934 Act at the time of exercise of limited stock appreciation rights whether or not the date of exercise is within one of the ten (10) day periods provided for in Section 5(D). 14 The person exercising limited stock appreciation rights granted in conjunction with a nonstatutory stock option or in conjunction with stand-alone stock appreciation rights shall receive cash in respect of each share of the Common Stock subject to the stock option or stand-alone stock appreciation rights, or portion thereof, which is surrendered unexercised in an amount equal to the excess of the fair market value of such share on the date of exercise over the option price of such stock option or the base price of such stand-alone stock appreciation rights, as the case may be. For this purpose, fair market value shall mean the highest closing sale price of the Common Stock quoted by such reliable source as the Committee, in its discretion, may rely upon during the period beginning on the 90th day prior to the date on which the limited stock appreciation rights are exercised and ending on such date (or if no such sale price quotation is available, the highest mean between the bona fide bid and asked prices on any date during such period) (such closing sale price or such mean, as applicable, being hereinafter referred to as "such closing sale price"), except that (i) in the event any Person acquires Beneficial Ownership, directly or indirectly, of securities of the Corporation entitling such Person to 25% or more of the Voting Power of the Corporation within the meaning of Section 8(A)(5)(a), fair market value shall mean the greater of such closing sale price or the highest price per share paid for the Common Stock shown on the Statement on Schedule 13D, or any amendment thereto, filed by the Person acquiring such beneficial ownership and (ii) in the event of a Tender Offer, fair market value shall mean the greater of such closing sale price or the highest price paid for the Common Stock pursuant to any Tender Offer in effect at any time beginning on the 90th day prior to the date on which the limited stock appreciation rights are exercised and ending on such date. In the event such value cannot be determined on the date of exercise of the limited stock appreciation rights, such value shall be determined by the Committee as promptly as practicable after such exercise and payment by the Corporation shall be made as promptly as practicable after such determination. Any non-cash consideration received by the holders of any shares of the Common Stock in a Tender Offer shall be valued at the higher of (i) the valuation placed thereon by the Person making the Tender Offer and (ii) the valuation placed thereon by the Committee. The person exercising limited stock appreciation rights granted in conjunction with an incentive stock option shall receive cash in respect of each share of the Common Stock subject to the stock option, or portion thereof, which is surrendered unexercised in an amount equal to the excess of the fair market value of such share on the date of exercise, determined as provided in Section 5(I), over the option price of such stock option. The date of exercise of limited stock appreciation rights shall be determined under procedures established by the Committee, and payment under this Section 8(D) shall be made by the Corporation as soon as practicable after the date of exercise. To the extent that the stock option or stand-alone stock appreciation right in conjunction with which the limited stock appreciation rights shall have been granted is exercised, cancelled, terminates or expires, the limited stock appreciation rights shall be cancelled. If limited stock appreciation rights are granted in conjunction with a stock option as to which alternative stock appreciation rights also have been granted or in conjunction with stand-alone stock appreciation rights, the alternative stock appreciation rights or stand-alone stock appreciation rights may not be exercised during any period during which the limited stock appreciation rights may be exercised. All limited stock appreciation rights shall be confirmed by an agreement, or an amendment thereto, which shall be executed on behalf of the Corporation by the Chief Executive Officer (if other than the President), the President or any Vice President and by the grantee. Subject to the foregoing provisions of this 15 Section 8(D) and the other provisions of the Plan, limited stock appreciation rights granted under the Plan shall be subject to such other terms and conditions as shall be determined, in its discretion, by the Committee and set forth in the agreement referred to in Section 5(H), or an amendment thereto. (E) Limited Cash Payment Rights. Limited cash payment rights granted in conjunction with a nonstatutory stock option shall be exercisable for a period of sixty (60) days following any Section 8 Event by the person who is entitled to exercise the nonstatutory stock option and shall entitle such person to surrender the nonstatutory stock option, or any portion thereof, unexercised and to receive from the Corporation in exchange therefor cash in an amount equal to two (2) times the amount provided for in the third paragraph of Section 8(D) multiplied by such percentage not greater than 100% as the Committee, in its discretion, shall determine. For purposes of the third paragraph of Section 8(D), the words "limited cash payment rights" shall be deemed to be substituted for "limited stock appreciation rights." To the extent that limited cash payment rights are exercised, the nonstatutory stock option, or portion thereof, which is surrendered unexercised and any alternative stock appreciation rights or limited stock appreciation rights granted in conjunction with such stock option, or portion thereof, shall automatically terminate. Notwithstanding the foregoing, limited cash payment rights may not be exercised by a person who is subject to the provisions of Section 16(b) of the 1934 Act at the time of exercise unless and until at least six months have elapsed from the date of grant of the limited cash payment rights. The date of exercise of limited cash payment rights shall be determined under procedures established by the Committee, and payment of the cash provided for in this Section 8(E) shall be made by the Corporation as soon as practicable after the date of exercise. To the extent that the nonstatutory stock option in respect of which limited cash payment rights shall have been granted is exercised, cancelled, terminates or expires, the limited cash payment rights shall be cancelled. All limited cash payment rights shall be confirmed by an agreement, or an amendment thereto, which shall be executed on behalf of the Corporation by the Chief Executive Officer (if other than the President), the President or any Vice President and by the grantee. Subject to the foregoing provisions of this Section 8(E) and the other provisions of the Plan, limited cash payment rights granted under the Plan shall be subject to such other terms and conditions as shall be determined, in its discretion, by the Committee and set forth in the agreement referred to in Section 5(H), or an amendment thereto. (F) Lapse of Restrictions on Restricted Share Awards. If any "Section 8 Event" occurs prior to the scheduled lapse of all restrictions applicable to restricted share awards under the Plan, all such restrictions shall lapse upon the occurrence of any such "Section 8 Event" regardless of the scheduled lapse of such restrictions. (G) Payment of Performance Units. If any "Section 8 Event" occurs prior to the end of any Performance Period, all performance units awarded with respect to such Performance Period shall be deemed to have been fully earned as of the date of such Section 8 Event, regardless of the attainment or nonattainment of the Performance Target or any Minimum Target, and shall be paid to the awardees thereof as promptly as practicable thereafter. If the performance unit is not expressed as a fixed amount in dollars or shares, the Committee may provide in the performance unit agreement for the amount to be paid in the case of a Section 8 Event. 16 SECTION 9 Effect of the Plan on the Rights of Employees and Employer Neither the adoption of the Plan nor any action of the Board or the Committee pursuant to the Plan shall be deemed to give any employee any right to be granted a stock option (with or without alternative stock appreciation rights, cash payment rights, limited stock appreciation rights and/or limited cash payment rights) or stand-alone stock appreciation rights (with or without limited stock appreciation rights) or to be awarded restricted shares, performance units or bonus shares under the Plan. Nothing in the Plan, in any stock option, stock appreciation rights, cash payment rights, limited stock appreciation rights or limited cash payment rights granted under the Plan, in any restricted share, performance unit or bonus share award under the Plan or in any agreement providing for any of the foregoing shall confer any right to any employee to continue in the employ of the Corporation or any Subsidiary or interfere in any way with the rights of the Corporation or any Subsidiary to terminate the employment of any employee at any time. SECTION 10 Amendment The right to alter and amend the Plan at any time and from time to time and the right to revoke or terminate the Plan are hereby specifically reserved to the Board; provided always that no such revocation or termination shall terminate any outstanding stock options, stock appreciation rights, cash payment rights, limited stock appreciation rights or limited cash payment rights granted under the Plan or cause a revocation or a forfeiture of any restricted share, performance unit or bonus share award under the Plan; and provided further that no such alteration or amendment of the Plan shall, without shareholder approval (a) increase the total number of shares which may be issued or delivered under the Plan, (b) increase the total number of shares which may be covered by any stock options, stand-alone stock appreciation rights or restricted share, performance unit or bonus share awards granted to any one person, (c) change the minimum option price or base price, (d) make any changes in the class of employees eligible to receive incentive stock options or (e) extend any period set forth in the Plan during which stock options (with or without alternative stock appreciation rights, cash payment rights, limited stock appreciation rights and/or limited cash payment rights) or stand-alone stock appreciation rights (with or without limited stock appreciation rights) may be granted or restricted, performance or bonus shares may be awarded. No alteration, amendment, revocation or termination of the Plan shall, without the written consent of the holder of a stock option, stock appreciation rights, cash payment rights, limited stock appreciation rights, limited cash payment rights, restricted shares, performance units or bonus shares theretofore awarded under the Plan, adversely affect the rights of such holder with respect thereto. SECTION 11 Effective Date and Duration of Plan The effective date and date of adoption of the Plan shall be March 31, 1988, the date of adoption of the Plan by the Board, provided that such adoption of the Plan by the Board is approved by the affirmative vote of the holders of at least a majority of the outstanding shares of voting stock of the Corporation represented in person or by proxy at a meeting of such holders duly called, convened and held on or prior to March 30, 1989. No stock option, stock appreciation rights, limited stock appreciation rights or limited cash payment rights granted under the Plan may be exercised and no restricted shares, bonus shares or performance units payable in performance shares may be awarded until after such approval. No stock option, stock appreciation rights, cash payment rights, limited stock appreciation rights or limited cash payment rights may be granted and no restricted shares, bonus shares or performance units payable in performance shares may be awarded under the Plan subsequent to March 30, 1998. 17 EX-10.3 4 MANAGEMENT INCENTIVE COMPENSATION PLAN EXHIBIT 10.3 AUGUST 1997 KEYSTONE FINANCIAL, INC. MANAGEMENT INCENTIVE COMPENSATION PLAN AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1993 Working Copy - Includes First Amendment, effective 7/1/96 - - -------------------------------------------------------------------------------- -i- KEYSTONE FINANCIAL, INC. MANAGEMENT INCENTIVE COMPENSATION PLAN TABLE OF CONTENTS Page ARTICLE I OBJECTIVES........................................... 1 Section 1.01 Objectives........................................... 1 Section 1.02 Application of this Amended and Restated Plan........ 1 ARTICLE II DEFINITIONS.......................................... 2 Section 2.01 Definitions.......................................... 2 ARTICLE III ADMINISTRATION OF THE PLAN........................... 4 Section 3.01 Committee and Agents................................. 4 Section 3.02 Rules and Regulations................................ 4 Section 3.03 Quorum............................................... 4 Section 3.04 Plan Interpretation.................................. 4 Section 3.05 Notice of Participation.............................. 4 Section 3.06 Costs................................................ 4 Section 3.07 Unsecured Creditor................................... 4 Section 3.08 Authority of Board and Committee..................... 5 Section 3.09 Amendment, Modification or Termination............... 5 Section 3.10 Claim and Appeal Procedure........................... 5 ARTICLE IV PARTICIPANT ELIGIBILITY.............................. 7 Section 4.01 Designation of Groups................................ 7 Section 4.02 Participants......................................... 7 Section 4.03 New Participating Entities........................... 7 Section 4.04 Termination of Employment............................ 7 Section 4.05 Death, Retirement, Disability, Leave of Absence or Transfer...................................... 7 Section 4.06 Directors............................................ 7 1 ARTICLE V DETERMINATION OF INCENTIVE COMPENSATION AWARD AND DESCRETIONARY BONUS........................ 8 Section 5.01 Required Financial Performance Levels................ 8 Section 5.02 Performance Criteria................................. 8 Section 5.03 Determination of Salary Percentage and Allocation of Performance Criteria............................. 9 Section 5.04 Determination of Incentive Compensation Award........ 9 Section 5.05 Determination of Discretionary Bonus................. 9 ARTICLE VI PAYMENT TO PARTICIPANTS AND DEFERRALS................10 Section 6.01 Timing of Payment....................................10 Section 6.02 Payment in Common Stock..............................10 Section 6.03 Beneficiary Designation..............................11 Section 6.04 Deferral of Payment..................................11 Section 6.05 Deferral Account.....................................12 Section 6.06 Deemed Investment Elections..........................13 Section 6.07 Payment of Deferred Amounts..........................14 Section 6.08 Amount of Deferred Payment...........................15 Section 6.09 Automatic Cash Out...................................15 Section 6.10 Hardship Withdrawal..................................16 Section 6.11 Tax Withholding......................................16 ARTICLE VII MISCELLANEOUS PROVISIONS.............................18 Section 7.01 No Recourse..........................................18 Section 7.02 Expense..............................................18 Section 7.03 Merger or Consolidation..............................18 Section 7.04 Legal Costs..........................................18 Section 7.05 Gender and Number....................................18 Section 7.06 Construction.........................................18 Section 7.07 Non-alienation.......................................18 Section 7.08 No Employment Rights.................................19 Section 7.09 Minor or Incompetent.................................19 Section 7.10 Illegal or Invalid Provision.........................19 -2- ARTICLE I OBJECTIVES Section 1.01 Objectives. The Plan was originally adopted, and was and continues to be, designed to achieve the following objectives: (a) Increase the profitability and growth of Keystone Financial in a manner which is consistent with the goals of Keystone, its stockholders and its employees. (b) Provide executive compensation which is competitive with other bank holding companies and banks and provide the potential for payment of meaningful cash awards. (c) Attract and retain personnel of outstanding ability and encourage excellence in the performance of individual responsibilities. (d) Motivate and reward those members of management who contribute to the success of Keystone. (e) Allow the flexibility which permits revision and strengthening from time to time to reflect changing organizational goals and objectives. (f) The intent of this amended and restated Plan, which is effective as of January 1, 1993, is profit enhancement through quality performance. Section 1.02 - Application of this Amended and Restated Plan. The amended and restated Plan set forth herein is generally effective as of January 1, 1993. Certain provisions are effective on January 1, 1994 or later dates. To the extent there is any inconsistency between this amended and restated Plan and a Deferral Election filed with the Committee, or the time of payment provisions of the prior Plan, with respect to deferred Incentive Compensation Awards for Award Years which began prior to January 1, 1994, the Deferral Election or prior Plan time of payment provisions shall control. -1- ARTICLE II DEFINITIONS Section 2.01 - Definitions. As used herein, the following words and phrases shall have the meanings below, unless the context clearly indicates otherwise: (a) "Award Year" shall mean a calendar year beginning on or after January 1, 1993. (b) "Beneficiary" shall mean the person or persons, natural or legal, designated in writing by the Participant to receive any benefits under the Plan which may become payable in the event of the Participant's death or, if none is designated or surviving at the time of the Participant's death, the Participant's surviving spouse shall be the Beneficiary or, if there is no surviving spouse, then the estate of the Participant shall be the Beneficiary. (c) "Board" shall mean the Board of Directors of Keystone (d) "Committee" shall mean the Human Resources Committee of the Board. (e) "Deferral Account" shall mean the bookkeeping account established on the books and records of Keystone or a Participating Entity, as applicable, for a Partici- pant to reflect the deferred Incentive Compensation Award credited to the Participant for an Award Year and adjustments thereto under the various provisions of the Plan. The use of the term Deferral Account shall not mean, under any circumstances, that a Participant or Beneficiary, or the Participant's estate, shall have title to any specific assets of Keystone or a Participating Entity. (f) "Deferral Election" shall mean the written notice, in the form prescribed by the Committee or its delegate, filed with the Committee, which indicates the portion of an Incentive Compensation Award which the Participant elects to defer in accordance with the terms of the Plan. No Deferral Election shall be effective until it is received and acknowledged by the Committee or its delegate. (g) "Disability" shall mean the total and permanent disability of a Participant, as defined by any Long-Term Disability Plan, maintained by Keystone or a Participating Entity which is applicable to the Participant, as in effect at the time of determination. (h) "Employee" shall mean any common law employee of Keystone or a Participating Entity. (i) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. -2- (j) "Fair Market Value" shall mean the fair market value of one share of Keystone Financial, Inc. Common Stock as determined pursuant to Section 6.02. (k) "Financial Performance" shall mean the financial performance of Keystone and/or a Participating Entity as determined from time to time by the Committee or its delegate. (l) "Group" shall mean the group to which a Participant is assigned in accordance with Section 4.01. (m) "Incentive Compensation Award" shall mean the dollar amount of compensation awarded to a Participant for an Award Year as determined under Article V of the Plan. (n) "Keystone" shall mean Keystone Financial, Inc. (o) "Participant" shall mean an Employee who has been designated by the Committee to be a participant in the Plan in accordance with Section 3.05, and only for as long as such designation remains in effect. (p) "Participating Entity" shall mean National Bank of the Main Line, Northern Central Bank, Mid-State Bank, Pennsylvania National Bank; American Trust Bank and American Trust Bank of West Virginia as of a date to be established by Keystone's Executive Vice President of Banking Group; and any other subsidiary of Keystone, affiliate bank of Keystone, or other affiliated entity of Keystone, which elects to participate in the Plan with respect to its Employees and is approved by the Board or the Committee to participate in the Plan, with such status as a Parti- cipating Entity and participation in the Plan ceasing automatically on the date the subsidiary or affiliate ceases to be a subsidiary or affiliate of Keystone. (q) "Plan" shall mean the Keystone Financial, Inc. Management Incentive Compensation Plan, amended and restated effective January 1, 1993, as set forth herein, and as it may be amended from time to time hereafter. (r) "Salary" shall mean the Participant's base salary from Keystone or a Participating Entity. -3- ARTICLE III ADMINISTRATION OF THE PLAN Section 3.01 - Committee and Agents. Full power and authority to administer the Plan shall be vested in the Committee. The Committee may appoint a secretary who may, but need not be, a member of the Committee. The Committee may also employ such other agents as it deems appropriate to assist it with the administration of the Plan. Section 3.02 - Rules and Regulations. The Committee shall, from time to time, establish rules, forms and procedures of general application for the administration of the Plan. Section 3.03 - Quorum. A majority of the members of the Committee shall constitute a quorum for purposes of transacting business relating to the Plan. The acts of a majority of the members present (in person, or by conference telephone) at any meeting of the Committee at which there is a quorum shall be valid acts of the Committee. Acts reduced to and approved unanimously in writing by all of the Committee members shall also be valid acts. Section 3.04 - Plan Interpretation. The Committee shall have the full power and authority to construe and interpret the Plan, and make all determinations of Incentive Compensation Awards under the Plan, approve all Employees who are to participate in the Plan, determine the Group to which a Participant is assigned under Section 4.01, and determine all facts and other issues relating to claims and appeals under the Plan. Section 3.05 - Notice of Participation. The Committee shall send a written notice, in the form prescribed by the Committee or its delegate, informing the Employee that he or she has been selected to be a Participant in the Plan and specifying the period for which such designation is to remain in effect. No Employee shall have the right to become a Participant and shall not be a Participant until the date specified in the notice. Furthermore, being designated a Participant does not guarantee an Employee that an Incentive Compensation Award will be earned or that such Employee will be permitted to defer receipt of an Incentive Compensation Award pursuant to Section 6.04. Section 3.06 - Costs. All costs and expenses involved in the administration of the Plan shall be borne by Keystone or the Participating Entity. Section 3.07 - Unsecured Creditor. The Plan constitutes a mere promise by Keystone or the Participating Entity to make benefit payments in the future. Keystone's and the Participating Entities' obligations under the Plan shall be unfunded and unsecured promises to pay. Keystone and the Participating Entities shall not be obligated under any circumstance to fund their respective financial obligations under the Plan. Any of them may, in its discretion, set aside funds in a trust or other vehicle, subject to the claims of its creditors, in order to assist it in meeting its obligations under the Plan, if such arrangement will not cause the Plan to be considered a funded deferred compensation plan under ERISA, or the Internal Revenue Code of 1986, as amended, and provided, further, -4- that any trust created by Keystone or a Participating Entity and any assets held by such trust to assist Keystone or the Participating Entity in meeting its obligations under the Plan will conform to the terms of the model trust, as described in Rev. Proc. 92-64, 1992-2 C.B. 422 or any successor. The Participants and their Beneficiaries shall have the status of, and their rights to receive payments of earned Incentive Compensation Awards shall be no greater than the rights of, general unsecured creditors of Keystone or the applicable Participating Entity. Section 3.08 - Authority of Board and Committee. Any determination or action of the Committee or the Board and the records of the Committee shall be final, conclusive and binding on all Participants and Beneficiaries, and their beneficiaries, heirs, personal representatives, executors and administrators, and upon Keystone, the Participating Entities and all other persons having or claiming to have any right or interest in or under the Plan. No Participant shall participate in any decision of the Board or the Committee which directly or indirectly affects the Participant's Deferral Election or Deferral Account. Section 3.09 - Amendment, Modification or Termination. The Board, in its sole discretion, may amend, modify or terminate the Plan at any time and from time to time, provided that no such amendment, modification, or termination shall reduce the Participant's or Beneficiary's vested interest in the Deferral Account as of the day before any such amendment, modification or termination, unless consented to by the affected Participant or by the Beneficiary if the Participant is deceased. Section 3.10 - Claim and Appeal Procedure. (a) In the event of a claim by a Participant or a Part- cipant's Beneficiary for or in respect of any benefit under the Plan or the method of payment thereof, such Participant or Beneficiary shall present the reason for his claim in writing to the Committee, in c/o Keystone HR Administration, Williamsport, or such other person or entity designated and communicated by the Committee. The Committee shall, within ninety (90) days after the receipt of such written claim send written notification to the Participant or Beneficiary as to its disposition, unless special circumstances require an extension of time for processing the claim. If such an extension of time for processing is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial ninety (90) day period. In no event shall such extension exceed a period of ninety (90) days from the end of such initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render the final decision. (b) In the event the claim is wholly or partially denied, the written notification shall state the specific reason or reasons for the denial, include specific references to pertinent Plan provisions on which the denial is based, provide an explanation of any addi- tional material or information necessary for the Participant or Beneficiary to perfect the claim and a statement of why such material or information is necessary, and set forth the procedure by which the Participant or Beneficiary may appeal the denial of the claim. If the claim has not been granted and notice is not furnished within the time period speci fied in the preceding paragraph, the claim shall be deemed denied for the purpose of proceeding to appeal in accordance with paragraph (b) below. -5- (c) In the event a Participant or Beneficiary wishes to appeal the denial of his claim, he may request a review of such denial by making written application to the Committee, in c/o Keystone HR Administration, Williamsport, or such other person or entity desig- nated and communicated by the Committee, within sixty (60) days after receipt of the written notice of denial (or the date on which such claim is deemed denied if written notice is not received within the applicable time period specified in paragraph (a) above). Such Participant or Beneficiary (or his duly authorized representative) may, upon written request to the Committee, review documents which are perti- nent to such claim, and submit in writing issues and comments in support of his position. Within sixty (60)days after receipt of the written appeal (unless an extension of time is necessary due to special circumstances or is agreed to by the parties, but in no event more than one hundred and twenty (120) days after such receipt), the Committee shall notify the Participant or Beneficiary of its final decision. Such final decision shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specific references to the pertinent Plan provisions on which the decision is based. If an extension of time for review is required because of special circumstances, written notice of the extension shall be furnished to the claimant prior to the commencement of the extension. If the claim has not been granted and written notice is not provided within the time period specified above, the appeal shall be deemed denied. (d) If a Participant or Beneficiary does not follow the procedures set forth in paragraphs (a) and (b) above, he shall be deemed to have waived his right to appeal benefit determinations under the Plan. In addition, the decisions, actions and records of the Committee shall be conclusive and binding upon Keystone, the Participating Entities and all persons having or claiming to have any right or interest in or under the Plan. -6- ARTICLE IV PARTICIPANT ELIGIBILITY Section 4.01 - Designation of Groups. An Employee who is designated by the Committee as a Participant for an Award Year shall be a member of a Group, as determined from time to time by the Committee or its delegate. With respect to a Participant who moves from one Group to another during an Award Year, such Participant shall be treated as a member of each Group for the period of time in that Group during the Award Year and the Participant's actual Salary for the period in each Group shall be used to calculate the Incentive Compensation Award applicable for the period of time in each Group. Section 4.02 - Participants. Except as otherwise provided in this Section 4.02, an Employee who is not a Participant as of the first day of an Award Year shall not be a Participant for that Award Year. A new Employee of Keystone or a Participating Entity hired during an Award Year, and an Employee promoted to a Group during the Award Year who was not a Participant at the beginning of the Award Year, may become a Participant during an Award Year and participate in the Plan for such Award Year on a pro-rata basis. Section 4.03 - New Participating Entities. Except as otherwise provided in this Section 4.03, a Participating Entity may only join the Plan as of the first day of an Award Year. An entity which becomes a subsidiary, affiliate bank, or other affiliate of Keystone during an Award Year or for other reasons is not participating in the Plan at the beginning of the Award Year may become a Participating Entity during an Award Year and participate in the Plan for such Award Year on a pro-rata basis, or other basis specified by the Committee, if the Participating Entity joins the Plan effective not later than six (6) months after the beginning of the Award Year. Notwithstanding the above, the Committee, in its sole discretion, may provide in writing that a Participating Entity shall join the Plan more than six (6) months after the beginning of an Award Year and shall specify in such writing the basis on which the Participating Entity's Participants shall be eligible for an Incentive Compensation Award for the first Award Year. Section 4.04 - Termination of Employment. A Participant who voluntarily or involuntarily terminates employment with Keystone and all Participating Entities prior to the end of an Award Year will forfeit any right to an Incentive Compensation Award for the Award Year during which termination occurs, except as otherwise provided in Section 4.05 below or as otherwise determined by the Committee or its delegate. Section 4.05 - Death, Retirement, Disability, Leave of Absence or Transfer. If, during an Award Year, a Participant dies, retires, terminates employment because of Disability, is granted a leave of absence, or is transferred to a non-Participating Entity or out of all Groups, the Committee may, at its discretion or under such uniform rules as it may prescribe, make a partial or full Incentive Compensation Award to the Participant for the Award Year. Section 4.06 - Directors. A member of the Board who is not an Employee in one of the Groups may not participate in the Plan. -7- ARTICLE V DETERMINATION OF INCENTIVE COMPENSATION AWARD AND DISCRETIONARY BONUS Section 5.01 - Required Financial Performance Levels. In order for an Incentive Compensation Award to be made for an Award Year, the following performance levels must be met: (a) The minimum level of Financial Performance established by the Committee for an Award Year for Keystone or a Participating Entity must be met before any Incentive Compensation Award based on Keystone's or such Participating Entity's Financial Performance can be made. (b) Keystone's Financial Performance for the Award Year must be at least two-thirds (or such other percentage established by the Committee) of the minimum level of Financial Performance established for Keystone under (a) above. (c) The Committee shall establish from time to time and communicate to Participants the performance rating required to apply the minimum, maximum and other intermediate percentages within the performance criteria established under Section 5.02 for purposes of calculating the Incentive Compensation Award for an Award Year; provided, however, that, notwith- standing any other provision of the Plan to the contrary, any Participant who receives a rating of "unsatisfactory" on any performance appraisal report during an Award Year shall be ineligible for an Incentive Compensation Award for that Award Year, and any Participant who receives a rating of "meets minimal expectations" on any performance appraisal report during an Award Year shall be eligible for all or part of any Incentive Compensation Award for that Award Year only if approved by the Committee upon recommendation of Keystone executive management. Section 5.02 - Performance Criteria. (a) The Incentive Compensation Award for a Participant may be calculated in part on the basis of Keystone's Financial Performance and in part on the basis of the Financial Performance of the Participating Entity who employs the Participant. (b) Effective beginning with the 1994 Award Year, in addition to the Financial Performance criteria refer- red to in paragraph (a) above, the Incentive Compen- sation Award for a Participant may be calculated in part based on the Participant's individual perfor- mance and/or performance of the Participant's job unit, the levels of which will be measured by general criteria (e.g., revenues, margins, cost management, quality, customer service, etc.) and in part may consist of a discretionary piece based on the Participant's individual performance measured by personal behavioral criteria (e.g. attitude, team- work, etc.). Guidelines for determining the require- ments for achieving the various performance levels (e.g., Outstanding, Meets Expectations, etc.) will be developed by the Committee or its delegate and communicated to Participants from time to time during the Award Year. -8- (c) The Committee may, in its sole discretion, change or eliminate the performance criteria referred to in paragraphs (a) or (b) above, and may establish new or additional performance criteria, from time to time, provided that the applicable performance criteria are communicated to affected Participants. Section 5.03 - Determination of Salary Percentage and Allocation of Performance Criteria. The Committee shall determine and, itself or through its delegate, communicate to Participants from time to time the percentage of a Participant's Salary to be taken into account for purposes of determining a Participant's Incentive Compensation Award for an Award Year. The Committee shall also determine and, itself or through its delegate, communicate to Parti- cipants the percentages of the performance criteria established under Section 5.02 above which are applicable to Participants in each Group, and for this purpose may subdivide each Group into Keystone Participants and Participating Entity Participants, or such other subgroups as it may determine. Section 5.04 - Determination of Incentive Compensation Award. The amount of a Participant's Incentive Compensation Award for an Award Year, if any, shall be determined by the Committee or its delegate in accordance with the terms of the Plan and shall be communicated in writing to the Participant on or before March 15th of the next year. Section 5.05 - Determination of Discretionary Bonus. The Committee may grant, from time to time in its sole discretion, a bonus to any Participant based on any criteria it determines. Such bonus, if specifically designated by the Committee as payable under this Plan, shall be subject to such provisions of the Plan as it shall specify; provided, however, that such bonus may not be subject to the provisions of Section 6.04 regarding elective deferrals or the provisions of Section 6.07 regarding the Participant's election of the form of payment. -9- ARTICLE VI PAYMENT TO PARTICIPANTS AND DEFERRALS Section 6.01 - Timing of Payment. An Incentive Compensation Award for an Award Year shall be paid to the Participant, or in the case of death to the Participant's Beneficiary, on or before March 15th of the next year, unless the Participant has made an election to defer receipt until a later date by filing a Deferral Election with the Committee which is effective for the Award Year in accordance with Section 6.04. Section 6.02 - Payment in Common Stock. At the discretion of the committee which administers the Keystone Financial, Inc. 1992 Stock Incentive Plan (the "SIP Committee") or any similar plan in effect from time to time (the "SIP"), Incentive Compensation Awards payable on or after January 1, 1994 under any Section of this Article VI may be paid in whole or in part in shares of Keystone Financial, Inc. Common Stock, provided, however, that with respect to Participants subject to Section 16 of the Securities Exchange Act of 1934, such shares must be paid in a manner consistent with the provisions of and as provided in the SIP. The number of shares of Common Stock to be paid would be determined by dividing the cash payment which would otherwise be made by the Fair Market Value on the date on which the payment is to be made. Any fractional share shall be paid in cash. A Participant shall be considered, on the date as of which Fair Market Value is determined for purposes of the stock distribution, as a shareholder of Keystone with respect to the shares to be distributed. For purposes of this Section 6.02, Fair Market Value is the mean between the following prices, as applicable, for the date as of which Fair Market Value is to be determined, as quoted in The Wall Street Journal (or in such other reliable publication as the SIP Committee or its delegate, in its discretion, may determine to rely upon): (a) if the Common Stock is listed on the New York Stock Exchange, the highest and lowest sales prices per share of the Common Stock as quoted in the NYSE-Composite Transactions listing for such date, (b) if the Common Stock is not listed on the New York Stock Exchange, the highest and lowest sales prices per share of Common Stock for such date on (or on any composite index including) the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which the Common Stock is listed, or (c) if the Common Stock is not listed on any exchange referred to in paragraphs (a) or (b) above, the highest and lowest sales prices per share of the Common Stock for such date on the National Association of Securities Dealers Automated Quotations System or any successor system then in use ("NASDAQ"). If there are no such sale price quotations for the date as of which Fair Market Value is to be determined, but there are such sale price quotations within a reasonable period both before and after such date, then Fair Market Value shall be determined by taking a weighted average of the means between the -10- highest and lowest sales prices per share of the Common Stock as so quoted on the nearest date before and the nearest date after the date as of which Fair Market Value is to be determined. The average should be weighted inversely by the respective numbers of trading days between the selling dates and the date as of which Fair Market Value is to be determined. If there are no such sale price quotations on or within a reasonable period both before and after the date as of which Fair Market Value is to be determined, then Fair Market Value shall be the mean between the bona fide bid and asked prices per share of Common Stock as so quoted for such date on NASDAQ, or if none, the weighted average of the means between such bona fide bid and asked prices on the nearest trading date before and the nearest trading date after the date as of which Fair Market Value is to be determined in the manner described above in this Section 6.02. If the Fair Market Value of the Common Stock cannot be determined on the basis previously set forth in this Section 6.02 on the date as of which Fair Market Value is to be determined, the SIP Committee or its delegate shall in good faith determine the Fair Market Value of the Common Stock on such date. Fair Market Value shall be determined without regard to any restriction other than a restriction which, by its terms, will never lapse. Section 6.03 - Beneficiary Designation. A Participant may file with the Committee or its delegate a completed designation of Beneficiary Form as prescribed by the Committee or its delegate. Such designation may be made, revoked or changed by the Participant at any time before death or receipt of the balance of the Deferral Account, but such designation of Beneficiary will not be effective and supersede all prior designations until it is received and acknowledged by the Committee or its delegate. If the Committee has any doubt as to the proper Beneficiary to receive payments hereunder, the Committee shall have the right to withhold such payments until the matter is finally adjudicated. However, any payment made in good faith shall fully discharge the Committee, Keystone, the Participating Entities and the Board from all further obligations with respect to that payment. Section 6.04 - Deferral of Payment. A Participant who is determined by the Committee or its delegate to be in the group of Participants constituting a select group of management or highly compensated employees of Keystone and Participating Entities for purposes of Title I of ERISA may elect to defer receipt of all or part (but not less than $1,000) of his or her Incentive Compensation Award for an Award Year, with payment of deferred amounts to be made following termination of employment or death as provided in Section 6.07. In order for a Deferral Election to be effective, a Participant must complete and file the appropriate forms provided the Committee, in accordance with procedures established by the Committee, prior to the beginning of the Award Year or not more than thirty (30) days from the date of becoming a Participant if after the beginning of an Award Year. A Deferral Election will be effective with respect to Incentive Compensation Awards attributable to services performed by the Participant after the election becomes effective and shall continue in effect for future Award Years until rescinded by the Participant in writing on a form provided by and delivered to the Committee prior to January 1 of the Award Year for which the recission is to be effective. Notwithstanding the foregoing, no election to defer an Incentive Compensation Award shall be effective for a Participant who has made a hardship withdrawal from the Keystone Financial 401(k) Savings Plan (the "401(k) Plan") (a) for a period of 12 months from the date of such hardship withdrawal, if the hardship withdrawal has been made in reliance on Treasury Regulation ss. 1.401(k)-1(d)(2)(iv)(B) and the deferred Incentive Compensation Award would constitute an employee elective contribution or employee contribution under an employer plan within the meaning of Treasury Regulation ss. 1.401(k)-1(d)(2)(iv)(B)(4) or any successor regulation or (b) for such other period as required for suspension of deferrals under this Plan pursuant to the provisions of the 401(k) Plan. -11- Section 6.05 - Deferral Account. The Committee shall cause a Deferral Account to be established and maintained only on the books of Keystone or the Participating Entity for each Participant who elects to defer payment of all or part of his or her Incentive Compensation Award pursuant to Section 6.04. Such account shall be credited with the portion of each Incentive Compensation Award deferred, adjusted quarterly as provided below, and shall be debited for any payment to the Participant or the Participant's Beneficiary. A separate subaccount within the Deferral Account shall be maintained for each Award Year with respect to which a Participant's Deferral Election provides for a number of installment payments which is different from the Participant's Deferral Election applicable to other Award Years, and as otherwise determined by the Committee. (a) The amount in the Participant's Deferral Account shall be adjusted on a quarterly basis as of the last day of each calendar quarter to reflect net earnings, gains or losses for the quarter. The adjustment for earnings, gains or losses for each quarter shall be equal to the amount determined under (1) or (2) below as follows: (1) Moody's Long-Term Corporate Bond Rates. The total amount determined by multiplying (A) one hundred and five percent (105%) of the average of the Moody's Long-Term Corporate Bond Rates for the three (3) months in the preceding calendar quarter (current calendar quarter, effective January 1, 1994) divided by twelve, by (B) the balance in the Participant's Deferral Account as of the end of each month in the current quarter; or (2) Other Options. The total amount determined by multiplying the rate earned (positive or negative) by each fund available under paragraph (b) below (taking into account earnings distributed and share appreciation (gains) or depreciation (losses) on the value of shares of the fund) for each month of the current calendar quarter by the portion of the balance in the Participant's Deferral Account as of the end of each such month, respectively, which is deemed to be invested in the fund pursuant to Section 6.06 below. (b) Deemed Investment Options. Subject to elimination, modification or addition by the Committee, the fol- lowing shall be the funds available for the Parti- cipant's election of deemed investments pursuant to Section 6.06 below: (1) Balanced Fund. This fund is a Keystone managed fund and consists of a mix of 30% to 60% in the common stock of large, highly capitalized companies, 40% to 70% in short-term to intermediate-term fixed income investments, and 0% to 10% in money market securities. The goal is to provide a balance of long-term growth and current income. The Balanced Fund shall be the same as the Balanced Fund used from time to time by the Keystone Financial 401(k) Savings Plan. -12- (2) Fixed Income Fund. This fund is a Keystone managed fund and uses primarily money market investments, government obligations, corporate bonds, and other high-quality fixed-income securities. The maturities of the fixed-income investments will not exceed 10 years or, in the case of asset-backed securities, an average life of 5 years. The goal is to provide an acceptable rate of return while maintaining moderately stable principal value. The Fixed Income Fund shall be the same as the Fixed Income Fund used from time to time by the Keystone Financial 401(k) Savings Plan. (3) Core Equity Fund. This fund is a Keystone managed fund and is designed for principal growth through investment in the common stock of primarily large, highly capitalized companies. The Core Equity Fund shall be the same as the Core Equity Fund used from time to time by the Keystone Financial 401(k) Savings Plan. (4) Aggressive Equity Fund. This fund is a Keystone managed fund designed to provide growth of principal over time consistent with the growth and risk characteristics of common stocks of smaller capitalized comp- anies (with market caps between $100 million and $1 billion) by investing in diversified common stocks of corporations traded on the major U.S. and non-U.S. exchanges. The Aggressive Equity Fund shall be the same as the Aggressive Equity Fund used by the Keystone Financial 401 (k) Savings Plan. (5) Global Fund. This fund is intended to prov- ide investment opportunity to participate in the growth characteristics of non-U.S. oriented investments. The fund is a Keystone managed fund which invests in diversified common stocks of foreign corporations, collective trust and mutual funds. The Global Fund shall be the same as the Global Fund used from time to time under the Keystone Financial 401(k) Savings Plan. (6) Other Options. In addition to, or in lieu of, the investment options described above, other funds may be established from time to time, as determined by the Committee, and the Committee may provide any other form of investment option it determines to be advis- able; provided, however, that such funds and options shall be made available and com- municated to all Participants on a uniform basis. -13- Section 6.06 - Deemed Investment Elections. (a) The Participant shall designate, on a form provided by the Committee, the percentage, in ten percent (10%) multiples (or such other percentage as permitted from time to time by the Committee), of the deferred Incentive Compensation Award that is to be deemed to be invested in the available funds under Section 6.05(b), with the balance of the deferred Incentive Compensation Award to receive interest credit according to Section 6.05(a)(1) above. Said designation shall be effective on a date specified by the Committee or its delegate and remain in effect and apply to all subsequent deferred Incentive Compensation Awards until changed as provided below. (b) A Participant may elect to change, on a calendar quarter basis, the deemed investment election under paragraph (a) above with respect to future deferred Incentive Compensation Awards among one or more of the options then available by written notice to the Committee, on a form provided by the Committee (or by voice or other form of notice permitted by the Committee), at least 30 days before the first day of the calendar quarter as of which the change is to be effective, with such change to be effective for amounts credited to the Deferral Account on or after the effective date. (c) A Participant may elect to reallocate the balance of the Deferral Account, subject to any limitations imposed by the Committee or its delegate, on a calendar quarter basis, in ten percent (10%) multiples (or such other percentage as permitted from time to time by the Committee) among the deemed investment options then available. A Participant may make such an election by written notice to the Committee, on a form provided by the Committee (or by voice or other form of notice permitted by the Committee), at least 30 days before the first day of the calendar quarter as of which the transfer election is to be effective, with such transfer to be based on the value of the Deferral Account on the last day of the preceding quarter. (d) The election of deemed investments among the options provided above shall be the sole responsibility of each Participant. Keystone, the Participating Entities, Employees, and Committee members are not authorized to make any recommendation to any Participant with respect to such election. Each Participant assumes all risk connected with any adjustment to the value of his Deferral Account. Neither the Committee, Keystone, nor the Participating Entities in any way guarantees against loss or depreciation. (e) All payments from the Plan shall be made from the portion of the Participant's Deferral Account (or of the applicable subaccount) which is deemed to be invested in the Moody's Long-Term Corporate Bond Rates first, the Fixed Income Fund next, the Balanced Fund next, the Core Equity Fund next, the Aggressive Equity Fund next, the Global Fund next, and last from all other funds in the order established by the Committee. -14- Section 6.07 - Payment of Deferred Amounts. (a) Deferred Incentive Compensation Awards shall be paid in a lump sum or annual installments, for a period not to exceed ten years, to the Participant as indicated on the Participant's Deferral Election form. The first payment to the Participant shall be made on March 30 (or if March 30 is not a business day, on the first preceding business day) of the calendar year following the calendar year during which the Participant's termination of employment with Keystone and all Participating Entities occurs. For this purpose, termination of employment includes voluntary or involuntary termination of employment due to retirement or any other reason other than death, including disability, and shall be the date reflected on Keystone's or the Participating Entity's records as the Participant's termination date. (b) In the event of the Participant's death prior to commencement of installment payments due under the Plan, the first installment payment to the Beneficiary shall be made on March 30 (or if March 30 is not a business day, on the first preceding business day) of the calendar year following the calendar year during which the Participant's death occurs and shall be paid in the same form of payment as would have been applicable to the Participant had the Participant survived. (c) In the event of the Participant's death after commencement of installment payments to the Participant but prior to full payment of the installments due, the remaining installments due under the Plan in respect of the Participant shall continue to the Beneficiary on the same basis as they would have been paid to the Participant. The first payment to the Beneficiary shall be made on the later of the date payment would otherwise be made or the last day of the second month following the month in which the Participant's death occurs and shall include all payments due to the Beneficiary following death and prior to the first payment. Section 6.08 - Amount of Deferred Payment. If a lump sum payment is elected for a deferred Incentive Compensation Award for an Award Year, such payment shall be equal to the value of the Participant's Deferral Account as adjusted on the last day of the calendar quarter prior to the date the lump sum payment is to be made. If annual installments are elected as the payment method for a deferred Incentive Compensation Award, the amount of the first installment shall be calculated by dividing the lump sum value of the Participant's Deferral Account, as determined above, by the number of installments to be paid. Each later installment shall be determined on the same basis as the first installment except that the value shall be divided by the number of installments remaining to be paid. Amounts held pending distribution from the Plan shall continue to be credited with earnings, gains or losses on a quarterly basis pursuant to Section 6.05. Section 6.09 - Automatic Cash Out. The Plan is intended to constitute an unfunded plan for tax purposes and for purposes of Title I of ERISA and is intended to be maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees of Keystone and Participating Entities and to qualify for the exclusions from Title -15- I of ERISA which are provided for in Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. Notwithstanding any provision in this Plan to the contrary, in the event that the Department of Labor, or any other regulatory or other body, issues final regulations which provide, or a court issues a final determination, that the Plan does not qualify for any of such exclusions under ERISA, the Board may amend Section 6.04 of the Plan to change the deferral eligibility provisions, and the Committee or the Board may revoke the designation of all or some Employees as Participants for the current or future Award Years, and the Committee or the Board may take such other action as it determines to be appropriate in order for the Plan to qualify for such exclusions. In addition, Participants who are precluded from participating in the deferral provisions of Section 6.04 because of this Section 6.09 shall have the balance in their Deferral Account, determined as of the end of the preceding calendar quarter, plus the amount of any Incentive Compensation Award deferred during the current calendar quarter, distributed in a single lump sum as soon as practicable after it is determined that their deferrals should cease, and such Participant's Deferral Elections shall be void and of no further effect. Keystone, the Participating Entities, the Committee and the Board shall have no liability to any Participant who receives a distribution from the Plan or whose participation is otherwise affected by reason of this Section 6.09. Section 6.10 - Hardship Withdrawal. Notwithstanding the terms of any Deferral Election made by a Participant hereunder, the Committee may, in its sole discretion, permit on or after January 1, 1994 the withdrawal of all or a portion of the amounts credited to a Participant's Deferral Account, upon the request of the Participant or the Participant's representative, or following the death of a Participant upon the request of a Participant's Beneficiary or such Beneficiary's representative, if the Committee determines that the Participant or Beneficiary, as the case may be, is confronted with an unforeseeable emergency. For this purpose, an unforeseeable emergency is an unanticipated emergency caused by an event that is beyond the control of the Participant or Beneficiary and that would result in severe financial hardship to the Participant or Beneficiary if an early hardship withdrawal were not permitted. The Participant or Beneficiary shall provide to the Committee such evidence as the Committee may require to demonstrate that such emergency exists and financial hardship would occur if the withdrawal were not permitted. Any withdrawal under this Section 6.10 shall be limited to the amount necessary to meet the emergency. For purposes of the Plan, a hardship shall be considered to constitute an immediate and unforeseen financial hardship if the Participant has an unexpected need for cash to pay for expenses incurred by him or a member of his immediate family (spouse and/or natural or adopted children) such as those arising from illness, casualty loss, or death. Cash needs arising from foreseeable events, such as the purchase or building of a house or education expenses will not be considered to be the result of an unforeseeable financial emergency. Payment shall be made, as soon as practicable after the Committee approves the payment and determines the amount of the payment, in a single lump sum from the portion of the Deferral Account representing Award Years beginning on or after January 1, 1994 with the longest number of installment payments being first, and then from the portion of the Deferral Account representing Award Years beginning prior to January 1, 1994 with the latest payment commencement dates first, and then from the portion of a Deferral Account, in each case in accordance with Section 6.06(e). Section 6.11 - Tax Withholding. All Incentive Compensation Awards, whether or not deferred under the Plan, shall be subject to Federal income, FICA, and other tax withholding as required by applicable law. At the time that tax withholding is required, if an amount is payable in cash under the Plan to the Participant the amount of the required tax withholding shall be withheld from and reduce such cash payment. If, however, an amount is not then payable in cash or the cash payable under the Plan to the Participant is less than the required withholding, the Participant shall pay, by check or money order payable to Keystone or the Participant Entity employing the Participant, not later than the date such withholding is required, the amount of the required tax withholding or, at the sole election of Keystone or such Participating Entity, the amount of required tax withholding shall be withheld from other compensation or amounts payable to the Participant. The Participant shall hold Keystone or such Participating Entity harmless in acting to satisfy the withholding obligation in this manner. -16- ARTICLE VII MISCELLANEOUS PROVISIONS Section 7.01 - No Recourse. If the Financial Performance taken into account for determination of an Incentive Compensation Award is found to be incorrect by Keystone's independent certified public accountants at any time during the following calendar year and was more than the correct amount, there shall be no recourse by Keystone directly against any person or estate. However, Keystone shall have the right to correct such error by reducing by the entire excess amount any subsequent payments yet to be made under the Plan for all Award Years. Any underpayments as a result of such error in the Financial Performance taken into account shall be corrected within six (6) months after the accountants report the error to the Committee provided that the Committee confirms the error. Section 7.02 - Expense. For purposes of determining Financial Performance, Incentive Compensation Awards shall be treated as an expense for book purposes in the fiscal year of Keystone or the Participating Entity, as applicable, in which the Incentive Compensation Award is earned by a Participant, as opposed to subsequent fiscal year(s) during which the Incentive Compensation Award is paid, except as determined otherwise by the Committee or its delegate. Section 7.03 - Merger or Consolidation. All obligations for amounts earned but not yet paid under this Plan shall survive any merger, consolidation or sale of all or substantially all of Keystone's or a Participating Entity's assets to any entity, and be the liability of the successor to the merger or consolidation or the purchaser of assets, unless otherwise agreed to by the parties thereto. Section 7.04 - Legal Costs. A Participant will be reimbursed by Keystone (or its successor) or the Participating Entity (or its successor) for any and all expenses incurred in successfully enforcing, by judgment of a court of competent jurisdiction and after all appeals have been exhausted, the Participant's right to receive payments under the terms of this Plan. Section 7.05 - Gender and Number. The masculine pronoun whenever used in the Plan shall include the feminine and vice versa. The singular shall include the plural and the plural shall include the singular whenever used herein unless the context requires otherwise. Section 7.06 - Construction. The provisions of the Plan shall be construed, administered and governed by the laws of the Commonwealth of Pennsylvania, including its statute of limitations provisions, to the extent not preempted by ERISA or other applicable Federal law. Titles of Articles and Sections of the Plan are for convenience of reference only and are not to be taken into account when construing and interpreting the provisions of the Plan. Section 7.07 - Non-alienation. Except as may be required by law, neither the Participant nor any Beneficiary shall have the right to, directly or indirectly, alienate, assign, transfer, pledge, anticipate or encumber (except by reason of death) any amount that is or may be payable hereunder, including in respect of any liability of a Participant or Beneficiary for alimony or other -17- payments for the support of a spouse, former spouse, child or other dependent, prior to actually being received by the Participant or Beneficiary hereunder, nor shall the Participant's or Beneficiary's rights to benefit payments under the Plan be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Participant or Beneficiary or to the debts, contracts, liabilities, engagements, or torts of any Participant or Beneficiary, or transfer by operation of law in the event of bankruptcy or insolvency of the Participant or any Beneficiary, or any legal process. Notwithstanding the foregoing, the Committee may, in its sole discretion, recognize and establish procedures for administering a domestic relations or other family court order providing for the Plan to pay all or a portion of a Participant's Deferral Account to or for the benefit of a Participant's spouse, former spouse or children, provided that such order does not require the Plan to make payment prior to the time payment would otherwise be made to the Participant pursuant to the terms of the Plan as in effect from time to time and that it meets such other requirements as the Committee shall specify. Section 7.08 - No Employment Rights. Neither the adoption of the Plan nor any provision of the Plan shall be construed as a contract of employment between Keystone or a Participating Entity and any Employee or Participant, or as a guarantee or right of any Employee or Participant to future or continued employment with Keystone or a Participating Entity, or as a limitation on the right of Keystone or a Participating Entity to discharge any of its Employees with or without cause. Specifically, designation as a Participant does not create any rights, and no rights are created under the Plan, with respect to continued or future employment or conditions of employment. Section 7.09 - Minor or Incompetent. If the Committee determines that any Participant or Beneficiary entitled to a payment under the Plan is a minor or incompetent by reason of physical or mental disability, it may, in its sole discretion, cause any payment thereafter becoming due to such person to be made to any other person for his benefit, without responsibility to follow application of amounts so paid. Payments made pursuant to this provision shall completely discharge Keystone, the Participating Entities, the Plan, the Committee and the Board. Section 7.10 - Illegal or Invalid Provision. In case any provision of the Plan shall be held illegal or invalid for any reason, such illegal or invalid provision shall not affect the remaining parts of the Plan, but the Plan shall be construed and enforced without regard to such illegal or invalid provision. -18- EX-10.4 5 EXECUTIVE EMPLOYMENT AGREEMENT Exhibit 10.4 EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is made on the ____ day of ______________, 1998 between KEYSTONE FINANCIAL, INC. (the "Corporation"), a Pennsylvania corporation with its principal office at One Keystone Plaza, Harrisburg, PA 17105 and Carl L. Campbell (the "Executive"), residing at 4717 Pine Ridge Road, Harrisburg, PA 17110. WHEREAS, the Corporation desires to employ the Executive as the Chief Executive Officer of the Corporation under the terms and conditions set forth in this Agreement; and WHEREAS, the Executive desires to serve the Corporation as the Chief Executive Officer under the terms and conditions set forth in this Agreement. NOW THEREFORE, in consideration of the mutual covenant and agreement set forth herein and intending to be legally bound hereby, the parties agree as follows: 1. DEFINITIONS. The following definitions shall apply in this Agreement: a) "Anniversary Date" shall mean January 1, 1999 and the January 1 of each successive year. b) "Annual Salary" shall be the stated base cash compensation defined in Section 5(a) without regard to any elective deferral or salary reduction plan or program of the Corporation. c) "Board of Directors" shall mean the Board of Directors of the Corporation as constituted from time to time. d) "Change of Control" shall be as defined in Section 14 of this Agreement. e) "Code" shall mean the Internal Revenue Code of 1986, as amended. f) "Disability" shall be as defined in Section 10(b) of this Agreement. g) "Early Retirement" shall be that age stipulated from time to time by the Human Resources Committee of the Board of Directors as the age at which key management personnel may elect to take early retirement. h) "LTD" means the Corporation's long-term disability insurance for key management personnel as in effect from time to time. 1 i) "MICP" means the Corporation's Management Incentive Compensation Plan as in effect from time to time, or any successor plan thereto. j) "Normal Retirement" shall be that age stipulated from time to time by the Human Resources Committee of the Board of Directors as the age at which key management personnel are required to take mandatory retirement. k) "Senior Executive" shall mean any key management employee of the Corporation or a Subsidiary whose employment relationship is gov- erned by a contract or agreement. l) "Subsidiary" shall mean any bank, corporation or other entity of which the Corporation owns, directly or indirectly through one or more Subsidiaries, a majority of each class of equity security having ordinary voting power in an election of directors. 2. TERM OF AGREEMENT; RENEWAL. a) This Agreement shall be initially effective for a fifty-three-month period beginning August 1, 1998 and ending on December 31, 2002. Except as provided in Section 2(b), the term of this Agreement will automatically renew on January 1, 1999 and on each subsequent Anniversary Date for an additional five-year period unless, prior to the first day of October preceding the first Anniversary Date within the then current term, either party shall give written notice of nonrenewal to the other, in which event this Agreement shall terminate at the end of the five-year period then in effect. For example, the initial contract period is August 1, 1998 through December 31, 2002. On January 1, 1999, the term of this Agreement extends to December 31, 2003. On January 1, 2000, the term of this Agreement extends to December 31, 2004 unless one of the parties provides a written notice of intent not to renew the Agreement prior to October 1, 1999. b) In the event of a Change of Control, if the Corporation provides the Executive with timely notice of nonrenewal pursuant to Section 2(a) prior to the first Anniversary Date following the Change of Control, the Corporation's decision not to renew this Agreement shall not constitute "good reason" for purposes of Section 10(d)(ii). Any subsequent decision by the Corporation not to renew this Agreement shall, however, constitute good reason for purposes of Section 10(d)(ii). 3. POSITION AND DUTIES. The Executive shall serve as Chief Executive Officer reporting to the Board of Directors and shall have supervision and control over, and responsibility for, the general management and operation of the Corporation, and shall have such other powers and duties as may from time to time be prescribed by the Board of Directors, provided that such duties are consistent with the position of a Senior Executive. 2 4. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall devote substantially all his working time, ability and attention to the business of the Corporation during the term of this Agreement. The Executive shall notify the Board of Directors in writing before the Executive engages in any other business or commercial activities, duties or pursuits, including, but not limited to, directorships of other companies. Under no circumstances may the Executive engage in any business or commercial activities, duties or pursuits which compete with the business or commercial activities of the Corporation or any of its Subsidiaries, nor may the Executive serve as a director or officer or in any other capacity with any business entity unless he shall have received advance written approval from the Board of Directors. 5. COMPENSATION. a) ANNUAL SALARY. For services rendered under this Agreement, the Executive shall be entitled to receive as base compensation an Annual Salary at an initial rate of $400,000 per year. The Executive's Annual Salary shall be reviewed thereafter by the Board of Directors at least once annually and may be adjusted at the discretion of the Board of Directors in accordance with the Corporation's then-current compensation policies and practices and other factors deemed relevant by the Board of Directors; provided, that at no time shall the Annual Salary be less than the Execu- tive's Annual Salary in the prior calendar year. Annual Salary shall be subject to withholding and other applicable taxes and payroll deductions and payable in substantially equal monthly installments or such other more frequent intervals as may be determined by the Board of Directors as payroll policy for Senior Executives. b) INCENTIVE COMPENSATION. The Executive shall be eligible for annual incentive awards under and in accordance with the MICP, based on achievement of annual performance goals and other criteria set forth in the MICP. Subject to the terms and conditions of the MICP and all rules and regulations pertaining thereto, any incentive award to which the Executive becomes entitled will be paid to the Executive within ninety (90) days following the end of the fiscal year in question. In addition to the MICP, the Executive will be eligible to participate in any stock option, stock bonus, or other incentive plan available generally to other Senior Executives from time to time. 6. BENEFITS, VACATION TIME, EXPENSES AND PERQUISITES. a) EMPLOYEE BENEFIT PLANS. During the term of this Agreement, the Executive shall be entitled to participate in all employee benefit 3 plans made available from time to time by the Corporation to its Senior Executives, including, but not limited to, pension, profit-sharing, savings, supplemental retirement income, medical and health-and-accident plans and arrangements, subject to and on a basis consistent with the terms and conditions of, and the Corporation rules and regulations pertaining to such plans and arrangements, and any limitations or qualifications imposed by any applicable governmental body. Subject to the foregoing, the benefit plans and arrangements provided to the Executive shall include, but not be limited to, the following: i) Retirement Income Plans: The Executive shall be entitled to participate in any nonqualified supplemental retirement income plans available from time to time to the Corporation's Senior Executives, and shall become vested in such plans according to the schedules provided in the plan documents. Benefits to be received by the Executive pursuant to such plans will be calculated under the formulas utilized in such plans as in effect from time to time; provided, however, that in the event of a Change of Control, the involuntary termination of the Executive's employment other than for cause or the termination of the Executive's employment for good reason (in either case, whether or not in conjunction with a Change of Control), the benefits to be provided to the Executive pursuant to such plans shall be calculated under the formulas utilized by such plans as in effect from time to time but in no event shall such benefits be less than the benefits calculated under the formulas utilized in such plans as in effect on the date of the Change of Control (as defined in Section 14(g)) or the effective date of the Executive's termination of employment , respectively. ii) Life Insurance: Subject to satisfaction of conditions imposed by the applicable insurance company for additional coverage, the Corporation shall maintain for the Executive during the term of this Agreement the insurance coverage established for the Executive effective January 1, 1994, under and in accordance with the Keystone Financial Executive Split Dollar Agreement with Executive; provided, and notwithstanding any contrary provisions therein, the Corporation shall have no unilateral right to terminate or modify such Split Dollar Agreement with the Executive. iii) Disability Insurance: In addition to standard group benefit provisions, the Corporation shall make available a supplemental LTD insurance policy for purchase by the Executive, provided the Executive qualifies as a medically acceptable risk to the issuing company on a standard underwriting basis. Such policy shall provide that in the event the Executive becomes disabled in accordance with the terms of such policy, he shall be entitled to receive benefits from all sources (e.g., Social Security, group LTD and 4 supplemental LTD) equal to 67% of his Annual Salary as in effect at the time of disability until he reaches the age of 65 or dies, whichever occurs first. The Corporation shall continue to pay to the Executive his Annual Salary during any applicable "elimination" (waiting) period under the supplemental LTD policy, not to exceed one hundred and eighty (180) days. Notwithstanding the foregoing, supplemental LTD coverage shall be required only if and to the extent that the Corporation's group LTD insurance policy benefit limit is such that it does not permit the Executive to receive the above-stated percentage (i.e., 67%) of income replacement at the time of said disability. b) VACATION. During the term of this Agreement, the Executive shall be entitled to the number of paid vacation days in each calendar year determined by the Corporation from time to time for its Senior Executives, but not less than four (4) weeks in any calendar year. Such vacation entitlement shall be subject to all rules and policies concerning vacation time as shall be applicable to Senior Executives from time to time. The Executive shall also be entitled to all paid holidays given by the Corporation to its Senior Executives. c) REIMBURSABLE GENERAL EXPENSES. During the term of this Agreement, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him (in accordance with the policies and procedures established from time to time by the Board of Directors for its Senior Executives) in performing services hereunder, provided that the Executive first properly accounts therefor in accordance with such policies and procedures. d) REIMBURSABLE AUTO EXPENSES. During the term of this Agreement, the Executive shall be entitled to receive a monthly payment under the Corporation's Automobile Capital Cost Reimbursement Plan (the "ACCRP") for selected executives. Such payments shall be treated as current income and be subject to regular payroll tax withholding and deductions. The Executive shall also be entitled to reimbursement for operating expenses of the automobile associated with business travel at the established corporate mileage rate. 5 e) MISCELLANEOUS. The Executive shall be entitled to receive such other perquisites, e.g. club memberships and "fringe benefits", as the Board of Directors shall deem appropriate in its sole direction. 7. INDEMNIFICATION. The Corporation shall indemnify the Executive, to the fullest extent permitted from time to time by Pennsylvania law, with respect to any threatened, pending or contemplated action, suit or proceeding, brought against him by reason of the fact that he is or was a director, officer, employee or agent of the Corporation or is or was serving at the written request of the Corporation as a director, officer, employee or agent of another person or entity. To the fullest extent permitted by Pennsylvania law, the Corporation shall in advance of final disposition pay any and all expenses incurred by the Executive in connection with any threatened, pending or completed action, suit or proceeding with respect to which the Executive may be entitled to indem- nification hereunder. The Executive's right to indemnification provided herein is not exclusive of any other rights of indemnification to which the Executive may be entitled under any bylaw, agreement, vote of shareholders or otherwise, and shall continue beyond the term of this Agreement. The Corporation shall use its best efforts to obtain insurance coverage for the Executive under an insurance policy covering officers and directors of the Corporation against lawsuits, arbitrations or other proceedings; however, nothing herein shall be construed to require the Corporation to obtain such insurance if the Board of Directors determines that such coverage cannot be obtained at a commer- cially reasonable price. Notwithstanding the foregoing, the Executive shall be entitled to indemnification from the Subsidiary which is his actual employer if such indemnification is available and provides more extensive coverage than the ndemnification provided under this Agree- ment. 8. UNAUTHORIZED DISCLOSURE. During the term of this Agreement or at any later time, the Executive shall not, without the written consent of a duly authorized executive officer of the Corporation, disclose to any person (including an employee of the Corporation or a Subsidiary), other than a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Corporation, any material confidential information obtained by him while in the employ of the Corporation or any Subsidiary or operating unit with respect to any of the services, products, improvements, formulas, designs or styles, processes, custo- mers, methods of distribution or business practices, the disclosure of which reasonably would be expected to materially damage the Corporation; provided, however, that for purposes of this Agreement, confidential information shall not include any information known generally to the public (other than as a result of unauthorized disclosure by the Executive) or any information of a type not otherwise considered confi- dential by persons engaged in the same business or a business similar to that conducted by the Corporation. 9. RESTRICTIVE COVENANTS. Except as otherwise provided below, upon termi- nation of his employment hereunder regardless of the circumstances or reasons for such termination, the Executive covenants and agrees as follows: a) NONCOMPETITION. The Executive shall not, directly or indirectly, within the marketing area of the Corporation and its Subsidiaries (defined as all areas within 100 miles of the work location to which the Executive was assigned for the majority of time during 6 the twelve months preceding the termination of his employment where the Corporation has established an active and material market presence) enter into or engage generally in direct or indirect competition with the Corporation in the business of banking or any banking or trust related business, either directly or indirectly as an individual on his own or as a partner or joint venturer, or as a director, officer, shareholder (except as an incidental shareholder), employee or agent for any person, for a period of one year after the date of termination of his employment, except where the termination occurs in conjunction with a Change of Control as described in Section 11(d). The existence of any material claim or cause of action of the Executive against the Corporation, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Corporation of this covenant. The Executive acknowledges and agrees that enforcement of this covenant not to compete will not prevent him from earning a livelihood and that any breach of the restrictions set forth in this paragraph will result in irreparable injury to the Corporation for which it shall have no adequate remedy at law, and that the Corporation shall be entitled to injunctive relief in order to enforce the provisions hereof. In the event that this paragraph shall be determined by any court of competent jurisdiction to be unenforceable in part by reason of it being too great a period of time or covering too great a geographical area, it shall be in full force and effect as to that period of time or geographical area determined to be reasonable by the court. b) RETURN OF MATERIALS. Upon termination of employment with the Corporation for any reason, including a termination of employment in conjunction with a Change of Control as described in Section 11(d), the Executive shall immediately deliver to the Corporation all correspondence, manuals, letters, notes, notebooks, reports and any other documents and tangible items containing or constituting confidential information about the Corporation maintained at his office and shall promptly deliver all said materials held by him at other locations. c) NONSOLICITATlON OF EMPLOYEES. The Executive shall not entice or solicit, directly or indirectly, any other executives or key management personnel of the Corporation to leave the employ of the Corporation or its Subsidiaries to work with the Executive or any entity with which the Executive has affiliated for a period of one year following the Executive's termination of employment with the Corporation for any reason, including a termination of employment in conjunction with a Change of Control as described in Section 11(d). d) NONSOLICITATION OF CUSTOMERS. The Executive shall not entice or solicit, directly or indirectly, any client or customer of the Corporation or any Subsidiary for a period of one year following the Executive's termination of employment with the Corporation for any reason, including a termination of employment in conjunction with a Change of Control as described in Section 11(d). 7 e) REMEDY. The Executive acknowledges and agrees that any breach of the restrictions set forth in Sections 8 and 9 will result in irreparable injury to the Corporation for which it shall have no meaningful remedy in law and the Corporation shall be entitled to injunctive relief in order to enforce provisions hereof. Upon obtaining such injunction, the Corporation shall be entitled to pursue reimbursement from the Executive and/or the Executive's employer of costs incurred in securing a qualified replacement for any employee enticed away from the Corporation by the Executive. Further, the Corporation shall be entitled to set off against or obtain reimbursement from the Executive of any payments owed or made to the Executive by the Corporation hereunder. 10. TERMINATION. a) GENERALLY. The Executive's employment hereunder shall terminate upon his Early Retirement, Normal Retirement or death. b) TERMINATION DUE TO PERMANENT DISABILITY. If the Executive becomes permanently disabled because of sickness, physical or mental disability, or any other reason, and is unable to perform or complete his duties under this Agreement for a period anti- cipated to extend for a period of at least one hundred eighty (180)consecutive calendar days (or such other length of time that is equal to any applicable elimination period provided for in an LTD insurance policy), the Corporation shall have the option to terminate this Agreement by giving written notice of termination to the Executive. Such termination shall be without prejudice to any right the Executive may have under the LTD insurance program maintained by the Corporation. Such disability shall be certified by the Corporation's group LTD carrier, in conjunction with the Executive's supplemental LTD carrier if such supplemental policy is in effect; in the event these carriers cannot agree, they shall designate a licensed physician whose decision shall be binding for purposes of this Agreement. c) TERMINATION FOR CAUSE. The Corporation may terminate the Execu- tive's employment hereunder for cause. For the purposes of this Agreement, the Corporation shall have "cause" to terminate the Executive's employment hereunder upon (i) the willful failure by the Executive to substantially perform his duties hereunder, other than any such failure resulting from the Executive's incapacity due to physical or mental illness, (ii) the willful engaging by the Executive in gross misconduct materially injur- ious to the Corporation, (iii) the willful violation by the Executive of the provisions of Sections 4 or 8 hereof, after notice from Corporation and a failure to cure such violation within 30 days of said notice, or if said violation cannot be cured within 30 days, within a reasonable time thereafter if the 8 Executive is diligently attempting to cure the violation, (iv) the gross negligence of the Executive in the performance of his duties, or (v) receipt of a final written directive or order of any governmental body or entity having jurisdiction over the Corporation or any of its Subsidiaries requiring termination or removal of the Executive. The determination of the existence of cause shall be made in the reasonable judgment of the Board of Directors or its delegee. d) TERMINATION BY EMPLOYEE UPON GOOD REASON. The Executive may terminate his employment for good reason. The term "good reason" shall mean (i) a reduction in the Executive's Annual Salary in violation of Section 5 hereof, or his total cash compensation opportunities (e.g. annual incentive awards under the Corpora- tion's MICP or equity participation awards) or benefits (except any reductions in compensation which may be applied broadly among all executives because of adverse financial conditions for the Corporation or as part of a restructuring of the Corporation's executive compensation program), (ii) the Corporation's decision not to renew the Agreement (except as otherwise provided in Sec- tion 2(b)), (iii) the Corporation's failure to remedy a material breach of this Agreement within thirty (30) days following written notice of the breach from the Executive, (iv) the Executive's position is eliminated and he is not offered a comparable position within thirty (30) days or (v) the lessening of the Executive's job responsibilities or an unacceptable relo- cation (defined as more than thirty-five (35) miles from the Executive's prior work site). e) SALE OF SUBSIDIARY. i) If the entity which is the actual employer of the Executive is a Subsidiary of the Corporation (the "Employer Subsidiary"), the disposition of equity securities or assets of the Employer Subsidiary by the Corporation or by another Subsidiary such that the Employer Subsidiary ceases to qualify as a Subsidiary for purposes of this Agreement shall not constitute a termination of the Executive's employment hereunder. ii) If the Executive remains employed by the Employer Subsidiary following its sale, the Executive shall remain eligible to receive the payments and benefits specified in Section 11(d) for the periods of time specified therein and the provision of such payments and benefits shall remain the obligation of the Corporation. iii) If the Executive is employed by the Corporation or another Subsidiary following the sale of the Employer Subsidiary, the Executive shall not be eligible to receive the payments and benefits specified in Section 11(d) notwithstanding the fact that the sale of the Employer Subsidiary constituted a Change of Control as defined in Section 14. Unless the Executive and the Corporation agree otherwise, the Executive shall, however, remain eligible to receive the payments and benefits specified in Sections 11(a) and 11(b). 9 11. PAYMENTS UPON TERMINATION. a) If the Executive's employment shall be terminated because of Early Retirement, Normal Retirement, death, Disability or for cause, the Corporation shall pay the Executive or his guardian or estate his full Annual Salary through the date of termi- nation at the rate in effect at the time of termination and any other amounts owing to the Executive at the date of termination. Further, should termination occur because of Early Retirement, Normal Retirement, death, or Disability, the Corporation may elect to pay the Executive, or his guardian or estate, at the end of the fiscal year in which the termination occurred, a prorated award under the MICP, and also may elect to accelerate vesting of restricted stock, stock option and performance share awards to provide a full or prorated compensation opportunity for the retired or disabled Executive or the deceased Executive's guar- dian or estate. Notwithstanding the foregoing, the Corporation shall have no obligation to provide payments of benefits beyond what the Executive is entitled to under the terms and conditions of the various compensation and benefit plans and arrangements maintained by the Corporation. b) If (i) the Executive's employment is terminated by the Corpora- tion other than for the reasons or circumstances set forth under Sections 10(a), (b) or (c) hereof or (ii) if the Executive termi- nates his employment within 90 days following the occurrence of any of the events constituting "good reason" as defined in Section 10(d), then the Corporation shall make a lump-sum cash payment to the Executive equal to two times his highest Annual Salary during the three-calendar-year period ending before the effective date of the termination. In such event the Corporation shall also maintain in full force and effect (and the Executive shall remain a participant in), for a minimum period of twenty- four (24) months, all employee benefit plans and programs to which the Executive was entitled prior to the date of termina- tion, including but not limited to, pension, profit-sharing, savings, supplemental retirement income, medical and health-and- accident plans and arrangements, but specifically excluding the ACCRP and the Performance Unit Plan (the "PUP"), if the Execu- tive's continued participation is permitted under the general terms and conditions and rules and regulations of such plans and programs. In the event that the Executive's continued participation in any such plan or program is prohibited, the Executive shall be entitled to receive an amount equal to the annual contribution, payments, premiums, credits or allocations made by the Corporation to him, to his account or on his behalf under such plans and programs from which his continued parti- cipation is barred, except that if the Executive's participation 10 in any health, medical, life insurance, or disability plan or program is barred, the Corporation shall use its best efforts to obtain and pay for, on the Executive's behalf, individual insurance plans, policies or programs which provide to the Executive health, medical, life and disability insurance coverage which is equivalent to the insurance coverage to which the Executive was entitled prior to the date of termination. In the event of a termination of the Executive's employment described in this Section 11(b), the termination will be deemed to have been a voluntary termination of employment with the consent of the Corporation for purposes of any stock option plan maintained by the Corporation. c) If termination occurs as a result of expiration of the Agreement, the Executive will not be entitled to receive any severance payments or continuation of benefit coverages except as provided under law (COBRA). The Executive will be permitted to exercise vested stock options and grants as prescribed in the agreements covering those options and grants. d) If, within the period beginning on the date of the Change of Control (as defined in Section 14(g)) and ending on the date that is twenty-four (24) months following the later of (i) the date of the Change of Control or (ii) in the case of a Change of Control described in Sections 14(c) or (d), the date on which the transaction resulting in the Change of Control was consummated, (i) the Executive terminates his employment within ninety (90) days following the occurrence of any of the events constituting "good reason" as described in Section 10(d) or (ii) the Executive terminates employment for any reason during the thirty (30)-day period beginning on the later of (A) the date that is twelve (12) months following the date of the Change of Control (as defined in Section 14(g)) or (B) in the case of a Change of Control described in Sections 14(c) or (d), the date that is twelve (12) months following the date on which the transaction resulting in the Change of Control is consummated, then the Corporation shall (i) make a lump-sum payment to the Executive equal to two and one-half times the sum of (A) his highest Annual Salary during the three-calendar-year period ending before the effective date of the termination and (B) an amount equal to the highest annual MICP award earned during the three-complete-plan- year period ending before the effective date of the termination, (ii) maintain benefit coverages for the Executive as specified in Section 11(b) (such coverages shall, however, include the PUP and the ACCRP) for a period of twenty-four (24) months; (iii) release its collateral assignment under the Split Dollar Agree- ment with Executive without reimbursement of premiums paid for that policy; and (iv) provide to the Executive outplacement and career counseling services as may be requested by the Executive, provided that the costs of such services may not exceed 15% of the Executive's highest Annual Salary during the three-calendar -year period ending before the effective date of the termination. Further, notwithstanding the terms of any restricted stock, stock option and/or performance share award or grant made to the Executive, such award or grant will become fully vested and the Executive will have a six-month period from date of termination in which to exercise available stock options. 11 12. GROSS-UP PROVISION. In the event any payments made to the Executive upon termination of employment in conjunction with a Change of Control (pursuant to this Agreement and any other plans, programs and arrangements maintained by the Corporation) would constitute "excess parachute payments" within the meaning of Code Section 280G, the Corporation will make an additional payment to the Executive in an amount such that after the payment of all income and excise taxes, the Executive will be in the same after-tax position as if no excise tax had been imposed on any excess parachute payments made by the Corporation to the Executive pursuant to this Agreement or otherwise. 13. DAMAGES FOR BREACH OF CONTRACT. In the event of a breach of this Agreement by either the Corporation or Executive resulting in damages to either party, that party may recover from the party breaching the Agreement any and all damages that may be sustained. 14. DEFINITION OF CHANGE OF CONTROL. For purposes of this Agreement, "Change of Control" shall mean the occurrence of any one of the following events: a) The Corporation acquires actual knowledge that any Person (other than the Corporation, any Subsidiary of the Corporation, any employee benefit plan of the Corporation or any of its Subsidiaries or any entity holding securities for or pursuant to the terms of any such plan) has acquired the Beneficial Ownership, directly or indirectly, of securities of the Corporation entitling such Person to a majority of the voting power of the Corporation's Voting Stock. b) A majority of the Board of Directors of the Corporation shall consist of persons other than (i) persons who were members of the Board of Directors on the date first written above, or (ii) persons (A) whose nomination or election as directors of the Corporation was approved by at least two-thirds of the then members of the Board of Directors (excluding any director referred to in clause (B) of this paragraph) who either were directors of the Corporation on the date first above written or whose nomination or election as a director was so approved and (B) who are not nominees or representatives of (1) any Person having Beneficial Ownership, directly or indirectly, of securi- ties of the Corporation entitling such Person to 10% or more of the voting power of the Corporation's Voting Stock or (2) any "participant," as defined in Rule 14a-11 under the Securities Exchange Act of 1934 or any successor rule, in any actual or threatened solicitation (other than a solicitation by the Corporation) subject to Rule 14a-11 or any successor rule relating to the election or removal of any directors of the Corporation; 12 c) The Corporation and/or any Subsidiary of the Corporation shall be a party to any merger, consolidation, division, share exchange, transfer of assets or any other transaction or series of related transactions outside the ordinary course of business (a "Business Combination") as a result of which the shareholders of the Corporation immediately prior to such Business Combination (excluding any party, other than the Corporation or a Subsidiary, to the Business Combination or any Affiliate or Associate of any such party) shall not hold immediately following such transaction a majority of the voting power of the Voting Stock of a Person or Persons immediately thereafter holding, directly or indirectly through Subsidiaries, assets of the Corporation and its consol- idated subsidiaries immediately prior to the Business Combination constituting at least sixty-five percent (65%) of Total Assets; or d) If the entity which is the actual employer of the Executive hereunder (the "Employer Company") is other than the Corporation, either (i) the Employer Company shall cease to be a Subsidiary of the Corporation or (ii) the Employer Company and/or any Subsi- diary of the Employer Company shall be a party to any Business Combination as a result of which the Corporation shall not hold immediately following such transaction a majority of the voting power of the Voting Stock of a Person or Persons immediately thereafter holding, directly or indirectly through Subsidiaries, assets of the Employer Company and its consolidated subsidiaries immediately prior to the Business Combination constituting at least seventy-five percent (75%) of the Employer Company's Total Assets. e) In the case of a Change of Control defined in Section 14(c) hereof, following such Change of Control the term "Employer Company" as used herein shall mean the Person which following such Change of Control holds the largest percentage of Employer Company's Total Assets, including for this purpose Total Assets which are held by such Person directly or indirectly through one or more Subsidiaries. Employer Company shall not enter into any transaction involving such a Change of Control unless at or prior to the consummation thereof such Person assumes the obligations of Employer Company hereunder. f) For purposes of this Section 14, "Person," "Affiliate," "Associate," "Voting Stock" and "Total Assets" shall have the definitions contained in, and "Beneficial Ownership" shall be determined as provided in, Article 10 of Keystone's Restated Articles of Incorporation, as in effect on the date first written above. g) For purposes of Sections 14(a) and (b), the date of the "Change of Control" is the date on which the Change of Control occurs. For purposes of Sections 14(c) and (d), the date of the "Change of Control" is the date on which the transaction resulting in a Change of Control is first evidenced in writing and executed by an authorized officer of the Corporation and/or Subsidiary including, without limitation, any letter of intent, sale or purchase agreement and/or agreement of merger, or, in the case of a series of Business Combination transactions resulting in a Change of Control, the date the earliest of such transactions is first evidenced in writing and executed by an authorized officer of the Corporation and/or Subsidiary. 13 15. NOTICE. For the purposes of this Agreement, notices and all other communications shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Carl L. Campbell 4717 Pine Ridge Road Harrisburg, PA 17110 If to the Corporation: Keystone Financial, Inc. One Keystone Plaza Harrisburg, PA 17101 Attn: Board of Directors or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon actual receipt. 16. BINDING EFFECT. This Agreement shall inure to the benefit of and be binding upon the Executive and his heirs and personal representatives, and the Corporation and any successor to the Corporation. 17. ENFORCEMENT OF SEPARATE PROVISIONS. Should any provision of this Agree- ment be ruled unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. 18. AMENDMENT. This Agreement may be amended or canceled only by mutual agreement of the parties in writing without the consent of any other person. 19. ARBITRATION. In the event that any disagreement or dispute shall arise between the parties concerning this Agreement, the issue(s) will be submitted to binding arbitration in the City of Harrisburg, PA pursuant to the rules of the American Arbitration Association. Any award entered shall be final and binding upon the parties hereto and judgment upon the award may be entered in any court having jurisdiction thereof. Attorneys' fees and administrative court costs associated with such actions shall be paid by the Corporation. 14 20. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. If the Executive dies prior to the expiration of his term of employment hereunder, any moneys that may be due him from the Corporation under this Agreement as of the date of death shall be paid to the executor, administrator, or other personal representative of the Executive's estate. 21. LAW GOVERNING. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 22. CAPTIONS; PRONOUNS. All captions are for convenience only and do not form a substantive part of this Agreement. All pronouns and any vari- ations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person or persons may require. 23. ENTIRE AGREEMENT. This Agreement supersedes any and all agreements, either oral or in writing, between the parties with respect to the employment by the Executive by the Corporation, and this Agreement contains all the covenants and agreements between the parties with respect to such employment. ATTEST: KEYSTONE FINANCIAL, INC. _________________________________ By:_______________________________ Secretary Uzal H. Martz, Jr. WITNESS: EXECUTIVE - - ---------------------------------- --------------------------------- Carl L. Campbell 15 EX-10.5 6 EXECUTIVE EMPLOYMENT AGREEMENT Exhibit 10.5 EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is made on the ____ day of ______________, 1998 between KEYSTONE FINANCIAL, INC. (the "Corporation"), a Pennsylvania corporation with its principal office at One Keystone Plaza, Harrisburg, PA 17105 and Mark L. Pulaski (the "Executive"), residing at 13 Fieldstone Drive, Mechanicsburg, PA 17055. WHEREAS, the Corporation desires to employ the Executive in a Senior Executive position with the Corporation or a Subsidiary under the terms and conditions set forth in this Agreement; and WHEREAS, the Executive desires to serve the Corporation or a Subsidiary in a Senior Executive position under the terms and conditions set forth in this Agreement. NOW THEREFORE, in consideration of the mutual covenant and agreement set forth herein and intending to be legally bound hereby, the parties agree as follows: 1. DEFINITIONS. The following definitions shall apply in this Agreement: a) "Anniversary Date" shall mean January 1, 1999 and the January 1 of each successive year. b) "Annual Salary" shall be the stated base cash compensation defined in Section 5(a) without regard to any elective deferral or salary reduction plan or program of the Corporation. c) "Board of Directors" shall mean the Board of Directors of the Corporation as constituted from time to time. d) "Change of Control" shall be as defined in Section 14 of this Agreement. e) "Code" shall mean the Internal Revenue Code of 1986, as amended. f) "Disability" shall be as defined in Section 10(b) of this Agreement. g) "Early Retirement" shall be that age stipulated from time to time by the Human Resources Committee of the Board of Directors as the age at which key management personnel may elect to take early retirement. h) "LTD" means the Corporation's long-term disability insurance for key management personnel as in effect from time to time. i) "MICP" means the Corporation's Management Incentive Compensation Plan as in effect from time to time, or any successor plan thereto. j) "Normal Retirement" shall be that age stipulated from time to time by the Human Resources Committee of the Board of Directors as the age at which key management personnel are required to take mandatory retirement. k) "Senior Executive" shall mean any key management employee of the Corporation or a Subsidiary whose employment relationship is governed by a contract or agreement. 1 l) "Subsidiary" shall mean any bank, corporation or other entity of which the Corporation owns, directly or indirectly through one or more Subsidiaries, a majority of each class of equity security having ordinary voting power in an election of directors. 2. TERM OF AGREEMENT; RENEWAL. a) This Agreement shall be initially effective for a twenty-nine-month period beginning August 1, 1998 and ending on December 31, 2000. Except as provided in Section 2(b), the term of this Agreement will automatically renew on January 1, 1999 and on each subsequent Anniversary Date for an additional three-year period unless, prior to the first day of October preceding the first Anniversary Date within the then current term, either party shall give written notice of nonrenewal to the other, in which event this Agreement shall terminate at the end of the three-year period then in effect. For example, the initial contract period is August 1, 1998 through December 31, 2000. On January 1, 1999, the term of this Agreement extends to December 31, 2001. On January 1, 2000, the term of this Agreement extends to December 31, 2002 unless one of the parties provides a written notice of intent not to renew the Agreement prior to October 1, 1999. b) In the event of a Change of Control, if the Corporation provides the Executive with timely notice of nonrenewal pursuant to Section 2(a) prior to the first Anniversary Date following the Change of Control, the Corporation's decision not to renew this Agreement shall not constitute "good reason" for purposes of Section 10(d)(ii). Any subsequent decision by the Corporation not to renew this Agreement shall, however, constitute good reason for purposes of Section 10(d)(ii). 3. POSITION AND DUTIES. The Executive shall serve initially as President and Chief Operating Officer of the Corporation reporting to the Chairman and Chief Executive Officer of the Corporation and shall have supervision and control over, and responsibility for, the general management and operation of the Corporation, and shall have such other powers and duties as may from time to time be prescribed by the Chairman and Chief Executive Officer of the Corporation, provided that such duties are consistent with the position of a Senior Executive. 2 4. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall devote substantially all his working time, ability and attention to the business of the Corporation during the term of this Agreement. The Executive shall notify the Board of Directors in writing before the Executive engages in any other business or commercial activities, duties or pursuits, including, but not limited to, directorships of other companies. Under no circumstances may the Executive engage in any business or commercial activities, duties or pursuits which compete with the business or commercial activities of the Corporation or any of its Subsidiaries, nor may the Executive serve as a director or officer or in any other capacity with any business entity unless he shall have received advance written approval from the officer of the Corporation to whom he reports as provided in Section 3 of this Agreement. 5. COMPENSATION. a) ANNUAL SALARY. For services rendered under this Agreement, the Executive shall be entitled to receive as base compensation an Annual Salary at an initial rate of $300,000 per year. The Executive's Annual Salary shall be reviewed thereafter by the Board of Directors at least once annually and may be adjusted at the discretion of the Board of Directors in accordance with the Corporation's then-current compensation policies and practices and other factors deemed relevant by the Board of Directors; provided, that at no time shall the Annual Salary be less than the Executive's Annual Salary in the prior calendar year. Annual Salary shall be subject to withholding and other applicable taxes and payroll deductions and payable in substantially equal monthly installments or such other more frequent intervals as may be determined by the Board of Directors as payroll policy for Senior Executives. b) INCENTIVE COMPENSATION. The Executive shall be eligible for annual incentive awards under and in accordance with the MICP, based on achievement of annual performance goals and other criteria set forth in the MICP. Subject to the terms and conditions of the MICP and all rules and regulations pertaining thereto, any incentive award to which the Executive becomes entitled will be paid to the Executive within ninety (90) days following the end of the fiscal year in question. In addition to the MICP, the Executive will be eligible to participate in any stock option, stock bonus, or other incentive plan available generally to other Senior Executives from time to time. 3 6. BENEFITS, VACATION TIME, EXPENSES AND PERQUISITES. a) EMPLOYEE BENEFIT PLANS. During the term of this Agreement, the Executive shall be entitled to participate in all employee benefit plans made available from time to time by the Corporation to its Senior Executives, including, but not limited to, pension, profit-sharing, savings, supplemental retirement income, medical and health-and-accident plans and arrangements, subject to and on a basis consistent with the terms and conditions of, and the Corporation rules and regulations pertaining to such plans and arrangements, and any limitations or qualifications imposed by any applicable governmental body. Subject to the foregoing, the benefit plans and arrangements provided to the Executive shall include, but not be limited to, the following: i) Retirement Income Plans: The Executive shall be entitled to participate in any nonqualified supplemental retirement income plans available from time to time to the Corporation's Senior Executives, and shall become vested in such plans according to the schedules provided in the plan documents. Benefits to be received by the Executive pursuant to such plans will be 4 calculated under the formulas utilized in such plans as in effect from time to time; provided, however, that in the event of a Change of Control, the involuntary termination of the Executive's employment other than for cause or the termination of the Executive's employment for good reason (in either case, whether or not in conjunction with a Change of Control), the benefits to be provided to the Executive pursuant to such plans shall be calculated under the formulas utilized by such plans as in effect from time to time but in no event shall such benefits be less than the benefits calculated under the formulas utilized in such plans as in effect on the date of the Change of Control (as defined in Section 14(g)) or the effective date of the Executive's termination of employment , respectively. ii) Life Insurance: Subject to satisfaction of conditions imposed by the applicable insurance company for additional coverage, the Corporation shall maintain for the Executive during the term of this Agreement the insurance coverage established for the Executive effective January 1, 1994, under and in accordance with the Keystone Financial Executive Split Dollar Agreement with Executive; provided, and notwithstanding any contrary provisions therein, the Corporation shall have no unilateral right to terminate or modify such Split Dollar Agreement with the Executive. iii) Disability Insurance: In addition to standard group benefit provisions, the Corporation shall make available a supplemental LTD insurance policy for purchase by the Executive, provided the Executive qualifies as a medically acceptable risk to the issuing company on a standard underwriting basis. Such policy shall provide that in the event the Executive becomes disabled in accordance with the terms of such policy, he shall be entitled to receive benefits from all sources (e.g., Social Security, group LTD and supplemental LTD) equal to 67% of his Annual Salary as in effect at the time of disability until he reaches the age of 65 or dies, whichever occurs first. The Corporation shall continue to pay to the Executive his Annual Salary during any applicable "elimination" (waiting) period under the supplemental LTD policy, not to exceed one hundred and eighty (180) days. Notwithstanding the foregoing, supplemental LTD coverage shall be required only if and to the extent that the Corporation's group LTD insurance policy benefit limit is such that it does not permit the Executive to receive the above-stated percentage (i.e., 67%) of income replacement at the time of said disability. b) VACATION. During the term of this Agreement, the Executive shall be entitled to the number of paid vacation days in each calendar year determined by the Corporation from time to time for its Senior Executives, but not less than four (4) weeks in any calendar year. Such vacation entitlement shall be subject to all rules and policies concerning vacation time as shall be applicable to Senior Executives from time to time. The Executive shall also be entitled to all paid holidays given by the Corporation to its Senior Executives. c) REIMBURSABLE GENERAL EXPENSES. During the term of this Agreement, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him (in accordance with the policies and procedures established from time to time by the Board of Directors for its Senior Executives) in performing services hereunder, provided that the Executive first properly accounts therefor in accordance with such policies and procedures. d) REIMBURSABLE AUTO EXPENSES. During the term of this Agreement, the Executive shall be entitled to receive a monthly payment under the Corporation's Automobile Capital Cost Reimbursement Plan (the "ACCRP") for selected executives. Such payments shall be treated as current income and be subject to regular payroll tax withholding and deductions. The Executive shall also be entitled to reimbursement for operating expenses of the automobile associated with business travel at the established corporate mileage rate. e) MISCELLANEOUS. The Executive shall be entitled to receive such other perquisites, e.g. club memberships and "fringe benefits", as the Board of Directors shall deem appropriate in its sole direction. 5 7. INDEMNIFICATION. The Corporation shall indemnify the Executive, to the fullest extent permitted from time to time by Pennsylvania law, with respect to any threatened, pending or contemplated action, suit or proceeding, brought against him by reason of the fact that he is or was a director, officer, employee or agent of the Corporation or is or was serving at the written request of the Corporation as a director, officer, employee or agent of another person or entity. To the fullest extent permitted by Pennsylvania law, the Corporation shall in advance of final disposition pay any and all expenses incurred by the Executive in connection with any threatened, pending or completed action, suit or proceeding with respect to which the Executive may be entitled to indemnification hereunder. The Executive's right to indemnification provided herein is not exclusive of any other rights of indemnification to which the Executive may be entitled under any bylaw, agreement, vote of shareholders or otherwise, and shall continue beyond the term of this Agreement. The Corporation shall use its best efforts to obtain insurance coverage for the Executive under an insurance policy covering officers and directors of the Corporation against lawsuits, arbitrations or other proceedings; however, nothing herein shall be construed to require the Corporation to obtain such insurance if the Board of Directors determines that such coverage cannot be obtained at a commercially reasonable price. Notwithstanding the foregoing, the Executive shall be entitled to indemnification from the Subsidiary which is his actual employer if such indemnification is available and provides more extensive coverage than the indemnification provided under this Agreement. 8. UNAUTHORIZED DISCLOSURE. During the term of this Agreement or at any later time, the Executive shall not, without the written consent of a duly authorized executive officer of the Corporation, disclose to any person (including an employee of the Corporation or a Subsidiary), other than a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Corporation, any material confidential information obtained by him while in the employ of the Corporation or any Subsidiary or operating unit with respect to any of the services, products, improvements, formulas, designs or styles, processes, customers, methods of distribution or business practices, the disclosure of which reasonably would be expected to materially damage the Corporation; provided, however, that for purposes of this Agreement, confidential information shall not include any information known generally to the public (other than as a result of unauthorized disclosure by the Executive) or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that conducted by the Corporation. 9. RESTRICTIVE COVENANTS. Except as otherwise provided below, upon termination of his employment hereunder regardless of the circumstances or reasons for such termination, the Executive covenants and agrees as follows: a) NONCOMPETITION. The Executive shall not, directly or indirectly, within the marketing area of the Corporation and its Subsidiaries (defined as all areas within 100 miles of the work location to which the Executive was assigned for the majority of time during the twelve months preceding the termination of his employment where the Corporation has established an active and material market presence) enter into or engage generally in direct or indirect competition with the Corporation in the business of banking or any banking or trust 6 related business, either directly or indirectly as an individual on his own or as a partner or joint venturer, or as a director, officer, shareholder (except as an incidental shareholder), employee or agent for any person, for a period of one year after the date of termination of his employment, except where the termination occurs in conjunction with a Change of Control as described in Section 11(d) . The existence of any material claim or cause of action of the Executive against the Corporation, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Corporation of this covenant. The Executive acknowledges and agrees that enforcement of this covenant not to compete will not prevent him from earning a livelihood and that any breach of the restrictions set forth in this paragraph will result in irreparable injury to the Corporation for which it shall have no adequate remedy at law, and that the Corporation shall be entitled to injunctive relief in order to enforce the provisions hereof. In the event that this paragraph shall be determined by any court of competent jurisdiction to be unenforceable in part by reason of it being too great a period of time or covering too great a geographical area, it shall be in full force and effect as to that period of time or geographical area determined to be reasonable by the court. b) RETURN OF MATERIALS. Upon termination of employment with the Corporation for any reason, including a termination of employment in conjunction with a Change of Control as described in Section 11(d), the Executive shall immediately deliver to the Corporation all correspondence, manuals, letters, notes, notebooks, reports and any other documents and tangible items containing or constituting confidential information about the Corporation maintained at his office and shall promptly deliver all said materials held by him at other locations. c) NONSOLICITATlON OF EMPLOYEES. The Executive shall not entice or solicit, directly or indirectly, any other executives or key manage- ment personnel of the Corporation to leave the employ of the Corporation or its Subsidiaries to work with the Executive or any entity with which the Executive has affiliated for a period of one year following the Executive's termination of employment with the Corporation for any reason, including a termination of employment in conjunction with a Change of Control as described in Section 11(d). d) NONSOLICITATION OF CUSTOMERS. The Executive shall not entice or solicit, directly or indirectly, any client or customer of the Corporation or any Subsidiary for a period of one year following the Executive's termination of employment with the Corporation for any reason, includin a termination of employment in conjunction with a Change of Control as described in Section 11(d). 7 e) REMEDY. The Executive acknowledges and agrees that any breach of the restrictions set forth in Sections 8 and 9 will result in irreparable injury to the Corporation for which it shall have no meaningful remedy in law and the Corporation shall be entitled to injunctive relief in order to enforce provisions hereof. Upon obtaining such injunction, the Corporation shall be entitled to pursue reimbursement from the Executive and/or the Executive's employer of costs incurred in securing a qualified replacement for any employee enticed away from the Corporation by the Executive. Further, the Corporation shall be entitled to set off against or obtain reimbursement from the Executive of any payments owed or made to the Executive by the Corporation hereunder. 10. TERMINATION. a) GENERALLY. The Executive's employment hereunder shall terminate upon his Early Retirement, Normal Retirement or death. b) TERMINATION DUE TO PERMANENT DISABILITY. If the Executive becomes permanently disabled because of sickness, physical or mental disability, or any other reason, and is unable to perform or complete his duties under this Agreement for a period anticipated to extend for a period of at least one hundred eighty (180) consecutive calendar days (or such other length of time that is equal to any applicable elimination period provided for in an LTD insurance policy), the Corporation shall have the option to terminate this Agreement by giving written notice of termination to the Executive. Such termination shall be without prejudice to any right the Executive may have under the LTD insurance program maintained by the Corporation. Such disability shall be certified by the Corporation's group LTD carrier, in conjunction with the Executive's supplemental LTD carrier if such supplemental policy is in effect; in the event these carriers cannot agree, they shall designate a licensed physician whose decision shall be binding for purposes of this Agreement. c) TERMINATION FOR CAUSE. The Corporation may terminate the Executive's employment hereunder for cause. For the purposes of this Agreement, the Corporation shall have "cause" to terminate the Executive's employment hereunder upon (i) the willful failure by the Executive to substantially perform his duties hereunder, other than any such failure resulting from the Executive's incapacity due to physical or mental illness, (ii) the willful engaging by the Executive in gross misconduct materially injurious to the Corporation, (iii) the willful violation by the Executive of the provisions of Sections 4 or 8 hereof, after notice from Corporation and a failure to cure such violation within 30 days of said notice, or if said violation cannot be cured within 30 days, within a reasonable time thereafter if the Executive is diligently attempting to cure the violation, (iv) the gross negligence of the Executive in the performance of his duties, or (v) receipt of a final written directive or order of any governmental body or entity having jurisdiction over the Corporation or any of its Subsidiaries requiring termination or removal of the Executive. The determination of the existence of cause shall be made in the reasonable judgment of the Board of Directors or its delegee. 8 d) TERMINATION BY EMPLOYEE UPON GOOD REASON. The Executive may terminate his employment for good reason. The term "good reason" shall mean (i) a reduction in the Executive's Annual Salary in violation of Section 5 hereof, or his total cash compensation opportunities (e.g. annual incentive awards under the Corporation's MICP or equity partic- ipation awards) or benefits (except any reductions in compensation which may be applied broadly among all executives because of adverse financial conditions for the Corporation or as part of a restructuring of the Corporation's executive compensation program), (ii) the Corporation's decision not to renew the Agreement (except as otherwise provided in Section 2(b)), (iii) the Corporation's failure to remedy a material breach of this Agreement within thirty (30) days following written notice of the breach from the Executive, (iv) the Executive's position is eliminated and he is not offered a comparable position within thirty (30) days or (v) the lessening of the Executive's job responsibilities or an unacceptable relocation (defined as more than thirty-five (35) miles from the Executive's prior work site). e) SALE OF SUBSIDIARY. i) If the entity which is the actual employer of the Executive is a Subsidiary of the Corporation (the "Employer Subsidiary"), the disposition of equity securities or assets of the Employer Subsidiary by the Corporation or by another Subsidiary such that the Employer Subsidiary ceases to qualify as a Subsidiary for purposes of this Agreement shall not constitute a termination of the Executive's employment hereunder. ii) If the Executive remains employed by the Employer Subsidiary following its sale, the Executive shall remain eligible to receive the payments and benefits specified in Section 11(d) for the periods of time specified therein and the provision of such payments and benefits shall remain the obligation of the Corporation. iii) If the Executive is employed by the Corporation or another Subsidiary following the sale of the Employer Subsidiary, the Executive shall not be eligible to receive the payments and benefits specified in Section 11(d) notwithstanding the fact that the sale of the Employer Subsidiary constituted a Change of Control as defined in Section 14. Unless the Executive and the Corporation agree otherwise, the Executive shall, however, remain eligible to receive the payments and benefits specified in Sections 11(a) and 11(b). 9 11. PAYMENTS UPON TERMINATION. a) If the Executive's employment shall be terminated because of Early Retirement, Normal Retirement, death, Disability or for cause, the Corporation shall pay the Executive or his guardian or estate his full Annual Salary through the date of termination at the rate in effect at the time of termination and any other amounts owing to the Executive at the date of termination. Further, should termination occur because of Early Retirement, Normal Retirement, death, or Disability, the Corporation may elect to pay the Executive, or his guardian or estate, at the end of the fiscal year in which the termination occurred, a prorated award under the MICP, and also may elect to accelerate vesting of restricted stock, stock option and performance share awards to provide a full or prorated compensation opportunity for the retired or disabled Executive or the deceased Executive's guardian or estate. Notwithstanding the foregoing, the Corporation shall have no obligation to provide payments of benefits beyond what the Executive is entitled to under the terms and conditions of the various compensation and benefit plans and arrangements maintained by the Corporation. b) If (i) the Executive's employment is terminated by the Corporation other than for the reasons or circumstances set forth under Sections 10(a), (b) or (c) hereof or (ii) if the Executive terminates his employment within 90 days following the occurrence of any of the events constituting "good reason" as defined in Section 10(d), then the Corporation shall make a lump-sum cash payment to the Executive equal to one and one-half times his highest Annual Salary during the three-calendar-year period ending before the effective date of the termination. In such event the Corporation shall also maintain in full force and effect (and the Executive shall remain a participant in), for a minimum period of eighteen (18) months, all employee benefit plans and programs to which the Executive was entitled prior to the date of termination, including but not limited to, pension, profit-sharing, savings, supplemental retirement income, medical and health-and-accident plans and arrangements, but specifically excluding the ACCRP and the Performance Unit Plan (the "PUP"), if the Executive's continued participation is permitted under the general terms and conditions and rules and regulations of such plans and programs. In the event that the Executive's continued participation in any such plan or program is prohibited, the Executive shall be entitled to receive an amount equal to the annual contribution, payments, premiums, credits or allocations made by the Corporation to him, to his account or on his behalf under such plans and programs from which his continued participation is barred, except that if the 10 Executive's participation in any health, medical, life insurance, or disability plan or program is barred, the Corporation shall use its best efforts to obtain and pay for, on the Executive's behalf, individual insurance plans, policies or programs which provide to the Executive health, medical, life and disability insurance coverage which is equivalent to the insurance coverage to which the Executive was entitled prior to the date of termination. In the event of a termination of the Executive's employment described in this Section 11(b), the termination will be deemed to have been a voluntary termination of employment with the consent of the Corporation for purposes of any stock option plan maintained by the Corporation. c) If termination occurs as a result of expiration of the Agreement, the Executive will not be entitled to receive any severance payments or continuation of benefit coverages except as provided under law (COBRA). The Executive will be permitted to exercise vested stock options and grants as prescribed in the agreements covering those options and grants. d) If, within the period beginning on the date of the Change of Control (as defined in Section 14(g)) and ending on the date that is twenty-four (24) months following the later of (i) the date of the Change of Control or (ii) in the case of a Change of Control described in Sections 14(c) or (d), the date on which the transaction resulting in the Change of Control was consummated, (i) the Executive terminates his employment within ninety (90) days following the occurrence of any of the events constituting "good reason" as described in Section 10(d) or (ii) the Executive terminates employment for any reason during the thirty (30)-day period beginning on the later of (A) the date that is twelve (12) months following the date of the Change of Control (as defined in Section 14(g)) or (B) in the case of a Change of Control described in Sections 14(c) or (d), the date that is twelve (12) months following the date on which the transaction resulting in the Change of Control is consummated, then the Corporation shall (i) make a lump-sum payment to the Executive equal to two and one-half times the sum of (A) his highest Annual Salary during the three-calendar-year period ending before the effective date of the termination and (B) an amount equal to the highest annual MICP award earned during the three-complete-plan-year period ending before the effective date of the termination; (ii) maintain benefit coverages for the Executive as specified in Section 11(b) (such coverages shall, however, include the PUP and the ACCRP) for a period of twenty-four (24) months; (iii) release its collateral assignment under the Split Dollar Agreement with Executive without reimbursement of premiums paid for that policy; and (iv) provide to the Executive outplacement and career counseling services as may be requested by the Executive, provided that the costs of such services may not exceed 15% of the Executive's highest Annual Salary during the three-calendar-year period ending before the effective date of the termination. Further, notwithstanding the terms of any restricted stock, stock option and/or performance share award or grant made to the Executive, such award or 11 grant will become fully vested and the Executive will have a six-month period from date of termination in which to exercise available stock options. 12. GROSS-UP PROVISION. In the event any payments made to the Executive upon termination of employment in conjunction with a Change of Control (pursuant to this Agreement and any other plans, programs and arrangements maintained by the Corporation) would constitute "excess parachute payments" within the meaning of Code Section 280G, the Corporation will make an additional payment to the Executive in an amount such that after the payment of all income and excise taxes, the Executive will be in the same after-tax position as if no excise tax had been imposed on any excess parachute payments made by the Corporation to the Executive pursuant to this Agreement or otherwise. 13. DAMAGES FOR BREACH OF CONTRACT. In the event of a breach of this Agreement by either the Corporation or Executive resulting in damages to either party, that party may recover from the party breaching the Agreement any and all damages that may be sustained. 14. DEFINITION OF CHANGE OF CONTROL. For purposes of this Agreement, "Change of Control" shall mean the occurrence of any one of the following events: a) The Corporation acquires actual knowledge that any Person (other than the Corporation, any Subsidiary of the Corporation, any employee benefit plan of the Corporation or any of its Subsidiaries or any entity holding securities for or pursuant to the terms of any such plan) has acquired the Beneficial Ownership, directly or indirectly, of securities of the Corporation entitling such Person to a majority of the voting power of the Corporation's Voting Stock. b) A majority of the Board of Directors of the Corporation shall consist of persons other than (i) persons who were members of the Board of Directors on the date first written above, or (ii) persons (A) whose nomination or election as directors of the Corporation was approved by at least two-thirds of the then members of the Board of Directors (excluding any director referred to in clause (B) of this paragraph) who either were directors of the Corporation on the date first above written or whose nomination or election as a director was so approved and (B) who are not nominees or representatives of (1) any Person having Beneficial Ownership, directly or indirectly, of securities of the Corporation entitling such Person to 10% or more of the voting power of the Corporation's Voting Stock or (2) any "participant," as defined in Rule 14a-11 under the Securities Exchange Act of 1934 or any successor rule, in any actual or threatened solicitation (other than a solicitation by the Corporation) subject to Rule 14a-11 or any successor rule relating to the election or removal of any directors of the Corporation; 12 c) The Corporation and/or any Subsidiary of the Corporation shall be a party to any merger, consolidation, division, share exchange, transfer of assets or any other transaction or series of related transactions outside the ordinary course of business (a "Business Combination") as a result of which the shareholders of the Corporation immediately prior to such Business Combination (excluding any party, other than the Corporation or a Subsidiary, to the Business Combination or any Affiliate or Associate of any such party) shall not hold immediately following such transaction a majority of the voting power of the Voting Stock of a Person or Persons immediately thereafter holding, directly or indirectly through Subsidiaries, assets of the Corporation and its consolidated subsidiaries immediately prior to the Business Combination constituting at least sixty-five percent (65%) of Total Assets; or d) If the entity which is the actual employer of the Executive hereunder (the "Employer Company") is other than the Corporation, either (i) the Employer Company shall cease to be a Subsidiary of the Corporation or (ii) the Employer Company and/or any Subsidiary of the Employer Company shall be a party to any Business Combination as a result of which the Corporation shall not hold immediately following such transaction a majority of the voting power of the Voting Stock of a Person or Persons immediately thereafter holding, directly or indirectly through Subsidiaries, assets of the Employer Company and its consolidated subsidiaries immediately prior to the Business Combination constituting at least seventy-five percent (75%) of the Employer Company's Total Assets. e) In the case of a Change of Control defined in Section 14(c) hereof, following such Change of Control the term "Employer Company" as used herein shall mean the Person which following such Change of Control holds the largest percentage of Employer Company's Total Assets, including for this purpose Total Assets which are held by such Person directly or indirectly through one or more Subsidiaries. Employer Company shall not enter into any transaction involving such a Change of Control unless at or prior to the consummation thereof such Person assumes the obligations of Employer Company hereunder. f) For purposes of this Section 14, "Person," "Affiliate," "Associate," "Voting Stock" and "Total Assets" shall have the definitions contained in, and "Beneficial Ownership" shall be determined as provided in, Article 10 of Keystone's Restated Articles of Incorporation, as in effect on the date first written above. g) For purposes of Sections 14(a) and (b), the date of the "Change of Control" is the date on which the Change of Control occurs. 13 For purposes of Sections 14(c) and (d), the date of the "Change of Control" is the date on which the transaction resulting in a Change of Control is first evidenced in writing and executed by an authorized officer of the Corporation and/or Subsidiary including, without limitation, any letter of intent, sale or purchase agreement and/or agreement of merger, or, in the case of a series of Business Combination transactions resulting in a Change of Control, the date the earliest of such transactions is first evidenced in writing and executed by an authorized officer of the Corporation and/or Subsidiary. 15. NOTICE. For the purposes of this Agreement, notices and all other communications shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Mark L. Pulaski 13 Fieldstone Drive, Mechanicsburg, PA 17055 If to the Corporation: Keystone Financial, Inc. One Keystone Plaza Harrisburg, PA 17101 Attn: Chairman of the Board or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon actual receipt. 16. BINDING EFFECT. This Agreement shall inure to the benefit of and be binding upon the Executive and his heirs and personal representatives, and the Corporation and any successor to the Corporation. 17. ENFORCEMENT OF SEPARATE PROVISIONS. Should any provision of this Agreement be ruled unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. 18. AMENDMENT. This Agreement may be amended or canceled only by mutual agreement of the parties in writing without the consent of any other person. 19. ARBITRATION. In the event that any disagreement or dispute shall arise between the parties concerning this Agreement, the issue(s) will be submitted to binding arbitration in the City of Harrisburg, PA pursuant to the rules of the American Arbitration Association. Any award entered shall be final and binding upon the parties hereto and judgment upon the award may be entered in any court having jurisdiction thereof. Attorneys' fees and administrative court costs associated with such actions shall be paid by the Corporation. 14 20. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. If the Executive dies prior the expiration of his term of employment hereunder, any moneys that may be due him from the Corporation under this Agreement as of the date of death shall be paid to the executor, administrator, or other personal representative of the Executive's estate. 21. LAW GOVERNING. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 22. CAPTIONS; PRONOUNS. All captions are for convenience only and do not form a substantive part of this Agreement. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person or persons may require. 23. ENTIRE AGREEMENT. This Agreement supersedes any and all agreements, either oral or in writing, between the parties with respect to the employment by the Executive by the Corporation, and this Agreement contains all the covenants and agreements between the parties with respect to such employment. KEYSTONE FINANCIAL, INC. ATTEST: ______________________________ By:____________________________ Secretary Carl L. Campbell Chief Executive Officer WITNESS: EXECUTIVE - - ------------------------------- -------------------------------- Mark L. Pulaski 15 EX-10.8 7 SUPPLEMENTAL RETIREMENT INCOME PLAN Exhibit 10.8 KEYSTONE FINANCIAL, INC. SUPPLEMENTAL RETIREMENT INCOME PLAN EFFECTIVE JANUARY 1, 1994 KEYSTONE FINANCIAL, INC. SUPPLEMENTAL RETIREMENT INCOME PLAN TABLE OF CONTENTS Page PREAMBLE.............................................. i ARTICLE 1. DEFINITIONS........................................... 1 Section 1.01 Actual Death Benefit.................................. 1 Section 1.02 Actual Pension........................................ 1 Section 1.03 Beneficiary........................................... 1 Section 1.04 Board................................................. 1 Section 1.05 Code.................................................. 1 Section 1.06 Committee............................................. 1 Section 1.07 Effective Date........................................ 1 Section 1.08 ERISA................................................. 1 Section 1.09 Excluded Compensation................................. 1 Section 1.10 Keystone.............................................. 1 Section 1.11 Participant........................................... 1 Section 1.12 Participating Entity.................................. 2 Section 1.13 Pension Plan.......................................... 2 Section 1.14 Plan.................................................. 2 ARTICLE 2. BENEFITS.............................................. 3 Section 2.01 Retirement Benefits................................... 3 Section 2.02 Death Benefits........................................ 4 Section 2.03 Beneficiary Designation............................... 5 ARTICLE 3. ADMINISTRATION........................................ 6 Section 3.01 Committee and Agents.................................. 6 Section 3.02 Rules and Regulations................................. 6 Section 3.03 Quorum................................................ 6 Section 3.04 Plan Interpretation................................... 6 Section 3.05 Notice of Participation............................... 6 Section 3.06 Costs................................................. 6 Section 3.07 Unsecured Creditor.................................... 6 Section 3.08 Authority of Board and Committee...................... 7 Section 3.09 Amendment, Modification or Termination......................................... 7 Section 3.10 Claim and Appeal Procedure............................ 7 Section 3.11 Status of Plan........................................ 8 Section 3.12 Tax Withholding....................................... 9 ARTICLE 4. MISCELLANEOUS PROVISIONS.............................. 10 Section 4.01 Merger or Consolidation............................... 10 Section 4.02 Gender and Number..................................... 10 Section 4.03 Construction.......................................... 10 Section 4.04 Non-alienation........................................ 10 Section 4.05 No Employment Rights.................................. 11 Section 4.06 Minor or Incompetent.................................. 11 Section 4.07 Illegal or Invalid Provision.......................... 11 PREAMBLE The purpose of the Keystone Financial, Inc. Supplemental Retirement Income Plan is to supplement retirement benefits payable from the Keystone Financial, Inc. Pension Plan which have been limited by various Internal Revenue Code provisions and the exclusion of deferred compensation from the definition of compensation under the Pension Plan. The Plan is designed to provide supplemental retirement benefits because of the following limitations: (Degree) The maximum benefit limitations under Internal Revenue Code Section 415. (Degree) The maximum compensation limitations under Internal Revenue Code Section 401(a)(17). (Degree) The provisions of the Pension Plan which exclude from the definition of compensation under the Pension Plan certain amounts earned or deferred under the Keystone Financial, Inc. Savings Restoration Plan and the Keystone Financial, Inc. Management Incentive Compensation Plan and any other nonqualified plan maintained by Keystone or a subsidiary or affiliate which participates in this Plan. ARTICLE 1. DEFINITIONS As used herein, the following words and phrases shall have the meanings below, unless the context clearly indicates otherwise: 1.01 "Actual Death Benefit" shall mean the death benefit which is paid or is to be paid from the Pension Plan following the death of a Participant. 1.02 "Actual Pension" shall mean the pension benefit which is paid or is to be paid from the Pension Plan to a Participant. 1.03 "Beneficiary" shall mean the person or persons, natural or legal, designated in writing by the Participant in accordance with Section 2.03 to receive any benefits under the Plan which may become payable in the event of the Participant's death, or if none is designated or surviving at the time of the Participant's death, the Participant's surviving spouse shall be the Beneficiary or, if there is no surviving spouse, then the estate of the Participant shall be the Beneficiary. 1.04 "Board" shall mean the Board of Directors of Keystone. 1.05 "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. 1.06 "Committee" shall mean the Human Resources Committee of the Board. 1.07 "Effective Date" shall mean January 1, 1994. 1.08 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.09 "Excluded Compensation" shall mean the amount of elective deferrals made by a Participant and benefits payable pursuant to the provisions of the Keystone Financial, Inc. Savings Restoration Plan, the Keystone Financial, Inc. Management Incentive Compensation Plan, and any other nonqualified deferred compensation plan of Keystone or a Participating Entity which is excluded from the calculation of the Actual Pension or Actual Death Benefit. 1.10 "Keystone" shall mean Keystone Financial, Inc. 1.11 "Participant" shall mean any participant in the Pension Plan whose Actual Pension is limited or with respect to whom the Actual Death Benefit is limited by reason of Code Section 415, Code Section 401(a)(17) or Excluded Compensation. 1.12 "Participating Entity" shall mean National Bank of the Main Line, Northern Central Bank, Mid-State Bank, Pennsylvania National Bank; American Trust Bank and American Trust Bank of West Virginia as of a date to be estab- lished by Keystone's Executive Vice President of Banking Group; and any subsidiary of Keystone, affiliate bank of Keystone, or other affiliated entity of Keystone, which elects to participate in the Plan with respect to its Participants and is approved by the Board or the Committee to participate in the Plan, with such status as a Participating Entity hereunder and participation in the Plan ceasing automatically on the date the subsidiary or affiliate ceases to be a subsidiary or affiliate of Keystone. 1.13 "Pension Plan" shall mean the Keystone Financial, Inc. Pension Plan in effect from time to time. 1.14 "Plan" shall mean the Keystone Financial, Inc. Supplemental Retirement Income Plan, as set forth herein or as it may be amended hereafter. ARTICLE 2. BENEFITS 2.01 Retirement Benefits. (a) A Participant who is determined by the Committee to be a member of a select group of management or highly compensated employees of Keystone or a Participating Entity for purposes of Title I of ERISA and is 100% vested in his Actual Pension under the Pension Plan at the time payment is to commence hereunder after the Effective Date shall receive a pension from the Plan which is equal to the difference between the Participant's Actual Pension and what the Actual Pension would have been without regard to the limitations of Code Sections 415 and 401(a)(17) and taking into account Excluded Compensation. The amount payable under the Plan shall be determined on the basis of the Actual Pension payable in the form of a single life annuity beginning as of the first day of the month on or after the later of the Participant's 65th birthday or termination of employment with Keystone and all Participating Entities. (b) A Participant who is not covered by (a) above and is 100% vested in his Actual Pension under the Pension Plan at the time payment is to commence hereunder on or after the Effective Date shall receive a pension from the Plan which is equal to the difference between the Participant's Actual Pension and what the Actual Pension would have been without regard to the limitations of Code Sections 415. The amount payable under the Plan shall be determined on the basis of the Actual Pension payable in the form of a single life annuity beginning as of the first day of the month on or after the later of the Participant's 65th birthday or termination of employment with Keystone and all Participating Entities. (c) Subject to (d) below, payment of amounts payable from the Plan under (a) or (b) above shall commence to the Participant, if then living, as of the later of the first day of the month on or following the Participant's termination of employment which entitles the Participant to an Actual Pension or the first day of the month following the Participant's 65th birthday, with such payment to begin not later than 30 days thereafter in the form of a single life annuity if the Participant is not then married or adjusted on the same basis as under the Pension Plan and paid in the form of a Qualified Joint and Survivor Annuity (as defined in the Pension Plan) if the Participant is then married. (d) Notwithstanding (c) above, if the present value actuarial equivalent of the amount to be paid under (a) or (b) above is not more than $5,000, determined as of the first day of the month following the Participant's termination of employment which entitles the Participant to an Actual Pension on the basis of the assumptions used for calculating similar lump sums under the Pension Plan, such lump sum amount shall be paid to the Participant, if then living, on March 30 of the calendar year following the calendar year in which the Participant's termination of employment occurs and shall be in lieu of all other payments to the Participant under the Plan. 2.02 Death Benefits. (a) In the event of the death of the Participant after payments from the Plan have begun in the form of a Qualified Joint and Survivor Annuity, the Participant's spouse shall receive the payments due based on that form of payment commencing with the month following the month of the Participant's death, and no other payments shall be due from the Plan with respect to the Participant. (b) In the event of the death of the Participant after payment from the Plan has been made in the form of a lump sum or commenced in the form of a single life annuity, no further payments shall be due from the Plan with respect to the Participant. (c) In the event of the death of the Participant prior to the date on which a lump sum would have been made under Section 2.01(d) above, the payment shall be made on the scheduled payment date to the Participant's Beneficiary and no other payments shall be due from the Plan with respect to the Participant. (d) In the event a Participant who is determined by the Committee to be a member of a select group of management or highly compensated employees of Keystone or a Participating Entity for purposes of Title I of ERISA at the time of death on or after the Effective Date is 100% vested under the Pension Plan and dies prior to any payments commencing under the Plan, and if (c) above does not apply, in lieu of all other payments from the Plan, the person(s) receiving or entitled to receive the Actual Death Benefit under the Pension Plan with respect to the Participant shall receive a death benefit from the Plan which is equal to the difference between the Actual Death Benefit and what the Actual Death Benefit would have been without regard to the limitations of Code Sections 415 and 401(a)(17) and taking into account Excluded Compensation. The amount payable under the Plan shall be determined on the basis of the Actual Death Benefit which would be payable in the form of a single life annuity beginning as of the first day of the month on or after the Participant's death, or as of the earliest date thereafter as of which the Actual Death Benefit can be paid. (e) In the event a Participant dies on or after the Effective Date and prior to any payments commencing to him under the Plan, and is 100% vested under the Pension Plan, and if (c) and (d) above do not apply, in lieu of all other payments from the Plan, the person(s) receiving or entitled to receive the Actual Death Benefit under the Pension Plan with respect to the Participant shall receive a death benefit from the Plan which is equal to the difference between the Actual Death Benefit and what the Actual Death Benefit would have been without regard to the limitations of Code Section 415. The amount payable under the Plan shall be determined on the basis of the Actual Death Benefit which would be payable in the form of a single life annuity beginning as of the first day of the month on or after the Participant's death, or the earliest date thereafter as of which the Actual Death Benefit can be paid. (f) Subject to (g) below, payment of amounts payable from the Plan under (d) or (e) above shall commence as of the later of the first day of the month following the Participant's death or the earliest date thereafter as of which the Actual Death Benefit can be paid, with such payment to be in the form of a single life annuity beginning not later than 30 days thereafter. (g) Notwithstanding (f) above, if the present value actuarial equivalent of the amount to be paid under (d) or (e) above is not more than $5,000, determined as of the date the benefit payment would otherwise commence under (f) above on the basis of the assumptions used for calculating similar lump sums under the Pension Plan, such lump sum amount shall be paid on such date, or within 30 days thereafter, in lieu of all payments which would otherwise be made under the Plan. 2.03 Beneficiary Designation. A Participant may file with the Committee or its delegate a completed designation of Beneficiary Form as prescribed by the Committee or its delegate. Such designation may be made, revoked or changed by the Participant at any time before death or receipt of all payments due under the Plan, but such designation of Beneficiary will not be effective and supersede all prior designations until it is received and acknowledged by the Committee or its delegate. If the Committee has any doubt as to the proper Beneficiary to receive payments hereunder, the Committee shall have the right to withhold such payments until the matter is finally adjudicated. However, any payment made in good faith shall fully discharge the Committee, Keystone, the Participating Entities and the Board from all further obligations with respect to that payment. ARTICLE 3. ADMINISTRATION 3.01 Committee and Agents. Full power and authority to administer the Plan shall be vested in the Committee. The Committee may appoint a secretary who may, but need not be, a member of the Committee. The Committee may also employ such other agents as it deems appropriate to assist it with the administration of the Plan. 3.02 Rules and Regulations. The Committee shall adopt such rules and regulations of general application as are beneficial for the administration of the Plan. 3.03 Quorum. A majority of the members of the Committee shall constitute a quorum for purposes of transacting business relating to the Plan. The acts of a majority of the members present at any meeting (in person, or by conference telephone) of the Committee at which there is a quorum shall be valid acts of the Committee. Acts reduced to and approved unanimously in writing by all of the Committee members shall also be valid acts. 3.04 Plan Interpretation. The Committee shall have the full power and authority to construe and interpret the Plan, and make all determinations of benefits under the Plan, approve all Participants, and determine all facts and other issues relating to claims and appeals under the Plan. 3.05 Notice of Participation. Following a Participant's termination of employment which entitles the Participant to an Actual Pension, or following the death of the Participant, the Committee shall send a written notice informing the Participant or other person entitled to a benefit under the Plan that he or she is entitled to a benefit under the Plan. Being a Participant from time to time does not guarantee that a benefit will be payable under the Plan. 3.06 Costs. All costs and expenses involved in the administration of the Plan shall be borne by Keystone or the Participating Entity. 3.07 Unsecured Creditor. The Plan constitutes a mere promise by Keystone or the Participating Entity to make benefit payments in the future. Keystone's and the Participating Entities' obligations under the Plan shall be unfunded and unsecured promises to pay. Keystone and the Participating Entities shall not be obligated under any circumstance to fund their respective financial obligations under the Plan. Any of them may, in its discretion, set aside funds in a trust or other vehicle, subject to the claims of its creditors, in order to assist it in meeting its obligations under the Plan, if such arrangement will not cause the Plan to be considered a funded deferred compensation plan under ERISA or the Code and provided, further, that any trust created by Keystone or a Participating Entity and any assets held by such trust to assist Keystone or the Participating Entity in meeting its obligations under the Plan will conform to the terms of the model trust, as described in Rev. Proc. 92-64, 1992-2 C.B. 422 or any successor. The Participants and their Beneficiaries shall have the status of, and their rights to receive payments under the Plan shall be no greater than the rights of, general unsecured creditors of Keystone or the applicable Participating Entity. 3.08 Authority of Board and Committee. Any determination or action of the Committee or the Board shall be final, conclusive and binding on all Participants and other recipients, and their beneficiaries, heirs, personal representatives, executors and administrators. No Participant shall participate in any decision of the Board or the Committee which directly or indirectly affects the Participant's benefits under the Plan. 3.09 Amendment, Modification or Termination. The Board, in its sole discretion, may amend, modify or terminate the Plan at any time and from time to time, provided that no such amendment, modification, or termination shall reduce the benefit then being paid to the Participant or other person from the Plan or which would be payable if the Participant retired or died on the day before any such amendment, modification or termination, unless consented to by the affected Participant or by such other person if the Participant is deceased. 3.10 Claim and Appeal Procedure. (a) In the event of a claim by a Participant or other person for or in respect of any benefit under the Plan, such Participant or other person shall present the reason for the claim in writing to the Committee, in c/o Keystone HR Administration, Williamsport, or to such other person or entity designated and communicated by the Committee. The Committee shall, within ninety (90) days after the receipt of such written claim, send written notification to the Participant or other person as to its disposition, unless special circumstances require an extension of time for processing the claim. If such an extension of time for processing is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial ninety (90) day period. In no event shall such extension exceed a period of ninety (90) days from the end of such initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render the final decision. In the event the claim is wholly or partially denied, the written notification shall state the specific reason or reasons for the denial, include specific references to pertinent Plan provisions on which the denial is based, provide an explanation of any additional material or information necessary for the Participant or other person to perfect the claim and a statement of why such material or information is necessary, and set forth the procedure by which the Participant or other person may appeal the denial of the claim. If the claim has not been granted and notice is not furnished within the time period specified in the preceding paragraph, the claim shall be deemed denied for the purpose of proceeding to appeal in accordance with paragraph (b) below. (b) In the event a Participant or other person wishes to appeal the claim denial, he or she may request a review of such denial by making written application to the Committee, in c/o Keystone HR Administration, Williamsport, or to such other person or entity designated and communicated by the Committee, within sixty (60) days after receipt of the written notice of denial (or the date on which such claim is deemed denied if written notice is not received within the applicable time period specified in paragraph (a) above). Such Participant or other person (or his or her duly authorized representative) may, upon written request to the Committee, review documents which are pertinent to such claim, and submit in writing issues and comments in support of his or her position. Within sixty (60) days after receipt of the written appeal (unless an extension of time is necessary due to special circumstances or is agreed to by the parties, but in no event more than one hundred and twenty (120) days after such receipt), the Committee shall notify the Participant or other person of its final decision. Such final decision shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specific references to the pertinent Plan provisions on which the decision is based. If an extension of time for review is required because of special circumstances, written notice of the extension shall be furnished to the claimant prior to the commencement of the extension. If the claim has not been granted and written notice is not provided within the time period specified above, the appeal shall be deemed denied. (c) If a Participant or other person does not follow the procedures set forth in paragraphs (a) and (b) above, he or she shall be deemed to have waived the right to appeal benefit determinations under the Plan. In addition, all determinations by and decisions of the Committee under this Section shall be binding on and conclusive as to the Participant or other person. 3.11 Status of Plan. The Plan is intended to constitute an unfunded plan for tax purposes and for purposes of Title I of ERISA and is intended to be maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees of Keystone and Participating Entities and to qualify for the exclusions from Title I of ERISA which are provided for in Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. Notwithstanding any provision in this Plan to the contrary, in the event that the Department of Labor, or any other regulatory or other body, issues final regulations which provide, or a court issues a final determination, that the Plan does not qualify for any of such exclusions under ERISA, the Board may amend the Plan and the Committee may revoke the designation of all or some Participants as members of a select group of management or highly compensated employees, and the Committee and the Board may take such other action as it determines to be appropriate in order for the Plan to qualify for such exclusions. 3.12 Tax Withholding. All benefits under the Plan shall be subject to Federal income, FICA, and other tax withholding as required by applicable law. At the time that tax withholding is required, if an amount is payable in cash under the Plan to the Participant the amount of the required tax withholding shall be withheld from and reduce such cash payment. If, however, an amount is not then payable in cash or the cash payable under the Plan to the Participant is less than the required withholding, the Participant shall pay, by check or money order payable to Keystone or the Participant Entity employing the Participant, not later than the date such withholding is required, the amount of the required tax withholding or, at the sole election of Keystone or such Participating Entity, the amount of required tax withholding shall be withheld from other compensation or amounts payable to the Participant. The Participant shall hold Keystone or such Participating Entity harmless in acting to satisfy the withholding obligation in this manner. ARTICLE 4. MISCELLANEOUS PROVISIONS 4.01 Merger or Consolidation. All obligations for amounts earned but not yet paid under this Plan shall survive any merger, consolidation or sale of all or substantially all of Keystone's or a Participating Entity's assets to any entity, and be the liability of the successor to the merger or consolidation or the purchaser of assets, unless otherwise agreed to by the parties thereto. 4.02 Gender and Number. The masculine pronoun whenever used in the Plan shall include the feminine and vice versa. The singular shall include the plural and the plural shall include the singular whenever used herein unless the context requires otherwise. 4.03 Construction. The provisions of the Plan shall be construed, administered and governed by the laws of the Commonwealth of Pennsylvania, including its statute of limitations provisions, to the extent not preempted by ERISA or other applicable Federal law. Titles of Articles and Sections of the Plan are for convenience of reference only and are not to be taken into account when construing and interpreting the provisions of the Plan. 4.04 Non-alienation. Except as may be required by law, neither the Participant or other person shall have the right to, directly or indirectly, alienate, assign, transfer, pledge, anticipate or encumber any amount that is or may be payable hereunder, including in respect of any liability of a Participant or other person for alimony or other payments for the support of a spouse, former spouse, child or other dependent, prior to actually being received by the Participant or other person hereunder, nor shall the Participant's or other person's rights to benefit payments under the Plan be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Participant or other person or to the debts, contracts, liabilities, engagements, or torts of any Participant or other person, or transfer by operation of law in the event of bankruptcy or insolvency of the Participant or other person, or any legal process. Notwithstanding the foregoing, the Committee may, in its sole discretion, recognize and establish procedures for administering a domestic relations or other family court order providing for the Plan to pay all or a portion of a Participant's benefit to or for the benefit of a Participant's spouse, former spouse or children, provided that such order does not require the Plan to make payment prior to the time payment would otherwise be made to the Participant pursuant to the terms of the Plan as in effect from time to time and that it meets such other requirements as the Committee shall specify. 4.05 No Employment Rights. Neither the adoption of the Plan nor any provision of the Plan shall be construed as a contract of employment between Keystone or a Participating Entity and any Participant, or as a guarantee or right of any Participant to future or continued employment with Keystone or a Participating Entity, or as a limitation on the right of Keystone or a Participating Entity to discharge any of its employees with or without cause. Specifically, being a Participant does not create any rights, and no rights are created under the Plan, with respect to continued or future employment or conditions of employment. 4.06 Minor or Incompetent. If the Committee determines that any Participant or other person entitled to a payment under the Plan is a minor or incompetent by reason of physical or mental disability, it may, in its sole discretion, cause any payment thereafter becoming due to such person to be made to any other person for his or her benefit, without responsibility to follow application of amounts so paid. Payments made pursuant to this provision shall completely discharge Keystone, the Participating Entities, the Plan, the Committee, and the Board. 4.07 Illegal or Invalid Provision. In case any provision of the Plan shall be held illegal or invalid for any reason, such illegal or invalid provision shall not affect the remaining parts of the Plan, but the Plan shall be construed and enforced without regard to such illegal or invalid provision. EX-10.9 8 1990 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN Exhibit 10.9 KEYSTONE FINANCIAL, INC. 1990 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN (as amended through March 25, 1993) The purposes of the 1990 Non-Employee Directors' Stock Option Plan (the "Plan") are to promote the long-term success of Keystone Financial, Inc. (the "Corporation") by creating a long-term mutuality of interests between the non-employee Directors and shareholders of the Corporation, to provide an additional inducement for such Directors to remain with the Corporation and to provide a means through which the Corporation may attract able persons to serve as Directors of the Corporation. SECTION 1 Administration The Plan shall be administered by a Committee (the "Committee") appointed by the Board of Directors of the Corporation and consisting of not less than two members of the Board. The Committee shall keep records of action taken at its meetings. A majority of the Committee shall constitute a quorum at any meeting, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee, shall be the acts of the Committee. The Committee shall interpret the Plan and prescribe such rules, regulations and procedures in connection with the operations of the Plan as it shall deem to be necessary and advisable for the administration of the Plan consistent with the purposes of the Plan. All questions of interpretation and application of the Plan, or as to stock options granted under the Plan, shall be subject to the determination of the Committee, which shall be final and binding. No discretion concerning decisions regarding the Plan shall be exercised by any person other than the Committee. Notwithstanding the above, the selection of the Directors to whom stock options are to be granted, the timing of such grants, the number of shares subject to any stock option, the exercise price of any stock option, the periods during which any stock option may be exercised and the term of any stock option shall be as hereinafter provided, and the Committee shall have no discretion as to such matters. SECTION 2 Shares Available under the Plan The total number of shares which may either be issued pursuant to or be subject to outstanding stock options (including both stock options granted under Section 3 and reload options) granted under the Plan is limited to 1,234,375 shares of Common Stock, par value $2.00 per share, of the Corporation (the "Common Stock"), subject to adjustment and subsititution as set forth in Section 5. Of such total authorized shares, no more than 234,375 shares of Common Stock, subject to adjustment and substitution as set forth in Section 5, may either be issued pursuant to or be subject to outstanding stock options (not including reload options) granted under Section 3 of the Plan. If any stock option granted under the Plan is cancelled by mutual consent or terminates or expires for any reason without having been exercised in full, the number of shares subject thereto shall again be available for purposes of the Plan. The shares which may be issued under the Plan may be either authorized but unissued shares or treasury shares or partly each, as shall be determined from time to time by the Board. SECTION 3 Grant of Stock Options On January 2 or, if January 2 is not a day on which the principal market for the Common Stock is open for trading, then on the first such trading day, of each of the years 1991 through 1995, each person who is then a member of the Board of Directors of the Corporation and who is not then an employee of the Corporation or any of its subsidiaries (a "non-employee Director") shall be granted a "nonstatutory stock option" (i.e., a stock option which does not qualify under Section 422A of the Internal Revenue Code of 1986) to purchase 1,875 shares of Common Stock. If the number of shares then remaining available for the grant of stock options under the Plan is not sufficient for each non-employee Director to be granted an option for 1,875 shares, then each non-employee Director shall be granted an option for a number of whole shares equal to the number of shares then remaining available divided by the number of non-employee Directors, disregarding any fractions of a share. SECTION 4 Terms and Conditions of Stock Options Stock options granted under the Plan shall be subject to the following terms and conditions: (A) The purchase price at which each stock option may be exercised (the "option price") shall be one hundred percent (100%) of the fair market value per share of the Common Stock covered by the stock option on the date of grant, determined as provided in Section 4(G). (B) The option price for each stock option shall be paid in full upon exercise and shall be payable in cash in United States dollars (including check, bank draft or money order); provided, however, that in lieu of such cash the person exercising the stock option may pay the option price in whole or in part by delivering to the Corporation shares of the Common Stock having a fair market value on the date of exercise of the stock option, determined as provided in Section 4(G), equal to the option price for the shares being purchased; except that (i) any portion of the option price representing a fraction of a share shall in any event be paid in cash and (ii) no shares of the Common Stock which have been held for less than one year may be delivered in payment of the option price of a stock option. The date of exercise of a stock option shall be determined under procedures established by the Committee, and as of the date of exercise the person exercising the stock option shall be considered for all purposes to be the owner of the shares with respect to which the stock option has been exercised. Payment of the option price with shares shall not increase the number of shares of the Common Stock which may be issued under the Plan as provided in Section 2. (C) No stock option shall be exercisable by a grantee while a Director prior to the second anniversary of the date of grant, and no stock option shall be exercisable in any event during the first six months of its term except in case of death or disability as provided in Section 4(E). No stock option shall be exercisable after the expiration of ten years from the date of grant. A stock option to the extent exercisable at any time may be exercised in whole or in part. (D) No stock option shall be transferable by the grantee otherwise than by Will, or if the grantee dies intestate, by the laws of descent and distribution of the state of domicile of the grantee at the time of death. All stock options shall be exercisable during the lifetime of the grantee only by the grantee or the grantee's guardian or legal representative. (E) If a grantee ceases to be a Director of the Corporation for any reason, any outstanding stock options held by the grantee shall be exercisable and shall terminate according to the following provisions: (i) If a grantee ceases to be a Director of the Corporation for any reason other than resignation, removal for cause or death, any then outstanding stock option held by such grantee (whether or not exercisable by the grantee immediately prior to ceasing to be a Director) shall be exercisable by the grantee at any time prior to the expiration date of such stock option or within one year after the date the grantee ceases to be a Director, whichever is the shorter period, provided that, except in the case of a grantee who is disabled within the meaning of Section 422A(c)(7) of the Code (a "Disabled Grantee"), in no event shall the option be exercisable during the first six months of its term; (ii) If during his term of office as a Director a grantee resigns from the Board or is removed from office for cause, any outstanding stock option held by the grantee which is not exercisable by the grantee immediately prior to resignation or removal shall terminate as of the date of resignation or removal, and any outstanding stock option held by the grantee which is exercisable by the grantee immediately prior to resignation or removal shall be exercisable by the grantee at any time prior to the expiration date of such stock option or within 90 days after the date of resignation or removal, whichever is the shorter period; (iii) Following the death of a grantee during service as a Director of the Corporation, any outstanding stock option held by the grantee at the time of death (whether or not exercisable by the grantee immediately prior to death) shall be exercisable by the person entitled to do so under the Will of the grantee, or, if the grantee shall fail to make testamentary disposition of the stock option or shall die intestate, by the legal representative of the grantee at any time prior to the expiration date of such stock option or within one year after the date of death, whichever is the shorter period; (iv) Following the death of a grantee after ceasing to be a Director and during a period when a stock option is exercisable, any outstanding stock option held by the grantee at the time of death shall be exercisable by such person entitled to do so under the Will of the grantee or by such legal representative (but only to the extent the stock option was exercisable by the grantee immediately prior to the death of the grantee) at any time prior to the expiration date of such stock option or within one year after the date of death, whichever is the shorter period. A stock option held by a grantee who has ceased to be a Director of the Corporation shall terminate upon the expiration of the applicable exercise period, if any, specified in this Section 4(E). Whether a grantee is a Disabled Grantee shall be determined, in its discretion, by the Committee, and any such determination by the Committee shall be final and binding. (F) All stock options shall be confirmed by an agreement, or an amendment thereto, which shall be executed on behalf of the Corporation by the Chief Executive Officer (if other than the President), the President or any Vice President and by the grantee. (G) Fair market value of the Common Stock shall be the mean between the following prices, as applicable, for the date as of which fair market value is to be determined as quoted in The Wall Street Journal (or in such other reliable publication as the Committee, in its discretion, may determine to rely upon): (a) if the Common Stock is listed on the New York Stock Exchange, the highest and lowest sales prices per share of the Common Stock as quoted in the NYSE-Composite Transactions listing for such date, (b) if the Common Stock is not listed on such exchange, the highest and lowest sales prices per share of Common Stock for such date on (or on any composite index including) the principal United States securities exchange registered under the 1934 Act on which the Common Stock is listed, or (c) if the Common Stock is not listed on any such exchange, the highest and lowest sales prices per share of the Common Stock for such date on the National Association of Securities Dealers Automated Quotations System or any successor system then in use ("NASDAQ"). If there are no such sale price quotations for the date as of which fair market value is to be determined but there are such sale price quotations within a reasonable period both before and after such date, then fair market value shall be determined by taking a weighted average of the means between the highest and lowest sales prices per share of the Common Stock as so quoted on the nearest date before and the nearest date after the date as of which fair market value is to be determined. The average should be weighted inversely by the respective numbers of trading days between the selling dates and the date as of which fair market value is to be determined. If there are no such sale price quotations on or within a reasonable period both before and after the date as of which fair market value is to be determined, then fair market value of the Common Stock shall be the mean between the bona fide bid and asked prices per share of Common Stock as so quoted for such date on NASDAQ, or if none, the weighted average of the means between such bona fide bid and asked prices on the nearest trading date before and the nearest trading date after the date as of which fair market value is to be determined, if both such dates are within a reasonable period. The average is to be determined in the manner described above in this Section 4(G). If the fair market value of the Common Stock cannot be determined on the basis previously set forth in this Section 4(G) for the date as of which fair market value is to be determined, the Committee shall in good faith determine the fair market value of the Common Stock on such date. Fair market value shall be determined without regard to any restriction other than a restriction which, by its terms, will never lapse. (H) The obligation of the Corporation to issue shares of the Common Stock under the Plan shall be subject to (i) the effectiveness of a registration statement under the Securities Act of 1933, as amended, with respect to such shares, if deemed necessary or appropriate by counsel for the Corporation, (ii) the condition that the shares shall have been listed (or authorized for listing upon official notice of issuance) upon each stock exchange, if any, on which the Common Stock shares may then be listed and (iii) all other applicable laws, regulations, rules and orders which may then be in effect. (I) Subject to the approval of the shareholders of the Corporation at its 1993 Annual Meeting, each stock option outstanding under the Plan as of March 25, 1993 and each stock option thereafter granted under the Plan (including reload options) shall have reload option rights as provided in this Section 4(I). Reload option rights shall entitle the original grantee of a stock option (and only such original grantee), upon exercise of the stock option or any portion thereof through delivery of previously owned shares of Common Stock, to automatically be granted on the date of such exercise a new nonstatutory stock option (a "reload option") (i) for a number of shares of Common Stock equal to the number of full shares delivered in payment of the option price of the original option, (ii) having an option price equal to one hundred percent (100%) of the fair market value per share (determined as provided in Section 4(G)) of the Common Stock covered by the reload option on such date of grant, (iii) having the same expiration date as the stock option so exercised and (iv) otherwise having the same terms and conditions as a stock option granted under Section 3 of the Plan. Reload option rights shall entitle a grantee to be granted a reload option only if the underlying option or reload option to which it relates is exercised by the original grantee during service as a director of the Corporation. Notwithstanding any provision of the Plan or any stock option agreement, no holder of reload option rights may be granted a reload option covering a number of shares in excess of the number of authorized shares then remaining available under the Plan. Except as otherwise specifically provided herein or required by the context, the term "stock option" as used in this Plan shall include reload options granted hereunder. Subject to the foregoing provisions of this Section 4 and the other provisions of the Plan, any stock option granted under the Plan may be subject to such restrictions and other terms and conditions, if any, as shall be determined, in its discretion, by the Committee and set forth in the agreement referred to in Section 4(F), or an amendment thereto. SECTION 5 Adjustment and Substitution of Shares If a dividend or other distribution shall be declared upon the Common Stock payable in shares of the Common Stock, the number of shares of the Common Stock then subject to any outstanding stock options, the number of shares of the Common Stock to be subject to any stock option thereafter granted and the number of shares of the Common Stock which may be issued under the Plan but are not then subject to outstanding stock options shall be adjusted by adding thereto the number of shares of the Common Stock which would have been distributable thereon if such shares had been outstanding on the date fixed for determining the shareholders entitled to receive such stock dividend or distribution. If the outstanding shares of the Common Stock shall be changed into or exchangeable for a different number or kind of shares of stock or other securities of the Corporation or another corporation, whether through reorganization, reclassification, recapitalization, stock split-up, combination of shares, merger or consolidation, then there shall be substituted for each share of the Common Stock subject to any then outstanding stock option, for each share of the Common Stock which would otherwise be subject to any stock option thereafter granted and for each share of the Common Stock which may be issued under the Plan but which is not then subject to any outstanding stock option, the number and kind of shares of stock or other securities into which each outstanding share of the Common Stock shall be so changed or for which each such share shall be exchangeable. In case of any adjustment or substitution as provided for in this Section 5, the aggregate option price for all shares subject to each then outstanding stock option prior to such adjustment or substitution shall be the aggregate option price for all shares of stock or other securities (including any fraction) to which such shares shall have been adjusted or which shall have been substituted for such shares. Any new option price per share shall be carried to at least three decimal places with the last decimal place rounded upwards to the nearest whole number. No adjustment or substitution provided for in this Section 5 shall require the Corporation to issue or sell a fraction of a share or other security. Accordingly, all fractional shares or other securities which result from any such adjustment or substitution shall be eliminated and not carried forward to any subsequent adjustment or substitution. SECTION 6 Additional Rights in Certain Events (A) Definitions. For purposes of this Section 6, the following terms shall have the following meanings: (1) "Affiliate," "Associate" and "Parent" shall have the respective meanings set forth in Rule 12b-2 under the 1934 Act as in effect on the effective date of the Plan. (2) The term "Person" shall be used as that term is used in Sections 13(d) and 14(d) of the 1934 Act. (3) Beneficial Ownership shall be determined as provided in Rule 13d-3 under the 1934 Act as in effect on the effective date of the Plan. (4) "Voting Shares" shall mean all securities of a company entitling the holders thereof to vote in an annual election of directors (without consideration of the rights of any class of stock other than the Common Stock to elect directors by a separate class vote); and a specified percentage of "Voting Power" of a company shall mean such number of the Voting Shares as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors (without consideration of the rights of any class of stock other than the Common Stock to elect directors by a separate class vote). (5) "Tender Offer" shall mean a tender offer or exchange offer to acquire securities of the Corporation (other than such an offer made by the Corporation or any Subsidiary), whether or not such offer is approved or opposed by the Board. (6) "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Corporation if each of the corporations other than the last corporation in the unbroken chain owns stock possessing at least fifty percent (50%) or more of the total combined Voting Power of all classes of stock in one of the other corporations in the chain. (7) "Section 6 Event" shall mean the date upon which any of the following events occurs: (a) The Corporation acquires actual knowledge that any Person other than the Corporation, a Subsidiary or any employee benefit plan(s) sponsored by the Corporation has acquired the Beneficial Ownership, directly or indirectly, of securities of the Corporation entitling such Person to 25% or more of the Voting Power of the Corporation; (b) (i) A Tender Offer is made to acquire securities of the Corporation entitling the holders thereof to 50% or more of the Voting Power of the Corporation; or (ii) Voting Shares are first purchased pursuant to any other Tender Offer; or (c) At any time less than 60% of the members of the Board of Directors shall be individuals who were either (i) Directors on the effective date of the Plan or (ii) individuals whose election, or nomination for election, was approved by a vote (including a vote approving a merger or other agreement providing for the membership of such individuals on the Board of Directors) of at least two-thirds of the Directors then still in office who were Directors on the effective date of the Plan or who were so approved. (B) Acceleration of the Exercise Date of Stock Options Notwithstanding any other provision contained in the Plan, in case any "Section 6 Event" occurs all outstanding stock options shall become immediately and fully exercisable whether or not otherwise exercisable by their terms, provided that, except as provided in Section 4(E), in no event shall a stock option be exercisable during the first six months of its term. SECTION 7 Effect of the Plan on the Rights of Corporation and Shareholders Nothing in the Plan, in any stock option granted under the Plan, or in any stock option agreement shall confer any right to any person to continue as a Director of the Corporation or interfere in any way with the rights of the shareholders of the Corporation or the Board of Directors to elect and remove Directors. SECTION 8 Amendment and Termination The right to amend the Plan at any time and from time to time and the right to terminate the Plan at any time are hereby specifically reserved to the Board; provided always that no such termination shall terminate any outstanding stock options granted under the Plan; and provided further that no amendment of the Plan shall (a) be made without shareholder approval if shareholder approval of the amendment is at the time required for stock options under the Plan to qualify for the exemption from Section 16(b) of the 1934 Act provided by Rule 16b-3 or by the rules of the NASDAQ National Market System or any stock exchange on which the Common Stock may then be listed, (b) amend more than once every six months the provisions of the Plan relating to the selection of the Directors to whom stock options are to be granted, the timing of such grants, the number of shares subject to any stock option, the exercise price of any stock option, the periods during which any stock option may be exercised and the term of any stock option other than to comport with changes in the Internal Revenue Code or the rules and regulations thereunder or (c) otherwise amend the Plan in any manner that would cause stock options under the Plan not to qualify for the exemption provided by Rule 16b-3. No amendment or termination of the Plan shall, without the written consent of the holder of a stock option theretofore awarded under the Plan, adversely affect the rights of such holder with respect thereto. Notwithstanding anything contained in the preceding paragraph or any other provision of the Plan or any stock option agreement, the Board shall have the power to amend the Plan in any manner deemed necessary or advisable for stock options granted under the Plan to qualify for the exemption provided by Rule 16b-3 (or any successor rule relating to exemption from Section 16(b) of the 1934 Act), and any such amendment shall, to the extent deemed necessary or advisable by the Board, be applicable to any outstanding stock options theretofore granted under the Plan notwithstanding any contrary provisions contained in any stock option agreement. In the event of any such amendment to the Plan, the holder of any stock option outstanding under the Plan shall, upon request of the Committee and as a condition to the exercisability of such option, execute a conforming amendment in the form prescribed by the Committee to the stock option agreement referred to in Section 4(F) within such reasonable time as the Committee shall specify in such request. SECTION 9 Effective Date and Duration of Plan The effective date and date of adoption of the Plan shall be March 29, 1990, the date of adoption of the Plan by the Board, provided that on or prior to December 31, 1992 such adoption of the Plan by the Board is approved by the affirmative vote of the holders of at least a majority of the outstanding shares of voting stock of the Corporation represented in person or by proxy at a duly called and convened meeting of such holders. Notwithstanding any other provision contained in the Plan, no stock option granted under the Plan may be exercised until after such shareholder approval. No stock option may be granted under Section 3 of the Plan subsequent to January 3, 1995. After January 3, 1995, reload options may continue to be granted during the terms of stock options then outstanding. EX-10.16 9 1997 STOCK INCENTIVE PLAN Exhibit 10.16 KEYSTONE FINANCIAL, INC. 1997 STOCK INCENTIVE PLAN The purposes of the 1997 Stock Incentive Plan (the "Plan") are to encourage eligible employees of Keystone Financial, Inc. (the "Corporation") and its Subsidiaries to increase their efforts to make the Corporation and each Subsidiary more successful, to provide an additional inducement for such employees to remain with the Corporation or a Subsidiary, to reward such employees by providing an opportunity to acquire shares of the Common Stock, par value $2.00 per share, of the Corporation (the "Common Stock") on favorable terms and to provide a means through which the Corporation may attract able persons to enter the employ of the Corporation or one of its Subsidiaries. For the purposes of the Plan, the term "Subsidiary" means any corporation in an unbroken chain of corporations beginning with the Corporation, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing at least fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 1 Administration The Plan shall be administered by a Committee (the "Committee") appointed by the Board of Directors of the Corporation (the "Board") and consisting of not less than two members of the Board, each of whom at the time of appointment to the Committee and at all times during service as a member of the Committee shall be both (1) a "non-employee director" as then defined under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor rule and (2) an "outside director" as then defined in the regulations under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor provision. The Committee shall interpret the Plan and prescribe such rules, regulations and procedures in connection with the operations of the Plan as it shall deem to be necessary and advisable for the administration of the Plan consistent with the purposes of the Plan. The Committee shall keep records of action taken at its meetings. A majority of the Committee shall constitute a quorum at any meeting, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by all members of the Committee, shall be the acts of the Committee. SECTION 2 Eligibility Those employees of the Corporation or any Subsidiary who share responsibility for the management, growth or protection of the business of the Corporation or any Subsidiary shall be eligible to be granted stock options (with or without reload option rights and/or cash payment rights) and to receive restricted share, performance share or other stock awards as described herein. Subject to the provisions of the Plan, the Committee shall have full and final authority, in its discretion, to grant stock options (with or without reload option rights and/or cash payment rights), restricted shares, performance shares and other stock awards as described herein and to determine the employees to whom any such grant shall be made and the number of shares to be covered thereby. In determining the eligibility of any employee, as well as in determining the number of shares covered by each grant of a stock option, restricted shares, performance shares or other stock award and whether reload option rights and/or cash payment rights shall be granted in conjunction with a stock option, the Committee shall consider the position and the responsibilities of the employee being considered, the nature and value to the Corporation or a Subsidiary of his or her services, his or her present and/or potential contribution to the success of the Corporation or a Subsidiary and such other factors as the Committee may deem relevant. 1 SECTION 3 Shares Available under the Plan The aggregate net number of shares of Common Stock which may be issued and as to which grants of stock options (including reload options), restricted shares, performance shares or other stock awards may be made under the Plan is 2,500,000 shares, subject to adjustment and substitution as set forth in Section 7. If any stock option is exercised by delivering previously owned shares in payment of the option price, the number of shares so delivered to the Corporation shall again be available for purposes of the Plan. If any stock option is cancelled by mutual consent or terminates or expires for any reason without having been exercised in full, the number of shares subject thereto shall again be available for purposes of the Plan. If shares of Common Stock are forfeited to the Corporation pursuant to the restrictions applicable to restricted shares or under the terms of any other stock award, the shares so forfeited shall again be available for purposes of the Plan. To the extent any award of performance shares or any other stock award is not earned or is paid in cash rather than shares, the number of shares covered thereby shall again be available for purposes of the Plan. The shares which may be issued under the Plan may be either authorized but unissued shares or treasury shares or partly each, as shall be determined from time to time by the Board. The maximum aggregate number of shares of Common Stock which shall be available for the grant of stock options, restricted shares and performance shares to any one individual under the Plan during any calendar year shall be limited to 200,000 shares. The limitation in the preceding sentence shall be interpreted and applied in a manner consistent with Section 162(m) of the Code. To the extent consistent with Section 162(m) of the Code, in applying this limitation a reload option (a) shall be deemed to have been granted at the same time as the original underlying stock option and (b) shall not be deemed to increase the number of shares covered by the original underlying stock option grant. SECTION 4 Grant of Stock Options, Reload Options and Cash Payment Rights and Awards of Restricted Shares, Performance Shares and Other Stock Awards The Committee shall have authority, in its discretion, (a) to grant "incentive stock options" pursuant to Section 422 of the Code, to grant "nonstatutory stock options" (i.e., stock options which do not qualify under Sections 422 or 423 of the Code) or to grant both types of stock options (but not in tandem), (b) to award restricted shares, (c) to award performance shares and (d) to make other stock awards as described herein. The Committee also shall have the authority, in its discretion, to grant reload option rights in conjunction with incentive stock options or nonstatutory stock options with the effect provided in Section 5(D) and to grant cash payment rights in conjunction with nonstatutory stock options with the effect provided in Section 5(E). Reload option rights granted in conjunction with an incentive stock option may only be granted at the time the incentive stock option is granted. Cash payment rights may not be granted in conjunction with incentive stock options. Reload option rights and/or cash payment rights granted in conjunction with a nonstatutory stock option may be granted either at the time the stock option is granted or at any time thereafter during the term of the stock option. Notwithstanding any other provision contained in the Plan or in any stock option agreement, but subject to the possible exercise of the Committee's discretion contemplated in the last sentence of this Section 4, the aggregate fair market value, determined as provided in Section 5(I) on the date of grant, of the shares with respect to which incentive stock options are exercisable for the first time by an employee during any calendar year under all plans of the corporation employing such employee, any parent or subsidiary corporation of such corporation and any predecessor corporation of any such corporation shall not exceed $100,000. If the date on which one or more of such incentive stock options could first be exercised would be accelerated pursuant to any provision of the Plan or any stock option agreement, and the acceleration of such exercise date would result in a violation of the restriction set forth in the preceding sentence, then, notwithstanding any such provision, but subject to the 2 provisions of the next succeeding sentence, the exercise dates of such incentive stock options shall be accelerated only to the date or dates, if any, that do not result in a violation of such restriction and, in such event, the exercise dates of the incentive stock options with the lowest option prices shall be accelerated to the earliest such dates. The Committee may, in its discretion, authorize the acceleration of the exercise date of one or more incentive stock options even if such acceleration would violate the $100,000 restriction set forth in the first sentence of this paragraph and even if such incentive stock options are thereby converted in whole or in part to nonstatutory stock options. SECTION 5 Terms and Conditions of Stock Options, Reload Option Rights and Cash Payment Rights Stock options, reload option rights and cash payment rights granted under the Plan shall be subject to the following terms and conditions: (A) The purchase price at which each stock option may be exercised (the "option price") shall be such price as the Committee, in its discretion, shall determine but shall not be less than one hundred percent (100%) of the fair market value per share of the Common Stock covered by the stock option on the date of grant, except that in the case of an incentive stock option granted to an employee who, immediately prior to such grant, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation or any Subsidiary (a "Ten Percent Employee"), the option price shall not be less than one hundred ten percent (110%) of such fair market value on the date of grant. For purposes of this Section 5(A), an individual (i) shall be considered as owning not only shares of stock owned individually but also all shares of stock that are at the time owned, directly or indirectly, by or for the spouse, ancestors, lineal descendants and brothers and sisters (whether by the whole or half blood) of such individual and (ii) shall be considered as owning proportionately any shares owned, directly or indirectly, by or for any corporation, partnership, estate or trust in which such individual is a shareholder, partner or beneficiary. (B) The option price for each stock option shall be paid in full upon exercise and shall be payable in cash in United States dollars (including check, bank draft or money order), which may include cash forwarded through a broker or other agent-sponsored exercise or financing program or, in the case of nonstatutory stock options, a certification acceptable to the Committee that is provided through a broker and which attests to the sale of the shares covered by the stock option and the availability of the option price to the Corporation; provided, however, that in lieu of such cash or certification the person exercising the stock option may (if authorized by the Committee at the time of grant in the case of an incentive stock option, or at any time in the case of a nonstatutory stock option) pay the option price in whole or in part by delivering to the Corporation shares of Common Stock having a fair market value on the date of exercise of the stock option equal to the option price for the shares being purchased; except that (i) any portion of the option price representing a fraction of a share shall in any event be paid in cash and (ii) no shares of Common Stock which have been held for less than six months may be delivered in payment of the option price of a stock option. Delivery of shares of Common Stock in payment of the exercise price of a stock option, if authorized by the Committee, may be accomplished through the effective transfer to the Corporation of shares of Common Stock held through a broker or other agent. If the person exercising a stock option participates in a broker or other agent-sponsored exercise or financing program, the Corporation will cooperate with all reasonable procedures of the broker or other agent to permit participation by the person exercising the stock option in the exercise or financing program. Notwithstanding any procedure of the broker or other agent-sponsored exercise or financing program, if the option price is paid in cash, the exercise of the stock option shall not be deemed to occur and no shares of Common Stock will be issued until the Corporation has received full payment in cash (including check, bank draft or money order) for the option price from the broker or other agent or the appropriate certification in the case of nonstatutory stock options. The date of exercise of a stock option shall be determined under procedures established by the Committee, and as of the date of exercise the person exercising the stock option shall be considered for all purposes to be the owner of the shares with respect to which the stock option has been exercised. 3 (C) Subject to Section 8(B), a stock option shall become exercisable at such time or times and/or upon the occurrence of such event or events as may be determined by the Committee at the time of grant of the stock option or, in the case of a nonstatutory stock option, at any time thereafter during the term of the stock option. Unless otherwise determined by the Committee and reflected in the stock option agreement or, in the case of a nonstatutory stock option, an amendment thereto, a stock option shall be exercisable from its date of grant. No stock option shall be exercisable after the expiration of ten years (five years in the case of an incentive stock option granted to a Ten Percent Employee) from the date of grant. A stock option to the extent exercisable at any time may be exercised in whole or in part. (D) Reload option rights granted in conjunction with a stock option shall entitle the holder of the stock option, upon exercise of the stock option or any portion thereof through delivery of previously owned shares of Common Stock, to automatically be granted on the date of such exercise a new nonstatutory stock option (a "reload option") (i) for a number of shares of Common Stock not exceeding the number of full shares delivered in payment of the option price of the original option, (ii) having an option price not less than one hundred percent (100%) of the fair market value per share of the Common Stock covered by the reload option on such date of grant, (iii) having an expiration date not later than the expiration date of the stock option so exercised and (iv) otherwise having terms permissible for an original grant of a stock option under the Plan. Subject to the preceding sentence and the other provisions of the Plan, reload option rights and reload options granted thereunder shall have such terms and be subject to such restrictions and conditions, if any, as shall be determined, in its discretion, by the Committee and set forth in the agreement referred to in Section 5(H) relating to the original option or, for reload option rights and reload options not granted in conjunction with an incentive stock option, in an amendment to such agreement, in the agreement relating to the reload option or in an amendment thereto. In granting reload option rights, the Committee, may, in its discretion, provide for successive reload option grants upon the exercise of reload options granted thereunder. Unless otherwise determined, in its discretion, by the Committee, reload option rights shall entitle the holder of a stock option to be granted a reload option only if the underlying option or reload option to which it relates is exercised during employment with the Corporation or a Subsidiary of the original grantee of the underlying option. Notwithstanding any provision of the Plan or any stock option agreement, no holder of reload option rights may be granted a reload option covering a number of shares in excess of the number of shares then remaining available under the Plan. Except as otherwise specifically provided herein or required by the context, the term "stock option" as used in this Plan shall include reload options granted hereunder. (E) Cash payment rights granted in conjunction with a nonstatutory stock option shall entitle the original grantee of the stock option, or the person who becomes the holder of the stock option by reason of the death of such original grantee, upon exercise of the stock option or any portion thereof, to receive cash from the Corporation (in addition to the shares to be received upon exercise of the stock option) equal to (1) such percentage (not greater than 100%) as the Committee, in its discretion, shall determine of the excess of the fair market value of a share of Common Stock on the date of exercise of the stock option over the option price per share of the stock option, multiplied by (2) the number of shares covered by the stock option, or portion thereof, which is exercised. Payment of the cash provided for in this Section 5(E) shall be made by the Corporation as soon as practicable after the time the amount payable is determined. The Committee may, in its discretion, provide for the grant of cash payment rights in connection with reload options. (F) No incentive stock option and, except to the extent otherwise determined by the Committee and reflected in the stock option agreement or an amendment thereto, no nonstatutory stock option shall be transferable by the grantee otherwise than by Will, or if the grantee dies intestate, by the laws of descent and distribution of the state of domicile of the grantee at the time of death. All incentive stock options and, except to the extent otherwise determined by the Committee and reflected in the stock option agreement or an amendment thereto, all nonstatutory stock options shall be exercisable during the lifetime of the grantee only by the grantee. 4 (G) Subject to the provisions of Section 4 in the case of incentive stock options, unless the Committee, in its discretion, shall otherwise determine: (i) If the employment of a grantee who is not disabled within the meaning of Section 422(c)(6) of the Code (a "Disabled Grantee") is voluntarily terminated with the consent of the Corporation or a Subsidiary or a grantee retires under any retirement plan of the Corporation or a Subsidiary, any then outstanding incentive stock option held by such grantee shall be exercisable by the grantee (but only to the extent exercisable by the grantee immediately prior to the termination of employment) at any time prior to the expiration date of such incentive stock option or within three months after the date of termination of employment, whichever is the shorter period; (ii) If the employment of a grantee who is not a Disabled Grantee is voluntarily terminated with the consent of the Corporation or a Subsidiary or a grantee retires under any retirement plan of the Corporation or a Subsidiary, any then outstanding nonstatutory stock option of such grantee (whether or not then held by the grantee) shall be exercisable (but only to the extent exercisable immediately prior to the grantee's termination of employment) at any time prior to the expiration date of such nonstatutory stock option or within one year after the date of termination of employment, whichever is the shorter period; (iii) If the employment of a grantee who is a Disabled Grantee is voluntarily terminated with the consent of the Corporation or a Subsidiary, any then outstanding stock option of such grantee (whether or not then held by the grantee) shall be exercisable in full (whether or not so exercisable immediately prior to the grantee's termination of employment) at any time prior to the expiration date of such stock option or within one year after the date of termination of employment, whichever is the shorter period; (iv) Following the death of a grantee during employment, any stock option of the grantee outstanding at the time of death shall be exercisable in full (whether or not so exercisable immediately prior to the death of the grantee) by the person entitled to do so under the Will of the grantee, or, if the grantee shall fail to make testamentary disposition of the stock option or shall die intestate, by the legal representative of the grantee (or, in the case of a nonstatutory stock option, if permitted under the stock option agreement, by the grantee's inter vivos transferee) at any time prior to the expiration date of such stock option or within one year after the date of death, whichever is the shorter period; (v) Following the death of a grantee after termination of employment during a period when a stock option is exercisable, any stock option of the grantee outstanding at the time of death shall be exercisable (but only to the extent the stock option was exercisable immediately prior to the death of the grantee) by such person entitled to do so under the Will of the grantee or by such legal representative (or, in the case of a nonstatutory stock option, by such inter vivos transferee) at any time prior to the expiration date of such stock option or within one year after the date of death, whichever is the shorter period; and (vi) Unless the exercise period of a stock option following termination of employment has been extended as provided in Section 8(C), if the employment of a grantee terminates for any reason other than voluntary termination with the consent of the Corporation or a Subsidiary, retirement under any retirement plan of the Corporation or a Subsidiary or death, all stock options of the grantee outstanding at the time of such termination of employment (whether or not then held by the grantee) shall automatically terminate. 5 For purposes of this Section 5(G), an involuntary termination of the grantee's employment other than for "Cause" or any voluntary termination of the grantee's employment shall be deemed to be a voluntary termination of employment with the consent of the Corporation and "Cause" shall have the same meaning as provided in Section 6(B)(vii) of the Plan. In accordance with the preceding sentence, whether termination of employment is a voluntary termination with the consent of the Corporation or a Subsidiary and whether a grantee is a Disabled Grantee shall be determined in each case, in its discretion, by the Committee, and any such determination by the Committee shall be final and binding. If a grantee of a stock option, reload option rights, restricted shares, performance shares or other stock award engages in the operation or management of a business (whether as owner, partner, officer, director, employee or otherwise and whether during or after termination of employment) which is in competition with the Corporation or any of its Subsidiaries, the Committee may immediately terminate all outstanding stock options of the grantee, declare forfeited all restricted shares of the grantee as to which the restrictions have not yet lapsed, terminate all outstanding performance share awards of the grantee for which the applicable Performance Period has not been completed and declare forfeited all outstanding other stock awards of the grantee which remain subject to restriction or which have otherwise not yet become payable (whether or not such stock options, restricted shares, performance shares or other stock awards are then held by the grantee); provided, however, that this sentence shall not apply if the exercise period of a stock option following termination of employment has been extended as provided in Section 8(C), if the lapse of the restrictions applicable to restricted shares has been accelerated as provided in Section 8(D) or if a performance share award has been deemed to have been earned as provided in Section 8(E). Whether a grantee has engaged in the operation or management of a business which is in competition with the Corporation or any of its Subsidiaries shall also be determined, in its discretion, by the Committee, and any such determination by the Committee shall be final and binding. (H) All stock options, reload option rights and cash payment rights shall be confirmed by an agreement, or an amendment thereto, which shall be executed by Corporation and the grantee. (I) For all purposes under the Plan, fair market value of the Common Stock shall be the mean between the following prices, as applicable, for the date as of which fair market value is to be determined as quoted in The Wall Street Journal (or in such other reliable publication as the Committee, in its discretion, may determine to rely upon): (a) if the Common Stock is listed on the New York Stock Exchange, the highest and lowest sales prices per share of the Common Stock as quoted in the NYSE-Composite Transactions listing for such date, (b) if the Common Stock is not listed on such exchange, the highest and lowest sales prices per share of Common Stock for such date on (or on any composite index including) the principal United States securities exchange registered under the Exchange Act on which the Common Stock is listed, or (c) if the Common Stock is not listed on any such exchange, the highest and lowest sales prices per share of Common Stock for such date on the National Association of Securities Dealers Automated Quotations System or any successor system then in use ("NASDAQ"). If there are no such sale price quotations for the date as of which fair market value is to be determined but there are such sale price quotations within a reasonable period both before and after such date, then fair market value shall be determined by taking a weighted average of the means between the highest and lowest sales prices per share of Common Stock as so quoted on the nearest date before and the nearest date after the date as of which fair market value is to be determined. The average should be weighted inversely by the respective numbers of trading days between the selling dates and the date as of which fair market value is to be determined. If there are no such sale price quotations on or within a reasonable period both before and after the date as of which fair market value is to be determined, then fair market value of the Common Stock shall be the mean between the bona fide bid and asked prices per share of Common Stock as so quoted for such date on NASDAQ, or if none, the weighted average of the means between such bona fide bid and asked prices on the nearest trading date before and the nearest trading date after the date as of which fair market value is to be determined, if both such dates are within a reasonable period. The average is to be determined in the manner described above in this Section 5(I). If the fair market value of the Common Stock cannot be determined on the basis previously set forth in this Section 5(I) on the date as of which fair market value is to be determined, the Committee shall in good faith determine the fair market value of the Common Stock on such date. Fair market value shall be determined without regard to any restriction other than a restriction which, by its terms, will never lapse. 6 (J) The obligation of the Corporation to issue shares of Common Stock under the Plan shall be subject to (i) the effectiveness of a registration statement under the Securities Act of 1933, as amended, with respect to such shares, if deemed necessary or appropriate by counsel for the Corporation, (ii) the condition that the shares shall have been listed (or authorized for listing upon official notice of issuance) upon each stock exchange, if any, on which the Common Stock shares may then be listed and (iii) all other applicable laws, regulations, rules and orders which may then be in effect. Subject to the foregoing provisions of this Section and the other provisions of the Plan, any stock option granted under the Plan may be exercised at such times and in such amounts and be subject to such restrictions and other terms and conditions, if any, as shall be determined, in its discretion, by the Committee and set forth in the agreement referred to in Section 5(H), or an amendment thereto. SECTION 6 Terms and Conditions of Restricted Share, Performance Shares and Other Stock Awards (A) Restricted Shares. Restricted share awards shall be evidenced by a written agreement in the form prescribed by the Committee in its discretion, which shall set forth the number of shares of Common Stock awarded, the restrictions imposed thereon (including, without limitation, restrictions on the right of the grantee to sell, assign, transfer or encumber such shares while such shares are subject to other restrictions imposed under this Section 6(A)), the duration of such restrictions, the events (which may, in the discretion of the Committee, include performance-based events) the occurrence of which would cause a forfeiture of the restricted shares in whole or in part and such other terms and conditions as the Committee in its discretion deems appropriate. Restricted share awards shall be effective only upon execution of the applicable restricted share agreement by the Corporation and the grantee. If so determined by the Committee at the time of an award of restricted shares, the lapse of restrictions on restricted shares may be based on the extent of achievement over a specified Performance Period of one or more Performance Targets based on Performance Criteria established by the Committee as provided in Section 6(B). In such case, the award of restricted shares and all determinations by the Committee in respect thereto shall be made by the Committee in accordance with the procedures applicable to performance shares as provided in Section 6(B). Following a restricted share award and prior to the lapse or termination of the applicable restrictions, the Committee shall deposit share certificates for such restricted shares in escrow. Upon the lapse or termination of the applicable restrictions (and not before such time), the grantee shall be issued or transferred share certificates for the restricted shares. From the date a restricted share award is effective, the grantee shall be a shareholder with respect to all the shares represented by such certificates and shall have all the rights of a shareholder with respect to all such shares, including the right to vote such shares and to receive all dividends and other distributions paid with respect to such shares, subject only to the restrictions imposed by the Committee. (B) Performance Shares. The Committee may award performance shares which shall be earned by an awardee based on the level of performance during a specified Performance Period by the Corporation, a Subsidiary or Subsidiaries, any branch, department or other portion thereof or the awardee individually, as determined by the Committee. No award of performance shares shall be granted later than 90 days after the commencement of the applicable Performance Period. For the purposes of the grant of performance shares, the following definitions shall apply: (i) "performance share" shall mean an award, expressed in shares of Common Stock, granted to an awardee with respect to a Performance Period. 7 (ii) "Performance Period" shall mean an accounting period of the Corporation or a Subsidiary of not less than one year, as determined by the Committee in its discretion. (iii) "Performance Criteria" shall mean one or more preestablished, objective measures of performance during a Performance Period by the Corporation, a Subsidiary or Subsidiaries, any branch, department or other portion thereof or the awardee individually, selected by the Committee in its discretion to determine whether an award of performance shares has been earned in whole or in part. Performance Criteria may be based on earnings per share, earnings, earnings growth, return on equity, return on assets, asset growth or ratio of capital to assets. Performance Criteria based on such performance measures may be based either on the performance of the Corporation, Subsidiary or portion thereof under such measure for the Performance Period and/or upon a comparison of such performance with the performance of a peer group of corporations selected or defined by the Committee at the time of making a performance share award. The Committee may in its discretion also determine to use other objective performance measures as Performance Criteria. (iv) "Performance Target" shall mean the level or levels of achievement of one or more Performance Criteria which must be attained during a Performance Period for a performance share award to be fully earned, as established by the Committee at the time of making an award of performance shares and set forth in the award agreement. (v) "Performance Threshold" shall mean the minimum level or levels of achievement of the Performance Criteria applicable to a Performance Period which must be attained for any portion of a performance share award to be earned. If the Performance Threshold is other than the Performance Target, the Committee shall establish and the award agreement shall set forth, in addition to the Performance Target, the Performance Threshold, the number of performance shares earned if the Performance Threshold is achieved, and the manner of determining the number of performance shares earned if the actual level of performance is between the Performance Threshold and the Performance Target. (vi) "Performance Maximum" shall mean a maximum number of performance shares which may be earned with respect to a performance share award and the level or levels of achievement of the Performance Criteria applicable to a Performance Period which must be attained or exceeded for such maximum amount to be earned. If the Performance Maximum is higher than the number of performance shares earned on achievement of the Performance Target, the Committee shall establish and the award agreement shall set forth the maximum number of performance shares which may be earned, the level or levels of achievement of the Performance Criteria applicable to the Performance Period which must be attained for such maximum number of performance shares to be earned, and the manner of determining the number of performance shares earned if the actual level of performance is between the Performance Target and the Performance Maximum. (vii) "Cause," "Disability" and "Retirement" shall have the meanings provided in the Corporation's 1996 Performance Unit Plan. In granting an award of performance shares, the Committee shall establish and cause to be set forth in writing: (a) the number of performance shares granted to the awardee; (b) the Performance Period applicable to the award; and (c) the Performance Criteria to be employed in determining whether all or any part of the performance shares awarded have been earned during the Performance Period and the method of determining the number of performance shares earned, including the applicable Performance Target and any Performance Threshold or Performance Maximum. The terms so established by the Committee shall be objective such that a third party having knowledge of the relevant facts could determine (1) whether or not the Performance Target and any Performance Threshold or Performance Maximum has been achieved and (2) the number of performance shares which have been earned based on such performance. Each award of performance shares shall be evidenced by a written award agreement executed by the awardee and the Corporation which shall set forth the aforesaid terms of the performance share award as established by the Committee and such other terms and conditions, not inconsistent with the provisions of the Plan, applicable to the award as the Committee in its discretion may determine to include therein. 8 Within 75 days following the end of a Performance Period, the Committee shall determine in accordance with the terms of the Plan and the award agreement and shall certify in writing whether the applicable Performance Target, any applicable Performance Threshold or Performance Maximum, and any other material terms of a performance share award were achieved or satisfied and the number of performance shares, if any, earned by the awardee. For this purpose, approved minutes of the meeting of the Committee at which the certification is made shall be sufficient to satisfy the requirement of a written certification. Payment of earned performance shares shall be made to the awardee on or before March 15th of the year following the end of the Performance Period. Payment in respect of earned performance shares may be made in shares of Common Stock, in cash, or partly in shares of Common Stock and partly in cash, as determined by the Committee at the time of payment. For purposes of any payment in cash, earned performance shares shall be converted to dollars based on the fair market value of the Common Stock, determined as provided in Section 5(I), as of the date the amount payable is determined by the Committee. In establishing Performance Criteria and Performance Targets for any Performance Period, the Committee may define accounting terms so as to specify in an objectively determinable manner the effect of changes in accounting principles, extraordinary items, discontinued operations, mergers or other business combinations, acquisitions or dispositions of assets and the like. Unless otherwise so determined by the Committee and reflected in the award agreement, accounting terms used by the Committee in establishing Performance Criteria and Performance Targets shall be defined, and the results based thereon shall be measured, in accordance with generally accepted accounting principles as applied by the Corporation in preparing its consolidated financial statements and related financial disclosures for the Performance Period, as included in its reports filed with the Securities and Exchange Commission. If during any Performance Period (a) a dividend or other distribution shall be declared upon the Common Stock payable in shares of Common Stock, (b) the outstanding shares of Common Stock shall be changed into or exchangeable for a different number or kind or shares of stock or other securities of the Corporation or another corporation, whether through reorganization, reclassification, stock split-up, combination of shares, merger or consolidation, (c) there shall be a change in the capitalization of the Corporation resulting from the separation from the Corporation of any corporation or business through a spin-off or other distribution of stock or property to the shareholders of the Corporation, a reorganization or a partial or complete liquidation, an appropriate and proportionate adjustment shall be made by the Committee with respect to any Performance Target, Performance Threshold and Performance Maximum to be calculated by reference to earnings per share or other stock-based Performance Criteria so as to preserve as nearly as may be practicable the intended effect of such performance measures as originally established by the Committee. Any such adjustment made by the Committee shall be final, binding and conclusive as to all awardees, notwithstanding the provisions of any award agreement. In any such event, the number of performance shares subject to any award shall also be adjusted as provided in Section 7. Unless otherwise determined by the Committee at the time of making an award of performance shares and reflected in the applicable award agreement, if all employment of an awardee with the Corporation and its Subsidiaries terminates prior to the end of a Performance Period for any reason other than death, Disability, Retirement or an involuntary termination by the Corporation or a Subsidiary not for Cause, then all performance shares of the awardee for which the applicable Performance Period has not been completed as of the date of such termination of employment shall be deemed forfeited. In the case of a termination of employment prior to the end of the applicable performance Period due to death, Disability, Retirement or involuntary termination not for Cause, the award agreement may specify the manner of determining the number of performance shares, if any, which shall be deemed earned based on the extent to which the applicable Performance Target has been achieved as of the date of termination of employment, the percentage of the Performance Period elapsed and/or such other factors as the Committee may deem relevant. In the absence of such specification, the determination of whether any performance shares shall be 9 deemed earned if the employment of the awardee terminates prior to the end of the applicable Performance Period due to death, Disability, Retirement or involuntary termination not for Cause, and the number of performance shares earned and the timing of payment thereof, shall be made by the Committee in its sole and absolute discretion. Payment in respect of any earned performance shares following a termination of employment as provided in this paragraph shall be made to the awardee, or in the event of death to his or her estate, as promptly as practicable after the number of performance shares earned has been determined by the Committee, which shall make such determination within 75 days after termination of employment. If the Committee determines that all or any part of the performance share award shall be paid, payment may be made in shares of Common Stock, in cash, or partly in cash and partly in shares of Common Stock, as determined by the Committee at the time of payment. For purposes of any payment in cash, performance shares shall be converted to dollars based on the fair market value of the Common Stock, determined as provided in Section 5(I), as of the date the amount payable is determined by the Committee. Any determination by the Committee on any matter with respect to performance shares shall be final and binding on both the Corporation and the awardee. (C) Other Stock Awards. The Committee shall have the authority in its discretion to grant to eligible employees such other awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares of Common Stock as deemed by the Committee to be consistent with the purposes of the Plan, including, without limitation, purchase rights, shares awarded without restrictions or conditions, or securities or other rights convertible or exchangeable into shares of Common Stock. In the discretion of the Committee, such other stock awards, including shares of Common Stock, or other types of awards authorized under the Plan, may be used in connection with, or to satisfy obligations of the Corporation or a Subsidiary to eligible employees under, other compensation or incentive plans, programs or arrangements of the Corporation or a Subsidiary, including without limitation the 1996 Performance Unit Plan, the Management Incentive Compensation Plan and the Savings Restoration Plan. The Committee shall determine the terms and conditions, if any, of any other stock awards made under the Plan. SECTION 7 Adjustment and Substitution of Shares If a dividend or other distribution shall be declared upon the Common Stock payable in shares of Common Stock, the number of shares of Common Stock then subject to any outstanding stock options, performance share or other stock awards and the number of shares of Common Stock which may be issued under the Plan but are not then subject to outstanding stock options or awards shall be adjusted by adding thereto the number of shares of Common Stock which would have been distributable thereon if such shares had been outstanding on the date fixed for determining the shareholders entitled to receive such stock dividend or distribution. Shares of Common Stock so distributed with respect to any restricted shares held in escrow shall also be held by the Corporation in escrow and shall be subject to the same restrictions as are applicable to the restricted shares on which they were distributed. If the outstanding shares of Common Stock shall be changed into or exchangeable for a different number or kind of shares of stock or other securities of the Corporation or another corporation, or cash or other property, whether through reorganization, reclassification, recapitalization, stock split-up, combination of shares, merger or consolidation, then there shall be substituted for each share of Common Stock subject to any then outstanding stock option, performance share or other stock award, and for each share of Common Stock which may be issued under the Plan but which is not then subject to any outstanding stock option or award, the number and kind of shares of stock or other securities (and in the case of outstanding options or awards, the cash or other property) into which each outstanding share of the Common Stock shall be so changed or for which each such share shall be exchangeable. Unless otherwise determined by the Committee in its discretion, any such stock or securities, as well as any cash or other property, into or for which any restricted shares held in escrow shall be changed or exchangeable in any such transaction shall also be held by the Corporation in escrow and shall be subject to the same restrictions as are applicable to the restricted shares in respect of which such stock, securities, cash or other property was issued or distributed. 10 In case of any adjustment or substitution as provided for in this Section 7, the aggregate option price for all shares subject to each then outstanding stock option prior to such adjustment or substitution shall be the aggregate option price for all shares of stock or other securities (including any fraction), cash or other property to which such shares shall have been adjusted or which shall have been substituted for such shares. Any new option price per share or other unit shall be carried to at least three decimal places with the last decimal place rounded upwards to the nearest whole number. No adjustment or substitution provided for in this Section 7 shall require the Corporation to issue or sell a fraction of a share or other security. Accordingly, all fractional shares or other securities which result from any such adjustment or substitution shall be eliminated and not carried forward to any subsequent adjustment or substitution. Owners of restricted shares held in escrow shall be treated in the same manner as owners of Common Stock not held in escrow with respect to fractional shares created by an adjustment or substitution of shares, except that, unless otherwise determined by the Committee in its discretion, any cash or other property paid in lieu of a fractional share shall be subject to restrictions similar to those applicable to the restricted shares exchanged therefor. If any such adjustment or substitution provided for in this Section 7 requires the approval of shareholders in order to enable the Corporation to grant incentive stock options, then no such adjustment or substitution shall be made without the required shareholder approval. Notwithstanding the foregoing, in the case of incentive stock options, if the effect of any such adjustment or substitution would be to cause the stock option to fail to continue to qualify as an incentive stock option or to cause a modification, extension or renewal of such stock option within the meaning of Section 424 of the Code, the Committee may elect that such adjustment or substitution not be made but rather shall use reasonable efforts to effect such other adjustment of each then outstanding stock option as the Committee, in its discretion, shall deem equitable and which will not result in any disqualification, modification, extension or renewal (within the meaning of Section 424 of the Code) of such incentive stock option. SECTION 8 Additional Rights in Certain Events (A) Definitions. For purposes of this Section 8, the following terms shall have the following meanings: (1) The term "Person" shall be used as that term is used in Sections 13(d) and 14(d) of the Exchange Act. (2) Beneficial Ownership shall be determined as provided in Rule 13d-3 under the Exchange Act as in effect on the effective date of the Plan. (3) "Voting Shares" shall mean all securities of a company entitling the holders thereof to vote in an annual election of Directors (without consideration of the rights of any class of stock other than the Common Stock to elect Directors by a separate class vote); and a specified percentage of "Voting Power" of a company shall mean such number of the Voting Shares as shall enable the holders thereof to cast such percentage of all the votes which could be cast in an annual election of directors (without consideration of the rights of any class of stock other than the Common Stock to elect Directors by a separate class vote). (4) "Tender Offer" shall mean a tender offer or exchange offer to acquire securities of the Corporation (other than such an offer made by the Corporation or any Subsidiary), whether or not such offer is approved or opposed by the Board. 11 (5) "Section 8 Event" shall mean the date upon which any of the following events occurs: (a) The Corporation acquires actual knowledge that any Person other than the Corporation, a Subsidiary or any employee benefit plan(s) sponsored by the Corporation has acquired the Beneficial Ownership, directly or indirectly, of securities of the Corporation entitling such Person to 10% or more of the Voting Power of the Corporation; (b) A Tender Offer is made to acquire securities of the Corporation entitling the holders thereof to 20% or more of the Voting Power of the Corporation; or (c) A solicitation subject to Rule 14a-11 under the Exchange Act (or any successor Rule) relating to the election or removal of 50% or more of the members of any class of the Board shall be made by any person other than the Corporation; or (d) The shareholders of the Corporation shall approve a merger, consolidation, share exchange, division or sale or other disposition of assets of the Corporation as a result of which the shareholders of the Corporation immediately prior to such transaction shall not hold, directly or indirectly, immediately following such transaction a majority of the Voting Power of (i) in the case of a merger or consolidation, the surviving or resulting corporation, (ii) in the case of a share exchange, the acquiring corporation or (iii) in the case of a division or a sale or other disposition of assets, each surviving, resulting or acquiring corporation which, immediately following the transaction, holds more than 10% of the consolidated assets of the Corporation immediately prior to the transaction; provided, however, that (i) if securities beneficially owned by a grantee are included in determining the Beneficial Ownership of a Person referred to in paragraph 5(a), (ii) a grantee is required to be named pursuant Item 2 of the Schedule 14D-1 (or any similar successor filing requirement) required to be filed by the bidder making a Tender Offer referred to in paragraph 5(b) or (iii) if a grantee is a "participant" as defined in 14a-11 under the Exchange Act (or any successor Rule) in a solicitation (other than a solicitation by the Corporation) referred to in paragraph 5(c), then no Section 8 Event with respect to such grantee shall be deemed to have occurred by reason of such event. (B) Acceleration of the Exercise Date of Stock Options. Subject to the provisions of Section 4 in the case of incentive stock options, unless the agreement referred to in Section 5(H), or an amendment thereto, shall otherwise provide, notwithstanding any other provision contained in the Plan, in case any "Section 8 Event" occurs all outstanding stock options (other than those held by a person referred to in the proviso to Section 8(a)(5)) shall become immediately and fully exercisable whether or not otherwise exercisable by their terms. (C) Extension of the Expiration Date of Stock Options. Subject to the provisions of Section 4 in the case of incentive stock options, unless the agreement referred to in Section 5(H), or an amendment thereto, shall otherwise provide, notwithstanding any other provision contained in the Plan, all stock options held by a grantee (other a grantee referred to in the proviso to Section 8(a)(5)) whose employment with the Corporation or a Subsidiary terminates within one year of any Section 8 Event for any reason other than voluntary termination with the consent of the Corporation or a Subsidiary, retirement under any retirement plan of the Corporation or a Subsidiary or death shall be exercisable for a period of three months from the date of such termination of employment, but in no event after the expiration date of the stock option. 12 (D) Lapse of Restrictions on Restricted Share Awards. If any "Section 8 Event" occurs prior to the scheduled lapse of all restrictions applicable to restricted share awards under the Plan (other than those held by a person referred to in the proviso to Section 8(a)(5)), then unless the agreement referred to in Section 6(A), or an amendment thereto, shall otherwise provide, all such restrictions shall lapse upon the occurrence of any such "Section 8 Event" regardless of the scheduled lapse of such restrictions. (E) Payment of Performance Shares. If any "Section 8 Event" occurs prior to the end of any Performance Period, then unless otherwise provided in the applicable award agreement, all performance shares awarded with respect to such Performance Period (other than those held by a person referred to in the proviso to Section 8(a)(5)) shall be deemed to have been fully earned as of the date of such Section 8 Event without regard to actual performance, and as of the date of the Section 8 Event there shall be due and payable to the awardee with respect thereto the maximum number of performance shares which could have been earned during the Performance Period through achievement of the Performance Maximum, if any, or if none, the Performance Target. SECTION 9 Effect of the Plan on the Rights of Employees and Employer Neither the adoption of the Plan nor any action of the Board or the Committee pursuant to the Plan shall be deemed to give any employee any right to be granted a stock option (with or without reload option rights and/or cash payment rights), restricted shares, performance shares or other stock awards under the Plan. Nothing in the Plan, in any stock option, reload option rights or cash payment rights granted under the Plan, in any restricted share, performance share or other stock award under the Plan or in any agreement providing for any of the foregoing shall confer any right to any employee to continue in the employ of the Corporation or any Subsidiary or interfere in any way with the rights of the Corporation or any Subsidiary to terminate the employment of any employee at any time. SECTION 10 Amendment The right to amend the Plan at any time and from time to time and the right to revoke or terminate the Plan are hereby specifically reserved to the Board; provided that no amendment of the Plan shall be made without shareholder approval (1) if the effect of the amendment is (a) to make any changes in the class of employees eligible to receive incentive stock options under the Plan, (b) to increase the number of shares with respect to which incentive stock options may be granted under the Plan or (2) if shareholder approval of the amendment is at the time required (a) by the rules of the NASDAQ National Market System or any stock exchange on which the Common Stock may then be listed or (b) for nonstatutory stock options or performance shares granted under the Plan to qualify as "performance based compensation" as then defined in the regulations under Section 162(m) of the Code. No alteration, amendment, revocation or termination of the Plan shall, without the written consent of the holder of a stock option, reload option rights, cash payment rights, restricted shares, performance shares or other stock award theretofore awarded under the Plan, adversely affect the rights of such holder with respect thereto. SECTION 11 Effective Date and Duration of Plan The effective date and date of adoption of the Plan shall be March 27, 1997, the date of adoption of the Plan by the Board, provided that such adoption of the Plan by the Board is approved by a majority of the votes cast at a duly 13 held meeting of shareholders held on or prior to March 26, 1998 at which a quorum representing a majority of the outstanding voting stock of the Corporation is, either in person or by proxy, present and voting. No stock option granted under the Plan may be exercised, and no restricted shares, performance shares or other stock award may be payable, until after and contingent upon such approval. No stock option, reload option rights, cash payment rights, restricted shares, performance shares or other stock award may be granted under the Plan subsequent to March 26, 2007, except that reload options and associated cash payment rights may be granted pursuant to reload option rights then outstanding. SECTION 12 Withholding Income or employment taxes may be required to be withheld by the Corporation or a Subsidiary in connection with the exercise of a stock option, upon a "disqualifying disposition" of the shares acquired upon exercise of an incentive stock option, at the time restricted shares are granted or vest or performance shares are earned or upon the receipt by the grantee of cash in payment of cash payment rights or dividends on restricted stock which has not vested. Except as provided below, the grantee shall pay the Corporation in cash the amount required to be withheld. A grantee may elect to have any withholding obligation at the time of the exercise of a nonstatutory stock option or at the time restricted shares vest or performance shares are earned satisfied by the Corporation withholding from the shares of Common Stock the grantee would otherwise receive full shares of Common Stock having a fair market value, determined as provided in Section 5(I), on the date that the amount of tax to be withheld is determined equal to, or as nearly equal as possible to but less than, the amount required to be withheld. The Corporation will request that the grantee pay any additional amount required to be withheld directly to the Corporation in cash and the grantee's election may be subject to any requirements imposed by the Committee. Any income or employment taxes required to be withheld by the Corporation or any of its Subsidiaries upon the receipt by the grantee of cash in payment of cash payment rights or dividends will be satisfied by the Corporation by withholding the taxes required to be withheld from the cash the grantee would otherwise receive. If a grantee does not pay any income or employment taxes required to be withheld by the Corporation or any of its Subsidiaries within ten days after a request for the payment of such taxes, the Corporation or such Subsidiary may withhold such taxes from any other compensation to which the grantee is entitled from the Corporation or any of its subsidiaries. 14 EX-10.18 10 EXECUTIVE EMPLOYMENT AGREEMENT Exhibit 10.18 EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is made on the ____ day of ______________, 1997 between KEYSTONE FINANCIAL, INC. (the "Corporation"), a Pennsylvania corporation with its principal office at One Keystone Plaza, Harrisburg, PA, and JAMES M. DEITCH (the "Executive"), residing at 3405 Pebble Ridge Road, York, PA l7405, WHEREAS, said Executive Employment Agreement shall become effective on January l, l997; and WHEREAS, the Corporation desires to employ the Executive in a Senior Executive position with the Corporation or a Subsidiary under the terms and conditions set forth herein; and WHEREAS, the Executive desires to serve the Corporation in a Senior Executive position under the terms and conditions set forth in this Agreement; NOW THEREFORE, in consideration of the mutual covenant and agreement set forth herein and intending to be legally bound hereby, the parties agree as follows: 1. DEFINITIONS. The following definitions shall apply in this Agreement: (a) "Anniversary Date" shall mean January 1, 1997 and the January 1 of each successive year. (b) "Annual Salary" shall be the base cash compensation defined in Section 5(a) without regard to any elective deferral or salary reduction plan or program of the Corporation. (c) "Board of Directors" shall mean the Board of Directors of the Corporation as constituted from time to time. (d) "Change of Control" shall be as defined in paragraph 14 of this Agreement. (e) "Disability" shall be as defined in paragraph 10(b) of this Agreement. (f) "Early Retirement" shall be that age stipulated from time to time by the Human Resources Committee of the Board of Directors as the age at which key management personnel may elect to take early retirement. 1 (g) "LTD" means the corporation's long-term disability insurance for key management personnel as in effect from time to time. (h) "MICP" means the Corporation's Management Incentive Compensation Plan as in effect from time to time, or any successor plan thereto. (i) "Normal Retirement" shall be that age stipulated from time to time by the Human Resources Committee of the Board of Directors as the age at which key management personnel are required to take mandatory retirement. (j) "Senior Executive" shall mean any key management employee of the Corporation or a Subsidiary whose employment relationship is governed by a contract or agreement. (k) "Subsidiary" shall mean any bank, corporation or other entity of which the Corporation owns, directly or indirectly, through one or more Subsidiaries, a majority of each class of equity security having ordinary voting power in an election of directors. 2. TERM OF AGREEMENT; RENEWAL. This Agreement shall be initially effective for a three-year period beginning January l, l997. The term of this Agreement will automatically renew on January 1, 1998 and each subsequent Anniversary Date for an additional three-year period unless, prior to the first day of October preceding the first Anniversary Date within the then current term, either party shall give written notice of nonrenewal to the other, in which event this Agreement shall terminate at the end of the three-year period then in effect. For example, the initial contract period is January l, 1997 through December 31, 1999. On January 1, 1998, the term of this Agreement extends to December 31, 2000, unless one of the parties provides written notice of his intent not to renew the Agreement prior to October 1, l997. 3. POSITION AND DUTIES. The Executive shall serve initially as President/Chief Executive Officer of Keystone National Bank, reporting to the Senior Executive Vice President and Chief Banking Officer of the Corporation, and shall have supervision and control over, and responsibility for, the general management and operation of Keystone National Bank, and shall have such other powers and duties as may from time to time be prescribed by the Senior Executive Vice President and Chief Banking Officer of the Corporation, provided that such duties are consistent with the position of a Senior Executive. 4. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall devote substantially all his working time, ability and attention to the business of the Corporation during the term of this Agreement. The Executive shall notify the Board of Directors in writing before the Executive engages in any other business or commercial activities, duties or pursuits, including, but not limited to, directorships of other companies. Under no circumstances may the Executive engage in any business or commercial activities, duties or pursuits which compete with the business or commercial activities of the Corporation or any of its Subsidiaries, nor may the Executive serve as a director or officer or in any other capacity with any business entity unless he shall have received advance written approval from the officer of the Corporation to whom he reports as provided in paragraph 3 of this Agreement. 5. COMPENSATION. (a) ANNUAL SALARY. For services rendered under this Agreement, the Executive shall be entitled to receive as base compensation for the period through December 31, 1997, an Annual Salary at an initial rate of $175,000 per year. The Executive's Annual Salary shall be reviewed thereafter by the Board of Directors at least once annually and may be adjusted at the discretion of the Board of Directors in accordance with the Corporation's then-current compensation policies and practices and other factors deemed relevant by the Board; provided, that at no time shall the Annual Salary be less than the Executive's Annual Salary in the prior calendar year. Annual Salary shall be subject to withholding and other applicable taxes and payroll deductions and payable in substantially equal monthly installments or such other more frequent intervals as may be determined by the Board of Directors as payroll policy for Senior Executives. 2 (b) INCENTIVE COMPENSATION. The Executive shall be eligible for annual incentive awards under and in accordance with the MICP, based on achievement of annual performance goals and other criteria set forth in the MICP. Subject to the terms and conditions of the MICP and all rules and regulations pertaining thereto, any incentive award to which the Executive becomes entitled will be paid to the Executive within ninety (90) days following the end of the fiscal year in question. In addition to the MICP, the Executive will be eligible to participate in any stock option, stock bonus, or other incentive plan available generally to other Senior Executives from time to time. 6. BENEFITS, VACATION TIME, EXPENSES AND PERQUISITES. (a) EMPLOYEE BENEFIT PLANS. During the term of this Agreement the Executive shall be entitled to participate in all Corporate employment benefit plans made available from time to time by the Corporation to its Senior Executives, including but not limited to pension, profit-sharing, savings, supplemental retirement income, medical and health-and-accident plans and arrangements, subject to and on a basis consistent with the terms and conditions of, and the Corporation rules and regulations pertaining to,such plans and arrangements, and any limitations or qualifications imposed by any applicable governmental body. Subject to the foregoing, the benefit plans and arrangements provided to the Executive shall include, but not be limited to, the following: (i) Retirement Income Plans: The Executive shall be entitled to participate in any nonqualified supplemental retirement income plans available from time to time to the Corporation's "highly compensated employees" as defined by Section 414(q) of the Internal Revenue Code, and shall become vested in such plans according to the schedules provided in the plan documents. Benefits to be received by the Executive upon retirement will be calculated under formulas utilized in such plans as in effect (A) upon the effective date of this Agreement, and (B) at the time of the Executive's retirement, and actual payments will be the greater (higher) of two benefit amounts calculated under the formulas. (ii) Life Insurance: Subject to satisfaction of conditions imposed by the applicable insurance company for additional coverage, the Corporation shall continue to maintain for the Executive during the term of this Agreement the insurance coverage established for the Executive effective January l, l994 (and as amended January 1, 1997) under and in accordance with the Keystone Financial Executive Split Dollar Agreement with Executive; provided, and notwithstanding any contrary provisions therein, the Corporation shall have no unilateral right to terminate or modify such Split Dollar Agreement with Executive. (iii)Disability Insurance: In addition to standard group benefit provisions, the Corporation shall make available a supplemental LTD insurance policy for purchase by the Executive, provided the Executive qualifies as a medically acceptable risk to the issuing company on a standard underwriting basis. Such policy shall provide that in the event the Executive becomes disabled in accordance with the terms of such policy, he shall be entitled to receive benefits from all sources (e.g., Social Security, group LTD and supplemental LTD) equal to 67% of his Annual Salary as in effect at the time of disability until he reaches the age of 65 or dies, whichever occurs first. The Corporation shall continue to pay to the Executive his Annual Salary during any applicable "elimination" (waiting) period under the supplemental LTD policy, not to exceed one hundred and eighty (180) days. Notwithstanding the foregoing, supplemental LTD coverage shall be required only if and to the extent that the Corporation's group LTD insurance policy benefit limit is such that it does not permit the Executive to receive the above-stated percentage (i.e., 67%) of income replacement at the time of said disability. 3 (b) VACATION. During the term of this Agreement, the Executive shall be entitled to the number of paid vacation days in each calendar year determined by the Corporation from time to time for its Senior Executives, but not less than four (4) weeks in any calendar year. Such vacation entitlement shall be subject to all rules and policies concerning vacation time as shall be applicable to Senior Executives from time to time. The Executive shall also be entitled to all paid holidays given by the Corporation to its Senior Executives. (c) REIMBURSABLE GENERAL EXPENSES. During the term of this Agreement, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by him (in accordance with the policies and procedures established from time to time by the Board of Directors of the Corporation for its Senior Executives) in performing services hereunder, provided that the Executive first properly accounts therefor in accordance with such policies and procedures. (d) REIMBURSABLE AUTO EXPENSES. During the term of this Agreement, the Executive shall be entitled to receive a monthly payment under the Corporation's Automobile Capital Cost Reimbursement Plan for selected executives. Such payments shall be treated as current income and be subject to regular payroll tax withholding and deductions. The Executive shall also be entitled to reimbursement for operating expenses of the automobile associated with business travel at the established corporate mileage rate. (e) MISCELLANEOUS. The Executive shall be entitled to receive such other perquisites, e.g. club memberships, and "fringe benefits" as the Board of Directors shall deem appropriate in its sole direction. 7. INDEMNIFICATION. The Corporation shall indemnify the Executive, to the fullest extent permitted from time to time by Pennsylvania law, with respect to any threatened pending or contemplated action, suit or proceeding, brought against him by reason of the fact that he is or was a director, officer, employee or agent of the Corporation or is or was serving at the written request of the Corporation as a director, officer, employee or agent of another person or entity. To the fullest extent permitted by Pennsylvania law, the Corporation shall in advance of final disposition pay any and all expenses incurred by Executive in connection with any threatened, pending or completed action, suit or proceeding with respect to which Executive may be entitled to indemnification hereunder. Executive's right to indemnification provided herein is not exclusive of any other rights of indemnification to which Executive may be entitled under any bylaw, agreement, vote of shareholders or otherwise, and shall continue 4 beyond the term of this Agreement. The Corporation shall use its best efforts to obtain insurance coverage for the Executive under an insurance policy covering officers and directors of the Corporation against lawsuits, arbitrations or other proceedings; however, nothing herein shall be construed to require the Corporation to obtain such insurance if the Board of Directors of the Corporation determines that such coverage cannot be obtained at a commercially reasonable price. Notwithstanding the foregoing, the Executive shall be entitled to indemnification from the Subsidiary which is his actual employer if such indemnification is available and provides more extensive coverage than the indemnification provided under this Agreement. 8. UNAUTHORIZED DISCLOSURE. During the term of this Agreement or at any later time, the Executive shall not, without the written consent of a duly authorized executive officer of the Corporation, disclose to any person, other than a person (including an employee of the Corporation or a Subsidiary) to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Corporation, any material confidential information obtained by him while in the employ of the Corporation or any Subsidiary or operating unit with respect to any of the services, products, improvements, formulas, designs or styles, processes, customers, methods of distribution or business practices, the disclosure of which reasonably would be expected to materially damage the Corporation; provided, however, that for purposes of this Agreement confidential information shall not include any information known generally to the public (other than as a result of unauthorized disclosure by the Executive) or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that conducted by the Corporation. 9. RESTRICTIVE COVENANTS. Except as otherwise provided below, upon termination of his employment hereunder regardless of the circumstances or reasons for such termination, the Executive covenants and agrees as follows: (a) NONCOMPETITION. The Executive shall not, directly or indirectly, within the marketing area of the Corporation and its Subsidiaries (defined as all areas within 100 miles of the work location to which the Executive was assigned for the majority of time during the twelve months preceding termination of his employment where the Corporation has established an active and material market presence) enter into or engage generally in direct or indirect competition with the Corporation in the business of banking or any banking or trust related business, either directly or indirectly as an individual on his own or as a partner or joint venturer, or as a director, officer, shareholder (except as an incidental shareholder), employee or agent for any person, for a period of one year after the date of termination of his employment, except where the termination occurs within twenty-four (24) months following a Change of Control as defined herein. The existence of any material claim or cause of action of the Executive against the Corporation, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Corporation of this covenant. The Executive acknowledges and agrees that enforcement of this covenant not to compete will not prevent him from earning a livelihood and that any breach of the restrictions set forth in this paragraph will result in irreparable injury to the Corporation for which it shall have no adequate remedy at law, and that therefore the Corporation shall be entitled to injunctive relief in order to enforce the provisions hereof. In the event that this paragraph shall be determined by any court of competent jurisdiction to be unenforceable in part by reason of it being too great a period of time or covering too great a geographical area, it shall be in full force and effect as to that period of time or geographical area determined to be reasonable by the court. 5 (b) RETURN OF MATERIALS. Upon termination of employment with the Corporation, the Executive shall immediately deliver to the Corporation all correspondence, manuals, letters, notes, notebooks, reports and any other documents and tangible items containing or constituting confidential information about the Corporation maintained at his office and shall promptly deliver all said materials held by him at other locations. (c) NONSOLICITATlON OF EMPLOYEES. The Executive shall not entice or solicit, directly or indirectly, any other executives or key management personnel of the Corporation to leave the employ of the Corporation or its Subsidiaries to work with the Executive or any entity with which the Executive has affiliated for a period of one year following the Executive's termination of employment with the Corporation. The Executive acknowledges and agrees that any breach of the restrictions set forth in this paragraph will result in irreparable injury to the Corporation for which it shall have no meaningful remedy in law and the Corporation shall be entitled to injunctive relief in order to enforce provisions hereof. Upon obtaining such injunction, the Corporation shall be entitled to pursue reimbursement from the Executive and/or the Executive's employer of costs incurred in securing a qualified replacement for any employee enticed away from the Corporation by the Executive. Further, the Corporation shall be entitled to set off against or obtain reimbursement from the Executive of any payments owed or made to the Executive by the Corporation hereunder. 10. TERMINATION. (a) GENERALLY. The Executive's employment hereunder shall terminate upon his Early Retirement, Normal Retirement or death. (b) TERMINATION DUE TO PERMANENT DISABILITY. If the Executive becomes permanently disabled because of sickness, physical or mental disability, or any other reason, and is unable to perform or complete his duties under this Agreement for a period anticipated to extend for a period of at least one hundred eighty (180) consecutive calendar days (or such other length of time that is equal to any applicable elimination period provided for in an LTD insurance policy), the Corporation shall have the option to terminate this Agreement by giving written notice of termination to the Executive. Such termination shall be without prejudice to any right the Executive may have under the LTD insurance program maintained by the Corporation. Such disability shall be certified by the Corporation's group LTD carrier, in conjunction with the Executive's supplemental LTD carrier if such supplemental policy is in effect; in the event these carriers cannot agree, they shall designate a licensed physician whose decision shall be binding for purposes of this Agreement. 6 (c) TERMINATION FOR CAUSE. The Corporation may terminate the Executive's employment hereunder for cause. For the purposes of this Agreement, the Corporation shall have "cause" to terminate the Executive's employment hereunder upon (i) the willful failure by the Executive to substantially perform his duties hereunder, other than any such failure resulting from the Executive's incapacity due to physical or mental illness, or (ii) the willful engaging by the Executive in gross misconduct materially injurious to the Corporation, or (iii) the willful violation by the Executive of the provisions of paragraphs 4 or 8 hereof, after notice from Corporation and a failure to cure such violation within 30 days of said notice, or if said violation cannot be cured within 30 days, within a reasonable time thereafter if the Executive is diligently attempting to cure the violation, or (iv) the gross negligence of the Executive in the performance of his duties, or (v) receipt of a final written directive or order of any governmental body or entity having jurisdiction over the Corporation or any of its Subsidiaries requiring termination or removal of the Executive. The determination of the existence of cause shall be made in the reasonable judgment of the Board of Directors or its delegee. (d) TERMINATION BY EMPLOYEE UPON GOOD REASON. The Executive may terminate his employment for good reason. The term "good reason" shall mean (i) a reduction in the Executive's Annual Salary in violation of Section 5 hereof, or his total cash compensation opportunities (e.g. annual incentive awards under the Corporation's MICP, equity participation awards) or benefits (except any reductions in compensation which may be applied broadly among all executives because of adverse financial conditions for the Corporation or as part of a restructuring of the Corporation's executive compensation program), (ii) the Corporation's decision not to renew the Agreement, (iii) the Corporation's failure to remedy a material breach of this Agreement within thirty (30) days following written notice of the breach from the Executive, or (iv) any of the circumstances described in paragraph 11(d) following a Change of Control. 11. PAYMENTS UPON TERMINATION. (a) If the Executive's employment shall be terminated because of Early Retirement, Normal Retirement, death, Disability or for cause, the Corporation shall pay the Executive or his guardian or Estate his full Annual Salary through the date of termination at the rate in effect at the time of termination and any other amounts owing to Executive at the date of termination. Further, should termination occur because of Early Retirement, Normal Retirement, death, or Disability, the Corporation may elect to pay the Executive, or his guardian or estate, at the end of the fiscal year in which the termination occurred, a prorated award under the MICP, and also may elect to accelerate vesting of restricted stock, stock option and performance share awards to provide a full or prorated compensation opportunity for the retired or disabled Executive or the deceased Executive's guardian or estate. Notwithstanding the foregoing, the Corporation shall have no obligation to provide payments of benefits beyond what the Executive is entitled to under the terms and conditions of the various compensation and benefit plans and arrangements maintained by the Corporation. (b) If the Executive's employment is terminated by the Corporation other than for the reasons or circumstances set forth under paragraph 10(a), (b) or (c) hereof, or if the Executive terminates employment within 90 days following the Corporation's decision not to renew his employment agreement or if the Executive terminates his employment for any of the "Good Reasons" defined in paragraph 10(d), then the Corporation shall make a lump-sum cash payment to the Executive equal to one and one-half times his highest Annual Salary during the three years preceding the termination. In such event the Corporation shall also maintain in full force and effect, for a minimum period of eighteen (18) months, all employee benefit plans and programs to which the Executive was entitled prior to the date of termination, including but not limited to pension, profit-sharing, savings, supplemental retirement income, medical and health-and-accident plans and arrangements, if the Executive's continued participation is permitted under the general terms and conditions and rules and regulations of such plans and programs. In the event that the Executive's continued participation in any such plan or program is prohibited, the Executive shall be entitled to receive an amount equal to the annual 7 contribution, payments, premiums, credits or allocations made by the Corporation to him, to his account or on his behalf under such plans and programs from which his continued participation is barred, except that if Executive's participation in any health, medical, life insurance, or disability plan or program is barred the Corporation shall use its best efforts to obtain and pay for, on Executive's behalf, individual insurance plans, policies or programs which provide to Executive health, medical, life and disability insurance coverage which is equivalent to the insurance coverage to which Executive was entitled prior to the date of termination. (c) If termination occurs as a result of expiration of the Agreement, the Executive will not be entitled to receive any severance payments or continuation of benefit coverages except as provided under law (COBRA). The Executive will be permitted to exercise vested stock options and grants as prescribed in the agreements covering those options and grants. (d) If, within twenty-four (24) months following a Change of Control as defined herein, the Executive's position is eliminated and he is not offered a comparable position within thirty (30) days, or the Executive terminates employment due to a lessening of job responsibilities or an unacceptable relocation (defined as more than 35 miles from the Executive's prior work site), or there is a reduction in the Executive's compensation, compensation opportunities or benefits as described in Paragraph 10(d)(i) hereof, or the Executive terminates employment for any reason during the thirty (30) day period following the first anniversary of the Change of Control, then the Corporation shall (i) make a lump-sum payment to the Executive equal to two and one-half times the sum of (A) his highest Annual Salary and (B) an amount equal to the highest annual MICP award earned during the three year period preceding the termination; (ii) maintain benefit coverages for the Executive as specified in paragraph 11(b) above for a period of twenty-four (24) months; (iii) release its collateral assignment under the Split Dollar Agreement with Executive without reimbursement of premiums paid for that policy; and (iv) provide to the Executive outplacement and career counseling services as may be requested by the Executive, provided that the costs of such services may not exceed 15% of the Executive's highest Annual Direct Salary during the three years preceding the termination. Further, notwithstanding the terms of any restricted stock, stock option and/or performance share award or grant made to the Executive, such award or grant will become fully vested and the Executive will have a six month period from date of termination in which to exercise available stock options. 12. GROSS-UP PROVISION ON CHANGE OF CONTROL PAYMENTS. Should the total of payments made to the Executive upon termination following a Change of Control exceed the amount allowed under Internal Revenue Code Section 4999, the Corporation will make an additional payment to the Executive in an amount such that after the payment of all income and excise taxes the Executive will be in the same after-tax position as if no excise tax had been imposed. 8 13. DAMAGES FOR BREACH OF CONTRACT. In the event of a breach of this Agreement by either the Corporation or Executive resulting in damages to either party, that party may recover from the party breaching the Agreement any and all damages that may be sustained. 14. DEFINITION OF CHANGE OF CONTROL. For purposes of this Agreement "Change of Control" shall mean the occurrence of any one of the following events: (a) A majority of the Board of Directors of the Corporation shall consist of persons other than (i) persons who were members of the Board of Directors of Keystone on the date first written above, or (ii) persons (A) whose nomination or election as directors of the Corporation was approved by at least two-thirds of the then members of the Board of Directors of the Corporation (excluding any director referred to in clause (B) of this paragraph) who either were directors of the Corporation on the date first above written or whose nomination or election as a director was so approved and (B) who are not nominees or representatives of (1) any Person having Beneficial Ownership, directly or indirectly, of securities of the Corporation entitling such Person to 10% or more of the voting power of the Corporation's Voting Stock or (2) any "participant," as defined in Rule 14a-11 under the Securities Exchange Act of 1934 (the "Exchange Act") or any successor rule, in any actual or threatened solicitation (other than a solicitation by the Corporation) subject to Rule 14a-11 or any successor rule relating to the election or removal of any directors of the Corporation; (b) The Corporation and/or any Subsidiary of the Corporation shall be a party to any merger, consolidation, division, share exchange, transfer of assets or any other transaction or series of related transactions outside the ordinary course of business (a "Business Combination") as a result of which the shareholders of the Corporation immediately prior to such Business Combination (excluding any party, other than the Corporation or a Subsidiary, to the Business Combination or any Affiliate or Associate of any such party) shall not hold immediately following such transaction a majority of the voting power of the Voting Stock of a Person or Persons immediately thereafter holding, directly or indirectly through Subsidiaries, assets of the Corporation and its consolidated subsidiaries immediately prior to the Business Combination constituting at least sixty-five percent (65%) of Total Assets; or (c) If the entity which is the actual employer of the Executive hereunder (the "Employer Company") is other than the Corporation, either (i) the Employer Company shall cease to be a Subsidiary of the Corporation or (ii) the Employer Company and/or any Subsidiary of the Employer Company shall be a party to any Business Combination as a result of which the Corporation shall not hold immediately following such transaction a majority of the voting power of the Voting Stock of a Person or Persons immediately thereafter holding, directly or indirectly through Subsidiaries, assets of the Employer Company and its consolidated subsidiaries immediately prior to the Business Combination constituting at least seventy-five percent (75%) of Company's Total Assets. (d) In the case of a Change of Control defined in paragraph 14(b) or paragraph 14(c)(ii) hereof, following such Change of Control the term "Employer Company" as used herein shall mean the Person which following such Change of Control holds the largest percentage of Employer Company's Total Assets, including for this purpose Total Assets which are held by such Person directly or indirectly through one or more Subsidiaries. Employer Company shall not enter into any transaction involving such a Change of Control unless at or prior to the consummation thereof such Person assumes the obligations of Employer Company hereunder. (e) For purposes of this Section 14, "Person," "Affiliate," "Associate," "Voting Stock" and "Total Assets" shall have the definitions contained in, and "Beneficial Ownership" shall be determined as provided in, Article 10 of Keystone's Restated Articles of Incorporation, as in effect on the date first written above. 9 (f) For purposes of this Section 14, the date of the "Change of Control" is the date on which the "Change of Control" occurs or, in the case of a series of Business Combination Transactions resulting in a Change of Control, the date the earliest of such transactions is consummated. 15. NOTICE. For the purposes of this Agreement, notices and all other communications shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: James M. Deitch 3405 Pebble Ridge Road York, PA 17405 If to the Corporation: Keystone Financial. Inc. One Keystone Plaza Harrisburg, PA 17101 Attn: Chairman of the Board or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon actual receipt. 16. BINDING EFFECT. This Agreement shall inure to the benefit of and be binding upon the Executive and his heirs and personal representatives, and the Corporation and any successor to the Corporation. 17. ENFORCEMENT OF SEPARATE PROVISIONS. Should any provision of this Agreement be ruled unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. 18. AMENDMENT. This Agreement may be amended or cancelled only by mutual agreement of the parties in writing without the consent of any other person. 19. ARBITRATION. In the event that any disagreement or dispute shall arise between the parties concerning this Agreement, the issue(s) will be submitted to binding arbitration in the City of Harrisburg, PA pursuant to the rules of the American Arbitration Association. Any award entered shall be final and binding upon the parties hereto and judgment upon the award may be entered in any court having jurisdiction thereof. Attorneys' fees and administrative court costs associated with such actions shall be paid by the Corporation. 20. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. If the Executive dies prior the expiration of his term of employment hereunder, any moneys that may be due him from the Corporation under this Agreement as of the date of death shall be paid to the executor, administrator, or other personal representative of the Executive's estate. 21. LAW GOVERNING. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 22. CAPTIONS; PRONOUNS. All captions are for convenience only and do not form a substantive part of this Agreement. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person or persons may require. 10 23. ENTIRE AGREEMENT. This Agreement supersedes any and all agreements, either oral or in writing, between the parties with respect to the employment by the Executive by the Corporation, and this Agreement contains all the covenants and agreements between the parties with respect to such employment. KEYSTONE FINANCIAL, INC. ATTEST: __________________________ By:______________________________ Secretary President and CEO WITNESS: EXECUTIVE - - -------------------------- ------------------------------- James M. Deitch 11 EX-10.19 11 MANAGEMENT COMMITTEE CHANGE OF CONTROL AGREEMENT Exhibit 10.19 MANAGEMENT COMMITTEE CHANGE OF CONTROL AGREEMENT THIS AGREEMENT is made on the ____ day of ______________, 1997 between KEYSTONE FINANCIAL, INC. (the "Corporation"), a Pennsylvania corporation with its principal office at One Keystone Plaza, Harrisburg, PA, and ____________________ (the "Executive"), residing at________________________________. WHEREAS, the Executive has substantial knowledge, ability and experience which are beneficial to the successful operation of the Corporation; and WHEREAS, the Corporation desires to secure for itself the benefit of the Executive's knowledge, ability and experience and be assured of the Executive's continued active participation in the business operations of the Corporation; and WHEREAS, the Executive has acquired and uses and will continue to acquire and use extensive knowledge and information about the Corporation's operations, much of which is confidential and proprietary in nature; and WHEREAS, the Corporation wishes to protect its confidential and proprietary information as well as its general business interests; and WHEREAS, the Corporation has adopted the Keystone Financial, Inc. Severance Plan Following Change of Control, effective as of September 30, 1994 (the "Severance Plan"), which provides severance benefits to eligible employees who lose their jobs under certain circumstances set forth in the Severance Plan; and WHEREAS, the Executive and the Corporation wish to enter into this Agreement in order to protect the confidential and proprietary interests of the Corporation and to induce the Executive to remain actively involved in the business operations of the Corporation by providing the Executive with the opportunity to receive benefits in excess (and in lieu) of the benefits that would be available to the Executive under the Severance Plan in the event of his termination of employment in conjunction with a Change of Control (as defined herein). NOW THEREFORE, in consideration of the mutual covenant and agreement set forth herein and intending to be legally bound hereby, the parties agree as follows: 1. DEFINITIONS. The following definitions shall apply in this Agreement: (a) "Annual Salary" shall be the stated annual base cash compensation payable to the Executive by the Corporation without regard to any elective deferral or salary reduction plan or program of the Corporation. (b) "Board of Directors" shall mean the Board of Directors of the Corporation, as constituted from time to time. (c) "Cause" shall be (I) the willful failure by the Executive to substantially perform his duties other than any such failure resulting from the Executive's incapacity due to physical or mental illness, (ii) the willful engaging by the Executive in gross misconduct materially injurious to the Corporation or a Subsidiary, (iii) the willful violation by the Executive of the provisions of Section 3 hereof, (iv) the gross negligence of the Executive in the performance of his duties or (v) receipt of a final written directive or order of any governmental body or entity having jurisdiction over the Corporation or any of its Subsidiaries requiring termination or removal of the Executive. The determination of the existence of Cause shall be made in the reasonable judgment of the office of the Chief Executive Officer (or its successor) . (d) "Change of Control" shall be as defined in Section 8 of this Agreement. 1 (e) "Code" shall mean the Internal Revenue Code of 1986, as amended. (f) "Good Reason" shall mean (I) within the period beginning on the date of the Change of Control (as defined in Section 8(g)) and ending on the date that is twenty-four (24) months following the later of (A) the date of the Change of Control or (B) in the case of a Change of Control described in Sections 8(c) or (d), the date on which the transaction resulting in the Change of Control was consummated, there is a reduction in the Executive's Annual Salary or his total cash compensation opportunities (e.g. annual incentive awards under the MICP, equity participation awards) or benefits (except any reductions in compensation which may be applied broadly among all executives because of adverse financial conditions for the Corporation or as part of a restructuring of the Corporation's executive compensation program), or the Executive's position is eliminated and he is not offered a comparable position within thirty (30) days following the effective date of the elimination of the position, or the Executive terminates employment due to a lessening of job responsibilities or an unacceptable relocation (defined as more than 35 miles from the Executive's prior work site), or (ii) the Executive terminates employment for any reason during the thirty (30)-day period beginning on the later of (A) the date that is twelve (12) months following the date of the Change of Control (as defined in Section 8(g)) or (B) in the case of a Change of Control described in Sections 8(c) or (d), the date that is twelve (12) months following the date on which the transaction resulting in the Change of Control was consummated. (g) "Management Committee" means the individuals designated by the executive management of the Corporation from time to time. The members of the Management Committee are listed in Exhibit A hereto. (h) "MICP" means the Corporation's Management Incentive Compensation Plan as in effect from time to time, or any successor plan thereto. (I) "Subsidiary" shall mean any bank, corporation or other entity of which the Corporation owns, directly or indirectly through one or more Subsidiaries, a majority of each class of equity security having ordinary voting power in an election of directors. 2. DURATION OF AGREEMENT. This Agreement shall remain in effect only while the Executive is a member of the Management Committee (or such other covered position as designated by executive management of the Corporation, in which case the Corporation shall have an affirmative obligation to inform the Executive in writing that this Agreement shall remain in effect notwithstanding the change in the Executive's position; the absence of notice expressly provides notice to the Executive that the Agreement is no longer in effect); provided however, that if the Executive ceases to be a member of the Management Committee as a result of a Change of Control, Sections 3 and 4 of the Agreement shall no longer remain in effect but the Corporation and the Executive shall otherwise be obligated to abide by the terms of this Agreement. 3. UNAUTHORIZED DISCLOSURE. During the term of this Agreement or at any later time, the Executive shall not, without the written consent of a duly authorized executive officer of the Corporation, disclose to any person (including an employee of the Corporation or a Subsidiary), other than a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Corporation, any material confidential information obtained by him while in the employ of the Corporation or any Subsidiary or operating unit with respect to any of the services, products, improvements, formulas, designs or styles, processes, customers, methods of distribution or business practices, the disclosure of which reasonably would be expected to materially damage the Corporation; provided, however, that for purposes of this Agreement, confidential information shall not include any information known generally to the public (other than as a result of unauthorized disclosure by the Executive) or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that conducted by the Corporation. 2 4. RESTRICTIVE COVENANTS. Except as otherwise provided below and in Section 2, upon termination of his employment with the Corporation (or a Subsidiary), regardless of the circumstances or reasons for such termination, the Executive covenants and agrees as follows: (a) NONCOMPETITION. The Executive shall not, directly or indirectly, within the marketing area of the Corporation and its Subsidiaries (defined as all areas within 100 miles of the work location to which the Executive was assigned for the majority of time during the twelve months preceding termination of his employment where the Corporation has established an active and material market presence) enter into or engage generally in direct or indirect competition with the Corporation in the business of banking or any banking or trust related business, either directly or indirectly as an individual on his own or as a partner or joint venturer, or as a director, officer, shareholder (except as an incidental shareholder), employee or agent for any person, for a period of one year after the date of termination of his employment, except where the termination is in conjunction with a Change of Control as described in Section 5(c), in which case this restrictive covenant shall not be imposed upon the Executive. The existence of any material claim or cause of action of the Executive against the Corporation, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Corporation of this covenant. The Executive acknowledges and agrees that enforcement of this covenant not to compete will not prevent him from earning a livelihood and that any breach of the restrictions set forth in this paragraph will result in irreparable injury to the Corporation for which it shall have no adequate remedy at law, and that therefore the Corporation shall be entitled to injunctive relief in order to enforce the provisions hereof. In the event that this paragraph shall be determined by any court of competent jurisdiction to be unenforceable in part by reason of it being too great a period of time or covering too great a geographical area, it shall be in full force and effect as to that period of time or geographical area determined to be reasonable by the court. (b) RETURN OF MATERIALS. Upon termination of employment with the Corpora- for any reason, including termination in conjunction with a Change of Control as described in Section 5(c), the Executive shall immediately deliver to the Corporation all corrrespondence, manuals, letters, notes, notebooks, reports and any other documents and tangible items containing or constituting confidential information about the Corpora- tion maintained at his office and shall promptly deliver all said materials held by him at other locations. (c) NONSOLICITATlON OF EMPLOYEES. The Executive shall not entice or solicit, directly or indirectly, any other executives or key management personnel of the Corporation to leave the employ of the Corporation or its Subsidiaries to work with the Executive or any entity with which the Executive has affiliated for a period of one year following the Executive's termination of employment with the Corporation for any reason, including a termination of employment in conjunction with a Change of Control as described in Section 5(c). (d) NONSOLICITATION OF CUSTOMERS. The Executive shall not entice or solicit, directly or indirectly, any client or customer of the Corporation or any Subsidiary for a period of one year following the Executive's termination of employment with the Corporation for any reason, including a termination of employment in conjunction with a Change of Control as described in Section 5(c). (e) REMEDY. The Executive acknowledges and agrees that any breach of the restrictions set forth in Sections 3 and 4 will result in irreparable injury to the Corporation for which it shall have no meaningful remedy in law and the Corporation shall be entitled to injunctive relief in order to enforce provisions hereof. Upon obtaining such injunction, the Corporation shall be entitled to pursue reimbursement from the Executive and/or the Executive's employer of costs incurred in securing a qualified replacement for any employee enticed away from the Corporation by the Executive. Further, the Corporation shall be entitled to set off against or obtain reimbursement from the Executive of any payments owed or made to the Executive by the Corporation hereunder. 3 5. PAYMENTS UPON TERMINATION OF EMPLOYMENT. (a) The Executive shall be entitled to the benefits described in Section 5(c) only in the event that his employment with the Corporation is terminated in conjunction with a Change of Control as described in Section 5(c). (b) If the Executive's employment is terminated by the Corporation for Cause or if the Executive terminates his employment other than for Good Reason, the Executive shall not be entitled to the benefits set forth in Section 5(c) but the restrictions set forth in Sections 3 and 4 hereof shall continue in full force and effect. (c) If the Executive's employment is terminated by the Corporation other than for Cause within the period beginning on the date of the Change of Control (as defined in Section 8(g)) and ending on the date that is twenty-four (24) months following the later of (I) the date of the Change of Control or (ii) in the case of a Change of Control described in Sections 8(c) or (d), the date on which the transaction resulting in the Change of Control was consummated, or if the Executive terminates his employment for Good Reason, then the Corporation shall make a lump-sum cash payment to the Executive equal to one and one-half times the sum of (A) his highest Annual Salary during the three-calendar-year period ending before the effective date of the termination and (B) an amount equal to the highest annual MICP award earned during the three-complete-plan-year period ending before the effective date of the termination. The lump sum payment shall be made no later than thirty (30) days following the effective date of the termination. In such event, the Corporation shall also maintain in full force and effect (and the Executive shall remain a participant in), for a minimum period of eighteen (18) months following the termination, all employee benefit plans and programs to which the Executive was entitled prior to the date of termination, including, but not limited to, pension, profit-sharing, savings, supplemental retirement income, medical and health-and-accident plans and arrangements and the Corporation's Automobile Capital Cost Reimbursement Plan, if the Executive's continued participation is permitted under the general terms and conditions and rules and regulations of such plans and programs. In the event that the Executive's continued participation in any such plan or program is prohibited, the Executive shall be entitled to receive an amount equal to the annual contribution, payments, premiums, credits or allocations made by the Corporation to him, to his account or on his behalf under such plans and programs from which his continued participation is barred, except that if Executive's participation in any health, medical, life insurance, or disability plan or program is barred, the Corporation shall use its best efforts to obtain and pay for, on Executive's behalf, individual insurance plans, policies or programs which provide to Executive health, medical, life and disability insurance coverage which is equivalent to the insurance coverage to which Executive was entitled prior to the date of termination. 6. GROSS-UP PROVISION. In the event any payments made to the Executive upon termination in conjunction with a Change of Control (pursuant to this Agreement and any other plans, programs and arrangements maintained by the Corporation) would constitute "excess parachute payments" within the meaning of Code Section 280G, the Corporation will make an additional payment to the Executive in an amount such that after the payment of all income and excise taxes, the Executive will be in the same after-tax position as if no excise tax had been imposed. 7. DAMAGES FOR BREACH OF CONTRACT. In the event of a breach of this Agreement by either the Corporation or Executive resulting in damages to either party, that party may recover from the party breaching the Agreement any and all damages that may be sustained. 8. DEFINITION OF CHANGE OF CONTROL. For purposes of this Agreement, "Change of Control" shall mean the occurrence of any one of the following events: (a) The Corporation acquires actual knowledge that any Person (other than the Corporation, any Subsidiary of the Corporation, any employee benefit plan of the Corporation or any of its Subsidiaries or any entity holding securities for or pursuant to the terms of any such plan) has acquired the Beneficial Ownership, directly or indirectly, of securities of the Corporation entitling such Person to a majority of the voting power of the Corporation's Voting Stock. 4 (b) A majority of the Board of Directors shall consist of persons other than (I) persons who were members of the Board of Directors on the date first written above, or (ii) persons (A) whose nomination or election as directors of the Corporation was approved by at least two-thirds of the then members of the Board of Directors (excluding any director referred to in clause (B) of this paragraph) who either were directors of the Corporation on the date first above written or whose nomination or election as a director was so approved and (B) who are not nominees or representatives of (1) any Person having Beneficial Ownership, directly or indirectly, of securities of the Corporation entitling such Person to 10% or more of the voting power of the Corporation's Voting Stock or (2) any "participant," as defined in Rule 14a-11 under the Securities Exchange Act of 1934 or any successor rule, in any actual or threatened solicitation (other than a solicitation by the Corporation) subject to Rule 14a-11 or any successor rule relating to the election or removal of any directors of the Corporation; (c) The Corporation and/or any Subsidiary of the Corporation shall be a party to any merger, consolidation, division, share exchange, transfer of assets or any other transaction or series of related transactions outside the ordinary course of business (a "Business Combination") as a result of which the shareholders of the Corporation immediately prior to such Business Combination (excluding any party, other than the Corporation or a Subsidiary, to the Business Combination or any Affiliate or Associate of any such party) shall not hold immediately following such transaction a majority of the voting power of the Voting Stock of a Person or Persons immediately thereafter holding, directly or indirectly through Subsidiaries, assets of the Corporation and its consolidated subsidiaries immediately prior to the Business Combination constituting at least sixty-five percent (65%) of Total Assets; or (d) If the entity which is the actual employer of the Executive hereunder (the "Employer Company") is other than the Corporation, either (I) the Employer Company shall cease to be a Subsidiary of the Corporation or (ii) the Employer Company and/or any Subsidiary of the Employer Company shall be a party to any Business Combination as a result of which the Corporation shall not hold immediately following such transaction a majority of the voting power of the Voting Stock of a Person or Persons immediately thereafter holding, directly or indirectly through Subsidiaries, assets of the Employer Company and its consolidated subsidiaries immediately prior to the Business Combination constituting at least seventy-five percent (75%) of the Employer Company's Total Assets. (e) In the case of a Change of Control defined in Section 8(c), hereof, following such Change of Control the term "Corporation" as used herein shall mean the Person which following such Change of Control holds the largest percentage of Corporation's Total Assets, including for this purpose Total Assets which are held by such Person directly or indirectly through one or more Subsidiaries. The Corporation shall not enter into any transaction involving such a Change of Control unless at or prior to the consummation thereof such Person assumes the obligations of the Corporation hereunder. (f) For purposes of this Section 8, "Person," "Affiliate," "Associate," "Voting Stock" and "Total Assets" shall have the definitions contained in, and "Beneficial Ownership" shall be determined as provided in, Article 10 of the Corporation's Restated Articles of Incorporation, as in effect on the date first written above. (g) For purposes of Sections 8(a) and (b), the date of the "Change of Control" is the date on which the Change of Control occurs. For purposes of Sections 8(c) and (d), the date of the "Change of Control" is the date on which the transaction resulting in a Change of Control is first evidenced in writing and executed by an authorized officer of the Corporation and/or Subsidiary including, without limitation, any letter of intent, sale or purchase agreement and/or agreement of merger, or, in the case of a series of Business Combination transactions resulting in a Change of Control, the date the earliest of such transactions is first evidenced in writing and executed by an authorized officer of the Corporation and/or Subsidiary. 9. COORDINATION WITH SEVERANCE PLAN. It is the intent of the parties that the benefits provided to the Executive hereunder shall be in lieu of the benefits that would be available to the Executive under the Severance Plan. If the Executive would be eligible to receive benefits under the Severance Plan, however, he shall elect in writing within ten (10) days of his last day of employment whether to receive the benefits under the Severance Plan or those provided under this Agreement. The Executive's decision in this regard shall be irrevocable. If the Executive fails to make an election, the terms of this Agreement shall be controlling and the Executive shall not be entitled to any benefits under the Severance Plan. 5 10. NOTICE. For the purposes of this Agreement, notices and all other communications shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: If to the Corporation: Keystone Financial, Inc. One Keystone Plaza Harrisburg, PA 17101 Attn: Chief Executive Officer or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon actual receipt. 11. BINDING EFFECT. This Agreement shall inure to the benefit of and be binding upon the Executive and his heirs and personal representatives, and the Corporation and any successor to the Corporation. 12. ENFORCEMENT OF SEPARATE PROVISIONS. Should any provision of this Agreement be ruled unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. 13. AMENDMENT. Except as otherwise provided herein, this Agreement may be amended or canceled only by mutual agreement of the parties in writing without the consent of any other person. In the event the Corporation wishes to terminate this Agreement or reduce the benefits available to the Executive hereunder, the Corporation may unilaterally effectuate any such action, provided that the Corporation provides the Executive with written notice of such action at least two (2) years in advance of the effective date of any such termination or reduction in benefits. This two-year notice requirement may be reduced or waived by the Executive. This Agreement may be amended to enhance the benefits available to the Executive hereunder at any time, provided the Executive consents in writing to any such amendment. 14. ARBITRATION. In the event that any disagreement or dispute shall arise between the parties concerning this Agreement, the issue(s) will be submitted to binding arbitration in the City of Harrisburg, PA pursuant to the rules of the American Arbitration Association. Any award entered shall be final and binding upon the parties hereto and judgment upon the award may be entered in any court having jurisdiction thereof. Attorneys' fees and administrative court costs associated with such actions shall be paid by the Corporation. 15. EMPLOYMENT. Nothing contained herein shall be construed as conferring upon the Executive the right to continue in the employ of the Corporation. 16. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. If the Executive dies prior the payment of any moneys that may be due him from the Corporation under this Agreement as of the date of death, such moneys shall be paid to the executor, administrator, or other personal representative of the Executive's estate. 17. LAW GOVERNING. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 6 18. CAPTIONS; PRONOUNS. All captions are for convenience only and do not form a substantive part of this Agreement. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person or persons may require. KEYSTONE FINANCIAL, INC. ATTEST: __________________________ By:______________________________ Secretary WITNESS: EXECUTIVE - - -------------------------- --------------------------------- EXHIBIT A August 1997 Members of KFI Management Committee (those noted are members who do not have employment agreements) for purposes of a Change of Control (COC) Agreement: The following positions are those positions designated by Executive Management to be offered a COC Agreement: NOTE: Positions set forth in this list are subject to change at any time in the sole discretion of the Office of the CEO. Corporate Controller Deputy General Counsel Director of Audit and Risk Assessment Director of Human Resources Director of Information Services Director of Investments & ALCO Support Director of KeyCall Center Director of Marketing Services Director of Operation Services President & CEO of Dealer Center Division 7 EX-12 12 COMPUTATION OF RATIOS Exhibit 12.1 - Computation of Ratios Ratio of Earnings to Fixed Charges:
(In thousands) Year Ended December 31, 1998 1997 1996 - - ------------------------------------------------ ------------ ---------- ---------- 1. Income before taxes $145,439 $126,870 $126,686 2. Fixed charges: a. Interest expense 240,684 232,494 211,301 b. Interest component of rent expense 2,734 2,459 2,652 - - ------------------------------------------------ ------------ ---------- ---------- c. Total fixed charges (line 2a+line 2b) 243,418 234,953 213,953 d. Interest on deposits 193,087 194,898 186,257 - - ------------------------------------------------ ------------ ---------- ---------- e. Fixed charges excluding interest on deposits (line 2c - line 2d) 50,331 40,055 27,696 - - ------------------------------------------------ ------------ ---------- ---------- 3. Income before taxes plus fixed charges: a. Including interest on deposits (line 1 + line 2c) 388,857 361,823 340,639 b. Excluding interest on deposits (line 1 + line 2e) $195,770 $166,925 $154,382 - - ------------------------------------------------ ------------ ---------- ---------- 4. Ratio of earnings to fixed charges: a. Including interest on deposits (Line 3a divided by line 2c) 1.60x 1.54x 1.59x b. Excluding interest on deposits (line 3b divided by line 2e) 3.89x 4.17x 5.57x - - ------------------------------------------------ ------------ ---------- ----------
1 EX-13.1 13 ANNUAL REPORT EXHIBIT 13.1 Selected Financial Data
(in thousands except per share data) Year Ended December 31, 1998 1997 1996 1995 1994 - - --------------------------------------------------------------------------------------------------- Operations: - - --------------------------------------------------------------------------------------------------- Interest income $ 517,649 $ 510,738 $ 473,420 $ 446,786 $ 386,894 Interest expense 240,684 232,494 211,301 200,775 152,463 - - --------------------------------------------------------------------------------------------------- Net interest income 276,965 278,244 262,119 246,011 234,431 Provision for credit losses 17,150 15,316 10,713 8,568 10,324 Noninterest income 108,813 89,932 71,525 58,137 51,921 Noninterest expense 223,189 225,990* 196,245 182,130 182,333 Income tax expense 45,692 38,953 37,180 34,001 25,907 - - --------------------------------------------------------------------------------------------------- Net Income $ 99,747 $ 87,917* $ 89,506 $ 79,449 $ 67,788 - - --------------------------------------------------------------------------------------------------- Pre-tax security gains, included above $ 11,018 $ 6,071 $ 871 $ 1,789 $ 978 - - --------------------------------------------------------------------------------------------------- Net interest spread 3.71% 3.87% 3.87% 3.90% 4.11% Impact of noninterest funds .71 .72 .74 .71 .57 - - --------------------------------------------------------------------------------------------------- Net interest margin 4.42% 4.59% 4.61% 4.61% 4.68% - - --------------------------------------------------------------------------------------------------- Per Share: - - ----------------------------------------------------------------------------------------------------- Net income: Basic $1.94 $1.70* $1.72 $1.60 $1.38 Diluted 1.92 1.68* 1.70 1.59 1.37 Dividends 1.13 1.06 0.98 0.93 0.86 Dividend payout ratio 58.25% 63.65% 56.98% 58.13% 54.85% Average shares outstanding 51,446,436 51,692,534 52,118,819 49,557,082 49,188,961 - - ----------------------------------------------------------------------------------------------------- Balances at December 31: - - ----------------------------------------------------------------------------------------------------- Loans & leases $ 4,459,783 $ 4,712,566 $ 4,336,470 $ 4,096,866 $ 3,900,900 Allowance for credit losses (60,274) (65,091) (56,256) (55,415) (53,708) Total assets 6,968,227 6,841,337 6,450,579 6,213,222 5,796,576 Deposits 5,231,718 5,233,165 5,059,721 4,993,608 4,726,842 FHLB borrowings & long-term debt 557,266 349,943 226,776 168,564 155,752 Shareholders' equity 661,665 685,485 660,406 621,766 533,643 Ratios: - - ----------------------------------------------------------------------------------------------------- Return on average assets 1.45% 1.33% 1.44% 1.35% 1.23% Return on average equity 14.63 13.27 14.09 14.00 12.90 Equity to assets, average 9.92 9.99 10.19 9.66 9.53 Risk adjusted capital ratios: Leverage ratio 8.66% 9.15% 10.03% 10.12% 9.59% "Tier 1" 12.59 12.50 14.43 14.48 13.75 "Total" capital 13.84 13.75 15.66 15.67 15.00 Loans to deposits, year-end 85.25% 90.05% 85.71% 82.04% 82.53% Allowance for credit losses to loans 1.35 1.38 1.30 1.35 1.38 Nonperforming assets to loans 0.65% 0.55% 0.65% 0.72% 0.87% Loans 90 days past due 0.64 0.70 0.46 0.41 0.25 - - ----------------------------------------------------------------------------------------------------- Total risk elements to loans 1.29% 1.25% 1.11% 1.13% 1.12% - - --------------------------------------------------------------------------------------------------- *Merger-related special charges in 1997 reduced net income by $8.6 million or $0.17 per share and increased noninterest expenses by $11.4 million.
20 Financial Review This review has been provided to present information needed to fully understand the financial condition and the results of operations of Keystone Financial Inc., (Keystone). The review will include comparisons of financial performance for 1998, 1997, and 1996. Results for 1997 were influenced by the impact of special charges incurred in connection with a merger that was completed in that year. Unless otherwise indicated, all year-to-year comparisons will be presented exclusive of these special charges. Throughout this review, net interest income and the yield on earning assets are presented on a fully-tax equivalent basis. Additionally, balances represent average daily balances unless otherwise indicated. 1998 Summary Performance Results Keystone's 1998 performance, like that of many financial institutions, reflected underlying strength despite forces which constrained the rate of performance improvement. Results were influenced by both changes in national and international economic conditions and by Keystone's strategic evolution as a diversified financial services company. On the economic front, low inflation, reduced interest rates, higher consumer confidence, and strong consumer spending all contributed to a continuation of our national economic expansion. On the other hand, the third quarter stock market correction, rising consumer delinquencies, the fallout from the Asian crisis, and the possibility of an inverted yield curve all combined to increase the possibility of recessionary pressures beyond 1998. In much the same way, Keystone's 1998 performance was influenced by these contrasting conditions. Net income reached $99.7 million during 1998, a modest 3.4% improvement over core 1997 performance results of $96.5 million. Likewise, EPS rose to $1.94 versus core EPS of $1.87, or 3.7% growth. Keystone's ROA and ROE were 1.45% and 14.63%, respectively, compared to 1.46% and 14.54% in 1997. Comparable peer group ratios for Keefe, Bruyette, and Woods, Inc. financial institutions with assets between and $5 and $10 billion were 1.33% and 14.43%. The three major essentials of improved profit performance for a financial institution are increased revenues, management of credit quality, and control over operating expenses. Keystone's revenue base expanded during 1998, including the impact of strong growth in noninterest revenue sources such as asset management, mortgage banking, and electronic banking. Conversely, Keystone experienced a slight decline in its largest source of revenue, net interest income. Low interest rates, which helped create conditions wherein asset management and mortgage banking activities have flourished, also created more competitive conditions that reduced the spread between earning asset yields and funding costs, and compressed net interest income. Similarly, while consumer spending and lower rates spurred increases in the consumption of credit, the number of consumer defaults also increased, raising Keystone's charge-off levels and loan loss provision. Finally, management's efforts in controlling overhead expenses combined with the successful integration of 1997 merger partners resulted in only modest growth in operating expenses and contributed to improved overall performance in 1998. Strategic Evolution Keystone's desire for improved performance, combined with its ongoing evolution into a diversified provider of financial services within the communities it serves, was the catalyst for the decision to combine its seven separate banking charters at the end of 1998. Effective December 31, 1998, Keystone's seven banks operate under one name: Keystone Financial Bank, N.A. This change will represent a significant adjustment within Keystone's internal operations. Customers, however, will continue to be served under the banner of "Relationship Banking", with a corporate culture emphasizing community banking and localized service. Externally, the change will provide Keystone with a common platform from which to serve customers throughout its markets, expanding delivery channel capabilities while linking product lines through a common branding strategy. 21 Internally, the changes will increase the focus on customer needs, and will simplify and standardize work processes for Keystone associates. External Issues and Economic Conditions The U.S. economy began 1998 under the cloud of potential fallout from the collapse of the Asian economy. Though the conditions in Asia had little direct effect on Keystone or the customers it serves, the ripple effect on the national economy effected some erosion of consumer confidence and raised concerns over the ability to sustain the largest expansion in U.S. history. Throughout 1998, interest rates exhibited a steady decline, which had a direct impact on financial institutions. Since rates began the year at what were thought to be historically low levels, further declines in interest rates during 1998 had a multi-faceted influence on bank performance. The declines reduced the amount of interest that financial institutions could pay to depositors, making growth in traditional funding sources difficult. Furthermore, meaningful reductions in deposit rates as a means to lower funding costs were less practicable given the already low rates being paid. The steady decline in rates also became a catalyst for businesses and consumers to refinance or renegotiate existing debt, which reduced asset yields and increased competitive pressures. Finally, the rate decline was accompanied by a flattening of the yield curve, creating little opportunity to increase asset yields by extending maturities. In summary, the trends in interest rates during 1998 served to create conditions which, over the course of the year, compressed net interest margin and constrained growth in net interest income. Interest rate trends were more conducive to improvements in revenues from both asset management activities and mortgage banking. Asset management provides fee income from investment management services, personal trust, employee benefit plan management, mutual funds, annuities, and employee benefits record keeping. Employee benefit plan sponsors, as well as individual consumers of investment products, were proactive in seeking higher returns through these product offerings during the low interest rate environment. The proliferation of employer-sponsored plans and Keystone's proven ability to provide competitive services through specialized subsidiaries such as Martindale Andres (investment services) and MMC&P (benefits administration and consulting) contributed to revenue growth. Keystone also provided competitive and convenient access to consumer investment product offerings that included brokerage services, mutual funds, annuities, and other programs. Similarly, interest rate trends played a key role in the expansion of revenues from mortgage banking activities. Keystone's success in this area has been historically driven by the purchased money mortgage business, with less dependence on the refinancing segment of the market. Like many mortgage banking companies, Keystone was favorably affected by the influence of lower rates on home purchases and refinancing activity, which contributed to the highest level of mortgage loan volume in its history. External issues and economic conditions went beyond the trend toward lower interest rates. During the third quarter, concerns over the unprecedented growth in stock market valuations led to a significant market correction. Concern over the third quarter correction, accompanied by the threat of a protracted bear market, was allayed somewhat by the fourth quarter revival in stock prices. Nonetheless, consumer confidence was shaken by the potential for increased recessionary risk. Adding to the complexity of economic trends was the looming Year 2000 (Y2K) deadline. During 1998, Keystone completed the vast majority of programming changes necessary to achieve Y2K readiness, with final testing scheduled for completion in mid 1999. Keystone has incurred substantial costs to ensure Y2K readiness. Despite these incremental costs, overhead levels were controlled by effective management of the workforce, success with merger integration initiatives, and low inflation. At the same time, Keystone continued to make the appropriate investment in technology necessary for revenue expansion, including the electronic banking network and process improvement initiatives. 22 Outlook for 1999 External issues and economic conditions will continue to be factors in Keystone's 1999 performance results. These factors, combined with Keystone's efforts to evolve its seven banks into a single financial services company, will provide substantial challenges. In connection therewith, Keystone has announced a first quarter 1999, restructuring charge of approximately $15 million, which will help to facilitate its reorganization under the single bank charter. This change, together with the commitment of Keystone's capable team of associates, will allow Keystone to simplify, standardize, and improve the efficiency of internal processes. More importantly, these changes will set the stage for Keystone's continuing emergence as the premier financial institution in its market place. This emergence will manifest itself through focused, highly-trained, financial consultants and associates capable of understanding customer needs, making recommendations, delivering solutions, and deepening relationships with businesses and consumers. It will emanate from the continued development and expansion of Keystone's product mix including both conventional banking products, as well as new and improved offerings such as Keystone's proprietary mutual funds, now known as the "Governor Funds". Finally, Keystone's emergence will be revealed in its ongoing commitment to relationship banking with a local, community-based emphasis. The year will bring significant challenges and unprecedented opportunities that will allow Keystone to successfully position itself closer to its goal of becoming the financial institution of choice in the Mid-Atlantic region. Forward-Looking Statements From time to time, Keystone has and will continue to make statements which may include "forward-looking" information. Keystone cautions that "forward-looking" information disseminated through financial presentations should not be construed as guarantees of future performance. Furthermore, actual results may differ from expectations contained in such "forward-looking" information as a result of factors which are not predictable. Financial institution performance can be affected by any number of factors, many of which are outside of management's direct control. Examples include, but are not limited to, the effect of prevailing economic conditions; the overall direction of government policies; unforseen changes in the general interest rate environment; the actions and policy directives of the Federal Reserve Board; competitive factors in the marketplace, and business risk associated with the management of the credit extension function and fiduciary activities. Each of these factors could affect estimates, assumptions, uncertainties, and risks considered in the development of "forward-looking" information, and could cause actual results to differ materially from management's expectations regarding future performance. NET INTEREST INCOME Keystone derives revenue from both intermediation activities, the results of which are reflected in net interest income, and from fee- and service-based income, which is included in noninterest income performance. Net interest income continues to be the most significant component of revenue, comprising over 74% of total revenues. Net interest income is defined as the difference between interest income on earning assets and interest expense on deposits and borrowed funds. Net interest margin provides a relative measure of a financial institution's ability to efficiently deliver net interest income from a given level of average earning assets. Both net interest income and net interest margin are influenced by interest rate changes, changes in the relationships between rates, and changes in the composition or absolute volumes of earning assets and liabilities. 23 The following table compares net interest income and net interest margin components between 1998 and 1997 (in thousands):
1998 1997 Change Yield/ Yield/ Yield/ Amount Rate Amount Rate Amount Rate - - -------------------------- ---------- --------- ----------- -------- ----------- -------- Interest income $526,218 8.15% $519,598 8.32% $6,620 (0.17) Interest expense 240,684 4.44 232,494 4.45 (8,190) 0.01 - - -------------------------- ---------- --------- ----------- -------- ----------- -------- Net interest income $285,534 $287,104 $(1,570) - - -------------------------- ---------- --------- ----------- -------- ----------- -------- Interest spread 3.71% 3.87% (0.16) Impact of noninterest 0.71 0.72 (0.01) funds - - -------------------------- ---------- --------- ----------- -------- ----------- -------- Net interest margin 4.42% 4.59% (0.17) - - -------------------------- ---------- --------- ----------- -------- ----------- -------- *The change in net interest income consisted of unfavorable volume variances totaling $961,000 and unfavorable rate variances totaling $609,000.
Interest Rates While efforts to improve net interest margin and net interest income are influenced by pricing, product mix and customer preferences, the general level of interest rates and the shape of the overall yield curve are also major factors. By the end of 1997, it was the general consensus that rates were not likely to experience dramatic easing, though some downward pressure was expected if the economy cooled and inflation remained under control. In fact, economic growth did slow during 1998 and inflation remained largely in check. Overall interest rates, however, declined more significantly than most observers would have predicted at the beginning of the year. The decline was particularly notable given the more dramatic drop in longer term interest rates, which served to flatten the slope of the U.S. Treasury yield curve. The average difference between the most extreme points on the curve, the 3-month T-bill and 30-year bond rates, was 142 basis points in 1997, and dropped to 67 basis points in 1998. This trend, if it were to continue, would reduce the opportunity for financial institutions to improve their net interest margins. The following is a comparison of the average yield curve for U.S. Treasury instruments for specific intervals between three months and thirty years, which serves as an illustration of the extent of rate declines and the corresponding change in the yield curve between 1998 and 1997.
Three Six One Two Three Five Ten Thirty Months Months Year Years Years Years Years Years - - ------ --------- --------- --------- --------- --------- --------- --------- --------- 1998 4.91% 5.02% 5.05% 5.13% 5.14% 5.15% 5.26% 5.58% 1997 5.18% 5.37% 5.60% 5.96% 6.07% 6.21% 6.34% 6.60%
Successful management of both net interest income and net interest margin is a function of proactively fulfilling customer needs and preferences in a manner which is considerate of the changing interest rate environment. 24 Interest Income/Earning Assets Interest income grew slightly during the year from $519.6 million in 1997 to $526.2 million in 1998, an increase of 1.3%. Pricing trends and product mix played significant roles in the determination of interest income performance. Businesses and consumers, sensitized to the steady decline in interest rates, exhibited a higher propensity to renegotiate or refinance existing borrowings. Consequently, asset yields and interest income came under measurable pressure. While Keystone exhibited growth in its core "Relationship Banking" credit activities, absolute growth in the loan portfolio was mitigated by a number of factors. As announced late in 1997, Keystone undertook a strategic curtailment of its indirect lending activities to reduce funding pressures and increase the capacity for more relationship-oriented lending. While commercial loans, commercial real estate loans, and consumer credits exhibited stable growth, aggregate loan growth abated in the later stages of 1998. The run-off of the remaining portfolio of indirect automobile loans and leases began to outpace the growth in relationship-based credit activities. Likewise, the ongoing and successful execution of Keystone's mortgage banking operation, which has resulted in a substantial volume of fixed-rate loans that are sold in the secondary market, has served to accelerate the run-off of the existing balance sheet portfolio of variable-rate mortgage loans. On a combined basis, these factors served to moderate both absolute growth in loan volumes as well as increases in interest income. Reduced aggregate loan volumes also influenced the yield on the investment portfolio. During the course of the year, the loan to deposit ratio eased somewhat resulting in a higher relative level of investments. Interest rate trends, including the impact of both steadily declining rates and the flatter yield curve, provided less opportunity to price these higher volumes of investments at more favorable rates. Improvement in earning asset yields during 1998 presented many challenges. During 1998, the earning asset yield was 8.15%, a decline of 17 basis points from the yield of 8.32% recorded in 1997. Keystone will continue to focus on its relationship banking approach, balancing customer needs with an appropriate value-added pricing strategy. Interest Expense/Funding Sources Improvement in net interest income is achieved by maximizing interest income and minimizing interest expense, while simultaneously moderating the exposure to interest rate risk factors. Like most financial institutions, Keystone's ability to both attract funding through deposit vehicles and calibrate the impact of lower rates with customer desire for higher returns, made substantial increases in the deposit funding base difficult. Keystone achieved deposit growth in its more competitive product offerings such as free checking, the index money market account (IMMA), and variable rate certificates of deposit. Consumer preferences for products which meet the dual objectives of responsiveness to liquidity needs and competitive returns sustained growth in these funding sources. As expected, these same consumer preferences contributed to a decline in more conventional core deposit vehicles, such as savings deposits, mitigating the overall growth in deposit funding. While the lower rate environment contributed to reduced yield on earning assets, funding costs were virtually unchanged. This trend was driven by two primary factors. First, the reduced mix of lower cost core deposits, accompanied by the migration into higher priced competitive deposit vehicles such as IMMAs and variable rate CDs, exerted upward pressure on funding costs. Though both IMMAs and variable rate CDs reflected lower rates than in 25 1997, the increased mix of these deposit sources, combined with the lower mix of less expensive core deposits, mitigated the potential for more measurable cost reductions. Secondly, Keystone experienced a slightly higher dependency on other funding sources such as FHLB advances and medium-term notes. Consequently, funding costs decreased only slightly, from 4.45% in 1997 to 4.44% in 1998. Net Interest Spread and Net Interest Margin Combining the impact of both yield on earning assets with the cost of funding sources results in interest spread, a measure of a financial institution's ability to effectively blend the impact of changing rates, shifting rate indices, and product mix changes with evolving consumer needs. Net interest margin combines the impact of interest spread with both the investment of noninterest funding sources and the level of nonearning assets. In 1998, Keystone experienced a compression in interest rate spread due to a more competitive loan pricing environment, and the impact of higher cost funding sources. Interest spread declined from 3.87% in 1997 to 3.71% in 1998. Lower interest rates reduced the impact of noninterest funding sources one basis point from .72% in 1997 to .71% in 1998. Consequently, net interest margin dropped from 4.59% to 4.42%. Quarterly Performance The following table provides a comparative summary of earning asset yields, funding costs, and other information for each of the four quarters of 1998 and 1997 (in thousands): 1998 Fourth Third Second First Quarter Quarter Quarter Quarter - - ------------------------------ ----------- ---------- ---------- ---------- Asset yield 7.93% 8.14% 8.24% 8.22% Funding cost 4.29 4.47 4.48 4.52 - - ------------------------------ ----------- ---------- ---------- ---------- Interest spread 3.64% 3.67% 3.76% 3.70% - - ------------------------------ ----------- ---------- ---------- ---------- Net interest margin 4.33% 4.39% 4.48% 4.43% - - ------------------------------ ----------- ---------- ---------- ---------- Net interest income $70,258 $71,584 $72,377 $71,315 - - ------------------------------ ----------- ---------- ---------- ---------- 1997 Fourth Third Second First Quarter Quarter Quarter Quarter - - ------------------------------ ----------- ---------- ---------- ---------- Asset yield 8.38% 8.38% 8.33% 8.20% Funding cost 4.55 4.47 4.44 4.36 - - ------------------------------ ----------- ---------- ---------- ---------- Interest spread 3.83% 3.91% 3.89% 3.84% - - ------------------------------ ----------- ---------- ---------- ---------- Net interest margin 4.56% 4.62% 4.63% 4.56% - - ------------------------------ ----------- ---------- ---------- ---------- Net interest income $72,788 $74,087 $71,687 $68,542 - - ------------------------------ ----------- ---------- ---------- ---------- The steady decline in rates during 1998 had less dramatic impact on reducing quarterly funding costs, but influenced a more measurable drop in earning asset yields. This trend, combined with the influence of rapid run-off of the curtailed commodity-based indirect loan and lease products, reduced the potential for growth in net interest income, particularly since mid year. Keystone's strategic focus on expanding and deepening customer relationships through delivery of more value-added products is expected to provide opportunities to mitigate the impact of these trends during 1999. PROVISION FOR CREDIT LOSSES The provision for credit losses grew in 1998 to $17.2 million from $15.3 million in 1997, an increase of 12%. The conditions which influenced the level of credit quality erosion were linked to the residual effect of the late 1997 curtailment of indirect lending activities combined with the higher level of defaults and personal bankruptcies within the consumer sector. These factors culminated in an increased provision and associated charge-offs which occurred during the second quarter. While erosion of credit quality in the consumer sector has been influenced by unfavorable national trends, no similar trends have emerged within the commercial sector. In fact, the credit quality trends and standards within Keystone's overall commercial portfolio have remained stable. The allowance for credit losses expressed as a percentage of loans, was 1.35% at December 31, 1998 versus 1.38% one year earlier. The coverage of nonperforming credits provided by the allowance was 242% compared to the prior year ratio of 310%. Credit quality has always been a cornerstone of Keystone's performance and remains one of its highest priorities. See the allowance for credit loss and asset quality section of this review for additional information. NONINTEREST INCOME At the end of 1993, noninterest income (exclusive of security gains) comprised 17% of Keystone's total revenue stream. By the end of 1998, the noninterest income component of revenues grew to almost 26%. The evolution of Keystone into a diversified provider of financial services has dramatically influenced the growth potential of the service and fee income component of revenues. From 1997 to 1998, aggregate noninterest revenues (exclusive of security gains) grew 16.6% from $83.9 million to $97.8 million. This followed 18.7% growth in 1997. Efforts to expand and deepen customer relationships by developing a comprehensive slate of financial products has enhanced the rate of growth in revenues from asset management activities, mortgage banking, and electronic banking. These changes have included the expansion of the menu of services combined with strategic delivery channel advances that have been designed to be more responsive to customer's preferences. Asset Management Keystone's asset management activities provide an effective illustration of the adaptive strategies that have fueled the growth in noninterest revenues. Keystone banks historically provided personal and employee benefit trust services. In 1995, Keystone acquired Martindale Andres to both expand asset management capabilities and leverage recognized investment advisory expertise throughout Keystone. Similar advances occurred with the 1997 introduction of proprietary mutual funds, now known as "Governor Funds", as well as the acquisition of MMC&P, a retirement benefit consulting firm. Furthermore, it was during these periods that Keystone also added enhanced brokerage services and annuity sales and introduced, on a limited basis in 1998, insurance capabilities. These strategies have all influenced the related expansion in fees and made Keystone one of a limited number of institutions in its marketplace with the competence to deliver a diverse menu of asset management services. The growth in the individual fee income categories included an 8% increase in trust fees, 44% increase in investment management, a more than doubling of benefit services, and an overall increase of 22% in total trust and investment advisory fees. Total fees grew from $21.3 million in 1997 to $25.9 million in 1998. Mortgage Banking Similar to the experience in asset management, Keystone's successful expansion of mortgage banking activities combined the benefits of innovative product development, rapid customer turnaround processes, and the convenience of 26 Keystone's extensive network of community offices. Keystone's mortgage banking unit completed its most successful year in 1998, originating nearly $500 million of mortgage loans, including approximately $333 million which were sold in the secondary market. Keystone now services $1.7 billion of loans, of which approximately $957 million is "serviced for others". Following a 31% increase in mortgage banking fees in 1997, Keystone produced a 29% increase during 1998 as mortgage banking revenues grew to $12.4 million or 12.7% of total noninterest revenues. Growth in this area of the business has been generated by a consistently innovative approach during a period of unprecedented opportunity. The low interest rate environment and the consistently strong consumer demand for housing has expanded opportunities, and Keystone has been responsive. For example, Keystone became a recognized specialist in the area of construction lending and has also carved a niche in the self-build log home financing business. Additionally, Keystone gained access to another consistent source of increased volume and high quality loans through its correspondent network. In summary, Keystone successfully managed the business opportunities presented to its mortgage banking unit by understanding customer needs and preferences and meeting these needs through innovative and responsive product design and delivery. Electronic Banking Electronic banking has also had a major strategic impact on the growth in noninterest revenues. Keystone's electronic banking network includes traditional and advanced function ATMs and is composed of both internal ATM sites as well as those sites available through Keystone's alliance with major convenience store chains. Keystone's electronic banking strategy has been responsive to changing consumer preferences for convenient and strategically located sites to obtain cash, conduct transactions, and access payment systems. With nearly 500 ATMs throughout its network, Keystone now has the 45th largest network of automatic teller machines in the United States. Overall access through electronic means includes conventional ATM transactions, advanced- function ATM capability, point of sale services utilizing Keystone's Visa Check Card services, and telephone banking which is now fully operational within Keystone's Telephone Banking Center. Keystone continuously evaluates its entire electronic banking network in order to minimize unproductive services or locations and emphasize redeployment of electronic services into markets with higher transaction and fee potential. Keystone also has enhanced its electronic network through new and innovative products and services including its electronic checking account services and preferred provider status for ATM placements within colleges or universities located within its markets. During 1998, Keystone achieved a 25% increase in the aggregate ATM and point of service activity including nearly a 60% increase in its Keystone Visa Check Card transactions. Keystone's usage rate for its Visa Check Card exceeds the national average based upon number of transactions per card. Additionally, the Telephone Banking Center calls increased nearly three-fold from the activity levels as of the end of 1997. In total, electronic banking fees increased 57% including an approximately $2 million increase from the impact of surcharging. Service Charges and Other Fees from service charges on deposits have historically been a major and important source of noninterest revenues. Such revenues grew 6% to $18.4 million in 1998 from $17.4 million in 1997 and were reflective of both fee adjustments and the expansion of customer services. Other income increased by $1.2 million in 1998 as income from bank-owned life insurance and the gain on the sale of an insignificant subsidiary exceeded branch sale gains recognized in 1997. During 1998, Keystone realized approximately $11 million in security gains, the majority of which related to the disposition of its minority interest in a financial institution that was acquired by another company. 27 Noninterest Expenses Core noninterest expenses, exclusive of the charges associated with the 1997 merger, rose 4.0% from $214.6 million to $223.2 million, an increase of $8.5 million. For the most part, core expense growth was negligible, as most of the 1998 increase reflected the first full year impact of the mid-year 1997 purchases of MMC&P and a Maryland-based thrift. Additionally, expenses in 1998 included the current year impact of incremental expenses necessary to achieve Y2K readiness. Growth in controllable expenses reflected ongoing efforts associated with expense management. Keystone's decision to unify its banks under a single charter should accelerate expense reduction opportunities. We anticipate that this unification will reduce operating expenses by 10% beginning with the Year 2000. Expense management efforts, however, also reflected investment in those areas of the business which demonstrate superior potential for revenue expansion and in technological initiatives which achieved a more efficient leverage of Keystone's human capital. Salaries and Benefits Effective and efficient delivery of a broad menu of financial services begins with attracting and retaining a motivated, experienced and well-trained team of associates. Over the past several years, Keystone has embarked on a structured program to attract and retain a skilled workforce and to provide a financial reward system linked to execution of revenue-enhancing activities. These programs include Keystone's "targeted selection" initiative, which is an interview process for prospective associates designed to identify and attract candidates with demonstrated potential to succeed in a consultative selling environment. Additional programs include the variable compensation program which is linked to preestablished "pay-for-performance" criteria. Such programs have been designed to increase the amount of compensation for those associates more directly responsible for customer responsiveness and revenue growth. While these programs tend to elevate the "at risk" component of employee compensation, they also provide associates with greater incentive and opportunity for personal financial reward. Most of these programs are in the second or third year of implementation and have now become an integral part of Keystone's reward system. Keystone will continue to prospectively adjust and adapt compensation systems to ensure that these programs provide the most effective link between reward-based compensation and meeting customers' financial needs. In 1998, salary expense grew 5.1% from $92.6 million to $97.4 million. This growth related primarily to the first full year of activity for businesses that had been acquired in 1997, and, to a lesser extent, merit increases and increased variable compensation. The increase was mitigated by the offsetting influence of a reduced workforce. Efficiency gains, some of which relate to the benefits of technology, were linked to the reduction in full-time equivalent employees from 3,114 at the end of 1997 to 2,965 at the end of 1998. Benefits expense levels have also stabilized, due to the favorable impacts of both a reduced workforce and effective management of Keystone's benefit costs, primarily its employee health care plan. Benefit expenses rose only slightly from $17.3 million in 1997 to $17.5 million in 1998. Keystone's efforts to provide high quality health care through its company-sponsored managed care program has mitigated increases in this vital component of employee compensation. More recent national trends portend possible increases in benefit costs after 1998 as the health care industry continues to evolve and consolidate. Keystone's effort to manage its workforce levels is expected to offset the potential for meaningful increases in these projected expenses. Occupancy and Equipment Expenses Changing customer needs and preferences continue to be the primary stimulus for the evolution and enhancement of Keystone's customer delivery systems and related internal processes. While these initiatives have increased both occupancy and 28 equipment expense in the near term, such expenses are critically evaluated to ensure appropriate leverage of Keystone's skilled team of financial consultants. Investments included the costs associated with the Telephone Banking Center, an ever-expanding network of ATM and electronic banking enhancements, and infrastructure improvements to internal processes. In 1998, occupancy expenses rose 5.5% to $17.3 million while equipment expenses rose 9.8% to $20.6 million. Results for 1997 included comparable expenses of $16.4 and $18.7 million, respectively. At the same time, Keystone has constantly and consistently worked to revamp and revitalize its network of community offices. Late in 1998 and early in 1999, Keystone finalized its planning efforts to enhance the community office delivery system. Such efforts will include more precise assessments of market potential and ongoing evaluations of optimum service levels within Keystone's community office systems. The results of these efforts, which were an integral component of Keystone's reorganization strategy, will begin to be reflected in early 1999. Other Expenses Other expenses, which include items such as marketing, insurance, audit and legal fees, consulting expenses, bank shares tax, and postage expenses aggregated $70.3 million in 1998 and $69.5 million in 1997. This increase of 1.2% is reflective of Keystone's ongoing effort to achieve efficiencies in its expense structure. Notably, Keystone achieved substantial reductions in categories such as marketing, recruiting, professional fees, and problem loan expense, which served to overcome increased expenses in areas more affected by corresponding improvement in fee income, such as reinsurance and merchant interchange activities. Income Taxes Income tax expense was $45.7 million in 1998 versus $38.9 million in 1997. The increase in taxes was reflective of higher levels of taxable income as the effective tax rate was approximately 31% in both years. Year 2000 There are few individual topics which have engendered as much discussion and wide-spread media attention as the issue of Year 2000 (Y2K) readiness and its many associated concerns. Given its potentially significant impact on business in general and financial institutions in particular, Y2K readiness has been a subject of intense management focus. The level of awareness and attention has been particularly acute within the financial services industry with its many layers of regulatory oversight and perceived influence on the overall flow of commerce. The fundamental issue associated with Y2K readiness stems from the fact that historically, most computer systems were written with two digits rather than four digits to designate the applicable year. Accordingly, it is anticipated that systems may recognize a date using "00" as the year "1900" rather than "2000", thus increasing the possibility of computer system failures, miscalculations and disruption of normal business operations. Keystone's computer systems are managed by its information technology (IT) division, which has the primary responsibility to meet information processing needs through the acquisition, operation, and customization of software and hardware acquired from major providers. A limited portion of data processing needs, estimated at approximately 15%, is met by various third party service providers. Keystone's formal plan to resolve issues attendant to the approach of the Y2K consists of four major phases: inventory; assessment; distribution; and implementation. The four phases of the plan are primarily being performed using internal resources. The initial or inventory phase of Keystone's Y2K Plan identified all information technology and significant non-IT components. The inventory of components, which was identified during this phase, serves as the 29 foundation for assessment of all potential Y2K issues. Keystone has completed this step. However, we recognize that as a part of doing business, new items will be added to the inventory as needed and these items will be exposed to the process. The second, or assessment phase of the plan evaluated the need for modification, upgrade or replacement of either internally managed or service-based systems to meet Y2K readiness standards. Ten corporate critical IT systems were identified to be the highest level of execution risk if not adequately safeguarded for failure or malfunction. Assessment of all identified components is complete. In the process of completing this phase, Keystone has determined it has no significant exposure due to non-IT components with embedded technology. During the third, or distribution phase, decisions were made about how to remedy Y2K problems detected by the assessment. Decisions were made for all components to either retire, replace, update or convert each software or hardware item that is not year 2000 compliant. The final, or implementation phase includes installation, system testing and transition to a production environment. Of the ten corporate critical systems, three systems are in production with testing complete; six systems are in production and require only minor additional testing; the remaining system is scheduled for production by the end of the second quarter of 1999. It has been determined that all identified corporate critical replacement or updated systems meet the standards necessary for Y2K readiness. The risk associated with Y2K readiness, therefore, is primarily associated with the implementation of these systems and can be remedied, if necessary, via standard vendor support channels or by redirecting internal or external resources. Management's current risk assessment is that should difficulties be encountered with implementation, only minor delays in transaction processing or information availability will occur. If delays in either transaction processing or information availability would occur for extended periods for corporate critical systems, or if timely modification could not be made, Y2K issues could have a material effect on both customers and on the operations of Keystone. In a worst case scenario, which management does not consider to be likely, Keystone may be unable to clear checks, process payments, or obtain customer account information. In addition, customers' access to funds could be delayed. Failure to achieve Y2K readiness could also subject Keystone or its subsidiaries to potential sanctions or directives from various regulatory agencies responsible for supervisory oversight of financial institutions. The impact of Year 2000 issues on Keystone will depend not only on steps taken by Keystone to address and prevent potential Y2K problems but also on the way in which Y2K issues are addressed by governmental agencies, businesses and other third parties that provide services or data to, or receive services or data from, Keystone, or whose financial condition or operational capability is important to Keystone. Keystone is engaged in an effort to survey the readiness of such third party suppliers, vendors, and major customers, and to date, Keystone is not aware of any third party problems which would materially impact Keystone's results of operations, liquidity or capital resources. However, Keystone has no means to determine with absolute assurance that external parties will by Y2K ready, or that such parties failure to be Y2K ready would not have a material impact on Keystone. Expenditures since the inception of the project have aggregated $5.6 million, of which $3 million were capitalized. During 1999, Keystone expects to spend an additional $2 million, of which $.5 million will be capitalized and amortized over a three- to five-year period. All expenditures will be funded through operating cash flows. 30 Keystone's estimate of costs and the time required to complete Y2K modifications, as well as the assessment of readiness to deal with Y2K issues, are based on forward-looking information and are dependent upon assumptions regarding future events. There can be no guarantee that estimates of costs or completion dates will be achieved or that all risk has been appropriately identified and assessed. Specific factors that might cause differences include, but are not limited to, the availability and cost of personnel, satisfactory Y2K upgrade execution, the ability to identify all issues, and similar uncertainties. BALANCE SHEET OVERVIEW Keystone's total assets reached $6.97 billion at the end of 1998, a slight increase over the total of $6.84 billion reported at the end of 1997. Growth was constrained by a number of factors including the run-off of curtailed credit products, such as indirect loans and leases, and the securitization of mortgage products. Period end loan balances declined as growth in relationship- based product offerings was not sufficient to offset this run-off. In addition, balance sheet expansion was also constrained by sluggish deposit growth. LOANS During 1998, Keystone experienced less than robust growth in aggregate loan balances despite strong increases in relationship-based activities. Growth trends within Keystone's loan portfolio resulted directly from the execution of its core business strategy, meeting customer needs through relationship banking. First, Keystone seeks to preserve precious funding sources to ensure credit availability for creditworthy customers that exhibit demonstrated potential and desire for more expanded relationships. At the same time, Keystone also seeks ways to more appropriately meet credit needs through the delivery of commodity- based products that have the potential to create opportunities for expanded relationships. A prime example of this effort is mortgage banking, which also combines balance sheet risk management strategies and accessability to funding through the secondary market. Finally, Keystone has curtailed those activities which tend to absorb funding with little or no opportunity to profitably expand relationships, such as indirect lending and leasing. The following summary reflects the impact of these strategies on specific loan balances through 1998 and 1997 (in thousands):
1998 1997 Change - - ------------------------ --------------------- ------------------- -------------------- Amount % Amount % Amount % - - ------------------------ ------------- ------- ------------ ------ ----------- -------- Commercial $663,415 14% $622,569 14% $40,846 7 % Floor plan financing 171,872 4 186,737 4 (14,865) (8) Commercial-real estate secured 1,496,526 33 1,294,933 28 201,593 16 Consumer mortgages 774,388 17 944,731 21 (170,343) (18) Direct consumer 919,952 20 856,225 19 63,727 7 Indirect consumer 248,942 5 293,013 6 (44,071) (15) Lease financing 314,749 7 374,421 8 (59,672) (16) - - ------------------------ ------------- ------- ------------ ------ ----------- -------- $4,589,844 100% $4,572,629 100% $17,215 --- % - - ------------------------ ------------- ------- ------------ ------ ----------- --------
Though declines in commodity-based indirect loan and lease categories were anticipated, the actual pace of runoff exceeded expectations and offset the 31 growth that was achieved in relationship-based categories. Growth in commercial real estate (16%), commercial loan (7%) and direct consumer credit (7%) was strong, however, and reflected Keystone's stated commitment to maximize relationship banking opportunities. The changes in Keystone's organizational structure announced near the end of 1998 were designed to build on this foundation and identify service delivery enhancements through an intense and skillful focus through a line of business approach. Coincident with the implementation of its proprietary business analysis tools, Keystone has divided its commercial business into three broad segments: commercial banking, business banking, and emerging business banking. Pursuant to this stratification, Keystone examined and identified more common financial needs and attributes of customers included therein, and will seek to tailor its approach to meeting individual financial needs through its financial consultancy model. For example, Keystone has a demonstrated familiarity with the nuances of automobile dealer floor plan financing and has constantly evaluated and improved service delivery features to this important business segment. Despite this focus on floor plan financing, outstanding balances declined during 1998 due to the mid-year strike of a major auto manufacturer. Likewise, the formal restructuring of Keystone under one charter, with its regional focus and local market teams, has been designed to ensure high touch delivery and local market knowledge combined with the benefits of focused business line management. This restructuring is a logical evolution of Keystone's relationship banking culture. The growing demand for direct lending coupled with the strategic effort to make Keystone the premier lender in its community markets, are expected to accelerate both lending and other financial service delivery opportunities within the retail sector. ALLOWANCE FOR CREDIT LOSSES AND ASSET QUALITY Keystone's ratio of the allowance for credit losses to loans was 1.35% at December 31, 1998, versus 1.38% at the end of 1997. The absolute level of the allowance was $60.3 million at the end of 1998 compared to $65.1 million at the end of the previous year. This reduction was directly attributed to lower loan balances and risk exposure for commodity and securitized loan products. The following table sets forth five years of activity within the allowance for loan losses beginning January 1, 1994 (in thousands):
1998 1997 1996 1995 1994 - - ----------------------------------------- --------- -------------------- --------- ---------- Balance at January 1, $65,091 $56,256 $55,415 $53,708 $51,084 Loans charged off: Commercial (2,326) (1,930) (1,936) (874) (4,417) Real estate-secured: Commercial (2,543) (1,234) (1,646) (1,971) (4,265) Consumer (885) (1,116) (651) (708) (638) Consumer (14,442) (10,010) (6,702) (5,498) (2,932) Lease financing (3,862) (2,987) (1,330) (786) (198) - - ----------------------------------------- --------- -------------------- --------- ---------- Total loans charged off (24,058) (17,277) (12,265) (9,837) (12,450) - - ----------------------------------------- --------- -------------------- --------- ---------- Recoveries: Commercial 303 501 461 281 528 Real estate-secured: Commercial 675 410 465 538 849 Consumer 444 219 152 164 280 Consumer 1,302 1,104 1,138 900 968 Lease financing 244 251 177 158 29 - - ----------------------------------------- --------- -------------------- --------- ---------- Total recoveries 2,968 2,485 2,393 2,041 2,654 - - ----------------------------------------- --------- -------------------- --------- ---------- Net loans charged off (21,090) (14,792) (9,872) (7,796) (9,796) Provision charged to operations 17,150 15,316 10,713 8,568 10,324 Other (877) 8,311 ---- 935 2,096 - - ----------------------------------------- --------- -------------------- --------- ---------- Balance at December 31, $60,274 $65,091 $56,256 $55,415 $53,708 - - ----------------------------------------- --------- -------------------- --------- ---------- Ratio of allowance to year-end loans 1.35% 1.38% 1.30% 1.35% 1.38% Ratio to Average Loans: Provision .37% .33% .26% .21% .29% Net charge-offs .46% .32% .24% .20% .27% - - ----------------------------------------- --------- -------------------- --------- ----------
The most significant credit risk issue affecting Keystone during 1998 was the impact of rising consumer delinquencies, consumer bankruptcies, and related net charge-off activity. Keystone's most substantial credit exposures involved those loans that had been originated through indirect automobile lending and leasing activities. Although Keystone curtailed this line of business near the end of 1997, absolute levels of problem credits associated with these loans and leases grew during the first half of 1998. Approximately 20% of the $14.4 million consumer charge-offs incurred during 1998 and all of the lease financing charge-offs related to the indirect business. Risk Elements As a means of assessing the risk profile of its loan portfolio, Keystone has monitored the level of aggregate risk elements which include nonperforming assets (NPA's)and loans past due more than 90 days. Nonperforming assets include nonaccrual loans, restructurings, and other real estate (ORE). Nonaccrual loans are loans for which interest income is not accrued due to concerns about the collection of interest and/or principal. Restructured loans may involve renegotiated interest rates, repayment terms, or both, because of a deterioration in the financial condition of the borrower. ORE activity in 1998 reflected no unusual or significant fluctuations in balances. The following table provides a comparative summary of nonperforming assets and total risk elements at the end of each of the last five years (in thousands):
1998 1997 1996 1995 1994 - - --------------------------------- --------- --------- --------- ---------- ---------- Nonaccrual loans $24,675 $20,520 $19,350 $19,142 $26,701 Restructurings 264 489 393 503 144 - - --------------------------------- --------- --------- --------- ---------- ---------- Nonperforming loans 24,939 21,009 19,743 19,645 26,845 Other real estate 3,982 5,028 8,305 9,777 7,028 - - --------------------------------- --------- --------- --------- ---------- ---------- Nonperforming assets 28,921 26,037 28,048 29,422 33,873 Loans past due 90 days or more 28,549 33,062 20,141 16,798 10,062 - - --------------------------------- --------- --------- --------- ---------- ---------- Total risk elements $57,470 $59,099 $48,189 $46,220 $43,935 - - --------------------------------- --------- --------- --------- ---------- ----------
Substantially all of the loans in the nonaccrual category at December 31, 1998, were contractually past due as to principal or interest. The relationships of nonperforming assets and total risk elements to total loans and to the allowance for credit losses provide important measures of asset quality. The allowance for credit losses must be adequate to absorb credit risk in these categories and in the remainder of the loan portfolio. The following table summarizes the total risk element components expressed as a percentage of year-end loans and relevant coverage provided by the allowance for credit losses.
1998 1997 1996 1995 1994 - - ------------------------------------------- ------- ------- ------- ------- ------- Ratio to Year-End Loans: Nonperforming assets 0.65% 0.55% 0.65% 0.72% 0.87% 90 days past due 0.64 0.70 0.46 0.41 0.25 - - ------------------------------------------- ------- ------- ------- ------- ------- Total risk elements 1.29% 1.25% 1.11% 1.13% 1.12% - - ------------------------------------------- ------- ------- ------- ------- ------- Coverage Ratios: Ending allowance to nonperforming loans 242% 310% 285% 282% 200% Ending allowance to risk elements* 113% 120% 141% 152% 146% Ending allowance to net charge-offs 2.9x 4.4x 5.7x 7.1x 5.5x - - ------------------------------------------- ------- ------- ------- ------- ------- * Excludes ORE.
The relative level of nonperforming assets continues to moderate within rather narrow boundaries and has been influenced by the ebb and flow of broad economic trends. Total risk elements expressed as a percentage of loans grew only slightly during the year from 1.25% at the end of 1997 to 1.29% at the end of 1999. The migration of a single large commercial credit from the 90-days past due category at the end of 1997 into nonaccrual status during 1998 increased the ratio of nonperforming assets to loans while decreasing the ratio of 90-days past due to loans. During this period, Keystone's credit risk exposure has not been substantially influenced by any systemic deterioration in commercial or commercial real estate categories but more by the broad trends within the consumer sector. As the relative mix of indirect credit is reduced, the proclivity for more relationship-based lending is expected to introduce a higher density of loans with more favorable credit attributes. Management has identified approximately $12.2 million of loans outstanding at December 31, 1998 were concern exists as to the potential for future classification into one of the risk element categories. Substantially all of these loans were current at the end of 1998. Such loans totaled $8.3 million at the end of 1997. Credit risk associated with nonperforming assets also can be measured in terms of exposure to specific categories of loans. The following table provides the components of nonperforming assets, detailed by loan categories, at the end of each of the past five years, (in thousands):
- - -------------------------------- --------------------------------------------------- 1998 1997 1996 1995 1994 - - -------------------------------- ---------- --------- --------- --------- ---------- Commercial $10,066 $4,550 $4,340 $4,833 $5,651 Commercial real estate: Construction and development 1,941 220 764 1,951 5,690 Permanent 8,640 11,960 12,196 10,919 10,597 Residential real estate 960 1,465 1,014 1,173 4,486 Consumer 3,332 2,814 1,429 769 421 - - -------------------------------- ---------- --------- --------- --------- ---------- Nonperforming loans 24,939 21,009 19,743 19,645 26,845 Other real estate 3,982 5,028 8,305 9,777 7,028 - - -------------------------------- ---------- --------- --------- --------- ---------- Total nonperforming assets $28,921 $26,037 $28,048 $29,422 $33,873 - - -------------------------------- ---------- --------- --------- --------- ----------
Keystone also reviews trends with respect to less severe categories of past due loans, including loans which are 30 to 90 days past due. The following is a comparative summary of past due loans at the end of 1998 and 1997 (in thousands): % of Total % of Total 1998 Loans 1997 Loans - - ------------------ ---------- ------------ ----------- -------------- 30-59 days $47,899 1.1% $53,320 1.1% 60-89 days 12,451 0.3 15,807 0.4 Over 90 days 28,549 0.6 33,062 0.7 - - ------------------ ---------- ------------ ----------- -------------- $88,899 2.0% $102,189 2.2% - - ------------------ ---------- ------------ ----------- -------------- The level of past due loans expressed as a percentage of total loans at December 31, 1998 was consistent with the same period in 1997. Allocation of Allowance In determining the adequacy of the allowance for loan losses, management makes allocations to specific problem commercial loans based on the present value of expected future cash flows or the fair value of the underlying collateral for impaired loans and to pools of other commercial loans based on various credit risk factors. Allocations to loan pools are developed by internal risk rating and are based on management's judgment concerning historical loss trends and other relevant factors. Installment and residential mortgage loan allocations are made at a total portfolio level based on historical loss experience adjusted for portfolio activity and current conditions. While allocations are made to specific loans and pools of loans, the allowance is available for all loan losses. The following table summarizes the allocation of the allowance for credit losses at December 31, for each of the past five years (in thousands):
1998 1997 1996 1995 1994 - - ------------------------ ------------ ----------- ----------- ----------- --------- Commercial $13,436 $11,266 $9,944 $11,450 $11,168 Real Estate secured: Commercial 8,813 12,630 11,922 11,969 12,104 Consumer 2,064 1,849 2,324 2,251 2,563 Consumer 15,574 16,844 12,693 7,724 7,036 General Risk 20,387 22,502 19,373 22,021 20,837 - - ------------------------ ------------ ----------- ----------- ----------- --------- $60,274 $65,091 $56,256 $55,415 $53,708 - - ------------------------ ------------ ----------- ----------- ----------- ---------
During 1998, the portion of the allowance specifically allocated to commercial loans increased, while conversely, the portion allocated to commercial real estate decreased to reflect changes in management's risk ratings for these categories of loans. Similarly, the level of nonperforming commercial loans increased during 1998 while the level of nonperforming commercial real estate decreased. Overall Assessment Keystone has assessed all of the above factors in the establishment of the allowance for credit losses. The determination as to the adequacy of the allowance reflects management's judgment, and was based upon collateral, local market conditions, various estimates, and other information that requires subjective analysis. These factors, which are prone to change, are monitored by management to evaluate their potential impact on management's assessment of the adequacy of the allowance. Based on its evaluation of loan quality, management believes that the allowance for credit losses at December 31, 1998 was adequate to absorb potential losses within the loan portfolio. INVESTMENTS Keystone has established corporate investment policies that address various aspects of portfolio management including, but not limited to, quality standards, liquidity and maturity limits, investment concentrations, and regulatory guidelines. Compliance with these policies is reported regularly to the Board of Directors. Keystone's objectives with respect to investment management include maintenance of appropriate asset liquidity, facilitation of asset/liability management strategies, and maximization of return. At December 31, 1998, Keystone's investments represented 25.7% of total assets. The following is a summary of the carrying values of investments at December 31, 1998 and 1997 (in thousands):
1998 1997 - - ------------------------------ ------------------------- ---------------------------- Available Held to Available Held to for Sale Maturity for Sale Maturity - - ------------------------------ ------------ ------------ --------------- ------------ Negotiable money market investments $290,975 $----- $178,404 $----- U.S. Treasury securities 123,388 ----- 194,120 ----- U.S. Government agency obligations 548,572 500,418 503,078 366,238 Obligations of states and political subdivisions 57,692 146,018 74,171 143,910 Corporate and other 109,126 13,100 141,627 18,240 - - ------------------------------ ------------ ------------ --------------- ------------ $1,129,753 $659,536 $1,091,400 $528,388 ============================== ============ ============ =============== ============
The weighted average duration of Keystone's fixed rate investments was 2.33 years at December 31, 1998. Ratings for state and municipal, and corporate issues are provided by major rating agencies, principally Moody's and Standard & Poor's. At the end of 1998, the portion of all state and municipal holdings rated "AAA" was 89.8% and the portion of all corporate issues rated "A" or better was 98.2%. The relationship of market value to the amortized cost of investments at December 31, 1998, was 101.1% compared to 101.4% at the end of 1997. At December 31, 1998, investments "held-to-maturity", which are carried at amortized cost, contained gross unrealized gains and losses of $11.7 million and $0.3 million, respectively. Unrealized gains and losses included in the carrying value of the "available-for-sale" investments of $11.5 million and $1.8 million, respectively, were reflected, on a net of tax basis, as an adjustment to shareholders' equity. Keystone holds no concentration of corporate or municipal investment securities of any single issuer which exceeds 10% of shareholders' equity. FASB Statement No. 119, "Disclosures About Derivative Financial Instruments and the Fair Value of Financial Instruments" defined two distinct types of off- balance sheet derivative activities: "trading" activities and "end-user" activities. Keystone does not engage in derivatives trading activities but has made use, as an end-user, of interest rate swaps. These swaps, together with other strategies, have been used to manage Keystone's overall exposure to the effect of changes in interest rates. Keystone has also made use of forward mortgage commitments to reduce the market risk associated with interest rate fluctuations in fixed consumer mortgages. Further disclosures of these activities are included in the footnotes to the financial statements. A broader definition of derivatives would include any financial instrument which derives its value or contractual cash flows from the price of some other security or index. Keystone's investment policy governs the nature and extent of on- balance sheet financial derivative holdings, which currently include both collateralized mortgage obligations and structured notes. This policy limits Keystone's exposure to derivatives risk by defining restrictions on the amount of credit, prepayment, extension, and interest-rate risk associated with derivative financial instruments. Keystone's aggregate investment in this form of financial derivative holdings is substantially composed of U.S. Government Agency holdings. In June of 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement provides new accounting treatment for derivatives transactions and hedging activities. The standard will be effective for Keystone beginning on January 1, 2000. Adoption of the standard is not expected to have a significant impact on Keystone's financial condition or results of operations. DEPOSITS Financial institutions continue to rely heavily on deposit balances as the primary source of funding for credit activities. Customer desires for higher returns, the lure of increased stock market valuations, higher consumer risk tolerance, and more accessible investment distribution channels, such as on-line investing, have all served as impediments to growth in this important funding source. Despite these trends, Keystone has been able to preserve its funding base through product development initiatives designed to meet these competitive challenges. Though aggregate deposit funding remained relatively static from 1997 to 1998, the mix of deposits reflect the influence of competitive pressures and Keystone's proactive strategy to meet customers' needs. Deposit composition consisted of the following for 1998 and 1997:(in thousands):
Change ----------- 1998 1997 Amount % - - ------------------------------------------ ------------ ------------ ------------ ------- Noninterest-bearing demand $637,533 $606,907 30,626 5% NOW 309,238 330,514 (21,276) (6) Savings 514,226 600,759 (86,533) (14) Money market 740,086 650,082 90,004 14 Variable-rate CD 719,165 575,025 144,140 25 Other time deposits less than $100,000 1,958,919 2,114,231 (155,312) (7) Time deposits $100,000 or more 310,137 278,181 31,956 11 - - ------------------------------------------ ------------ ------------ ------------ ------- $5,189,304 $5,155,699 33,605 1% - - ------------------------------------------ ------------ ------------ ------------ -------
Keystone's deposit mix was most significantly affected by initiatives in three major areas. First, Keystone's earlier introduction and continued promotion of its free-checking and electronic checking products, combined with a corporate cash management product, contributed to 5% growth in noninterest-bearing demand deposit balances. Secondly, Keystone developed and expanded its indexed money market account (IMMA) in order to provide customers with a competitive alternative to retail products now available through a variety of financial intermediaries. The rate provided on this account has been indexed to short-term Treasury rates rather than to administered rates, providing added assurance to Keystone customers that they are achieving competitive returns combined with convenient access. Finally, the variable rate certificate of deposit, with its indexed rate and flexible liquidity options, has been a formidable and competitive product offering. Each of these products has been successful in blending the security of deposit insurance with competitive features in pricing. Keystone's preemptive approach to providing its customers with competitive product offerings has facilitated some internal disintermediation of more established deposit products such as savings and NOW accounts. More importantly, Keystone believes that this approach provides consumers with assurance that, in its role as a financial services provider, the foremost objective is to meet customer needs. BORROWED FUNDS While deposits continue to be the primary source of funding, Keystone has augmented its funding needs through other sources based on its overall funding strategy. The composition of other borrowed funds is presented in the following table (in thousands): Change 1998 1997 Amount % - - ---------------------------- ----------- ----------- ------------- ---------- Short-term borrowings $375,131 $371,645 $3,486 1% FHLB borrowings 372,097 240,533 131,564 55 Long-term debt 119,313 64,016 55,297 86 - - ---------------------------- ----------- ----------- ------------- ---------- $866,541 $676,194 $190,347 28% - - ---------------------------- ----------- ----------- ------------- ---------- Strategic leverage efforts, including investment initiatives and share repurchase programs, have influenced the volume and composition of nondeposit funding sources. The most common form of these funding sources, short-term borrowings, are obtained to meet both the short-term funding needs and the short-term investment requirements of primarily commercial and governmental customers. FHLB borrowings, which are collateralized by residential mortgages or other qualified securities, reflect a variety of credit products available to Keystone through its membership in the Federal Home Loan Bank. In May of 1998, Keystone issued $30 million of senior medium-term notes under a shelf registration executed in 1997, at a coupon rate of 6.50% and a maturity date of 2008. The proceeds were used to fund the common stock repurchase program and other general funding needs. Remaining aggregate funding available under this registration was $270 million. Keystone will continue to access this funding source for general corporate purposes on an as needed basis. SHAREHOLDERS' EQUITY The changing nature of the financial services industry, including the expansion of fee-based activities such as asset management services and mortgage banking, requires a proactive view of capital management. Maintenance of appropriate levels of capital is subjected to constraints and restrictions imposed by regulatory authorities, dividend requirements, and acquisition opportunities. Keystone's capital management policies have been designed to ensure maintenance of appropriate levels of capital under a variety of economic conditions. At the end of 1998, shareholders' equity was $662 million versus $685 million at December 31, 1997, resulting in an equity to assets ratio of 9.50%. The principal source of new capital for Keystone is earnings retention, which is a function of its return on beginning equity and the dividends paid to shareholders. Keystone, in its capital management policies, has set forth specific guidelines to ensure a favorable, consistent, and sustainable pattern of dividend payments. Dividend declarations during 1998 equated to an 8.6% payout on year-end 1997 book value. Many financial institutions, including Keystone, continued to generate earnings retention levels in excess of asset growth rates which has resulted in increased relative levels of capital. Under guidelines set forth in its capital management policies, Keystone has sought to execute strategies and tactics which would moderate capital growth and increase the level of earning assets, thus improving the leverage of its capital base. Two capital management strategies contributing to the equity contraction experienced in 1998 included the acquisition of treasury stock and the increased annual dividend to shareholders. In formulating these capital management initiatives, a multitude of additional external factors are considered, including regulatory implications and the desire to preserve pooling-of-interests accounting. In November 1998, the Board of Directors approved a share repurchase program which authorized the repurchase from that date of up to 3,000,000 common shares. Under the program, the shares are to be repurchased from time to time in the open market or through negotiated transactions. Under a separate 1997 authorization, one million common shares were repurchased in the first half of 1998 and retired. The 1 million shares held at December 31, 1998, were acquired under the November, 1998, authorization and are expected to be reissued over time in connection with employee stock purchase, 401(k), stock option and dividend reinvestment plans as well as other corporate purposes. Banking industry regulators have set forth capital adequacy guidelines based on capital ratios for bank holding companies and their banking subsidiaries. Based on risk-adjusted capital rules and definitions prescribed by the regulators, the regulatory guidelines establish ranges of capital adequacy which extend from "significantly undercapitalized" to "well-capitalized". These assessments of capital adequacy directly influence the focus of regulatory oversight, including the premium rates charged for deposit insurance. Regulators, including both the Federal Reserve Board and the Office of the Comptroller of Currency, operate under a risk-based supervisory approach designed to encourage management focus on the most effective use of capital commensurate with its risk profile in generating a return to stockholders, while serving depositors, creditors, and regulatory needs. With regulatory oversight increasingly focused on capital issues, Keystone and other financial institutions have been challenged to develop a capital measurement system that will ensure effective management of capital levels and associated business risk. Keystone will continue to be responsive to the need to balance both capital adequacy levels and business risk issues. The following table provides Keystone's risk-based capital position at the end of 1998 and a comparison to the various regulatory capital requirements. "Well Minimum Keystone Capitalized" Requirements - - ------------------------- ------------- --------------- --------------- Leverage ratio 8.66% 5.00% 4.00% "Tier 1" capital ratio 12.59% 6.00% 4.00% "Total" capital ratio 13.84% 10.00% 8.00% - - ------------------------- ------------- --------------- --------------- Failure to meet any one of the minimum capital ratios would result in an institution being classified as "undercapitalized" or "significantly undercapitalized". Such classifications could disrupt dividends, capital distributions, or affiliate management fees. In addition, other restrictions, prohibitions, and related supervisory actions would be likely depending upon the overall level of capital. Keystone anticipates no significant problems in meeting the current or future capital standards. Intangible assets, consisting primarily of core deposit intangibles and goodwill, totaled $62 million at December 31, 1998 or 10% of "Tier 1" capital. ASSET/LIABILITY MANAGEMENT AND MARKET RISK The process by which financial institutions manage earning assets and funding sources under different interest rate environments is called asset/liability management. The primary goal of asset/liability management is to increase net interest income through the prudent control of market risk, liquidity, interest rate risk, and capital. Two important barometers of performance are net interest margin and liquidity. Net interest margin is increased by widening interest spread while controlling interest rate sensitivity. The adequacy of liquidity is determined by the ability to meet the cash flow requirements of both depositors and customers requesting bank credit. Asset/liability management within Keystone is governed by the Board of Directors (the Board). The Board delegates the responsibility of asset/liability management to the corporate Asset/Liability Management Committee (ALCO) whose representation includes both bank and holding company personnel. ALCO sets forth strategic directives which guide day-to-day asset/liability management initiatives. ALCO also reviews and approves all significant market risk, liquidity, long-term funding opportunities, and capital management programs. Interest Rate Risk Interest rate risk can be quantified by measuring the change in net interest margin relative to changes in market interest rates. Risk is identified by reviewing repricing characteristics of interest-earning assets and interest-bearing liabilities. Keystone's ALCO policy sets forth guidelines that limit the level of interest rate risk within specified tolerance ranges. Keystone utilizes a variety of techniques to measure and monitor interest rate risk, including the use of simulation analysis. In order to quantify the impact of changes in interest rates on net interest income, Keystone conducts quarterly interest rate shock simulations which quantify the impact of interest rate changes over periods of up to two years. These simulations are used to determine whether corrective action may be warranted or required in order to adjust the overall interest rate risk profile of Keystone. Keystone's asset/liability management policy limits interest rate risk exposure to 5% of net interest income for the succeeding twelve-month period and 8% for the succeeding twenty-four- month period. Simulations prepared as of December 31, 1998 for the ensuing twelve month and twenty-four month periods have measured potential reductions in net interest income of approximately 3% and 2%, respectively, well within Keystone's defined tolerance levels. Comparable measures as of December 31, 1997 were 1% for the twelve-month period and 2% for the twenty-four month period. Current simulations are prepared under the assumption that rates will increase 200 basis points or decrease 100 basis points over a three month period and then stabilize. Simulation results are influenced by a number of estimates and assumptions with regard to embedded options, prepayment behaviors, pricing strategies, cash flows, and others. Such assumptions and estimates are inherently uncertain and, as a consequence, results will neither precisely estimate net interest income nor precisely measure the impact of higher or lower interest rates on net interest income. The results of these simulations are reported to Keystone's Board of Directors on a quarterly basis. Management has determined that Keystone maintained a level of interest rate risk within its asset/liability management policy limits at December 31, 1998. Management augments rate shock simulations with GAP interest rate sensitivity analysis and with market value of portfolio equity (MVPE) computations. GAP is defined as the volume difference between interest rate-sensitive assets and liabilities. GAP is used by management to assist in evaluating the results of rate shock simulations to identify areas that may warrant corrective action, and to identify interest rate risk exposure for periods beyond one year. By utilizing GAP to monitor longer term interest rate risk, Keystone attempts to minimize fluctuations in net interest margin and thereby achieve consistent net interest income growth during periods of changing interest rates. MVPE is a more comprehensive measure that attempts to quantify the impact of aggregate interest rate risk exposure on the intrinsic value of financial institutions, and is particularly useful in quantifying the impact of changing interest rates on that intrinsic value. Analyses similar to those conducted for interest rate shock simulations are conducted for MVPE computations, with policy guidelines on the acceptable reduction in Keystone's intrinsic value under defined interest rate conditions. Under current guidelines, intrinsic value must exceed regulatory capital requirements for "well capitalized" institutions. Computations of Keystone's MVPE yielded intrinsic values well in excess of these limits, under both a 200 basis points increase or 100 basis points decrease in overall interest rates. This measurement tool, while valuable as a gauge of longer-term interest rate risk, has several limitations including: the intrinsic value of assets, liabilities and off-balance sheet instruments does not necessarily represent the fair value of the financial instruments since it does not include credit risk and liquidity; estimated cash flows are required for nonmaturity financial instruments; and the future structure of Keystone's balance sheet does not include ongoing loan and deposit activities from core business within the present value assessment. The following table provides an analysis of Keystone's interest rate sensitivity as measured under GAP at December 31, 1998 compared to 1997 (dollars in thousands):
December 31, 1998 December 31,1997 1 month 3 months 6 months 1 year 1 year - - ------------------------------------------------------------------ ---------------------------- Assets $1,383,118 $1,704,278 $2,029,396 $2,567,125 $3,017,875 Liabilities 1,703,836 2,592,327 2,996,943 3,514,717 3,313,948 Cumulative GAP (320,718) (888,049) (967,547) (947,592) (296,073) As a percent of total assets (4.60%) (12.74%) (13.89%) (13.60%) (4.33)% Gap ratio 0.81 0.66 0.68 0.73 0.91 - - ------------------------------------------------------------------ ----------------------------
While rate shock simulations, GAP analysis, and MVPE computations provide measures of interest rate risk, such presentations cannot accurately reflect all actual repricing opportunities which will occur within loan and deposit categories. The information provided by these analyses, however, provides some indication of the potential for interest rate adjustment, but does not necessarily mean that the rate adjustment will occur or that it will occur in accordance with the assumptions. Despite these inherent limitations, Keystone believes that the tools used to manage its level of interest rate risk provide an appropriate measure of market risk exposure. Liquidity Liquidity is defined as Keystone's ability to meet maturing obligations and customers' demand for funds on a continuous basis. Liquidity is sustained by stable core deposits, a diversified mix of liabilities, strong credit perception, and the maintenance of sufficient assets convertible to cash without material loss or disruption of normal operations. Keystone monitors liquidity through regular computations of prescribed liquidity ratios. Failure to meet the prescribed minimum standards for these ratios requires that management identify tactics which will ensure compliance with policy guidelines. Keystone actively manages liquidity within a defined range and has developed reasonable liquidity contingency plans, including ensuring availability of alternate funding sources to maintain adequate liquidity under a variety of business conditions. Keystone's primary sources of liquidity are funds derived through earnings and deposit balances. Liquidity is also provided by scheduled maturities of loans and investment securities, as well as the early payoff of customer loan balances. Liquidity may also be influenced by the volume and timing of securitizations, particularly mortgage loans. Consideration is given to the maturity of assets and expected future growth/funding needs when developing investment strategies. These liquidity sources may also be augmented by other forms of liability liquidity, such as FHLB borrowings, medium term notes, or other forms of term borrowings. For example, Keystone had $270 million available for the issuance of senior or subordinated debt securities at December 31, 1998 under an existing shelf registration filed with the Securities and Exchange Commission (SEC). Keystone's ability to access the capital markets was demonstrated in 1998 through the issuance of $30 million in senior medium-term notes near mid-year. Keystone's operating, investing, and financing activities are conducted within the overall constraints of Keystone's liquidity management policy. Parent company liquidity represents another important aspect of liquidity management. The parent company relies primarily on the bank subsidiary to provide funding for dividends to its shareholders and unallocated corporate expenses. The amount of dividends from the bank to the parent company is constrained by federal regulations, which have not historically limited Keystone's practices. Periodically, the parent company may also access other forms of funding to facilitate strategic corporate initiatives. Based upon the inherent strength and profitability of its bank subsidiary, holding company liquidity is deemed adequate. REGULATORY MATTERS Keystone and its affiliates are subject to periodic examinations by one or more of the various regulatory agencies. During 1998, examinations were conducted at the holding company and at Keystone's banking and nonbanking subsidiaries. These examinations included, but were not limited to, procedures designed to review lending practices, credit quality, liquidity, compliance, and capital adequacy. Reviews specifically designed to assess the status of Keystone's Y2K readiness were also conducted on a regular basis during the year by regulatory examiners. No comments were received from the various regulatory bodies which would have a material adverse effect on Keystone's liquidity, capital resources, or operations. INFLATION Keystone's ability to cope with the impact of inflation is best determined by an analysis of its ability to respond to changing interest rates and manage noninterest income and expense. As discussed in the asset/liability management section of this review, Keystone manages the mix of interest rate-sensitive assets and liabilities in order to limit the impact of changing interest rates on net interest income. Inflation also has a direct impact on noninterest income and expense, such as service fees, salary expense and benefits, and other overhead expenses. Inflationary pressures over the last several years have been modest, although the potential for future inflationary pressure is always present given changing trends in the economy. Management will continue to monitor the impact of these trends on the pricing of its products and services and on the control of overhead expenses. SEGMENT REPORTING Keystone's business segments are community banking, mortgage banking, and asset management services. These segments are managed separately because they offer distinctly different products distributed through different delivery channels. No customer of Keystone individually represents 10% or more of consolidated revenue and revenues from foreign customers are negligible. The community banking segment constituted over 90% of Keystone's revenue, profit, and assets for the years ended December 31, 1998, 1997 and 1996 and was the only reportable segment. As such, financial information for this segment does not differ materially from the information provided in the consolidated financial statements. 1997 vs 1996 Summary Performance during 1997 was significantly influenced by the expansion of Keystone's franchise during the year. The merger of Financial Trust Corp. (FTC) added another strategic partner in Keystone's expanding financial services marketplace while the acquisition of First Financial Corp of Western Maryland (FFWM) added important market share to Keystone's existing franchise in Maryland and West Virginia. The merger of FTC was accounted for as a pooling of interests and all prior periods were restated. The thrift institution acquired through the FFWM transaction was merged into an existing Keystone bank and was accounted for under the purchase method of accounting. Accordingly, the acquired assets and liabilities and results of operations of FFWM were included in combined results from May 29, 1997, and reflected approximately half of the growth in average earning assets and the majority of the increase in total deposits. Net income, which was affected by special charges incurred in connection with the FTC merger, was $87.9 million in 1997 versus $89.5 million in 1996, a decrease of 1.8%. Special charges, which included pre-tax merger expenses of $11.4 million as well as certain portfolio charges, reduced net income by $8.6 million, or $.17 per basic share. Excluding special charges, net income in 1997 was $96.5 million or $1.87 per basic share, compared to $89.5 million and $1.72 in 1996, an 8.7% improvement in basic earnings per share. Keystone's return on average assets (ROA) and return on average equity (ROE) were 1.33% and 13.27%, respectively, versus 1.44% and 14.09% in the prior year. Excluding the effect of the special charges, ROA and ROE were 1.46% and 14.54% in 1997. Total revenues, excluding security gains, grew 8.6%, including a 5.9% increase in net interest income and 18.7% growth in noninterest revenues. The growth in net interest income was stimulated by both increased loan volume and improvement in the proportionate mix of earning assets. The growth rate of noninterest revenues continued to be driven by new and expanded asset management activities, strength in mortgage banking performance, and successful electronic banking initiatives. Though improvements in credit quality were experienced through the course of the year, Keystone prudently increased its provision for credit losses and sustained a strong ratio of the allowance to loans of 1.38% at December 31, 1997 compared with 1.30% at the end of 1996. Operating expenses were influenced by 1997 merger activity, by investments in activities connected with the growth in fee income, and by ongoing improvement in Keystone's financial services delivery system. Interest Income Interest income grew 7.7% on the strength of slightly higher interest rates and steady growth in loans, driving an improved earning asset mix. Interest income grew to $520 million in 1997 from $482 million in 1996, an increase of $38 million. Interest income was influenced by expanded middle market businesses and retail customers, and included growth in commercial real estate loans and direct consumer credits of 23% and 27%, respectively. Growth in loans was also affected by balance sheet management and liquidity strategies. For example, a sale of approximately $259 million of mortgage loans was executed as a strategic component of Keystone's acquisition of FFWM. Keystone's focus on relationship banking, responsiveness to interest rates, and prudent liquidity management enabled it to achieve an increase in earning asset yields of 8.32% versus 8.20% in 1996. The 12 basis points improvement in yields, combined with a 6% increase in earning assets, allowed Keystone to sustain steady revenue growth. Interest Expense Improvement in net interest income must include increased levels of interest income combined with prudent management of both funding cost and capacity. While competitive pressures constrained deposit growth, deposit-gathering strategies have been augmented by self-funding securitization activities as well as prudent use of credit markets, most notably FHLB advances. Keystone's funding approach resulted in an increase in the overall funding costs from 4.33% in 1996 to 4.45% in 1997, a 12 basis points increase which was equal to the improvement in asset yields. Net Interest Income Combining the impact of yield on earning assets with the cost of funding sources results in interest spread. Net interest margin combines the impact of interest spread with both the investment of noninterest funding sources and the level of nonearning assets. In 1997, Keystone successfully sustained both its overall interest spread and its net interest margin. Interest spread was 3.87% in both 1997 and 1996. Similarly, net interest margin remained constant at 4.59% compared to 4.61% in 1996. Provision for Credit Losses The provision for credit losses grew by 43% during the year from $10.7 million in 1996 to $15.3 million in 1997. The provision was influenced by higher levels of consumer charge offs and the changing risk characteristics of Keystone's credit portfolio. Charge-offs were primarily affected by the evolving risk characteristics of consumer debt as reflected in higher levels of defaults and personal bankruptcy trends. Since the end of 1996, the allowance for credit losses expressed as a percentage of loans grew from 1.30% to 1.38%. Noninterest Income Revenue stream diversification has been directly influenced by Keystone's commitment to enhance its position as the "financial services provider of choice" in the markets in which it operates. This focus has manifested itself in an increasing higher relative contribution of noninterest revenues to the overall revenue stream. During 1997, noninterest revenues (excluding security transactions) accounted for 22.6% of aggregate revenues versus 20.7% in 1996. In total, noninterest revenues grew 18.7% over 1996 performance. Trust and investment advisory services, the largest single source of fee-based revenues within Keystone, was a major driver of the improved revenues and reflected 21% growth over 1996 performance. Assets under management within Keystone now exceed $3.5 billion, growth of nearly 10% since 1996. Such growth has been influenced by the emergence of Martindale Andres & Co. and the expansion of revenue sources through the acquisition of MMC&P. Keystone has been equally successful in enhancing its mortgage banking strategy. Originations during 1997 approached $300 million, reflecting a 5% increase over 1996. Residential mortgage loans serviced at the end of 1997 grew to nearly $1.9 billion. As a result of the growth in originations and loans serviced, mortgage banking revenues grew 31% during 1997. Deposit account service charges in 1997 were flat as compared to the prior year. In late 1996, Keystone had introduced its free checking option. This strategic initiative, which provided Keystone with a competitive position in its marketplace, constrained the rate of growth in deposit fee income. Similar to the strategies employed within both asset management and mortgage banking, Keystone has successfully leveraged its electronic banking configuration to improve related fee income growth. Growing demand for access to funds and technological innovations contributed to a $2.3 million increase in ATM and debit card fees. Surcharge fees also enabled Keystone to charge noncustomers who access their banks through Keystone's ATM network. These factors, along with other fee-based initiatives, resulted in growth to aggregate fee income of 26.5%. Noninterest Expense Noninterest expenses, exclusive of the special charges associated with the merger of FTC, rose to $214.6 million from $196.2 million, an increase of $18.4 million or 9.3%. Of the overall increase, approximately 26% was attributed to the absorption of the expense structures in both the FFWM and MMC&P acquisitions, both of which were accounted for under the purchase method of accounting. Core operating expenses, excluding the impact of acquisitions, grew approximately 7% virtually unchanged from the previous year. Special charges in connection with the merger of FTC totaled $11.4 million and included professional fees, integration and conversion expenses, and costs of various separation plans directly related to the merger. Salary expenses grew to $92.6 million versus $81.9 million in 1996, an increase of 13.1%. A portion of this increase was related to personnel additions from the FFWM and MMC&P transactions. On average, the number of full-time equivalent employees grew only 3% from 1996 to 1997, reflecting efficiency gains which offset employees added in the acquisitions. Other factors influencing the increase included average salary increases approximating 4% and Keystone's sales compensation program. This program was designed to provide additional incentive opportunities and manage compensation expenses at levels commensurate with revenue improvement. The cost control features of managed care have constrained the growth in benefit expenses while providing high-quality health care services. Keystone's ability to efficiently and effectively absorb employees through its merger and acquisition strategies has also enabled it to leverage its health care structure over a more substantial employee base. During 1997, Keystone expanded the use of technology-related delivery channels while, at the same time, subjecting its more traditional community office network to analysis which quantified the effectiveness and efficiency of product and service delivery. Technology investment in delivery channels included the expanded ATM network and Keystone's automated telephone banking network. The reconfiguration of delivery channels has also affected the most traditional and visible financial services outlet, the community banking office, and the occupancy expenses related thereto. During 1997, Keystone modified its delivery approach to certain markets by selling offices in these markets and relying on more effective and efficient alternative channels of delivery for providing products and services to customers within these markets. Other expenses grew to $69.5 million, or 6.1% compared with 1996, and were also affected by the impact of the purchase accounting for the FFWM and MMC&P transactions. Exclusive of the impact of the absorption of these expense structures, increases in specific categories included merchant banking expenses, postage, and communications-related costs, each of which were influenced by revenue-related activities or expansions of customer-focused product or service capabilities. Income Taxes Income tax expense reached $39 million in 1997, reflecting an effective tax rate of 30.7% versus 29.3% in 1996. Report of Ernst & Young LLP, Independent Auditors Shareholders and Board of Directors Keystone Financial, Inc. We have audited the accompanying consolidated statements of condition of Keystone Financial, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the management of Keystone Financial, Inc. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1996 financial statements of Financial Trust Corp, a wholly owned subsidiary, which statements reflect net interest income constituting 20% of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for Financial Trust Corp, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and, for 1996, the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Keystone Financial, Inc. and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Pittsburgh, Pennsylvania January 29, 1999
Consolidated Statements of Condition December 31, (in thousands, except share data) 1998 1997 - - ------------------------------------------------- -------------- -------------- ASSETS - - ------------------------------------------------- -------------- -------------- Cash and due from banks $190,622 $206,223 Federal funds sold 141,700 25,300 Interest-bearing deposits with banks 5,978 1,928 Investment securities available for sale 1,129,753 1,091,400 Investment securities held to maturity (fair values 1998 - $670,934; 1997- $538,218) 659,536 528,388 Loans held for resale 76,423 43,055 Loans and leases 4,459,783 4,712,566 Allowance for credit losses (60,274) (65,091) - - ------------------------------------------------- -------------- -------------- Net loans 4,399,509 4,647,475 Premises and equipment 124,080 116,615 Other assets 240,626 180,953 - - ------------------------------------------------- -------------- -------------- TOTAL ASSETS $6,968,227 $6,841,337 - - ------------------------------------------------- -------------- -------------- LIABILITIES - - ------------------------------------------------- -------------- -------------- Noninterest-bearing deposits $710,161 $637,164 Interest-bearing deposits 4,521,557 4,596,001 - - ------------------------------------------------- -------------- -------------- Total deposits 5,231,718 5,233,165 Federal funds purchased and security repurchase agreements 363,739 399,730 Other short-term borrowings 11,306 26,160 - - ------------------------------------------------- -------------- -------------- Total short-term borrowings 375,045 425,890 Federal Home Loan Bank Borrowings 427,027 248,150 Long-term debt 130,239 101,793 Other liabilities 142,533 146,854 - - ------------------------------------------------- -------------- -------------- TOTAL LIABILITIES 6,306,562 6,155,852 - - ------------------------------------------------- -------------- -------------- SHAREHOLDERS' EQUITY - - ------------------------------------------------- -------------- -------------- Preferred stock; $1.00 par value, authorized 8,000,000 shares; none issued or outstanding ----- ----- Common stock: $2.00 par value, authorized 100,000,000 shares; issued 51,448,335 - 1998 and 52,029,017 - 1997 102,897 104,058 Surplus 162,350 155,430 Retained earnings 424,873 418,605 Deferred KSOP benefit expense (553) (1,150) Treasury stock: 1,013,600 shares at cost - 1998 (34,186) ----- Accumulated other comprehensive income 6,284 8,542 - - ------------------------------------------------- -------------- -------------- TOTAL SHAREHOLDERS' EQUITY 661,665 685,485 - - ------------------------------------------------- -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,968,227 $6,841,337 - - ------------------------------------------------- -------------- -------------- The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Income Year Ended December 31, (in thousands except per share data) 1998 1997 1996 - - --------------------------------------------- ----------- ----------- ---------- INTEREST INCOME - - --------------------------------------------- ----------- ----------- ---------- Loans and fees on loans $401,949 $404,096 $370,364 Investments - taxable 93,955 82,664 79,977 Investments - tax-exempt 11,366 12,230 12,723 Federal funds sold and other 4,820 5,340 5,668 Loans held for resale 5,559 6,408 4,688 - - --------------------------------------------- ----------- ----------- ---------- 517,649 510,738 473,420 INTEREST EXPENSE - - --------------------------------------------- ----------- ----------- ---------- Deposits 193,087 194,898 186,257 Short-term borrowings 17,486 18,134 14,506 FHLB borrowings 21,507 14,677 10,175 Long-term debt 8,604 4,785 363 - - --------------------------------------------- ----------- ----------- ---------- 240,684 232,494 211,301 - - --------------------------------------------- ----------- ----------- ---------- NET INTEREST INCOME 276,965 278,244 262,119 Provision for credit losses 17,150 15,316 10,713 - - --------------------------------------------- ----------- ----------- ---------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 259,815 262,928 251,406 - - --------------------------------------------- ----------- ----------- ---------- NONINTEREST INCOME - - --------------------------------------------- ----------- ----------- ---------- Trust and investment advisory fees 25,906 21,291 17,597 Service charges on deposit accounts 18,443 17,356 17,234 Fee income 24,548 20,029 15,840 Mortgage banking income 12,412 9,633 7,334 Reinsurance income 3,167 3,512 2,864 Other income 13,319 12,040 9,785 Net gains - equity securities 10,306 5,754 529 Net gains - debt securities 712 317 342 - - --------------------------------------------- ----------- ----------- ---------- 108,813 89,932 71,525 - - --------------------------------------------- ----------- ----------- ---------- NONINTEREST EXPENSE - - --------------------------------------------- ----------- ----------- ---------- Salaries 97,443 92,650 81,894 Employee benefits 17,535 17,311 16,508 Occupancy expense, net 17,302 16,407 15,916 Furniture and equipment expense 20,567 18,732 16,156 Special charges ----- 11,410 ----- Other expense 70,342 69,480 65,771 - - --------------------------------------------- ----------- ----------- ---------- 223,189 225,990 196,245 - - --------------------------------------------- ----------- ----------- ---------- Income before income taxes 145,439 126,870 126,686 Income tax expense 45,692 38,953 37,180 - - --------------------------------------------- ----------- ----------- ---------- NET INCOME $99,747 $87,917 $89,506 - - --------------------------------------------- ----------- ----------- ---------- PER SHARE DATA - - --------------------------------------------- ----------- ----------- ---------- Net income: Basic $1.94 $1.70 $1.72 Diluted 1.92 1.68 1.70 Dividends 1.13 $1.06 $0.98 - - --------------------------------------------- ----------- ----------- ---------- The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity - - ----------------------------------------------------------------------------------------------------------------------------------- Issued and Deferred Outstanding KSOP Net Unrealized (in thousands) Common Common Retained Benefit Treasury Securities Shareholders' Shares Stock Surplus Earnings Expense Stock Gains Equity - - ----------------------------------------------------------------------------------------------------------------------------------- BALANCES AT JANUARY 1, 1996 38,069 $76,139 $139,886 $401,448 ($1,750) $ --- $6,043 $621,766 Net income --- --- --- 89,506 --- --- --- 89,506 Change in unrealized gain on available-for-sale securities --- --- --- --- --- --- (1,847) (1,847) ------- Comprehensive income 87,659 Dividends --- --- --- (46,998) --- --- --- (46,998) Stock issued: Stock split/dividend 14,004 28,009 (6,170) (21,938) --- --- --- (99) Benefit plans 137 273 2,561 --- --- --- --- 2,834 KSOP 12 24 278 --- --- --- --- 302 Dividend reinvestment 98 195 2,696 --- --- --- --- 2,891 Deferred KSOP benefit expense --- --- --- --- 501 --- --- 501 Acquisition of treasury stock (424) --- --- --- (9,915) --- (9,915) Reissuance of treasury stock 90 --- (38) --- --- 1,503 --- 1,465 - - ----------------------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1996 51,986 $104,640 $139,213 $422,018 ($1,249) ($8,412) $4,196 $660,406 Net income --- --- --- 87,917 --- --- --- 87,917 Change in unrealized gain on available-for-sale securities --- --- --- --- --- --- 4,346 4,346 ------- Comprehensive income 92,263 Dividends --- --- --- (55,964) --- --- --- (55,964) Stock issued: Benefit plans 524 1,048 8,178 --- --- --- --- 9,226 KSOP 28 56 763 --- --- --- --- 819 Dividend reinvestment 130 260 3,422 --- --- --- --- 3,682 Deferred KSOP benefit expense --- --- --- --- 523 --- --- 523 Acquisition of treasury stock (2,318) --- --- --- --- (72,586) --- (72,586) Reissuance of treasury stock 7 --- --- --- --- 182 --- 182 Retirement of treasury stock --- (2,290) (3,312) (35,366) --- 40,931 --- (37) Shares issued in acquisitions 1,672 344 7,166 --- (424) 39,885 --- 46,971 - - ----------------------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1997 52,029 $104,058 $155,430 $418,605 ($1,150) $ --- $8,542 $685,485 Net income --- --- --- 99,747 --- --- --- 99,747 Change in unrealized gain on available-for-sale securities --- --- --- --- --- --- (2,258) (2,258) ------- Comprehensive income 97,489 Dividends --- --- --- (58,195) --- --- --- (58,195) Stock issued: Benefit plans 255 511 4,570 --- --- --- --- 5,081 KSOP 20 40 637 --- --- --- --- 677 Dividend reinvestment 144 288 4,840 --- --- --- --- 5,128 Deferred KSOP benefit expense --- --- --- --- 597 --- --- 597 Acquisition of treasury stock (2,014) --- --- --- --- (74,597) --- (74,597) Retirement of treasury stock --- (2,000) (3,127) (35,284) --- 40,411 --- --- - - ----------------------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1998 50,434 $102,897 $162,350 $424,873 ($553) ($34,186) $6,284 $661,665 - - ----------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Cash Flows Year Ended December 31, (in thousands) 1998 1997 1996 - - ------------------------------------------------ -------------- ----------- ------------ OPERATING ACTIVITIES: Net income $99,747 $87,917 $89,506 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 17,150 15,316 10,713 Provision for depreciation and amortization 21,653 18,062 15,840 Deferred income taxes 4,770 14,537 14,880 Sale of loans held for resale 244,103 203,887 441,716 Origination of loans held for resale (285,974) (240,325) (365,209) (Increase) decrease in interest receivable 4,437 (4,459) (3,964) Increase (decrease) in interest payable 125 (567) (1) Other (31,669) 20,660 (6,391) - - ------------------------------------------------ -------------- ----------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 74,342 115,028 197,090 - - ------------------------------------------------ -------------- ----------- ------------ INVESTING ACTIVITIES: Net cash received in bank acquisitions ----- 35,646 ----- Net increase in interest-bearing deposits w/ banks (4,050) (25,363) (3,121) Available for sale securities: Sales 224,089 176,606 98,724 Maturities 1,174,685 855,464 1,208,804 Purchases (1,423,334) (891,694) (1,368,734) Held to maturity securities: Maturities 177,096 91,370 108,438 Purchases (308,589) (192,900) (103,268) Net (increase) decrease in loans 238,686 (343,350) (367,093) Proceeds from sales of loans 12,372 302,840 52,013 Purchases of loans (12,666) (11,947) (1,986) Purchases of bank-owned life insurance (50,230) ----- ----- Purchases of premises and equipment (24,366) (23,641) (16,870) Other (10,959) (6,404) (1,025) - - ------------------------------------------------ -------------- ----------- ------------ NET CASH USED IN INVESTING ACTIVITIES ( 7,266) (33,373) (394,118) - - ------------------------------------------------ -------------- ----------- ------------ FINANCING ACTIVITIES: Net increase (decrease) in deposits (1,447) (99,242) 66,113 Net increase (decrease) in short-term borrowings (50,845) 27,926 64,593 Proceeds from FHLB borrowings 273,000 242,313 420,892 Repayments of FHLB borrowings (94,122) (253,418) (360,715) Issuance of long-term debt 30,000 100,000 ---- Repayment of long-term debt (1,554) (780) (1,962) Acquisition of treasury stock (74,597) (72,586) (9,915) Cash dividends (58,195) (55,964) (46,998) Other 11,483 10,147 7,894 - - ------------------------------------------------ -------------- ----------- ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 33,723 (101,604) 139,902 - - ------------------------------------------------ -------------- ----------- ------------ INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 100,799 (19,949) (57,126) Cash and cash equivalents at beginning of year 231,523 251,472 308,598 - - ------------------------------------------------ -------------- ----------- ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $332,322 $231,523 $251,472 - - ------------------------------------------------ -------------- ----------- ------------ The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summarized Accounting Policies The accounting policies discussed below are followed consistently by Keystone Financial, Inc., and its subsidiaries (Keystone). These policies are in accordance with generally accepted accounting principles and conform to common practices in the banking industry. Nature of Operations: Keystone provides a wide range of financial services to a diverse client base through its bank and nonbank subsidiaries. The client base includes individual, business, public, and institutional customers primarily located in Pennsylvania, Maryland, and West Virginia. Lending services include secured and unsecured commercial loans, residential and commercial mortgages, installment loans, revolving consumer loans and lease financing. Deposit services include a variety of checking, savings, time, money market, and individual retirement accounts. Money management services are available to customers through a variety of techniques, all of which are designed to improve cash flow, control disbursements, and increase return on investments. A full spectrum of asset management services is offered by specialists, including administration of trusts and estates, investment management, administration of retirement and employee benefit plans, and other fiduciary responsibilities. Keystone's nonbanking subsidiaries perform specialized services including mortgage banking, discount brokerage services, investment advisor services, and reinsurance. Keystone is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by various regulatory authorities. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from the estimates, and such differences may be material to the financial statements. Principles of Consolidation: The consolidated financial statements include the accounts of: Keystone Financial, Inc., the parent company; its wholly-owned banking subsidiary, Keystone Financial Bank, N.A., and its subsidiaries, ATB Real Estate Investment Trust, Inc., Keystone Brokerage, Inc, and other nonbanking subsidiaries of Keystone consisting of Financial Trust Services Company, Key Trust Company, Keystone Financial Mid-Atlantic Funding Corp., Keystone Financial Unlimited, Inc., Keystone Investment Services, Inc., Keystone Life Insurance Company, Martindale Andres & Co., MMC&P Retirement Benefit Services, Inc. and two community development corporations. On December 31, 1998, Keystone combined its former seven separate banks into a single charter, Keystone Financial Bank, N.A. The seven former banks were American Trust Bank, N.A.; Financial Trust Company; Keystone Bank, N.A., Keystone National Bank; Mid-State Bank and Trust Company; Northern Central Bank; and Pennsylvania National Bank and Trust Company. All significant intercompany accounts have been eliminated in consolidation. Trading Account Assets: Securities classified as trading account assets are held for resale in anticipation of short-term market movements and are carried at fair value with market adjustments recorded against income. Keystone has made limited use of trading account portfolios. Investments: Keystone classifies its securities as either "held-to-maturity" or "available-for-sale" at the time of purchase. Debt securities are classified as held-to-maturity based upon management's positive ability and intent to hold such securities to maturity. Held-to-maturity securities are stated at cost, adjusted for amortization of premiums and accretion of discounts (amortized cost). Debt securities not classified as trading or held-to-maturity and marketable equity securities not classified as trading are classified as available-for-sale. Available-for-sale securities are stated at fair value, with unrealized gains and losses, net of tax, reported as a component of shareholders' equity. The cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of a mortgage-backed security, over the estimated life of the security. Such amortization/accretion, as well as interest and dividends, is included in interest income from investments. Realized gains and losses and declines in value judged to be other than temporary are included in net securities gains (losses). The cost of securities sold is based on the specific identification method, and sales are reported as of the trade date. Loans Held for Resale: Loans held for resale, primarily consisting of fixed-rate consumer mortgages, are valued at the lower of cost or market, determined on an aggregate basis. Mortgage Servicing Rights: An asset is recognized for mortgage servicing rights acquired through purchase or origination. Amounts capitalized are amortized in proportion to, and over the period of, estimated net servicing income. If mortgage loans are sold or securitized with servicing retained, the total cost of the mortgage loans is allocated to the loans and the servicing rights based on their relative fair values. Keystone performs a periodic review for impairment in the fair value of recorded mortgage servicing rights. Interest and Fees on Loans: Interest income on loans is accrued based upon the principal amount outstanding using methods that produce level yields. Loan origination fees and certain direct loan origination costs have been deferred and the net amount amortized as an adjustment of the related loan yield over the estimated contractual life of the related loans. Keystone places loans and leases on nonaccrual when collection of principal is in doubt, or when interest is 90 days past due, unless the loan is well-secured and in the process of collection. Classification of a loan as nonaccrual is also considered when the financial condition of the borrower is in a state of significant deterioration. When loans are placed on nonaccrual, including those identified as impaired, loan interest receivable is reversed. Interest payments received on these loans and leases are applied as a reduction of the principal balance when concern exists as to the ultimate collectability of principal; otherwise such payments are recognized as interest income. Loans and leases are removed from nonaccrual when they have performed in accordance with contract terms for a reasonable period of time and when concern no longer exists as to their collectability. Impaired Loans: Impaired loans are defined as those loans for which it is probable that contractual amounts due will not be received. Impaired loans are reported at the present value of expected future cash flows using the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The determination of impairment requires judgement including estimates of the amount and timing of cash flows. Loans included as components of risk elements are not deemed to be impaired when it is probable that contractual amounts due will be received through the normal collection process. Identification of impaired loans is the primary obligation of the credit extension function and is augmented by the normal loan review process. Factors which are considered in the identification of impaired loans include, but are not limited to: classification into nonaccrual or workout status; a history of payment delinquency; adverse industry trends; and a general understanding of a customer's financial status. An insignificant delay or payment shortfall, such as those attributable to seasonal payment waivers, would not necessarily require treatment as an impaired loan when other factors make it probable that contractual amounts will be received. The majority of loans classified as impaired on an individual basis are commercial loans and commercial loans secured by real estate. Other loans, such as residential real estate and consumer loans and leases are aggregated for the purpose of measuring impairment due to their homogeneous risk characteristics and their predilection for statistically valid historical analysis. Loans, including impaired loans, are charged-off when they are deemed to be substantially uncollectible. Direct Lease Financing: Financing of equipment, principally consisting of automobiles and business equipment, had been provided to customers under lease arrangements accounted for as direct financing leases. These leases are reported in the consolidated statements of condition under the loan caption as a net amount, consisting of the aggregate of lease payments receivable and estimated residual values, less unearned income. Income is recognized in a manner which results in an approximate level yield over the lease term. New lease activity since the beginning of 1998 has been limited pursuant to the curtailment of the indirect automobile leasing program and the sale of the business equipment leasing operation. Allowance for Loan Losses: The allowance for loan losses is established through provisions charged against income. Loans deemed to be uncollectible are charged against the allowance and recoveries of previously charged-off loans are credited to the allowance. Management's determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. This evaluation is inherently subjective as it requires material estimates, including, but not limited to, the amounts and timing of expected future cash flows or the fair value of collateral on impaired loans, estimated losses on installment and residential mortgage loans, and general amounts for historical loss experience, economic conditions, known deterioration in certain classes of loans or collateral, trends in delinquencies, uncertainties in estimating losses, and inherent risks in the various portions of the loan portfolio, all of which may be susceptible to significant change. In determining the adequacy of the allowance for loan losses, management makes allocations to specific problem commercial loans based on the present value of expected future cash flows or the fair value of the underlying collateral for impaired loans and to pools of other commercial loans based on various credit risk factors. Allocations to loan pools are developed by internal risk rating and are based on management's judgment concerning historical loss trends and other relevant factors. Installment and residential mortgage loan allocations are made at a total portfolio level based on historical loss experience adjusted for portfolio activity and current conditions. While allocations are made to specific loans and pools of loans, the allowance is available for all loan losses. While the Company's allowance methodology strives to reflect all risk factors, there continues to be a certain element of risk arising in part from, but not limited to, potential for estimation or judgmental errors, charge-off volatility, rapid declines in the credit quality of assets arising from such factors as fraud, portfolio management risks, or sudden economic or industry shifts. Unallocated amounts of the allowance provide coverage for such risks. The level of total allowance is evaluated based on the facts known about the individual components and certain asset quality coverage ratios. Financial Derivatives and other Hedging Activity: Interest rate swap contracts are utilized to hedge specific credit and/or funding activities, and the differential of interest paid or received is reflected in the interest income or expense of the hedged item. The fair values of these swap contracts have been appropriately disclosed in a footnote to these financial statements and have not been recognized in the financial statements. Forward mortgage commitments, and other hedging vehicles have been used to reduce the market risk associated with interest rate fluctuations, most notably in connection with the hedge of the pipeline of fixed rate consumer mortgages. Changes in the market value of the forward mortgage commitments, are recognized in income when the related changes in the fair values of the loans being hedged are recognized. In June of 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement provides new accounting treatment for derivatives transactions and hedging activities. The standard will be effective for Keystone on January 1, 2000. Adoption of the standard is not expected to have a significant impact on Keystone's financial condition or results of operations. Transfers and Servicing of Financial Assets and Extinguishment of Liabilities: In June 1996, the Financial Accounting Standards Board issued Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement provided new accounting and reporting standards for sales, securitizations and servicing of receivables and other financial assets, for certain secured borrowing and collateral transactions, and for extinguishment of liabilities. Provisions of this standard have not had a significant impact on Keystone's financial condition or results of operations. Premises and Equipment: Bank premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed generally on the straight-line method over the estimated useful lives of the related assets. On January 1, 1998, Keystone adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". This statement requires the capitalization of certain computer software costs incurred during the application development stage of internal use software. The adoption of this statement did not have a material impact on Keystone's financial condition or results of operations. Intangible Assets: Intangible assets, consisting primarily of goodwill and core deposit intangibles, are stated at cost, less accumulated amortization. Amortization of goodwill is generally recognized on the straight-line method over periods ranging from 15-25 years. Amortization of core deposit intangibles is recognized on an accelerated basis, generally over a ten-year period. Intangible assets are reviewed periodically for impairment. Other Real Estate: Other real estate is comprised of property acquired through a foreclosure proceeding or an acceptance of a deed in lieu of foreclosure. Balances are carried at the lower of the related loan balance or estimated fair value less estimated disposition costs. Any losses realized upon disposition of the property, and holding costs prior thereto, are charged against income. Trust Assets and Income: Assets held in a fiduciary capacity are not assets of the company and are therefore not included in the consolidated financial statements. Stock Based Compensation: Stock options and shares issued under the Employee Stock Purchase Plan are accounted for under Accounting Principles Board Opinion (APB) No. 25. Stock options are granted at exercise prices not less than the fair value of the common stock on the date of grant. Under APB 25, no compensation expense is recognized related to these plans. The pro forma impact to net income and earnings per share that would occur if compensation expense was recognized based on the estimated fair value of the options and purchase rights on the date of the grant is disclosed in the notes to the consolidated financial statements. Pensions: In 1998, Keystone adopted Financial Accounting Standards Board Statement No. 132, "Employers' Disclosures about Pensions and Other Post- retirement Benefits". This statement requires revised disclosures about pension and other post-retirement benefit plans but does not impact the measurement or recognition of those plans. As such, adoption of this statement did not impact Keystone's financial condition or results of operations. Disclosures for 1997 and 1996 were restated in accordance with this new statement. The provision for pension expense was actuarially determined using the projected unit credit actuarial cost method. The funding policy is to contribute an amount sufficient to meet the requirements of ERISA, subject to Internal Revenue Code contribution limitations. Income Taxes: The provision for income taxes is based on the results of operations and the impact of tax rate changes on the carrying amount of deferred tax assets and liabilities. In computing the tax liability, the results of operations are adjusted principally for the tax effect of tax-exempt income. Comprehensive Income: During 1998, Keystone adopted Financial Accounting Standards Board Statement 130, "Reporting Comprehensive Income", which required reclassification of financial statements for earlier periods. Sources of comprehensive income not included in net income are limited to unrealized gains and losses on certain investments in debt and equity securities. Reclassifications: Certain amounts reported in the 1997 annual report have been reclassified to conform with the 1998 presentation. These reclassifications did not impact Keystone's financial condition or results of operations. Per Share Information: Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is calculated by increasing the denominator for the assumed conversion of all potentially dilutive securities. Keystone's dilutive securities are limited to stock options granted under various incentive plans. Historical shares outstanding and per share data have been restated to reflect the 1996 three-for-two stock split. Treasury Stock: The acquisition of treasury stock is recorded under the cost method. The subsequent disposition or sale of the treasury stock is recorded using the average cost inventory method. Segment Reporting: In 1998, Keystone adopted Financial Accounting Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information". This statement established standards for reporting information about operating segments and related disclosures about products and services, geographic areas, and major customers. The adoption of this new standard did not affect Keystone's financial condition or results of operations. Cash Flow Information: Keystone considers cash and due from banks and federal funds sold as cash and cash equivalents. Interest paid on deposits and other borrowings aggregated $240,888,000, $233,061,000, and $211,302,000, in 1998, 1997, and 1996, respectively. Cash payments for income taxes approximated $39,830,000, $19,253,000, and $23,898,000 for 1998, 1997, and 1996, respectively. 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):
1998 Available-for-Sale - - -------------------------------------- ------------------------------------------------ Amortized Unrealized Cost Gains Losses Fair 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 Cost Gains Losses Fair Value - - -------------------------------------- ------------ ---------------------- ------------ U.S. Government agency obligations $500,418 $5,936 $135 $506,219 Obligations of states and political subdivisions 146,018 5,333 158 151,193 Corporate and other securities 13,100 422 --- 13,522 - - -------------------------------------- ------------ ---------- ----------- ------------ Total $659,536 $11,691 $293 $670,934 - - -------------------------------------- ------------ ---------- ----------- ------------
1997 Available-for-Sale - - -------------------------------------- ---------------------------------------------- Amortized Unrealized Cost Gains Losses Fair 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 Cost Gains Losses Fair Value - - --------------------------------------- ------------ ------------------- ------------ U.S. Government agency obligations $366,238 $4,928 $150 $371,016 Obligations of states and political 143,910 4,845 5 148,750 subdivisions Corporate and other securities 18,240 230 18 18,452 - - --------------------------------------- ------------ --------- --------- ------------ Total $528,388 $10,003 $173 $538,218 - - --------------------------------------- ------------ --------- --------- ------------
1996 Available-for-Sale - - -------------------------------------- ------------------------------------------------ Amortized Unrealized Cost Gains Losses Fair Value - - -------------------------------------- ------------- --------------------- ------------ Negotiable money market investments $194,566 $15 $15 $194,566 U.S. Treasury securities 244,010 1,083 551 244,542 U.S. Government agency obligations 561,245 2,817 4,624 559,438 Obligations of states and political 101,992 1,669 141 103,520 subdivisions Corporate and other securities 101,846 6,324 142 108,028 - - -------------------------------------- ------------- ----------- --------- ------------ Total $1,203,659 $11,908 $5,473 $1,210,094 - - -------------------------------------- ------------- ----------- --------- ------------ 1996 Held-to-Maturity - - -------------------------------------- ------------------------------------------------ Amortized Unrealized Cost Gains Losses Fair Value - - -------------------------------------- ------------- --------------------- ------------ U.S. Government agency obligations $230,402 $1,997 $1,680 $230,719 Obligations of states and political 134,194 3,308 135 137,367 subdivisions Corporate and other securities 15,362 156 78 15,440 - - -------------------------------------- ------------- ----------- --------- ------------ Total $379,958 $5,461 $1,893 $383,526 - - -------------------------------------- ------------- ----------- --------- ------------
Investment securities having a carrying value of $893,097,000 at December 31, 1998, were pledged to secure public and trust deposits, treasury tax and loan activity, discount window and FHLB borrowings, and security repurchase agreements. Pre-tax security gains and losses included in operating results from 1996 through 1998 were as follows (in thousands): 1998 1997 1996 - - -------------------- --------------- -------------- --------------- Gains $11,148 $6,847 $980 Losses (130) (776) (109) - - -------------------- --------------- -------------- --------------- Net $11,018 $6,071 $871 - - -------------------- --------------- -------------- --------------- The following tables display at December 31, 1998, the contractual maturities, amortized costs, related fair values, and the weighted average yield (tax- equivalent basis) available thereon, of investment securities (in thousands):
Available for Sale - - -------------------------------------------------------------------------------------------------------------- After One, Within One Year But Within Five Years Amortized Fair Amortized Fair Cost Value Yield Cost Value Yield - - -------------------------------------------------------------------------------------------------------------- Negotiable money market investments $290,954 $290,975 4.99% $ --- $ --- ---% U.S. Treasury securities 54,577 54,821 6.25 67,578 68,567 5.67 Government agency obligations 31,191 31,349 6.44 312,514 313,773 5.82 Obligations of states and political subdivisions 4,612 4,676 5.54 23,557 24,185 4.92 Corporate and other securities 6,769 6,831 6.45 14,760 14,929 6.31 - - -------------------------------------------------------------------------------------------------------------- Total $388,103 $388,652 5.32% $418,409 $421,454 5.77% - - --------------------------------------------------------------------------------------------------------------
Held to Maturity - - -------------------------------------------------------------------------------------------------------------- After One, Within One Year But Within Five Years Amortized Fair Amortized Fair Cost Value Yield Cost Value Yield - - -------------------------------------------------------------------------------------------------------------- Government agency obligations $ 2,086 $ 2,106 6.23% $191,297 $193,698 6.37% Obligations of states and political subdivisions 8,015 8,137 5.68 14,275 14,868 5.61 Corporate and other securities - - - 12,964 13,386 6.63 - - -------------------------------------------------------------------------------------------------------------- Total $ 10,101 $ 10,243 5.79% $218,536 $221,952 6.34% - - --------------------------------------------------------------------------------------------------------------
Available for Sale - - --------------------------------------------------------------------------------------------------------------- After Five, But Within Ten Years After Ten Years Amortized Fair Amortized Fair Cost Value Yield Cost Value Yield - - --------------------------------------------------------------------------------------------------------------- Negotiable money market investments $ --- $ --- ---% $ --- $ --- ---% U.S. Treasury securities --- --- --- --- --- --- Government agency obligations 36,305 36,505 6.37 166,442 166,945 6.39 Obligations of states and political subdivisions 18,306 19,007 5.18 9,516 9,824 5.34 Corporate and other securities 250 250 7.54 82,754 87,116 6.68 - - -------------------------------------------------------------------------------------------------------------- Total $ 54,861 $ 55,762 5.97% $258,712 $263,885 6.45% - - --------------------------------------------------------------------------------------------------------------
Held to Maturity - - -------------------------------------------------------------------------------------------------------------- After Five, But Within Ten Years After Ten Years Amortized Fair Amortized Fair Cost Value Yield Cost Value Yield - - -------------------------------------------------------------------------------------------------------------- Government agency obligations $123,659 $125,438 6.50% $183,376 $184,977 6.47% Obligations of states and political subdivisions 15,714 16,423 5.50 108,014 111,765 5.33 Corporate and other securities 136 136 9.00 --- --- --- - - -------------------------------------------------------------------------------------------------------------- Total $139,509 $141,997 6.39% $291,390 $296,742 6.05% - - --------------------------------------------------------------------------------------------------------------
Loans and Leases The composition of loans and leases was as follows at December 31, (in thousands):
1998 1997 - - ----------------------------------------------------------- ------------ --- ------------ Consumer financings: - - ----------------------------------------------------------- ------------ --- ------------ Direct loans $904,178 $884,226 Indirect loans 187,818 334,504 Net investment in direct lease financing receivables 235,884 335,017 - - ----------------------------------------------------------- ------------ --- ------------ 1,327,880 1,553,747 Loans secured by real estate: Consumer 754,280 862,227 Commercial 1,530,449 1,384,923 - - ----------------------------------------------------------- ------------ --- ------------ 2,284,729 2,247,150 Commercial 679,412 708,480 Floor plan financing 167,762 203,189 - - ----------------------------------------------------------- ------------ --- ------------ Total $4,459,783 $4,712,566 - - ----------------------------------------------------------- ------------ --- ------------
At December 31, 1998, substantially all of the consumer real estate loans outstanding were pledged under blanket collateral agreements to secure outstanding Federal Home Loan Bank borrowings. No industry concentrations exist. Activity within the allowance for credit losses was summarized as follows (in thousands):
1998 1997 1996 - - --------------------------------------------- ---------- - ---------- - ---------- Balance at January 1 $65,091 $56,256 $55,415 Recoveries on loans previously charged off 2,968 2,485 2,393 Loans charged off (24,058) (17,277) (12,265) Net loans charged off (21,090) (14,792) (9,872) Provision charged to operations 17,150 15,316 10,713 Other (877) 8,311 ----- - - --------------------------------------------- ---------- - ---------- - ----------- Balance at December 31 $60,274 $65,091 $56,256 - - --------------------------------------------- ---------- - ---------- - -----------
Total nonaccrual and restructured loan balances and related annual interest data were as follows (in thousands):
1998 1997 1996 - - --------------------------------------- --------- --- ------------ --- ---------- Nonaccrual $24,675 $20,520 $19,350 Restructured 264 489 393 - - --------------------------------------- --------- --- ------------ --- ---------- Total $24,939 $21,009 $19,743 - - --------------------------------------- --------- --- ------------ --- ---------- Interest computed at original terms $2,385 $2,144 $1,896 Interest recognized 361 473 598 - - --------------------------------------- --------- --- ------------ --- ----------
At December 31, 1998, there were no significant commitments to lend additional funds on these loans. The following is a summary presentation of loans that are considered to be impaired: - - ------------------------------------------------------------- --------- -------- At December 31, 1998 1997 1996 - - ------------------------------------------------------------- --------- -------- Recorded investment in impaired loans $20,647 $16,730 $17,300 Impaired loans for which an allowance exists 5,091 12,805 7,375 Amount of allowance specifically allocated to impaired loans 3,131 1,540 1,560 For the years ended December 31, 1998 1997 1996 - - ------------------------------------------------------------- -------- --------- Average recorded investment in impaired loans $18,689 $17,015 $17,501 - - ------------------------------------------------------------- -------- --------- Certain directors and executive officers of Keystone and its subsidiaries, and their associates, were indebted to the bank subsidiaries during 1998. Such loans were made in the ordinary course of business and on customary terms. Loan activity during 1998 with these related parties was as follows (in thousands): Beginning Balance Additions Repayments Ending Balance - - --------------------- ------------------ ----------------- ----------------- $179,377 $201,889 $202,529 $178,737 Financial Derivatives, Hedging Activity, and Commitments Keystone engages in activities associated with the use of off-balance sheet derivative financial instruments (derivatives) and hedges to manage its exposure to changes in interest rates. Activities have included interest rate swap activity, forward commitments for mortgage banking inventory management, the use of short sales and put options to hedge against the potential deterioration in the value of indirect auto financings held for sale, loan commitments and standby letters of credit made in the ordinary course of its banking business. In managing net interest income, Keystone uses interest rate swaps to offset the difference or mismatch in repricing indices of core banking assets and related funding. The risk associated with potential reductions in net interest income attributable to this mismatch is broadly defined as "basis risk". At December 31, 1998, interest rate swaps totaling $250,000,000 (notional amount) were used to manage this component of risk to net interest income performance. Another form of interest rate risk managed through specific hedging activity at December 31, 1998, related to outstanding forward mortgage commitments and put options related to the mortgage banking pipeline. Under the terms of these commitments, Keystone agreed to deliver a specified volume of mortgage loans with a specified portfolio yield, and received a pre-established price commitment pursuant to timely delivery of the mortgage loans. The purpose of these arrangements is to manage the effect of interest rate changes on these loans between the date of the original loan commitment and the date of delivery for sale into the secondary market. At December 31, 1998, Keystone had entered into commitments to deliver approximately $95,064,000 of mortgage loans for sale into the secondary market. The fair value of these commitments at December 31, 1998, was $826,000 and was considered in the lower of cost or market evaluation of loans held for sale. The delivery dates for these commitments are short-term in nature and will expire at various dates in the first half of 1999. Keystone is a party to financial instruments with off-balance sheet risk used in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Keystone's maximum exposure to credit loss in the event of nonperformance by the counter party to the financial instrument for the loan commitments and standby letters of credit is the contractual or notional amount of those instruments. Keystone uses the same policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount and nature of collateral obtained, if deemed necessary, is based on management's credit evaluation of the counter party. Standby letters of credit are agreements used by Keystone's customers as a means of improving their credit standings in dealing with others. Under these agreements, Keystone guarantees certain financial commitments of its customers. Outstanding commitments for loans and standby letters of credit were as follows as December 31 (in thousands): 1998 1997 - - --------------------------- ------------ ------------ Loan commitments $1,091,657 $1,027,782 Standby letters of credit 73,843 75,574 - - --------------------------- ------------ ------------ Premises and Equipment The following summarizes premises and equipment at December 31, (in thousands): 1998 1997 - - ---------------------------------------------- ----------- ------------ Land $12,562 $12,801 Buildings 99,702 97,298 Equipment 120,564 108,169 Leasehold improvements 15,544 15,741 - - ---------------------------------------------- ----------- ------------ 248,372 234,009 Accumulated depreciation and amortization (124,292) (117,394) - - ---------------------------------------------- ----------- ------------ Total $124,080 $116,615 - - ---------------------------------------------- ----------- ------------ Depreciation and amortization expense related to premises and equipment amounted to $16,056,000 in 1998, $14,554,000 in 1997, and $13,058,000 in 1996. Keystone and its subsidiaries lease various equipment and buildings under operating lease agreements. In 1998, 1997, and 1996, total rent expense amounted to $8,203,000, $7,377,000, and $7,956,000, respectively. Future annual minimum lease payments do not significantly exceed historic levels. Federal Home Loan Bank Borrowings Keystone Financial Bank, N.A. is a member of the Federal Home Loan Bank (FHLB) of Pittsburgh and, as such, can take advantage of the FHLB program for overnight and term advances at published daily rates. Under the terms of a blanket collateral agreement, advances from the FHLB are collateralized by first mortgage loans and securities. Advances available under this agreement are limited by available and qualifying collateral and the amount of FHLB stock held by the borrower. At December 31, 1998, Keystone's member bank could borrow an additional $826,684,000 based on qualifying collateral. Such additional borrowing would require that the bank increase its investment in FHLB stock by approximately $90,000,000. Outstanding borrowings from the Federal Home Loan Bank are summarized as follows (in thousands): December 31, 1998 1997 - - ------------------------------------ -------------- ------------ Due 1998, 5.45% to 7.71% $------ $57,957 Due 1999, 4.75% to 6.51% 64,268 49,286 Due 2000, 4.77% to 6.51% 80,831 70,830 Due 2001, 4.73% to 6.80% 67,000 6,000 Due 2002, 5.25% to 6.08% 60,550 60,550 Due 2003, 5.71% to 7.23% 7,768 2,893 After 2003, 1.00% to 7.20% 146,610 634 - - ------------------------------------ -------------- ------------ $427,027 $248,150 - - ------------------------------------ -------------- ------------ Of the December 31, 1998 outstanding balance, $307,400,000 was either adjustable or subject to conversion. Of this amount, $10,000,000 was adjustable with LIBOR. The remaining $297,400,000 are advances which are subject to conversion to adjustable rates at the option of the FHLB at various dates in 2001 and 2003. In the event the FHLB elects to convert these advances to adjustable rates, Keystone has the option to prepay the borrowings without penalty. Long-term Debt Long-term debt at December 31 consisted of the following (in thousands): 1998 1997 - - --------------------------------------------------- --------- ------------ Senior medium-term notes: Interest at 7.3%, mature 2004 $99,812 $99,777 Interest at 6.5%, mature 2008 29,876 --- Other 551 2,016 - - -------------------------------------------------- ---------- ------------ Total $130,239 $101,793 - - -------------------------------------------------- ---------- ------------ Keystone Financial Mid-Atlantic Funding Corp., a wholly-owned funding subsidiary of Keystone, issued $100 million of senior medium term notes in 1997 and an additional $30 million in 1998 under a $400 million shelf registration statement. The notes provide for semi-annual interest payments at a fixed rate and are unconditionally guaranteed by Keystone. The proceeds from the issuance of the notes were used primarily for general corporate purposes. Contingencies Keystone and its subsidiaries are subject to various legal proceedings that arise in the ordinary course of business. In late 1997, an investment advisor not affiliated with Keystone ("investment advisor") was accused by the Securities and Exchange Commission of defrauding its clients, which were primarily school districts and municipalities, resulting in losses alleged to approximate $70 million. A Keystone subsidiary had been previously engaged to maintain custody of certain funds and investments of the unaffiliated investment advisor. In an effort to recover the alleged losses, legal proceedings were subsequently initiated by the court-appointed trustee for the investment advisor and by its clients. These proceedings included individual and class actions against Keystone, its subsidiaries, and some of its employees alleging that these entities or individuals were responsible for, and contributed to, the loss. Management is vigorously contesting these actions. The loss, if any, to Keystone or its subsidiaries resulting from the actions cannot be reasonably estimated at this time. Because of the complexity of these actions, it is expected that final resolution of these matters will not occur for a number of years. Shareholders' Equity Series A Junior Participating Preferred Stock (Preferred Stock) (par value $1.00 per share, with voting powers and dividends and liquidation rights per share equal to 187.5 times that of the current common stock) has been established in connection with the adoption of a Shareholders' Rights Plan (Rights Plan). Under the Rights Plan, 200,000 shares of Preferred Stock are reserved for issuance on the exercise of rights attached to the outstanding common stock. The rights are exercisable only if a person or group acquires or announces a tender or exchange offer to acquire 20% or more of Keystone's common stock. In the event a person or group acquires a 20% position, each right not owned by the person or group will entitle its holder to purchase at the exercise price of $70.00, a number of shares of common stock, 5.333 one-thousandths (0.005333) of a share of Preferred Stock, or other securities or assets of Keystone or common shares of the acquiring company having a market value equal to twice the exercise price. At any time after a person or group acquires 20% or more (but less than 50%) of the outstanding common stock, the Board of Directors may exchange part or all of the rights (other than the rights held by the person or group) for shares of common or 5.333 one-thousandths of a share of Preferred Stock on a one-for-one basis. The Board of Directors is entitled to redeem the rights at any time before a 20% position has been acquired. Unless extended, the rights will expire on February 8, 2000. Stock-based Compensation Keystone provides eligible employees and directors with various stock option and stock purchasing plans which are more fully described below. Keystone has an employee "Stock Incentive Plan" and a "Nonemployee Directors' Stock Option Plan." Under the terms of these plans, Keystone has reserved for issuance a total of 2,875,000 shares of common stock for qualifying employees and nonemployee directors, of which approximately 2,572,000 are available for future grants. The plans provide for the issuance of nonqualified options and, under the employee plan, incentive stock options. Options are granted at an exercise price not less than the fair market value of Keystone common stock on the date of grant, vest in two years, and expire approximately ten years after the grant date. Keystone also has outstanding options pursuant to predecessor plans and plans of acquired banks. The following table provides a summary of options outstanding under the "Stock Incentive Plan," the "Nonemployee Directors' Stock Option Plan", and other predecessor or acquired plans. Weighted Average Exercise Common Price Shares - - ---------------------------- ------------ ------------ January 1, 1996 $17.92 1,825,636 Granted 21.09 312,636 Exercised 10.60 (83,966) Terminated 20.88 (51,146) - - ---------------------------- ------------ ------------ December 31, 1996 $18.62 2,003,160 - - ---------------------------- ------------ ------------ Granted $25.40 307,339 Exercised 16.30 (443,815) Terminated 23.16 (21,926) - - ---------------------------- ------------ ------------ December 31, 1997 $19.61 1,844,758 - - ---------------------------- ------------ ------------ Granted $40.03 244,651 Exercised 15.66 (221,845) Terminated 33.23 (27,552) - - ---------------------------- ------------ ------------ December 31, 1998 $22.62 1,840,012 - - ---------------------------- ------------ ------------ The following table summarizes information about stock options outstanding at December 31, 1998: Options Outstanding Options Exercisable - - -------------------------------------------------------------------------------- Weighted- Average Weighted- Weighted- Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life (years) Price Exercisable Price - - -------------------------------------------------------------------------------- $4.95 - $10.50 159,252 2.58 $8.71 159,252 $8.71 $11.13 - $16.74 187,703 2.49 $14.71 177,567 $14.63 $18.03 - $24.75 991,268 5.26 $21.53 991,225 $21.52 $25.00 - $29.87 272,114 8.02 $25.40 22,576 $25.00 $34.44 - $41.06 229,675 8.66 $40.13 9,823 $37.82 - - ------------------------------------------------------------------------------- $4.95 - $41.06 1,840,012 5.58 $22.62 1,360,443 $19.30 - - ------------------------------------------------------------------------------- Options exercisable at the end of 1997 and 1996 were 1,192,657 and 1,333,422, respectively. Under the "Employee Stock Purchase Plan", eligible employees are provided an opportunity to purchase Keystone common stock at a discount from market price. The Plan provides for the purchase of stock through payroll deductions at a price which is the lesser of 85% of the fair market value of the common stock as of the first or last day of the annual purchase period. The purchase period commences on July 1 and ends on June 30. Keystone has reserved 750,000 shares of common stock, of which 459,000 remain available for future purchases. The amount of common shares issued under this program in 1998, 1997, and 1996 were as follows: Price Shares Per Share Issued - - -------------------------- ------------------ ------------ 1998 $26.24 99,980 1997 $19.20 94,195 1996 $15.79 97,196 The following pro forma amounts indicate the net income and earnings per share that would have resulted if compensation expense for the stock option plans and employee stock purchase plan was determined under the recognition provisions of Statement No. 123 using the fair value of the awards at the grant date.
1998 1997 1996 - - ------------------------------ ------------------------ --------- ---------- ---------- Net Income (in thousands): As reported $99,747 $87,917 $89,506 Pro forma 97,773 86,457 88,348 Diluted earnings per share: As reported $1.92 $1.68 $1.70 Pro forma 1.88 1.65 1.68 - - ------------------------------ ------------------------ --------- ---------- ----------
Information regarding the weighted-average grant-date fair values for stock options and purchase rights granted in 1998, 1997, and 1996 were as follows: Assumptions ------------------------------------- Grant Date Fair Value (Per Option Dividend Expected Interest /Share) Yield Volatility Rates Life - - ------------------------------ ------------------------------------------------- Stock option plans: 1998 $7.95 2.8% 15% 5.63% 7yrs 1997 $4.20 4.2% 15% 6.37% 7yrs 1996 $3.01 4.6% 15% 5.50% 7yrs Employee stock purchase plan: 1998 $7.62 3.5% 15% 5.63% 1yr 1997 $6.30 4.5% 15% 5.63% 1yr 1996 $4.28 4.1% 12% 5.75% 1yr - - ------------------------------ ------------------------------------------------- The fair values were estimated using the Black-Scholes model. This model is predominantly used to value traded options, which differ from Keystone's options, and requires the use of numerous assumptions, many of which are subjective in nature. Therefore, the pro forma results are estimates of the impact to operations if compensation expense had been recognized for all stock based compensation plans and are not indicative of the impact on future periods. Keystone also has a Management Stock Ownership Program (the "Program") which is intended, among other things, to promote alignment of management and shareholder interests and to encourage management to focus on value creation. To accomplish these purposes, the Program establishes stock ownership goals for executive and senior officers of the Corporation to be achieved over a five-year period. In order to assist the officers in attaining their stock ownership goals, a related plan provides for nonrecourse, noninterest-bearing loans, in amounts not to exceed 50% of the officer's stock ownership goal, to be used to purchase shares of Keystone common stock at fair market value. The loans are secured by collateral having an initial value of 120% of the loan amount and consisting of the shares of Keystone stock purchased with the loan plus additional shares of stock or other acceptable collateral owned by the executive. At December 31, 1998 and 1997, the amount executives participating in the Program owed Keystone for financed purchases totaled $2,064,000 and $1,709,000, respectively. Keystone has a dividend reinvestment plan for shareholders under which additional shares of Keystone common stock may be purchased at market value with reinvested dividends and voluntary cash payments. Keystone has reserved 900,000 shares of common stock for this Plan, and approximately 192,000 shares remain unissued. The following number of shares of Keystone common stock were purchased pursuant to this plan: 144,000 in 1998, 130,000 in 1997, and 98,000 in 1996. Employee Benefit Plans Keystone provides a noncontributory defined benefit pension plan covering substantially all full-time employees. Plan benefits are based on years of service and qualifying compensation during the final years of employment. The following table summarizes the activity in the pension plan for the years ended December 31, (in thousands): 1998 1997 - - -------------------------------------------------------- ----------- ----------- Projected benefit obligation, beginning of year $84,890 $75,060 Service cost 3,268 2,907 Interest cost 5,780 5,458 Benefits paid (4,028) (4,243) Change in assumptions 1,309 4,500 Amendments (566) (97) Experience loss 717 1,305 - - -------------------------------------------------------- ----------- ----------- Projected benefit obligation, end of year $91,370 $84,890 - - -------------------------------------------------------- ----------- ----------- Fair value of plan assets at beginning of year $106,239 $89,560 Actual return on assets (2,766) 20,922 Benefits paid (4,028) (4,243) - - -------------------------------------------------------- ----------- ----------- Fair value of plan assets at end of year $99,445 $106,239 - - -------------------------------------------------------- ----------- ----------- Funded status at end of year $8,075 $21,349 Unrecognized net assets at transition (2,510) (3,137) Unrecognized net gain (111) (12,839) Unrecognized prior service cost (1,702) (1,497) - - -------------------------------------------------------- ----------- ----------- Prepaid benefit expense at end of year $3,752 $3,876 - - -------------------------------------------------------- ----------- -----------
1998 1997 1996 - - -------------------------------------------------- ---------- ---------- ----------- Service cost benefits earned during the period $3,268 $2,907 $2,793 Interest cost on projected benefit obligation 5,780 5,458 5,166 Expected return on plan assets (7,692) (7,120) (6,666) Net amortization: Net transition asset (627) (725) (668) Prior service cost (181) (137) (115) Net (gain) loss (424) --- 24 - - -------------------------------------------------- ---------- ---------- ----------- Pension expense $124 $383 $534 - - -------------------------------------------------- ---------- ---------- -----------
Actuarial assumptions used in the determination of the projected benefit obligation were as follows:
1998 1997 1996 - - --------------------------------------------------- --------- ---------- ---------- Rate of increase in future compensation levels 5.00% 5.50% 5.50% Expected long-term rate of return on plan assets 8.00 8.50 8.50 Weighted average discount rate 6.75 7.00 7.50 - - --------------------------------------------------- --------- ---------- ----------
The unrecognized net assets at transition and the unrecognized prior service costs are being amortized over the expected service lives of eligible employees, which approximate 15 years. Trusteed pension plan assets consist primarily of equity and fixed income securities and short-term investments. A 401(k) deferred savings plan covers eligible employees of Keystone. The plan provides for a matching employer contribution equal to 60% of the employee contribution. While employees can contribute up to 15% of their compensation, the employer match is limited to 5% of employee compensation. Matching contributions are paid entirely in Keystone stock. Expense recognized for the employer contributions was $ 1,984,000 in 1998, $ 1,580,000 in 1997, and $1,303,000 in 1996. Income Taxes Deferred income taxes reflect the tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities are as follows (in thousands): December 31, Deferred tax assets: 1998 1997 - - ----------------------------------------- ------------ ------------ Allowance for credit losses $19,598 $20,717 Deferred liabilities 1,850 1,879 Compensation accruals 4,259 3,229 Deferred tax liabilities: - - ----------------------------------------- ------------ ------------ Lease financing activities (47,742) (47,672) Net unrealized gains on securities available-for-sale (3,383) (4,600) Premises and equipment (3,088) (3,862) Intangible assets (4,668) (4,044) Other (2,961) 287 - - ----------------------------------------- ------------ ------------ Net deferred tax liability ($36,135) ($34,066) - - ----------------------------------------- ------------ ------------ The provision for income taxes consisted of the following components (in thousands): 1998 1997 1996 - - --------------------------------- --------- ---- ----------- --- ---------- Deferred provision $4,770 $14,537 $14,880 Current provision: Federal taxes 39,642 23,229 21,441 State taxes 1,280 1,187 859 - - --------------------------------- --------- ---- ----------- --- ---------- Total $45,692 $38,953 $37,180 - - --------------------------------- --------- ---- ---------- ---- ---------- A reconciliation of income tax expense and the amounts which would have been recorded based upon statutory rates (35%) is as follows (in thousands): 1998 1997 1996 - - ------------------------------------ ---------- ---- ---------- ---- ---------- Provision on pre-tax income at statutory rates $50,904 $44,405 $44,340 Tax exempt interest income (5,448) (5,089) (6,212) Other 236 (363) (948) - - ------------------------------------ ---------- ---- ----------- --- ---------- Total $45,692 $38,953 $37,180 - - ------------------------------------ ---------- ---- ---------- ---- ---------- Effective Rate 31.4% 30.7% 29.3% - - ------------------------------------ ---------- ---- ---------- ---- ---------- Income taxes attributable to investment security gains were $3,856,000 in 1998, $2,125,000 in 1997, and $305,000 in 1996. Comprehensive Income During 1998, Keystone adopted Financial Accounting Standards Board Statement 130, "Reporting Comprehensive Income", which required reclassification of financial statements for earlier periods. Sources of comprehensive income not included in net income are limited to unrealized gains and losses on certain investments in debt and equity securities. The disclosure of comprehensive income is as follows (in thousands):
Year Ended December 31, - - ----------------------------- ------------------------------------------------------------- 1998 1997 1996 - - ----------------------------- ------------------- -------------------- -------------------- Before Net of Before Net of Before Net of Tax Tax Tax Tax Tax Tax - - ----------------------------- --------- --------- ---------- --------- --------- ---------- Net Income $99,747 $87,917 $89,506 Unrealized gains(losses) on securities: Unrealized holding gains (losses) arising during the period 7,544 4,904 12,757 8,292 (1,971) (1,281) Less: Reclassification adjustment for gains included in net income 11,018 7,162 6,071 3,946 871 566 - - ----------------------------- --------- --------- ---------- --------- --------- ---------- (3,474) (2,258) 6,686 4,346 (2,842) (1,847) - - ----------------------------- --------- --------- ---------- --------- --------- ---------- Comprehensive Income $97,489 $92,263 $87,659 ============================= ========= ========= ========== ========= ========= ==========
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):
1998 1997 1996 - - ------------------------------------------- -------------- --------------- --------------- Numerator - Net Income $99,747 $87,917 $89,506 Denominators: Average Basic shares outstanding 51,446 51,693 52,119 Average Dilutive option effect 596 627 362 - - ------------------------------------------- -------------- --------------- --------------- Average Dilutive shares outstanding 52,042 52,320 52,481 - - ------------------------------------------- -------------- --------------- --------------- EPS: Basic $1.94 $1.70 $1.72 Diluted $1.92 $1.68 $1.70 - - ------------------------------------------- -------------- --------------- ---------------
Segment Reporting In June of 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", which was effective for fiscal years beginning after December 15, 1997. Under the terms of this new statement, a segment is defined as a revenue producing component of the enterprise for which separate financial information is produced internally and is subject to evaluation by the chief operating decision maker in deciding how to allocate resources to segments. Operating segments with a reported measure of revenue, profit or loss, or assets, that is 10% or more of combined revenue, profit or loss, or assets, respectively of all operating segments must be reported separately. Keystone considered the nature of its products and services offered to customers in order to identify its business segments, which are community banking, mortgage banking, and asset management services. These segments are managed separately because they offer distinctly different products distributed through different delivery channels. No customer of Keystone individually represents 10% or more of consolidated revenue and revenues with customers of foreign countries are minimal. The segment of community banking constituted over 90% of Keystone's revenue, profit, and assets for the years ended December 31, 1998, 1997, and 1996 and was the only reportable segment. As such, financial information for this segment does not differ materially from the information provided in the consolidated financial statements. Regulatory Capital Requirements Bank regulators have set forth requirements for risk-based capital, which resulted in the establishment of international capital standards for banks. The following table provides Keystone's consolidated risk-based capital position at the end of 1998 and 1997 and a comparison to the various regulatory capital requirements (in thousands):
1998 1997 Well- ---- ---- Capitalized Minimum Amount Ratio Amount Ratio Ratio Ratio - - ----------------------- ---------- ---------- ---------- --------- ------------- ----------- Total capital (to risk-weighted assets) $653,664 13.84% $675,575 13.75% 10% 8% Tier 1 capital (to risk-weighted assets) 594,623 12.59% 614,172 12.50% 6% 4% Tier 1 capital (to average assets) 594,623 8.66% 614,172 9.15% 5% 4% - - ----------------------- ---------- ---------- ---------- --------- ------------- -----------
At December 31, 1998, Keystone Financial Bank, N.A. had capital at or above the "well-capitalized" level for each of the three ratios. Failure to meet any one of the minimum capital ratios would result in an institution being classified as "undercapitalized" or "significantly undercapitalized". Such classifications could disrupt dividends, capital distributions, or affiliate management fees. In addition, other restrictions, prohibitions, and related supervisory actions would be likely depending upon the overall level of capital. Keystone anticipates no problems in meeting the current or future capital standards. As of December 31, 1998, each predecessor bank to Keystone Financial Bank, N.A. has been categorized as "well-capitalized" by its primary regulator at its most recent examination. Restrictions Under Federal Reserve regulations, depository institutions must maintain reserves in the form of cash or amounts on deposit with Federal Reserve Banks. For the year ended December 31, 1998, Keystone's bank subsidiary maintained average reserve balances of approximately $56,033,000. Dividends that may be paid to Keystone by its subsidiary bank are limited by state and federal regulations. The related amount available for dividends aggregated $87,226,000 at December 31, 1998. Federal Reserve regulations also limit the subsidiary bank as to the amount it may loan its affiliates, including Keystone. At December 31, 1998, the maximum amount available for loans to affiliates approximated 10% of consolidated net assets. Fair Value of Financial Instruments FASB Statement No. 107 requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison with independent markets, and, in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 excludes certain 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):
1998 1997 ----------------------- ----------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value - - --------------------------------------------- ------------------------------------ Financial Assets: Cash and due from banks $190,622 $190,622 $206,223 $206,223 Federal funds sold and other 147,678 147,678 27,228 27,228 Investment securities available for sale 1,129,753 1,129,753 1,091,400 1,091,400 Investment securities held to maturity 659,536 670,934 528,388 538,218 Loans held for resale 76,423 76,423 43,055 43,055 Loans, net of allowance for credit losses 4,163,938 4,313,572 4,275,218 4,447,413 Leases 235,571 243,242 372,257 380,855 - - --------------------------------------------- ------------------------------------ Financial Liabilities: Time deposits $2,923,751 $2,952,578 $3,023,702 $3,048,175 Other deposits 2,307,967 2,307,967 2,209,463 2,209,463 Short-term borrowings 375,045 375,045 425,890 425,890 FHLB borrowings 427,027 431,470 248,150 249,629 Long-term debt 130,239 136,707 101,793 101,793 - - --------------------------------------------- ------------------------------------ Off-Balance Sheet Instruments: Lending commitments and letters of credit $----- $(800) $----- $(684) All other $----- $596 $----- $(217) - - --------------------------------------------- ------------------------------------
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. Under the terms of the agreement, each Financial Trust shareholder received Keystone common stock at a fixed exchange ratio of 1.65 shares for each Financial Trust share, resulting in the issuance of 14.2 million shares of Keystone stock. The merger was accounted for under the pooling-of-interests method of accounting, and, as such, all prior period information has been restated. The results of operations of Financial Trust were combined with Keystone for the year ended December 31, 1996 as follows (in thousands): Financial Consolidated Keystone Trust Keystone - - --------------------------------------- ------------ ------------ -------------- Net interest income $209,763 $52,356 $262,119 Net income 69,475 20,031 89,506 - - --------------------------------------- ------------ ------------ -------------- Financial data for Keystone and Financial Trust from the beginning of 1997 to the date of consummation, May 30, 1997, is presented below: Financial Consolidated Keystone Trust Keystone - - ----------------------------------------- ---------- ------------ -------------- Net interest income $89,411 $22,623 $112,034 Net income 28,773 9,225 37,998 Dividends declared 23,120 4,796 27,916 - - ----------------------------------------- ---------- ------------ -------------- On May 29, 1997, Keystone completed the acquisition of First Financial Corporation of Western Maryland (FFWM), a thrift holding company with assets approximating $355 million based in Cumberland, Maryland. Under the terms of the agreement with FFWM, each of its shareholders received Keystone common stock at a fixed exchange ratio of 1.29 shares of Keystone for each FFWM share, or cash. The issuance of 1.6 million Keystone shares amounted to 60% of the total consideration of $76 million and, accordingly, the transaction was accounted for as a purchase. The transaction resulted in the recognition of goodwill and core deposit intangibles totaling approximately $34 million and $6 million, respectively, which are being amortized over 25 and 10-year periods. The results of FFWM have been included herein from the consummation date of May 29, 1997. Pro forma results of operations as though FFWM had been combined with Keystone at the beginning of the periods presented do not differ materially from consolidated results presented herein. Parent Company Financial Statements The following parent company condensed statements reflect the financial condition and results of operations of Keystone (in thousands): Statements of Condition December 31, 1998 1997 - - ----------------------------------------------- ------------ ------------ Assets: Cash $271 $1,489 Investment securities 14,876 65,024 Investments in: Subsidiary banks 585,189 630,102 Other subsidiaries 88,723 115,624 Other assets 726 889 - - ----------------------------------------------- ------------ ------------ TOTAL ASSETS $689,785 $813,128 - - ----------------------------------------------- ------------ ------------ Liabilities: Long-term debt $3,556 $100,106 Other liabilities 24,564 27,537 - - ----------------------------------------------- ------------ ------------ TOTAL LIABILITIES 28,120 127,643 Shareholders' Equity 661,665 685,485 - - ----------------------------------------------- ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $689,785 $813,128 - - ----------------------------------------------- ------------ ------------ Statements of Income Year Ended December 31, 1998 1997 1996 - - -------------------------------------------- ---------- ----------- ----------- Income: Dividends from subsidiaries: Bank subsidiaries $60,068 $67,305 $71,891 Other subsidiaries 21,997 ---- 134 Net securities gains 9,301 ---- ---- - - -------------------------------------------- ---------- ----------- ----------- Expenses: Net interest expense(income) 6,981 2,144 (299) Operating expense 2,759 9,483 3,233 - - -------------------------------------------- ---------- ----------- ----------- Income before taxes and undistributed 81,626 55,678 69,091 earnings of subsidiaries Income taxes (benefit) (1,506) (3,712) (799) Equity in undistributed earnings of subsidiaries 16,615 28,527 19,616 - - -------------------------------------------- ---------- ----------- ----------- NET INCOME $99,747 $87,917 $89,506 - - -------------------------------------------- ---------- ----------- ----------- Statements of Cash Flows Year Ended December 31, 1998 1997 1996 - - ------------------------------------------ ----------- ----------- ----------- OPERATING ACTIVITIES: Net income $99,747 $87,917 $89,506 Equity in undistributed earnings (16,615) (28,527) (19,616) Other (2,810) 14,729 1,042 - - ------------------------------------------ ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 80,322 74,119 70,932 - - ------------------------------------------ ----------- ----------- ----------- INVESTING ACTIVITIES: Net (increase) decrease in investments 50,148 (38,529) (13,030) (Investments in) distributions from subsidiaries 88,429 (24,459) (8,451) - - ------------------------------------------ ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 138,577 (62,988) (21,481) - - ------------------------------------------ ----------- ----------- ----------- FINANCING ACTIVITIES: Cash dividends declared (58,195) (55,964) (46,998) KSOP activity: Common stock proceeds 677 819 302 Payment of debt (597) (523) (569) Proceeds of long-term debt 30,928 98,960 --- Repayment of long-term debt (125,735) --- --- Acquisition of treasury stock (74,597) (72,586) (9,915) Proceeds from issuance of common stock under benefits plans 10,211 12,908 7,190 Other (2,809) 5,717 34 - - ------------------------------------------ ----------- ----------- ----------- NET CASH USED IN FINANCING ACTIVITIES (220,117) (10,669) (49,956) - - ------------------------------------------ ----------- ----------- ----------- Increase (decrease) in cash (1,218) 462 (505) Cash at beginning of year 1,489 1,027 1,532 - - ------------------------------------------ ----------- ----------- ----------- CASH AT END OF YEAR $271 $1,489 $1,027 - - ------------------------------------------ ----------- ----------- ----------- Supplemental Financial Information Net Interest Income Keystone's largest source of revenue is net interest income, which is the difference between interest on earning assets and interest expense on deposits and other borrowed funds. The following table provides a summary of net interest income performance for the three years ended December 31, 1998 (in thousands): 1998 - - ------------------------------------------------------------------------------- Average Yield/ (in thousands) Balance Interest Rate - - ------------------------------------------------------------------------------- ASSETS Federal funds sold and other $89,247 $4,820 5.40% Investment securities: Negotiable money market investments 160,214 8,713 5.44 Taxable investment securities 1,338,147 85,399 6.38 Nontaxable investment securities(1) 209,119 16,692 7.98 Loans held for resale 68,926 5,559 8.07 Consumer loans (2) (3) 1,483,643 135,934 9.16 Real estate loans (1) (2) (3) 2,270,914 196,516 8.65 Commercial loans (1) (2) (3) 835,287 72,585 8.69 - - ------------------------------------------------------------------------------- Total earning assets $6,455,497 $526,218 8.15% Allowance for credit losses (63,600) Other assets 482,419 - - ------------------------------------------------------------------------------- Total Assets $6,874,316 LIABILITIES AND SHAREHOLDERS' EQUITY NOW/Savings deposits $823,463 $12,737 1.55% Money market deposits 740,086 20,649 2.79 Time deposits 2,988,222 159,702 5.34 Short-term borrowings 375,131 17,486 4.66 FHLB borrowings 372,097 21,506 5.78 Long-term debt 119,313 8,604 7.21 - - ------------------------------------------------------------------------------- Total interest-bearing liabilities $5,418,312 $240,684 4.44% Demand deposits 637,533 Other liabilities 136,659 Shareholders' equity 681,812 - - ------------------------------------------------------------------------------- Total Liabilities and Equity $6,874,316 Interest rate spread 3.71% Net interest income and net interest margin $285,534 4.42% Tax-equivalent adjustment (8,569) - - ------------------------------------------------------------------------------- Net interest income $276,965 - - ------------------------------------------------------------------------------- 1997 - - ------------------------------------------------------------------------------- (in thousands) Average Yield/ Balance Interest Rate - - ------------------------------------------------------------------------------- ASSETS Federal funds sold and other $84,032 $5,340 6.35% Investment securities: Negotiable money market investments 108,278 6,155 5.68 Taxable investment securities 1,174,674 77,034 6.56 Nontaxable investment securities(1) 225,384 17,557 7.79 Loans held for resale 77,330 6,408 8.29 Consumer loans (2) (3) 1,523,659 136,257 8.94 Real estate loans (1) (2) (3) 2,239,664 196,964 8.79 Commercial loans (1) (2) (3) 809,306 73,883 9.13 - - ------------------------------------------------------------------------------- Total earning assets $6,242,327 $519,598 8.32% Allowance for credit losses (61,800) Other assets 449,475 - - ------------------------------------------------------------------------------- Total Assets $6,630,002 LIABILITIES AND SHAREHOLDERS' EQUITY NOW/Savings deposits $931,273 $15,930 1.71% Money market deposits 650,082 16,306 2.51 Time deposits 2,967,437 162,662 5.48 Short-term borrowings 371,645 18,134 4.88 FHLB borrowings 240,533 14,677 6.10 Long-term debt 64,016 4,785 7.47 - - -------------------------------------------------------------------------------- Total interest-bearing liabilities $5,224,986 $232,494 4.45% Demand deposits 606,907 Other liabilities 135,789 Shareholders' equity 662,320 - - ------------------------------------------------------------------------------- Total Liabilities and Equity $6,630,002 Interest rate spread 3.87% Net interest income and net interest margin $287,104 4.59% Tax-equivalent adjustment (8,860) - - ------------------------------------------------------------------------------- Net interest income $278,244 - - ------------------------------------------------------------------------------- 1996 - - ------------------------------------------------------------------------------- (in thousands) Average Yield/ Balance Interest Rate - - ------------------------------------------------------------------------------- ASSETS Federal funds sold and other $106,374 $5,668 5.33% Investment securities: Negotiable money market investments 153,631 8,583 5.59 Taxable investment securities 1,143,073 71,458 6.25 Nontaxable investment securities(1) 235,731 18,953 8.04 Loans held for resale 53,656 4,688 8.74 Consumer loans (2) (3) 1,271,662 113,377 8.92 Real estate loans (1) (2) (3) 2,209,179 196,152 8.88 Commercial loans (1) (2) (3) 708,328 63,514 8.97 - - ------------------------------------------------------------------------------- Total earning assets $5,881,634 $482,393 8.20% - - ------------------------------------------------------------------------------- Allowance for credit losses (56,211) Other assets 407,225 - - ------------------------------------------------------------------------------- Total Assets $6,232,648 LIABILITIES AND SHAREHOLDERS' EQUITY NOW/Savings deposits $1,102,294 $20,404 1.85% Money market deposits 536,237 12,732 2.37 Time deposits 2,759,973 153,121 5.55 Short-term borrowings 323,938 14,506 4.48 FHLB borrowings 159,503 10,175 6.38 Long-term debt 3,569 363 10.17 - - ------------------------------------------------------------------------------- Total interest-bearing liabilities $4,885,514 $211,301 4.33% Demand deposits 604,536 Other liabilities 107,247 Shareholders' equity 635,351 - - ------------------------------------------------------------------------------- Total Liabilities and Equity $6,232,648 Interest rate spread 3.87% Net interest income and net interest margin $271,092 4.61% Tax-equivalent adjustment (8,973) - - ------------------------------------------------------------------------------- Net interest income $262,119 - - -------------------------------------------------------------------------------
1998 change from 1997 1997 change from 1996 --------------------- --------------------- Total Change due to(4) Total Change due to(4) Change Volume Rate Change Volume Rate - - ----------------------------------------------------------------------------------------------------------------------------- Interest income on: Federal funds sold and other ($520) ($1,160) $640 ($328) ($1,400) $1,072 Investment securities(1) 10,060 12,643 (2,583) 1,752 (156) 1,908 Loans held for resale (849) (681) (168) 1,720 1,973 (253) Loans and leases (1)(2)(3) (2,071) 4,881 (6,952) 34,061 39,782 (5,721) - - ----------------------------------------------------------------------------------------------------------------------------- 6,620 15,683 (9,063) 37,205 40,199 (2,994) Interest expense on: NOW deposits 265 316 (51) 3,024 2,973 51 Savings deposits 2,928 1,480 1,448 1,450 (652) 2,102 Money market deposits (4,344) (4,526) 182 (3,574) (3,968) 394 Time deposits 2,961 (2,110) 5,071 (9,541) (2,623) (6,918) Short-term borrowings 648 (169) 817 (3,628) (2,255) (1,373) FHLB borrowings (6,829) (7,641) 812 (4,502) (4,962) 460 Long-term debt (3,819) (3,993) 174 (4,422) (4,543) 121 - - ----------------------------------------------------------------------------------------------------------------------------- (8,190) (16,643) 8,453 (21,193) (16,030) (5,163) - - ----------------------------------------------------------------------------------------------------------------------------- Net Interest Income Change - Tax Equivalent ($1,570) ($960) ($610) $16,012 $24,169 ($8,157) - - ----------------------------------------------------------------------------------------------------------------------------- (1) Interest income and yields are adjusted to a fully taxable-equivalent basis using a 35% tax rate. (2) Non-performing loans are included in the average balances. (3) Interest on loans includes fees on loans of $7,056,000 in 1998, $6,523,000 in 1997, and $5,954,000 in 1996. (4) The change in interest due to both rate and volume has been allocated to the volume and rate changes in proportion to the absolute dollar amounts of each change.
GAP Interest rate sensitivity is evidenced by the changes in net interest income and net interest margin relative to changes in market interest rates. One indicator of interest rate sensitivity is GAP, which measures the volume difference between interest rate sensitive assets and liabilities. The following table apportions the balance sheet at December 31, 1998, into rate sensitive periods based on the repricing or maturity dates of the various cash-flow streams.
Rate Sensitive Period As of December 31, 1998(in thousands) 1 to 90 91 to 180 181 to 360 1 to 2 Beyond Days Days Days Years 2 Years Total - - --------------------------------------------------------------------------------------------------------------------- ASSETS Federal funds sold and other $147,678 - - - - $147,678 Investment securities 346,933 51,133 57,806 136,218 1,197,199 1,789,289 Loans held for resale 76,423 - - - - 76,423 Consumer loans 332,093 110,750 200,839 307,972 376,226 1,327,880 Consumer mortgages 176,690 106,730 162,319 179,040 129,501 754,280 Commercial real estate loans 172,183 38,571 77,717 114,482 1,127,496 1,530,449 Commercial loans 452,277 17,935 39,048 71,524 266,390 847,174 - - --------------------------------------------------------------------------------------------------------------------- Total earning assets 1,704,277 325,119 537,729 809,236 3,096,812 6,473,173 Other assets - - - - 495,054 495,054 - - --------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,704,277 $325,119 $537,729 $809,236 $3,591,866 $6,968,227 - - --------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY NOW deposits $236,270 - - - $402,298 $638,568 Savings deposits 57,768 - - - 141,431 199,199 Money market deposits 537,448 - - - 220,609 758,057 Time deposits 1,375,483 378,114 489,810 401,578 280,748 2,925,733 Short-term borrowings 374,418 313 314 - - 375,045 FHLB borrowings 10,790 26,041 27,602 81,005 281,589 427,027 Long-term debt 149 149 48 96 129,797 130,239 - - --------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 2,592,326 404,617 517,774 482,679 1,456,472 5,453,868 Demand deposits - - - - 710,161 710,161 Other liabilities - - - - 142,533 142,533 Shareholders' equity - - - - 661,665 661,665 - - --------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,592,326 $404,617 $517,774 $482,679 $2,970,831 $6,968,227 - - --------------------------------------------------------------------------------------------------------------------- Interest Rate Sensitivity ($888,049) ($79,498) $19,955 $326,557 $621,035 Cumulative GAP ($888,049) ($967,547) ($947,592) ($621,035) - - ---------------------------------------------------------------------------------------------------------------------
Other Liquidity Elements The predominant source of income from earning assets is derived from the loan portfolio. Commercial loans and commercial loans secured by real estate comprise 53% of total loans and are closely monitored in terms of the volume of loans which are sensitive to changes in interest rates. The following table shows the maturity of commercial loans and commercial loans secured by real estate as of December 31, 1998(in thousands):
After One But Within Within Five After Five One Year Years Years Total - - ------------------------------------ ----------- ---------- ------------- ------------ Commercial $464,622 $198,857 $183,695 $847,174 Commercial real estate 307,400 376,642 846,407 1,530,449 - - ------------------------------------ ----------- ---------- ------------- ------------ $772,022 $575,499 $1,030,102 $2,377,623 - - ------------------------------------ ----------- ---------- ------------- ------------ Loans maturing after one year with: Fixed interest rates: Commercial $124,143 $77,676 Commercial real estate 240,241 606,192 Variable interest rates: Commercial 74,714 106,019 Commercial real estate 136,401 240,215 - - ------------------------------------ ----------- ---------- ------------- ------------ Total $575,499 $1,030,102 ==================================== =========== ========== ============= ============
Deposits with balances exceeding $100,000 and short-term borrowings are not considered core funding sources because they are generally short-term in nature and are subject to competitive bids. The following is a maturity summary of deposits of $100,000 or more at December 31, 1998 (in thousands): Certificates of Other Time Deposit of Deposits of $100,000 or more $100,000 or more - - ----------------------------------- ------------------ ------------------ 3 months or less $193,455 $5,899 Over 3 months through 6 months 65,952 4,666 Over 6 months through 12 months 93,563 5,374 Over 12 months 44,668 22,640 - - ----------------------------------- ------------------ ------------------ Total $397,638 $38,579 =================================== ================== ================== 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):
1998 1997 1996 - - -------------------------------------------------- ---------- ------------ ----------- Balance at December 31, $363,739 $399,730 $368,886 Weighted average interest rate at year end 4.67% 4.75% 4.75% Maximum amount outstanding at any month end $395,635 $405,268 $377,727 Average amount outstanding during the year $357,090 $367,102 $307,225 Weighted average interest rate during the year 4.62% 4.78% 4.58% - - -------------------------------------------------- ---------- ------------ -----------
Investment Portfolio Analysis Keystone's investment policy specifically addresses the use of derivatives and other hedging activities and provides for specific restrictions on the type and extent of Keystone's exposure. A narrow definition of financial derivatives includes off-balance sheet instruments such as futures, forwards, swaps, and options which are designed to manage various types of business risks. Keystone has historically made use of the off-balance sheet derivatives known as "interest rate swaps" as a means to manage the income exposure associated with changes in interest rates, as well as forward commitments, put options, and short sales to manage exposure to market risk. A broader definition of derivatives would include any financial instrument which derives its value, or contractually required cash flows, from the price of some other security or index. Keystone's investment in this form of financial derivatives is limited to some forms of collateralized mortgage obligations (CMO's) and structured notes. The following is a brief description of both "on" and "off"-balance sheet derivatives and other hedging activity utilized by Keystone. Interest Rate Swaps Interest rate swaps are off-balance sheet financial instruments which provide for the exchange of interest payments on a specified principal amount (notional amount) for a specified period of time. Investment policy requires that Keystone may execute a swap contract only as a hedge of an interest rate position and not for the purpose of speculation or trading. That policy further requires that swap contracts must be approved in advance by the bank president and parent company executives, and that swap counterparties must be reviewed for credit-worthiness on at least an annual basis. Keystone's policy also sets forth specific limitations on exposure to a single counter party and sets an aggregate limit on the notional value of interest rate swaps as a percentage of capital. Other Hedging Activity Forward mortgage commitments, as well as put options and short sales of U.S. Treasury securities, have been used to reduce the market risk, associated with interest rate fluctuations, of fixed-rate consumer mortgages and indirect automobile loans held for sale. In accordance with Keystone's written policy, such transactions must be ratified by the Board of Directors and can only be executed as a hedge of market risk and not for the purpose of speculation or trading. Such activity is self-limited by the level of loan production. CMO's Purchases of CMO's are restricted principally to U.S. Government issues that have passed various regulatory standards associated with mortgage extension or prepayment risk. All Keystone CMO holdings can be desegregated into groupings which more accurately define the extent of mortgage extension or prepayment risk, and include PAC's (planned amortization class), SEQ PAY (sequential pay class), VADM's (very accurately defined maturity), TAC's (targeted amortization class) and others. Other more volatile forms of CMO's include interest-only, principal- only, inverse floating bonds, and residuals, all of which are specifically designated as prohibited investments under Keystone's investment policy. At December 31, 1998, Keystone had $156,844,000 in collateralized mortgage obligations, compared to $61,477,000 at December 31, 1997. The CMO securities held by Keystone are primarily shorter-maturity class bonds that were structured to have more predictable cash flows, by being less sensitive to prepayments during periods of changing interest rates than other longer-term class bonds similarly available. Substantially all of the CMO's held by Keystone were issued or backed by Federal Agencies. Structured Notes A structured note is a debt security whose cash flow characteristics, including coupon rate, redemption amount or redemption rate may be dependent on one or more indices or future cash flow adjustment. Keystone's activity in structured notes has been limited to U.S. Government Agency index amortization notes (IANs), whereby the principal balance amortizes according to the prepayments on a specific collateral pool of mortgage-backed securities. Keystone's investment in structured notes is also limited by investment policy guidelines and aggregated $9,972,000 at the end of 1998. The following presentation provides an analysis of the composition of investments included in both investments available-for-sale and investments held-to-maturity. This comparison includes a detailed presentation of derivative financial instruments included in the U.S. Government agency category (in thousands): December 31, 1998 - - -------------------------------------- ---------------------------------------- Amortized Market Unrealized Cost Value Gain/(Loss) - - -------------------------------------- ------------- ------------ ------------- U.S. Government Agency Obligations: Conventional $561,198 $565,846 $4,648 Mortgage-backed 318,856 322,186 3,330 CMO's: PAC's1 102,777 102,443 (334) Seq Pay's2 25,374 25,231 (143) VADM's3 6,254 6,293 39 TAC's4 2,494 2,495 1 Other 19,945 20,184 239 Structured notes 9,972 10,113 141 - - -------------------------------------- ------------- ------------ ------------- Subtotal 1,046,870 1,054,791 7,921 - - -------------------------------------- ------------- ------------ ------------- Negotiable money market instruments 290,954 290,975 21 U.S. Treasury securities 122,155 123,388 1,233 State and political subdivision obligations 202,009 208,885 6,876 Corporate and other 117,633 122,648 5,015 - - -------------------------------------- ------------- ------------ ------------- Total $1,779,621 $1,800,687 $21,066 - - -------------------------------------- ------------- ------------ ------------- 1. A PAC(planned amortization class) has a principal payment schedule that is guaranteed within a predetermined range of mortgage prepayment rates, i.e. has built-in call protection, lower prepayment risk and lower average life variability. 2. A SEQ PAY (sequential pay class) allocates collateral principal payments sequentially to a series of bonds. Principal payments are directed initially only to the first tranche until it is completely retired. Once the first tranche is retired, the principal payments are applied to the second tranche until it is retired, and so on. 3. A VADM(very accurately defined maturity) has a stated final payment date which provides protection from mortgage payment extension risk. 4. A TAC(targeted amortization class) has a payment schedule that offers some call protection if mortgage prepayments increase, but little to no extension protection if prepayments slow down. Credit Risk and Loan Portfolio Analysis Keystone's objective as a lending institution is to profitably meet the credit needs of customers within the communities in which it operates. Credit risk and lending practices are governed by written policies and procedures which have been designed to provide for an acceptable level of risk and compensating return. These policies have also established requirements for lending authority, underwriting practices, collateral standards, lending concentrations, geographic limits, and other important elements of the credit process. Significant policies are reviewed, at a minimum, on an annual basis. Keystone maintains a corporate loan review function that determines adherence to credit policies, assesses the effectiveness of the credit process, and objectively evaluates the quality of the loan portfolio. In connection with these reviews, adversely classified credits within the portfolio are identified and included on a classified loan report, which is reviewed by management on a monthly basis. Loan Composition Keystone maintains a diverse loan portfolio. The composition of Keystone's loan portfolio is illustrated in the following comparison of loan balances at the end of each of the last five years (in thousands):
1998 1997 1996 1995 1994 - - --------------------------- ------------ ------------- ------------ ------------ ------------- Commercial: Commercial and industrial $615,925 $637,617 $547,153 $487,843 $426,434 Floor plan financing 167,762 203,189 172,248 167,504 150,066 Obligations of political subdivisions 63,487 70,863 73,749 64,677 60,160 - - --------------------------- ------------ ------------- ------------ ------------ ------------- 847,174 911,669 793,150 720,024 636,660 - - --------------------------- ------------ ------------- ------------ ------------ ------------- Commercial Real Estate: Commercial and industrial 1,299,052 1,080,776 843,746 828,508 840,910 Multi-family residential 76,752 130,148 99,074 92,544 84,548 Obligations of political subdivisions 47,493 40,930 29,686 33,010 31,023 Construction and land development 95,279 117,503 91,755 86,983 68,652 Agricultural 11,873 15,566 12,756 13,363 14,364 - - --------------------------- ------------ ------------- ------------ ------------ ------------- 1,530,449 1,384,923 1,077,017 1,054,408 1,039,497 - - --------------------------- ------------ ------------- ------------ ------------ ------------- Consumer: Real estate 754,280 862,227 1,186,663 1,206,547 1,184,346 Installment 543,513 704,242 626,573 631,584 655,163 Home equity 508,729 473,365 311,086 256,505 227,110 Personal lines of credit 39,754 41,123 40,498 43,244 46,392 Leases 235,884 335,017 301,483 184,554 111,732 - - --------------------------- ------------ ------------- ------------ ------------ ------------- 2,082,160 2,415,974 2,466,303 2,322,434 2,224,743 - - --------------------------- ------------ ------------- ------------ ------------ ------------- Total $4,459,783 $4,712,566 $4,336,470 $4,096,866 $3,900,900 - - --------------------------- ------------ ------------- ------------ ------------ -------------
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, 1998 credit extensions totaling $191,392,000 were outstanding, and consisted of floor plan and related commercial loans and mortgages. o Keystone has no dependence on a single customer. The ten largest credit relationships account for only 3% of the total loans outstanding at the end of 1998. Geographic Risk In addition to industry or customer concentrations, credit risk is also affected by the geographic characteristics of the loan portfolio. The credit risk profile of Keystone's portfolio is enhanced by the stable economic climate and the industry diversification of Keystone's-defined market. o The overwhelming majority of Keystone's lending activities are conducted within its own defined market. o Keystone has no loan exposure in foreign countries. Categories of Exposure Keystone's loan portfolio can be evaluated in terms of its exposure to certain types of loans which are presumed to exhibit a higher degree of credit risk. Examples include credit extensions for highly leveraged transactions, speculative real estate ventures, or certain commercial real estate loans. These types of loans may subject a lender to a higher level of loss from economic downturns, dramatic changes in interest rates, or depressed real estate markets. The following comments provide insight into this aspect of Keystone's loan profile. o Keystone has not been active in the organization, syndication, or purchase of highly leveraged transactions. o Keystone's commercial real estate lending practice requires an evaluation of the borrower's ability to repay debt from cash flow provided through operations. The underlying value of real estate is viewed as a secondary source of repayment. In addition, Keystone's lending practices generally require guarantees, endorsements, and other forms of recourse which provide additional security for such credits. Keystone monitors its exposure to commercial and commercial real estate loans. This includes a review of all customer account relationships and classification of credits into risk-related categories. The following table summarizes the commercial and commercial real estate segments of the portfolio (in thousands): December 31, 1998 Balance Relationship Average - - ----------------------------- ------------ -- -------------- Commercial loans $847,174 Commercial real estate 1,530,449 - - ----------------------------- ------------ -- -------------- $2,377,623 $150 - - ----------------------------- ------------ -- -------------- At December 31, 1998, approximately 23% of the balance of commercial real estate was nonowner occupied. Individual categories of nonowner-occupied in excess of $75 million were office buildings and apartment/rental units which totaled $93,304,000 and $83,757,000, respectively. Secondary Market Activity Keystone sells a significant portion of its fixed consumer mortgages to secondary market investors. Keystone recognizes an income stream from the servicing of these loans subsequent to the sale. The sale of these loans enables mortgage loans to be self-funding. Allocation of Allowance The allowance for credit losses is maintained at a level adequate to absorb losses associated with credit risk. Management exercises its judgment to allocate the allowance to specific categories of loans. The following table summarizes the allocation of the allowance for credit losses at December 31, (in thousands): 1998 1997 1996 1995 1994 - - -------------------------- --------- ---------- --------- ---------- ---------- Commercial $13,436 $11,266 $9,944 $11,450 $11,168 Real estate secured: Commercial 8,813 12,630 11,922 11,969 12,104 Consumer 2,064 1,849 2,324 2,251 2,563 Consumer 15,574 16,844 12,693 7,724 7,036 General risk 20,387 22,502 19,373 22,021 20,837 - - -------------------------- --------- ---------- --------- ---------- ---------- $60,274 $65,091 $56,256 $55,415 $53,708 - - -------------------------- --------- ---------- --------- ---------- ---------- While management has apportioned the allowance to the different loan categories, the allowance is general in nature and is available for the loan portfolio in its entirety. Keystone assesses the reasonableness of the allocation of the allowance by preparing a percentage-based comparison of the allocated allowance to the actual loan portfolio. The percentage allocation of allowance to any given category of loans may change disproportionately to the percentage of total loans in that category due primarily to changes in internal risk ratings of the various categories. At December 31, the following comparison is provided:
1998 1997 1996 1995 1994 - - ------------------------------ ---------- ---------- --------- ---------- --------- Commercial: % of Total loans 19% 19% 18% 18% 16% % Allocation of allowance 22% 17% 18% 21% 21% Commercial real estate: % of Total loans 33% 29% 25% 26% 27% % Allocation of allowance 15% 19% 21% 22% 23% Consumer real estate: % of Total loans 18% 18% 27% 29% 30% % Allocation of allowance 3% 3% 4% 4% 5% Consumer: % of Total loans 30% 34% 30% 27% 27% % Allocation of allowance 26% 26% 23% 14% 13% General Risk: % Allocation of allowance 34% 35% 34% 39% 38% - - ------------------------------ ---------- ---------- --------- ---------- --------- Total loans 100% 100% 100% 100% 100% - - ------------------------------ ---------- ---------- --------- ---------- --------- Allocation of allowance 100% 100% 100% 100% 100% - - ------------------------------ ---------- ---------- --------- ---------- ---------
Quarterly Information Income Performance
1998 - - ------------------------------------------- ----------------------------------------------------- Fourth Third Second First (in thousands, except per share data) 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 - - ------------------------------------------- ------------ ------------ -------------- ------------
1997 - - ------------------------------------------- ----------------------------------------------------- Fourth Third Second First (in thousands, except per share data) Quarter Quarter Quarter Quarter - - ------------------------------------------- ------------ ------------ -------------- ------------ Interest income $131,273 $132,215 $126,804 $120,446 Interest expense 60,650 60,446 57,341 54,057 - - ------------------------------------------- ------------ ------------ -------------- ------------ Net interest expense 70,623 71,769 69,463 66,389 Provision for credit losses 3,544 4,319 3,659 3,794 - - ------------------------------------------- ------------ ------------ -------------- ------------ Net interest income after provision 67,079 67,450 65,804 62,595 Noninterest income 21,681 20,825 20,429 20,926 Security transactions 2,842 3,524 (444) 149 Noninterest expense 55,329 55,531 63,768 51,362 - - ------------------------------------------- ------------ ------------ -------------- ------------ Income before income taxes 36,273 36,268 22,021 32,308 Income Taxes 10,709 11,668 7,039 9,537 - - ------------------------------------------- ------------ ------------ -------------- ------------ Net income $25,564 $24,600 $14,982 $22,771 - - ------------------------------------------- ------------ ------------ -------------- ------------ Tax effect of security transactions $995 $1,233 ($155) $52 - - ------------------------------------------- ------------ ------------ -------------- ------------ Earnings per share: Basic $0.49 $0.48 $0.29 $0.44 Diluted 0.49 0.47 0.29 0.43 Dividends per share $0.28 $0.26 $0.26 $0.26 Average shares outstanding 51,979,519 51,834,406 51,320,373 51,630,443 - - ------------------------------------------- ------------ ------------ -------------- ------------
STOCK INFORMATION Market Prices and Dividends The common stock of Keystone Financial, Inc. trades on The Nasdaq Stock MarketSM under the symbol KSTN. The Nasdaq Stock MarketSM, which began operation in 1971, is the world's first electronic securities market and the fastest growing stock market in the U.S. NASDAQ utilizes today's information technologies-computers and telecommunications-to unite its participants in a screen-based, floorless market. This competitive marketplace, along with the many products and services available to issuers and their shareholders, attracts today's largest and fastest growing companies to NASDAQ. More domestic and foreign companies list on NASDAQ than on all other U.S. stock markets combined. At the close of business on January 29, 1999, there were approximately 15,027 shareholders of record. The table below sets forth the quarterly range of high and low closing sales prices for Keystone common stock as reported by NASDAQ and dividends declared per common share. Quarterly Closing Dividends Sales Price Range Declared High Low 1998 - - -------------------- ------------ ------------ ------------ I $42.00 $36.00 $0.28 II 41.53 34.00 0.28 III 37.13 27.88 0.28 IV 37.00 25.72 0.29 - - -------------------- ------------ ------------ ------------ $1.13 - - -------------------- ------------ ------------ ------------ 1997 - - -------------------- ------------ ------------ ------------ I $28.00 $24.88 $0.26 II 33.25 24.50 0.26 III 38.88 30.56 0.26 IV 41.00 34.00 0.28 - - -------------------- ------------ ------------ ------------ $1.06 - - -------------------- ------------ ------------ ------------ While Keystone is not obligated to pay cash dividends, the Board of Directors presently intends to continue the policy of paying quarterly dividends. Future dividends will depend, in part, upon the earnings and financial condition of Keystone. The payment of dividends is subject to applicable regulatory rules and policies. See the dividend and loan restriction information listed in the notes to the consolidated financial statements. EX-21 14 SUBSIDIARIES OF REGISTRANT Exhibit 21.1 Jurisdiction of Incorporation ------------------ First Tier Subsidiaries of Registrant: Financial Trust Services Company Pennsylvania Keystone Financial Bank, N.A. United States Keystone Financial Unlimited, Inc. Pennsylvania Key Trust Company Pennsylvania Keystone CDC, Inc. Pennsylvania Keystone Financial Community Development Corporation I Pennsylvania Keystone Financial Life Insurance Company Arizona Keystone Financial Mid-Atlantic Funding Corporation Pennsylvania Keystone Investment Services, Inc. Delaware Martindale Andres & Company Pennsylvania MMC&P Retirement Benefit Services, Inc. Pennsylvania Second Tier Subsidiaries of Registrant: Keystone Financial Mortgage Corporation Pennsylvania Keystone Brokerage, Inc. Pennsylvania ATB Holding Company, Inc. Delaware ATB Real Estate Investment Trust, Inc. Maryland EX-23 15 CONSENT OF ERNST & YOUNG, LLP Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Keystone Financial, Inc. of our report dated January 29, 1999, included in the 1998 Annual Report to Shareholders of Keystone Financial, Inc. Regarding: 1) Registration Statement on Form S-8 relating to the 1988 Stock Incentive Plan (File #33-38427). 2) Registration Statement on Form S-3 relating to the Dividend Reinvestment Plan (File #333-02063). 3) Registration Statement on Form S-8 relating to the 1992 Director Fee Plan (File #33-48031). 4) Registration Statement on Form S-3 relating to the Main Line Bancshares, Inc. Stock Option Agreements (File #33-50526). 5) Registration Statement on Form S-8 relating to the 1990 Non-Employee Directors' Stock Option Plan (File #33-59372). 6) Registration Statement on Form S-8 relating to the 1992 Stock Incentive Plan (File #33-68800). 7) Registration Statement on Form S-8 relating to the Elmwood Bancorp, Inc. Key Employee Stock Compensation Program (File #33-77358) 8) Registration Statement on Form S-8 relating to the Amended and Restated Nonqualified Stock Option Agreement with Donald E. Stone (File #33-77354). 9) Registration Statement on Form S-8 relating to The Frankford Corporation 1983 Incentive Stock Option Plan (File #33-82088). 10) Registration Statement on Form S-8 relating to the 1995 Employee Stock Purchase Plan (File #33-91572). 11) Registration Statement on Form S-8 relating to the 1995 Management Stock Purchase Plan (File #33-91574). 12) Registration Statement on Form S-8 relating to the 1995 Non-Employee Director's Stock Option Plan (File # 333-04281). 13) Registration Statement on Form S-3 relating to the Senior/ Subordinated Medium-Term Notes (File #333-25393). 14) Registration Statement on Form S-8 relating to the Financial Trust Corp Stock Option Plan of 1992 (File #333-49325). 15) Registration Statement on Form S-8 relating to the Financial Trust Corp Non-Employee Director Stock Option Plan of 1994 (File #333-49323). We also consent to the incorporation by reference in the above listed Registra- tion Statements of our report dated January 29, 1999, with respect to the consolidated financial statements of Keystone Financial, Inc. and subsidiaries incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ ERNST & YOUNG LLP ------------------------- Pittsburgh, Pennsylvania March 29 , 1999 EX-23 16 CONSENT OF BEARD & COMPANY, INC. Exhibit 23.2 CONSENT OF BEARD & COMPANY, INC., INDEPENDENT AUDITORS Regarding: 1) Registration Statement on Form S-8 relating to the 1988 Stock Incentive Plan (File #33-38427). 2) Registration Statement on Form S-3 relating to the Dividend Reinvestment Plan (File #333-02063). 3) Registration Statement on Form S-8 relating to the 1992 Director Fee Plan (File #33-48031). 4) Registration Statement on Form S-3 relating to the Main Line Bancshares, Inc. Stock Option Agreements (File #33-50526). 5) Registration Statement on Form S-8 relating to the 1990 Non-Employee Directors' Stock Option Plan (File #33-59372). 6) Registration Statement on Form S-8 relating to the 1992 Stock Incentive Plan (File #33-68800). 7) Registration Statement on Form S-8 relating to the Elmwood Bancorp, Inc. Key Employee Stock Compensation Program (File #33-77358). 8) Registration Statement on Form S-8 relating to the Amended and Restated Nonqualified Stock Option Agreement with Donald E. Stone (File #33-77354). 9) Registration Statement on Form S-8 relating to The Frankford Corporation 1983 Incentive Stock Option Plan (File #33-82088). 10) Registration Statement on Form S-8 relating to the 1995 Employee Stock Purchase Plan (File #33-91572). 11) Registration Statement on Form S-8 relating to the 1995 Management Stock Purchase Plan (File #33-91574). 12) Registration Statement on Form S-8 relating to the 1995 Non-Employee Director's Stock Option Plan (File # 333-04281). 13) Registration Statement on Form S-3 relating to the Senior/ Subordinated Medium-Term Notes (File #333-25393). 14) Registration Statement on Form S-8 relating to the Financial Trust Corp Stock Option Plan of 1992 (File #333-49325). 15) Registration Statement on Form S-8 relating to the Financial Trust Corp Non-Employee Director Stock Option Plan of 1994 (File #333-49323). We consent to the incorporation by reference in the above listed Registration Statements of our report dated, February 28, 1997, with respect to the consolidated financial statements of Financial Trust Corp and subsidiaries for the year ended December 31, 1996, included in this Annual Report (Form 10-K) of Keystone Financial, Inc. for the year ended December 31, 1998. /s/ BEARD & COMPANY, INC ------------------------- Reading, Pennsylvania March 26, 1999 EX-27 17 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the financial statements and statistical disclosures referenced within item 14(a)(1)(2) and item 1 of the Form 10-K and is qualified in its entirety by reference to such financial statements and statistical disclosures. 1,000 12-MOS DEC-31-1998 DEC-31-1998 190,622 5,978 141,700 0 1,129,753 659,536 670,934 4,459,783 60,274 6,968,227 5,231,718 375,045 142,533 557,266 0 0 102,897 558,768 6,968,227 401,949 105,321 10,379 517,649 193,087 240,684 276,965 17,150 11,018 223,189 145,439 99,747 0 0 99,747 1.94 1.92 3.71 24,675 28,549 264 12,200 65,091 24,058 2,968 60,274 60,274 0 0
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