-----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, IwbTSv0by99ExMGa0RV7/yEA9p7I6z8YIm6IO9mMTIPWI908a1klLVNjslk+QNet PLt2fs+ooV86X4zDLZBe8w== 0000950132-97-000024.txt : 19970127 0000950132-97-000024.hdr.sgml : 19970127 ACCESSION NUMBER: 0000950132-97-000024 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 25 FILED AS OF DATE: 19970123 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYSTONE FINANCIAL INC CENTRAL INDEX KEY: 0000717809 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232289209 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-20283 FILM NUMBER: 97509823 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 S-4 1 FORM S-4 As filed with the Securities and Exchange Commission on January 23, 1997 Registration No. 333-_________________ ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM S-4 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ------------------ KEYSTONE FINANCIAL, INC. (Exact name of registrant as specified in its charter)
Pennsylvania 6711 23-2289209 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
One Keystone Plaza, Front and Market Streets P.O. Box 3660, Harrisburg, Pennsylvania 17105-3660 (717) 233-1555 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------ Ben G. Rooke, Esquire, Keystone Financial, Inc. One Keystone Plaza, Front and Market Streets P.O. Box 3660, Harrisburg, Pennsylvania 17105-3660 (717) 231-5701 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------ Approximate date of commencement of the proposed sale of the securities to the public: The date of mailing the Joint Proxy Statement/Prospectus contained herein. CALCULATION OF REGISTRATION FEE
====================================================================================================== Title of Proposed Proposed securities Amount maximum maximum Amount of to be to be offering price aggregate registration registered registered per share offering price fee - ------------------------------------------------------------------------------------------------------ Common Stock, $2 par value.. 14,214,495 shs. $24.356 (1) $346,209,124 (1) $104,912 Common Stock, $2 par value.. 1,688,921 shs. $23.450 (2) $ 39,604,540 (2) $ 12,001 ======================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee and calculated in accordance with Rule 457(f)(1) on the basis of the average of the high and low sale prices for Common Stock of Financial Trust Corp on the NASDAQ National Market System on January 17, 1997 of $40.50 and $39.875, respectively, and the maximum of 8,614,846 shares of such stock to be converted in the FTC Merger described herein into Common Stock of the registrant. (2) Estimated solely for the purpose of calculating the registration fee and calculated in accordance with Rule 457(f)(1) on the basis of the average of the high and low sale prices for Common Stock of First Financial Corporation of Western Maryland on the NASDAQ National Market System on January 17, 1997 of $30.25 and $30.25, respectively, and the estimated maximum of 1,309,241 shares of such stock to be converted in the FFWM Merger described herein into Common Stock of the registrant. ------------------ The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ KEYSTONE FINANCIAL, INC. Cross-Reference Sheet between Items of Form S-4 and Captions in Joint Proxy Statement/Prospectus ------------------------------------------------
Form S-4 Item Caption(s) or Location in Number and Caption Joint Proxy Statement/Prospectus - ------------------------------------------- ----------------------------------- A. Information About the Transaction 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus.............. Facing Page of Registration Statement; Outside Front Cover Page of Joint Proxy Statement/ Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus........ Available Information; Table of Contents 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information................ Summary; Introduction 4. Terms of the Transaction... FTC Plan of Merger; Pro Forma Combined Financial Information--Information Concerning the Pro Forma Combined Financial Data; FFWM Plan of Merger; Comparison of Keystone Common Stock and FTC Common Stock; Comparison of Keystone Common Stock and FFWM Common Stock 5. Pro Forma Financial Pro Forma Combined Financial Information................ Information 6. Material Contacts with the Company Being Acquired..... FTC Plan of Merger--Background of and Reasons for the FTC Merger;--Voting Agreements;--Keystone Board of Directors Following the FTC Merger;--Interests of Certain Persons in the Transaction;--Warrant Agreement;--Effect of Certain Transactions Involving Keystone; FFWM Plan of Merger--Background of the FFWM Merger;--Voting Agreements;--Boards of Directors Following the FFWM Merger;--Interests of Certain Persons in the Transaction;--Stock Option Agreement 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters.. NA
Form S-4 Item Caption(s) or Location in Number and Caption Joint Proxy Statement/Prospectus - -------------- ----------------------------------- 8. Interests of Named Experts and Counsel................ FTC Plan of Merger--Opinion of FTC Financial Advisor; FFWM Plan of Merger--Opinion of FFWM Financial Advisor 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities. NA B. Information About the Registrant 10. Information with Respect to S-3 Registrants......... Summary; Information Concerning Keystone 11. Incorporation of Certain Information by Reference... Information Concerning Keystone--Keystone Documents Incorporated by Reference 12. Information with Respect to S-2 or S-3 Registrants.. NA 13. Incorporation of Certain Information by Reference... NA 14. Information with Respect to Registrants Other than S-3 or S-2 Registrants..... NA C. Information About the Company Being Acquired 15. Information with Respect to S-3 Companies........... Summary; Information Concerning FTC 16. Information with Respect to S-2 or S-3 Companies.... Summary; Information Concerning FFWM; Exhibits 13.1 and 13.2 17. Information with Respect to Companies Other Than S-2 or S-3 Companies.. NA D. Voting and Management Information 18. Information if Proxies, Consents or Authorizations are to be Solicited
-2-
Item Number and Caption in Schedule 14A under the Securities Exchange Act of 1934 or Caption(s) or Location in Regulation S-K Joint Proxy Statement/Prospectus --------------------------- ---------------------------------- (1) Date, Time and Place Information................ Outside Front Cover Page of Joint Proxy Statement/Prospectus; Summary; Introduction; Shareholder Proposals and Nominations (2) Revocability of Proxy...... Introduction--Voting and Revocation of Proxies (3) Dissenters' Rights of Appraisal.................. FTC Plan of Merger--Absence of Dissenters' Rights of Keystone or FTC Shareholders; FFWM Plan of Merger--Dissenters' Rights of FFWM Shareholders (4) Persons Making the Introduction; Solicitation............... Introduction--Solicitation of Proxies (5) Interest of Certain Persons in Matters to be Acted Upon.............. FTC Plan of Merger--Keystone Board of Directors Following the FTC Merger;--Interests of Certain Persons in the Transaction; FFWM Plan of Merger--Boards of Directors Following the FFWM Merger;-- Interests of Certain Persons in the Transaction (6) Voting Securities and Principal Holders Thereof.. Introduction--Record Date; Voting Rights; Information Concerning Keystone--Keystone Documents Incorporated by Reference; Information Concerning FTC--FTC Documents Incorporated by Reference; Information Concerning FFWM--FFWM Documents Incorporated by Reference (21) Vote Required for Approval. FTC Plan of Merger--Required Votes; Management Recommendation; FFWM Plan of Merger--Required Votes; Management Recommendation (401) Directors and Executive Officers................... FTC Plan of Merger--Keystone Board of Directors Following the FTC Merger; Information Concerning Keystone--Keystone Documents Incorporated by Reference; Information Concerning FTC--FTC Documents Incorporated by Reference
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Item Number and Caption in Schedule 14A under the Securities Exchange Act of 1934 or Caption(s) or Location in Regulation S-K Joint Proxy Statement/Prospectus --------------------------- ---------------------------------- (402) Executive Compensation..... Information Concerning Keystone--Keystone Documents Incorporated by Reference; Information Concerning FTC--FTC Documents Incorporated by Reference (404) Certain Relationships and Related Transactions............... Information Concerning Keystone--Keystone Documents Incorporated by Reference; Information Concerning FTC--FTC Documents Incorporated by Reference
Form S-4 Item Caption(s) or Location in Number and Caption Joint Proxy Statement/Prospectus - ------------------ ----------------------------------- 19. Information if Proxies, Consents or Authorizations are Not to be Solicited, or in Exchange Offer....... NA
-4- Joint Proxy Statement/Prospectus KEYSTONE FINANCIAL, INC. Up to 15,903,416 Shares of Common Stock, $2 par value, issuable in proposed mergers with FINANCIAL TRUST CORP and FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND This Joint Proxy Statement/Prospectus is being furnished to the shareholders of Keystone Financial, Inc. ("Keystone"), Financial Trust Corp ("FTC") and First Financial Corporation of Western Maryland ("FFWM") in connection with the solicitation of proxies by their respective Boards of Directors for use at a Special Meeting of Shareholders of Keystone to be held on March 17, 1997, a Special Meeting of Shareholders of FTC to be held on March 18, 1997 and a Special Meeting of Shareholders of FFWM to be held on March 17, 1997. At the Keystone and FTC Meetings, shareholders of Keystone and FTC will vote upon a proposed merger of FTC into Keystone (the "FTC Merger"). As a result of the FTC Merger, Keystone, which will be the surviving corporation, will acquire all of the assets and liabilities of FTC, and the shareholders of FTC will become shareholders of Keystone. Each outstanding share of FTC Common Stock will be converted in the FTC Merger into 1.65 shares of Keystone Common Stock. The purpose of the FFWM Special Meeting is to consider a proposed merger of FFWM into Keystone (the "FFWM Merger"). As a result of the FFWM Merger, Keystone, which will be the surviving corporation, will acquire all of the assets and liabilities of FFWM, and each outstanding share of FFWM Common Stock will be converted into either 1.29 shares of Keystone Common Stock or an equivalent amount in cash, as elected by the holder thereof subject to the limitations described herein. The FTC Merger and the FFWM Merger are separate and independent transactions. Either Merger may be consummated whether or not the other is approved by the shareholders entitled to vote thereon and whether the other is consummated or not consummated for any reason. On February ___, 1997, the closing sale price for Keystone Common Stock on the NASDAQ National Market System was $_____ per share. FTC and FFWM shareholders should note that the market value of the Keystone Common Stock may change prior to consummation of the Mergers. ---------------------------------------- THE SHARES OF KEYSTONE COMMON STOCK TO BE ISSUED IN THE MERGERS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OF KEYSTONE COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. ---------------------------------------- No person has been authorized to give any information or to make any representation not contained herein, and, if given or made, any such information or representation should not be relied upon as having been authorized. This Joint Proxy Statement/Prospectus does not constitute an offer or solicitation by any person in any State in which such offer or solicitation is not authorized by the laws thereof or in which the person making such offer or solicitation is not qualified to make the same. Neither the delivery of this Joint Proxy Statement/Prospectus at any time nor the distribution of Keystone Common Stock hereunder shall imply that the information herein is correct as of any time subsequent to its date. The date of this Joint Proxy Statement/Prospectus is February ___, 1997. AVAILABLE INFORMATION Keystone, FTC and FFWM are subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and in accordance therewith file reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.; Suite 1300, 7 World Trade Center, New York, New York; and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois. Copies of such material can also be obtained at prescribed rates by writing to the SEC, Public Reference Section, Washington, D.C. 20549. Such material may also be accessed electronically by means of the SECs home page on the Internet at http://www.sec.gov. Keystone Common Stock, FTC Common Stock and FFWM Common Stock are quoted on the NASDAQ National Market System, and such reports, proxy statements and other Keystone, FTC and FFWM information can also be inspected at the offices of NASDAQ Operations, 1735 K Street, N.W., Washington, D.C. Keystone has filed with the SEC under the Securities Act of 1933 (the "Securities Act") a Registration Statement on Form S-4 (the "Registration Statement") covering the shares of Keystone Common Stock issuable in the Mergers. As permitted by the rules and regulations of the SEC, this Joint Proxy Statement/Prospectus omits certain information, exhibits and undertakings contained in the Registration Statement. The statements contained in this Joint Proxy Statement/Prospectus as to the contents of any contract or other document filed as an exhibit to the Registration Statement are of necessity brief descriptions and are not necessarily complete. Each such statement is qualified in its entirety by reference to the copy of such contract or document filed or incorporated by reference as an exhibit to the Registration Statement. The Registration Statement and the exhibits thereto can be inspected at the public reference facilities of the SEC at the addresses set forth above or through the SECs home page on the Internet. Copies of such material can be obtained at prescribed rates by mail addressed to the SEC, Public Reference Section, Washington, D.C. 20549. This Joint Proxy Statement/Prospectus incorporates by reference certain documents relating to Keystone, FTC and FFWM which are not presented herein or delivered herewith. See "Information Concerning Keystone--Keystone Documents Incorporated by Reference," "Information Concerning FTC--FTC Documents Incorporated by Reference" and "Information Concerning FFWM--FFWM Documents Incorporated by Reference." Copies of such documents are available upon request and without charge to any person to whom this Joint Proxy Statement/Prospectus has been delivered. Requests for Keystone documents should be directed to Keystone Financial, Inc., One Keystone Plaza, Front and Market Streets, P.O. Box 3660, Harrisburg, Pennsylvania 17105-3660, Attention: Ben G. Rooke, Corporate Secretary (telephone: 717-231-5701). Requests for FTC documents should be directed to Financial Trust Corp, 1415 Ritner Highway, Carlisle, Pennsylvania 17013, Attention: Lauren L. Shutt, Corporate Secretary (telephone: 717-241- 7710). Requests for FFWM documents should be directed to First Financial Corporation of Western Maryland, 118 Baltimore Street, Cumberland, Maryland 21502, Attention: William C. Marsh, Executive Vice President and Chief Financial Officer (telephone: 301-784-3106). In order to ensure timely delivery of the documents, any request by a Keystone shareholder should be made not later than March 10, 1997, any request by an FTC shareholder should be made not later than March 11, 1997 and any request by an FFWM shareholder should be made not later than March 10, 1997. KEYSTONE FINANCIAL, INC. FINANCIAL TRUST CORP and FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND ----------- JOINT PROXY STATEMENT/PROSPECTUS ----------- TABLE OF CONTENTS Page ---- SUMMARY.............................................. iv INTRODUCTION Record Dates; Voting Rights....................... 1 Purposes of the Special Meetings.................. 2 Voting and Revocation of Proxies.................. 2 Trust Department Shares........................... 3 Solicitation of Proxies........................... 3 FTC PLAN OF MERGER The FTC Merger.................................... 4 Background of and Reasons for the FTC Merger...... 4 Required Votes; Management Recommendations........ 7 Voting Agreements................................. 7 Opinion of Keystone Financial Advisor............. 8 Opinion of FTC Financial Advisor.................. 10 Conversion of FTC Shares.......................... 12 Tax Consequences to FTC Shareholders.............. 14 Keystone Board of Directors Following the FTC Merger........................................... 15 Interests of Certain Persons in the Transaction... 15 Warrant Agreement................................. 16 Inconsistent Activities........................... 17 Conduct of FTC's Business Pending the FTC Merger.. 17 FTC Dividend Limitation........................... 18 Conditions to the FTC Merger...................... 18 Representations and Warranties.................... 18 Amendment, Waiver and Termination................. 18 Absence of Dissenters' Rights of Keystone or FTC Shareholders..................................... 19 Restrictions on Resales by FTC Affiliates......... 19 Effect of Certain Transactions Involving Keystone. 19 Effect on FTC Employee and Director Stock Options. 20 Effect on FTC's Dividend Reinvestment Plan........ 20 Expenses.......................................... 20 Effective Date of the FTC Merger.................. 21 PRO FORMA COMBINED FINANCIAL INFORMATION INFORMATION CONCERNING THE PRO FORMA COMBINED FINANCIAL DATA..................................... 22 PRO FORMA COMBINED CONDENSED STATEMENT OF CONDITION. 23 PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME... 24 -i- INFORMATION CONCERNING KEYSTONE KEYSTONE SELECTED FINANCIAL DATA.................... 25 STOCK PRICES AND DIVIDENDS ON KEYSTONE COMMON STOCK. 27 KEYSTONE DOCUMENTS INCORPORATED BY REFERENCE........ 28 INFORMATION CONCERNING FTC FTC SELECTED FINANCIAL DATA......................... 29 STOCK PRICES AND DIVIDENDS ON FTC COMMON STOCK...... 31 FTC DOCUMENTS INCORPORATED BY REFERENCE............. 32 FFWM PLAN OF MERGER The FFWM Merger................................... 33 Background of the FFWM Merger..................... 33 Reasons for the FFWM Merger....................... 35 Required Vote; Management Recommendation.......... 36 Voting Agreements................................. 36 Opinion of FFWM Financial Advisor................. 36 Elections by FFWM Shareholders.................... 40 Limitations on Effectiveness of Elections......... 41 Additional Procedures and Determinations.......... 42 Conversion of FFWM Shares......................... 42 Tax Consequences to FFWM Shareholders............. 43 Boards of Directors Following the FFWM Merger..... 45 Interests of Certain Persons in the Transaction... 45 Stock Option Agreement............................ 47 Inconsistent Activities........................... 48 Conduct of Business Pending the FFWM Merger....... 48 FFWM Dividend Limitation.......................... 49 Conditions to the FFWM Merger..................... 49 Representations and Warranties.................... 49 Amendment, Waiver and Termination................. 49 Termination Fee................................... 50 Dissenters' Rights of FFWM Shareholders........... 51 Restrictions on Resales by FFWM Affiliates........ 53 Effect on FFWM's Dividend Reinvestment Plan....... 53 Expenses.......................................... 53 Accounting Treatment.............................. 53 Effective Date of the FFWM Merger................. 53 INFORMATION CONCERNING FFWM FFWM SELECTED FINANCIAL DATA........................ 55 STOCK PRICES AND DIVIDENDS ON FFWM COMMON STOCK..... 57 FFWM DOCUMENTS INCORPORATED BY REFERENCE............ 58 COMPARISON OF KEYSTONE COMMON STOCK AND FTC COMMON STOCK................................ 59 COMPARISON OF KEYSTONE COMMON STOCK AND FFWM COMMON STOCK............................... 64 LEGAL OPINIONS....................................... 71 -ii- EXPERTS.............................................. 71 SHAREHOLDER PROPOSALS AND NOMINATIONS................ 71 OTHER MATTERS........................................ 72 ANNEXES I. Opinion of Danielson Associates Inc. to Keystone....................................... A-1 II. Opinion of Berwind Financial Group, L.P. to FTC......................................... A-2 III. Opinion of Alex. Brown & Sons Incorporated to FFWM........................................ A-4 IV. Statutory Provisions Concerning Dissenters' Rights of FFWM Shareholders.................... A-6 -iii- SUMMARY The following is a brief summary of certain information which may also be contained elsewhere in this Joint Proxy Statement/Prospectus. This summary is provided for convenience and should not be considered complete. It is qualified in its entirety by the more detailed information contained in this Joint Proxy Statement/Prospectus and in the Annexes hereto. The Parties Keystone Financial, Inc. ("Keystone") is a bank holding company with its principal executive offices at One Keystone Plaza, Front and Market Streets, P.O. Box 3660, Harrisburg, Pennsylvania 17105-3660, (telephone: 717-233-1555). In terms of assets, Keystone is the fifth largest bank holding company headquartered in Pennsylvania. Its banking subsidiaries are American Trust Bank, N.A., Cumberland, Maryland ("American Trust Bank"); Frankford Bank, N.A., Horsham, Pennsylvania; Keystone National Bank, Lancaster, Pennsylvania; Mid- State Bank and Trust Company, Altoona, Pennsylvania; Northern Central Bank, Williamsport, Pennsylvania; and Pennsylvania National Bank and Trust Company, Pottsville, Pennsylvania. Keystone also has several nonbank subsidiaries and divisions providing specialized services, including Keystone Financial Mortgage Company, Lancaster, Pennsylvania; Martindale Andres & Co. (asset management firm), West Conshohocken, Pennsylvania; and Keystone Financial Dealer Center, Williamsport, Pennsylvania. Keystone's subsidiary banks provide a wide range of financial products and services through a combined total of 140 community offices located in central and southeastern Pennsylvania, western Maryland and northeastern West Virginia. Keystone's subsidiary banks operate under the "supercommunity" banking philosophy, functioning as local community banks with a personalized service approach to customers while at the same time taking advantage of the size of the Keystone organization to provide a broad product line and gain operating and management efficiencies through centralized banking operation. In addition to traditional banking services provided by its community banks, Keystone's nonbank subsidiaries deliver an array of services to both Keystone and its customers, including brokerage, investment, mortgage banking, leasing, and credit life and accident and health insurance. See "Keystone Documents Incorporated by Reference." Keystone Common Stock is traded in the over-the-counter market under the symbol "KSTN" and is listed in the NASDAQ National Market System. On February ___, 1997, the closing sale price for Keystone Common Stock on the NASDAQ National Market System was $_____. See "Information Concerning Keystone--Stock Prices and Dividends on Keystone Common Stock." At September 30, 1996, Keystone reported total assets of $5.186 billion, deposits of $4.111 billion, and net loans and leases of $3.437 billion. Keystone reported net income of $61,314,000, or $1.73 per share for the year ended December 31, 1995 and net income of $51,615,000, or $1.36 per share for the nine months ended September 30, 1996. See "Information Concerning Keystone--Selected Financial Data" and "Keystone Documents Incorporated by Reference." Financial Trust Corp ("FTC") is a bank holding company with its principal executive offices at 1415 Ritner Highway, Carlisle, Pennsylvania 17013 (telephone: 717-243-8003). In terms of assets, FTC is the 17th largest bank holding company headquartered in Pennsylvania. Its banking subsidiaries are Financial Trust Company, Carlisle, Pennsylvania; Chambersburg Trust Company, Chambersburg, Pennsylvania; First National Bank and Trust Co., Waynesboro, Pennsylvania; and Washington County National Bank, Williamsport, Maryland. -iv- FTC's subsidiary banks operate a combined total of 48 banking offices in south central Pennsylvania and western Maryland. FTC also delivers trust services to its commercial bank markets through Financial Trust Services Company and provides credit life and disability insurance to its subsidiary banks' loan customers through Financial Trust Life Insurance Company. See "FTC Documents Incorporated by Reference." FTC Common Stock is traded in the over-the-counter market under the symbol "FITC" and is listed in the NASDAQ National Market System. On February ___, 1997, the closing sale price for FTC Common Stock on the NASDAQ National Market System was $_____. See "Information Concerning FTC--Stock Prices and Dividends on FTC Common Stock." At September 30, 1996, FTC reported total assets of $1.227 billion, deposits of $976 million, and net loans of $762 million. FTC reported net income of $18,135,000, or $2.12 per share for the year ended December 31, 1995 and net income of $15,102,000, or $1.77 per share for the nine months ended September 30, 1996. See "Information Concerning FTC--Selected Financial Data" and "FTC Documents Incorporated by Reference." First Financial Corporation of Western Maryland ("FFWM") is a thrift holding company with its principal executive offices at 118 Baltimore Street, Cumberland, Maryland 21502 (telephone: 301-724-3363). FFWM's principal subsidiary is First Federal Savings Bank of Western Maryland ("First Federal"), which operates 10 banking offices in Allegany, Garrett and Washington Counties, in western Maryland. See "FFWM Documents Incorporated by Reference." FFWM Common Stock is traded in the over-the-counter market under the symbol "FFWM" and is listed in the NASDAQ National Market System. On February ___, 1997, the closing sale price for FFWM Common Stock on the NASDAQ National Market System was $_____. See "Information Concerning FFWM--Stock Prices and Dividends on FFWM Common Stock." At September 30, 1996, FFWM reported total assets of $346 million, deposits of $281 million, and net loans of $270 million. FFWM reported net income of $3,600,000, or $1.65 per share for its fiscal year ended June 30, 1996 and net income of $43,000, or $0.02 per share for the three months ended September 30, 1996. See "Information Concerning FFWM --Selected Financial Data" and "FFWM Documents Incorporated by Reference." The Special Meetings Keystone Special Meeting. The Special Meeting of Shareholders of Keystone (the "Keystone Special Meeting") will be held at 10:00 a.m., local time, on March 17, 1997 at the Wildwood Conference Center, Harrisburg Area Community College, One HACC Drive, Harrisburg, Pennsylvania. Only holders of record of Common Stock, par value $2.00 per share, of Keystone ("Keystone Common Stock") at the close of business on February 3, 1997 will be entitled to vote at the Keystone Special Meeting. At that date, approximately [37,998,000] shares of Keystone Common Stock were outstanding, each share being entitled to one vote. See "Introduction." FTC Special Meeting. The Special Meeting of Shareholders of FTC (the "FTC Special Meeting") will be held at 1:00 p.m., local time, on March 18, 1997 at 1415 Ritner Highway, Carlisle, Pennsylvania. Only holders of record of Common Stock, par value $5.00 per share, of FTC ("FTC Common Stock") at the close of business on January 31, 1997 will be entitled to vote at the FTC Special Meeting. At that date, [8,532,131] shares of FTC Common Stock were outstanding, each share being entitled to one vote. See "Introduction." FFWM Special Meeting. The Special Meeting of Shareholders of FFWM (the "FFWM Special Meeting") will be held at 10:00 a.m., local time, on March 17, 1997 at the Holiday Inn, 100 South George Street, Cumberland, Maryland. Only holders of record of Common Stock, par value $1.00 per share, of FFWM ("FFWM Common Stock"), at the close of business on January 31, 1997 will be entitled to vote at the FFWM Special -v- Meeting. At that date, [2,167,896] shares of FFWM Common Stock were outstanding, each share being entitled to one vote. See "Introduction." Proposed Mergers Keystone and FTC. At their respective Meetings, the shareholders of Keystone and FTC will be asked to approve an Agreement and Plan of Reorganization and a related Agreement and Plan of Merger (collectively, the "FTC Plan of Merger") between Keystone and FTC. The FTC Plan of Merger provides for a merger of FTC into Keystone (the "FTC Merger") in which Keystone will acquire all of the assets and liabilities of FTC, and the subsidiaries of FTC will become Keystone subsidiaries. See "FTC Plan of Merger--The FTC Merger." As a result of the FTC Merger, the shareholders of FTC will become shareholders of Keystone. Each outstanding share of FTC Common Stock will be converted in the FTC Merger into 1.65 shares of Keystone Common Stock, with cash to be paid in lieu of any fractional share. See "FTC Plan of Merger--Conversion of FTC Common Stock." On February ___, 1997, the closing sale price for Keystone Common Stock on the NASDAQ National Market System was $_____ per share. Keystone and FFWM. At the FFWM Special Meeting, the Shareholders of FFWM will be asked to approve an Agreement and Plan of Merger between Keystone and FFWM (the "FFWM Plan of Merger"). The FFWM Plan of Merger provides for the merger (the "FFWM Merger") of FFWM into Keystone. It is contemplated that contemporaneously with the FFWM Merger, FFWM's subsidiary, First Federal, will be merged into American Trust Bank, one of Keystone's operating bank subsidiaries (the "FFWM Bank Merger"). See "FFWM Plan of Merger--The FFWM Merger." In the FFWM Merger, each outstanding share of FFWM Common Stock will be converted into either (1) 1.29 shares of Keystone Common Stock, with cash to be paid in lieu of any fractional share or (2) cash in an amount equal to 1.29 times the average of the closing bid prices for Keystone Common Stock on the NASDAQ National Market System for the 20 trading days ending with the sixth trading day preceding the closing date for the FFWM Merger. FFWM shareholders may elect to receive either Keystone Common Stock or cash, but not both, subject to certain limitations described herein. See "FFWM Plan of Merger--Elections by FFWM Shareholders;" "FFWM Plan of Merger--Limitations on Effectiveness of Elections;" and "FFWM Plan of Merger--Conversion of FFWM Common Stock." On February ___, 1997, the closing bid price for Keystone Common Stock on the NASDAQ National Market System was $_____ per share. Elections by FFWM Shareholders FFWM shareholders may elect to receive in the FFWM Merger for each share of FFWM Common Stock held of record either (1) 1.29 shares of Keystone Common Stock, with cash to be paid in lieu of any fractional share (the "Stock Election") or (2) cash in an amount equal to 1.29 times the average of the closing bid prices for Keystone Common Stock on the NASDAQ National Market System for the 20 trading days ending with the sixth trading day preceding the closing date for the FFWM Merger (the "Cash Election"). Each FFWM shareholder (other than nominees) must make the same Election for all FFWM shares held of record. The enclosed proxy card for FFWM shareholders contains a Form of Election for designating either the Stock Election or the Cash Election. Persons who become holders of record of FFWM Common Stock after the record date for the FFWM Special Meeting may obtain a Form of Election by writing to First Financial Corporation of Western Maryland, 118 Baltimore Street, Cumberland, Maryland 21502, Attention: William C. Marsh, Executive Vice President and Chief Financial Officer. To be effective, a Form of Election must be received by FFWM no later than 10:00 a.m., local time, on March 17, 1997. FFWM shareholders who fail to submit a Form of Election by this deadline will be deemed to have made either the Stock Election or the Cash Election, as necessary to meet the limitations described herein. Upon this deadline Elections will become irrevocable and will bind any transferee of the shares of the electing FFWM shareholder. See "FFWM Plan of Merger--Elections by FFWM Shareholders." The FFWM Plan of Merger requires that the aggregate market value of the Keystone Common Stock to be issued under the Stock Election (1) shall be at least equal to 55% of the total consideration payable by Keystone in the FFWM Merger and (2) shall not (unless permitted by Keystone in its sole discretion) exceed 60% of such total -vi- consideration except as necessary to assure that each FFWM shareholder shall be deemed to have made either solely the Stock Election or solely the Cash Election. If necessary to meet either of these limitations, the Elections made by certain FFWM shareholders may be disregarded. See "FFWM Plan of Merger--Limitations on Effectiveness of Elections." Relationship of the Two Mergers The FTC Merger and the FFWM Merger are separate and independent transactions. Either Merger may be consummated whether or not the other is approved by the shareholders entitled to vote thereon and whether or not the other is consummated or is not consummated for any reason. Therefore, in considering whether to vote in favor of the FTC Merger, Keystone and FTC shareholders should consider the effect of the FTC Merger both with and without consummation of the FFWM Merger. Similarly, in considering whether to vote in favor of the FFWM Merger, FFWM shareholders should consider the effect of the FFWM Merger both with and without consummation of the FTC Merger. Reasons for the FTC Merger Keystone. For Keystone, the FTC Merger will strengthen its market position in central Pennsylvania and western Maryland and provide entry into new markets in south central Pennsylvania. Keystone believes that as a result of the FTC Merger it will also be able to achieve operating economies and enhanced revenue growth arising from a wider distribution of its products and services. Consummation of the FTC Merger will create a company capable of competitively providing a broad array of traditional and innovative banking products and services to the resulting market. The combination of the skills, resources and services offered by Keystone and FTC will enable the resulting company to more effectively compete with other full-service financial institutions in Keystone's and FTC's respective markets. See "FTC Plan of Merger--Background of and Reasons for the FTC Merger." FTC. Over the past decade, as the pace of change within the banking industry has accelerated and as competition from non-bank financial service providers has increased, FTC carefully reviewed its strategic alternatives and long-term goals and considered what steps should be taken to maintain and enhance its competitive position. In prior years this process led the FTC Board of Directors to determine that it should continue its strategy of independence and to seek growth internally and through acquisitions. While FTC as an independent entity historically has been able to implement effective strategies to achieve strong financial performance, the changing dynamics of the banking industry is likely to inhibit its ability to continue to achieve comparable future performance. The efficiencies of larger organizations whose cost of doing business is on average less than that of FTC creates a competitive disadvantage. This disadvantage will most likely be amplified in the future as the role of technology expands, placing greater emphasis on substantial capital investment with a somewhat uncertain outcome. Additionally, the ability of nonbank competition to provide banking-related services with substantially less regulatory oversight, the preclusion of banking institutions to engage in certain financial product lines and the migration of traditional bank products such as deposits to alternative investments likely will adversely affect institutions such as FTC in their ability to generate competitive returns to their shareholders. As a consequence of the foregoing factors, and considering FTC's strategic geographical fit within Keystone's franchise, as well as the share exchange ratio and the increased dividends and improved liquidity the transaction is likely to provide to FTC's shareholders, the Board of Directors of FTC believes that the FTC Merger will be in the best interests of FTC's shareholders and its customers and the communities which it serves. See "FTC Plan of Merger--Background of and Reasons for the FTC Merger." -vii- Reasons for the FFWM Merger FFWM. During August 1996, the FFWM Board of Directors determined that it was appropriate to explore and evaluate the various options available to FFWM to maximize shareholder value, including the possible sale of FFWM. To this end, the Board of Directors engaged the investment banking firm of Alex. Brown & Sons Incorporated ("Alex. Brown") to assist FFWM in its evaluation. Alex. Brown conducted extensive efforts to identify potential acquirors and assist the Board of Directors in evaluating the proposals received, which ultimately resulted in the selection of Keystone as the acquiror of FFWM. The FFWM Board of Directors believes that the FFWM Merger is in the best interests of FFWM's shareholders and the communities in which FFWM operates. In reaching this determination FFWM's Board of Directors evaluated numerous factors and obtained a written opinion from Alex. Brown to the effect that the consideration to be paid to shareholders of FFWM in connection with the FFWM Merger is fair, from a financial point to view, to FFWM's shareholders. For a more detailed discussion of the reasons for the FFWM Merger see "FFWM Plan of Merger--Background of and Reasons for the FFWM Merger." Keystone. Through the merger of FFWM's subsidiary, First Federal, with Keystone's subsidiary, American Trust Bank, Keystone seeks to increase American Trust Bank's market penetration in the areas currently served by both banks and to extend American Trust Bank's market geographically. Keystone hopes following the merger to retain First Federal's depositors and consumer borrowers and thereby increase its retail customer base. In turn, American Trust Bank will have the opportunity to expand banking relationships with its new customers by offering them products and services not presently offered by First Federal. Keystone believes that the merger may enable it to realize cost efficiencies at the same time that it expands its customer base. Finally, the merger will enable American Trust Bank to expand its market geographically, both in the counties in which both banks have offices and into the city of Hagerstown, Maryland, where First Federal currently has an office, but American Trust Bank does not. See "FFWM Plan of Merger--Background of and Reasons for the FFWM Merger." Opinions of Financial Advisors The investment banking firm of Danielson Associates Inc. has rendered an opinion to Keystone dated February ___, 1997 that the terms of the FTC Merger are fair, from a financial point of view, to Keystone and its shareholders. The investment banking firm of Berwind Financial Group, L.P. has rendered an opinion to FTC dated February ___, 1997 that the terms of the FTC Merger are fair, from a financial point of view, to FTC shareholders. The investment banking firm of Alex. Brown & Sons Incorporated has rendered an opinion to the FFWM Board of Directors dated November 26, 1996 that the total consideration to be received by FFWM shareholders in the FFWM Merger is fair, from a financial point of view, to FFWM shareholders. These opinions are attached as Annexes I, II and III to this Joint Proxy Statement/Prospectus and should be read in their entirety for information as to the matters considered and the assumptions made in rendering such opinions. See "FTC Plan of Merger--Opinion of Keystone Financial Advisor," "FTC Plan of Merger--Opinion of FTC Financial Advisor" and "FFWM Plan of Merger--Opinion of FFWM Financial Advisor." Votes Required for Approval FTC Merger. Approval of the FTC Plan of Merger by the shareholders of Keystone requires the affirmative vote of a majority of the votes cast on the proposal by the holders of Keystone Common Stock. An abstention or a broker non-vote is not a vote cast and will not affect the number of Keystone votes required for approval. See "FTC Plan of Merger--Required Votes; Management Recommendations." As of January 2, 1997, the directors and executive officers of Keystone beneficially owned an aggregate of 4.31% of the outstanding Keystone Common Stock. As of January 14, 1997 the trust departments of Keystone's bank subsidiaries, acting in a fiduciary capacity, had sole voting power over approximately 0.01% of the outstanding Keystone Common Stock. See "Introduction--Trust Department Shares." -viii- Approval of the FTC Plan of Merger by the shareholders of FTC requires the affirmative vote of the holders of two-thirds of the outstanding shares of FTC Common Stock. An abstention or a broker non-vote by an FTC shareholder will have the same legal effect as a vote against the approval of the FTC Plan of Merger. See "FTC Plan of Merger--Required Votes; Management Recommendations." As of January 1, 1997, the directors and executive officers of FTC beneficially owned an aggregate of 5.8% of the outstanding FTC Common Stock. As of January 1, 1997 FTC's trust subsidiary, acting in a fiduciary capacity, had sole voting power over approximately 6.2% of the outstanding FTC Common Stock. As of February ___, 1997, Keystone owned and had voting power over [31,400] shares of FTC Common Stock. See "Introduction--Trust Department Shares." The directors of FTC have entered into agreements with Keystone to vote in favor of the FTC Merger shares of FTC Common Stock beneficially owned by them individually or jointly and to use their best efforts to cause certain other shares over which they have or share voting power to be voted in favor of the FTC Merger. These agreements cover an aggregate of 5.6% of the outstanding FTC Common Stock. No monetary or other consideration was paid to any FTC director for entering into these agreements. See "FTC Plan of Merger--Voting Agreements." Shareholders of FFWM are not being asked to approve the FTC Merger. FFWM Merger. Approval of the FFWM Plan of Merger requires the affirmative vote of the holders of a majority of the outstanding shares of FFWM Common Stock. An abstention or a broker non-vote by an FFWM shareholder will have the same legal effect as a vote against the approval of the FFWM Plan of Merger. See "FFWM Plan of Merger--Required Vote; Management Recommendation." As of January 31, 1997, the directors and executive officers of FFWM beneficially owned an aggregate of 7.3% of the outstanding FFWM Common Stock. The directors of FFWM have entered into agreements with Keystone to vote in favor of the FFWM Merger shares of FFWM Common Stock beneficially owned by them individually or jointly and to use their best efforts to cause certain other shares over which they have or share voting power to be voted in favor of the FFWM Merger. These agreements cover an aggregate of 6.5% of the outstanding FFWM Common Stock. No monetary or other consideration was paid to any FFWM director for entering into these agreements. See "FFWM Plan of Merger--Voting Agreements." Shareholders of Keystone and FTC are not being asked to approve the FFWM Plan of Merger. Boards of Directors' Recommendations Keystone. The Board of Directors of Keystone believes that the FTC Merger is in the best interests of the shareholders of Keystone and unanimously recommends that Keystone shareholders vote "FOR" approval of the FTC Plan of Merger. FTC. The Board of Directors of FTC believes that the FTC Merger is in the best interests of the shareholders of FTC and unanimously recommends that FTC shareholders FTC vote "FOR" approval of the FTC Plan of Merger. FFWM. The Board of Directors of FFWM believes that the FFWM Merger is in the best interests of the shareholders of FFWM and unanimously recommends that FFWM shareholders vote "FOR" approval of the FFWM Plan of Merger. SHAREHOLDERS OF KEYSTONE, FTC AND FFWM ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE- PAID ENVELOPE. -ix- Post-Merger Boards of Directors Following the FTC Merger, Ray L. Wolfe, Chairman and Chief Executive Officer of FTC, will become Chairman of the Board of Keystone. Mr. Wolfe and two other directors of FTC, to be designated by FTC subject to Keystone's approval, will become members of the Board of Directors of Keystone. See "FTC Plan of Merger--Keystone Board of Directors Following the Merger." Following the FFWM Merger, three directors of FFWM to be selected by Keystone will become members of the Board of Directors of American Trust Bank. See "FFWM Plan of Merger--Boards of Directors following the Merger." Interests of Certain Persons in the Transactions FTC Merger. In connection with the FTC Merger, Keystone has entered into an employment agreement with Ray L. Wolfe, the Chairman of the Board and Chief Executive Officer of FTC. The agreement provides for Mr. Wolfe's employment by Keystone for three years following the FTC Merger at an annual compensation of $350,000 and for his retention as a consultant thereafter until August 15, 2003 at an annual compensation of $177,000. Keystone has also agreed to honor FTC's and its subsidiaries' obligations to indemnify their directors and officers, and charter and bylaw provisions limiting the liability of directors, with respect to events occurring prior to the FTC Merger and to provide employees of FTC and its subsidiaries with credit for their prior service with FTC in determining eligibility and vesting under Keystone's employee benefit plans. See "FTC Plan of Merger--Interests of Certain Persons in the Transaction." FFWM Merger. In consideration of their being available to Keystone for advisory services, Keystone has agreed to pay each director of FFWM who continues to serve until the FFWM Merger an amount equal to the fees paid to the director by FFWM during the year preceding the FFWM Merger. These amounts, which are estimated to range between $12,200 and $13,400 per director, will be reduced by any fees received for service as a director of American Trust Bank. FFWM and First Federal are parties to an employment agreement with Patrick J. Coyne, Chairman of the Board, President and Chief Executive Officer, and severance agreements with Kenneth W. Andres, William C. Marsh and R. Craig Pugh, three Executive Vice Presidents. Under these agreements, upon consummation of the FFWM Merger and in satisfaction of the employers' obligations under the terms of the agreements and existing stock option and incentive plan agreements, Messrs. Coyne, Andres, Marsh and Pugh will receive pre-tax severance payments in the amounts of [$1,334,348, $421,827, $344,152 and $445,594], respectively. The employment of each of Messrs. Coyne, Andres, Marsh and Pugh will terminate effective on the effective date of the FFWM Merger, and none of these officers will have any continuing employment with Keystone or American Trust Bank following the effective date. Keystone has agreed in the FFWM Plan of Merger to honor FFWM's obligations to indemnify the directors and officers of FFWM and its subsidiaries, and charter and bylaw provisions limiting the liability of FFWM directors, with respect to events occurring prior to the FFWM Merger and to provide FFWM's directors and officers with certain liability insurance coverage for three years following the FFWM Merger. It has also agreed to pay FFWM directors and officers who hold unexercised stock options under FFWM's stock incentive plan, in exchange for the cancellation of their options, an amount equal to the net amount that would have been received under the Cash Election if the option had been exercised prior to the FFWM Merger. Finally, Keystone has agreed that employees of FFWM and its subsidiaries who become Keystone employees will be entitled to participate in Keystone employee benefit plans, with credit for their prior service with FFWM in determining eligibility and vesting, and that employees of FFWM and its subsidiaries with at least one year of service prior to the FFWM Merger will be entitled to participate in a Keystone severance plan that will provide severance benefits if the employee's employment is terminated in certain circumstances upon or following the FFWM Merger. See "FFWM Plan of Merger--Interests of Certain Persons in the Transaction." -x- Tax Consequences Keystone Shareholders. No gain or loss for federal or Pennsylvania income tax purposes will be recognized by Keystone shareholders as a result of either the FTC Merger or the FFWM Merger. FTC Shareholders. No gain or loss for federal or Pennsylvania income tax purposes will be recognized by shareholders of FTC on the exchange of their shares for Keystone Common Stock in the FTC Merger, except with respect to cash received in lieu of fractional shares. For a more complete description of the Federal and Pennsylvania income tax consequences of the FTC Merger, see "FTC Plan of Merger--Tax Consequences to FTC Shareholders." FFWM Shareholders. No gain or loss for federal income tax purposes or for Maryland personal income tax purposes will be recognized by shareholders of FFWM who make or are deemed to have made the Stock Election, except with respect to cash received in lieu of fractional shares. For FFWM shareholders who make or are deemed to have made the Cash Election or who exercise dissenters' rights, the cash received will be treated as a distribution in redemption of their FFWM Common Stock, subject to the provisions and limitations of Section 302 of the Internal Revenue Code of 1986. For a more complete description of the Federal and Maryland income tax consequences of the FFWM Merger, see "FFWM Plan of Merger--Tax Consequences to FFWM Shareholders." Warrant/Option Agreements FTC Warrant Agreement. In connection with the FTC Plan of Merger, FTC has entered into an agreement granting Keystone a warrant to purchase up to 19.9% of the outstanding FTC Common Stock, at an exercise price of $43.725 per share, upon the occurrence of certain events. In general, the events which would permit Keystone to exercise its warrant would involve an attempt by a third person to gain control of FTC. The Warrant Agreement is designed to compensate Keystone for its risks, costs and expenses and the commitment of resources associated with the FTC Plan of Merger in the event the FTC Merger is not consummated due to an attempt by a third person to gain control of FTC. The Warrant Agreement may discourage third persons from making competing offers to acquire FTC and is intended to increase the likelihood that the FTC Plan of Merger will be consummated in accordance with its terms. Exercise of the warrant for more than 5% of the outstanding FTC Common Stock would be subject to the approval of regulatory authorities. See "FTC Plan of Merger--Warrant Agreement." FFWM Option Agreement. In connection with the FFWM Plan of Merger, FFWM has entered into an agreement granting Keystone an option to purchase up to 16.6% of the outstanding FFWM Common Stock, at an exercise price of $34.19 per share, upon the occurrence of certain events. In general, the events which would permit Keystone to exercise its option would involve an attempt by a third person to gain control of FFWM. The Option Agreement is designed to compensate Keystone for its risks, costs and expenses and the commitment of resources associated with the FFWM Plan of Merger in the event the FFWM Merger is not consummated due to an attempt by a third person to gain control of FFWM. The Option Agreement may discourage third persons from making competing offers to acquire FFWM and is intended to increase the likelihood that the FFWM Plan of Merger will be consummated in accordance with its terms. Exercise of the option for more than 5% of the outstanding FFWM Common Stock would be subject to the approval of regulatory authorities. See "FFWM Plan of Merger--Option Agreement." Dissenters' Rights Keystone Shareholders. Keystone shareholders will not have statutory dissenters' rights with respect to the FTC Merger or the FFWM Merger. -xi- FTC Shareholders. FTC shareholders will not have statutory dissenters' rights with respect to the FTC Merger. FFWM Shareholders. Record holders of FFWM Common Stock who object to the FFWM Merger and comply with the prescribed statutory procedures are entitled to have the fair value of their shares determined in accordance with the Delaware General Corporation Law and paid to them in cash in lieu of the shares of Keystone Common Stock or cash they would otherwise be entitled to receive in the FFWM Merger. A copy of the pertinent statutory provisions is attached to this Joint Proxy Statement/Prospectus as Annex IV. Failure to follow such provisions precisely may result in a loss of dissenters' rights. See "FFWM Plan of Merger--Dissenters' Rights of FFWM Shareholders." Differences in Shareholder Rights The rights of the holders of Keystone Common Stock differ in certain respects from those of the holders of FTC Common Stock and FFWM Common Stock. FTC Common Stock. While for both FTC and Keystone supermajority shareholder votes are required to approve certain mergers and other transactions and certain amendments to the Articles of Incorporation or Bylaws, the types of transactions or amendments subject to the special vote requirements and the votes required for approval differ between the two companies. While both FTC and Keystone have classified Boards of Directors, there are differences in the rights of shareholders of the two companies to increase or decrease the size of the Board, to fill vacancies and to nominate and remove directors. Unlike FTC, Keystone has established a shareholder rights plan which may discourage outside persons from attempting to acquire control of Keystone. While both FTC and Keystone are subject to certain provisions of the Pennsylvania Business Corporation Law which may make an attempt to acquire control of the corporation more difficult, Keystone has elected to opt out from coverage of some of these provisions. Unlike FTC, Keystone has an authorized class of preferred stock which, if issued, could affect the rights of the holders of Keystone Common Stock. For a more detailed discussion of the differences between the rights of the holders of FTC Common Stock and those of the holders of Keystone Common Stock, see "Comparison of Keystone Common Stock and FTC Common Stock." FFWM Common Stock. While for both FFWM and Keystone supermajority shareholder votes are required to approve certain mergers and other transactions with a substantial shareholder and certain charter and bylaw amendments, the types of transactions and amendments subject to the special vote requirements and the votes required for approval differ between the two companies. While both FFWM and Keystone have classified Boards of Directors, there are differences in the rights of shareholders of the two companies to nominate and remove directors. Keystone has established a shareholder rights plan which may discourage outside persons from attempting to acquire control of Keystone. FFWM does not have a shareholder rights plan but does restrict the ability of any person to vote more than 10% of its outside shares. While the statutes governing both Keystone and FFWM contain additional provisions that may discourage takeover attempts by outside persons, the provisions of the two statutes are not the same. For a more detailed discussion of the differences between the rights of the holders of FFWM Common Stock and those of the holders of Keystone Common Stock, see "Comparison of Keystone Common Stock and FFWM Common Stock." Regulatory Approvals The FTC Merger requires approval by the Board of Governors of the Federal Reserve System, the Pennsylvania Department of Banking and the Maryland Bank Commissioner. The FFWM Bank Merger, which is a condition to the FFWM Merger, requires approval by the Office of the Comptroller of the Currency ("OCC"). Applications for these approvals will be filed and are expected to be approved, although no assurances may be given as to whether or when such approvals may be received. -xii- Conditions; Amendment; Termination In addition to shareholder and regulatory approval, consummation of each Merger is contingent upon the receipt of certain tax opinions and the satisfaction of a number of other conditions. See "FTC Plan of Merger-- Conditions to the FTC Merger" and "FFWM Plan of Merger--Conditions to the FFWM Merger." Notwithstanding prior shareholder approval, either Plan of Merger may generally be amended in any respect other than the ratio for converting FTC Common Stock into Keystone Common Stock in the FTC Merger or the formulas for converting FFWM Common Stock into Keystone Common Stock or cash in the FFWM Merger. The FTC Plan of Merger may be terminated, and the FTC Merger abandoned, notwithstanding prior shareholder approval, by mutual agreement of Keystone and FTC or by either of them in the event of a material breach by the other party, the failure of the shareholders of either party to approve the FTC Merger, the denial of a required regulatory approval or failure to satisfy the conditions to the FTC Merger prior to December 31, 1997. See "FTC Plan of Merger--Amendment, Waiver and Termination." The FFWM Plan of Merger may be terminated, and the FFWM Merger abandoned, notwithstanding prior shareholder approval, by mutual agreement of Keystone and FFWM or by either of them in the event of a material breach by the other party, the failure of the shareholders of FFWM to approve the FFWM Merger, the denial of a required regulatory approval or failure to consummate the FFWM Merger prior to November 26, 1997. The FFWM Plan of Merger may also be terminated by FFWM if the average closing bid price for Keystone Common Stock shall be less than $21.20 for the period of 20 consecutive trading days ending with the date of approval of the FFWM Bank Merger by the OCC or by Keystone if the average closing bid price for Keystone Common Stock for such period shall be greater than $31.80. In the event Keystone elects to terminate for this reason, FFWM may prevent such termination by electing to proceed with the FFWM Merger at a reduced exchange ratio. See "FFWM Plan of Merger--Amendment, Waiver and Termination." Effective Dates of the Mergers It is presently anticipated that if the FTC Plan of Merger is approved by the shareholders of Keystone and FTC, the FTC Merger will become effective in the second quarter of 1997. However, there can be no assurance that all conditions necessary to the consummation of the FTC Merger will be satisfied or, if satisfied, that they will be satisfied in time to permit the FTC Merger to become effective at the anticipated time. See "FTC Plan of Merger--Effective Date of the FTC Merger." It is presently anticipated that if the FFWM Plan of Merger is approved by the shareholders of FFWM, the FFWM Merger will become effective in the second quarter of 1997. However, there can be no assurance that all conditions necessary to the consummation of the FFWM Merger will be satisfied or, if satisfied, that they will be satisfied in time to permit the FFWM Merger to become effective at the anticipated time. See "FFWM Plan of Merger--Effective Date of the FFWM Merger." Exchange of Certificates Instructions on how to effect the exchange of FTC Common Stock certificates for Keystone Common Stock certificates or the exchange of FFWM Common Stock certificates for Keystone Common Stock certificates or cash will be sent as promptly as practicable after the FTC Merger or FFWM Merger becomes effective to each shareholder of record of FTC or FFWM immediately prior to such Merger. Shareholders should not send in stock certificates until they receive written instructions to do so. -xiii- Pre-Announcement Prices Keystone and FTC Common Stock. The following table sets forth (i) the closing sale price for Keystone Common Stock on the NASDAQ National Market System on December 19, 1996, the last trading day prior to the first public announcement of the FTC Merger, (ii) the closing sale price for FTC Common Stock on the NASDAQ National Market System on December 19, 1996, and (iii) an equivalent per share price for FTC Common Stock computed by multiplying the closing sale price for Keystone Common Stock on December 19, 1996 by the FTC Merger exchange ratio of 1.65.
Last Pre-Announcement Equivalent Per Prices Share Price ------------------------------ ------------------------ Keystone Common Stock...... $26.75 -- FTC Common Stock........... $29.25 $44.14
On February ___, 1997, the closing sale price for Keystone Common was $___. Using this price, the equivalent per share price for FTC Common Stock would have been $___. The closing sale price for FTC Common Stock on February ___, 1997 was $___. No assurance can be given as to what the market price of Keystone Common Stock will be when and if the FTC Merger is consummated. Because the FTC Merger exchange ratio is fixed and because the market price of Keystone Common Stock is subject to fluctuation, the value of the shares of Keystone Common Stock that holders of FTC Common Stock will receive in the FTC Merger may increase or decrease prior to and following the FTC Merger. Keystone and FTC shareholders are advised to obtain current market quotations for Keystone Common Stock and FTC Common Stock. FFWM Common Stock. The following table sets forth (i) the closing sale price for Keystone Common Stock on the NASDAQ National Market System on November 25, 1996, the last trading day prior to the first public announcement of the FFWM Merger, (ii) the closing sale price for FFWM Common Stock on the NASDAQ National Market System on November 25, 1996, and (iii) an equivalent per share price for FFWM Common Stock computed by multiplying the closing sale price for Keystone Common Stock on November 25, 1996 by the FFWM Merger exchange ratio of 1.29.
Last Pre-Announcement Equivalent Per Prices Share Price ------------------------------ ------------------------ Keystone Common Stock...... $26.625 -- FFWM Common Stock.......... $27.75 $34.35
On February ___, 1997, the closing sale price for Keystone Common Stock was $___. Using this price, the equivalent per share price for FFWM Common Stock would have been $___. The closing sale price for FFWM Common Stock on February ___, 1997 was $___. No assurance can be given as to what the market price of Keystone Common Stock will be when and if the FFWM Merger is consummated. Because the FFWM Merger exchange ratio is fixed and because the market price of Keystone Common Stock is subject to fluctuation (1) the value of the shares of Keystone Common Stock that holders of FFWM Common Stock may receive in the FFWM Merger under the Stock Election may increase or decrease prior to and following the FFWM Merger and (2) the amount per share of FFWM Common Stock that FFWM shareholders may receive under the Cash Election may increase or decrease prior to the FFWM Merger. FFWM shareholders are advised to obtain current market quotations for Keystone Common Stock and FFWM Common Stock. -xiv- Keystone Stock Repurchase Program On November 16, 1995, as part of its capital management planning process, Keystone's Board of Directors authorized a common share repurchase program of up to 1.5 million shares of Keystone Common Stock. However, any determination as to the amount and timing of share repurchases would be subject to an evaluation of alternative investment returns and overall capitalization levels. Shares repurchased under the program were to be held as treasury stock for such corporate purposes as may be determined, including to fund Keystone's existing employee benefit and share related plans. In order to satisfy pooling-of- interests accounting requirements associated with the FTC Merger, on January 23, 1997 Keystone's Board of Directors amended the share repurchase program to limit the maximum number of shares to be reacquired to 1.2 million and to provide that the program shall terminate no later than the closing date for the FTC Merger. At December 31, 1996, Keystone had 320,000 shares of Keystone Common Stock held in treasury. In a separate action, at the January 23, 1997 meeting of the Keystone Board of Directors, the Board authorized the repurchase of up to 1.5 million shares of Keystone Common Stock for issuance in the FFWM Merger. The FFWM Merger will be accounted for as a purchase business combination. This repurchase program will be completed no later than the closing date for the FFWM Merger. [NOTE: Prior to the mailing to shareholders, a "Subsequent Events" section will be added to the Summary concerning Keystone's and FTC's announcements of results for the year ended December 31, 1996 and FFWM's announcement of results for its fiscal quarter ended December 31, 1996.] -xv- Selected Financial Information--(unaudited) The following table sets forth certain historical financial information for Keystone, FTC and FFWM and certain pro forma combined financial information for Keystone giving effect to the FTC Merger under the pooling-of-interests method of accounting. See "Information Concerning the Pro Forma Combined Financial Data." The FFWM Merger will be accounted for under the purchase method of accounting. The addition of FFWM would not have materially affected the pro forma combined financial information as presented. This information is based on the historical financial statements of Keystone, FTC and FFWM incorporated herein by reference and the pro forma combined financial information appearing elsewhere herein and should be read in conjunction with such statements and information and the related notes.
Nine Months Ended September 30, Year Ended December 31, ---------------------- ---------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (In Thousands, Except Per Share Amounts) Keystone (1) Earnings Net interest income.................. $ 156,925 $ 146,945 $ 197,352 $ 188,418 $ 182,510 $ 177,927 $ 163,734 Provision for credit losses.......... 6,336 6,502 7,859 9,484 7,940 16,053 16,323 Net income........................... 51,615 45,110 61,314 51,359 51,349 45,742 40,268 Per Share Net income........................... $ 1.36 $ 1.28 $ 1.73 $ 1.46 $ 1.47 $ 1.33 $ 1.18 Cash dividends declared.............. 0.72 0.68 0.93 0.86 0.79 0.73 0.68 Statement of Condition at Period End Assets............................... $5,186,129 $4,807,854 $5,074,785 $4,706,000 $4,419,726 $4,311,779 $4,120,215 Deposits............................. 4,111,103 3,848,290 4,061,888 3,827,983 3,582,688 3,655,261 3,560,284 Long-term debt....................... 2,518 4,491 4,048 6,054 5,990 5,144 2,143 Shareholders' equity................. 502,579 447,214 480,694 407,774 412,880 378,314 348,143 FTC (2) Earnings Net interest income.................. $ 38,800 $ 36,233 $ 48,659 $ 46,013 $ 43,950 $ 42,272 $ 37,067 Provision for loan losses............ 599 323 709 840 3,640 2,800 1,498 Income before cumulative effect of accounting change.............................. 15,102 13,557 18,135 16,429 13,962 15,020 13,452 Cumulative effect of accounting change................... -- -- -- -- 373 -- -- Net income........................... 15,102 13,557 18,135 16,429 14,335 15,020 13,452 Per Share Income before cumulative effect of accounting change.............................. $ 1.77 $ 1.59 $ 2.12 $ 1.92 $ 1.64 $ 1.77 $ 1.58 Cumulative effect of accounting change.................... -- -- -- -- 0.04 -- -- Net income........................... 1.77 1.59 2.12 1.92 1.68 1.76 1.58 Cash dividends declared.............. 0.71 0.63 0.85 0.79 0.71 0.65 0.62 Statement of Condition at Period End Assets............................... $1,227,405 $1,118,079 $1,138,437 $1,090,576 $ 995,171 $ 964,917 $ 918,184 Deposits............................. 975,905 921,187 931,720 898,859 836,733 828,687 796,943 Long-term debt....................... 5,388 761 743 811 615 683 1,402 Shareholders' equity................. 146,424 135,821 141,072 125,869 114,737 105,375 95,171
-xvi-
Nine Months Ended September 30, Year Ended December 31, ----------------------- ----------------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---------- ----------- ---------- ----------- ------------- ---------- ------------- (In Thousands, Except Per Share Amounts) Pro Forma Combined Keystone and FTC (1) (2) Earnings Net interest income.................... $ 195,725 $ 183,178 $ 246,011 $ 234,431 $ 226,460 $ 220,199 $ 200,801 Provision for credit losses............ 6,935 6,825 8,568 10,324 11,580 18,853 17,821 Net income............................. 66,717 58,667 79,449 67,788 65,311(3) 60,762 53,720 Per Share Net income............................. $ 1.28 $ 1.19 $ 1.60 $ 1.38 $ 1.33(3) $ 1.25 $ 1.12 Cash dividends declared................ 0.72 0.68 0.93 0.86 0.79 0.73 0.68 Statement of Condition at Period End Assets................................. $6,413,534 $5,925,933 $6,213,222 $5,796,576 $5,414,897 $5,276,696 $5,038,399 Deposits............................... 5,087,008 4,769,477 4,993,608 4,726,842 4,419,421 4,483,948 4,357,227 Long-term debt......................... 7,906 5,252 4,791 6,865 6,605 5,827 3,545 Shareholders' equity................... 649,003 583,035 621,766 533,643 527,617 483,689 443,314
Three Months Ended September 30, Year Ended June 30, ----------------------- -------------------------------------------------------------- 1996 1995 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (In Thousands, Except Per Share Amounts) FFWM Earnings Net interest income.................... $ 3,978 $ 3,297 $ 14,378 $ 13,365 $ 11,931 $ 11,298 $ 10,249 Provision for loan losses.............. 75 150 600 5,985 780 350 317 Income (loss) before cumulative effect of accounting change.................. 43 801 3,600 (1,219) 2,364 2,153 3,252 Cumulative effect of accounting change.................. -- -- -- -- 1,695 -- -- Net income (loss)...................... 43 801 3,600 (1,219) 4,059 2,153 3,252 Per Share Income (loss) before cumulative effect of accounting change.................. $ 0.02 $ 0.37 $ 1.65 $ (0.56) $ 1.09 $ 1.02 $ 0.51(4) Cumulative effect of accounting change.................. -- -- -- -- 0.78 -- -- Net income (loss)...................... $ 0.02 $ 0.37 $ 1.65 $ (0.56) $ 1.87 $ 1.02 $ 0.51(4) Cash dividends declared................ 0.12 0.12 0.48 0.46 0.37 0.27 0.07 Statement of Condition at Period End Assets................................. $ 345,505 $ 330,874 $ 321,994 $ 329,375 $ 345,646 $ 343,557 $ 342,281 Deposits............................... 280,705 287,445 274,756 283,360 301,208 301,820 304,962 Long-term debt......................... Shareholders' equity................... 40,368 39,243 41,707 38,470 40,267 37,472 34,021 - --------------
(1) Keystone financial information for the three years ended December 31, 1993 has been restated to reflect mergers with the Frankford Corporation, WM Bancorp and Elmwood Bancorp, Inc. which occurred in 1994. These transactions were accounted for as poolings of interests. Keystone per share information has been adjusted to reflect a 3-for-2 stock split in the form of a 50% stock dividend in August 1996. -xvii- (2) FTC financial information for the four years ended December 31, 1994 has been restated to reflect the acquisition of Washington County National Bank, which occurred in 1995 and was accounted for as a pooling of interests. FTC per share information has been adjusted to reflect a 10% stock dividend in June 1996. (3) Calculated before cumulative effect of FTC accounting change in 1993. (4) For the period February 10, 1992 (effective date of stock conversion and initial public offering) through June 30, 1992, the portion of the year in which the FFWM Common Stock was outstanding. Comparative Per Share Data--(unaudited) The following table sets forth for the periods indicated (i) historical earnings, book values and dividends per share for Keystone, FTC and FFWM Common Stock, (ii) pro forma comparative earnings and book values per share for Keystone, FTC and FFWM Common Stock giving effect to the FTC Merger (but not to the FFWM Merger) under the pooling-of-interests method of accounting and (iii) pro forma comparative dividends per share for FTC and FFWM Common Stock. The addition of FFWM would not have materially affected the pro forma comparative earnings and book values per share. The following data is based on the historical financial statements of Keystone, FTC and FFWM incorporated herein by reference and the pro forma combined financial information appearing elsewhere herein and should be read in conjunction with such financial statements and such information and the related notes.
Nine Months Ended September 30, Twelve Months Ended December 31, -------------------- ------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 -------- ---------- -------- ------ --------- ------ ------ (In Thousands, Except Per Share Amounts) Net Income (Loss) Per Common Share (1) (2) Keystone Shareholders Keystone............................... $ 1.36 $ 1.28 $ 1.73 $ 1.46 $ 1.47 $ 1.33 $ 1.18 Keystone and FTC Pro Forma.............................. 1.28 1.19 1.60 1.38 1.33 1.25 1.12 FTC Shareholders FTC.................................... $ 1.77 $ 1.59 $ 2.34 $ 2.12 $ 1.80(3) $ 1.94 $ 1.74 FTC Pro Forma Equivalent............... 2.11 1.96 2.64 2.28 2.20 2.06 1.85 FFWM Shareholders FFWM................................... $ 0.93 $( 0.87) $( 0.50) $ 1.08 $ 1.89 $ 1.11 -- FFWM Pro Forma Equivalent Keystone.............................. 1.75 1.65 2.23 1.90 1.90 1.72 1.52 Keystone and FTC...................... 1.65 1.54 2.06 1.78 1.72 1.61 1.44 Book Value Per Common Share (1) (2) Keystone Shareholders Keystone............................... $13.17 12.64 $ 12.69 $11.64 $11.77 $10.86 $10.18 Keystone and FTC Pro Forma.............................. 12.44 11.79 11.96 10.86 10.73 9.89 9.19 FTC Shareholders FTC.................................... $17.24 $ 15.90 $ 16.52 $14.74 $13.43 $12.36 $11.19 FTC Pro Forma Equivalent............... 20.53 19.45 19.73 17.92 17.70 16.32 15.16
-xviii-
Nine Months Ended September 30, Twelve Months Ended December 31, ------------------- -------------------------------------- 1996 1995 1995 1994 1993 1992 1991 --------- -------- ------ ------ ------ ------ ------ (In Thousands, Except Per Share Amounts) FFWM Shareholders FFWM................................... $19.00 $18.16 $18.42 $20.70 $20.45 $18.56 -- FFWM Pro Forma Equivalent Keystone.............................. 16.99 16.31 16.37 15.02 15.18 14.01 13.13 Keystone and FTC...................... 16.05 15.21 15.43 14.01 13.84 16.32 11.86 Cash Dividends Declared Per Common Share (1) (2) (4) Keystone Shareholders Keystone............................... $ 0.72 $ 0.68 $ 0.93 $ 0.86 $ 0.79 $ 0.73 $ 0.68 FTC Shareholders FTC.................................... $ 0.71 $ 0.63 $ 0.85 $ 0.79 $ 0.71 $ 0.65 $ 0.62 FTC Pro Forma Equivalent............... 1.19 1.12 1.53 1.42 1.30 1.20 1.12 FFWM Shareholders FFWM................................... $ 0.36 $ 0.36 $ 0.48 $ 0.42 $ 0.30 $ 0.20 -- FFWM Pro Forma Equivalent............................. 0.93 0.88 1.20 1.11 1.02 0.94 0.88 - -----------------------
(1) The Keystone pro forma per share information is prepared on the basis of the pro forma combined financial information, which includes the impact of the FTC Merger, as included elsewhere herein. See "Pro Forma Combined Financial Information." The FTC pro forma equivalent per share information represents the Keystone and FTC pro forma book values and net income per share and the Keystone historical dividends per share, multiplied by the FTC Merger exchange ratio of 1.65 shares of Keystone Common Stock for each share of FTC Common Stock. The FFWM pro forma equivalent per share information represents the Keystone historical and the Keystone and FTC pro forma book values and net income per share and the Keystone historical dividends per share, multiplied by the FFWM Merger exchange ratio of 1.29 shares of Keystone Common Stock for each share of FFWM Common Stock. Keystone financial information for the three years ended December 31, 1993 has been restated to reflect mergers with The Frankford Corporation, WM Bancorp and Elmwood Bancorp, Inc., which occurred in 1994, and FTC financial information for the fours years ended December 31, 1994 has been restated to reflect the acquisition of Washington County National Bank, which occurred in 1995. These transactions were accounted for as poolings of interests. (2) Keystone per share information has been restated to reflect three-for-two stock split in the form of a 50% stock dividend declared in 1996. FTC per share information has been restated to reflect a 10% stock dividend declared in 1996. (3) Before cumulative effects of accounting changes, which increased FTC net income by $.05 per share in 1993 and increased FFWM net income by $.78 per share in FFWM's fiscal year ended June 30, 1994. (4) While Keystone is not obligated to pay cash dividends, the Board of Directors presently intends to continue the policy of paying quarterly cash dividends. Future dividends will depend, in part, upon the earnings and financial condition of Keystone. -xix- KEYSTONE FINANCIAL, INC. FINANCIAL TRUST CORP and FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND --------------------------- JOINT PROXY STATEMENT/PROSPECTUS --------------------------- INTRODUCTION This Joint Proxy Statement/Prospectus is furnished in connection with the solicitation by the Boards of Directors of Keystone Financial, Inc. ("Keystone"), Financial Trust Corp ("FTC") and First Financial Corporation of Western Maryland ("FFWM") of proxies to be voted at Special Meetings of Shareholders of Keystone, FTC and FFWM, respectively, and at any adjournment or adjournments thereof (collectively, the "Special Meetings"). The Keystone Special Meeting will be held at 10:00 a.m., local time, on Monday, March 17, 1997 at the Wildwood Conference Center, Harrisburg Area Community College, One HACC Drive, Harrisburg, Pennsylvania. The FTC Special Meeting will be held at 1:00 p.m., local time, on Tuesday, March 18, 1997 at 1415 Ritner Highway, Carlisle, Pennsylvania. The FFWM Special Meeting will be held at 10:00 a.m., local time, on Monday March 17, 1997 at the Holiday Inn, 100 South George Street, Cumberland, Maryland. The approximate dates on which this Joint Proxy Statement/Prospectus will first be mailed to the shareholders of Keystone, FTC and FFWM are February 14, February ___ and February ___, 1997, respectively. Record Dates; Voting Rights The Board of Directors of Keystone has fixed the close of business on February 3, 1997 as the record date for determining the shareholders of Keystone entitled to notice of and to vote at the Keystone Special Meeting. At that date, approximately [37,998,000] shares of Common Stock, par value $2.00 per share, of Keystone ("Keystone Common Stock") were outstanding. On February 3, 1997, there were approximately _____ shareholders of record of Keystone Common Stock. The Board of Directors of FTC has fixed the close of business on January 31, 1997 as the record date for determining the shareholders of FTC entitled to notice of and to vote at the FTC Special Meeting. At that date, [8,532,131] shares of Common Stock, par value $5.00 per share, of FTC ("FTC Common Stock") were outstanding. On January 31, 1997, there were approximately [3,609] shareholders of record of FTC Common Stock. The Board of Directors of FFWM has fixed the close of business on January 31, 1997 as the record date for determining the shareholders of FFWM entitled to notice of and to vote at the FFWM Special Meeting. At that date, [2,167,896] shares of Common Stock, par value $1.00 per share, of FFWM ("FFWM Common Stock") were outstanding. On January 31, 1997, there were approximately _____ shareholders of record of FFWM Common Stock. Each share of Keystone, FTC or FFWM Common Stock entitles its holder of record at the close of business on the record date to one vote on each matter properly submitted to the shareholders for action at the appropriate Special Meeting. Keystone, FTC and FFWM do not have any other outstanding classes of capital stock. -1- Purposes of the Special Meetings Keystone and FTC Meetings: Approval of FTC Plan of Merger. At their respective Special Meetings, the shareholders of Keystone and FTC will be asked to consider and vote upon a proposal to approve an Agreement and Plan of Reorganization and a related Agreement and Plan of Merger, each dated as of December 19, 1996 (collectively, the "FTC Plan of Merger"), between FTC and Keystone. As more fully described below under "FTC Plan of Merger," the FTC Plan of Merger provides for a merger of FTC into Keystone (the "FTC Merger"). In the FTC Merger, each outstanding share of FTC Common Stock will be converted into the right to receive 1.65 shares of Keystone Common Stock. Keystone has received an opinion of the investment banking firm of Danielson Associates Inc. that the terms of the FTC Merger are fair to the shareholders of Keystone from a financial point of view. See "FTC Plan of Merger--Opinion of Keystone Financial Advisor." FTC has received an opinion of the investment banking firm of Berwind Financial Group, L.P. that the terms of the FTC Merger are fair to the shareholders of FTC from a financial point of view. See "FTC Plan of Merger-- Opinion of FTC Financial Advisor." THE BOARDS OF DIRECTORS OF KEYSTONE AND FTC BELIEVE THAT THE FTC MERGER IS IN THE BEST INTERESTS OF THEIR RESPECTIVE SHAREHOLDERS, AND EACH UNANIMOUSLY RECOMMENDS THAT ITS SHAREHOLDERS VOTE TO APPROVE THE FTC PLAN OF MERGER. FFWM Special Meeting: Approval of FFWM Plan of Merger. At the FFWM Special Meeting, the shareholders of FFWM will be asked to consider and vote upon a proposal to approve an Agreement and Plan of Merger dated as of November 26, 1996 between FFWM and Keystone (the "FFWM Plan of Merger"). As more fully described below under "FFWM Plan of Merger," the FFWM Plan of Merger provides for a merger of FFWM into Keystone (the "FFWM Merger"). In the FFWM Merger, each outstanding share of FFWM Common Stock (other than shares subject to dissenters' rights) will be converted into the right to receive, at the election of the holder, either (1) 1.29 shares of Keystone Common Stock or (2) cash in an amount equal to 1.29 times the average of the closing bid prices for Keystone Common Stock on the NASDAQ National Market System for the 20 trading days ending with the sixth trading day preceding the closing date for the FFWM Merger. The elections by the holders of FFWM Common Stock are subject to certain limitations described below as to the minimum and maximum numbers of shares of FFWM Common Stock that may be converted into Keystone Common Stock. See "FFWM Plan of Merger--Limitations on Effectiveness of Elections." It is contemplated that contemporaneously with the FFWM Merger, FFWM's bank subsidiary, First Federal Savings Bank of Western Maryland, will be merged into American Trust Bank, one of Keystone's operating bank subsidiaries. FFWM has received an opinion of the investment banking firm of Alex. Brown & Sons Incorporated that the total consideration to be received by FFWM shareholders in the FFWM Merger is fair, from a financial point of view, to FFWM shareholders. See "FFWM Plan of Merger--Opinion of FFWM Financial Advisor." THE BOARD OF DIRECTORS OF FFWM BELIEVES THAT THE FFWM MERGER IS IN THE BEST INTERESTS OF THE SHAREHOLDERS OF FFWM AND UNANIMOUSLY RECOMMENDS THAT FFWM SHAREHOLDERS VOTE TO APPROVE THE FFWM PLAN OF MERGER. Voting and Revocation of Proxies All properly executed proxies not theretofore revoked will be voted at the Special Meetings or any adjournments thereof in accordance with the instructions thereon. Keystone and FTC proxies containing no voting instructions will be voted in favor of approval of the FTC Plan of Merger. FFWM proxies containing no voting instructions will be voted in favor of approval of the FFWM Plan of Merger. As to any other matter brought before -2- a Special Meeting and submitted to a shareholder vote, proxies will be voted in accordance with the judgment of the proxyholders named thereon. A shareholder who has executed and returned a proxy may revoke it at any time before it is voted by filing with the Secretary of Keystone, FTC or FFWM, as the case may be, written notice of such revocation or a later dated proxy or by attending the appropriate Special Meeting and voting in person. Attendance at a Special Meeting will not, of itself, constitute a revocation of a proxy. Trust Department Shares As of January 14, 1997 the trust departments of Keystone's bank subsidiaries, acting in a fiduciary capacity for various trusts and estates, held an aggregate of 2,373,615 shares of Keystone Common Stock (approximately 6.25% of the outstanding shares). Of these shares, the banks have sole voting power over 4,525 shares, share voting power with other persons over 98,098 shares, have sole investment power over 1,834,741 shares and share investment power with other persons over 133,730 shares. Keystone does not know of any other person who has or shares voting and/or investment power over more than 5% of the outstanding Keystone Common Stock. As of January 1, 1997 FTC's trust company subsidiary, Financial Trust Services Company, acting in a fiduciary capacity for various trusts and estates, beneficially owned an aggregate of 669,923 shares of FTC Common Stock, or approximately 7.9% of the outstanding FTC Common Stock. Of these shares, the trust company has sole voting power over 528,978 shares and shares voting power with other persons over 121,747 shares. The trust company had no voting power over 19,198 shares. In addition to shares held in a fiduciary capacity, as of February 3, 1997 Keystone owned approximately [31,400] shares of FTC Common Stock, and a subsidiary of FTC owned approximately [937] shares of Keystone Common Stock. It is anticipated that shares of Keystone or FTC Common Stock over which Keystone, FTC or their subsidiaries have sole voting power will be voted in favor of approval of the FTC Plan of Merger. Shares as to which the subsidiaries share voting power will be voted in consultation with the other persons having voting power over such shares. Solicitation of Proxies In addition to solicitation by mail, directors, officers and employees of Keystone, FTC and FFWM may solicit proxies from the shareholders of Keystone, FTC and FFWM, respectively, in person or by telephone or otherwise for no additional compensation. Brokerage houses, nominees, fiduciaries and other custodians will be requested to forward proxy soliciting materials to beneficial owners of shares held of record by them and will be reimbursed for their reasonable expenses. Keystone, FTC and FFWM will each bear its own expenses in connection with the solicitation of proxies for its Special Meeting. Keystone has retained the firm of Corporate Investor Communications, Inc. ("CIC"), 111 Commerce Road, Carlstadt, New Jersey 07072-2586, to assist in the solicitation of proxies for the Keystone Special Meeting. For these services CIC will receive a fee of $5,000, plus reimbursement for its out-of-pocket disbursements. If requested to contact individual registered holders and nonobjecting beneficial owners, CIC will charge a fee of $3.00 per holder contacted, which fee includes directory assistance and related telephone expenses. Keystone estimates the total cost of the services of CIC to be approximately $9,000. FFWM has retained Morrow & Co., Inc., 909 Third Avenue, 20th Floor, New York, New York 10022, a professional proxy soliciting firm, to assist in the solicitation of proxies and for related services. FFWM will pay Morrow & Co., Inc. a fee of $5,000 and has agreed to reimburse it for its reasonable out-of- pocket expenses. -3- FTC PLAN OF MERGER This section of the Joint Proxy Statement/Prospectus describes certain of the more important aspects of the FTC Plan of Merger. The following description does not purport to be complete and is qualified in its entirety by reference to the FTC Plan of Merger, which has been filed with the SEC as an exhibit to the Registration Statement. The FTC Plan of Merger is incorporated in this Joint Proxy Statement/Prospectus by reference to such filing and is available upon request. See "Available Information." The FTC Merger The FTC Plan of Merger provides for a merger of Keystone and FTC in which Keystone will be the surviving corporation. As a result of the FTC Merger, Keystone will acquire all of the assets and liabilities of FTC, FTC's subsidiaries will become subsidiaries of Keystone, and FTC will cease to exist as a separate corporation. In the FTC Merger, the shareholders of FTC will become shareholders of Keystone. Each of the approximately [8,532,131] outstanding shares of FTC Common Stock will be converted into the right to receive 1.65 shares of Keystone Common Stock, with cash to be paid in lieu of any fractional share. See "Conversion of FTC Shares." The FTC Merger will not result in any change in the shares of Keystone Common Stock held by the current Keystone shareholders. Keystone is a bank holding company with its principal executive offices in Harrisburg, Pennsylvania. Its bank subsidiaries are American Trust Bank, Cumberland, Maryland, Frankford Bank, N.A., Horsham, Pennsylvania; Keystone National Bank, Lancaster, Pennsylvania; Mid-State Bank and Trust Company, Altoona, Pennsylvania; Northern Central Bank, Williamsport, Pennsylvania; and Pennsylvania National Bank and Trust Company, Pottsville, Pennsylvania, which operate a combined total of 140 banking offices in central and southeastern Pennsylvania, western Maryland and northeastern West Virginia. It also has a number of nonbank subsidiaries and divisions which provide services to Keystone and its customers, including brokerage, investment, mortgage banking, leasing and insurance. See "Summary--The Parties--Keystone" and "Keystone Documents Incorporated by Reference." FTC is a bank holding company with its principal executive offices in Carlisle, Pennsylvania. Its bank subsidiaries are Financial Trust Company, Carlisle, Pennsylvania; Chambersburg Trust Company, Chambersburg, Pennsylvania; First National Bank and Trust Co., Waynesboro, Pennsylvania; and Washington County National Bank, Williamsport, Maryland, which operate a combined total of 48 banking offices in south central Pennsylvania and western Maryland. FTC also has two nonbank subsidiaries which provide trust services and insurance to FTC customers. See "Summary--The Parties--FTC" and "FTC Documents Incorporated by Reference." Following the FTC Merger, FTC's subsidiaries will be wholly owned subsidiaries of Keystone. Background of and Reasons for the FTC Merger FTC. As the pace of change within the banking industry has accelerated over the past decade, and as competition from non-bank financial service providers has increased, FTC carefully reviewed its strategic alternatives and long-term goals and took appropriate steps to maintain and enhance its competitive position. As part of this process, FTC confirmed its commitment to the Pennsylvania and Maryland markets in which it operates by building on existing strengths and expanding into neighboring markets, both through internal growth as well as through identifying appropriate acquisition opportunities. FTC's Board of Directors has, over a number of years, periodically reviewed strategic alternatives including (i) remaining independent and continuing its strategy of internal growth and expansion through -4- acquisitions, (ii) engaging in a merger-of-equals type transaction and (iii) undertaking a strategic combination with a larger banking organization. In prior years, FTC's Board determined that it should continue its strategy of independence and to seek growth internally and through acquisitions. It was in this context that FTC entered into an agreement to acquire Washington County National Bank in 1995. However, such opportunities are increasingly limited in FTC's market area. While FTC historically has been able to implement effective strategies to achieve strong financial performance, the changing dynamics of the banking industry are likely to inhibit the company's ability to continue to achieve comparable future performance. The efficiencies of larger organizations whose cost of doing business is on average less than FTC's creates a competitive disadvantage. This disadvantage will most likely be amplified in the future as the role of technology expands, placing greater emphasis on substantial capital investment with a somewhat uncertain outcome. Additionally, the ability of nonbank competition to provide banking-related services with substantially less regulatory oversight, the preclusion of banking institutions to engage in certain financial product lines and the migration of traditional bank products such as deposits to alternative investments likely will adversely affect institutions such as FTC in their ability to generate competitive returns to their shareholders. Messrs. Wolfe and Campbell, the chief executive officers of FTC and Keystone, respectively, have known each other for a number of years as a result of the geographic proximity of the two institutions and their service with various community and bank industry groups. On occasion, they have previously discussed, on an informal basis, the strategic direction of their respective institutions, as well as the implications of consolidation within the banking industry and increased competition from nonbank service providers. In early 1996, Messrs. Wolfe and Campbell discussed the implications of 1995's record level of merger and acquisition activity on, in particular, the markets in which they operate. At this time, they decided to explore, at least conceptually, whether a combination of FTC and Keystone was feasible from a financial, business and cultural perspective. These discussions were terminated during the month of April, however, as FTC decided to continue its existing strategic plan. During the month of November, Messrs. Wolfe and Campbell once again resumed conversations concerning a potential combination between the two companies. Due to appreciation in Keystone's stock price since early 1996 and increased earnings from FTC, they discussed the possibility that a transaction between the two companies might be possible. On November 19th, Mr. Wolfe met with FTC's Planning Committee, a subcommittee of the Board consisting of Mr. Wolfe and five other board members, to discuss his recent conversations with Mr. Campbell. After deliberation, the Planning Committee decided that it might be in FTC's shareholders' best interest to consider pursuing a combination with Keystone. The Planning Committee then decided to invite representatives of Keystone to make a presentation to FTC's Board of Directors to discuss the company's operating philosophy, strategic direction, current stock valuation and other various areas of interest. Upon the request of the Planning Committee, FTC held a special board meeting on November 25th at which representatives of Berwind Financial Group, L.P. ("Berwind") and Keystone made a formal presentation. Also in attendance were representatives of FTC's legal advisor, McNees, Wallace & Nurick. Berwind began its presentation by providing an overview of the banking industry in general, citing various trends and developments including among others, competition for banking assets, migration of banking deposits, importance of technology and consolidation. Next, Berwind addressed FTC's position within the industry, comparing various performance ratios with certain comparable peer groups. Berwind then provided similar commentary on Keystone. Lastly, Berwind addressed FTC's strategic position from a financial point of view with respect to (i) remaining independent and (ii) a possible affiliation with Keystone. Thereafter, representatives of Keystone joined the meeting and provided an overview of their institution, including financial, operational and stock performance. In addition, the representatives discussed FTC's potential strategic and geographical fit within Keystone's franchise. After their presentation, Keystone's representatives were excused from the meeting. At this time FTC's Board discussed various considerations relevant to forming a strategic alliance with Keystone. After deliberation, the -5- Board unanimously agreed to explore further a possible affiliation with Keystone. In addition, pending further discussions with Keystone, the Board of Directors decided not to authorize conversations with any other party. Discussions between the senior staffs of FTC and Keystone occurred subsequent to the November 25th Board meeting. These meetings and conversations focused on quantifying what synergies and revenue enhancements would be realizable in a combination of the two companies. In addition, conversations were held concerning FTC's on-going role in the pro forma entity, namely, board and managerial representation. Following these discussions, Keystone indicated its willingness to continue negotiations based upon a 1.60 stock exchange ratio. After Keystone improved the proposed exchange ratio to 1.65 as a result of further negotiation, the Planning Committee on December 12th met with representatives of Berwind to evaluate the proposed transaction from a financial point of view. Berwind discussed with the Planning Committee, among other things, the ability of FTC to generate sufficient returns to its shareholders both internally and externally and to improve shareholder liquidity in light of increasing bank and non-bank competition. Berwind then outlined with the Committee certain financial considerations of the proposed transaction based upon the exchange ratio. Discussions focused on the proposed price, potential rates of return and improved liquidity the transaction would provide FTC's shareholders. After consultation with Berwind's representatives, the Planning Committee decided that, although a further effort should be made to obtain a greater exchange ratio, a transaction based upon the proposed exchange ratio warranted FTC's Board of Directors' review. On December 16th, a special meeting of the FTC Board of Directors was held to discuss the results of discussions held with Keystone. Representatives of McNees, Wallace & Nurick, FTC's legal counsel, and Berwind were in attendance. Mr. Wolfe updated the Board on the result of senior management's discussions with Keystone. At that time, representatives of Berwind made an extensive presentation and distributed materials to the directors of FTC relating to current banking markets, industry trends and conditions, the current value of the future prospects for FTC as an independent entity and the value of the merger and a comparison of the exchange ratio to those used in comparable bank mergers. Following Berwind's presentation, counsel explained in detail various legal and regulatory aspects of the transaction. At the conclusion of these presentations, extensive discussions followed involving the Board of Directors, Berwind and counsel. Upon the conclusion of these discussions, the Board authorized management to negotiate the terms of a definitive agreement with Keystone based upon a 1.65 exchange ratio. Mr. Wolfe advised the Board that it would be important that the process move quickly in order to preserve confidentiality. On the afternoon of December 19th, 1996, FTC's Board of Directors reconvened to review the proposed Agreement and Plan of Reorganization and other related transactional documents. At the meeting, representatives of Berwind and McNees, Wallace & Nurick were present to discuss in detail, among other things, the potential financial and strategic benefits of the proposed transaction, the fairness of the transaction to FTC's shareholders and the anticipated tax and accounting treatment of the proposed transaction. After being apprised of the results of the continuing negotiations to finalize the documentation and consideration of related information, FTC's Board, by unanimous vote of all directors present, approved the Agreement and Plan of Reorganization and the transactions contemplated thereby. Keystone. For Keystone, the FTC Merger will strengthen its market position in central Pennsylvania and western Maryland and provide entry into new markets in south central Pennsylvania. Keystone believes that as a result of the FTC Merger it will also be able to achieve operating economies and enhanced revenue growth arising from a wider distribution of its products and services. Consummation of the FTC Merger will create a company capable of competitively providing a broad array of traditional and innovative banking products and services to the resulting market. These products and services include complete banking services, discount brokerage, leasing, investment advisory services, mutual funds, annuities, mortgage services and automobile dealer financing. The combination of the skills, resources and services offered by Keystone and FTC will enable the resulting company to more effectively compete with other full- service financial institutions in Keystone's and FTC' respective markets. -6- Required Votes; Management Recommendations Keystone. Approval by the Keystone shareholders of the FTC Plan of Merger requires the affirmative votes a majority of the votes cast by the holders of Keystone Common Stock, voting in person or by proxy at the Keystone Special Meeting. An abstention or a broker non-vote is not a vote cast and will not be counted in determining the number of votes required for approval by the shareholders of Keystone. THE BOARD OF DIRECTORS OF KEYSTONE UNANIMOUSLY RECOMMENDS THAT KEYSTONE SHAREHOLDERS VOTE "FOR" APPROVAL OF THE FTC PLAN OF MERGER. FTC. Approval by the FTC shareholders of the FTC Plan of Merger requires the affirmative votes of the holders of at least two-thirds of the outstanding shares of FTC Common Stock, voting in person or by proxy at the FTC Special Meeting. Because FTC shareholder approval requires the affirmative votes of two-thirds of all outstanding FTC shares, an abstention or a broker non-vote will have the same legal effect as a vote by a FTC shareholder against approval of the FTC Plan of Merger. THE BOARD OF DIRECTORS OF FTC UNANIMOUSLY RECOMMENDS THAT FTC SHAREHOLDERS VOTE "FOR" APPROVAL OF THE FTC PLAN OF MERGER. Voting Agreements In connection with the FTC Plan of Merger, the directors of FTC have entered into agreements to vote certain shares of FTC Common Stock beneficially owned by them in favor of the FTC Merger. The directors of FTC have agreed with Keystone that they will vote in favor of the FTC Merger all shares of FTC Common Stock owned by them as individuals or (to the extent of their proportionate voting interest) jointly with other persons, and that they will use their best efforts to cause any other shares of FTC Common Stock over which they have or share voting power to be voted in favor of the FTC Merger. In the aggregate, these agreements commit 481,736 shares of FTC Common Stock (5.6% of the outstanding shares) to be voted in favor of the FTC Merger. The agreements further provide that with respect to shares of FTC Common Stock owned by the directors as individuals or (to the extent of the director's proportionate voting interest) jointly with other persons (collectively, "Shares"), the directors will not until the FTC Merger has been consummated or the FTC Plan of Merger has been terminated: (1) vote Shares in favor of any other merger or transaction which would have the effect of a person other than Keystone or an affiliate acquiring control of FTC or any of its subsidiaries or (2) sell or otherwise transfer Shares (i) pursuant to any tender offer or similar proposal made by a person other than Keystone or an affiliate, (ii) to any person other than Keystone or an affiliate seeking to obtain control of FTC or any of its subsidiaries or (iii) for the principal purpose of avoiding the director's obligations under the agreement. The agreements define "control" as the ability to (1) direct the voting of 10% or more of the shares eligible to vote in an election of directors or (2) direct the management and policies of FTC or a subsidiary. The agreements are applicable to the directors only in their capacities as shareholders and do not affect the exercise of their responsibilities as directors or officers. The agreements also do not apply to any shares of FTC Common Stock held by a director as a trustee or other fiduciary. No monetary or other compensation was paid to any FTC director for entering into these agreements. The foregoing is a summary of the material terms of the voting agreements. The form of these agreements has been filed with the SEC as an exhibit to the Registration Statement. Such form is incorporated herein by reference, and the foregoing summary of the agreements is qualified in its entirety by reference to such filing. -7- Opinion of Keystone Financial Advisor Keystone retained Danielson Associates Inc. ("Danielson Associates") to advise the Keystone Board of Directors as to the fairness of the FTC Plan of Merger to Keystone and its shareholders. Danielson Associates is regularly engaged in the valuation of banks, bank holding companies and thrifts in connection with mergers, acquisitions and other securities transactions and has extensive knowledge of, and experience with, Pennsylvania banking markets and banking organizations operating in those markets. Danielson Associates was selected by Keystone because of its knowledge of, experience with, and reputation in the financial services industry. At the January 23, 1997 meeting of the Keystone Board of Directors, Danielson Associates delivered an oral opinion that, in its opinion, as of such date, the financial terms of the FTC Plan of Merger are "fair" to Keystone and its shareholders. No limitations were imposed by the Keystone Board of Directors upon Danielson Associates with respect to the investigations made or procedures followed by it in arriving at its opinion. Although Danielson Associates furnished its opinion as to the fairness to Keystone and its shareholders of the consideration to be paid by Keystone in the FTC Merger, the amount of such consideration was determined by negotiations between Keystone and FTC in which Danielson Associates did not participate. In arriving at its opinion, Danielson Associates (a) reviewed certain business and financial information relating to FTC and Keystone, including annual reports for each of the fiscal years ended December 31, 1994 and 1995 and [Form 9-Y quarterly report] data from 1989 through 1996, including quarterly reports for 1996; (b) analyzed certain financial projections of FTC and Keystone prepared by their managements; (c) discussed the past and current operations, financial condition and prospects of FTC and Keystone with their senior executives; (d) analyzed the pro forma impact of the FTC Merger on Keystone's earnings per share, capitalization and financial ratios; (e) reviewed the reported prices and trading activity for FTC Common Stock and Keystone Common Stock and compared them to similar bank holding companies; (f) discussed the results of recent regulatory examinations of FTC with its senior management; (g) discussed the strategic objectives of Keystone; (h) reviewed and discussed with senior management of Keystone selected estimates of the cost savings and revenue enhancements projected by Keystone for the combined company and compared such amounts to those estimated in certain precedent transactions; (i) reviewed and compared the financial terms, to the extent publicly available, with comparable transactions; (j) reviewed the FTC Plan of Merger and certain related documents; and (k) considered such other factors as were deemed appropriate. Danielson Associates did not perform on its own or obtain any independent appraisal of assets or liabilities of FTC or Keystone or their respective subsidiaries nor has Danielson Associates examined any individual loan credit files of FTC or Keystone. Further, Danielson Associates did not independently verify the information provided by FTC or Keystone and assumed the accuracy and completeness of all such information. In addition, Danielson Associates has assumed the FTC Merger will be consummated in accordance with the terms set forth in the FTC Plan of Merger. In arriving at its opinion, Danielson Associates performed a variety of financial analyses, which it believes must be considered as a whole and that consideration of portions of such analyses and the factors considered therein, without considering all factors and analyses, could create an incomplete view of the analyses and the process underlying its opinion. The preparation of a fairness opinion is a complex process involving subjective judgments and is not necessarily susceptible to partial analysis and summary description. In its analyses, Danielson Associates made certain assumptions with respect to industry performance, business and economic conditions, and other matters, many of which are beyond Keystone's or FTC's control. Any estimates contained in Danielson Associates' analyses are not necessarily indicative of further results or value, which may be significantly more or less favorable than such estimates. Estimates of values of companies do not purport to be appraisals or necessarily reflect the prices at which companies or their securities may actually be sold. Comparable Companies Analyses. Danielson Associates compared FTC's (a) tangible capital of 11.35% of assets as of September 30, 1996; (b) 0.31% of assets not performing as of September 30, 1996; (c) net operating income of 2.36% of average assets for the twelve-month period ending September 30, 1996; and (d) portfolio mix, -8- with the medians for selected bank holding companies that Danielson Associates deemed comparable. These medians were (a) tangible capital of 8.65% of assets; (b) 0.63% of assets not performing; and (c) net operating income of 1.91% of average assets. The comparable companies included publicly- traded Pennsylvania bank holding companies with assets between $1 and $10 billion. Danielson Associates also compared Keystone's (a) stock price as of December 18, 1996 of 14.6 times earnings and 201% of book value, (b) dividend yield based on stock price as of December 18, 1996 and trailing four quarters dividends as of September 30, 1996 of 3.92%, (c) tangible capital of 9.44% of assets as of September 30, 1996, (d) nonperforming assets as of September 30, 1996, 0.86% of total assets and (e) return on average assets during the trailing four quarters ended September 30, 1996 of 1.36% with the medians for selected bank and bank holding companies that Danielson Associates deemed to be comparable to Keystone. The comparable medians were (a) stock price of 14.0 times earnings and 169% of book value, (b) dividend yield of 3.33%, (c) tangible capital of 8.65% of assets, (d) 0.63% of assets nonperforming and (e) return on average assets of 1.17%. Comparable Transactions Analysis. Danielson Associates also compared the consideration to be paid in the FTC Merger to the latest twelve months earnings and equity capital of FTC with the earnings and capital multiples paid in recent bank acquisitions. For this comparison, Danielson Associates used the median of the multiples of 1996 announced merger and acquisition transactions as of December 18, 1996 for acquisitions of banks in the Middle Atlantic and Northeast regions of the country. At the time Danielson Associates made its analysis, the consideration to be paid in the FTC Merger equaled 256% of FTC's September 30, 1996 book value and 19.1 times FTC's earnings for the trailing four quarters as of September 30, 1996. This compares to median multiples of 238% of book value and 20.4 times earnings for the most comparable acquisitions. Discounted Dividend Analysis. Danielson Associates performed a discounted dividend analysis to determine a range of present values per share of FTC Common Stock assuming FTC continued to operate as a stand-alone entity. This range was determined by adding (i) the estimated future dividend stream that FTC could generate, and (ii) the "terminal value" of FTC Common Stock at the end of year 2001. The dividend stream and terminal values were discounted to present values using discount rates which Danielson Associates viewed as appropriate for a company with FTC's risk characteristics. Implied Acquisition Value. As part of its analysis of the acquisition valuation, Danielson Associates assumed that the net present value of estimated cost savings and revenue enhancements was added to the stand-alone value of FTC Common Stock calculated as described above (see "Discounted Dividend Analysis" above). Based on cost savings and revenue enhancements ranging from $6.4 million to $8 million (20% to 25% of FTC's non-interest expense base) per year estimated by the management of Keystone to result from the FTC Merger, Danielson Associates estimated the implied acquisition value of FTC Common Stock. Pro Forma Merger Analysis. Danielson Associates analyzed the financial impact of the FTC Merger on the holders of Keystone Common Stock, using earnings estimates for 1997, based on actual 1996 performance, through 2001 and Keystone's estimates for cost savings and revenue enhancements expected to result from the FTC Merger. This analysis showed that, after giving effect to the FTC Merger, before the impact of one-time merger-related charges, current holders of Keystone Common Stock would realize a decrease in fully diluted earnings per share in 1997 and a subsequent increase in fully diluted earnings per share, in each case compared to Keystone on a stand-alone basis. Danielson Associates also analyzed the changes in return on equity from Keystone on a stand-alone basis, noting that such return on equity would increase following the FTC Merger. No company or transaction used in any comparisons is identical to FTC and Keystone. Accordingly, an analysis of the results of the foregoing is not purely mathematical; rather it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading values of the company or companies to which they are being compared. Compensation of Danielson Associates. Under the terms of an engagement agreement dated January 8, 1997, Keystone has paid to Danielson Associates a fixed fee of $30,000 for furnishing its opinion. This fee was not -9- contingent upon the contents of Danielson Associates' opinion or the conclusions reached therein. Keystone has also agreed to reimburse Danielson Associates for its out-of-pocket expenses incurred in connection with its engagement and to indemnify Danielson Associates and its officers and employees against liabilities and expenses resulting from its engagement. The summary set forth above does not purport to be a complete description of the analyses and procedures performed by Danielson Associates in the course of arriving at its opinions. The full text of the opinion of Danielson Associates dated as of February ___, 1997, which sets forth assumptions made and matters considered, is attached as Appendix I to this Proxy Statement/ Prospectus. Keystone shareholders are urged to read this opinion in its entirety. Danielson Associates' opinion is directed only to the consideration to be received by FTC shareholders in the Merger and does not constitute a recommendation to any Keystone shareholder as to how such shareholder should vote at the Keystone Special Meeting. Opinion of FTC Financial Advisor FTC retained Berwind to act as its financial advisor and to render a fairness opinion in connection with the FTC Merger. Berwind rendered its opinion (the "Opinion") to the Board of Directors of FTC that, based upon and subject to the various considerations set forth therein, as of the date of this Joint Proxy Statement/Prospectus, the consideration to be received in the FTC Merger is fair, from a financial point of view, to the holders of FTC Common Stock. The full text of Berwind's Opinion, which sets forth the assumptions made, matters considered and limitations of the review undertaken, is attached as Appendix II to this Joint Proxy Statement/Prospectus, is incorporated herein by reference, and should be read in its entirety in connection with this Joint Proxy Statement/Prospectus. The summary of the Opinion as set forth herein is qualified in its entirety by reference to the full text of such Opinion attached as Appendix II to this Joint Proxy Statement/Prospectus. Berwind was selected to act as FTC's financial advisor in connection with the FTC Merger based upon its qualifications, expertise and experience. Berwind has knowledge of, and experience with, Pennsylvania and surrounding banking markets as well as banking organizations operating in those markets and was selected by FTC because of its knowledge of, experience with, and reputation in the financial services industry. Berwind, as part of its investment banking business, is engaged regularly in the valuation of assets, securities and companies in connection with various types of asset and security transactions, including mergers, acquisitions and private placements, and also is engaged in providing valuations for various other purposes and in the determination of adequate consideration in such transactions. On December 19, 1996 FTC's Board of Directors approved and its officers executed the FTC Plan of Merger. In connection with and as a condition precedent to the FTC Merger, Berwind delivered its Opinion to FTC stating that, as of the date of the Opinion, the consideration to be received in the FTC Merger was fair to the shareholders of FTC from a financial point of view. The full text of the Opinion which sets forth assumptions made, matters considered and limits on the review undertaken is attached as Appendix II to this Joint Proxy Statement/Prospectus. No limitations were imposed by FTC's Board of Directors upon Berwind with respect to the investigations made or procedures followed by Berwind in rendering the Opinion. In rendering its Opinion, Berwind: (i) reviewed the historical financial performances, current financial positions and general prospects of FTC and Keystone; (ii) reviewed the FTC Plan of Merger; (iii) reviewed and analyzed the stock market performance of FTC and Keystone; (iv) studied and analyzed the consolidated financial and operating data of FTC and Keystone; (v) considered the terms and conditions of the proposed FTC Merger as compared with the terms and conditions of comparable bank and bank holding company mergers and acquisitions; (vi) met and/or communicated with certain members of FTC's and Keystone's senior management to discuss their respective operations, historical financial statements, and future prospects; (vii) reviewed this Joint Proxy Statement/Prospectus, and (viii) conducted such other financial analyses, studies and investigations as Berwind deemed appropriate. -10- In delivering its Opinion, Berwind assumed that in the course of obtaining the necessary regulatory and governmental approvals for the FTC Merger, no restriction will be imposed that would have a material adverse effect on the contemplated benefits of the FTC Merger. Berwind also assumed that there would not occur any change in applicable law or regulation that would cause a material adverse change in the prospects or operations of Keystone after the FTC Merger. Berwind relied without independent verification upon the accuracy and completeness of all of the financial and other information reviewed by and discussed with it for purposes of its Opinion. With respect to FTC's financial projections reviewed by Berwind in rendering its Opinion, Berwind assumed that such financial projections were reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of FTC as to the future financial performance of FTC. Berwind did not make an independent evaluation or appraisal of the assets (including loans) or liabilities of FTC or Keystone nor was it furnished with any such appraisal. Berwind also did not independently verify and has relied on and assumed that all allowances for loan and lease losses set forth in the balance sheets of FTC and Keystone were adequate and complied fully with applicable law, regulatory policy and sound banking practice as of the date of such financial statements. The following is a summary of selected analyses prepared by Berwind in connection with the delivery of its Opinion: Comparable Companies and Comparable Acquisition Transaction Analyses. Berwind compared selected financial and operating data for FTC with those of a peer group of selected banks and bank holding companies with assets between $1 billion and $2 billion, as of the most recent financial period publicly available, located in Pennsylvania, Maryland, Ohio and West Virginia. Financial data and operating ratios compared in the analysis of the FTC peer group included but were not limited to: return on average equity, shareholders' equity to assets ratio and certain asset quality ratios. Berwind also compared selected financial, operating and stock market data for Keystone with those of a peer group of selected commercial banks with assets between $3.5 billion and $7 billion, as of the most recent period publicly available, located in Pennsylvania, Maryland, New Jersey, Ohio and West Virginia. Financial, operating and stock market data, ratios and multiples compared in the analysis of the Keystone peer group included but were not limited to: return on average assets, return on average equity, shareholders' equity to asset ratios, certain asset quality ratios, price to book value, price to tangible book value, price to earnings (latest twelve months) and dividend yield. Berwind also compared the multiples of book value, tangible book value and latest twelve months' earnings of the FTC Merger with the multiples paid in recent acquisitions of banks and bank holding companies that Berwind deemed comparable. The transactions deemed comparable by Berwind included both interstate and intrastate acquisitions announced during the twelve month period ended as of the date of the Opinion, in which the selling institution's assets were between $750 million and $3 billion. No company or transaction, however, used in this analysis is identical to FTC, Keystone or the FTC Merger. Accordingly, an analysis of the result of the foregoing is not mathematical; rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that would affect the public trading values of the companies or company to which they are being compared. Discounted Dividend Analyses. Using discounted dividend analyses, Berwind estimated the present value of the future dividend streams that FTC could produce over a five-year period under various earnings growth assumptions. Berwind also estimated the terminal value for FTC's Common Stock after the five- year period by applying a range of earnings multiples to FTC's terminal year earnings. The range of multiples used reflected a variety of scenarios regarding the growth and profitability prospects of FTC. The dividend streams and terminal values were then discounted to present value using discount rates, reflecting different assumptions regarding the rates of return expected by holders or prospective buyers of FTC's Common Stock. -11- Pro Forma Contribution Analysis. Berwind analyzed the changes in the amount of earnings, book value and dividends represented by one share of FTC Common Stock prior to the FTC Merger and 1.65 shares of Keystone Common Stock after the FTC Merger. The analysis considered, among other things, the changes that the FTC Merger would cause to FTC's earnings per share, book value per share, tangible book value per share and indicated dividends. In reviewing the pro forma combined earnings, equity and assets of Keystone based on the FTC Merger with FTC, Berwind analyzed the contribution that FTC would have made to the combined company's earnings, equity and assets as of and for the period ended December 31, 1996. Berwind also reviewed the percentage ownership that FTC shareholders would hold in the combined company. In connection with rendering its Opinion, Berwind performed a variety of financial analyses. Although the evaluation of the fairness, from a financial point of view, of the consideration to be paid in the FTC Merger was to some extent a subjective one based on the experience and judgment of Berwind and not merely the result of mathematical analyses of financial data, Berwind principally relied on the previously discussed financial valuation methodologies in its determinations. Berwind believes its analyses must be considered as a whole and that selecting portions of such analyses and factors considered by Berwind without considering all such analyses and factors could create an incomplete view of the process underlying Berwind's Opinion. In its analysis, Berwind made numerous assumptions with respect to business, market, monetary and economic conditions, industry performance and other matters, many of which are beyond FTC's and Keystone's control. Any estimates contained in Berwind's analyses are not necessarily indicative of future results or values, which may be significantly more or less favorable than such estimates. In reaching its opinion as to fairness, none of the analyses performed by Berwind was assigned a greater or lesser weighting by Berwind than any other analysis. As a result of its consideration of the aggregate of all factors present and analyses performed, Berwind reached the conclusion, and opined, that the consideration to be received in the FTC Merger as set forth in the FTC Plan of Merger is fair from a financial point of view to FTC and its shareholders. Berwind's Opinion was based solely upon the information available to it and the economic, market and other circumstances as they existed as of the date its Opinion was delivered; events occurring after the date of its Opinion could materially affect the assumptions used in preparing its Opinion. Berwind has not undertaken to reaffirm and revise its Opinion or otherwise comment upon any events occurring after the date thereof. Pursuant to the terms of its engagement, FTC has paid Berwind $250,000 for acting as financial advisor in connection with the FTC Merger including delivering its Opinion. In addition, FTC has also agreed to pay Berwind $1,550,000 upon the consummation of the FTC Merger and to reimburse Berwind for its reasonable out-of-pocket expenses. Whether or not the FTC Merger is consummated, FTC has also agreed to indemnify Berwind and certain related persons against certain liabilities relating to or arising out of its engagement. The full text of the Opinion of Berwind dated as of the date of this Joint Proxy Statement/Prospectus, which sets forth assumptions made and matters considered, is attached hereto as Appendix II. FTC's shareholders are urged to read the Opinion in its entirety. Berwind's Opinion is directed only to the consideration to be received by FTC's shareholders in the FTC Merger and does not constitute a recommendation to any holder of FTC Common Stock as to how such holder should vote at the FTC Special Meeting. THE FOREGOING PROVIDES ONLY A SUMMARY OF THE OPINION OF BERWIND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THAT OPINION, WHICH IS SET FORTH IN APPENDIX II TO THIS JOINT PROXY STATEMENT/PROSPECTUS. Conversion of FTC Shares Exchange Ratio. On the effective date of the FTC Merger, each outstanding share of FTC Common Stock will be converted into the right to receive 1.65 shares of Keystone Common Stock, with cash to be paid in lieu of -12- any fractional share. On February ___, 1997, the closing sale price for Keystone Common Stock reported on the NASDAQ National Market System was $_____. Surrender of Certificates. As promptly as practicable after the effective date of the FTC Merger, Keystone will send to each shareholder of record of FTC immediately prior to the FTC Merger a letter of transmittal containing instructions on how to effect the exchange of FTC Common Stock certificates for certificates representing the shares of Keystone Common Stock into which their shares have been converted. FTC shareholders should not send in their certificates until they receive such written instructions. However, certificates should be surrendered promptly after instructions to do so are received. Any dividends declared on Keystone Common Stock after the effective date of the FTC Merger will apply to all whole shares of Keystone Common Stock into which shares of FTC Common Stock have been converted in the FTC Merger. However, no former FTC shareholder will be entitled to receive any such dividend until such shareholder's FTC Common Stock certificates have been surrendered for exchange as provided in the letter of transmittal. Upon such surrender, the shareholder will be entitled to receive all such dividends payable on the whole shares of Keystone Common Stock represented by the surrendered certificate or certificates (without interest thereon and less the amount of taxes, if any, which may have been imposed or paid thereon). Payment for Fractional Shares. No fractional shares of Keystone Common Stock will be issued in connection with the FTC Merger. Instead, each FTC shareholder who surrenders for exchange FTC Common Stock certificates representing a fraction of a share of Keystone Common Stock will be entitled to receive, in addition to a certificate for the whole shares of Keystone Common Stock represented by the surrendered certificates, cash in an amount equal to such fractional part of a share multiplied by the value of $26.50 for one whole share of Keystone Common Stock. Unexchanged Certificates. On the effective date of the FTC Merger, the stock transfer books of FTC will be closed, and no further transfers of FTC Common Stock will be made or recognized. Certificates for FTC Common Stock not surrendered for exchange will entitle the holder only to receive, upon surrender as provided in the letter of transmittal, a certificate for the whole shares of Keystone Common Stock represented by such certificates, plus payment of any amount for a fractional share or dividends to which such holder is entitled as outlined above. If the FTC Merger becomes effective and any former FTC shareholder does not surrender his or her FTC Common Stock certificates for exchange on or before the second anniversary of the effective date, Keystone, at its option, may at any time thereafter sell such shareholder's Keystone Common Stock without notice to the shareholder. After any such sale, the sole right of such shareholder shall be to receive, upon surrender of the shareholder's FTC Common Stock certificates, the net proceeds of the sale (without interest and less the amount of any taxes which may have been imposed or paid thereon). Keystone Shareholder Rights Plan. If no Distribution Date under Keystone's shareholder rights plan (see "Comparison of Keystone Common Stock and FTC Common Stock--Keystone Shareholder Rights Plan") shall have occurred prior to the effective date of the FTC Merger, then each share of Keystone Common Stock issued in the FTC Merger shall also evidence one Right under Keystone's shareholder rights plan. If the Distribution Date shall have occurred, then it is a condition to the FTC Merger that Keystone take one of the actions set forth under "Conditions to the FTC Merger" below. Adjustment of Exchange Ratio. The FTC Plan of Merger contains provisions for the proportionate adjustment of the exchange ratio in the event of a stock dividend, stock split, reclassification or similar event involving the Keystone Common Stock or the FTC Common Stock which occurs prior to the FTC Merger. -13- Tax Consequences to FTC Shareholders Federal Income Tax. The FTC Plan of Merger requires as a condition to the FTC Merger that each party receive a written opinion of counsel or of independent public accountants that for purposes of federal income tax: (1) The FTC Merger will constitute a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"), and Keystone and FTC will each be a "party to a reorganization" within the meaning of Section 368(b) of the Code; (2) No gain or loss will be recognized by Keystone or FTC as a result of the FTC Merger; (3) Except for cash received in lieu of fractional shares, no gain or loss will be recognized by holders of FTC Common Stock on the exchange of their shares for shares of Keystone Common Stock; (4) The basis of the shares of Keystone Common Stock to be received by the shareholders of FTC will be the same as the basis of the shares of FTC Common Stock exchanged therefor; and (5) The holding period of the shares of Keystone Common Stock received by the shareholders of FTC will include the period during which the FTC Common Stock exchanged therefor was held by the FTC shareholder, provided that the FTC Common Stock was held as a capital asset at the time of the exchange. No gain or loss for federal income tax purposes will be recognized by shareholders of FTC on the exchange of their shares for whole shares of Keystone Common Stock. However, gain or loss will be recognized by FTC shareholders upon the receipt of cash in payment for a fractional share. To compute the amount, if any, of such gain or loss, the cost or other basis of the FTC Common Stock exchanged must be allocated proportionately to the total number of shares of Keystone Common Stock received, including any fractional share interest. Gain or loss will be recognized measured by the difference between the cash received and the basis of the fractional share interest as so allocated. Under Section 302(a) of the Code, any such gain or loss will generally be entitled to capital gain or loss treatment if the FTC Common Stock was a capital asset in the hands of the shareholder. If any shares of Keystone Common Stock received in the FTC Merger are subsequently sold, gain or loss on the sale should be computed by allocating the cost or other basis of the FTC Common Stock exchanged in the FTC Merger to the shares sold in the manner described in the preceding paragraph. The holding period for the shares of Keystone Common Stock received in the FTC Merger will include the holding period for the shares of FTC Common Stock exchanged in determining, for example, whether any such gain or loss is a long-term or short- term capital gain or loss. Pennsylvania Personal Income Tax. No gain or loss for Pennsylvania personal income tax purposes will be recognized by shareholders of FTC who are subject to that tax on the receipt by them of whole shares of Keystone Common Stock in exchange for their FTC Common Stock. For Pennsylvania personal income tax purposes, the tax basis for the Keystone Common Stock received by FTC shareholders in the FTC Merger (including any fractional share interests to which they are entitled) will be the same as the basis of the FTC Common Stock exchanged. Cash received in lieu of a fractional share of Keystone Common Stock will be treated and taxed as if the fractional share had actually been received by the FTC shareholder and then immediately sold by the shareholder to Keystone for the cash received. The foregoing is intended only as a summary of certain federal income tax and Pennsylvania personal income tax consequences of the FTC Merger under existing law and regulations, as presently interpreted by judicial decisions and administrative rulings, all of which are subject to change without notice, and any such change might be retroactively applied to the FTC Merger. Among other things, the summary does not address state income tax consequences in states other than Pennsylvania, local taxes, or the federal or state income tax considerations that may affect the treatment of a shareholder who acquired FTC Common Stock pursuant to an employee stock option. Accordingly, it is recommended that FTC shareholders consult their own tax advisors with -14- specific reference to their own tax situations and potential changes in the applicable law as to all federal, state and local tax matters in connection with the FTC Merger. Keystone Board of Directors Following the FTC Merger At the time the FTC Merger becomes effective, Ray L. Wolfe, currently Chairman and Chief Executive Officer of FTC, will become Chairman of the Board of Keystone and will become a member of the Board of Directors of Keystone with a term expiring at Keystone's Annual Meeting in the year 2000. In addition, two other directors of FTC, each to be designated by FTC subject to the approval of Keystone, will become members of the Board of Directors of Keystone to serve for terms expiring at Keystone's Annual Meetings in 1998 and 1999, respectively. If prior to the FTC Merger Mr. Wolfe or one of the other two FTC directors becomes unable or declines to serve as a director of Keystone, FTC shall be entitled to designate a substitute director acceptable to Keystone. Keystone's Board of Directors presently consists of 17 directors, divided into three classes. See "Comparison of Keystone Common Stock and FTC Common Stock--Board of Directors--Classified Boards." Six Keystone directors will be elected at Keystone's 1997 Annual Meeting to serve for terms expiring in 2000. Of the remaining directors, the terms of five expire at the 1998 Annual Meeting and six at the 1999 Annual Meeting. Interests of Certain Persons in the Transaction Ray L. Wolfe Employment Agreement. In connection with the FTC Plan of Merger, Keystone has entered into an Employment Agreement with Ray L. Wolfe, Chairman and Chief Executive Officer of FTC. The Employment Agreement, which would become effective only on consummation of the FTC Merger, provides for Mr. Wolfe's employment by Keystone for a period of three years following the effective date of the FTC Merger at an all inclusive annual rate of compensation of $350,000, plus participation in such benefit and qualified retirement plans as are generally available to Keystone employees. For 1996, Mr. Wolfe's aggregate compensation from FTC and its subsidiaries was $413,757, plus stock option grants for 3,682 shares of FTC Common Stock. From the date of the FTC Merger until Keystone's annual meeting of shareholders in 1998, Mr. Wolfe would serve as Chairman of the Board of Keystone. Thereafter during the three-year period, Mr. Wolfe would serve in such senior executive capacities as are mutually agreed from time to time between Mr. Wolfe and Keystone's chief executive officer. From the end of the three-year period until Mr. Wolfe's 65th birthday on August 15, 2003, Mr. Wolfe would be employed by Keystone as a consultant at an annual rate of compensation of $177,000, plus participation in Keystone's regular medical care benefits plan. The Employment Agreement and the compensation and benefits to be provided to Mr. Wolfe thereunder may not be terminated by Keystone except upon Mr. Wolfe's death, total and permanent disability or substantial incapacity for a period exceeding six months or a breach by Mr. Wolfe of the nondisclosure and noncompetition provisions of the Agreement. The agreement prohibits Mr. Wolfe from disclosing Keystone confidential information at any time or, during the period ending two years after termination of his employment, from engaging directly or indirectly in any business which is in competition with Keystone or any of its subsidiaries in the areas of commercial banking, mortgage banking, leasing or the taking of deposits and which is located or operating in any county in which Keystone or a subsidiary has offices or any contiguous county. In the event of a change of control of Keystone, as defined in the agreement, Mr. Wolfe may elect to be paid the balance of the cash compensation for the term of the agreement in a single lump sum. In this event, both parties would be released from any further obligations under the agreement, except that Mr. Wolfe would remain subject to the agreement's nondisclosure and noncompetition provisions. FTC Directors' and Officers' Indemnification. Keystone has agreed that, to the extent permitted by law, all rights to indemnification and limitation of liability existing in favor of the current or former directors or officers of FTC and its subsidiaries, as provided in their respective charters or bylaws, shall survive the FTC Merger and that following the FTC Merger, to the extent permitted by law, Keystone and the former subsidiaries of FTC shall honor such obligations with respect to events, acts or omissions occurring prior to the FTC Merger. Any amendment after the FTC Merger to the limitation of liability or indemnification provisions of an FTC subsidiary's -15- charter or bylaws will not apply to events occurring prior to the FTC Merger. The bylaws of FTC provide that a director of FTC generally shall not be personally liable for monetary damages for any act or omission as a director unless the act or omission constitutes a breach of duty amounting to self- dealing, willful misconduct or recklessness. The articles of incorporation of FTC generally require FTC to indemnify its directors and officers against any and all expenses, liabilities or other matters for which indemnification is permitted by applicable law. Pennsylvania law generally permits a Pennsylvania corporation such as FTC to indemnify its directors and officers against expenses, liabilities and other matters, both as to action in their official capacities and as to action in another capacity while holding that office, except where the act or omission giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. The bylaws of Keystone and its subsidiaries contain similar provisions regarding limitation of liability and indemnification of directors and officers. Employee Benefit Plans. The FTC Plan of Merger provides that following the FTC Merger, employees of FTCs subsidiaries and employees of FTC who become Keystone employees shall be entitled to participate in generally applicable Keystone employee benefit plans on the same basis as other similarly situated employees of Keystone and its subsidiaries. Prior service of such employees with FTC and its subsidiaries shall be counted in determining eligibility to participate in such plans and for purposes of vesting of benefits, but not for purposes of benefit accrual. Warrant Agreement In connection with the FTC Plan of Merger, Keystone and FTC have entered into an Investment Agreement, and FTC has issued to Keystone a Warrant thereunder (collectively, the "Warrant Agreement") entitling Keystone to purchase up to approximately 19.9% (after exercise) of FTC's outstanding Common Stock upon the occurrence of certain events described below. The Warrant Agreement covers 2,113,706 shares of FTC Common Stock at an exercise price of $43.725 per share. The Warrant Agreement is designed to compensate Keystone for its risks, costs and expenses and the commitment of resources associated with the FTC Plan of Merger in the event the FTC Merger is not consummated due to an attempt by a third person to gain control of FTC. See also "Expenses" below. Keystone may not exercise or sell its Warrant except upon (i) a willful breach by FTC of the FTC Plan of Merger, (ii) the failure of FTC's shareholders to approve the FTC Plan of Merger after the announcement by a third person of a proposal to acquire 10% or more of the FTC Common Stock, to acquire, merge or consolidate with FTC or any of its subsidiaries or to acquire substantially all of the assets of FTC or any of its subsidiaries, (iii) the acquisition by a third person of beneficial ownership of 1% or more of the outstanding FTC Common Stock if after such acquisition such person would beneficially own 10% or more of the FTC Common Stock, (iv) the commencement by a third person of a tender offer or exchange offer which would result in beneficial ownership of 10% or more of the FTC Common Stock, or (v) the entry by FTC or any of its subsidiaries into an agreement or understanding with a third person for the third person to acquire, merge or consolidate with FTC or any of its subsidiaries or to acquire substantially all of the assets of FTC or any of its subsidiaries (each of the foregoing is hereafter referred to as a "Warrant Event"). No Warrant Event has occurred as of the date of this Joint Proxy Statement/Prospectus, and neither Keystone nor FTC is aware that any Warrant Event is contemplated by any third person. The Warrant Agreement may discourage third persons from making competing offers to acquire FTC and is intended to increase the likelihood that the FTC Merger will be consummated in accordance with the terms set forth in the FTC Plan of Merger. If a Warrant Event occurs, Keystone may exercise the Warrant in whole or in part or may sell or transfer all or part of the Warrant to other persons. Under federal banking law, exercise of the Warrant by Keystone for more than 5% of the outstanding FTC Common Stock would require approval of the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). Any sale of the Warrant or of shares of FTC Common Stock purchased thereunder would be subject to a right of first refusal by FTC unless sold in a public offering registered under the Securities Act. FTC agrees in the Warrant Agreement to effect such registration if requested. -16- Keystone may require FTC to redeem the Warrant or any shares of FTC Common Stock purchased thereunder if (i) a third person acquires beneficial ownership of 50% or more of the outstanding FTC Common Stock or (ii) a third person acquires, merges or consolidates with FTC or any of its subsidiaries or acquires substantially all of the assets of FTC or any of its subsidiaries (each of the foregoing is hereafter referred to as a "Redemption Event"). In general, the per share redemption price for the Warrant would be the higher of 10% of the exercise price or a per share price based on the difference between the exercise price and the highest price paid or agreed to be paid by the third person in connection with the Redemption Event. The per share redemption price for shares of FTC Common Stock purchased under the Warrant would generally be the higher of 110% of the exercise price or the highest price paid or agreed to be paid by the third person in connection with the Redemption Event. The Warrant Agreement also contains provisions giving FTC the right to repurchase shares of FTC Common Stock issued under the Warrant in certain limited circumstances and provisions for issuance of a substitute Warrant to purchase shares of the surviving or acquiring company in the event of a merger or other acquisition of FTC or any of its subsidiaries. The foregoing description is intended only as a summary of the material provisions of the Warrant Agreement and does not purport to be complete. It is qualified in its entirety by reference to the Warrant Agreement, which has been filed with the SEC as an exhibit to the Registration Statement. The Warrant Agreement is incorporated in this Joint Proxy Statement/Prospectus by reference to such filing. Inconsistent Activities FTC has agreed in the FTC Plan of Merger that unless and until the FTC Merger has been consummated or the FTC Plan of Merger has been terminated in accordance with its terms, FTC will not (i) solicit or encourage any proposals by a third person to acquire more than 1% of the FTC Common Stock, any stock of any FTC subsidiary or any significant portion of FTC's or any FTC subsidiary's assets (whether by tender offer, merger, purchase of assets or otherwise), (ii) afford a third party which may be considering any such transaction access to FTC's or any FTC subsidiary's properties, books or records except as required by law, (iii) enter into any discussions, negotiations, agreement or understanding for any such transaction or (iv) authorize or permit any of its directors, officers, employees or agents to do any of the foregoing. Notwithstanding the foregoing, FTC may take an action referred to in clause (ii) or (iii) of the previous sentence (or permit its directors, officers, employees or agents to do so) if FTC's Board of Directors, after consulting with counsel, determines that such actions should be taken or permitted in the exercise of its fiduciary duties. If FTC becomes aware of any offer or proposed offer to acquire any shares of FTC or any FTC subsidiary or any significant portion of FTC's or any FTC subsidiary's assets, or of any other matter which could adversely affect the FTC Merger, FTC is required to give immediate notice thereof to Keystone. Conduct of FTC's Business Pending the FTC Merger FTC has agreed in the FTC Plan of Merger that pending consummation of the FTC Merger, except as consented to by Keystone, FTC and its subsidiaries will conduct their businesses only in the ordinary course and will not, among other things, (i) issue, purchase or otherwise dispose of or acquire any shares of their capital stock or grant any options or other rights to acquire such stock, except pursuant to the Warrant Agreement, FTC's employee stock option plan or existing employee and director stock options; (ii) make certain changes in the compensation or benefits payable to employees or enter into employment contracts; (iii) merge or consolidate with, or acquire control over, any other corporation, bank or other organization or acquire or dispose of any material assets outside the ordinary course of business; (iv) make capital expenditures or lease assets in excess of certain limits; or (v) make material changes to their lending or investment policies. -17- FTC Dividend Limitation FTC has agreed in the FTC Plan of Merger that pending the FTC Merger it will not increase the rate of dividends on the FTC Common Stock to exceed $.25 per share in the quarters ending March 31 and June 30, 1997 or $.27 per share in any calendar quarter thereafter. During the quarter ended December 31, 1996, dividends on the FTC Common Stock were paid at the rate of $.25 per share. Conditions to the FTC Merger In addition to shareholder approval, the FTC Merger is contingent upon the satisfaction of a number of other conditions, including (i) approval of the FTC Merger by the Federal Reserve Board, the Pennsylvania Department of Banking and the Maryland Bank Commissioner without conditions deemed unduly burdensome by Keystone, (ii) the absence of any suit by the United States under the antitrust laws to prohibit the FTC Merger filed within the 30 days following Federal Reserve Board approval, (iii) receipt of the tax opinion described above (see "Tax Consequences") and (iv) the absence of any judicial or administrative order prohibiting or adversely affecting the FTC Merger or any pending or threatened litigation or administrative proceeding challenging the FTC Merger. Keystone's obligation to consummate the FTC Merger is subject to the following additional conditions: (i) qualification of the FTC Merger for pooling-of-interests accounting treatment and, if requested by Keystone, receipt of a letter from Keystone's independent auditors to that effect and (ii) receipt of the agreements of FTC affiliates described below under "Restrictions on Resales by FTC Affiliates." In addition, unless waived, each party's obligation to consummate the FTC Merger is subject to the performance by the other party of its obligations under the FTC Plan of Merger, the accuracy of the representations and warranties of the other party contained therein and the receipt of certain certificates and opinions from the other party and its counsel. If the Distribution Date under Keystone's shareholder rights plan (see "Comparison of Keystone Common Stock and FTC Common Stock--Keystone Shareholder Rights Plan") shall have occurred, then either (i) all Rights outstanding under the plan (other than those which have become void) shall have been exchanged for Keystone Common Stock and the exchange ratio for converting FTC Common Stock into Keystone Common Stock in the FTC Merger shall have been proportionately adjusted as provided in the FTC Plan of Merger, (ii) all Rights outstanding under the plan shall have been redeemed or (iii) Keystone shall have made provision for the issuance of equivalent rights to the holders of FTC Common Stock upon consummation of the FTC Merger. The FTC Merger is independent of the FFWM Merger and is not in any way contingent upon the consummation of the FFWM Merger. Representations and Warranties The representations and warranties of Keystone and FTC contained in the FTC Plan of Merger relate, among other things, to the organization and good standing of Keystone, FTC and their subsidiaries; the capitalization of Keystone and FTC and ownership of their subsidiaries; the authorization by Keystone and FTC of the FTC Plan of Merger and the Warrant Agreement and the absence of conflict with laws or other agreements; the accuracy and completeness of the financial statements and other information furnished to the other party; the absence of material adverse changes since December 31, 1995; the absence of undisclosed litigation; compliance with laws; the absence of certain potential environmental liabilities; and the accuracy of this Joint Proxy Statement/Prospectus and of Keystone's Registration Statement of which it is a part. Additional representations and warranties by FTC concern payment of taxes; title to properties; and the absence of undisclosed equity investments, employment contracts, employee benefit plans or material contracts. None of the representations and warranties contained in the FTC Plan of Merger will survive the consummation of the FTC Merger. Amendment, Waiver and Termination Notwithstanding prior shareholder approval, the FTC Plan of Merger may be amended in any respect by written agreement between the parties, except that after FTC shareholder approval no amendment may change the rate of exchange of FTC Common Stock for Keystone Common Stock in the FTC Merger or change the form of -18- such consideration. Keystone or FTC may also (i) extend the time for performance of any of the obligations of the other; (ii) waive any inaccuracies in the representations and warranties of the other; (iii) waive compliance by the other with any of its obligations under the FTC Plan of Merger; and (iv) waive any condition precedent to its obligations under the FTC Plan of Merger other than approval by the shareholders of FTC and Keystone of the FTC Plan of Merger, governmental regulatory approvals required to consummate the FTC Merger, securities registration requirements incident to the issuance of Keystone Common Stock in the FTC Merger and the receipt of the tax opinions described above. Notwithstanding prior shareholder approval, the FTC Plan of Merger may be terminated without liability of either party at any time prior to effectiveness of the FTC Merger (i) by mutual consent of Keystone and FTC or (ii) by either party in the event of (a) a material breach by the other party of a representation and warranty or covenant which has not been cured within 30 days after notice to the breaching party, (b) failure of the shareholders of Keystone or FTC to approve the FTC Plan of Merger at the appropriate Special Meeting, (c) a final judicial or regulatory determination denying any regulatory approval required for the FTC Merger or imposing conditions or requirements which Keystone reasonably determines to be materially adverse to its interests, or (d) failure to satisfy prior to December 31, 1997 any condition to its obligations to consummate the FTC Merger, if such failure occurs despite the good faith effort of the terminating party to perform all covenants and satisfy all conditions required of it. Absence of Dissenters' Rights of Keystone or FTC Shareholders Under Section 1571(b)(1)(ii) of the Pennsylvania Business Corporation Law, shareholders of Keystone and FTC do not have statutory dissenters' rights with respect to either the FTC Merger or the FFWM Merger since both Keystone Common Stock and FTC Common Stock is held of record by more than 2,000 shareholders. Restrictions on Resales by FTC Affiliates The shares of Keystone Common Stock issuable in the FTC Merger have been registered under the Securities Act, and such shares will generally be freely tradable by the FTC shareholders who receive Keystone Common Stock as a result of the FTC Merger. However, this registration does not cover resales by FTC shareholders who may be deemed to control or be under common control with FTC and who therefore may be deemed "affiliates" of FTC as that term is defined in Rule 145 under the Securities Act. Such affiliates may not sell their shares of Keystone Common Stock acquired in the FTC Merger except pursuant to: (i) an effective Registration Statement under the Securities Act covering the shares to be sold; (ii) the conditions contemplated by Rules 144 and 145 under the Securities Act; or (iii) another applicable exemption from the registration requirements of the Securities Act. The management of FTC will notify those persons whom it believes may be such affiliates. The FTC Plan of Merger requires as a condition to the FTC Merger that each such FTC affiliate enter into an agreement not to sell the shares of Keystone Common Stock acquired in the FTC Merger except in accordance with the requirements of the Securities Act and the regulations thereunder. In order to preserve the intended accounting treatment of the FTC Merger as a pooling of interests, the agreement also prohibits FTC affiliates from selling any shares of Keystone Common Stock or FTC Common Stock from the 30th day prior to the FTC Merger until Keystone's financial results covering at least 30 days of post-FTC Merger combined operations have been published. Effect of Certain Transactions Involving Keystone The FTC Plan of Merger provides that Keystone may not enter into an agreement for a merger, consolidation or share exchange in which it will not be the surviving or resulting corporation unless the surviving or resulting corporation shall have agreed in writing to be bound by the terms of the FTC Plan of Merger and the -19- Warrant Agreement. If under the terms of any such transaction the outstanding Keystone Common Stock is converted into or exchanged for other securities of any person, cash or other property, the FTC Plan of Merger shall be appropriately amended so that FTC shareholders will receive in the FTC Merger, for each share of FTC Common Stock held, the consideration paid in such transaction for shares of Keystone Common Stock multiplied by the exchange ratio under the FTC Plan of Merger (appropriately adjusted to reflect such event). As indicated above, it is a condition to the Merger that the parties receive the tax opinion described under "Tax Consequences" above. While this condition will not prevent Keystone from entering into any such transaction, FTC is not required to amend or waive this condition. Keystone must obtain the consent of FTC, which shall not unreasonably be withheld, before entering into an agreement for any such transaction which would result in Keystone's acquisition of a business in which, excluding the impact of the FTC Merger and the FFWM Merger, (1) Keystone's investment or proportionate share of the assets would exceed 20% of Keystone's consolidated assets at the end of the most recent year, (2) Keystone's equity in the income would exceed 20% of Keystone's consolidated net income for the most recent year or (3) the number of shares of Keystone Common Stock to be issued in the acquisition would exceed 20% of the shares outstanding at initiation of the acquisition. As of the date of this Joint Proxy Statement/Prospectus, Keystone does not contemplate entering into any transaction of the type described above, and Keystone is not aware that any such transaction is contemplated by any third person. Effect on FTC Employee and Director Stock Options Stock options for [114,115] shares of FTC Common Stock (the "FTC options") are presently outstanding under FTC's 1992 Stock Option Plan and its 1994 Non- Employee Director Stock Option Plan at option prices equal to the fair market value of such shares on the dates the options were granted. Under the FTC Plan of Merger, FTC may amend the agreements relating to the FTC options to provide that when the FTC Merger becomes effective (i) unexercised FTC options will be converted into options for the number of shares of Keystone Common Stock the optionee would have received under the FTC Plan of Merger had the FTC option been exercised prior to the FTC Merger and (ii) the option price per share will be proportionately adjusted. Keystone has also agreed to register under the Securities Act the shares of Keystone Common Stock issuable upon exercise of the amended FTC options by filing a registration statement with the SEC not later than 30 days after its first Annual Report on Form 10-K after the FTC Merger is filed with the SEC. Holders of FTC options may be prohibited under the Securities Act from exercising such options after the FTC Merger becomes effective until this registration statement is filed and becomes effective even if, under the terms of the FTC option, such option would expire prior to the time of such filing. Effect on FTC's Dividend Reinvestment Plan FTC's Dividend Reinvestment Plan [has been] [will be] terminated following reinvestment of the dividend payable , 1997. Following the ------------------- FTC Merger, shareholders will be able to participate in a Dividend Reinvestment Plan offered by Keystone. Expenses Keystone and FTC will each pay its own expenses incurred in connection with the FTC Plan of Merger, except that (1) each party will pay the cost of printing and mailing this Joint Proxy Statement/Prospectus and other proxy materials to its own shareholders, (2) each party will pay one-half of the cost of the tax opinion referred to above and (3) Keystone will pay the costs of printing and filing the Registration Statement and any materials required by state securities laws and the costs of preparing and filing the applications for the regulatory approvals required for the FTC Merger. However, the FTC Plan of Merger provides that if the FTC Merger is not consummated as a direct or indirect consequence of a change of control of Keystone or FTC, the party experiencing -20- the change of control shall reimburse the other party for all of its reasonable out-of-pocket expenses incurred in connection with the FTC Plan of Merger. Effective Date of the FTC Merger It is presently anticipated that if the FTC Plan of Merger is approved by the shareholders of Keystone and FTC, the FTC Merger will become effective in the second quarter of 1997. However, as noted above, consummation of the FTC Merger is subject to the satisfaction of a number of conditions, some of which cannot be waived. There can be no assurance that all conditions to the FTC Merger will be satisfied or, if satisfied, that they will be satisfied in time to permit the FTC Merger to become effective within the anticipated time frame. In addition, as also noted above, Keystone and FTC retain the power to abandon the FTC Merger or to extend the time for performance of conditions or obligations necessary to its consummation, notwithstanding prior shareholder approval. -21- PRO FORMA COMBINED FINANCIAL INFORMATION INFORMATION CONCERNING THE PRO FORMA COMBINED FINANCIAL DATA The FTC Merger will be accounted for by Keystone under the pooling-of- interests method of accounting, which views the FTC Merger as a uniting of the separate ownership interests of Keystone and FTC through an exchange of shares. As such, the pro forma financial information which follows represents the combined historical financial data of Keystone and FTC, subject only to certain adjustments described in the notes to the data presented. Certain reclassifications have been made to conform FTC's presentation with Keystone's presentation. There is no impact on net income from these reclassifications. Intercompany transactions between Keystone and FTC are immaterial and, accordingly, have not been eliminated. The FFWM Merger will be accounted for by Keystone under the purchase method of accounting. See "FFWM Plan of Merger--Accounting Treatment." Pro forma financial information concerning the FFWM Merger is not included herein. The addition of FFWM would not have materially affected the pro forma combined financial information as presented. The pro forma financial information is unaudited and is not necessarily indicative of the financial condition or the results of operations of Keystone as they would have been had the FTC Merger been effective during the periods presented, or as they may be in the future. The pro forma financial information should be read in conjunction with the historical financial statements of Keystone and FTC, including the notes thereto, incorporated by reference herein. See "Information Concerning Keystone--Keystone Documents Incorporated by Reference," and "Information Concerning FTC--FTC Documents Incorporated by Reference." -22- Keystone Financial, Inc. and Financial Trust Corp PRO FORMA COMBINED CONDENSED STATEMENT OF CONDITION September 30, 1996 (unaudited) The following unaudited pro forma combined condensed statement of condition combines in condensed form the consolidated statement of condition of Keystone and the consolidated balance sheet of FTC as of September 30, 1996, with certain pro forma adjustments described in the notes below. This statement should be read in conjunction with the historical financial statements of Keystone and FTC, including the notes thereto; the notes to this pro forma combined condensed statement of condition; and the pro forma combined condensed statements of income, including the notes thereto.
Combined Keystone (In Thousands) Keystone FTC Pro Forma and FTC Historical Historical Adjustments Pro Forma ----------- ----------- --------------- ----------- ASSETS: Cash and due from banks................... $ 164,954 $ 48,437 $ 213,391 Federal funds sold and other.............. 46,772 2,854 49,626 Investment securities available for sale.. 879,010 362,888 1,241,898 Investment securities held to maturity.... 377,999 -- 377,999 Assets held for resale.................... 99,455 -- 99,455 Loans and leases.......................... 3,481,937 773,213 4,255,150 Allowance for credit losses............... (44,495) (11,343) (55,838) ---------- ---------- ---------- Net loans................................. 3,437,442 761,870 4,199,312 Premises and equipment.................... 73,183 23,515 96,698 Other assets.............................. 107,314 27,841 135,155 ---------- ---------- ---------- TOTAL ASSETS.............................. $5,186,129 $1,227,405 $6,413,534 ========== ========== ========== LIABILITIES: Noninterest-bearing deposits.............. $ 521,449 $ 119,936 $ 641,385 Interest-bearing deposits................. 3,589,654 855,969 4,445,623 ---------- ---------- ---------- Total deposits............................ 4,111,103 975,905 5,087,008 Fed funds purchased & security repurchase agreements.................... 267,433 88,435 355,868 Other short-term borrowings............... 33,434 -- 33,434 ---------- ---------- ---------- Total short-term borrowings............... 300,867 88,435 389,302 FHLB borrowings........................... 169,786 -- 169,786 Long-term debt............................ 2,518 5,388 7,906 Other liabilities......................... 99,276 11,253 110,529 ---------- ---------- ---------- TOTAL LIABILITIES......................... 4,683,550 1,080,981 5,764,531 SHAREHOLDERS' EQUITY: Preferred stock........................... -- -- -- Common stock.............................. 76,366 42,703 (14,666)(1) 104,403 Surplus................................... 72,382 33,508 14,666 (1) 120,556 Retained earnings......................... 360,170 69,063 429,233 Deferred KSOP benefit expense............. (1,375) -- (1,375) Treasury stock............................ (441) (1,204) (1,645) Net unrealized securities gains (losses), net of tax..................... (4,523) 2,354 (2,169) ---------- ---------- ---------- TOTAL SHAREHOLDERS' EQUITY................ 502,579 146,424 -- 649,003 ---------- ---------- ----------- ---------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY.. $5,186,129 $1,227,405 -- $6,413,534 ========== ========== =========== ==========
(1) To transfer the common stock of FTC to surplus and reflect the issuance of 1.65 shares of Keystone Common Stock for each outstanding share of FTC Common Stock. -23- Keystone Financial, Inc. and Financial Trust Corp PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME (unaudited) The FTC Merger will be accounted for as a pooling of interests. Accordingly, the following unaudited pro forma combined condensed statements of income result from the combination of the historical consolidated condensed statements of income of Keystone and FTC for each period presented. These statements should be read in conjunction with the historical financial statements of Keystone and FTC, including the notes thereto; the notes to these pro forma combined condensed statements of income; and the pro forma combined condensed statement of condition, including the notes thereto. The pro forma combined results are not necessarily indicative of the results that would have been obtained had the FTC Merger been effective during the periods presented or of the combined results of future operations.
Nine Months Ended September 30, Year Ended December 31, ------------------------ ------------------------------------- (In Thousands, Except Per Share Amounts and Shares Outstanding) 1996 1995 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- INTEREST INCOME: Loans and fees on loans................. $ 275,778 $ 262,366 $ 353,025 $ 296,492 $ 294,252 Investment securities................... 68,732 61,525 83,062 84,494 75,485 Other................................... 8,046 7,781 10,699 5,908 8,666 ----------- ----------- ----------- ----------- ----------- 352,556 331,672 446,786 386,894 378,403 INTEREST EXPENSE: Deposits................................ 138,750 130,452 176,571 137,103 140,705 Short-term borrowings................... 10,678 9,501 12,910 8,418 5,687 FHLB borrowings......................... 7,138 8,157 10,827 6,446 5,265 Long-term debt.......................... 265 384 467 496 286 ----------- ----------- ----------- ----------- ----------- 156,831 148,494 200,775 152,463 151,943 ----------- ----------- ----------- ----------- ----------- NET INTEREST INCOME..................... 195,725 183,178 246,011 234,431 226,460 Provision for credit losses............. 6,935 6,825 8,568 10,324 11,580 ----------- ----------- ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES............. 188,790 176,353 237,443 224,107 214,880 Other income............................ 52,801 42,710 58,137 51,921 52,684 Other expense........................... 146,770 135,801 182,130 182,333 176,034 ----------- ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE................................. 94,821 83,262 113,450 93,695 91,530 Applicable income tax expense (benefit). 28,104 24,595 34,001 25,907 26,219 ----------- ----------- ----------- ----------- ----------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE............. $ 66,717 $ 58,667 $ 79,449 $ 67,788 $ 65,311 =========== =========== =========== =========== =========== AVERAGE NUMBER OF SHARES OUTSTANDING (1).................. 52,133,957 49,327,981 49,557,082 49,188,960 49,036,666 =========== =========== =========== =========== =========== EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE............ $ 1.28 $ 1.19 $ 1.60 $ 1.38 $ 1.33 =========== =========== =========== =========== =========== - -------------------
(1) The average number of shares outstanding reflects Keystone historical shares outstanding, adjusted for the 1996 three-for-two stock split, plus the historical shares outstanding of FTC, adjusted for the 1996 10% stock dividend, multiplied by the FTC Merger exchange ratio of 1.65. -24- INFORMATION CONCERNING KEYSTONE Keystone Financial, Inc. SELECTED FINANCIAL DATA The following unaudited table of selected financial data should be read in conjunction with Keystone's consolidated financial statements and the related notes and with Keystone's management's discussion and analysis of financial condition and results of operation (Financial Review), incorporated herein by reference. See "Keystone Documents Incorporated by Reference."
Nine Months Ended September 30, Year Ended December 31, -------------------------- -------------------------------------------------------------------- (In Thousands, Except Per Share Amounts and Ratios) 1996 1995 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Operations: Interest income................ $ 286,610 $ 270,285 $ 363,931 $ 313,202 $ 307,755 $ 330,645 $ 365,516 Interest expense............... 129,685 123,340 166,579 124,784 125,245 152,718 201,782 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net interest income............ 156,925 146,945 197,352 188,418 182,510 177,927 163,734 Provision for credit losses.... 6,336 6,502 7,859 9,484 7,940 16,053 16,323 Noninterest income............. 46,134 36,969 50,321 44,629 45,819 39,276 33,563 Noninterest expense............ 121,797 112,296 150,634 151,723 148,003 138,840 127,896 Income tax expense............. 23,311 20,006 27,866 20,481 21,037 16,568 12,810 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income..................... $ 51,615 $ 45,110 $ 61,314 $ 51,359 $ 51,349 $ 45,742 $ 40,268 =========== =========== =========== =========== =========== =========== =========== Pre-tax security gains, included in above........... $ 553 $ 392 $ 1,317 $ 834 $ 1,669 $ 1,750 $ 1,976 Per Share (1): Net income..................... $ 1.36 $ 1.28 $ 1.73 $ 1.46 $ 1.47 $ 1.33 $ 1.18 Cash dividends declared........ 0.72 0.68 0.93 0.86 0.79 0.73 0.68 Dividend payout ratio.......... 52.94% 53.13% 53.28% 59.22% 54.01% 55.27% 57.58% Average shares outstanding..... 38,046,244 35,233,136 35,462,358 35,093,138 34,956,927 34,475,862 34,099,094 Balances at Period End: Loans and leases............... $ 3,481,937 $ 3,243,618 $ 3,365,716 $ 3,193,405 $ 2,775,198 $ 2,785,335 $ 2,821,302 Allowance for credit losses.... 44,495 43,303 44,377 42,440 40,181 38,940 35,770 Total assets................... 5,186,129 4,807,854 5,074,785 4,706,000 4,419,726 4,311,779 4,120,215 Deposits....................... 4,111,103 3,848,290 4,061,888 3,827,983 3,582,688 3,655,261 3,560,284 Long-term debt................. 2,518 4,491 4,048 6,054 5,990 5,144 2,143 Shareholders' equity........... 502,579 447,214 480,694 407,774 412,880 378,314 348,143 Book value per share (1)....... 13.17 12.64 12.69 11.64 11.77 10.86 10.18 Selected Ratios: Return on average assets....... 1.37% 1.28% 1.29% 1.16% 1.19% 1.08% 0.98% Return on average equity....... 14.08 14.09 14.06 12.71 12.98 12.58 11.87 Interest rate spread........... 3.75 3.79 3.77 4.04 4.07 4.02 3.66 Net interest margin............ 4.49 4.50 4.49 4.63 4.63 4.67 4.48 Equity to assets, average...... 9.72 9.06 9.16 9.09 9.13 8.62 8.29 Loans to deposits at period end............... 84.70 84.29 82.86 83.42 77.46 76.20 79.24 Allowance for credit losses to loans at period end...... 1.28 1.34 1.32 1.33 1.45 1.40 1.27 Nonperforming assets to loans and ORE............... 0.71 0.77 0.78 0.95 1.32 1.66 1.51 Loans 90 days past due......... 0.58 0.42 0.44 0.24 0.14 0.22 0.30 Total risk elements to loans and ORE at period end (2)........... 1.29 1.19 1.22 1.19 1.46 1.88 1.81
-25-
Nine Months Ended September 30, Year Ended December 31, ------------------------- ------------------------------------------------------------------- (In Thousands, Except Per Share Amounts and Ratios) 1996 1995 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Risk-Adjusted Capital Ratios: Leverage ratio................. 9.43% 9.15% 9.28% 8.84% 9.18% 8.66% 8.30% "Tier 1" capital ratio......... 13.56 13.45 13.65 12.96 14.05 13.06 12.21 "Total" capital ratio.......... 14.80 14.70 14.83 14.21 15.30 14.26 13.44 - ------------------------
(1) Keystone per share amounts have been restated to reflect a 3-for-2 stock split, in the form of a 50% stock dividend, in 1996. (2) Total risk elements include nonperforming assets and loans past due 90 days or more. -26- STOCK PRICES AND DIVIDENDS ON KEYSTONE COMMON STOCK Keystone Common Stock is traded in the over-the-counter market under the symbol "KSTN" and is listed in the NASDAQ National Market System. The following table sets forth the high and low closing sales prices for Keystone Common Stock for the periods indicated, as reported by NASDAQ, and the cash dividends per share declared on Keystone Common Stock for such periods. The information contained in the table has been adjusted to reflect a 3-for-2 split of the Keystone Common Stock in the form of a 50% stock dividend in August 1996.
Quarterly Sales Price Range Cash ------------------------- Dividends High Low Declared ----------- ------------ --------- 1995 First Quarter.................... $20.17 $17.50 $0.23 Second Quarter................... 19.33 18.00 0.23 Third Quarter.................... 21.50 18.50 0.23 Fourth Quarter................... 22.67 19.67 0.24 ----- $0.93 ===== 1996 First Quarter.................... $22.83 $19.83 $0.24 Second Quarter................... 22.75 20.75 0.24 Third Quarter.................... 25.33 21.67 0.24 Fourth Quarter................... 27.75 24.50 0.26 ----- $0.98 ===== 1997 First Quarter (through February ___, 1997)............ $ . $ . $ .
On December 19, 1996, the last NASDAQ trading day prior to the public announcement of the FTC Merger, the closing sale price for the Keystone Common Stock was $26.75. On November 25, 1996, the last NASDAQ trading day prior to the public announcement of the FFWM Merger, the closing sale price for Keystone Common Stock was $26.625. On February ___, 1997, the closing sale price for Keystone Common Stock was $_____. On February 3, 1997, there were approximately [37,998,000] shares of Keystone Common Stock outstanding, held by approximately _____ shareholders of record. While Keystone is not obligated to pay cash dividends, Keystone's Board of Directors presently intends to continue the policy of paying quarterly cash dividends. Future dividends will depend, in part, upon the earnings and financial condition of Keystone. -27- KEYSTONE DOCUMENTS INCORPORATED BY REFERENCE The following documents previously filed by Keystone with the SEC pursuant to the Exchange Act (File No. 0-11460) are hereby incorporated by reference into this Joint Proxy Statement/Prospectus: 1. Keystone's Annual Report on Form 10-K for the year ended December 31, 1995; 2. Keystone's Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 1996; 3. Keystone's Current Reports on Form 8-K dated February 8, April 18, July 19, July 26, October 21, December 3, and December 24, 1996; and 4. The description of the Keystone Common Stock which is contained in Keystone's Current Report on Form 8-K dated July 31, 1992. All documents filed by Keystone with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Joint Proxy Statement/Prospectus and prior to the dates of the Keystone, FTC and FFWM Special Meetings shall be deemed to be incorporated by reference in this Joint Proxy Statement/Prospectus and to be a part hereof from the date of the filing of such documents. Keystone, FTC or FFWM shareholders who wish to obtain copies of the Keystone documents incorporated by reference herein may do so by following the instructions under "Available Information" above. -28- INFORMATION CONCERNING FTC Financial Trust Corp SELECTED FINANCIAL DATA The following unaudited table of selected financial data should be read in conjunction with FTC's consolidated financial statements and the related notes and with FTC's management's discussion and analysis of financial condition and results of operations, incorporated herein by reference. See "FTC Documents Incorporated by Reference."
Nine Months Ended September 30, Year Ended December 31, ------------------------ -------------------------------------------------------------------- (In Thousands, Except Per Share Amounts and Ratios) 1996 1995 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Operations: Interest income................ $ 65,946 $ 61,387 $ 82,855 $ 73,692 $ 70,648 $ 76,486 $ 80,529 Interest expense............... 27,146 25,154 34,196 27,679 26,698 34,214 43,462 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income............ 38,800 36,233 48,659 46,013 43,950 42,272 37,067 Provision for loan losses...... 599 323 709 840 3,640 2,800 1,498 Noninterest income............. 6,667 5,741 7,816 7,292 6,865 6,319 5,803 Noninterest expense............ 24,973 23,505 31,496 30,610 28,031 25,991 24,063 Income tax expense............. 4,793 4,589 6,135 5,426 5,182 4,780 3,857 Cumulative effect of accounting change........... -- -- -- -- 373 -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income..................... $ 15,102 $ 13,557 $ 18,135 $ 16,429 $ 14,335 $ 15,020 $ 13,452 ========== ========== ========== ========== ========== ========== ========== Pre-tax security gains, included in above........... $ 320 $ 218 $ 472 $ 144 $ 38 $ 192 $ 156 Per Share (1): Net income before cumulative effect of accounting change........... $ 1.77 $ 1.59 $ 2.12 $ 1.92 $ 1.64 $ 1.77 $ 1.58 Cash dividends declared........ 0.71 0.63 0.85 0.79 0.71 0.65 0.62 Dividend payout ratio.......... 39.83% 36.60% 37.40% 37.72% 39.20% 34.61% 35.98% Average shares outstanding..... 8,538,008 8,542,330 8,542,257 8,542,923 8,533,175 8,509,146 8,489,712 Balances at Period End: Loans.......................... $ 773,213 $ 729,949 $ 731,150 $ 707,495 $ 665,012 $ 635,934 $ 603,489 Allowance for loan losses...... 11,343 10,924 11,038 11,268 10,903 7,465 6,294 Total assets................... 1,227,405 1,118,079 1,138,437 1,090,576 995,171 964,917 918,184 Deposits....................... 975,905 921,187 931,720 898,859 836,733 828,687 796,943 Long-term debt................. 5,388 761 743 811 615 683 1,402 Shareholders' equity........... 146,424 135,821 141,072 125,869 114,737 105,375 95,171 Book value per share (1)....... 17.24 15.90 16.52 14.74 13.43 12.36 11.19 Selected Ratios: Return on average assets....... 1.73% 1.64% 1.64% 1.53% 1.47% 1.60% 1.54% Return on average equity....... 14.20 13.93 13.81 13.52 13.13 15.10 14.96 Interest rate spread........... 4.43 4.40 4.41 4.45 4.72 4.63 4.12 Net interest margin............ 5.10 5.04 5.06 4.95 5.23 5.25 4.97 Equity to assets, average...... 12.15 11.78 11.85 11.35 11.20 10.57 10.29 Loans to deposits at period end............... 79.23 79.24 78.47 78.71 78.40 76.74 75.73 Allowance for loan losses to loans at period end...... 1.47 1.50 1.51 1.59 1.64 1.17 1.04 Nonperforming assets to loans and ORE............... 0.21 0.45 0.44 0.49 0.71 0.43 0.53
-29-
Nine Months Ended September 30, Year Ended December 31, ------------------------- ------------------------------------------------------------------- (In Thousands, Except Per Share Amounts and Ratios) 1996 1995 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Selected Ratios (Continued): Loans 90 days past due and still accruing to loans and ORE............ 0.28 0.19 0.25 0.33 0.27 0.21 0.61 Total risk elements to loans and ORE at period end (2)........... 0.49 0.64 0.69 0.82 0.98 0.64 1.14 Risk-Adjusted Capital Ratios: Leverage ratio................. 11.53% 11.63% 11.85% 10.70% 11.29% 10.82% 10.13% "Tier 1" capital ratio......... 18.20 18.62 18.54 17.51 17.61 16.44 15.43 "Total" capital ratio.......... 19.43 19.87 19.78 18.76 18.86 17.62 16.50 - ------------------------
(1) FTC per share amounts have been restated to reflect a 10% stock dividend in 1996. (2) Total risk elements include nonperforming assets and loans past due 90 days or more. -30- STOCK PRICES AND DIVIDENDS ON FTC COMMON STOCK FTC Common Stock is traded in the over-the-counter market under the symbol "FITC" and is listed in the NASDAQ National Market System. The following table sets forth the high and low closing sales prices for FTC Common Stock for the periods indicated, as reported by NASDAQ, and the cash dividends per share declared on FTC Common Stock for such periods. The information contained in the table has been adjusted to reflect a 10% stock dividend paid on the FTC Common Stock in June 1996.
Quarterly Closing Sales Price Range Cash ----------------------- Dividends High Low Declared ---------- --------- --------- 1995 First Quarter........... $26.36 $24.32 $0.209 Second Quarter.......... 25.45 24.32 0.209 Third Quarter........... 26.82 24.32 0.209 Fourth Quarter.......... 28.64 26.14 0.227 ------ $0.854 ====== 1996 First Quarter........... $28.18 $26.59 $ 0.23 Second Quarter.......... 29.25 27.27 0.23 Third Quarter........... 29.00 26.00 0.25 Fourth Quarter.......... 40.75 26.75 0.25 ------ $ 0.96 ====== 1997 First Quarter (through February ___, 1997)... $ .25
On December 19, 1996, the last NASDAQ trading day prior to the public announcement of the FTC Merger, the closing sale price for FTC Common Stock was $29.25. On February ___, 1997, the closing sale price for FTC Common Stock was $_____. On January 31, 1997, the record date for the FTC Special Meeting, FTC had approximately [3,609] shareholders of record. At that date, [8,532,131] shares of FTC Common Stock were outstanding. -31- FTC DOCUMENTS INCORPORATED BY REFERENCE The following documents previously filed by FTC with the SEC pursuant to the Exchange Act (File No. 0-10756) are hereby incorporated by reference in this Joint Proxy Statement/Prospectus: 1. FTC's Annual Report on Form 10-K for the year ended December 31, 1995; 2. FTC's Quarterly Reports of Form 10-Q for the quarters ended March 31, June 30 and September 30, 1996; 3. FTC's Current Reports on Form 8-K filed February 5, April 30, May 20, August 28 and December 30, 1996 and its Current Report on Form 8-K/A dated May 6, 1996; and 4. The description of the FTC Common Stock which is contained in Amendment No. 2 to FTC's Registration Statement on Form S-4 (No. 33-91154) filed on July 6, 1995. All documents filed by FTC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the dates of the Special Meetings are hereby incorporated by reference in this Joint Proxy Statement/Prospectus and shall be deemed a part hereof from the date of the filing of such documents. Keystone, FTC and FFWM shareholders who wish to obtain copies of the FTC documents incorporated by reference herein may do so by following the instructions under "Available Information" above. -32- FFWM PLAN OF MERGER This section of the Joint Proxy Statement/Prospectus describes certain of the more important aspects of the FFWM Plan of Merger. The following description does not purport to be complete and is qualified in its entirety by reference to the FFWM Plan of Merger, which has been filed with the SEC as an exhibit to the Registration Statement. The FFWM Plan of Merger is incorporated in this Joint Proxy Statement/Prospectus by reference to such filing and is available upon request. See "Available Information." The FFWM Merger The FFWM Plan of Merger provides for a merger of FFWM and Keystone in which Keystone will be the surviving corporation. In the FFWM Merger, each of the approximately [2,167,896] outstanding shares of FFWM Common Stock (other than shares subject to dissenters' rights) will be converted into the right to receive either 1.29 shares of Keystone Common Stock or an equivalent amount of cash, as elected by the holder in the manner and subject to the limitations described below. See "Elections by FFWM Shareholders," "Limitations on Effectiveness of Elections" and "Conversion of FFWM Shares." The FFWM Merger will not result in any change in the shares of Keystone Common Stock held by the current Keystone shareholders. Keystone is a bank holding company with its principal executive offices in Harrisburg, Pennsylvania. Its bank subsidiaries are American Trust Bank, Cumberland, Maryland, Frankford Bank, N.A., Horsham, Pennsylvania; Keystone National Bank, Lancaster, Pennsylvania; Mid-State Bank and Trust Company, Altoona, Pennsylvania; Northern Central Bank, Williamsport, Pennsylvania; and Pennsylvania National Bank and Trust Company, Pottsville, Pennsylvania, which operate a combined total of 140 banking offices in central and southeastern Pennsylvania, western Maryland and northeastern West Virginia. It also has a number of nonbank subsidiaries and divisions which provide services to Keystone and its customers, including brokerage, investment, mortgage banking, leasing and insurance. See "Summary--The Parties--Keystone" and "Keystone Documents Incorporated by Reference." FFWM is a thrift holding company with its principal executive offices in Cumberland, Maryland. Its principal subsidiary is First Federal Savings Bank of Western Maryland ("First Federal"), which operates 10 banking offices in Allegany, Garrett and Washington Counties in Western Maryland. See "Summary--The Parties--FFWM" and "FFWM Documents Incorporated by Reference." As a result of the FFWM Merger, Keystone will acquire all of the assets and liabilities of FFWM, and FFWM will cease to exist as a separate corporation. It is contemplated that contemporaneously with the FFWM Merger, FFWM's subsidiary, First Federal, will be merged into American Trust Bank, one of Keystone's bank subsidiaries (the "Bank Merger"). Background of the FFWM Merger In May 1996, FFWM received a proposal from its largest shareholder requesting that the Board of Directors take steps to achieve a sale or merger of FFWM. Further, this shareholder later indicated his intention to nominate an alternative slate for election to FFWM's Board of Directors at the Annual Meeting of Shareholders, anticipated to be held in October 1996. During mid-August 1996, management contacted the investment banking firm of Alex. Brown & Sons Incorporated ("Alex. Brown") to discuss its possible engagement to assist FFWM in evaluating alternatives to maximize shareholder value. After discussions with management, Alex. Brown attended a meeting of FFWM's Board of Directors on August 19, 1996 and following a presentation to the Board, was engaged by FFWM as its financial advisor in order to assist the Board in exploring and evaluating the various options available to FFWM to maximize shareholder value, including the possible sale of FFWM. As disclosed in the press release issued on the -33- same day, the Board determined that it was appropriate to identify potential acquirors and to pursue discussions with interested parties, although no assurance was given that discussions would occur or, if discussions were to occur, that they would result in an offer being made to FFWM or that the Board would determine that any such offer, if received, would be in the best interest of FFWM's shareholders. Later in August 1996, Alex. Brown began the process of contacting 31 parties whom Alex. Brown believed might have an interest in acquiring FFWM. Of this number, 18 parties signed confidentiality agreements and received copies of a confidential offering memorandum. On September 10, 1996, Alex. Brown received four preliminary indications of interest regarding the possible acquisition of FFWM. Each of these four parties proceeded to conduct an extensive due diligence review of FFWM's business, operations and financial condition. On October 10, 1996 three parties submitted formal proposals regarding the possible acquisition of FFWM. On August 30, 1996, the shareholder proposal relating to the sale of FFWM was formally withdrawn. FFWM's largest shareholder also decided not to nominate an alternative slate in opposition to the Board's nominees for election as directors of FFWM. To FFWM's knowledge, each of these actions occurred without the benefit of any knowledge, other than from publicly available information, concerning the above-described events. During the remainder of October 1996, management, together with Alex. Brown and legal counsel, evaluated the three proposals and continued to discuss with each party the terms and conditions of their respective proposal. At a meeting of FFWM's Board of Directors held on November 6, 1996, management, as well as FFWM's legal counsel and Alex. Brown, reviewed the terms and conditions of the three proposals, two of which, including the proposal from Keystone, were viewed as the most potentially advantageous to FFWM's shareholders. After a thorough review and discussion of the terms, conditions and relative levels of risk associated with each of these proposals, the Board determined to authorize management, with the assistance of Alex. Brown and legal counsel, to negotiate a definitive agreement with the competing bidder and to conduct due diligence on the competing bidder's business, operations and financial condition. However, the Board specifically reserved its right, in the exercise of its fiduciary obligations, to reevaluate these competing proposals if there should be any significant change in the terms, conditions or relative levels of risk associated with either or both of the proposals. Keystone was informed by Alex. Brown of the Boards decision to proceed with the competing bidder. During the course of negotiations with the competing bidder, the competing bidder introduced several issues which FFWM believed were not customary in a transaction of this type. While the negotiations with the competing bidder were in process, FFWM was contacted by Keystone and informed that Keystone believed that it had satisfactorily addressed FFWM's stated concerns with its proposal and was prepared to improve upon its proposal. Management, together with Alex. Brown and legal counsel, verified Keystone's representation that it had addressed FFWM's stated concerns with Keystone's proposal. On or about November 20, 1996, Alex. Brown informed the competing bidder that Keystone had, through its own actions, reemerged as a potential acquiror and that management, upon the advice of Alex. Brown and legal counsel, believed that it was obligated to present to FFWM's Board of Directors the change in circumstances relating to the terms of both the competing bidder's proposal and Keystone's proposal. On November 22, 1996, FFWM's Board of Directors met and was informed by management, together with Alex. Brown and legal counsel, of the then existing terms, conditions and relative levels of risk associated with the proposals by the competing bidder and Keystone. After a lengthy discussion, and while not terminating negotiations with the competing bidder, the Board determined to authorize management, with the assistance of Alex. Brown and legal counsel, to negotiate a definitive agreement with Keystone. Management also began conducting due diligence on Keystone's business, operations and financial condition. Negotiation of a definitive agreement with Keystone was completed promptly and at a meeting of FFWM's Board of Directors held on November 26, 1996, management of FFWM, together with Alex. Brown and legal counsel, reviewed among other things, the terms of the proposed FFWM Merger, the terms of the FFWM Plan of Merger and a summary of management's due diligence findings. Based on that review and consideration -34- of the factors discussed herein, including the written fairness opinion provided by Alex. Brown, FFWM's Board of Directors unanimously approved and authorized the execution of the FFWM Plan of Merger. Reasons for the FFWM Merger FFWM. In reaching its determination that the FFWM Merger and the FFWM Plan of Merger are fair to, and in the best interests of, FFWM and its shareholders, FFWM's Board of Directors consulted with its financial advisor, as well as with FFWM's management, and considered a number of factors, including, without limitation, the following: (i) the Board of Directors' belief that the terms of the FFWM Plan of Merger are attractive in that the FFWM Plan of Merger allows FFWM's shareholders, subject to specified limitations, to choose whether to accept cash or to become shareholders of Keystone, a company that the Board of Directors believes has positive future prospects; (ii) the written opinion of Alex. Brown that the consideration is fair to FFWM's shareholders from a financial point of view, (iii) pro forma financial information on the FFWM Merger, including, among other things, earnings per share, dilution analysis and ratio impact information; (iv) the sustainability of core earnings by Keystone and potential for growth; (v) the tax-free nature of the transaction to FFWM and shareholders who receive solely shares of Keystone Common Stock in connection with the FFWM Merger; (vi) historical stock price information for both Keystone and FFWM; (vii) the Board's review, based on a presentation by FFWM's management regarding FFWM's due diligence and its analysis of the business, operations, management, earnings and financial condition of Keystone on both a historical and a prospective basis, of (A) the enhanced opportunities for operating efficiencies, particularly in terms of integration of operations and support functions such as product development, asset-liability management, marketing, data processing, loan review and finance and accounting, that could result from the FFWM Merger and (B) the enhanced opportunities for growth that the FFWM Merger would make possible, particularly the ability to access the managerial and other resources of Keystone in designing future products and services that FFWM does not now offer and in responding to changing competitive, technological and regulatory environments; (viii) the Board's belief that the combined enterprise, having a greater size and greater resources than FFWM, could offer FFWM's customers a broader range of products and services than FFWM presently offers as an independent entity; (ix) the Board's review of alternatives to the FFWM Merger (including the alternatives of remaining independent and growing internally, remaining independent for a period of time and then selling FFWM and remaining independent and growing through future acquisitions), including the range of possible values to FFWM's shareholders obtainable through implementation of such alternatives and the timing and likelihood of actually receiving such values; (x) the Board's review of the competing proposals, as discussed above; (xi) the Board's review of multiples of book value, earnings per share and market price to be paid by Keystone and paid by other acquirors in other comparable recent acquisitions of savings banks and thrifts; and (xii) the current and prospective economic environment and competitive constraints facing financial institutions, including FFWM and Keystone. Keystone. Through the merger of FFWM's subsidiary, First Federal, with Keystone's subsidiary, American Trust Bank, Keystone seeks to increase American Trust Bank's market penetration in the areas currently served by both banks and to extend American Trust Bank's market geographically. American Trust Bank has offices in Allegany and Garret Counties in Maryland and Mineral County, West Virginia. First Federal has eight offices in Allegany County, one office in Garrett County, and one office in Washington County, Maryland. At September 30, 1996, First Federal had total assets of $346 million and deposits of $281 million. Of First Federal's total assets, approximately 66% consist of consumer loans and residential mortgages. Keystone hopes following the merger to retain First Federal's depositors and consumer borrowers and thereby significantly increase its retail customer base. In turn, American Trust Bank will have the opportunity to increase its earnings by expanding banking relationships with its new customers by offering them products and services not presently offered by First Federal. Keystone believes that the merger may enable it to realize cost efficiencies at the same time that it expands its customer base. Finally, the merger will enable American Trust Bank to expand its market geographically, both in the counties in which both banks have offices and into the city of Hagerstown, in Washington County, Maryland, where First Federal currently has an office, but American Trust Bank does not. -35- Required Vote; Management Recommendation Approval of the FFWM Plan of Merger requires the affirmative vote of the holders of a majority of the outstanding shares of FFWM Common Stock. Because approval requires the affirmative vote of a majority of all outstanding FFWM shares, an abstention or a broker non-vote will have the same legal effect as a vote against approval of the FFWM Plan of Merger. THE BOARD OF DIRECTORS OF FFWM UNANIMOUSLY RECOMMENDS THAT FFWM SHAREHOLDERS VOTE "FOR" APPROVAL OF THE PLAN OF MERGER. The Board of Directors of Keystone has approved the FFWM Plan of Merger, and under the Pennsylvania Business Corporation Law no approval of the FFWM Plan of Merger by the shareholders of Keystone is required. Voting Agreements In connection with the FFWM Plan of Merger, the directors of FFWM have entered into agreements to vote certain shares of FFWM Common Stock beneficially owned by them in favor of the FFWM Merger. The directors of FFWM have agreed with Keystone that they will vote in favor of the FFWM Merger all shares of FFWM Common Stock owned by them as individuals or (to the extent of their proportionate interest) jointly with other persons, and that they will use their best efforts to cause any other shares of FFWM Common Stock over which they have or share voting power to be voted in favor of the FFWM Merger. In the aggregate, these agreements commit 141,134 shares of FFWM Common Stock (6.5% of the outstanding shares) to be voted in favor of the FFWM Merger. The agreements further provide that with respect to shares of FFWM Common Stock owned by the directors as individuals or (to the extent of the director's proportionate interest) jointly with other persons (collectively, "Shares"), the directors will not until the FFWM Merger has been consummated or the FFWM Plan of Merger has been terminated: (1) vote Shares in favor of any other merger or transaction which would have the effect of a person other than Keystone acquiring control of FFWM or First Federal or (2) sell or otherwise transfer Shares (i) pursuant to any tender offer or similar proposal made by a person other than Keystone or an affiliate, (ii) to any person other than Keystone or an affiliate seeking to obtain control of FFWM or First Federal or (iii) for the principal purpose of avoiding the director's obligations under the agreement. The agreements define "control" as the ability to direct (1) the voting of 10% or more of the shares eligible to vote in an election of directors or (2) the management and policies of FFWM or First Federal. The agreements are applicable to the directors only in their capacities as shareholders and do not affect the exercise of their responsibilities as directors or officers. The agreements also do not apply to any shares of FFWM Common Stock held by a director as a trustee or other fiduciary. No monetary or other compensation was paid to any FFWM director for entering into these agreements. The foregoing is a summary of the material terms of the voting agreements. The form of these agreements has been filed with the SEC as an exhibit to the Registration Statement. Such form is incorporated herein by reference, and the foregoing summary of the agreements is qualified in its entirety by reference to such filing. Opinion of FFWM Financial Advisor FFWM retained Alex. Brown to act as FFWM's financial advisor in connection with the FFWM Merger and related matters. Alex. Brown was selected to act as FFWM's financial advisor based upon its qualifications, expertise and reputation, as well as Alex. Brown's prior investment banking relationship and familiarity with FFWM. Alex. Brown regularly publishes research reports regarding the financial services industry and the businesses and securities of publicly owned companies in that industry. -36- On November 26, 1996, at the meeting at which the FFWM Board approved and adopted the FFWM Plan of Merger, Alex. Brown delivered a written opinion to the FFWM Board of Directors that, as of such date, the Total Consideration (defined below) to be received by the shareholders of FFWM, was fair to the shareholders of FFWM from a financial point of view (the "Opinion"). Pursuant to the Agreement, each share of FFWM common stock issued and outstanding immediately prior to the effective time of the merger with Keystone will be converted into the right to receive, at the election of the holder thereof, either (i) 1.29 shares (the "Exchange Ratio") of common stock of Keystone or (ii) an amount in cash equal to the Exchange Ratio multiplied by Keystone's average closing bid price for the 20 consecutive trading days preceding the sixth trading day prior to the closing date. The total consideration ("Total Consideration") shall mean the sum of the stock election described under (i), which will equal approximately 60% of the Total Consideration, and the cash election described under (ii), which will equal approximately 40% of the Total Consideration. No limitations were imposed by the FFWM Board of Directors upon Alex. Brown with respect to the investigations made or procedures followed by it in rendering the Opinion. The full text of the Opinion, which sets forth assumptions made, matters considered and limits on the review undertaken, is attached hereto as Annex III and is incorporated herein by reference. FFWM shareholders are urged to read the Opinion in its entirety. The following summary of the Opinion is qualified in its entirety by reference to the full text of the Opinion. In rendering the Opinion, Alex. Brown (i) reviewed the FFWM Plan of Merger, certain publicly available business and financial information concerning FFWM and Keystone, and certain internal financial analyses and forecasts for FFWM and Keystone prepared by their respective managements; (ii) held discussions with members of senior management of FFWM and Keystone regarding the past and current business operations, financial condition, and future prospects of their organizations; (iii) reviewed the reported price and trading activity for FFWM Common Stock and Keystone Common Stock and compared certain financial and stock market information for each of FFWM and Keystone with similar information for certain other financial institutions, the securities of which are publicly traded; (iv) reviewed the financial terms of certain recent business combinations in the financial institutions industry which Alex. Brown deemed comparable in whole or in part; and (v) performed such other studies and analyses as Alex. Brown considered appropriate. Alex. Brown relied without independent verification upon the accuracy and completeness of all of the financial and other information reviewed by and discussed with it for purposes of its Opinion. With respect to the financial forecasts reviewed by Alex. Brown in rendering its Opinion, Alex. Brown assumed that such financial forecasts were reasonably prepared on bases reflecting the best currently available estimates and judgments of the respective managements of each of FFWM and Keystone as to the future financial performance of FFWM and Keystone. Alex. Brown did not make an independent evaluation or appraisal of the assets or liabilities of FFWM or Keystone, nor was it furnished with any such appraisal. The summary set forth below does not purport to be a complete description of the analyses performed by Alex. Brown in this regard. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. Accordingly, notwithstanding the separate factors discussed below, Alex. Brown believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all analyses and factors, could create an incomplete view of the evaluation process underlying its opinion. No one of the analyses performed by Alex. Brown was assigned a greater significance than any other. In performing its analyses, Alex. Brown made numerous assumptions with respect to industry performance, business and economic conditions and other matters, many of which are beyond FFWM's or Keystone's control. The analyses performed by Alex. Brown are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses. Additionally, analyses relating to the values of businesses do not purport to be appraisals or to reflect the prices at which businesses actually may be sold. Analysis of Selected Publicly Traded Companies. In preparing the Opinion, Alex. Brown, using publicly available information, compared selected financial information, including book value, tangible book value, latest -37- twelve months ("LTM") earnings, 1996 estimated earnings, 1997 estimated earnings, asset quality ratios and loan loss reserve levels, for FFWM and its peer group of savings bank organizations. The peer group was comprised of savings banks located in Maryland, Virginia and West Virginia that possessed asset bases between $100 million and $500 million ("Peer Group"). The Peer Group included American National Bancorp (ANBK), Bedford Bancshares, Inc. (BFSB), Community Financial Corp. (CFFC), Equitable Federal Savings Bank (EQSB), Essex Bancorp, Inc. (ESX), Fed One Bancorp (FOBC), Guaranty Financial Corp. (GSLC), Harbor Federal Bancorp, Inc. (HRBF), and Washington Savings Bank, FSB (WSB). As of November 25, 1996, the relative multiples implied by the market price of FFWM's Common Stock and the mean market price of the common stock of the Peer Group to such selected financial data were: to LTM earnings 15.2x for FFWM and 11.2x for the Peer Group; to 1996 I/B/E/S (Institutional Brokerage Estimation Service) estimated earnings per share, 14.2x for FFWM and 11.8x for the Peer Group; to 1997 I/B/E/S estimated earnings per share, 13.7x for FFWM and 11.5x for the Peer Group; to stated book value, 146% for FFWM and 104% for the Peer Group; to tangible book value, 146% for FFWM and 104% for the Peer Group; and to total assets, 17.1% for FFWM and 9.8% for the Peer Group. Analysis of Selected Acquisition Transactions. In preparing the Opinion, Alex. Brown analyzed certain selected merger and acquisition transactions for savings banks based upon the acquisition price relative to stated book value, normalized book value (which assumes normalized book multiple is paid for all equity up to 8.0% of assets and then dollar-for-dollar for all additional equity), tangible book value, LTM earnings, total assets and the premiums to core deposits and market price. The market price premium is measured against the market price of the common stock one month prior to the acquisition announcement. The analysis included a review and comparison of the mean multiples represented by a sample of recently effected or pending savings bank acquisitions nationwide having a transaction value greater than $20 million and less than $100 million which were announced since January 1, 1995 (a total of 59 transactions) ("National Transactions"), as segmented into: (i) transactions in which the selling savings bank was headquartered in the Mid-Atlantic Region (15) ("Regional Transactions"); (ii) transactions in which the selling savings bank achieved a return on average assets ("ROAA") between 0.80% and 1.20% in the year of its announced acquisition (26) ("Profitability-Segmented Transactions"); and (iii) transactions in which the selling savings bank had a tangible equity to assets ratio greater than 10.0% (27) ("Capital-Segmented Transactions"). The relative multiples implied by the Total Consideration ($34.19 implied per share value to FFWM shareholders as of November 25, 1996) and each of the selected acquisition transaction segmentations, respectively, are provided in the following table:
Purchase Price to: --------------------------------------------- Core Book Norm. Bk Tang. Bk. LTM Deposits Market Value Value Value EPS Assets Premium Premium ------ --------- ---------- ----- ------- --------- -------- Consideration ($34.19 per share)...... 180.5% 221.5% 180.5% 18.8x 21.8% 13.1% 22.1% Comparable Acquisition Transactions: (a) Nationwide - Mean................ 146.5% 169.1% 149.1% 16.4x 16.3% 7.6% 30.3% High................................ 202.0% 263.6% 202.2% 23.3x 34.0% 17.7% 86.3% Low................................. 110.0% 110.0% 110.0% 8.5x 6.3% 1.5% -3.8% (b) Regional Transactions - Mean..... 153.2% 184.8% 155.0% 16.5x 19.2% 10.3% 31.8% High................................ 202.0% 250.8% 202.2% 21.8x 29.5% 17.4% 86.3% Low................................. 110.8% 115.1% 126.4% 8.9x 9.2% 3.3% -1.5% (c) Profitability-Segmented Mean..... 153.0% 177.7% 153.9% 15.9x 18.2% 8.7% 31.2% High................................ 202.0% 263.6% 202.2% 21.8x 34.0% 17.7% 86.3% Low................................. 110.5% 141.0% 110.5% 8.5x 8.1% 4.2% -1.5% (d) Capital-Segmented - Mean......... 140.6% 180.0% 141.5% 18.3x 21.8% 9.3% 24.2% High................................ 198.3% 263.6% 198.3% 21.8x 34.0% 17.7% 57.6% Low................................. 110.0% 129.8% 110.0% 12.1x 13.9% 3.5% -3.8%
-38- Contribution Analysis. Alex. Brown also determined the contribution by FFWM of key historical balance sheet items (including assets, loans and deposits) and selected historical income statement items (including latest twelve months net interest income and net income) to the resulting pro forma entity, as compared to the implied value contributed by Keystone in stock and cash that was received by current FFWM shareholders in aggregate as a result of the acquisition (as of the exchange ratio on November 26, 1996). The relative levels of contribution by FFWM in these selected areas and the implied value contributed by Keystone in stock and cash received by current FFWM shareholders, in aggregate, are presented in the following table:
FFWM Balance Sheet Items Contribution ------------------- ------------- Assets........................... 6.2% Loans............................ 7.2% Deposits......................... 6.4% Net Income Items ---------------- LTM Net Interest Income.......... 6.8% LTM Net Income................... 5.6% Implied Value Contributed in Stock and Cash by Keystone............. 7.2%
Impact on FFWM Shareholders. Based on the fixed exchange ratio that FFWM shareholders could receive as part of the FFWM Plan of Merger, Alex. Brown was able to determine the expected effect of the transaction to the current shareholders of FFWM Common Stock. The pro forma values listed in the table below and their resulting implications to current FFWM shareholders are based on historical and projected Keystone and FFWM financials; the 1997 estimated earnings per share figures also assume Keystone can recognize 40% pre-tax expense savings relating to the FFWM Merger. As such the values listed in the table below are not necessarily indicative of actual values, which may be significantly more or less than such estimates.
FFWM FFWM Stand-Alone Pro Forma ----------- ---------- 1997 Estimated EPS.... $ 2.03 $ 2.59 Percent Change...... 28% Book Value per Share.. $18.94 $17.72 Percent Change...... -3% Dividends per Share... $ 0.48 $ 1.24 Percent Change...... 158%
Discounted Dividend Analysis. Using discounted cash flow analysis, Alex. Brown estimated the present value of the future dividend streams that FFWM could produce over a five-year period, under different assumptions as if FFWM performed in accordance with management's forecasts and certain variants thereof. Alex. Brown also estimated the terminal value for FFWM's common equity after the five-year period by applying earnings acquisition multiples (14.0 - 18.0 times) currently being received by savings bank institutions with similar profitability ratios as FFWM is projected to have during its calendar year ending December 31, 2001. The range of multiples used reflected a variety of scenarios regarding the growth and profitability prospects of FFWM. The dividend streams and terminal values were then discounted to present values using discount rates ranging from 11.0% to 15.0%, which reflect different assumptions regarding the required rates of return of holders or prospective buyers of FFWM's common equity. Reference Range. Based in part on the several analyses discussed above, Alex. Brown developed, for purposes of its Opinion, a reference range for the value of FFWM common equity of $26.50 to $34.50 per share of -39- FFWM Common Stock. The values reflected in the foregoing reference range were considered along with the other analyses performed by Alex. Brown and were not intended to represent the price at which 100% of FFWM Common Stock could actually be sold. The foregoing reference ranges were based in part on the application of economic and financial models and are not necessarily indicative of actual values; which may be significantly more or less than such estimates. The reference ranges do not purport to be appraisals. Compensation of Financial Advisor. Pursuant to the terms of an engagement letter dated August 19, 1996, FFWM has agreed to pay Alex. Brown a fee of 1.0% of the aggregate consideration received by FFWM shareholders in the FFWM Merger. This fee is payable to Alex. Brown upon consummation of the FFWM Merger, and is estimated to be approximately $750,000, assuming that the per share consideration paid to FFWM shareholders is $34.19 at the consummation of the FFWM Merger. Whether or not the FFWM Merger is consummated, FFWM also has agreed to pay all of Alex. Brown's out-of-pocket expenses, including fees and disbursements of counsel, incurred by Alex. Brown in carrying out its duties under its engagement, and to indemnify Alex. Brown and certain related persons against certain liabilities relating to or arising out of its engagement. Elections by FFWM Shareholders Pursuant to the FFWM Plan of Merger, each holder of record of FFWM Common Stock may elect to receive, in exchange for each share of FFWM Common Stock held of record by such holder, either solely (1) 1.29 shares of Keystone Common Stock (the "Stock Election") or (2) an amount in cash equal to 1.29 times the average of the closing bid prices for the Keystone Common Stock on the NASDAQ National Market System for the 20 trading days ending with the sixth trading day immediately preceding the closing date for the FFWM Merger (the "Cash Election"). No Partial Elections. Except as discussed below with respect to nominee holders, each FFWM shareholder will be required to make the same Election (either solely the Stock Election or solely the Cash Election) for all shares of FFWM Common Stock held of record by such holder, whether such shares are held in a single or in multiple shareholder accounts. For purposes of the FFWM Plan of Merger, a person holding shares of record individually will be treated as a separate holder from the same person holding shares of record jointly with another person or in a fiduciary capacity. Manner of Election. The proxy card accompanying this Joint Proxy Statement/Prospectus as sent to each FFWM shareholder of record on the record date for the FFWM Special Meeting contains a Form of Election on which such shareholders may designate either the Stock Election or the Cash Election. Persons who become FFWM shareholders of record after the record date for the FFWM Special Meeting may obtain a Form of Election by writing to First Financial Corporation of Western Maryland, 118 Baltimore Street, Cumberland, Maryland 21502, Attention: William C. Marsh, Executive Vice President and Chief Financial Officer. To be effective, a Form of Election (or a facsimile thereof), properly completed and signed, must be received by FFWM at the above address not later than 10:00 a.m., local time, on March 17, 1997 (the "Election Deadline"). Any FFWM shareholder whose Form of Election is not received prior to the Election Deadline will be deemed to have made either the Stock Election or the Cash Election, as determined by Keystone in order to satisfy the Minimum Stock and Maximum Stock Limitations described below. See "Limitations on Effectiveness of Elections." Revocability of Elections. Any FFWM shareholder who has submitted a Form of Election may change it by submitting a revised Form of Election (or a facsimile thereof) which is received by FFWM prior to the Election Deadline. In the event multiple Forms of Election are submitted by the same shareholder, the latest dated Form of Election will control. Upon the Election Deadline, Elections will become irrevocable except to the extent that changes are permitted, in the discretion of Keystone, to satisfy the Minimum Stock and Maximum Stock Limitations described -40- below. See "Limitations on Effectiveness of Elections." In the event any shares of FFWM Common Stock are transferred after an Election has been made (or is deemed to have been made), the transferee of such shares will be bound by such Election unless a revised Form of Election (or a facsimile thereof) is received by FFWM prior to the Election Deadline. Nominee Holders. A holder of record of FFWM Common Stock who is a nominee only may submit one or more Forms of Election designating a combination of Elections, provided that such holder certifies to the satisfaction of Keystone that such shares are held as a nominee for more than one beneficial owner and that either solely the Stock Election or solely the Cash Election has been made with respect to all shares held as nominee for any one beneficial owner. Each beneficial owner for which such a Form of Election is submitted will be treated as a separate holder of FFWM Common Stock for the purpose of the Minimum Stock and Maximum Stock Limitations described below. Limitations on Effectiveness of Elections The effectiveness of any Election made by an FFWM shareholder as described above is subject to the following limitations: (1) Minimum Stock Limitation. The aggregate market value on the day prior to the FFWM Merger of all whole shares of Keystone Common Stock to be issued pursuant to the Stock Election (the "Stock Value") must be at least equal to 55% of the Total Consideration (defined below) payable to FFWM shareholders in connection with the FFWM Merger; and (2) Maximum Stock Limitation. The Stock Value may not exceed 60% (or such greater percentage as Keystone in its sole discretion may determine to permit) of the Total Consideration except as necessary to assure that either solely the Stock Election or solely the Cash Election shall be in effect for each holder of FFWM Common Stock. For purposes of these limitations, the "Total Consideration" payable to FFWM Shareholders in connection with the FFWM Merger is defined as the sum of (1) the Stock Value plus (2) the aggregate amount of cash which may be payable by Keystone (i) to FFWM shareholders making the Cash Election, (ii) in lieu of fractional shares of Keystone Common Stock to FFWM shareholders making the Stock Election (see "Conversion of FFWM Shares" below) and (iii) to FFWM shareholders who may perfect their rights as dissenting shareholders, as determined by Keystone as of the effective date of the FFWM Merger (see "Dissenters' Rights of FFWM Shareholders" below). In applying these limitations, Keystone will first treat any holders of FFWM Common Stock who have not submitted a timely Form of Election ("non- electing holders") as having made either the Stock Election as necessary to satisfy the Minimum Stock Limitation or the Cash Election as necessary to satisfy the Maximum Stock Limitation. If after allocating all non-electing holders to the Stock Election, Keystone determines that giving effect to all Cash Elections made by FFWM shareholders would result in the Minimum Stock Limitation not being met, the Cash Elections made by the FFWM shareholders holding the smallest numbers of shares of FFWM Common Stock will automatically be converted to the Stock Election in the order of their holdings of FFWM Common Stock, so that the holder of the smallest number of shares will be converted first, the holder of the second smallest number of shares will be converted second, and so on, until the Minimum Stock Limitation is satisfied. If after allocating all non-electing holders to the Cash Election, Keystone determines that giving effect to all Stock Elections made by FFWM shareholders would result in the Maximum Stock Limitation being exceeded, the Stock Elections made by the FFWM shareholders holding the smallest numbers of shares of FFWM Common Stock will automatically be converted to the Cash Election in the order of their holdings of FFWM Common Stock, in the same manner as described in the immediately preceding paragraph, until the Maximum Stock Limitation is satisfied. -41- Additional Procedures and Determinations Keystone has the right to establish additional procedures and to make reasonable determinations not inconsistent with the FFWM Plan of Merger governing any matters in connection therewith, including procedures and determinations as to the manner, form and validity of Elections, the necessity for, manner and extent of conversions of Elections resulting from the Minimum Stock and Maximum Stock Limitations and the ranking of holders of FFWM Common Stock for purposes of such conversions. Conversion of FFWM Shares On the effective date of the FFWM Merger, (1) each share of FFWM Common Stock held by an FFWM shareholder who has made or is deemed to have made the Stock Election will be converted into the right to receive 1.29 shares of Keystone Common Stock, and (2) each share of FFWM Common Stock held by an FFWM shareholder who has made or is deemed to have made the Cash Election will be converted into the right to receive an amount in cash equal to 1.29 times the average of the closing bid prices for the Keystone Common Stock on the NASDAQ National Market System for the 20 trading days ending with the sixth trading day immediately preceding the closing date for the FFWM Merger (the "Average Keystone Price"). On February ___, 1997, the closing bid price for Keystone Common Stock reported on the NASDAQ National Market System was $_____. Surrender of Certificates. As promptly as practicable after the effective date of the FFWM Merger, Keystone will send to each shareholder of record of FFWM immediately prior to the FFWM Merger a letter of transmittal containing instructions on how to effect the exchange of FFWM Common Stock certificates for certificates representing the shares of Keystone Common Stock or for the cash into which their FFWM shares have been converted. FFWM shareholders should not send in their certificates until they receive such written instructions. However, certificates should be surrendered promptly after instructions to do so are received. No interest will accrue or be payable in respect of any cash payable on surrender for exchange of FFWM Common Stock certificates, and no such cash will be paid or Keystone Common Stock certificates issued to any former FFWM shareholder until such shareholder's FFWM Common Stock certificates are surrendered for exchange as provided in the letter of transmittal. Any dividends declared on Keystone Common Stock after the effective date of the FFWM Merger will apply to all whole shares of Keystone Common Stock into which shares of FFWM Common Stock have been converted in the FFWM Merger under the Stock Election. However, no former FFWM shareholder will be entitled to receive any such dividend until such shareholder's FFWM Common Stock certificates have been surrendered for exchange as provided in the letter of transmittal. Upon such surrender the former FFWM shareholder will be entitled to receive all such dividends payable on the whole shares of Keystone Common Stock represented by the surrendered certificate or certificates (without interest thereon and less the amount of taxes, if any, which may have been imposed or paid thereon). Payment for Fractional Shares. No fractional shares of Keystone Common Stock will be issued in connection with the FFWM Merger. Instead, each FFWM shareholder who surrenders for exchange FFWM Common Stock certificates representing a fraction of a share of Keystone Common Stock will be entitled to receive, in addition to a certificate for the whole shares of Keystone Common Stock represented by the surrendered certificates, cash in amount equal to such fractional part of a share multiplied by the value of $26.50 for one whole share of Keystone Common Stock. Unexchanged Certificates. On the effective date of the FFWM Merger, the stock transfer books for FFWM Common Stock will be closed, and no further transfers of FFWM Common Stock will be made or recognized. Certificates for FFWM Common Stock not surrendered for exchange will entitle the holder only to -42- receive, upon surrender as provided in the letter of transmittal, either (1) a certificate for the whole shares of Keystone Common Stock into which the shares represented thereby have been converted under the Stock Election, plus payment of any amount for a fractional share or dividends to which such holder is entitled as outlined above, or (2) the cash into which the shares represented thereby have been converted under the Cash Election. If the FFWM Merger becomes effective and any former FFWM shareholder who makes or is deemed to have made the Stock Election does not surrender his or her FFWM Common Stock certificates for exchange on or before the second anniversary of the effective date, Keystone, at its option, may at any time thereafter sell such shareholder's Keystone Common Stock without notice to the shareholder. After any such sale, the sole right of such shareholder shall be to receive, upon surrender of the shareholder's FFWM Common Stock certificates, the net proceeds of the sale (without interest and less the amount of any taxes which may have been imposed or paid thereon). Keystone Shareholder Rights Plan. If no Distribution Date under Keystone's shareholder rights plan (see "Comparison of Keystone Common Stock and FFWM Common Stock--Keystone Shareholder Rights Plan") shall have occurred prior to the effective date of the FFWM Merger, then each share of Keystone Common Stock issued in the FFWM Merger shall also evidence one Right under Keystone's shareholder rights plan. If the Distribution Date shall have occurred, then it is a condition to the FFWM Merger that Keystone take one of the actions set forth under "Conditions to the FFWM Merger" below. Adjustment of Exchange Ratio. The FFWM Plan of Merger contains provisions for the proportionate adjustment of the exchange ratio to be used for converting FFWM Common Stock into Keystone Common Stock or cash in the FFWM Merger if a stock dividend, stock split, reclassification or similar event involving the Keystone Common Stock or the FFWM Common Stock occurs prior to the FFWM Merger. The exchange ratio of 1.29 shares of Keystone Common Stock for each share of FFWM Common Stock, as the same may be adjusted pursuant to such provisions, is sometimes referred to below as the "Exchange Ratio." See also "Amendment, Waiver and Termination" below for a discussion of Keystone's right to terminate the FFWM Plan of Merger in the event the average closing bid price for Keystone Common Stock for a prescribed 20-trading-day period exceeds $31.80, and FFWM's right to prevent such termination by electing to proportionately reduce the Exchange Ratio. Tax Consequences to FFWM Shareholders Federal Tax Opinion. The FFWM Plan of Merger requires as a condition to the FFWM Merger that an opinion of counsel or of independent public accountants be received by Keystone and FFWM to the effect that for purposes of federal income tax: (1) The FFWM Merger will constitute a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"); (2) Except for cash received in lieu of fractional shares, no income, gain or loss will be recognized by the shareholders of FFWM who receive solely Keystone Common Stock on the exchange of their shares of FFWM Common Stock; (3) The basis of shares of Keystone Common Stock to be received by shareholders of FFWM will be the same as the basis of the shares of FFWM Common Stock exchanged therefor; and (4) The holding period of the shares of Keystone Common Stock received by shareholders of FFWM will include the period during which the FFWM Common Stock exchanged therefor was held by the FFWM shareholder, provided that the FFWM Common Stock was held as a capital asset at the effective time of the FFWM Merger. Stock Election. An FFWM shareholder who makes or is deemed to have made the Stock Election will not recognize gain or loss for federal income tax purposes on the exchange of his FFWM shares for full shares of -43- Keystone Common Stock. However, gain or loss will be recognized upon the receipt of cash in lieu of a fractional share interest. To compute the amount, if any, of such gain or loss, the cost or other basis of the FFWM Common Stock exchanged must be allocated proportionately to the total number of shares of Keystone Common Stock received, including any fractional share interest. Gain or loss will be recognized measured by the difference between the cash received and the basis of the fractional share interest as so allocated. Under Section 302(a) of the Code, any such gain or loss will generally be entitled to capital gain or loss treatment if the FFWM Common Stock was a capital asset in the hands of the shareholder and the cash received was not essentially equivalent to a dividend. If any shares of Keystone Common Stock received in the FFWM Merger are subsequently sold, gain or loss on the sale should be computed by allocating the cost or other basis of the FFWM Common Stock exchanged in the FFWM Merger to the shares sold in the manner described in the preceding paragraph. The holding period for the shares of Keystone Common Stock received in the FFWM Merger will include the holding period for the shares of FFWM Common Stock exchanged in determining, for example, whether any such gain or loss is a long-term or short- term capital gain or loss. Cash Election. Where an FFWM shareholder makes or is deemed to have made the Cash Election and receives cash in exchange for FFWM Common Stock, the cash will be treated as received by the shareholder as a distribution in redemption of Keystone Common Stock that the shareholder would have received if the shareholder had made the Stock Election, subject to the provisions and limitations of Section 302 of the Code. Pursuant to Section 302, and assuming that the FFWM Common Stock of such shareholder is a capital asset in the hands of the shareholder, an FFWM shareholder who makes or is deemed to have made the Cash Election will realize capital gain or loss on the exchange if (i) such shareholder has no stock interest in Keystone following the FFWM Merger, (ii) the exchange is substantially disproportionate with respect to such shareholder or (iii) the exchange is not essentially equivalent to a dividend. For these purposes, an FFWM shareholder will be considered to own stock of Keystone owned after the FFWM Merger by certain related individuals or entities under the attribution of ownership rules set forth in Section 318 of the Code as made applicable to Section 302 of the Code. If none of (i), (ii) or (iii) above applies, an FFWM shareholder who makes or is deemed to have made the Cash Election will be treated as though the shareholder had received a dividend equal to the cash received, taxable as ordinary income in the year in which the FFWM Merger occurs. As indicated under the caption "Elections by FFWM Shareholders," each FFWM shareholder must make the same Election for all shares of FFWM Common Stock held in a particular capacity. If an FFWM shareholder holds FFWM Common Stock in more than one capacity--for example, a husband holds 100 shares individually and he and his wife hold 100 shares as tenants by the entireties--the same Election should be made for all such holdings. If the same Election is not made, FFWM shareholder may be subject to Section 356 of the Code. Pursuant to Section 356, the cash received may under certain circumstances be treated as a dividend, taxable as ordinary income in the year in which the FFWM Merger occurs. Dissenting Shareholders. Where an FFWM shareholder exercises dissenters' rights and receives cash in exchange for FFWM Common Stock, the cash will be treated as received by the shareholder as a distribution in redemption of the FFWM Common Stock subject to the provisions and limitations of Section 302 of the Code. The cash received by a dissenting FFWM shareholder will be treated as if the shares had been sold to FFWM for the cash received, and will generally be entitled to capital gain or loss treatment under Section 302 of the Code, provided the shares are a capital asset in the hands of the shareholder. However, because the ownership of shares by certain individuals related to the shareholder and by certain partnerships, estates, trusts and corporations in which the shareholder has an interest may have an adverse impact on the tax treatment of the cash received by the shareholder and result in it being taxed as a dividend, an FFWM shareholder should consult with his own personal tax advisor as to the federal, state and local tax consequences of exercising dissenters' rights. Maryland Personal Income Tax. For FFWM shareholders who are subject to the Maryland personal income tax, the Maryland state income tax consequences of receiving Keystone Common Stock and cash in lieu of fractional shares pursuant to the Stock Election, cash pursuant to the Cash Election, or cash as a dissenting shareholder are the same as they are under the Code for federal income tax purposes, as described above. -44- The foregoing is intended only as a summary of certain federal income tax and Maryland personal income tax consequences of the FFWM Merger under existing law and regulations, as presently interpreted by judicial decisions and administrative rulings, all of which are subject to change without notice, and any such change might be retroactively applied to the FFWM Merger. Among other things, the summary does not address state income tax consequences in states other than Maryland, local taxes, or the federal or state income tax considerations that may affect the treatment of a shareholder who acquired FFWM Common Stock pursuant to an employee stock option. Accordingly, it is recommended that FFWM shareholders consult their own tax advisors with specific reference to their own tax situations and potential changes in the applicable law as to all federal, state and local tax matters in connection with the FFWM Merger. Boards of Directors Following the FFWM Merger The FFWM Merger will not result in any changes in the membership of the Board of Directors of Keystone. However, at the time the FFWM Merger becomes effective, three directors of FFWM selected by Keystone will be added to the Board of Directors of American Trust Bank, which presently consists of 12 directors. Interests of Certain Persons in the Transaction Advisory Fees for FFWM Directors. Keystone has agreed in the FFWM Plan of Merger that, in consideration of their being available for reasonable advisory services during the one-year period following consummation of the FFWM Merger, Keystone will pay to each current director of FFWM who remains a director until immediately prior to the FFWM Merger an amount equal to the fees that such director received from FFWM during the one-year period preceding the FFWM Merger, including retainer fees and fees for attendance at Board of Directors and Board committee meetings. The amount paid to any FFWM director who becomes a member of the Board of Directors of American Trust Bank will be reduced by the amount of fees paid to the director for service in that capacity. Each director of FFWM receives a retainer of $200 each month so long as the director's rate of attendance at meetings of the Board of Directors exceeds 75% during the immediately preceding twelve-month period. Directors receive fees of $500 and $100 for each meeting of the Board of Directors of First Federal and subsidiaries thereof, respectively, attended and $50 for each committee meeting of First Federal's Board attended. In the fiscal year ended June 30, 1996 fees paid to FFWM directors ranged between $12,200 and $13,400 per director. FFWM Executive Officer Severance Arrangements. FFWM and First Federal (the "Employers") are parties to an Employment Agreement with Patrick J. Coyne, Chairman, President and Chief Executive Officer of the Employers. The Employers have also entered into Severance Agreements with the following Executive Vice Presidents, Kenneth W. Andres, William C. Marsh and R. Craig Pugh. Each of these agreements provide that in the event of a change of control, as defined in the agreements, the respective executive officer shall be entitled to receive a lump sum severance payment equal to three times (Mr. Coyne) or 2.99 times (Messrs. Andres, Marsh and Pugh) his average annual compensation for the preceding five years or, if employed for less than five years, such shorter period of time. Consummation of the FFWM Plan of Merger will constitute a change of control under the terms of each of the agreements. Further, the employment of each of Messrs. Coyne, Andres, Marsh and Pugh will terminate effective on the effective date of the FFWM Merger and none of these officers will have any continuing employment with Keystone or American Trust Bank following the effective date. Upon consummation of the FFWM Plan of Merger and in satisfaction of the Employers' obligations under the terms of existing employment, severance, stock option and incentive plan agreements, Messrs. Coyne, Andres, Marsh and Pugh will receive pre-tax severance payments in the amounts of [$1,334,348, $421,827, $344,152 and $445,594], respectively. These amounts are subject to reduction to the extent, if any, that the payments would constitute "excess parachute payments" under Section 280G of the Internal Revenue Code. -45- FFWM Directors' and Officers' Indemnification, Limitation of Liability and Insurance. Keystone has agreed in the FFWM Plan of Merger that following the FFWM Merger it will provide indemnification to any present or former director, officer or employee of FFWM and its subsidiaries with respect to any proceeding arising out of matters existing or occurring at or prior to the effective time of the FFWM Merger to the fullest extent, if any, that such person would have been entitled to indemnification by FFWM under FFWM's certificate of incorporation and bylaws. The certificate of incorporation and bylaws of FFWM generally require FFWM to indemnify its directors and officers, and any person who was serving at the request of FFWM as a director, officer, employee or agent of another corporation or enterprise, against expenses, including attorneys' fees, liabilities, losses, judgments, fines and amounts paid in settlement reasonably incurred in connection with any civil, criminal, administrative or investigative proceeding in which such person is or is threatened to be made a party is otherwise involved by reason of having served in such capacity, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of FFWM, and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Keystone has also agreed that the provision of FFWM's certificate of incorporation which limits the liability of its directors shall survive the FFWM Merger and continue in full force and effect with respect to liabilities arising out of matters existing or occurring at or prior to the effective time of the FFWM Merger. This provision provides that directors of FFWM shall not be liable to the corporation or its shareholders for monetary damage for breach of fiduciary duty as a director except for (i) a breach of the directors duty of loyalty to the corporation or its shareholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) the willful or negligent payment or making by the corporation of an unlawful dividend, stock purchase or redemption or (iv) any transaction from which the director derived an improper personal benefit. Finally, Keystone has agreed to maintain for three years following the FFWM Merger FFWM's current directors' and officers' liability insurance policy or a substantially equivalent policy covering FFWM's directors and officers for acts or omissions occurring prior to the FFWM Merger, provided that if the annual cost of such policy would exceed $20,590, then Keystone would only be required to use its reasonable efforts to obtain as much comparable insurance as is available for that amount. Cashout of FFWM Director and Officer Stock Options. Stock options for [14,173] shares of FFWM Common Stock are presently outstanding under FFWM's Stock Option Incentive Plan at option prices equal to the fair market value of such shares on the dates the options were granted. The FFWM Plan of Merger provides that each of these options which remains outstanding and unexercised at the time the FFWM Merger becomes effective will be converted into the right to receive, for each share of FFWM Common Stock subject to the option, an amount in cash equal to the excess of (1) the product of (a) the Exchange Ratio, multiplied by (b) the Average Keystone Price, over (2) the exercise price of the option. Benefit Plans and Severance Arrangements for FFWM Employees. Keystone has agreed that as soon as administratively practicable after the FFWM Merger, it will take appropriate action so that employees of FFWM and its subsidiaries will be entitled to participate in Keystone employee benefit plans of general applicability and that until such action is taken FFWM's plans shall remain in effect. No employee of FFWM or a subsidiary who becomes an employee of Keystone or a subsidiary shall be excluded from coverage under Keystone's medical insurance plans on the basis of a preexisting condition that was not also excluded under FFWM's medical insurance plans, except to the extent that such preexisting condition was excluded from coverage under FFWM's plans. For purposes of determining eligibility to participate in and the vesting of benefits under Keystone's employee benefit plans, but not for purposes of benefit accrual, Keystone will recognize years of service with FFWM or a subsidiary prior to the FFWM Merger. The FFWM Plan of Merger provides that employees of FFWM and its subsidiaries with at least one year of service prior to the FFWM Merger, other than employees who are parties to an employment or severance agreement, shall be eligible for benefits under Keystone's severance plan for employees. Under Keystone's severance plan, as modified for FFWM employees by the FFWM Plan of Merger, if within one year after the FFWM Merger the employment of such an employee is involuntarily terminated through no fault of the employee, -46- or voluntarily terminated by the employee within 30 days after being transferred to a location more than 35 commuting miles from the employee's current job location, then, in the absence of certain disqualifying events, the employee will generally be entitled to receive biweekly severance payments in an aggregate amount equal to one week's base compensation for each year of service up to a maximum of 26 weeks and to continuation of certain medical and life insurance benefits during the period of severance payments. If an eligible FFWM employee is offered a position with Keystone or a subsidiary at an annual base compensation below that in effect immediately prior to the FFWM Merger, the employee may elect either to accept the position at the reduced compensation or to refuse the position and take severance benefits. Severance payments will be offset by compensation received from subsequent employment during the period of severance benefits. Stock Option Agreement In connection with the FFWM Plan of Merger, Keystone and FFWM have entered into a Stock Option Agreement (the "Option Agreement") under which FFWM has granted Keystone an option (the "Option") to purchase up to 16.6% (after exercise) of FFWM's outstanding Common Stock upon the occurrence of certain events described below. The Option Agreement covers 423,600 shares of FFWM Common Stock at an exercise price of $34.19 per share. The Option Agreement is designed to compensate Keystone for its risks, costs and expenses and the commitment of resources associated with the FFWM Plan of Merger in the event the FFWM Merger is not consummated due to an attempt by a third person to gain control of FFWM. Keystone may not exercise or sell its Option unless (i) FFWM shall have authorized, recommended or publicly proposed, or publicly announced an intention to authorize, recommend or propose, or entered into an agreement with any third person to effect (A) a merger, consolidation or similar transaction involving FFWM or any of its subsidiaries, (B) the sale or other disposition of 15% or more of the consolidated assets of FFWM and its subsidiaries, or (C) the issuance, sale or other disposition of securities representing 15% or more of the voting power of FFWM or any of its subsidiaries (any of the foregoing an "Acquisition Transaction"); or (ii) any third person or group shall have acquired beneficial ownership of or the right to acquire beneficial ownership of 25% or more of the then outstanding shares of FFWM Common Stock (each of the foregoing is hereafter referred to as a "Purchase Event"). No Purchase Event has occurred as of the date of this Joint Proxy Statement/Prospectus, and neither Keystone nor FFWM is aware that any Purchase Event is contemplated by any third person. The Option Agreement may discourage third persons from making competing offers to acquire FFWM and is intended to increase the likelihood that the FFWM Merger will be consummated in accordance with the terms set forth in the FFWM Plan of Merger. If a Purchase Event occurs, Keystone may exercise the Option in whole or in part or may sell or transfer all or part of the Option to other persons. Under federal banking law, exercise of the Option by Keystone for more than 5% of the outstanding FFWM Common Stock would require approval of regulatory authorities. Keystone may require FFWM to redeem the Option or any shares of FFWM Common Stock purchased thereunder if (i) any third person or group shall have acquired beneficial ownership of or the right to acquire beneficial ownership of 50% or more of the then outstanding shares of FFWM Common Stock or (ii) FFWM (A) mergers or consolidates with any third person and is not the surviving corporation, (B) engages in a merger with a third person in which it is the surviving corporation but in which the outstanding shares of FFWM Common Stock are exchanged for other securities, cash or property or after the merger represent less than 50% of the outstanding shares or (C) sells or transfers more than 50% of its consolidated assets to any third person (each of the foregoing is hereafter referred to as a "Redemption Event"). In general, the per share redemption price for the Option would be excess, if any, over the Option exercise price of the highest of (i) the highest price paid for any share of FFWM Common Stock by the person or group acquiring 50% beneficial ownership, (ii) the price per share received by holders of FFWM Common Stock in connection with any Redemption Event transaction, or (iii) the highest closing sales price per share of FFWM Common Stock on the NASDAQ National Market System during the 60 business days preceding the request for redemption. The per share redemption price for shares of FFWM Common Stock purchased under the Option would be the sum of the Option redemption price and the exercise price paid for -47- the Option shares. The aggregate amount which FFWM is required to pay in redeeming the Option or Option shares is limited to $4 million. The Option Agreement also contains provisions for issuance of a substitute Option Agreement to purchase shares of the surviving or acquiring company in the event of a merger or other acquisition of FFWM or a majority of its assets. The foregoing description is intended only as a summary of the material provisions of the Option Agreement and does not purport to be complete. It is qualified in its entirety by reference to the Option Agreement, which has been filed with the SEC as an exhibit to the Registration Statement. The Option Agreement is incorporated in this Joint Proxy Statement/Prospectus by reference to such filing. Inconsistent Activities FFWM has agreed in the FFWM Plan of Merger that it will not, and will not permit its subsidiaries to, solicit or encourage inquiries or proposals with respect to, furnish any information relating to, or participate in any negotiations or discussions concerning, any acquisition, lease or purchase of all or a substantial portion of the assets of, or any equity interest in, FFWM or a subsidiary (other than with Keystone or an affiliate); provided that FFWM's Board of Directors may furnish such information or participate in such negotiations or discussions if such Board, after having consulted with and considered the advice of outside counsel, has determined that the failure to do so would cause the members of such Board to breach their fiduciary duties under applicable law. FFWM is required to promptly inform Keystone of any such request for information or of any such negotiations or discussions and to instruct its and its subsidiaries' directors, officers, representatives and agents to refrain from taking any action prohibited by these provisions. Conduct of Business Pending the FFWM Merger FFWM has agreed in the FFWM Plan of Merger that pending consummation of the FFWM Merger, except as consented to by Keystone, FFWM and its subsidiaries will conduct their business only in the ordinary course consistent with past practice and will not, among other things, (i) issue any shares of their capital stock or grant any options or other rights to acquire such stock, except pursuant to the Option Agreement or existing employee and director stock options, purchase any FFWM Common Stock or effect any recapitalization, stock dividend or split; (ii) amend their charter documents, suffer any lien on FFWM's ownership of its subsidiaries or waive or compromise any material right or claim; (iii) make certain changes in the compensation or benefits payable to employees and directors; (iv) enter into any transaction or agreement not in the ordinary course of business, certain borrowing arrangements or employment or labor contracts; (v) make voluntary changes in their accounting methods or tax reporting, (vi) make capital expenditures or lease assets in excess of certain limits; (vii) take certain actions with respect to branching; (viii) acquire control over or make equity investments exceeding 5% in any business; (ix) enter into interest-hedging agreements; (x) enter into any agreement granting a preferential right to purchase any of their assets or rights or requiring consent for their transfer; (xi) make material changes to their lending or investment policies; or (xii) take any action which would prevent or impede the FFWM Merger from qualifying as a reorganization within the meaning of Section 368 of the Internal Revenue Code. Keystone has agreed that except as consented to by FFWM it will not (i) amend its charter documents or those of a significant subsidiary in a manner which would adversely affect the terms of the Keystone Common Stock or the ability of Keystone and American Trust Bank to consummate the FFWM Merger and the Bank Merger, (ii) make any acquisition, enter into any agreement or transaction or take any other action that could materially adversely affect the ability of Keystone and American Trust Bank to consummate the FFWM Merger and the Bank Merger, (iii) declare or pay any dividend or distribution in respect of the Keystone Common Stock other than regular quarterly cash dividends in an amount determined by Keystone's Board of Directors in the ordinary course of business and consistent with past practice or (iv) take any action, other than the exercise of its -48- rights under the Option Agreement, which would prevent or impede the FFWM Merger from qualifying as a reorganization within the meaning of Section 368 of the Internal Revenue Code. FFWM Dividend Limitation FFWM has agreed in the FFWM Plan of Merger that pending the FFWM Merger it will not increase the rate of dividends on the FFWM Common Stock to exceed $.12 per share in any calendar quarter. Beginning in the quarter ended December 31, 1995, dividends on the FFWM Common Stock have been paid at the rate of $.12 per share. See "Information Concerning FFWM--Stock Prices and Dividends of FFWM Common Stock." Conditions to the FFWM Merger In addition to approval by the shareholders of FFWM, the FFWM Merger is contingent upon the satisfaction of a number of other conditions, including (i) receipt of regulatory approvals required for the consummation of the FFWM Merger and the Bank Merger and the expiration or all statutory waiting periods in connection therewith, (ii) the absence of any statute, rule or governmental or judicial injunction, order or decree which prohibits or restricts consummation of the FFWM Merger or the Bank Merger and (iii) receipt of the tax opinion described above (see "Tax Consequences to FFWM Shareholders"). In addition, unless waived, each party's obligation to consummate the FFWM Merger is subject to the performance by the other party of its obligations under the FFWM Plan of Merger, the accuracy of the representations and warranties of the other party contained therein, the receipt of certain certificates and opinions from the other party and the absence of any pending proceeding initiated by a governmental authority seeking to prevent consummation of the FFWM Merger or the Bank Merger. If the Distribution Date under Keystone's shareholder rights plan (see "Comparison of Keystone Common Stock and FFWM Common Stock--Keystone Shareholder Rights Plan") shall have occurred, then either (i) all Rights outstanding under the plan (other than those which have become void) shall have been exchanged for Keystone Common Stock and the Exchange Ratio shall have been proportionately adjusted as provided in the FFWM Plan of Merger, (ii) all Rights outstanding under the plan shall have been redeemed or (iii) Keystone shall have made provision for the issuance of equivalent rights to the holders of FFWM Common Stock upon consummation of the FFWM Merger. Representations and Warranties The representations and warranties of Keystone and FFWM contained in the FFWM Plan of Merger relate, among other things, to the organization and good standing of FFWM, Keystone and their subsidiaries; the capitalization of FFWM and Keystone and the ownership of their subsidiaries; the authorization by Keystone and FFWM of the FFWM Plan of Merger and the absence of conflict with laws or other agreements; the accuracy and completeness of the financial statements and other information furnished to the other party; the absence of material adverse changes since September 30, 1996; payment of taxes; the absence of undisclosed litigation; compliance with laws; insurance; and the accuracy of this Joint Proxy Statement/Prospectus and of Keystone's Registration Statement of which it is a part. Additional representations and warranties by FFWM concern the absence of certain potential environmental liabilities; the absence of undisclosed equity investments; the absence of undisclosed employment contracts, employee benefit plans or material contracts or material defaults thereunder; title to properties; and labor relations. None of the representations and warranties contained in the FFWM Plan of Merger will survive the consummation of the FFWM Merger. Amendment, Waiver and Termination Notwithstanding prior approval by the shareholders of FFWM, the FFWM Plan of Merger may be amended in any respect by written agreement between the parties, except that after such shareholder approval no amendment or waiver of any provision of the FFWM Plan of Merger may change the amount or form of the -49- consideration to be received by the holders of FFWM Common Stock in the FFWM Merger or otherwise materially adversely affect the FFWM shareholders without the approval of the shareholders so affected. Keystone or FFWM may also (i) extend the time for performance of any of the obligations of the other; (ii) waive any inaccuracies in the representations and warranties of the other; (iii) waive compliance by the other with any of its obligations under the FFWM Plan of Merger; and (iv) waive any condition precedent to its obligations under the FFWM Plan of Merger other than approval of the FFWM Plan of Merger by the shareholders of FFWM, governmental regulatory approvals required to consummate the FFWM Merger, securities registration requirements incident to the issuance of Keystone Common Stock in the FFWM Merger, and the absence of any judicial or administrative order prohibiting the FFWM Merger. Notwithstanding prior shareholder approval, the FFWM Plan of Merger may be terminated at any time prior to effectiveness of the FFWM Merger (a) by mutual consent of Keystone and FFWM or (b) by either party (1) in the event of a breach by the other party of a representation and warranty or covenant which would have a material adverse effect on the breaching party or on the ability of the parties to consummate the transactions contemplated by the FFWM Plan of Merger and which has not been cured within 30 days after notice to the breaching party, (2) if a court or regulatory authority has issued a final and nonappealable order enjoining or prohibiting consummation of the FFWM Merger or the Bank Merger or (3) if other than as a result of a failure of the terminating party to perform its obligations under the FFWM Plan of Merger (A) an application for a regulatory approval required to consummate the FFWM Merger or the Bank Merger is finally denied or withdrawn at the request of the regulatory agency, (B) the shareholders of FFWM do not approve the FFWM Plan of Merger at the FFWM Special Meeting or any adjournment thereof or (C) the FFWM Merger has not become effective on or prior to November 26, 1997. The FFWM Plan of Merger may also be terminated (a) by FFWM if the average of the closing bid prices for Keystone Common Stock on the NASDAQ National Market System for the 20 consecutive trading days ending with the date of approval of the Bank Merger by the OCC (the "Measurement Price") is less than $21.20 per share or (b) by Keystone if the Measurement Price is greater than $31.80 per share. If the FFWM Plan of Merger is terminated by Keystone pursuant to this provision, FFWM may within five days thereafter elect to decrease the exchange ratio of 1.29 shares of Keystone Common Stock for each FFWM share to a number (calculated to the nearest one-thousandth) obtained by dividing $41.02 by the Measurement Price. If FFWM makes this election, then Keystone's termination pursuant to this provision shall be deemed rescinded and the FFWM Plan of Merger shall remain in effect in accordance with its terms (except as the Exchange Ratio shall have been so modified). On February ___, 1997 the closing bid price for Keystone Common Stock on the NASDAQ National Market System was $_____. Termination Fee The FFWM Plan of Merger provides that if either party terminates the FFWM Plan of Merger due to a pending proceeding initiated by a governmental authority seeking to prevent consummation of the FFWM Merger or the Bank Merger or because an application for a regulatory approval required to consummate the FFWM Merger or the Bank Merger is finally denied or withdrawn at the request of the regulatory agency, Keystone will pay to FFWM a termination fee of $1,000,000. If within three years from the date of such termination, FFWM or any of its subsidiaries enters into an agreement providing for (a) the merger or consolidation of FFWM or any of its subsidiaries with any third person, (b) the disposition to any third person or persons in one or a series of related transactions not in the ordinary course of business of assets or deposits representing 15% or more of the consolidated assets or deposits of FFWM or (c) the issuance, sale, transfer or other disposition to any one person (including its affiliates or associates) of securities representing 15% or more of the voting power of FFWM or any of its subsidiaries, FFWM must repay such amount to Keystone without interest. -50- Dissenters' Rights of FFWM Shareholders A record holder of shares of FFWM Common Stock is entitled to exercise the rights of a dissenting shareholder under Section 262 of the Delaware General Corporation Law, as amended ("Section 262"), to object to the FFWM Plan of Merger and make written demand that Keystone, as the surviving corporation in the FFWM Merger, pay in cash the appraised value of the shares held as determined in accordance with Section 262. The following summary does not purport to be a complete statement of the provisions of Section 262 and is qualified in its entirety by reference to Section 262, the complete text of which is set forth as Annex IV to this Joint Proxy Statement/Prospectus. A beneficial owner of shares of FFWM Common Stock who is not the record holder of such shares is not entitled to exercise dissenters' rights directly, but instead must request the record holder of the shares to exercise such rights on his or her behalf. A beneficial owner wishing to exercise such rights should contact the record holder promptly and assure that the record holder complies with all of the statutory provisions and procedures summarized herein. If a record holder of shares of FFWM Common Stock (a "holder") wishes to dissent from the FFWM Plan of Merger and obtain payment of the appraised value of the holder's shares, he or she must satisfy all of the following conditions in order to obtain any right to payment of the appraised value of the shares under Section 262: (1) The holder must deliver to FFWM, before the taking of the vote on the FFWM Plan of Merger, a written demand for appraisal of the holder's shares. Such demand will be sufficient if it reasonably informs FFWM of the identity of the holder and that the holder intends thereby to demand the appraisal of the holder's shares. A proxy or vote against the FFWM Plan of Merger shall not constitute such a demand. A holder electing to take such action must do so by separate written demand as provided in Section 262. (2) The holder must hold of record the shares as to which appraisal is demanded on the date of making such written demand and continuously thereafter through the effective date of the FFWM Merger. (3) The holder must not vote the shares in favor of the FFWM Plan of Merger. Neither an abstention from voting with respect to, nor failure to vote in person or by proxy against approval of the FFWM Plan of Merger constitutes a waiver of the rights of a dissenting shareholder. However, a signed proxy card that is returned without any instruction as to how the proxy should be voted will be voted in favor of approval of the FFWM Plan of Merger and will be deemed a waiver of the rights of a dissenting shareholder. A dissenter who fails in any of these respects will not acquire any right to payment of the appraised value of the holders shares under Section 262. Each written demand for appraisal should clearly state that the holder intends thereby to demand the appraisal of the holders shares, should provide the name, address and telephone number of the holder and the number of shares of FFWM Common Stock held of record by the holder as to which appraisal is demanded and should be sent to First Financial Corporation of Western Maryland, 118 Baltimore Street, Cumberland, Maryland 21502, Attention: William C. Marsh, Executive Vice President and Chief Financial Officer. Within 10 days after the effective date of the FFWM Merger, Keystone shall notify each holder of FFWM Common Stock who has complied with the requirements of Section 262 and who has not voted in favor of the FFWM Plan of Merger of the date that the FFWM Merger has become effective. Within 120 days after the effective date of the FFWM Merger, Keystone or any holder who has complied with the requirements of Section 262 and who is otherwise entitled to appraisal rights, may file a petition in the Delaware Court of Chancery demanding a determination of the value of the stock of all such holders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the FFWM Merger, any holder -51- shall have the right to withdraw the holder's demand for appraisal and to accept the terms offered in the FFWM Plan of Merger. Within 120 days after the effective date of the FFWM Merger, any holder who has complied with the requirements of Section 262, upon written request, shall be entitled to receive from Keystone a statement setting forth the aggregate number of shares not voted in favor of the FFWM Merger and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the holder within 10 days after his written request for such a statement is received by Keystone or within 10 days after expiration of the period for delivery of demands for appraisal, whichever is later. Upon the filing of any such petition by a holder, service of a copy thereof shall be made upon Keystone, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all holders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by Keystone. If the petition is filed by Keystone, it shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to Keystone and to the holders shown on the list at the addresses therein stated. Such notice shall also be given by one or more publications at least one week before the day of the hearing, in a newspaper of general circulation published in Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be approved by the Court and shall be borne by Keystone. At the hearing on such petition, the Court shall determine the holders who have complied with Section 262 and who have become entitled to appraisal rights. The Court may require the holders who have demanded an appraisal for their shares to submit their FFWM Common Stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any holder fails to comply with such direction, the Court may dismiss the proceedings as to such holder. After determining the holders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the FFWM Merger, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which Keystone would have had to pay to borrow money during the pendency of the proceeding. Upon application by Keystone or by any holder entitled to participate in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the holders entitled to an appraisal. Any holder whose name appears on the list filed by Keystone and who has submitted his FFWM Common Stock certificates to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that he is not entitled to appraisal rights under Section 262. The Court shall direct the payment of the fair value of the shares, together with interest, if any, by Keystone to the holders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such holder upon the surrender to Keystone of the FFWM Common Stock certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, notwithstanding that Keystone is not a Delaware corporation. The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a holder, the Court may order all or a portion of the expenses incurred by any holder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal. From and after the effective date of the FFWM Merger, no holder of FFWM Common Stock who has demanded appraisal rights shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to shareholders of record at a date which is prior to the effective date of the FFWM Merger); provided, however, that if no petition for an appraisal -52- shall be filed within the time required by Section 262, or if such holder shall deliver to Keystone a written withdrawal of the holder's demand for an appraisal and an acceptance of the FFWM Merger, either within 60 days after the effective date of the FFWM Merger or thereafter with the written approval of Keystone, then the right of such holder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any holder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. FFWM SHAREHOLDERS WISHING TO EXERCISE DISSENTERS' RIGHTS ARE ADVISED TO CONSULT THEIR OWN COUNSEL TO ENSURE THAT THEY FULLY AND PROPERLY COMPLY WITH THE REQUIREMENTS OF SECTION 262. Restrictions on Resales by FFWM Affiliates The shares of Keystone Common Stock issuable in the FFWM Merger have been registered under the Securities Act, and such shares will generally be freely tradable by the FFWM shareholders who receive Keystone shares as a result of the FFWM Merger. However, this registration does not cover resales by FFWM shareholders who may be deemed to control or be under common control with FFWM and who therefore may be deemed "affiliates" of FFWM as that term is defined in Rule 145 under the Securities Act. Such affiliates may not sell their shares of Keystone Common Stock acquired in the FFWM Merger except pursuant to: (i) an effective Registration Statement under the Securities Act covering the shares to be sold; (ii) the conditions contemplated by Rules 144 and 145 under the Securities Act; or (iii) another applicable exemption from the registration requirements of the Securities Act. The management of FFWM will notify those persons whom it believes may be such affiliates. Effect on FFWM's Dividend Reinvestment Plan FFWM's Dividend Reinvestment Plan will be terminated [as of the last FFWM dividend payment date preceding the effective date of the FFWM Merger]. Following the FFWM Merger, FFWM shareholders who become Keystone shareholders will be able to participate in a Dividend Reinvestment Plan offered by Keystone. Expenses Keystone will pay 75% and FFWM will pay 25% of the expenses of printing the Registration Statement, and Keystone and FFWM will each pay 50% the portion of registration fee relating to the FFWM Merger to be paid to the SEC in connection therewith. Each party will pay its own other expenses incurred in connection with the FFWM Plan of Merger. Accounting Treatment The FFWM Merger will be accounted for under the purchase method of accounting. The assets and liabilities of FFWM acquired in the FFWM Merger will be recorded by Keystone for financial reporting purposes at their market values as of the date of the FFWM Merger, and any excess of the consideration paid over the net market values acquired will be recorded and amortized as goodwill. Effective Date of the FFWM Merger It is presently anticipated that if the FFWM Plan of Merger is approved by the shareholders of FFWM, the FFWM Merger will become effective in the second quarter of 1997. However, as noted above, consummation of the FFWM Merger is subject to the satisfaction of a number of conditions, some of which cannot be waived. There can be no assurance that all conditions to the FFWM Merger will be satisfied or, if satisfied, that they will be -53- satisfied in time to permit the FFWM Merger to become effective within the anticipated time frame. In addition, as also noted above, Keystone and FFWM retain the power to abandon the FFWM Merger or to extend the time for performance of conditions or obligations necessary to its consummation, notwithstanding prior shareholder approval. -54- INFORMATION CONCERNING FFWM First Financial Corporation of Western Maryland SELECTED FINANCIAL DATA The following unaudited table of selected financial data should be read in conjunction with FFWM's consolidated financial statements and the related notes and with FFWM's management's discussion and analysis of financial condition and results of operation, incorporated herein by reference. See "FFWM Documents Incorporated by Reference."
Three Months Ended September 30, Year Ended June 30, -------------------------- --------------------------------------------------------------- (In Thousands, Except Per Share Amounts and Ratios) 1996 1995 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Operations: Interest income............... $ 6,999 $ 6,344 $ 26,480 $ 24,809 $ 23,228 $ 25,050 $ 29,116 Interest expense.............. 3,021 3,047 12,102 11,444 11,297 13,752 18,867 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income........... 3,978 3,297 14,378 13,365 11,931 11,298 10,249 Provision for loan losses..... 75 150 600 5,985 780 350 317 Noninterest income............ 327 205 1,472 1,269 915 1,149 2,004 Noninterest expense........... 4,144(1) 2,039 9,379 10,633 8,237 8,717 6,604 Income tax expense (benefit).. 43 512 2,271 (765) 1,465 1,227 2,080 Cumulative effect of accounting change.......... -- -- -- -- 1,695 -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss)............. $ 43 $ 801 $ 3,600 $ (1,219) $ 4,059 $ 2,153 $ 3,252 ========== ========== ========== ========== ========== ========== ========== Pre-tax security gains, included in above.......... $ 51 -- $ 179 -- $ 6 -- -- Per Share: Net income (loss) before cumulative effect of accounting change.......... $ 0.02 $ 0.37 $ 1.65 $ (0.56) $ 1.09 $ 1.02 $ 0.51 Cash dividends declared....... 0.12 0.12 0.48 0.46 0.37 0.27 0.07 Dividend payout ratio......... 600.00% 32.43% 29.09% -- 33.94% 26.47% 13.73% Average shares outstanding.... 2,155,488 2,182,236 2,180,000 2,175,000 2,169,000 2,112,000 1,876,000 Balances at Period End: Loans......................... $ 278,220 $ 230,709 $ 250,908 $ 231,656 $ 224,065 $ 227,497 $ 236,473 Allowance for loan losses..... 7,855 8,782 7,795 8,590 4,561 3,841 3,553 Total assets.................. 345,505 330,874 321,994 329,375 345,646 343,557 342,281 Deposits...................... 280,705 287,445 274,756 283,360 301,208 301,820 304,962 Long-term debt................ Shareholders' equity.......... 40,368 39,243 41,707 38,470 40,267 37,472 34,021 Book value per share.......... 19.00 18.16 19.16 18.06 20.03 18.97 18.13 Selected Ratios: Return on average assets (1).. 0.05% 0.97% 1.09% -- 1.18% 0.62% 0.95% Return on average equity (1).. 0.42 8.25 8.97 -- 9.97 6.02 11.99 Interest rate spread.......... 4.19 3.54 4.08 3.73 3.31 3.20 3.02 Net interest margin........... 4.75 4.03 4.52 4.11 3.63 3.47 3.19 Equity to assets, average..... 12.38 11.76 12.20 11.66 11.86 10.38 7.96 Loans to deposits at period end.............. 99.11 80.26 91.32 81.75 74.39 75.38 77.54 Allowance for loan losses to loans at period end..... 2.82 3.81 3.11 3.71 2.04 1.69 1.50 Nonperforming assets to loans and ORE.............. 2.17 3.14 2.55 3.29 2.97 5.01 4.12
-55-
Three Months Ended September 30, Year Ended June 30, ---------------------- -------------------------------------------------------------- (In Thousands, Except Per Share Amounts and Ratios) 1996 1995 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Regulatory Capital Ratios: Tangible capital ratio........ 11.05% 11.15% 12.36% 10.98% 11.11% 10.33% 9.38% Core capital ratio............ 11.05 11.15 12.36 10.98 11.11 10.33 9.38 Risk-based capital ratio...... 19.56 20.46 21.60 20.60 21.58 20.27 17.66 - ------------------------
(1) Ratios for the three months ended September 30, 1996 and 1995 have been annualized. (2) Includes nonrecurring assessment of $1.9 million relating to the recapitalization of the SAIF insurance fund. -56- STOCK PRICES AND DIVIDENDS ON FFWM COMMON STOCK FFWM Common Stock is traded in the over-the-counter market under the symbol "FFWM" and is listed in the NASDAQ National Market System. The following table sets forth the high and low closing sales prices for FFWM Common Stock for the periods indicated, as reported by NASDAQ, and the cash dividends per share declared on FFWM Common Stock for such periods.
Quarterly Closing Sales Price Range Cash ----------------------- Dividends High Low Declared --------- -------- --------- Fiscal 1995 Quarter Ended: First Quarter, September 30, 1994.. $25.75 $22.50 $0.10 Second Quarter, December 31, 1994.. 27.50 18.50 0.12 Third Quarter, March 31, 1995...... 22.50 19.75 0.12 Fourth Quarter, June 30, 1995...... 22.00 18.75 0.12 ----- $0.46 ===== Fiscal 1996 Quarter Ended: First Quarter, September 30, 1995.. $22.50 $19.75 $0.12 Second Quarter, December 31, 1995.. 23.75 19.63 0.12 Third Quarter, March 31, 1996...... 20.50 18.00 0.12 Fourth Quarter, June 30, 1996...... 20.75 17.75 0.12 ----- $0.48 ===== Fiscal 1997 Quarter Ended: First Quarter, September 30, 1996.. $28.75 $20.13 $0.12 Second Quarter, December 31, 1996.. 32.50 27.00 0.12 Third Quarter (through February ___, 1997).............. 0.12
On November 25, 1996, the last NASDAQ trading day prior to the public announcement of the FFWM Merger, the closing sale price for the FFWM Common Stock was $27.75. On February ___, 1997, the closing sale price for the FFWM Common Stock was $_____. On January 31, 1997, the record date for the FFWM Special Meeting, FFWM had approximately _____ shareholders of record. At that date, [2,167,896] shares of FFWM Common Stock were outstanding. While FFWM is not obligated to pay cash dividends, the Board of Directors presently intends to continue the policy of paying quarterly cash dividends. Future dividends will depend, in part, upon the earnings and financial condition of FFWM. -57- FFWM DOCUMENTS INCORPORATED BY REFERENCE The following documents previously filed by FFWM with the SEC pursuant to the Exchange Act (File No. 0-10756) are hereby incorporated by reference in this Joint Proxy Statement/Prospectus: 1. FFWM's Annual Report on Form 10-K for the year ended June 30, 1996 ("FFWM Form 10-K"); 2. FFWM's Quarterly Report of Form 10-Q for the quarter ended September 30, 1996; and 3. FFWM's Current Reports on Form 8-K dated August 2, August 19, October 23 and December 2, 1996. All documents filed by FFWM pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the dates of the Special Meetings are hereby incorporated by reference in this Joint Proxy Statement/Prospectus and shall be deemed a part hereof from the date of the filing of such documents. Keystone, FTC and FFWM shareholders who wish to obtain copies of the FFWM documents incorporated by reference herein may do so by following the instructions under "Available Information" above. Copies of FFWM's 1996 Annual Report to Shareholders ("FFWM Annual Report") and its Quarterly Report on Form 10-Q for the Quarter ended September 30, 1996 are being mailed to FFWM shareholders along with this Joint Proxy Statement/Prospectus. The following portions of the FFWM Annual Report have been incorporated by reference into the FFWM Form 10-K and by reference to the FFWM Form 10-K are also incorporated by reference herein: 1. "Selected Consolidated Financial Data" on page 1; and 2. "Management's Discussion and Analysis," "Report of Independent Certified Public Accountants," "Consolidated Statements of Financial Condition," "Consolidated Statements of Operations," "Consolidated Statements of Stockholders' Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements" and "Stock and Dividend Information" on pages 4 through 42. Portions of the FFWM Annual Report other than those listed above as incorporated herein by reference are furnished for information only and are not a part of this Joint Proxy Statement/Prospectus. The FFWM Annual Report does not contain all of the information contained in the FFWM Form 10-K. -58- COMPARISON OF KEYSTONE COMMON STOCK AND FTC COMMON STOCK General Upon consummation of the Merger, shareholders of FTC will become shareholders of Keystone. Since the Articles of Incorporation ("Articles") and Bylaws of Keystone and FTC are not the same, the Merger will result in certain changes in the rights of the holders of FTC Common Stock. These changes are discussed below. Voting Rights General. The holders of Keystone Common Stock, like the holders of FTC Common Stock, are generally entitled to one vote for each share held of record on all matters submitted to a shareholder vote and do not have cumulative voting rights in the election of directors. The absence of cumulative voting means that a nominee for director must receive the votes of a plurality of the shares voted in order to be elected. Special Votes for Certain Transactions. The Articles of Keystone and FTC contain provisions requiring special shareholder votes to approve certain types of transactions. In the absence of these provisions, either the transactions would require approval by a majority of the shares voted at a meeting or no shareholder vote would be required. Keystone's Articles require that certain transactions between Keystone or a subsidiary and an "interested shareholder" be approved by the votes of the holders of (1) 75% of the voting power of all outstanding voting stock of Keystone and (2) a majority of the voting power of the voting stock not beneficially owned by the interested shareholder. An "interested shareholder" is generally defined by Keystone's Articles to mean a person or a group acting in concert that beneficially owns more than 20% of the voting power of Keystone's outstanding voting stock. The transactions subject to Keystone's special vote requirements include (1) a merger, consolidation or share exchange of Keystone or a subsidiary with an interested shareholder, (2) the sale, lease, exchange or other disposition, or the loan, mortgage, pledge or investment, by Keystone or a subsidiary of 5% or more of Keystone's assets to, with or for the benefit of an interested shareholder, (3) the issuance or transfer to an interested shareholder of securities of Keystone or a subsidiary valued at 5% or more of Keystone's consolidated total assets, (4) the adoption of any plan for the liquidation of Keystone proposed by or on behalf of an interested shareholder, (5) any reclassification of securities, recapitalization of Keystone, merger or consolidation of Keystone with a subsidiary or other transaction which increases the percentage of any class of stock of Keystone or a subsidiary owned by an interested shareholder and (6) any other transaction which is similar in purpose or effect to the foregoing. Keystone's special shareholder vote requirements do not apply to any transaction approved by a majority of the "disinterested directors." A disinterested director is any member of the Keystone Board who is not an interested shareholder or an affiliate, associate or representative of an interested shareholder and who (1) was a director before the interested shareholder became an interested shareholder or (2) is a successor to a disinterested director and was recommended for election by a majority of the disinterested directors then on the Board. FTC's Articles require that certain transactions involving FTC be approved by the vote of the holders of at least two-thirds of the outstanding shares of FTC Common Stock. The transactions subject to FTC's special voting requirements are a merger or consolidation of FTC with another corporation or the sale, lease or exchange of all or substantially all of the assets of FTC. -59- Board of Directors Classified Boards. The Articles of Keystone and the Bylaws of FTC divide the Board of Directors into three classes, each consisting of one-third (or as near as may be) of the whole number of the Board of Directors. One class of directors is elected at each Annual Meeting of Shareholders, and each class serves for a term of three years. The number of directors which constitute the full Board of Directors of Keystone may be increased or decreased only by the Board of Directors, by a vote including a majority of the disinterested directors then in office, and except as otherwise required by law, vacancies on the Board of Directors of Keystone, including vacancies resulting from an increase in the size of the Board, may be filled only by the Board of Directors by a similar vote. Directors elected by the Board to fill vacancies serve for the full remainder of the term of the class to which they have been elected. FTC's Bylaws provide that FTC's Board of Directors shall consist of such number of directors, not less than five, as the Board may determine. Vacancies on the FTC Board, including vacancies resulting from an increase in the number of directors, may be filled by a majority of the Board. Directors elected by the Board to fill vacancies serve only until the next annual meeting of shareholders or until an earlier special meeting called to elect directors. The shareholders of FTC can also change the number of FTC directors by amending the Bylaws in accordance with the provisions described below and may at the same meeting elect directors to fill any vacancies created by an increase in the size of the Board. Removal of Directors. Keystone's Articles provide that a director, any class of directors or the entire Board of Directors may be removed from office by shareholder vote only for cause and only if, in addition to any other vote required by law, such removal is approved by a majority of the voting power of the outstanding voting stock of Keystone which is not beneficially owned by an interested shareholder. FTC's Articles and Bylaws are silent as to removal of directors. Under the Pennsylvania Business Corporation Law ("BCL"), because FTC has a shareholder- adopted classified Board, the entire Board, any class of directors or any individual director may be removed from office only for cause by a majority of the votes cast at a meeting of the FTC shareholders. In addition, the entire Board may be removed from office with or without cause by the unanimous vote or consent of the holders of FTC Common Stock. Nomination of Director Candidates. The Articles of Keystone and the Bylaws of FTC require that any shareholder intending to nominate a candidate for election as a director must give the corporation advance written notice of the nomination, containing certain specified information. Keystone's Articles require that the notice be given not later than 120 days in advance of the meeting at which the election is to be held. FTC's Articles require the notice to be given not less than 14 or more than 50 days prior to the meeting at which the election is to be held, except that if less than 21 days notice of the meeting is given by FTC, the notice may be given within seven days after the notice of the meeting was mailed. Amendment of Articles and Bylaws Keystone's Articles require the votes of the holders of (1) 75% of the voting power of all outstanding voting stock of Keystone and (2) a majority of the voting power of the voting stock not beneficially owned by an interested shareholder to approve any amendment to Keystone's Articles or Bylaws. The special voting requirement does not apply to any amendment approved by a majority of the disinterested directors if at the time of such approval the disinterested directors constitute a majority of Keystone's Board. Except as to matters for which a shareholder vote is required by statute, Keystone's Board may also amend the Bylaws without shareholder approval by a vote including a majority of the disinterested directors then in office. FTC's Articles require the vote of the holders of at least two-thirds of the outstanding FTC Common Stock to amend the special shareholder vote provisions described above under "Voting Rights--Special Votes for Certain -60- Transactions." Under applicable provisions of the BCL, the other provisions of FTC's Articles may be amended by a majority of the votes cast at a meeting of FTC shareholders. However, in order to be deemed to be adopted by FTC, any Articles amendment adopted by the shareholders must also be approved by Board of Directors. Under the BCL, FTC's Bylaws may be amended by the shareholders at any annual or special meeting by a majority of the votes cast on the proposal. Except as to matters for which a shareholder vote is required by statute, FTC's Bylaws may also be amended by the vote of a majority of the Board of Directors, subject to the power of the shareholders to change such action, except that the Board may not adopt amendments fixing their qualifications, classification or term of office. Keystone Shareholder Rights Plan Keystone has established a shareholder rights plan under which each share of Keystone Common Stock presently outstanding or which is issued hereafter prior to the Distribution Date (defined below) is granted one preferred share purchase right (a "Right"). Each Right entitles the registered holder to purchase from Keystone 5.333 one-thousandths (0.005333) of a share of Series A Junior Participating Preferred Stock, par value $1.00 per share (the "Preferred Shares"), of Keystone at a price of $56.00 per 5.333 one-thousandths of a Preferred Share, subject to adjustment in the event of stock dividends and similar events occurring prior to the Distribution Date. Each 5.333 one- thousandths of a Preferred Share would have voting, dividend and liquidation rights which are the approximate equivalent of one share of Keystone Common Stock. The Rights are not exercisable until the Distribution Date, which is the earlier to occur of (i) 10 days following a public announcement that a person or group (an "Acquiring Person") has acquired beneficial ownership of 20% or more of the outstanding Keystone Common Stock or (ii) 10 business days (unless extended by the Board of Directors prior to any person or group becoming an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 20% or more of the outstanding Keystone Common Stock. Until the Distribution Date, the Rights will be transferred with and only with Keystone Common Stock, and the surrender for transfer of any certificate for Keystone Common Stock will also constitute the transfer of the Rights associated with the shares represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights will be mailed to holders of record of Keystone Common Stock as of the close of business on the Distribution Date, and the Rights will then become separately tradable. In the event that any person becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person or its associates or affiliates (which will be void), will thereafter have the right to receive upon exercise that number of Common Shares or, at the option of Keystone, Preferred Shares (or shares of a class or series of Keystone's preferred stock having equivalent rights, preferences and privileges) or, in certain circumstances, other securities or assets, having a market value of two times the exercise price of the Right. In the event that after the first public announcement that any person has become an Acquiring Person, Keystone is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold, proper provision will be made so that each holder of a Right, other than rights beneficially owned by the Acquiring Person or its associates or affiliates (which will be void) will thereafter have the right to receive, upon exercise of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. At any time after the acquisition by a person or group of beneficial ownership of 20% or more of the outstanding Keystone Common Stock and prior to the acquisition by such person or group of 50% or more of the outstanding Keystone Common Stock, the Board of Directors may exchange the Rights (other than Rights owned by such person or group, which have become void), in whole or in part, at an exchange ratio of one share of Keystone Common Stock, or 5.333 one-thousandths of a Preferred Share (or of a share of a class or series of -61- Keystone's preferred stock having equivalent rights, preferences and privileges), or, in certain circumstances, an amount of other securities or assets having equivalent value, per Right (subject to adjustment). At any time prior to the acquisition by a person or group of beneficial ownership of 20% or more of the outstanding Keystone Common Stock, the Board of Directors may redeem the Rights in whole, but not in part, at a price of $.01 per Right. The terms of the Rights may be amended by the Board of Directors without the consent of the holders of the Rights before the Distribution Date in any respect whatever, except for an amendment that would reduce the redemption price. Prior to any person becoming an Acquiring Person, Keystone may without the consent of the holders of the Rights lower the 20% thresholds referred to above to not less than the greater of (i) any percentage greater than the largest percentage of the outstanding Keystone Common Stock then known to Keystone to be beneficially owned by any person or group of affiliated or associated persons and (ii) 10%. The Rights will expire on February 8, 2000, unless the expiration date is extended or unless the Rights are earlier redeemed by Keystone as described above. Pennsylvania Business Corporation Law The provisions of Keystone's and FTC's Articles and Bylaws described under "Voting Rights" and "Board of Directors" above and Keystone's shareholder rights plan are in addition to certain provisions of Chapter 25 of the BCL which may have the effect of discouraging or rendering more difficult a hostile takeover attempt against Keystone or FTC. Under Section 2538 of the BCL, any merger, consolidation, share exchange or sale of assets between Keystone or FTC or their subsidiary and any shareholder of the corporation, any division of Keystone or FTC in which any shareholder receives a disproportionate amount of any shares or other securities of any corporation resulting from the division, any voluntary dissolution of Keystone or FTC in which a shareholder is treated differently from other shareholders of the same class or any reclassification in which any Keystone or FTC shareholder's voting or economic interest in the corporation is materially increased relative to substantially all other shareholders must, in addition to any other shareholder vote required, be approved by a majority of the votes which all shareholders other than the shareholder receiving the special treatment are entitled to cast with respect to the transaction. This special vote requirement does not apply to a transaction (1) which has been approved by a majority vote of the Board, without counting the vote of certain directors affiliated with or nominated by the interested shareholder or (2) in which the consideration to be received by the shareholders is not less than the highest amount paid by the interested shareholder in acquiring shares of the same class. Under Subchapter 25E of the BCL, if any person or group acting in concert acquires voting power over Keystone or FTC shares representing 20% or more of the votes which all shareholders of the corporation would be entitled to cast in an election of directors, any other shareholder may demand that such person or group purchase such shareholder's shares at a price determined in an appraisal proceeding. Under Subchapter 25G of the BCL, Keystone or FTC may not engage in merger, consolidation, share exchange, division, asset sale or a variety of other "business combination" transactions with a person which becomes the "beneficial owner" of shares representing 20% or more of the voting power in an election of directors of the corporation unless (1) the business combination or the acquisition of the 20% interest is approved by the Board of Directors of the corporation prior to the date the 20% interest is acquired, (2) the person beneficially owns at least 80% of the outstanding shares and the business combination (a) is approved by a majority vote of the disinterested shareholders and (b) satisfies certain minimum price and other conditions prescribed in Subchapter 25F, (3) the business combination is approved by a majority vote of the disinterested shareholders at a meeting called no earlier than five years after the date the 20% interest is acquired or (4) the business combination (a) is approved by shareholder vote at a meeting called no earlier than five years after the date the 20% interest is acquired and (b) satisfies certain minimum price and other conditions prescribed in Subchapter 25F. -62- Keystone has elected to opt out from coverage by Subchapter 25G of the BCL, which would have required a shareholder vote to accord voting rights to control shares acquired by a 20% shareholder in a control-share acquisition, and Subchapter 25H of the BCL, which would have required a person or group to disgorge to Keystone any profits received from a sale of Keystone's equity securities within 18 months after the person or group acquired or offered to acquire 20% of Keystone's voting power or publicly disclosed an intention to acquire control of Keystone. FTC has not elected to opt out from coverage by Subchapters 25G or 25H and is subject to these provisions. Preferred Stock FTC's Articles do not authorize any class of stock other than FTC Common Stock. The Articles of Keystone authorize Keystone to issue up to 8,000,000 shares of Keystone preferred stock. The authorized shares of Keystone preferred stock are issuable in one or more series on the terms set by the resolution or resolutions of Keystone's Board of Directors providing for the issuance thereof. Each series of preferred stock would have such dividend rate, which might or might not be cumulative, such voting rights, which might be general or special, and such liquidation preferences, redemption and sinking funds provisions, conversion rights or other rights and preferences, if any, as Keystone's Board of Directors may determine. Except for such rights as may be granted to the holders of any series of preferred stock in the resolution establishing such series or as required by law, all of the voting and other rights of the shareholders of Keystone belong exclusively to the holders of Keystone Common Stock. Dividend Rights The holders of FTC Common Stock and Keystone Common Stock are entitled to dividends when, as and if declared by their Board of Directors out of funds legally available therefor. However, if Keystone preferred stock is issued, the Board of Directors of Keystone may grant preferential dividend rights to the holders of such stock which would prohibit payment of dividends on the Keystone Common Stock unless and until specified dividends on the preferred stock had been paid. Liquidation Rights Upon liquidation, dissolution or winding up of Keystone or FTC, whether voluntary or involuntary, the holders of Keystone or FTC Common Stock are entitled to share ratably in the assets of the corporation available for distribution after all liabilities of the corporation have been satisfied. However, if preferred stock is issued by Keystone, the Board of Directors of Keystone may grant preferential liquidation rights to the holders of such stock which would entitle them to be paid out of the assets of the corporation available for distribution before any distribution is made to the holders of Keystone Common Stock. Miscellaneous There are no preemptive rights, sinking fund provisions, conversion rights, or redemption provisions applicable to Keystone or FTC Common Stock. Holders of fully paid shares of Keystone or FTC Common Stock are not subject to any liability for further calls or assessments. -63- COMPARISON OF KEYSTONE COMMON STOCK AND FFWM COMMON STOCK General FFWM is a Delaware corporation and, as such, is governed by Delaware General Corporation Law ("GCL"). As a result of the FFWM Merger, shareholders of FFWM who make or are deemed to have made the Stock Election will become shareholders of Keystone. Keystone is a Pennsylvania business corporation and, as such, the rights of Keystone's shareholders are governed by the Pennsylvania Business Corporation Law ("BCL"). Differences between the rights of FFWM shareholders and the rights of Keystone shareholders will arise from this change of applicable statute as well as from differences between the Certificate of Incorporation ("Certificate") and Bylaws of FFWM and the Articles of Incorporation ("Articles") and Bylaws of Keystone. These differences are described below. Voting Rights General. The holders of Keystone Common Stock, like the holders of FFWM Common Stock, are generally entitled to one vote for each share held of record on all matters submitted to a shareholder vote and do not have cumulative voting rights in the election of directors. The absence of cumulative voting means that a nominee for director must receive the votes of a plurality of the shares voted in order to be elected. Special Votes for Certain Transactions. Both Keystone's Articles and FFWM's Certificate contain provisions requiring special shareholder votes to approve certain types of transactions. In the absence of these provisions, either no shareholder vote would be required or, in the case of Keystone, the BCL would require approval of the transaction by a majority of the shares Keystone Common Stock voted at a meeting, and in the case of FFWM, the GCL would require approval of the transaction by either a majority of the outstanding shares of FFWM Common Stock or a majority of the shares of FFWM Common Stock represented at a meeting and entitled to vote. Keystone's Articles require that certain transactions between Keystone or a subsidiary and an "interested shareholder" be approved by the votes of the holders of (1) 75% of the voting power of all outstanding voting stock of Keystone and (2) a majority of the voting power of the voting stock not beneficially owned by the interested shareholder. An "interested shareholder" is generally defined by Keystone's Articles to mean a person or a group acting in concert that beneficially owns more than 20% of the voting power of Keystone's outstanding voting stock. The transactions subject to Keystone's special vote requirements include (1) a merger, consolidation or share exchange of Keystone or a subsidiary with an interested shareholder, (2) the sale, lease, exchange or other disposition, or the loan, mortgage, pledge or investment, by Keystone or a subsidiary of 5% or more of Keystone's assets to, with or for the benefit of an interested shareholder, (3) the issuance or transfer to an interested shareholder of securities of Keystone or a subsidiary valued at 5% or more of Keystone's consolidated total assets, (4) the adoption of any plan for the liquidation of Keystone proposed by or on behalf of an interested shareholder, (5) any reclassification of securities, recapitalization of Keystone, merger or consolidation of Keystone with a subsidiary or other transaction which increases the percentage of any class of stock of Keystone or a subsidiary owned by an interested shareholder and (6) any other transaction which is similar in purpose or effect to the foregoing. Keystone's special shareholder vote requirements do not apply to any transaction approved by a majority of the "disinterested directors." A disinterested director is any member of the Keystone Board who is not an interested shareholder or an affiliate, associate or representative of an interested shareholder and who (1) was a director before the interested shareholder became an interested shareholder or (2) is a successor to a disinterested director and was recommended for election by a majority of the disinterested directors then on the Board. -64- FFWM's Certificate requires that certain "business combinations" with or upon a proposal by an "interested stockholder" be approved by the votes of the holders of 80% of the voting power of the voting stock of FFWM not beneficially owned by the interested stockholder. An "interested stockholder" is defined by FFWM's Certificate to mean any person who is either (1) the beneficial owner of 10% or more of the voting power of FFWM's voting stock, (2) an affiliate of FFWM who was the beneficial owner of 10% or more of such voting power at any time in the previous two years or (3) a transferee which in the previous two years received voting stock from an interested stockholder in a transaction not involving a public offering. The "business combinations" subject to FFWM's special vote requirements include (1) a merger, consolidation or share exchange of FFWM or a subsidiary with an interested stockholder, (2) the sale, lease, exchange, pledge, transfer or other disposition by FFWM or a subsidiary to an interested stockholder of assets having a fair market value equal to 25% or more of FFWM's consolidated assets, (3) the issuance or transfer by FFWM or a subsidiary to an interested stockholder of securities of FFWM or a subsidiary for consideration equal to 25% or more of the fair market value of the outstanding FFWM Common Stock, (4) any reclassification of securities, recapitalization, merger, consolidation or other transaction, whether or not involving an interested stockholder, which has the direct or indirect effect of increasing the percentage of any class of FFWM's equity or convertible securities which is directly or indirectly owned by an interested stockholder and (5) the adoption of any plan for the liquidation or dissolution of FFWM or a subsidiary proposed by or on behalf of an interested stockholder. FFWM's special shareholder vote requirements do not apply to any business combination approved by a majority of the "disinterested directors." A disinterested director is any member of the FFWM Board who (1) has no material financial interest in the interested stockholder, (2) is not a director of the interested stockholder, (3) is not affiliated with the interested stockholder and (4) was not elected or appointed as a director of FFWM through the voting power or influence of the interested stockholder within two years preceding the date that approval of the business combination by the disinterested directors is required. FFWM's special shareholder vote requirements also do not apply to any business combination in which consideration is received by the shareholders of FFWM and which satisfies certain specified price and procedural conditions. FFWM 10% Vote Limitation. Under FFWM's Certificate, any shares of FFWM Common Stock beneficially owned by a person in excess of 10% of the outstanding shares are not entitled to voting rights. The 10% limitation does not apply if the offer to acquire, or beneficial ownership of, shares in excess of the limit has been approved by a two-thirds vote of FFWM's Board of Directors, excluding any directors who are not disinterested directors. Board of Directors Classified Boards. Both Keystone's Articles and FFWM's Certificate divide the Board of Directors into three classes, each consisting of one-third (or as near as may be) of the whole number of the Board of Directors. One class of directors is elected at each Annual Meeting of Shareholders, and each class serves for a term of three years. The number of directors which constitute Keystone's full Board of Directors may be increased or decreased only by the Board of Directors, by a vote including a majority of the disinterested directors then in office, and except as otherwise required by law, vacancies on Keystone's Board of Directors, including vacancies resulting from an increase in the size of the Board, may be filled only by the Board of Directors by a similar vote. Keystone Directors elected by the Board to fill vacancies serve for the full remainder of the term of the class to which they have been elected. The number of directors which constitute FFWM's full Board of Directors also may be increased or decreased only by the Board of Directors. In the absence of an interested stockholder, the vote required is a majority of the entire Board. During any time in which the Board is considering whether or has determined that there is an interested stockholder, the vote required is two- thirds of the entire Board. Any increase or decrease in -65- the number of directors must be apportioned among the three classes by a two- thirds vote of the directors, determined after giving effect to the increase or decrease. Vacancies on FFWM's Board of Directors, including vacancies resulting from an increase in the size of the Board, may be filled only by the Board of Directors by the vote of a majority of the directors in office. FFWM Directors elected by the Board to fill vacancies serve for the full remainder of the term of the class to which they have been elected. Removal of Directors. Keystone's Articles provide that a director, any class of directors or the entire Board of Directors may be removed from office by shareholder vote only for cause and only if, in addition to any other vote required by law, such removal is approved by a majority of the voting power of the outstanding voting stock of Keystone which is not beneficially owned by an interested shareholder. FFWM's Certificate provides that a director may be removed from office only for cause by the vote of at least 80% of the voting power of FFWM's outstanding voting stock at a meeting called expressly for that purpose with at least 30 days prior written notice to the director or directors to be removed. Nomination of Director Candidates. Keystone's Articles and FFWM's Bylaws require that any shareholder intending to nominate a candidate for election as a director must give the corporation advance written notice of the nomination, containing certain specified information. Keystone's Articles require that the notice must be given not later than 120 days in advance of the meeting at which the election is to be held. FFWM's Bylaws require the notice to be given at least 30 days in advance of the meeting at which the election is to be held, except that if less than 40 days' notice or public disclosure of the meeting date is given by FFWM, the notice may be given within 10 days after the date notice of the meeting date was mailed or publicly disclosed. Shareholder Meetings FFWM's Certificate provides that special meetings of shareholders may be called only by the Chairman of the Board, the President or by a two-thirds vote of FFWM's Board of Directors. Although under the BCL Keystone shareholders do not have a statutory right to call a special meeting of shareholders, Keystone's Bylaws currently provide that special meeting may be called by the shareholders by a written request of the holders of at least 20% of the outstanding shares of Keystone Common Stock. FFWM's Certificate also provides that any action by the shareholders of FFWM must be taken at a duly called annual or special meeting and may not be taken by written consent. Although the shareholders of Keystone may take action by written consent without a shareholder meeting, under the BCL any such action would require the unanimous written consent of all Keystone shareholders. FFWM's Bylaws require that in order for any proposal by an FFWM shareholder to be considered at an annual meeting, the shareholder must provide FFWM with written notice of the proposal, containing specified information, not less than 30 days prior to the date of the annual meeting. Keystone's Articles and Bylaws do not contain any special provisions requiring advance notice of shareholder proposals intended to be presented at a Keystone annual meeting. However, in order to be considered for inclusion in Keystone's or FFWM's proxy statement for an annual meeting, a shareholder proposal must be submitted in compliance with SEC regulations requiring, among other things, that the proposal be received by the corporation 120 days prior to the date of the proxy statement for the preceding annual meeting. Amendment of Charter and Bylaws Keystone's Articles require the votes of the holders of (1) 75% of the voting power of all outstanding voting stock of Keystone and (2) a majority of the voting power of the voting stock not beneficially owned by an interested shareholder to approve any amendment to Keystone's Articles or Bylaws. The special voting requirement does not apply to any amendment approved by a majority of the disinterested directors if at the time of such approval the disinterested directors constitute a majority of Keystone's Board. Except as to matters for which -66- a shareholder vote is required by statute, Keystone's Board may also amend the Bylaws without shareholder approval by a vote including a majority of the disinterested directors then in office. FFWM's Certificate provides that the affirmative vote of the holders of at least 80% of the voting power of the outstanding FFWM voting stock is required to amend certain provisions of FFWM's Certificate or any provision of FFWM's Bylaws. The Certificate provisions subject to this special voting requirement include the special vote provisions described under "Voting Rights--Special Votes for Certain Transactions" above, the provisions described under "Voting Rights--FFWM 10% Vote Limitation" above, the provisions relating to FFWM's Board of Directors and absence of cumulative voting described under "Voting Rights-- General" and "Board of Directors" above, the provisions restricting the call of special meetings and action by written consent described under "Shareholder Meetings" above, the provisions relating to director liability and indemnification described above under "FFWM Plan of Merger--Interests of Certain Persons in the Transaction, and the provisions requiring an 80% vote for amendments. Under the GCL, the remaining provisions of FFWM's Certificate may be amended with the affirmative vote of a majority of the outstanding shares of FFWM Common Stock. However, no Certificate amendment may be adopted by shareholders unless it is first proposed by FFWM's Board of Directors. Except as to matters for which a shareholder vote is required by statute, FFWM's Board may also amend the Bylaws without shareholder approval by a vote of two-thirds of the directors then in office. Keystone Shareholder Rights Plan Keystone has established a shareholder rights plan under which each share of Keystone Common Stock presently outstanding or which is issued hereafter prior to the Distribution Date (defined below) is granted one preferred share purchase right (a "Right"). Each Right entitles the registered holder to purchase from Keystone 5.333 one-thousandths (0.005333) of a share of Series A Junior Participating Preferred Stock, par value $1.00 per share (the "Preferred Shares"), of Keystone at a price of $56.00 per 5.333 one-thousandths of a Preferred Share, subject to adjustment in the event of stock dividends and similar events occurring prior to the Distribution Date. Each 5.333 one- thousandths of a Preferred Share would have voting, dividend and liquidation rights which are the approximate equivalent of one share of Keystone Common Stock. The Rights are not exercisable until the Distribution Date, which is the earlier to occur of (I) 10 days following a public announcement that a person or group (an "Acquiring Person") has acquired beneficial ownership of 20% or more of the outstanding Keystone Common Stock or (ii) 10 business days (unless extended by the Board of Directors prior to any person or group becoming an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 20% or more of the outstanding Keystone Common Stock. Until the Distribution Date, the Rights will be transferred with and only with Keystone Common Stock, and the surrender for transfer of any certificate for Keystone Common Stock will also constitute the transfer of the Rights associated with the shares represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights will be mailed to holders of record of Keystone Common Stock as of the close of business on the Distribution Date, and the Rights will then become separately tradable. In the event that any person becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person or its associates or affiliates (which will be void), will thereafter have the right to receive upon exercise that number of Common Shares or, at the option of Keystone, Preferred Shares (or shares of a class or series of Keystone's preferred stock having equivalent rights, preferences and privileges) or, in certain circumstances, other securities or assets, having a market value of two times the exercise price of the Right. In the event that after the first public announcement that any person has become an Acquiring Person, Keystone is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold, proper provision will be made so that each holder of a Right, other than rights beneficially owned by the Acquiring Person or its associates or affiliates (which will be void) will thereafter have -67- the right to receive, upon exercise of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. At any time after the acquisition by a person or group of beneficial ownership of 20% or more of the outstanding Keystone Common Stock and prior to the acquisition by such person or group of 50% or more of the outstanding Keystone Common Stock, the Board of Directors may exchange the Rights (other than Rights owned by such person or group, which have become void), in whole or in part, at an exchange ratio of one share of Keystone Common Stock, or 5.333 one-thousandths of a Preferred Share (or of a share of a class or series of Keystone's preferred stock having equivalent rights, preferences and privileges), or, in certain circumstances, an amount of other securities or assets having equivalent value, per Right (subject to adjustment). At any time prior to the acquisition by a person or group of beneficial ownership of 20% or more of the outstanding Keystone Common Stock, the Board of Directors may redeem the Rights in whole, but not in part, at a price of $.01 per Right. The terms of the Rights may be amended by the Board of Directors without the consent of the holders of the Rights before the Distribution Date in any respect whatever, except for an amendment that would reduce the redemption price. Prior to any person becoming an Acquiring Person, Keystone may without the consent of the holders of the Rights lower the 20% thresholds referred to above to not less than the greater of (I) any percentage greater than the largest percentage of the outstanding Keystone Common Stock then known to Keystone to be beneficially owned by any person or group of affiliated or associated persons and (ii) 10%. The Rights will expire on February 8, 2000, unless the expiration date is extended or unless the Rights are earlier redeemed by Keystone as described above. Pennsylvania Business Corporation Law The provisions of Keystone's Articles and Bylaws described under "Voting Rights" and "Board of Directors" above and Keystone's shareholder rights plan are in addition to certain provisions of Chapter 25 of the BCL which may have the effect of discouraging or rendering more difficult a hostile takeover attempt against Keystone. Under Section 2538 of the BCL, any merger, consolidation, share exchange or sale of assets between Keystone or a subsidiary and any shareholder of Keystone, any division of Keystone in which any shareholder receives a disproportionate amount of any shares or other securities of any corporation resulting from the division, any voluntary dissolution of Keystone in which a shareholder is treated differently from other shareholders of the same class or any reclassification in which any Keystone shareholder's voting or economic interest in the corporation is materially increased relative to substantially all other shareholders must, in addition to any other shareholder vote required, be approved by a majority of the votes which all shareholders other than the shareholder receiving the special treatment are entitled to cast with respect to the transaction. This special vote requirement does not apply to a transaction (1) which has been approved by a majority vote of the Board, without counting the vote of certain directors affiliated with or nominated by the interested shareholder or (2) in which the consideration to be received by the shareholders is not less than the highest amount paid by the interested shareholder in acquiring shares of the same class. Under Subchapter 25E of the BCL, if any person or group acting in concert acquires voting power over Keystone shares representing 20% or more of the votes which all shareholders of Keystone would be entitled to cast in an election of directors, any other shareholder may demand that such person or group purchase such shareholder's shares at a price determined in an appraisal proceeding. Under Subchapter 25G of the BCL, Keystone may not engage in merger, consolidation, share exchange, division, asset sale or a variety of other "business combination" transactions with a person which becomes the "beneficial owner" of shares representing 20% or more of the voting power in an election of directors of Keystone unless (1) the business combination or the acquisition of the 20% interest is approved by the Board of Directors of -68- Keystone prior to the date the 20% interest is acquired, (2) the person beneficially owns at least 80% of the outstanding shares and the business combination (a) is approved by a majority vote of the disinterested shareholders and (b) satisfies certain minimum price and other conditions prescribed in Subchapter 25F, (3) the business combination is approved by a majority vote of the disinterested shareholders at a meeting called no earlier than five years after the date the 20% interest is acquired or (4) the business combination (a) is approved by shareholder vote at a meeting called no earlier than five years after the date the 20% interest is acquired and (b) satisfies certain minimum price and other conditions prescribed in Subchapter 25F. Keystone has elected to opt out from coverage by Subchapter 25G of the BCL, which would have required a shareholder vote to accord voting rights to control shares acquired by a 20% shareholder in a control-share acquisition, and Subchapter 25H of the BCL, which would have required a person or group to disgorge to Keystone any profits received from a sale of Keystone's equity securities within 18 months after the person or group acquired or offered to acquire 20% of Keystone's voting power or publicly disclosed an intention to acquire control of Keystone. Delaware General Corporation Law The provisions of FFWM's Certificate described above under "Voting Rights-- Special Votes for Certain Transactions" are in addition to restrictions on business combinations between FFWM and a substantial shareholder imposed by Section 203 of the GCL. Under Section 203, FFWM may not engage in a "business combination" with an "interested stockholder" for a period of three years following the time that the shareholder became an interested stockholder unless (1) prior to such time FFWM's Board of Directors approved either the business combination or the transaction which resulted in the shareholder becoming an interested stockholder, (2) upon consummation of the transaction in which the shareholder became an interested stockholder, the interested stockholder owned at least 85% of the outstanding FFWM Common Stock, excluding shares owned by persons who are both directors and officers of FFWM or by certain employee stock plans or (3) at or subsequent to such time the business combination is approved by FFWM's Board of Directors and authorized at an annual or special meeting by the vote of at least two-thirds of the FFWM Common Stock which is not beneficially owned by the interested stockholder. For purposes of Section 203, an "interested stockholder" is generally (1) a beneficial owner of 15% or more of the outstanding FFWM Common Stock or (2) an affiliate or associate of FFWM which was a 15% beneficial owner at any time during the preceding three years. The definition of "business combination" under Section 203 includes transactions similar to those covered by the special voting provision of FFWM's Certificate described above under "Voting Rights--Special Votes for Certain Transactions." Dissenters' Rights The BCL provides for dissenters' rights in a variety of transactions including: (I) mergers or consolidations to which a corporation is a party (other than mergers not requiring a shareholder vote); (ii) certain sales, leases or exchanges of all or substantially all of the assets of a corporation; and (iii) certain share exchanges or plans of division. However, except in the case of (1) a merger, consolidation, share exchange or division in which their shares would be converted into or exchanged for something other than shares of the surviving, new, acquiring or other corporation (or cash in lieu of fractional shares) or (2) a transaction in which certain shareholders receive materially different treatment from that accorded other holders of the same class or series of shares, shareholders of a Pennsylvania business corporation are not entitled to dissenters' rights in any of the transactions mentioned above if their stock is either listed on a national securities exchange or held of record by 2,000 or more shareholders. Although Keystone Common Stock is not listed on a national securities exchange, it is held of record may more than 2,000 shareholders. The GCL also provides for dissenters' rights in certain mergers or consolidations involving FFWM. However, except in the case of a merger or consolidation in which they would be required to accept for their shares something other than (1) stock of the surviving or resulting corporation or (2) stock of another corporation which is listed on a national securities exchange, designated as a NASDAQ National Market System security or held of -69- record by more than 2,000 shareholders (or cash in lieu of fractional shares), the shareholders of a Delaware corporation are not entitled to dissenters' rights under the GCL if their stock is either listed on a national securities exchange, designated as a NASDAQ National Market System security or held of record by more than 2,000 shareholders. Although FFWM Common Stock is a NASDAQ National Market System security, because under the FFWM Plan of Merger the Stock Election may not be available to all FFWM shareholders desiring to make that election, shareholders of FFWM will have the right to dissent from the FFWM Merger. See "FFWM Plan of Merger--Dissenters' Rights of FFWM Shareholders." Preferred Stock Both Keystone's Articles and FFWM's Certificate authorize the corporation to issue shares of preferred stock. Keystone's Articles authorize up to 8,000,000 shares of Keystone preferred stock, and FFWM's Certificate authorizes up to 2,000,000 shares of FFWM preferred stock. The authorized shares of preferred stock are issuable in one or more series on the terms set by the resolution or resolutions of the Board of Directors of Keystone or FFWM providing for the issuance thereof. Each series of preferred stock would have such dividend rate, which might or might not be cumulative, such voting rights, which might be general or special, and such liquidation preferences, redemption and sinking funds provisions, conversion rights or other rights and preferences, if any, as the Board of Directors may determine. Except for such rights as may be granted to the holders of any series of preferred stock in the resolution establishing such series or as required by law, all of the voting and other rights of the shareholders of Keystone and FFWM belong exclusively to the holders of common stock. Dividend Rights The holders of FFWM Common Stock and Keystone Common Stock are entitled to dividends when, as and if declared by their Board of Directors out of funds legally available therefor. However, if Keystone or FFWM preferred stock is issued, the Board of Directors of the corporation may grant preferential dividend rights to the holders of such stock which would prohibit payment of dividends on the corporation's common stock unless and until specified dividends on the preferred stock had been paid. Liquidation Rights Upon liquidation, dissolution or winding up of Keystone or FFWM, whether voluntary or involuntary, the holders of Keystone or FFWM Common Stock are entitled to share ratably in the assets of the corporation available for distribution after all liabilities of the corporation have been satisfied. However, if preferred stock is issued by Keystone or FFWM, the Board of Directors of the corporation may grant preferential liquidation rights to the holders of such stock which would entitle them to be paid out of the assets of the corporation available for distribution before any distribution is made to the holders of common stock. Miscellaneous There are no preemptive rights, sinking fund provisions, conversion rights, or redemption provisions applicable to Keystone or FFWM Common Stock. Holders of fully paid shares of Keystone or FFWM Common Stock are not subject to any liability for further calls or assessments. -70- LEGAL OPINIONS Opinions with respect to certain legal matters in connection with the Mergers will be rendered by Reed Smith Shaw & McClay, Pittsburgh, Pennsylvania, as counsel for Keystone. Opinions with respect to certain legal matters in connection with the FTC Merger will be rendered by McNees, Wallace & Nurick, Harrisburg, Pennsylvania, as counsel for FTC. EXPERTS The consolidated financial statements of Keystone incorporated by reference in Keystone's Annual Report on Form 10-K for the year ended December 31, 1995 have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. As to the year 1993, their report is based in part on the reports of Coopers & Lybrand LLP, Deloitte & Touche LLP and KPMG Peat Marwick LLP, independent auditors. Such consolidated financial statements are incorporated herein in reliance upon such reports, given upon the authority of such firms as experts in auditing and accounting. The consolidated financial statements of FTC incorporated by reference in FTC's Annual Report on Form 10-K for the year ended December 31, 1995 have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. As to the years 1994 and 1993, their report is based in part on the report of Smith Elliott Kearns & Company, LLC, independent auditors. Such consolidated financial statements are incorporated herein in reliance upon such reports, given upon the authority of said firms as experts in auditing and accounting. The consolidated financial statements of FFWM as of June 30, 1996 and 1995, and for each of the years in the three-year period ended June 30, 1996, have been incorporated by reference herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, which report is incorporated by reference in the Annual Report on Form 10-K filed by FFWM for its fiscal year ended June 30, 1996, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering the June 30, 1996 consolidated financial statements of FFWM refers to a change in the method of accounting for income taxes during 1994 and for loan impairment and mortgage servicing rights during 1996. SHAREHOLDER PROPOSALS AND NOMINATIONS Due to the Mergers, it is presently anticipated that no Annual Meetings of Shareholders of FTC or FFWM will be held in 1997. In the event the FTC Merger is not consummated or is delayed, the shareholders of FTC will be advised as to the date of FTC's 1997 Annual Meeting of Shareholders and as to the date by which proposals of FTC shareholders must be received by FTC in order to be considered for inclusion in FTC's proxy statement for that meeting. In the event the FFWM Merger is not consummated or is delayed, the shareholders of FFWM will be advised as to the date of FFWM's 1997 Annual Meeting of Shareholders and as to the date by which proposals of FFWM shareholders must be received by in order to be considered for inclusion in FTC's proxy statement for that meeting. Proposals of Keystone shareholders intended to be presented at Keystone's 1997 Annual Meeting of Shareholders, to be held May 22, 1996, must have been received not later than December 4, 1996 in order to be considered for inclusion in Keystone's proxy statement and form of proxy for the 1997 Annual Meeting. The proxy statement for Keystone's 1997 Annual Meeting will set forth the date by which proposals intended to be presented at Keystone's 1998 Annual Meeting must be received by the Secretary of Keystone, at Keystone's address appearing on page iv above, in order to be considered for inclusion in Keystone's proxy statement and form of proxy for that meeting. -71- Keystone's Restated Articles of Incorporation require that any shareholder who intends to nominate a candidate for election as a director of Keystone must furnish a written notice of the nomination, containing the information specified in the Articles, so that it is received by the Secretary of Keystone not later than 120 days in advance of the meeting at which the election is to be held. A copy of these requirements will be furnished to any shareholder upon request to the Secretary at the address set forth on page iv. OTHER MATTERS The managements of Keystone, FTC and FFWM do not know of any other matters intended to be presented for shareholder action at their respective Special Meetings. If any other matter does properly come before any of the Special Meetings and is put to a shareholder vote, the proxies solicited hereby will be voted in accordance with the judgment of the proxyholders named thereon. -72- ANNEX I [Letterhead of Danielson Associates Inc.] DRAFT February ___, 1997 Board of Directors Keystone Financial, Inc. One Keystone Plaza Front & Market Street P.O. Box 3660 Harrisburg, Pennsylvania 17105-3660 Dear Members of the Board: Set forth herein is Danielson Associates Inc.'s ("Danielson Associates") independent opinion as to the "fairness" of the offer by Keystone Financial, Inc. ("Keystone") to buy all of the outstanding common stock of Financial Trust Corp ("Financial Trust") through an exchange of stock having a value at the time of the offer of about $375 million. In the course of preparing the opinion, the markets served by Financial Trust have been analyzed; its business and prospects have been discussed with management; its financial performance has been compared with banks in the region; the sale prices of comparable banks have been analyzed; and any unique characteristics have been considered. We also reviewed the Agreement and Plan of Reorganization and the Agreement and Plan of Merger (collectively, "Plan of Merger") between Keystone and Financial Trust. This opinion is based on data supplied by Keystone and Financial Trust, and it relies on some public information, all of which is believed to be reliable, but neither the completeness nor accuracy of such information can be guaranteed. The opinion assumes, based on Financial Trust's managements representation, that there are no significant loan problems beyond what are stated in recent reports to regulatory agencies and in the monthly report to the directors. We also have reviewed the financial projections made by Keystone, including estimates of cost savings and revenue enhancements expected to result from the merger and have assumed that they have been reasonably prepared and reflect the best currently available estimates and judgments of Keystone. In determining the "fairness" of the offer, we also have compared the common stock to be exchanged by Keystone with other similar bank holding companies. In so doing, we also compared Keystone's financial performance with these comparable financial institutions. Based on the foregoing, we are of the opinion on the date hereof that the offer made by Keystone to acquire all of the common stock of Financial Trust pursuant to the Plan of Merger is fair from a financial point of view to Keystone and its shareholders. Respectfully submitted, Arnold G. Danielson Chairman Danielson Associates Inc. A-1 ANNEX II [Letterhead of Berwind Financial Group, L.P.] FORM OF FAIRNESS OPINION (DATE) Board of Directors Financial Trust Corp. 1415 Ritner Highway Carlisle, PA 17013 Directors: You have requested our opinion as to the fairness, from a financial point of view, to the shareholders of Financial Trust Corp ("Financial Trust") of the financial terms of the proposed merger between Financial Trust and Keystone Financial, Inc. ("Keystone Financial"). The terms of the proposed merger (the "Proposed Merger") between Financial Trust and Keystone Financial are set forth in the Agreement and Plan of Reorganization dated as of December 19, 1996, (the "Agreement") and provide that each outstanding share of Financial Trust Common Stock, par value $5.00 per share, will receive 1.65 shares of Common Stock, par value $2.00 per share, of Keystone Financial determined in conformity with the exchange ratio set forth in the Agreement, with cash to be paid in lieu of any fractional shares. Berwind Financial Group, L.P., as part of its investment banking business, regularly is engaged in the valuation of assets, securities and companies in connection with various types of assets and securities transactions, including mergers, acquisitions, private placements and valuation for various other purposes, and in the determination of adequate consideration in such transactions. In arriving at our opinion, we have, among other things: (i) reviewed the historical financial performances, current financial positions and general prospects of Financial Trust and Keystone Financial, (ii) reviewed the Agreement, (iii) reviewed and analyzed the stock market performance of Financial Trust and Keystone Financial, (iv) studied and analyzed the consolidated financial and operating data of Financial Trust and Keystone Financial, (v) considered the terms and conditions of the Proposed Merger between Financial Trust and Keystone Financial as compared with the terms and conditions of comparable bank and bank holding company mergers and acquisitions, (vi) met and/or communicated with certain members of Financial Trust's and Keystone Financial's senior management to discuss their respective operations, historical financial statements and future prospects, (vii) reviewed the Joint Proxy Statement/Prospectus, and (viii) conducted such other financial analyses, studies and investigations as we deemed appropriate. Our opinion is given in reliance on information and representations made or given by Financial Trust and Keystone Financial, and their respective officers, directors, auditors, counsel and other agents, and on filings, releases and other information issued by Financial Trust and Keystone Financial including financial statements, financial projections, and stock price data as well as certain information from recognized independent sources. We have not independently verified the information concerning Financial Trust and Keystone Financial nor other data which we have considered in our review and, for purposes of the opinion set forth below, we have assumed and relied upon the accuracy and completeness of all such information and data. Additionally, we assume that the Proposed Merger is, in all respects, lawful under applicable law. A-2 Board of Directors (DATE) Page 2 With regard to financial and other information relating to the general prospects of Financial Trust and Keystone Financial, we have assumed that such information has been reasonably prepared and reflects the best currently available estimates and judgments of the managements of Financial Trust and Keystone Financial as to Financial Trust's and Keystone Financial's most likely future performance. In rendering our opinion, we have assumed that in the course of obtaining the necessary regulatory approvals for the Proposed Merger no conditions will be imposed that will have a material adverse effect on the contemplated benefits of the Proposed Merger to Financial Trust. Berwind also assumed that there would not occur any change in applicable law or regulation that would cause a material adverse change in the prospects or operations of Keystone Financial after the Proposed Merger. Our opinion is based upon information provided to us by the managements of Financial Trust and Keystone Financial, as well as market, economic, financial and other conditions as they exist and can be evaluated only as of the date hereof and speaks to no other period. Our opinion pertains only to the financial consideration of the Proposed Merger and does not constitute a recommendation to the Board of Financial Trust and does not constitute a recommendation to Financial Trusts shareholders as to how such shareholders should vote on the Proposed Merger. Based on the foregoing, it is our opinion that, as of the date hereof, the Proposed Merger between Financial Trust and Keystone Financial is fair, from a financial point of view, to the shareholders of Financial Trust. Sincerely, BERWIND FINANCIAL GROUP, L.P. A-3 ANNEX III [Letterhead of Alex. Brown & Sons Incorporated] November 26, 1996 First Financial Corporation of Western Maryland 118 Baltimore Street Cumberland, MD 21502 Dear Members of the Board of Directors: First Financial Corporation of Western Maryland ("First Financial" or the "Company") and Keystone Financial, Inc. ("Keystone"), a Pennsylvania Corporation, have entered into an Agreement and Plan of Merger dated as of November 26, 1996 (the "Agreement"). Pursuant to the Agreement, First Financial shall be merged with and into Keystone (the "Merger"), and each share of First Financial common stock issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive, at the election of the holder thereof, either (i) 1.29 shares (the "Exchange Ratio") of common stock of Keystone or (ii) an amount in cash equal to the Exchange Ratio multiplied by Keystone's average closing bid price for the 20 consecutive trading day preceding the closing date. The total consideration ("Total Consideration") shall mean the sum of the stock election described under (i), which will equal approximately 60% of the Total Consideration, and the cash election described under (ii), which will equal approximately 40% of the Total Consideration. You have requested our opinion as to whether the Total Consideration is fair, from a financial point of view, to First Financial's stockholders. Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of its investment banking business, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for estate, corporate and other purposes. We have acted as financial advisor to the Board of Directors of First Financial in connection with the transaction described above and will receive a fee for our services, the entirety of which is contingent upon consummation of the Merger. Alex. Brown regularly publishes research reports regarding the banking industry and the businesses and securities of publicly traded companies in the banking industry. In the ordinary course of business, Alex. Brown may actively trade the securities of banks and thrifts for our own account and the account of our customers and, accordingly, may at any time hold a long or short position in such securities. In connection with this opinion, we have reviewed certain publicly available financial information and other information concerning First Financial and Keystone and certain internal analyses and other information furnished to us by First Financial and Keystone. We have also held discussions with the members of the senior managements of First Financial and Keystone regarding the business prospects of their respective companies and the joint prospects of a combined company. In addition, we have (i) reviewed the reported prices and trading activity for the common stock of both First Financial and Keystone, (ii) compared certain financial and stock market information for First Financial and Keystone with similar information for certain companies whose securities are publicly traded, (iii) reviewed the financial terms of certain recent business combinations which we deemed comparable in whole or in part, (iv) reviewed the terms of the Agreement, and (v) performed such other studies and analyses and considered such other factors as we deemed appropriate. We have not independently verified the information described above and for purposes of this opinion have assumed the accuracy, completeness and fairness thereof. With respect to the information relating to the prospects of First Financial and Keystone, we have assumed that such information reflects the best currently available A-4 judgments and estimates of the managements of First Financial and Keystone as to the likely future financial performances of their respective companies. In addition, we have not made nor been provided with an independent valuation or appraisal of the assets and liabilities of First Financial and Keystone, nor have we been furnished with any such evaluations or appraisals. We are not expressing our opinion as to the value of Keystone's common stock when issued pursuant to the Merger or the prices at which Keystone's common stock will trade subsequent to such issuance. Our opinion is based on market, economic and other conditions as they exist and can be evaluated as of the date of this letter. Our advisory services and the opinion expressed herein were prepared for the use of the Board of Directors of First Financial and do not constitute a recommendation to any stockholder as to how such stockholder should vote. We hereby consent to the inclusion of this opinion in its entirety as an exhibit to any proxy or registration statement distributed in connection with the Merger. Based upon and subject to the foregoing, it is our opinion that, as of the date of this letter, the Total Consideration is fair, from a financial point of view, to First Financials stockholders. Very truly yours, ALEX. BROWN & SONS INCORPORATED By: /s/ Donald W. Delson -------------------------- Name: Donald W. Delson Managing Director A-5 ANNEX IV STATUTORY PROVISIONS CONCERNING DISSENTERS' RIGHTS OF FFWM SHAREHOLDERS DELAWARE GENERAL CORPORATION LAW SECTION 262--APPRAISAL RIGHTS 262 APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to (S)228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of his shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a nonstock corporation; and the words "depository receipt" mean a receipt or other instrument issued by a depository representing an interest in one or more shares, or fractions thereof, solely of stock of a corporation, which stock is deposited with the depository. (b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to (S)251 (other than a merger effected pursuant to subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title: (1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the holders of the surviving corporation as provided in subsection (f) of (S)251 of this title. (2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to (S)(S)251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except: a. Shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof; b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders; A-6 c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a. and b. of this paragraph; or d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a., b. and c. of this paragraph. (3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under (S)253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. (c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (e) of this section, shall apply as nearly as is practicable. (d) Appraisal rights shall be perfected as follows: (1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsections (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of his shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or (2) If the merger or consolidation was approved pursuant to (S)228 or (S)253 of this title, each constituent corporation, either before the effective date of the merger or consolidation or within ten days thereafter, shall notify each of the holders of any class or series of stock of such constituent corporation who are entitled to appraisal rights of the approval of the merger or consolidation and that appraisal rights are available for any or all shares of such class or series of stock of such constituent corporation, and shall include in such notice a copy of this section; provided that, if the notice is given on or after the effective date of the merger or consolidation, such notice shall be given by the surviving or resulting corporation to all such holders of any class or series of stock of a constituent corporation that are entitled to appraisal rights. Such notice may, and, if given on or after the effective date of the merger or consolidation, shall, also notify such stockholders of the effective date of the merger or consolidation. Any stockholder entitled to appraisal rights may, within twenty days after the date of mailing of such notice, demand in writing from the surviving or resulting corporation the appraisal of such holder's shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intend thereby to demand the appraisal of such holders shares. If such notice did not notify stockholders of the effective date of the merger or consolidation, either (i) each such constituent corporation shall send a second notice before the effective date of the merger or consolidation notifying each of the holders of any class or series of stock of such constituent corporation that are entitled to appraisal rights of the effective date of the merger or consolidation or (ii) the surviving or resulting A-7 corporation shall send such a second notice to all such holders on or within 10 days after such effective date; provided, however, that if such second notice is sent more than 20 days following the sending of the first notice, such second notice need only be sent to each stockholder who is entitled to appraisal rights and who has demanded appraisal of such holder's shares in accordance with this subsection. An affidavit of the secretary or assistant secretary or of the transfer agent of the corporation that is required to give either notice that such notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. For purposes of determining the stockholders entitled to receive either notice, each constituent corporation may fix, in advance, a record date that shall be not more than 10 days prior to the date the notice is given; provided that, if the notice is given on or after the effective date of the merger or consolidation, the record date shall be such effective date. If no record date is fixed and the notice is given prior to the effective date, the record date shall be the close of business on the day next preceding the day on which the notice is given. (e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw his demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after his written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later. (f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation. (g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder. (h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate A-8 in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted his certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that he is not entitled to appraisal rights under this section. (i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by the certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or any state. (j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal. (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded his appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of his demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. (l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. (Last amended by Ch. 349, L. `96, eff. 7-1-96.) A-9 PART II INFORMATION NOT REQUIRED IN PROSPECTUS -------------------------------------- Item 20. Indemnification of Directors and Officers. 1. Pennsylvania Business Corporation Law. Sections 1741 and 1742 of the Pennsylvania Business Corporation Law (the "BCL") provide that a business corporation shall have the power to indemnify any person who was or is a party, or is threatened to be made a party, to any proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such proceeding, if such person acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. In the case of an action by or in the right of the corporation, such indemnification is limited to expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person has been adjudged to be liable to the corporation unless, and only to the extent that, a court determines upon application that, despite the adjudication of liability but in view of all the circumstances, such person is fairly and reasonably entitled to indemnity for the expenses that the court deems proper. BCL Section 1744 provides that, unless ordered by a court, any indemnification referred to above shall be made by the corporation only as authorized in the specific case upon a determination that indemnification is proper in the circumstances because the indemnitee has met the applicable standard of conduct. Such determination shall be made: (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding; or (2) if such a quorum is not obtainable, or if obtainable and a majority vote of a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; or (3) by the shareholders. Notwithstanding the above, BCL Section 1743 provides that to the extent that a director, officer, employee or agent of a business corporation is successful on the merits or otherwise in defense of any proceeding referred to above, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. BCL Section 1745 provides that expenses (including attorneys' fees) incurred by an officer, director, employee or agent of a business corporation in defending any proceeding may be paid by the corporation in advance of the final disposition of the proceeding upon receipt of an undertaking to repay the amount advanced if it is ultimately determined that the indemnitee is not entitled to be indemnified by the corporation. BCL Section 1746 provides that the indemnification and advancement of expenses provided by, or granted pursuant to, the foregoing provisions is not exclusive of any other rights to which a person seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or directors or otherwise, and that indemnification may be granted under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise for any action taken or any failure to take any action whether or not the corporation would have the power to indemnify the person under any other provision of law and whether or not the indemnified liability arises or arose from any action by or in the right of the corporation, provided, however, that no indemnification may be II-1 made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. BCL Section 1747 permits a Pennsylvania business corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or other enterprise, against any liability asserted against such person and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify the person against such liability under the provisions described above. 2. Indemnification By-Law. Section 8.01 of the registrant's By-Laws (the "Indemnification By-Law") was adopted by the shareholders at their Annual Meeting held on May 28, 1987 and became effective on that date. Under the Indemnification By-Law, except as prohibited by law, every director and officer of the registrant is entitled as of right to be indemnified by the registrant against all expenses and liabilities incurred in connection with any actual or threatened claim or proceeding, whether civil, criminal, administrative, investigative or other, whether brought by or in the right of the registrant or otherwise, in which the director or officer may be involved in any manner, by reason of his being or having been a director or officer of the registrant or by reason of the fact that he is or was serving at the request of the registrant as a director, officer, employee, fiduciary or other representative of another corporation or other entity. In an action brought by a director or officer against the registrant, the director or officer is only entitled to indemnification for expenses in certain circumstances. Each director and officer is also entitled as of right to have his expenses in defending an action paid in advance by the registrant prior to final disposition of the action, subject to any obligation which may be imposed to reimburse the registrant in certain events. The Indemnification By-Law establishes a procedure whereby a director or officer may bring an action against the registrant if a written claim for indemnification or advancement of expenses is not paid by the registrant in full within thirty days after the claim has been presented. The director or officer is also entitled to advancement of expenses in this proceeding. The only defense to an action to recover a claim for indemnification is that the indemnitee's conduct was such that under Pennsylvania law the registrant is prohibited from indemnifying the indemnitee. The only defense to an action to recover payment of expenses in advance is failure by the indemnitee to make an undertaking to reimburse the registrant if such an undertaking is required. The Indemnification By-Law applies to every action, other than actions filed prior to January 27, 1987, except that it does not apply to the extent that Pennsylvania law does not permit its application to any breach or failure of performance of duty by a director or officer occurring prior to January 27, 1987. Any amendment or repeal of the Indemnification By-Law will operate prospectively only and will not affect any action taken, or failure to act, by a director or officer prior to the adoption of such amendment or repeal. 3. Director and Officer Liability Insurance. The registrant maintains director and officer liability insurance covering its directors and officers with respect to liability which they may incur in connection with their serving as such, which liability could include liability under the Securities Act of 1933. Under the insurance, the registrant is entitled to reimbursement for amounts as to which the directors and officers are indemnified under the Indemnification By-Law. The insurance may also provide certain additional coverage for the directors and officers against certain liability even though such liability is not subject to indemnification under the Indemnification By- Law. 4. Indemnification Agreements. At their Annual Meeting held on May 28, 1987, the shareholders also approved a proposed form of Indemnification Agreement to be entered into between the registrant and each of its present and future directors and such other officers, employees and agents of the registrant and its subsidiaries as shall be designated from time to time by the Board of Directors. The form of agreement provides essentially the same rights to indemnification against liabilities and expenses as are provided in the Indemnification By-Law. In addition, the form of agreement requires the registrant to either maintain the liability insurance coverage currently in effect for the benefit of the contractee or to hold the contractee harmless to the full extent of such coverage. II-2 Further, the form of agreement provides that if the full indemnification claimed by the contractee may not be paid by the registrant because prohibited by law and the registrant is jointly liable with the contractee as to the matter for which indemnification was sought (or would be so liable if the registrant were joined in such matter), the contractee has a right to contribution from the registrant for the amount of any expenses and liabilities incurred by the contractee as to such matter based on the relative benefits received by the registrant and the contractee from the transaction from which the liability arose and the relative fault of the registrant (including the registrant's other directors, officers, employees or agents) and the contractee in connection with the events which resulted in such expenses or liability, as well as any other relevant equitable considerations. Under the form of agreement, a contractee is entitled to the rights to indemnification for expenses and liability, advancement of expenses and contribution provided by the agreement notwithstanding any amendment or repeal of the Indemnification By-Law. In addition, although a change in law restricting indemnification rights would automatically restrict the indemnification rights provided under the Indemnification By-Law, the form of agreement provides that a change in law restricting indemnification rights will not affect the rights of a contractee under the agreement unless the law so requires. Item 21. Exhibits and Financial Statement Schedules. (a) Exhibits. An Exhibit Index, containing a list of all exhibits filed with this Registration Statement, is included on page II-8. (b) Financial Statement Schedules. Not applicable. (c) Report, Opinion or Appraisal. Not applicable. The opinions of Danielson Associates Inc., Berwind Financial Group, L.P. and Alex. Brown & Sons Incorporated are furnished as Annex I, Annex II and Annex III, respectively, to the Joint Proxy Statement/Prospectus. Item 22. Undertakings. The undersigned registrant hereby undertakes as follows: (1) that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (2) to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. (3) that prior to any public reoffering of the securities registered hereunder through the use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. II-3 (4) that every prospectus (i) that is filed pursuant to paragraph (3) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act of 1933, as amended, and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post- effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (5) that insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described under Item 20 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (6) to respond to requests for information that is incorporated by reference into the Joint Proxy Statement/Prospectus pursuant to Items 4, 10(b), 11 or 13 of Form S-4, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (7) to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Harrisburg, Pennsylvania, on the 23rd day of January, 1997. KEYSTONE FINANCIAL, INC. By /s/ Carl L. Campbell -------------------- Carl L. Campbell, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Carl L. Campbell, Ben G. Rooke, Donald F. Holt and George R. Barr, Jr., and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. Signature Capacity Date - --------------------------- --------------------------------- ---------------- /s/ Carl L. Campbell President, Chief Executive January 23, 1997 - --------------------------- Officer and Director Carl L. Campbell /s/ Mark L. Pulaski Senior Executive Vice President, January 23, 1997 - --------------------------- Chief Administrative Officer and Mark L. Pulaski Chief Financial Officer /s/ Donald F. Holt Senior Vice President, January 23, 1997 - --------------------------- Controller and Principal Donald F. Holt Accounting Officer /s/ A. Joseph Antanavage Director January 23, 1997 - --------------------------- A. Joseph Antanavage II-5 Signature Capacity Date - --------------------------- --------------------------------- ---------------- /s/ June B. Barry Director January 23, 1997 - --------------------------- June B. Barry /s/ J. Glenn Beall, Jr. Director January 23, 1997 - --------------------------- J. Glenn Beall, Jr. /s/ Paul I. Detwiler, Jr. Director January 23, 1997 - --------------------------- Paul I. Detwiler, Jr. /s/ Donald Devorris Director January 23, 1997 - --------------------------- Donald Devorris /s/ Richard W. DeWald Director January 23, 1997 - --------------------------- Richard W. DeWald /s/ Gerald E. Field Director January 23, 1997 - --------------------------- Gerald E. Field /s/ Walter W. Grant Director January 23, 1997 - --------------------------- Walter W. Grant /s/ Philip C. Herr II Director January 23, 1997 - --------------------------- Philip C. Herr II /s/ Uzal H. Martz, Jr. Director January 23, 1997 - --------------------------- Uzal H. Martz, Jr. /s/ Max A. Messenger Director January 23, 1997 - --------------------------- Max A. Messenger /s/ William L. Miller Director January 23, 1997 - --------------------------- William L. Miller II-6 Signature Capacity Date - --------------------------- --------------------------------- ---------------- /s/ Don A. Rosini Director January 23, 1997 - --------------------------- Don A. Rosini /s/ F. Dale Schoeneman Director January 23, 1997 - --------------------------- F. Dale Schoeneman /s/ Ronald C. Unterberger Director January 23, 1997 - --------------------------- Ronald C. Unterberger /s/ G. William Ward Director January 23, 1997 - --------------------------- G. William Ward II-7 EXHIBIT INDEX (Pursuant to Item 601 of Regulation S-K) Exhibit No. Description and Method of Filing - ------- ---------------------------------------- 2.1 Agreement and Plan of Reorganization dated as of December 19, 1996 between Keystone Financial, Inc. and Financial Trust Corp and Agreement and Plan of Merger dated as of December 19, 1996 between Keystone Financial, Inc. and Financial Trust Corp (filed herewith). 2.2 Agreement and Plan of Reorganization dated as of November 26, 1996 between Keystone Financial, Inc. and First Financial Corporation of Western Maryland (filed as Exhibit 2 to the Current Report on Form 8-K of First Financial Corporation of Western Maryland dated December 2, 1996 and incorporated herein by reference thereto). 4.1 Restated Articles of Incorporation of Keystone Financial, Inc., as amended through July 29, 1996 (filed herewith). 4.2 By-Laws of Keystone Financial, Inc., as amended to May 14, 1992 (filed as Exhibit 3.2 to the Annual Report on Form 10-K of Keystone Financial, Inc. for the year ended December 31, 1992 and incorporated herein by reference thereto). 4.3 Keystone Financial, Inc. Series A Junior Participating Preferred Stock Rights Agreement dated as of June 25, 1990 (filed as Exhibit 1 to the Form 8-A Registration Statement of Keystone Financial, Inc. dated January 25, 1990 and incorporated herein by reference thereto). 4.4 Amendment No. 1 to Series A Junior Participating Preferred Stock Rights Agreement dated as of December 20, 1990 (filed as Exhibit 2 to the Form 8 Amendment of Keystone Financial, Inc. dated December 20, 1990 and incorporated herein by reference thereto). 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. 5.1 Opinion of Reed Smith Shaw & McClay regarding the legality of the shares of Common Stock being registered (filed herewith). 13.1 1996 Annual Report to Shareholders of First Financial Corporation of Western Maryland (filed as Exhibit 13 to the Annual Report on Form 10-K of First Financial Corporation of Western Maryland for the year ended June 30, 1996 and incorporated herein by reference thereto). The 1996 Annual Report to Shareholders of First Financial Corporation of Western Maryland, except for the portions thereof incorporated by reference into the Annual Report on Form 10-K of First Financial Corporation of Western Maryland for the year ended June 30, 1996 and incorporated herein by reference to such Annual Report on Form 10-K, is furnished for the information of the Commission and is not to be considered part of this Registration Statement. 13.2 Quarterly Report on Form 10-Q of First Financial Corporation of Western Maryland for the quarter ended September 30, 1996 (incorporated herein by reference thereto). II-8 Exhibit No. Description and Method of Filing - ------- ---------------------------------------- 23.1 Consent of Ernst & Young LLP, independent auditors (filed herewith). 23.2 Consent of Ernst & Young LLP, independent auditors (filed herewith). 23.3 Consent of KPMG Peat Marwick LLP, independent auditors (filed herewith). 23.4 Consent of Reed Smith Shaw & McClay (contained in their opinion filed as Exhibit 5.1). 23.5 Consent of person named as about to become a director of Keystone Financial, Inc. (filed herewith). 23.6 Consent of Danielson Associates Inc. (to be filed by amendment). 23.7 Consent of Berwind Financial Group, L.P. (to be filed by amendment). 23.8 Consent of Alex. Brown & Sons Incorporated (contained in their opinion filed as Annex III to the Joint Proxy Statement/Prospectus included herein). 23.9 Consent of Coopers & Lybrand L.L.P. (filed herewith). 23.10 Consent of Deloitte & Touche LLP (filed herewith). 23.11 Consent of KPMG Peat Marwick LLP (filed herewith). 23.12 Consent of Smith Elliott Kearns & Company, LLC (filed herewith). 24.1 Power of Attorney (set forth on Page II-5 of the Registration Statement). 99.1 Preliminary copy of letter to shareholders of Keystone Financial, Inc. (filed herewith). 99.2 Preliminary copy of Notice of Special Meeting of Shareholders of Keystone Financial, Inc. (filed herewith). 99.3 Preliminary copy of form of proxy for use by shareholders of Keystone Financial, Inc. (filed herewith). 99.4 Preliminary copy of letter to shareholders of Financial Trust Corp (filed herewith). 99.5 Preliminary copy of Notice of Special Meeting of Shareholders of Financial Trust Corp (filed herewith). 99.6 Preliminary copy of form of proxy for use by shareholders of Financial Trust Corp (filed herewith). 99.7 Investment Agreement dated as of December 19, 1996 between Keystone Financial, Inc. and Financial Trust Corp (filed herewith). 99.8 Form of Agreement between Keystone Financial, Inc. and each director of Financial Trust Corp (filed herewith). II-9 Exhibit No. Description and Method of Filing - ------- ---------------------------------------- 99.9 Employment Agreement dated as of December 19, 1996 between Keystone Financial, Inc. and Ray L. Wolfe (filed herewith). 99.10 Preliminary copy of letter to shareholders of First Financial Corporation of Western Maryland (filed herewith). 99.11 Preliminary copy of Notice of Special Meeting of Shareholders of First Financial Corporation of Western Maryland (filed herewith). 99.12 Preliminary copy of form of proxy for use by shareholders of First Financial Corporation of Western Maryland (filed herewith). 99.13 Stock Option Agreement dated as of November 26, 1996 between Keystone Financial, Inc. and First Financial Corporation of Western Maryland (filed as Exhibit 10(a) to the Current Report on Form 8-K of First Financial Corporation of Western Maryland dated December 2, 1996 and incorporated herein by reference thereto). 99.14 Form of Agreement between Keystone Financial, Inc. and each director of First Financial Corporation of Western Maryland (filed herewith). II-10 EX-2.1 2 AGREEMENT & PLAN OF REORGANIZATION EXHIBIT 2.1 AGREEMENT AND PLAN OF REORGANIZATION ------------------------------------ THIS AGREEMENT dated as of December 19, 1996 (the "Agreement") between KEYSTONE FINANCIAL, INC., a Pennsylvania corporation ("Keystone"), and FINANCIAL TRUST CORP, a Pennsylvania corporation ("FTC"), W I T N E S S E T H : ------------------- WHEREAS, Keystone and FTC desire to merge in the manner provided for herein; NOW, THEREFORE, the parties hereto, in consideration of their mutual covenants and agreements herein contained and intending to be legally bound hereby, covenant and agree as follows: ARTICLE I THE MERGER ---------- 1.1. The Merger. The reorganization contemplated by this Agreement is ---------- the merger of FTC and Keystone (the "Merger") pursuant to the Agreement and Plan of Merger attached hereto as Appendix A (the "Merger Agreement"). As provided in the Merger Agreement, at the Effective Time (as defined in Section 8.1 hereof) FTC will be merged with and into Keystone, which will be the surviving corporation. In the Merger, each outstanding share of Common Stock, par value $5.00 per share, of FTC ("FTC Common Stock") will be converted into 1.65 shares (the "Exchange Ratio") of Common Stock, par value $2.00 per share, of Keystone ("Keystone Common Stock") (with cash in lieu of any fractional share) as provided in the Merger Agreement. The Exchange Ratio is subject to adjustment as provided in the Merger Agreement. ARTICLE II CONDITIONS ---------- 2.1. Mutual Conditions. The respective obligations of each party to effect ----------------- the Merger shall be subject to the fulfillment at or prior to the Closing of the following conditions: (a) Shareholder Approval. This Agreement and the Merger Agreement -------------------- shall have been approved by the affirmative vote of (1) the holders of at least two-thirds of the outstanding shares of FTC Common Stock at the FTC Shareholders Meeting referred to in Section 6.3 and (2) at least a majority of the votes cast thereon by the holders of Keystone Common Stock at the Keystone Shareholders Meeting referred to in Section 6.3, at which meetings a quorum of such shareholders shall be present in person or by proxy. (b) Regulatory Approvals. The Merger shall have been approved (1) by -------------------- the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under Section 3(a) of the Bank Holding Company Act of 1956 (the "Bank Holding Company Act"), 12 U.S.C. (S) 1842(a), (2) by the Pennsylvania Department of Banking (the "Department") under Section 112 of the Pennsylvania Banking Code of 1965 (the "Pennsylvania Banking Code"), 7 P.S. (S) 112, and (3) by the Maryland Bank Commissioner under Subtitle 9 of Title 5 of the Maryland Financial Institutions Code, Md. Financial Institutions Code Ann. (S) 5-901 et seq.; any other regulatory approvals necessary to the consummation of the Merger shall have been obtained; and all waiting periods imposed by any governmental authority in connection therewith shall have expired. None of such regulatory approvals shall contain or impose any conditions or requirements, including without limitation requirements relating to divestiture of branches or other material assets, which Keystone in its reasonable judgment considers to be materially adverse to its interests. No action or suit to enjoin or prohibit the Merger shall have been filed by the United States under the antitrust laws during the 30 days following the date of the approval of the Merger by the Federal Reserve Board. (c) Securities Act Registration. The Registration Statement --------------------------- contemplated by Section 6.1 hereof shall have been filed by Keystone with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as amended (the "Securities Act"), and shall have been declared effective prior to the time the joint proxy statement/prospectus contained therein (the "Proxy Statement/Prospectus ") is first mailed to the shareholders of FTC and Keystone, and no stop order with respect to the effectiveness of the Registration Statement shall have been issued nor any proceeding therefor initiated or threatened. In addition, the shares of Keystone Common Stock to be issued pursuant to the Merger Agreement shall be duly registered or qualified under the securities or "blue sky" laws of all states in which such action is required for purposes of the initial issuance of such stock and its distribution to the shareholders of FTC entitled to receive it. (d) Federal Tax Opinion. There shall have been received by each party ------------------- an opinion of counsel or of independent public accountants satisfactory to the parties, to the effect that: (i) The Merger will constitute a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"), and Keystone and FTC will each be a "party to a reorganization" within the meaning of Section 368(b) of the Code; (ii) No gain or loss will be recognized by Keystone or FTC as a result of the Merger; (iii) Except for cash received in lieu of fractional shares, no gain or loss will be recognized by the shareholders of FTC who receive solely Keystone Common Stock on the exchange of their shares of FTC Common Stock for shares of Keystone Common Stock; (iv) The basis of the shares of Keystone Common Stock to be received by the shareholders of FTC will be the same as the basis of the shares of FTC Common Stock exchanged therefor; and (v) The holding period of the shares of Keystone Common Stock to be received by the shareholders of FTC will include the period during which the FTC Common Stock surrendered in exchange therefor was held by the FTC shareholder, provided such FTC Common Stock was held as a capital asset in the hands of the FTC shareholder at the time of the exchange. 2.2. Keystone Conditions. The obligations of Keystone to effect the Merger ------------------- shall be subject to the fulfillment at or prior to the Closing of the following conditions: -2- (a) Representations and Warranties; Performance of Obligations. Except ---------------------------------------------------------- as otherwise consented to in writing by Keystone or contemplated by this Agreement, the representations and warranties of FTC contained herein shall be true and correct in all material respects as of the date hereof and as of the date of the Closing as though made on such date, except that any representation or warranty which specifically relates to an earlier date shall be true and correct in all material respects as of such earlier date; FTC shall have performed or complied in all material respects with all agreements, covenants and conditions under this Agreement and the Merger Agreement required to be performed or complied with by FTC at or prior to the Closing; and Keystone shall have received a certificate to each of the foregoing effects signed by the principal executive officer, the principal accounting officer and the secretary or an assistant secretary of FTC. (b) Investment Banker's Opinion. Keystone shall have received from an --------------------------- investment banking or financial advisory firm nationally or regionally recognized in the valuation of financial institution securities an affirmative written opinion dated as of a date within twenty business days of the date of mailing to the shareholders of Keystone of the Proxy Statement/Prospectus to the effect that, as of the date of such opinion, the terms of the Merger are fair, from a financial point of view, to Keystone and its shareholders. (c) Accounting Treatment. The Merger shall as of the date of the -------------------- Closing meet the requirements for pooling-of-interests accounting treatment under generally accepted accounting principles and under the accounting rules of the SEC, and, if requested by Keystone, Keystone shall have received a letter from Ernst & Young LLP in form and substance reasonably satisfactory to Keystone as to the foregoing matters. (d) Affiliates' Agreements. Keystone shall have received from each of ---------------------- the persons identified by FTC pursuant to Section 6.4 hereof an executed counterpart of an affiliate's agreement in the form contemplated by such Section. (e) Legal Opinion. Keystone shall have received from McNees, Wallace & ------------- Nurick, counsel for FTC, an opinion dated the date of the Closing and in form and substance reasonably satisfactory to Keystone as to such matters related to this Agreement, the Merger Agreement and the transactions contemplated thereby as Keystone may reasonably request. (f) Orders, etc. Neither Keystone nor FTC shall be subject to any ----------- order, decree or injunction of any court or agency of competent jurisdiction which enjoins, prohibits or materially adversely affects the Merger or to any pending or threatened litigation or proceeding by or before any such court or agency which seeks to enjoin or prohibit the Merger or to impose material damages on either party or any of its directors or officers by reason thereof. (g) Additional Documents. Keystone shall have received such certified -------------------- or other copies of such documents and proceedings of FTC in connection with the transactions contemplated hereby as Keystone may reasonably request. 2.3. FTC Conditions. The obligations of FTC to effect the Merger shall be -------------- subject to the fulfillment at or prior to the Closing of the following conditions: -3- (a) Representations and Warranties; Performance of Obligations. Except ---------------------------------------------------------- as otherwise consented to in writing by FTC or contemplated by this Agreement, the representations and warranties of Keystone contained herein shall be true and correct in all material respects as of the date hereof and as of the date of the Closing as though made on such date, except that any representation or warranty which specifically relates to an earlier date shall be true and correct in all material respects as of such earlier date; Keystone shall have performed or complied in all material respects with all agreements, covenants and conditions under this Agreement and the Merger Agreement required to be performed or complied with by Keystone at or prior to the Closing; and FTC shall have received a certificate to each of the foregoing effects signed by the principal executive officer, the principal accounting officer and the secretary or an assistant secretary of Keystone. (b) Investment Banker's Opinion. FTC shall have received from Berwind --------------------------- Financial Group, L.P. or another investment banking or financial advisory firm nationally or regionally recognized in the valuation of financial institution securities an affirmative written opinion dated as of a date within twenty business days of the date of mailing to the shareholders of FTC of the Proxy Statement/Prospectus to the effect that, as of the date of such opinion, the terms of the Merger are fair, from a financial point of view, to FTC and its shareholders. (c) Legal Opinion. FTC shall have received from Reed Smith Shaw & ------------- McClay, counsel for Keystone, an opinion dated the date of the Closing and in form and substance reasonably satisfactory to FTC as to such matters related to this Agreement, the Merger Agreement and the transactions contemplated thereby as FTC may reasonably request. (d) Orders, etc. Neither Keystone nor FTC shall be subject to any ----------- order, decree or injunction of any court or agency of competent jurisdiction which enjoins or prohibits the Merger or to any pending or threatened litigation or proceeding by or before any such court or agency which seeks to enjoin or prohibit the Merger or to impose material damages on either party or any of FTC's directors or officers by reason thereof. (e) Keystone Rights Agreement. If a Distribution Date, as such term is ------------------------- defined in the Rights Agreement dated as of January 25, 1990, as amended (the "Keystone Rights Agreement"), between Keystone and American Stock Transfer and Trust Company, as Rights Agent, shall have occurred, then either (i) all Rights (as defined in the Keystone Rights Agreement) then outstanding (other than Rights which have become void pursuant to Section 7(f) of the Keystone Rights Agreement) shall have been either (A) exchanged for shares of Keystone Common Stock pursuant to Section 24 of the Keystone Rights Agreement or (B) redeemed pursuant to Section 23 of the Keystone Rights Agreement or (ii) Keystone shall have made adequate provision for the issuance of a right substantially equivalent to the Rights with each share of Keystone Common Stock issuable pursuant to the Merger Agreement. (f) Additional Documents. FTC shall have received such certified or -------------------- other copies of such documents and proceedings of Keystone in connection with the transactions contemplated hereby as FTC may reasonably request. -4- ARTICLE III REPRESENTATIONS AND WARRANTIES OF FTC ------------------------------------- FTC represents and warrants to Keystone that, except in each case as disclosed in a letter delivered to Keystone on the date of this Agreement: 3.1. Organization. FTC is a corporation duly organized, validly existing and ------------ in good standing under the laws of the Commonwealth of Pennsylvania and is duly registered as a bank holding company under the Bank Holding Company Act. FTC has full corporate power and legal authority (including all material licenses, franchises, permits and other governmental authorizations which are legally required) to own its assets and to transact the business in which it is presently engaged. 3.2. Capitalization. The authorized capital stock of FTC consists as of the -------------- date of this Agreement of 16,000,000 shares of FTC Common Stock, of which 8,507,932 shares are issued and outstanding and 32,663 shares are held in treasury. All of such issued and outstanding shares are duly and validly authorized and issued, fully paid and nonassessable. Except for (1) the Investment Agreement between Keystone and FTC dated the date hereof and the Warrants issued thereunder (collectively, the "Warrant Agreement") and (2) stock options for 94,760 shares of FTC Common Stock outstanding under FTC's Stock Option Plan of 1992 and its Non-Employee Director Stock Option Plan of 1994 (the "FTC Option Plans") and stock options exercisable in December 1996 under FTC's Employee Stock Purchase Plan of 1992 (together with the options outstanding under the FTC Option Plans, the "Outstanding FTC Options"), FTC is not a party to or bound by any option, call, warrant, conversion privilege or other agreement obligating FTC at present, at any future time or upon the occurrence of any event to issue or sell any shares of FTC Common Stock or other capital stock of FTC. None of the terms of any Outstanding FTC Options provide that upon consummation of the Merger (i) unexercised options shall be converted into options for greater than the number of shares of Keystone Common Stock the optionee would have received in the Merger had the option been exercised prior to the Merger, (ii) the aggregate option price shall be decreased or (iii) the per share option price shall be adjusted other than proportionately to reflect the number of shares of Keystone Common Stock subject to the option. 3.3. Subsidiaries. FTC owns, directly or indirectly, all of the issued and ------------ outstanding shares of capital stock of Financial Trust Company, Chambersburg Trust Company, First National Bank and Trust Co. and Washington County National Bank (collectively, the "FTC Bank Subsidiaries") and of Financial Trust Services Company, Financial Trust Life Insurance Company and FT Realty Co. (all of the foregoing banks and corporations, collectively, the FTC Subsidiaries"). FTC has no other direct or indirect subsidiaries. All of the issued and outstanding capital stock of the FTC Subsidiaries is duly and validly authorized and issued, fully paid and nonassessable (except with respect to the national banks as provided in Section 55 of the National Bank Act) and is owned by FTC or an FTC Subsidiary free and clear of any liens, security interests, encumbrances, restrictions or other rights of any third person with respect thereto. There are no options, calls, warrants, conversion privileges or other agreements obligating any FTC Subsidiary at present or upon the occurrence of any event to issue or sell any shares of its capital stock. Each of Financial Trust Company and Chambersburg Trust Company is a bank and trust company duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania; each of First National Bank and Trust Co. and Washington County National Bank is a national banking association duly organized, validly existing and in good standing under the laws of the United States; Financial Trust Services Company is a trust company duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania; Financial Trust Life Insurance Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Arizona; -5- and FT Realty Co. is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. Each of the FTC Bank Subsidiaries is duly authorized to engage in the banking and trust business as an insured bank under the Federal Deposit Insurance Act (the "FDIC Act"). Each FTC Subsidiary has full corporate power and legal authority (including all material licenses, franchises, permits and other governmental authorizations which are legally required) to own its assets and to transact the business in which it is presently engaged. 3.4. Joint Ventures, etc. Neither FTC nor any FTC Subsidiary is a party to ------------------- any joint venture, a general or limited partner of any partnership or the owner of any equity or similar interest in any other person (including without limitation any interest pursuant to which FTC or an FTC Subsidiary has or may in any circumstance have an obligation to make a capital contribution to, or be liable for or on account of the liabilities, acts or omissions of, such other person) except (i) FTC's ownership of all the issued and outstanding capital stock of the FTC Subsidiaries identified in Section 3.3 and (ii) the ownership of marketable equity securities held as investments in the ordinary course of business and not exceeding 5% of the outstanding shares of any class and (iii) joint venture or other interests disclosed to Keystone in writing on the date hereof (the "FTC Joint Ventures"). 3.5. Corporate Authority; Absence of Violation. The Board of Directors of ----------------------------------------- FTC has authorized the execution and delivery by FTC of this Agreement, the Merger Agreement and the Warrant Agreement, has authorized the performance by FTC of this Agreement and the Warrant Agreement, has directed or will direct that this Agreement and the Merger Agreement be submitted to the shareholders of FTC for their approval and, subject to such approval, has authorized the performance by FTC of the Merger Agreement. FTC has the full power, authority and legal right to enter into this Agreement, the Merger Agreement and the Warrant Agreement, to perform its obligations hereunder and under the Warrant Agreement (except that the acquisition of more than 5% of the outstanding FTC Common Stock and certain other transactions pursuant to the Warrant Agreement would require the approval of regulatory authorities) and, subject to the approval of its shareholders and regulatory authorities, to perform its obligations under the Merger Agreement. This Agreement, the Merger Agreement and the Warrant Agreement have been duly and validly executed and delivered by FTC, and this Agreement constitutes, and subject to the approval of its shareholders and regulatory authorities the Merger Agreement constitutes, a valid and binding obligation of FTC enforceable against FTC in accordance with its terms, except to the extent enforcement is limited by bankruptcy, insolvency, moratorium, conservatorship, receivership or other similar laws of general application affecting creditors' rights or by the application by a court of equitable principles. Neither the execution and delivery by FTC of this Agreement, the Merger Agreement or the Warrant Agreement, compliance by FTC with any provision hereof or of the Warrant Agreement, nor, subject to the approval of its shareholders and regulatory authorities, compliance by FTC with any provision of the Merger Agreement will (i) violate any provision of the Articles of Incorporation or By-Laws of FTC, (ii) conflict with or result in a material breach of or material default under any material agreement, obligation or instrument to which FTC or any FTC Subsidiary is a party or by which any of them is bound or to which any of their material properties or assets is subject or (iii) violate any order or decree of any court or governmental authority or any statute, rule or regulation applicable to FTC, any FTC Subsidiary or any of their properties or assets (except that the acquisition of more than 5% of the outstanding FTC Common Stock and certain other transactions pursuant to the Warrant Agreement would require the approval of regulatory authorities). 3.6. Exchange Act Reports and Financial Statements. FTC has delivered to --------------------------------------------- Keystone (i) FTC's Annual Report on Form 10-K for the year ended December 31, 1995 containing consolidated balance sheets of FTC at December 31, 1995 and 1994 and consolidated statements of income, shareholders' equity and cash flows of FTC for the three years ended December 31, 1995, all certified by Ernst & Young LLP, -6- independent auditors, (ii) FTC's Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30, 1996 and September 30, 1996 containing unaudited consolidated balance sheets of FTC as of such dates and unaudited consolidated statements of income and cash flows of FTC for the interim periods reflected therein and (iii) any Current Reports on Form 8-K filed by FTC since December 31, 1995. All such reports (i) comply in all material respects with the requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and regulations of the SEC thereunder, (ii) do not contain any untrue statement of a material fact and (iii) do not omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. All such financial statements, including the related notes and schedules, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as indicated therein) and fairly present the consolidated financial condition, assets and liabilities of FTC at the dates thereof and the consolidated results of operations, shareholders' equity and cash flows of FTC for the periods stated therein, subject, in the case of the interim financial statements, to normal and recurring year-end audit adjustments and except that the interim financial statements do not contain all of the notes required by generally accepted accounting principles. 3.7. Absence of Certain Changes. Since December 31, 1995 there has not been -------------------------- any material change in the condition, financial or otherwise, or in the assets, liabilities or business of FTC and the FTC Subsidiaries other than changes in the ordinary course of business, none of which changes has had, or may be reasonably expected to have, a material adverse effect on the financial condition, results of operations, adequacy of the allowance for loan losses or business of FTC and the FTC Subsidiaries taken as a whole. Since December 31, 1995 there has not been (i) any damage to or destruction or loss of property of FTC or any FTC Subsidiary (whether or not insured) which has had or may have a material adverse effect on the business of FTC or any FTC Subsidiary or (ii) any material event which, had it occurred subsequent to the date hereof, would have required the consent of Keystone under Section 5.1 hereof. 3.8. Taxes. (a) The Federal income tax returns of FTC and the FTC ----- Subsidiaries have either been audited by the Internal Revenue Service or closed by statute for all periods beginning prior to January 1, 1995, except that the Federal income tax returns of Washington County National Bank for 1993, 1994 and the nine months ended September 30, 1995 remain open. All taxes, deficiencies, interest and penalties which are reflected as due under such returns or which have been assessed as a result of such audits have been paid in full, and there are no outstanding agreements to extend periods during which additional assessments may be made. (b) Federal income tax returns of FTC and the FTC Subsidiaries for all periods beginning on or after January 1, 1995 have been timely filed. Such returns are accurate in all material respects, and to the best of FTC's knowledge there is no material proposed deficiency, assessment, penalty or delinquency with respect to any of such returns or any of the taxes reflected as due and payable thereby. All taxes, deficiencies, interest and penalties which are reflected as due under such returns or which have been assessed as a result of audits thereof have either been paid in full or have been accrued or adequately reserved against in the financial statements contained in FTC's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. (c) All required Federal income tax returns of any FTC Joint Venture and all returns in respect of all other Federal, state and local taxes of any kind required to be filed by FTC, any FTC Subsidiary or any FTC Joint Venture have been timely filed, and all taxes, interest and penalties due in respect thereof have been paid. Such returns are accurate in all material respects, and to the best of FTC's knowledge there is no material proposed deficiency, assessment, penalty or delinquency with respect to any of such returns or any of the taxes reflected as due and payable thereby. -7- 3.9. Properties. FTC and the FTC Subsidiaries have good and marketable title ---------- to all of their properties and assets (including those reflected in the consolidated balance sheet of FTC at December 31, 1995, except such as have been disposed of in the ordinary course of business) free of any mortgage, encumbrance, lien or security interest, except pledges of assets to secure public deposits and minor imperfections in title and encumbrances which do not materially detract from the value or impair the use of the properties affected thereby. All leases material to FTC pursuant to which FTC or any FTC Subsidiary, as lessee, leases real or personal property are valid and effective in accordance with their respective terms, and there is not, under any of such leases, any material existing default by FTC or any FTC Subsidiary or any event which with notice or lapse of time or both would constitute such a material default. 3.10. Employee Contracts and Plans. Except as disclosed to Keystone in ---------------------------- writing on the date hereof, neither FTC nor any FTC Subsidiary is a party or subject to (i) any contract of employment or consulting agreement not terminable at will without penalty, (ii) any collective bargaining agreement or (iii) any profit sharing, pension, retirement, thrift, savings, incentive compensation, deferred compensation, bonus, stock option, stock purchase, restricted stock, stock appreciation right, performance share, performance unit, severance, salary continuation, holiday, vacation, disability, insurance, medical or other employee benefit, incentive or welfare plan, policy, contract or arrangement ("Employee Benefit Plan"). FTC has heretofore made available to Keystone copies of all Employee Benefit Plans of FTC and the FTC Subsidiaries, including individual employment contracts and stock option agreements. There are no pending or threatened strikes or labor stoppages involving any employees of FTC or any FTC Subsidiary, nor is FTC or any FTC Subsidiary aware of any organizing activity seeking to certify a collective bargaining unit or representative for any of such employees. All retirement and employee benefit or welfare plans of FTC or any FTC Subsidiary have been maintained and operated in accordance with their terms, and all such plans which are subject to the Employee Retirement Income Security Act of 1974 ("ERISA") and/or the Code have been maintained and operated in material compliance with all applicable provisions of ERISA and the Code and the regulations thereunder and are not subject to any accumulated funding deficiency within the meaning of ERISA and the regulations thereunder or to any outstanding liability to the Pension Benefit Guaranty Corporation. No "prohibited transaction" has occurred and is continuing with respect to any such plan, nor has any "reportable event" occurred in respect thereof, as such terms are defined in ERISA and the regulations thereunder, and no such plan is a "Multiemployer Plan" or a "Multiple Employer Plan", as such terms are defined in ERISA and the regulations thereunder. The current value of the assets of each FTC Employee Benefit Plan that is subject to Title IV of ERISA exceeds the present value of the accrued benefits under such plan based upon the actuarial assumptions (to the extent reasonable) presently used by such plan, and there is no complete or partial withdrawal liability within the meaning of Sections 4205 and 4203 of ERISA (and there would be no such liability assuming a complete or partial withdrawal from all FTC Employee Benefit Plans at the Effective Time) with respect to any such plan. There are no pending, threatened or anticipated claims (other than routine claims for benefits) by, on behalf of or against any of the FTC Employee Benefit Plans or any trusts related thereto. 3.11. Other Material Contracts. Neither FTC nor any FTC Subsidiary is a ------------------------ party or subject to any other contract or agreement which, if entered into after the date hereof, would require the consent of Keystone under Section 5.1 hereof. 3.12. Litigation and Other Proceedings. Neither FTC nor any FTC Subsidiary -------------------------------- is a party or subject to any pending, or to the knowledge of FTC may become a party or subject to any threatened, action, suit, arbitration, administrative proceeding or investigation, or judicial or administrative order, judgment or decree, which individually or in the aggregate will have, or could reasonably be expected to -8- have, a material adverse effect on the consolidated financial condition, results of operations or business of FTC and the FTC Subsidiaries taken as a whole. 3.13. Compliance with Laws; Regulatory Matters. FTC and the FTC Subsidiaries ---------------------------------------- are in compliance in all material respects with all laws, rules and regulations, all orders, directives and supervisory letters of, and all agreements, memoranda of understanding or similar arrangements with, regulatory authorities and all other legal requirements applicable to them or their businesses. Neither FTC nor any FTC Subsidiary is subject to any order, directive or supervisory letter of, or agreement, memorandum of understanding or similar arrangement (including board resolutions adopted at the request of a regulatory authority) with, any regulatory authority restricting its operations, restricting it from taking any action or requiring that certain actions be taken, and FTC has no knowledge that any such order, directive, supervisory letter, agreement, memorandum of understanding or similar arrangement is threatened, contemplated or under consideration by any regulatory authority. 3.14. Environmental Matters. To the knowledge of FTC, (a) no Hazardous --------------------- Substances (as hereinafter defined) have been stored, treated, dumped, spilled, disposed of, discharged, released or deposited in violation of any law or regulation or in a manner which would subject FTC or any FTC Subsidiary to liability under any law or regulation at, under or on (1) any property now owned, occupied or leased ("Present Property") by FTC, any FTC Subsidiary, any former subsidiary of FTC or any FTC Joint Venture (each, an "FTC Entity"), (2) any property previously owned, occupied or leased ("Former Property") by any FTC Entity during the time of such previous ownership, occupancy or lease; or (3) any Participation Facility (as hereinafter defined) during the time that any FTC Entity participated in the management of, or may be deemed to be or to have been an owner or operator of, such Participation Facility; (b) no FTC Entity has disposed of, or arranged for the disposal of, Hazardous Substances in violation of any law or regulation or in a manner which would subject FTC or any FTC Subsidiary to liability under any law or regulation from any Present Property, Former Property or Participation Facility, and no owner or operator of a Participation Facility disposed of, or arranged for the disposal of, Hazardous Substances in violation of any law or regulation or in a manner which would subject FTC or any FTC Subsidiary to liability under any law or regulation from a Participation Facility during the time that any FTC Entity participated in the management of, or may be deemed to be or to have been an owner or operator of, such Participation Facility; and (c) no Hazardous Substances have been stored, treated, dumped, spilled, disposed of, discharged, released or deposited in violation of any law or regulation or in a manner which would subject FTC or any FTC Subsidiary to liability under any law or regulation at, under or on any Loan Property (as hereinafter defined), nor is there, with respect to any such Loan Property, any violation of environmental law which could materially adversely affect the value of such Loan Property to an extent which could prevent or delay any FTC Entity from recovering the full value of its loan in the event of a foreclosure on such Loan Property. As used in this Section 3.14, (a) "Participation Facility" shall mean any property or facility of which any FTC Entity (i) has at any time participated in the management or (ii) may be deemed to be or to have been an owner or operator, (b) "Loan Property" shall mean any real property in which any FTC Entity holds a security interest in an amount greater than $100,000 and (c) "Hazardous Substances" shall mean (i) any flammable substances, explosives, radioactive materials, hazardous materials, hazardous substances, hazardous wastes, toxic substances, pollutants, contaminants or any related materials or substances specified in any applicable Federal or Pennsylvania law or regulation relating to pollution or protection of human health or the environment (including, without limitation, ambient or indoor air, surface water, groundwater, land surface or subsurface strata) and (ii) friable asbestos, polychlorinated biphenyls, urea formaldehyde, and petroleum and petroleum-based fuels. -9- 3.15. Proxy Statement/Prospectus, etc. None of the information relating to ------------------------------- FTC or any FTC Subsidiary contained in the Proxy Statement/Prospectus or in any amendment or supplement thereto, at the time the Registration Statement is declared effective, at the time the Proxy Statement/Prospectus is mailed to the shareholders of FTC and Keystone or at the dates of the Shareholders' Meetings of FTC and Keystone to consider the Merger, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading. All documents which FTC is responsible for filing with the SEC or any regulatory agency in connection with the Merger will comply as to form in all material respects with the requirements of applicable law, and all of the information relating to FTC and the FTC Subsidiaries in any document filed with the SEC or any other regulatory agency in connection with this Agreement, the Merger Agreement or the transactions contemplated thereby shall be true and correct in all material respects. 3.16. Accurate and Complete Disclosure. To the knowledge of FTC, the -------------------------------- information furnished to Keystone by or on behalf of FTC or any FTC Subsidiary in connection with its investigation of FTC and the FTC Subsidiaries, whether before or after the date of this Agreement, is true and correct in all material respects, and no representation or warranty of FTC contained herein contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. Other than matters of a general economic, regulatory or political nature, there are no presently existing material facts, circumstances or contingencies known to FTC which have had or which may be reasonably expected in the future to have a material adverse effect on the consolidated financial condition, results of operations or business of FTC and the FTC Subsidiaries taken as a whole. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF KEYSTONE ------------------------------------------ Keystone represents and warrants to FTC that, except in each case as disclosed in a letter delivered to FTC on the date of this Agreement: 4.1. Organization. Keystone is a corporation duly organized, validly ------------ existing and in good standing under the laws of the Commonwealth of Pennsylvania and is duly registered as a bank holding company under the Bank Holding Company Act. Keystone has full corporate power and legal authority (including all material licenses, franchises, permits and other governmental authorizations which are legally required) to own its assets and to transact the business in which it is presently engaged. 4.2. Capitalization. As of the date of this Agreement, the authorized -------------- capital stock of Keystone consists of 75,000,000 shares of Keystone Common Stock, of which approximately 37,998,000 shares are issued and outstanding, and 8,000,000 shares of Preferred Stock, par value $1.00 per share, of which no shares have been issued. All of such issued and outstanding shares are, and upon consummation of the Merger the shares of Keystone Common Stock to be issued pursuant to the Merger Agreement will be, duly and validly authorized and issued, fully paid and nonassessable. 4.3. Bank Subsidiaries. Keystone owns, directly or indirectly, all of the ----------------- issued and outstanding shares of capital stock of Mid-State Bank and Trust Company, Northern Central Bank, Pennsylvania National Bank and Trust Company, The Frankford Bank, N.A. and American Trust Bank, N.A. (collectively, the "Keystone Bank Subsidiaries"). All of the issued and outstanding capital stock of the Keystone Bank Subsidiaries is duly and validly authorized and issued, fully paid and nonassessable (except -10- with respect to the national banks as provided in Section 55 of the National Bank Act) and is owned by Keystone free and clear of any liens, security interests, encumbrances, restrictions on transfer or other rights of any third person with respect thereto. There are no options, calls, warrants, conversion privileges or other agreements obligating any Keystone Bank Subsidiary at present or upon the occurrence of any event to issue or sell any shares of its capital stock. Each of the Keystone Bank Subsidiaries is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and is duly authorized to engage in the banking or banking and trust business as an insured depository institution under the FDIC Act. Each Keystone Bank Subsidiary has full corporate power and legal authority (including all material licenses, franchises, permits and other governmental authorizations which are legally required) to own its assets and to transact the business in which it is presently engaged. 4.4. Corporate Authority; Absence of Violation. The Board of Directors of ----------------------------------------- Keystone has authorized the execution and delivery by Keystone of this Agreement, the Merger Agreement and the Warrant Agreement, has authorized the performance by Keystone of this Agreement and the Warrant Agreement, has directed or will direct that this Agreement and the Merger Agreement be submitted to the shareholders of Keystone for their approval and, subject to such approval and to the approval of regulatory authorities, has authorized the performance by Keystone of the Merger Agreement. Keystone has the full power, authority and legal right to enter into this Agreement, the Merger Agreement and the Warrant Agreement, to perform its obligations hereunder and under the Warrant Agreement (except that the acquisition of more than 5% of the outstanding FTC Common Stock and certain other transactions pursuant to the Warrant Agreement would require the approval of regulatory authorities) and, subject to the approval of its shareholders and regulatory authorities, to perform its obligations under the Merger Agreement. This Agreement, the Merger Agreement and the Warrant Agreement have been duly and validly executed and delivered by Keystone, and this Agreement constitutes, and subject to the approval of its shareholders and regulatory authorities the Merger Agreement constitutes, a valid and binding obligation of Keystone enforceable against Keystone in accordance with its terms, except to the extent enforcement is limited by bankruptcy, insolvency, moratorium, conservatorship, receivership or other similar laws of general application affecting creditors' rights or by the application by a court of equitable principles. Neither the execution and delivery by Keystone of this Agreement, the Merger Agreement or the Warrant Agreement, compliance by Keystone with any provision hereof or of the Warrant Agreement, nor, subject to the approval of its shareholders and regulatory authorities, compliance by Keystone with any provision of the Merger Agreement will (i) violate any provision of the Articles of Incorporation or By-Laws of Keystone, (ii) conflict with or result in a material breach of or material default under any material agreement, obligation or instrument to which Keystone or any of its subsidiaries is a party or by which any of them is bound or to which any of their material properties or assets is subject or (iii) violate any order or decree of any court or governmental authority or any statute, rule or regulation applicable to Keystone, any of its subsidiaries or any of their properties or assets (except that the acquisition of more than 5% of the outstanding FTC Common Stock and certain other transactions pursuant to the Warrant Agreement would require the approval of regulatory authorities). 4.5. Exchange Act Reports and Financial Statements. Keystone has delivered --------------------------------------------- to FTC (i) Keystone's Annual Report on Form 10-K for the year ended December 31, 1995 containing consolidated statements of condition of Keystone at December 31, 1995 and 1994 and consolidated statements of income, changes in shareholders' equity and cash flows of Keystone for the three years ended December 31, 1995, all certified by Ernst & Young LLP, independent auditors, (ii) Keystone's Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 1996 containing unaudited consolidated statements of condition of Keystone as of such dates and unaudited consolidated statements of income and cash flows of Keystone for the interim periods reflected therein and (iii) any Current Reports on Form 8-K filed by Keystone since December 31, 1995. All such reports (i) comply in all material respects -11- with the requirements of the Exchange Act and the rules and regulations of the SEC thereunder, (ii) do not contain any untrue statement of a material fact and (iii) do not omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. All such financial statements, including the related notes and schedules, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as indicated therein) and fairly present the consolidated financial condition, assets and liabilities of Keystone at the dates thereof and the consolidated results of operations and changes in shareholders' equity and cash flows of Keystone for the periods stated therein, subject, in the case of the interim financial statements, to normal and recurring year-end audit adjustments and except that the interim financial statements do not contain all of the notes required by generally accepted accounting principles. 4.6. Absence of Certain Changes. Since December 31, 1995, there has not been -------------------------- any material adverse change in the consolidated financial condition, results of operations or business of Keystone and its subsidiaries taken as a whole. 4.7. Litigation and Other Proceedings. Neither Keystone nor any of its -------------------------------- subsidiaries is a party or subject to any pending, or to the knowledge of Keystone may become a party or subject to any threatened, action, suit, arbitration, administrative proceeding or investigation, or judicial or administrative order, judgment or decree, which individually or in the aggregate will have, or could reasonably be expected to have, a material adverse effect on the consolidated financial condition, results of operations or business of Keystone and its subsidiaries taken as a whole. 4.8. Compliance with Laws; Regulatory Matters. Keystone and its subsidiaries ---------------------------------------- are in compliance in all material respects with all laws, rules and regulations, all orders, directives and supervisory letters of, and all agreements, memoranda of understanding or similar arrangements with, regulatory authorities and all other legal requirements applicable to them or their businesses. Neither Keystone nor any of its subsidiaries is subject to any order, directive or supervisory letter of, or agreement, memorandum of understanding or similar arrangement (including board resolutions adopted at the request of a regulatory authority) with, any regulatory authority restricting its operations, restricting it from taking any action or requiring that certain actions be taken, and Keystone has no knowledge that any such order, directive, supervisory letter, agreement, memorandum of understanding or similar arrangement is threatened, contemplated or under consideration by any regulatory authority. 4.9. Registration Statement, etc. Except for information relating to FTC and --------------------------- the FTC Subsidiaries, neither the Registration Statement, the Proxy Statement/Prospectus nor any amendment or supplement thereto, at the time the Registration Statement is declared effective, at the time the Proxy Statement/Prospectus is mailed to the shareholders of FTC and Keystone or at the dates of the Shareholders' Meetings of FTC and Keystone to consider the Merger, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading. All documents which Keystone is responsible for filing with the SEC or any regulatory agency in connection with the Merger will comply as to form in all material respects with the requirements of applicable law, and all of the information relating to Keystone and its subsidiaries in any document filed with the SEC or any other regulatory agency in connection with this Agreement, the Merger Agreement or the transactions contemplated thereby shall be true and correct in all material respects. 4.10. Environmental Matters. To the knowledge of Keystone, (a) no Hazardous --------------------- Substances (as hereinafter defined) have been stored, treated, dumped, spilled, disposed of, discharged, released or deposited in violation of any law or regulation or in a manner which would subject Keystone or any -12- Keystone subsidiary to liability under any law or regulation at, under or on (1) any property now owned, occupied or leased ("Present Property") by Keystone or any subsidiary or former subsidiary of Keystone (each, a "Keystone Entity"), (2) any property previously owned, occupied or leased ("Former Property") by any Keystone Entity during the time of such previous ownership, occupancy or lease; or (3) any Participation Facility (as hereinafter defined) during the time that any Keystone Entity participated in the management of, or may be deemed to be or to have been an owner or operator of, such Participation Facility; (b) no Keystone Entity has disposed of, or arranged for the disposal of, Hazardous Substances in violation of any law or regulation or in a manner which would subject Keystone or any Keystone subsidiary to liability under any law or regulation from any Present Property, Former Property or Participation Facility, and no owner or operator of a Participation Facility disposed of, or arranged for the disposal of, Hazardous Substances in violation of any law or regulation or in a manner which would subject Keystone or any Keystone subsidiary to liability under any law or regulation from a Participation Facility during the time that any Keystone Entity participated in the management of, or may be deemed to be or to have been an owner or operator of, such Participation Facility; and (c) no Hazardous Substances have been stored, treated, dumped, spilled, disposed of, discharged, released or deposited in violation of any law or regulation or in a manner which would subject Keystone or any Keystone subsidiary to liability under any law or regulation at, under or on any Loan Property (as hereinafter defined), nor is there, with respect to any such Loan Property, any violation of environmental law which could materially adversely affect the value of such Loan Property to an extent which could prevent or delay any Keystone Entity from recovering the full value of its loan in the event of a foreclosure on such Loan Property. As used in this Section 4.10, (a) "Participation Facility" shall mean any property or facility of which any Keystone Entity (i) has at any time participated in the management or (ii) may be deemed to be or to have been an owner or operator, (b) "Loan Property" shall mean any real property in which any Keystone Entity holds a security interest in an amount greater than $500,000 and (c) "Hazardous Substances" shall mean (i) any flammable substances, explosives, radioactive materials, hazardous materials, hazardous substances, hazardous wastes, toxic substances, pollutants, contaminants or any related materials or substances specified in any applicable Federal or Pennsylvania law or regulation relating to pollution or protection of human health or the environment (including, without limitation, ambient or indoor air, surface water, groundwater, land surface or subsurface strata) and (ii) friable asbestos, polychlorinated biphenyls, urea formaldehyde, and petroleum and petroleum-based fuels. 4.11. Accurate and Complete Disclosure. To the knowledge of Keystone, the -------------------------------- information furnished to FTC by or on behalf of Keystone or any of its subsidiaries in connection with FTC's investigation of Keystone and its subsidiaries, whether before or after the date of this Agreement, is true and correct in all material respects, and no representation or warranty of Keystone contained herein contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. Other than matters of a general economic, regulatory or political nature, there are no presently existing material facts, circumstances or contingencies known to Keystone which have had or which may be reasonably expected in the future to have a material adverse effect on the consolidated financial condition, results of operations or business of Keystone and its subsidiaries taken as a whole. -13- ARTICLE V CONDUCT OF FTC'S BUSINESS PENDING THE EFFECTIVE TIME ---------------------------------------------------- 5.1. Conduct of Business in Ordinary Course. Pending the Effective Time, -------------------------------------- except as otherwise consented to in writing by Keystone or as contemplated by this Agreement or the Warrant Agreement, (a) FTC will and will cause each FTC Subsidiary to (i) conduct its business only in the ordinary course thereof as conducted on the date hereof and (ii) use its best efforts to preserve its business organization and assets intact and to preserve its good will with its customers and others having business relations with it; and (b) FTC will not and, except in the case of clause (ii) below, will not permit any FTC Subsidiary to: (i) amend its Articles of Incorporation or By-Laws; (ii) declare, pay or set aside any dividend or other distribution in respect of its capital stock, except for cash dividends on the FTC Common Stock in an amount not in excess of $.25 per share in each of the calendar quarters ending March 31 and June 30, 1997 and not in excess of $.27 per share in any calendar quarter thereafter. The parties agree to consult with respect to the amount of the last FTC dividend payable prior to the Effective Time with the objective of assuring that the shareholders of FTC do not receive a shortfall or a premium based on the record and payment dates of their last dividend prior to the Merger and the record and payment dates of the first dividend of Keystone following the Merger; (iii) except for (A) the issuance and sale of FTC Common Stock upon exercise of the Outstanding FTC Options and (B) the grant and exercise of additional stock options under FTC's Stock Option Plan of 1992 in the ordinary course of business and consistent with past practice, issue, sell, purchase, redeem or otherwise dispose of or acquire, or grant any options, warrants or other rights to purchase or acquire, or combine, split or reclassify, any shares of its capital stock or any securities convertible into its capital stock; (iv) enter into any contract of employment or consulting agreement not terminable at will without penalty; (v) adopt or modify to increase the compensation or benefits under any Employee Benefit Plan or otherwise increase the compensation payable to its employees, except for modifications or increases required by law or existing contract or involving merit increases in accordance with past practices, normal cost-of-living increases, regular bonuses (including under FTC's executive incentive plan) and normal increases related to promotions or increased job responsibilities; (vi) merge or consolidate with or into any other corporation or bank, subject the proviso to the first sentence of Section 6.8; acquire control over, or any equity interest in, any other firm, bank, corporation or organization (except in connection with foreclosures in bona fide loan --------- transactions or investments in marketable equity securities in the ordinary course of business and not exceeding 5% of the outstanding shares of any class); liquidate; or purchase or acquire or, subject to the proviso in the first sentence of Section 6.8, sell or otherwise dispose of any material assets otherwise than in the ordinary course of business; -14- (vii) make any expenditure for a capital asset in excess of $50,000 per asset or $250,000 in the aggregate or enter into as lessee any lease of personal property providing for annual payments in excess of $50,000 or any lease of real property; (viii) change or modify in any material respect any of its lending or investment policies; (ix) take any action which if taken as of the date hereof would constitute a material breach of any representation or warranty contained herein; or (x) enter into any agreement, commitment or understanding with any person relating to any action prohibited by this Agreement, subject the proviso to the first sentence of Section 6.8. 5.2. FTC Stock Options. Notwithstanding anything contained in Section 5.1, ----------------- FTC may at any time prior to the Effective Time amend the stock option agreements relating to any or all of the stock options outstanding under the FTC Option Plans (the "FTC Options") to provide that upon consummation of the Merger (1) the FTC Options will become options for a number of shares of Keystone Common Stock equal to the number of shares of FTC Common Stock currently subject thereto multiplied by the Exchange Ratio, rounded downward to the nearest whole share and (2) the option price per share of Keystone Common Stock shall be equal the current option price per share of FTC Common Stock divided by the Exchange Ratio, rounded to the nearest cent. Except as otherwise consented to in writing by Keystone, no other changes shall be made to the terms of the FTC Options. Not later than 30 days after the filing of Keystone's first Annual Report on Form 10K following the Effective Time, Keystone shall cause the shares of Keystone Common Stock subject to the FTC Options to be registered under the Securities Act by filing one or more Registration Statements on SEC Form S-8 or SEC Form S- 3. Provided that Keystone continues to be eligible to use SEC Form S-8, SEC Form S-3 or a successor Form permitting similar incorporation by reference, Keystone shall maintain the registration under the Securities Act of the shares of Keystone Common Stock subject to the FTC Options until such options are exercised or expire. ARTICLE VI COVENANTS AND ACTIONS PENDING THE EFFECTIVE TIME ------------------------------------------------ 6.1 Securities Registration and Disclosure. As soon as practicable after the -------------------------------------- date hereof, Keystone will file with the SEC under the Securities Act a registration statement for the registration of the shares of Keystone Common Stock to be issued pursuant to the Merger Agreement (the "Registration Statement"). The parties shall cooperate in the preparation of the Proxy Statement/Prospectus and any amendments or supplements thereto, and each party shall be responsible for providing all information concerning itself and its subsidiaries required to be included therein. Keystone shall take any action required to be taken under any applicable state securities or "blue sky" laws in connection with the issuance of shares of Keystone Common Stock pursuant to the Merger Agreement, and FTC shall furnish Keystone all information concerning FTC and its shareholders as Keystone may reasonably request in connection with any such action. Each party will promptly provide the other with copies of all correspondence, comment letters, notices or other communications to or from the SEC relating to the Registration Statement, the Proxy Statement/Prospectus or any amendment or supplement thereto, and Keystone will advise FTC promptly after it receives notice thereof, of the effectiveness of the Registration Statement, of the issuance of any stop order with respect to the effectiveness thereof, of the suspension of the qualification of the Keystone Common Stock issuable in connection with the Merger for offering or sale in any jurisdiction, or of the initiation or threat of any proceeding for any such purpose. -15- 6.2. Regulatory Approvals. As soon as practicable after the date hereof, the -------------------- parties shall prepare and file (i) with the Federal Reserve Board an application for its approval of the Merger under the Bank Holding Company Act, (ii) with the Department an application for its approval of the Merger under the Pennsylvania Banking Code, (iii) with the Maryland Bank Commissioner an application for its approval of the Merger under the Maryland Financial Institutions Code and (iv) with any other regulatory agencies having jurisdiction any other applications for approvals or consents which may be necessary for the consummation of the Merger. Subject to the limitations herein provided, the parties will take or cause to be taken all actions necessary for such applications to be approved, and each party will promptly provide the other with copies of all correspondence, notices or other communications to or from such agencies relating to such applications. 6.3. Shareholders' Meetings. FTC and Keystone will each take appropriate ---------------------- action to call a meeting of its shareholders (the "Shareholders' Meetings"), to be held not more than forty-five days following the effective date of the Registration Statement (or, if later, the date of Keystone's Annual Meeting of Shareholders), to consider approval of this Agreement and the Merger Agreement and, subject to the fiduciary duties of its Board of Directors, will use its best efforts to secure such approval. In connection with its Shareholders' Meeting, FTC and Keystone will duly solicit, in compliance with Section 14(a) of the Exchange Act and the proxy rules of the SEC thereunder, the vote of its shareholders by mailing or delivering to each such shareholder, as soon as practicable after the effectiveness of the Registration Statement, the Proxy Statement/Prospectus, and as soon as practicable thereafter, any amendments or supplements thereto as may be necessary to assure that at the date of its Shareholders' Meeting the Proxy Statement/Prospectus shall conform to the requirements of Sections 3.15 and 4.9 hereof. 6.4. FTC Affiliates' Agreements. FTC will furnish to Keystone a list of all -------------------------- persons known to FTC who at the date of the FTC Shareholders' Meeting may be deemed to be "affiliates" of FTC within the meaning of Rule 145 under the Securities Act and for purposes of qualifying the Merger for "pooling of interests" accounting treatment ("FTC Affiliates"). FTC will use its best efforts to cause each FTC Affiliate to deliver to Keystone not later than 30 days prior to the Effective Time a written agreement providing that such person will not sell, pledge, transfer or otherwise dispose of (a) the shares of Keystone Common Stock to be received by such person in the Merger (the "Merger Shares") or any other shares of Keystone Common Stock or FTC Common Stock held by such person during the period commencing 30 days prior to the Effective Time and ending at such time as financial results covering at least 30 days of post- Merger combined operations have been published within the meaning of Section 201.01 of the SEC's Codification of Financial Reporting Policies or (b) the Merger Shares except in compliance with the applicable provisions of the Securities Act and the rules and regulations thereunder. 6.5. Public Announcements. The parties will consult with each other as to -------------------- the form and substance of any press release or other public disclosure of matters related to this Agreement or any of the transactions contemplated hereby. 6.6. Notice of Certain Events. Pending the Effective Time, each party will ------------------------ promptly notify the other of (i) any material change in the normal course of its business or in the operation of its properties, (ii) any event which may cause any of its representations and warranties hereunder to be inaccurate in any material respect as of the time of the Closing and (iii) any actions, claims or legal, administrative or arbitration proceedings or investigations threatened or commenced against it or its subsidiaries which are or may be material to their business or assets or to the consummation of the Merger and the transactions contemplated hereby. -16- 6.7. All Reasonable Efforts. Subject to the terms and conditions herein ---------------------- provided, each of the parties agrees to use all reasonable efforts to take, or cause to be taken, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement and the Merger Agreement, including, without limitation, using reasonable efforts to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the Merger; provided, however, that nothing contained herein shall require Keystone to agree to any condition or requirement which is sought or imposed by any regulatory authority in connection with the regulatory approvals referred to in Section 2.1(b) hereof and which Keystone reasonably considers to be materially adverse to its interests. Each party agrees to use all reasonable efforts to fulfill, or cause to be fulfilled, all conditions provided hereunder to the obligations of the other party to consummate the Merger; provided that nothing contained herein shall obligate a party or any of its directors or officers to breach their fiduciary obligations owed to the shareholders of such party. Each party will, and will cause its subsidiaries to, use its best efforts to obtain all consents of third parties required in connection with this Agreement or the transactions contemplated hereby under any other contract or agreement of such party or its subsidiaries. 6.8. Inconsistent Activities. Unless and until the Merger has been ----------------------- consummated or this Agreement has been terminated in accordance with its terms, FTC will not (i) solicit or encourage, directly or indirectly, any inquiries or proposals to acquire more than 1% of the FTC Common Stock, any other capital stock of itself or of any FTC Subsidiary or any significant portion of its or any FTC Subsidiary's assets (whether by tender offer, merger, purchase of assets or other transactions of any type); (ii) afford any third party which may be considering any such transaction access to its or any FTC Subsidiary's properties, books or records except as required by mandatory provisions of law; (iii) enter into any discussions or negotiations for, or enter into any agreement or understanding which provides for, any such transaction or (iv) authorize or permit any of its directors, officers, employees or agents to do or permit any of the foregoing; provided, however, that notwithstanding the ----------------- foregoing, FTC may afford such access, enter into any such discussions, negotiations or agreements or understandings, or authorize or permit any of its directors, officers, employees or agents to do so if the Board of Directors of FTC, after consulting with counsel, determines that such actions should be taken or permitted in the exercise of its fiduciary duties. If FTC becomes aware of any offer or proposed offer to acquire any such shares of capital stock of itself or any FTC Subsidiary or any significant portion of its or any FTC Subsidiary's assets (regardless of the form of the proposed transaction) or of any other matter which could adversely affect this Agreement or the Merger, FTC shall immediately give notice thereof to Keystone. -17- 6.9. Transactions Involving Keystone. Keystone shall not enter into any ------------------------------- agreement for a merger, consolidation or share exchange with or into any other person, unless the surviving or resulting corporation, if other than Keystone, shall have agreed in writing to be bound by the terms of this Agreement, the Merger Agreement and the Warrant Agreement. In the event that under the terms of any such agreement the outstanding Keystone Common Stock is converted into or exchanged for other securities of any person, cash or other property, the terms of this Agreement and the Merger Agreement shall be appropriately amended so that the shareholders of FTC shall receive in the Merger, for each share of FTC Common Stock, the consideration per share received by the holders of Keystone Common Stock in such transaction multiplied by the Exchange Ratio (as defined in the Merger Agreement and appropriately adjusted to reflect such event), provided that fractional shares or fractional units of other securities or property may be paid in cash based on the value of $26.50 for one whole share of Keystone Common Stock. It is understood that the condition contained in Section 2.1(d) shall not prevent Keystone from entering into any such transaction, but FTC shall not be required to amend or waive such condition. Keystone shall obtain the consent of FTC, which consent shall not unreasonably be withheld, before entering into an agreement for any such transaction which would result in the acquisition by Keystone of a business for which (excluding the impact of the Merger and Keystone's proposed merger with First Financial Corporation of Western Maryland) Keystone would be required under Rule 3-05(b)(2) of SEC Regulation S-X to include separate financial statements in a registration statement of Keystone under the Securities Act. 6.10. Access and Information. Pending the Effective Time, FTC and Keystone ---------------------- will each afford the other party and its authorized representatives reasonable access during normal business hours to its properties, books and records and personnel and those of its subsidiaries and will furnish promptly to the other party such financial and operating data and other information relating to its and its subsidiaries' business, assets and personnel as the other party may reasonably request. ARTICLE VII AMENDMENT, WAIVER AND TERMINATION --------------------------------- 7.1. Amendment. Subject to applicable law, this Agreement or the Merger --------- Agreement may be amended in any respect by an instrument in writing signed by an authorized officer of each of the parties, whether before or after the Shareholders' Meetings, except that no such amendment after the FTC Shareholders' Meeting shall affect the rate of exchange of FTC Common Stock for Keystone Common Stock provided in the Merger Agreement or change the form of such consideration. 7.2. Waiver. Keystone or FTC may (i) extend the time for performance of any ------ of the obligations of the other party, (ii) waive any inaccuracies in the representations and warranties of the other party, (iii) waive compliance by the other party with any of its covenants or agreements contained herein or in the Merger Agreement and (iv) waive the fulfillment of any condition to its obligations hereunder other than those set forth in Section 2.1 hereof, all of the foregoing to the fullest extent permitted by law. No such extension or waiver shall be effective unless contained in a writing signed by an authorized officer of the party against which it is asserted. 7.3. Termination. Notwithstanding prior approval by the shareholders of FTC ----------- or Keystone, this Agreement may be terminated and the Merger abandoned: (a) by mutual written consent of each of the parties hereto at any time prior to the Effective Time; or -18- (b) by either party in the event of a material breach of a representation and warranty or covenant of the other party contained herein, which breach has not been cured within 30 days after written notice of such breach is given to the breaching party by the party electing to terminate; or (c) by either party at any time after the shareholders of FTC or Keystone shall fail to approve this Agreement and the Merger Agreement in a vote taken at a meeting duly convened for that purpose, provided that the party electing to terminate shall have performed its obligations under Section 6.3 hereof; or (d) by either party at any time after a final judicial or regulatory determination (as to which all periods for appeal have expired an no appeal shall be pending) denying any regulatory approval required for the Merger or imposing conditions or requirements which Keystone in its reasonable judgment has determined to be materially adverse to its interests; or (e) by either party at any time after December 31, 1997 in the event of failure to satisfy any of the conditions to the obligations of the party electing to terminate, if such failure occurred despite the good faith effort of such party to perform all agreements and covenants and to satisfy all conditions required to be performed or satisfied by it. Termination pursuant to subparagraphs (b) through (e) of this Section 7.3 shall be effected by written notice provided by the terminating party in accordance with Section 8.6 hereof. 7.4. Keystone Due Diligence. Following the execution and delivery of this ---------------------- Agreement, FTC will permit Keystone to conduct an on-site due diligence investigation of FTC and its subsidiaries by (1) affording to Keystone's authorized representatives reasonable access during normal business hours to FTC's and its subsidiaries' books, records and properties, (2) making the personnel of FTC and its subsidiaries having knowledge of the matters to be investigated by Keystone reasonably available to Keystone during normal business hours and at their normal places of work and (3) furnishing to Keystone promptly upon request such financial and operating data and other information relating to FTC's and its subsidiaries' business, assets and personnel as Keystone may reasonably request. Keystone shall conduct its investigation in such a manner as to minimize any disruption of FTC's normal business operations. Notwithstanding anything else contained in this Agreement, Keystone may at any time during the period for its on-site investigation, in its sole and absolute discretion and without necessity of specifying any reason therefor, elect to terminate this Agreement, without liability of either party, by written notice to FTC. Keystone's right to terminate pursuant to this Section 7.4 shall expire unless written notice of exercise is received by FTC at its address provided in Section 8.6 not later than 5:00 p.m., Eastern Standard Time, on January 8, 1997. 7.5. FTC Due Diligence. Following the execution and delivery of this ----------------- Agreement, Keystone will permit FTC to conduct an on-site due diligence investigation of Keystone and its subsidiaries by (1) affording to FTC's authorized representatives reasonable access during normal business hours to Keystone's and its subsidiaries' books, records and properties, (2) making the personnel of Keystone and its subsidiaries having knowledge of the matters to be investigated by FTC reasonably available to FTC during normal business hours and at their normal places of work and (3) furnishing to FTC promptly upon request such financial and operating data and other information relating to Keystone's and its subsidiaries' business, assets and personnel as FTC may reasonably request. FTC shall conduct its investigation in such a manner as to minimize any disruption of Keystone's normal business operations. -19- Notwithstanding anything else contained in this Agreement, FTC may at any time during the period for its on-site investigation, in its sole and absolute discretion and without necessity of specifying any reason therefor, elect to terminate this Agreement, without liability of either party, by written notice to Keystone. FTC's right to terminate pursuant to this Section 7.5 shall expire unless written notice of exercise is received by Keystone at its address provided in Section 8.6 not later than 5:00 p.m., Eastern Standard Time, on January 8, 1997. 7.6. Effect of Termination. In the event of termination of this Agreement as --------------------- provided in Section 7.3, 7.4 or 7.5, this Agreement and the Merger Agreement shall forthwith become void, and there shall be no liability on the part of either party or their respective officers or directors except (i) as set forth in Sections 8.2, 8.7 and 8.8 hereof and (ii) in the event of a willful breach of this Agreement. ARTICLE VIII MISCELLANEOUS PROVISIONS ------------------------ 8.1. Closing and Effective Time. The closing of the transactions -------------------------- contemplated by this Agreement and the Merger Agreement (the "Closing") shall take place at the offices of Keystone, One Keystone Plaza, Front & Market Streets, Harrisburg, Pennsylvania at 10:00 a.m., local time, on the second business day following the fulfillment of all conditions set forth in Section 2.1 hereof, or at such other place, time and date as the parties shall agree. Subject to the fulfillment or waiver at or prior to the Closing of all other conditions to its obligations to consummate the Merger, each party shall execute and deliver for filing with the Pennsylvania Department of State Articles of Merger specifying that the Merger shall become effective at the close of business on the date of the Closing or at such other time and date as the parties shall agree (the "Effective Time"). 8.2. Confidentiality. Each party hereto shall cause all information obtained --------------- by it or its subsidiaries or representatives from the other party and its subsidiaries and representatives under or in connection with this Agreement or the negotiation hereof to be treated as confidential unless such information is, or through no fault of such party becomes, generally available to the public or unless required by legal process to release such information. Neither party shall use, or unless required by legal process to release such information knowingly permit others to use, any such information for any purpose other than in connection with this Agreement and the transactions contemplated hereby unless such information is, or through no fault of such party becomes, generally available to the public. In the event of termination of this Agreement, each party will, and will cause its subsidiaries and representatives to, return to the other all documents (including copies thereof and extracts therefrom) obtained by it from the other party and its subsidiaries and representatives under or in connection with this Agreement or its negotiation and which are not publicly available. 8.3. Entire Agreement. This Agreement, together with the Merger Agreement, ---------------- the Warrant Agreement and any other agreements signed between the parties on the date hereof, sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all previous agreements or understandings between the parties with respect thereto. 8.4. Counterparts; Headings. This Agreement may be executed in several ---------------------- counterparts, and by the parties hereto on separate counterparts, each of which will constitute an original. The headings and captions contained herein are for reference purposes only and do not constitute a part hereof. -20- 8.5. Further Assurances. Each party will execute and deliver such ------------------ instruments and take such other actions as the other party hereto may reasonably request in order to carry out the intent and purposes hereof and of the Merger Agreement. 8.6. Communications. All notices and other communications hereunder shall be -------------- in writing and will be deemed to have been given if delivered by hand or express carrier, telecopied with acknowledgment of receipt, or mailed by first-class or by registered or certified mail, postage prepaid, addressed as follows: If to Keystone: Keystone Financial, Inc. One Keystone Plaza Front & Market Streets P.O. Box 3660 Harrisburg, PA 17105-3660 Telecopier: 717-231-5759 Attention: Ben G. Rooke, Esquire With a copy to: Reed Smith Shaw & McClay James H. Reed Building 435 Sixth Avenue Pittsburgh, PA 15219-1886 Telecopier: 412-288-3063 Attention: Nelson W. Winter, Esquire If to FTC: Financial Trust Corp 1415 Ritner Highway Carlisle, Pennsylvania 17013 Telecopier: 717-241-7775 Attention: Ray L. Wolfe, Chairman and CEO With a copy to: McNees, Wallace & Nurick 100 Pine Street P.O. Box 1166 Harrisburg, PA 17108-1166 Telecopier: 717-236-2665 Attention: W. Jeffry Jamouneau, Esquire -21- or at such other address or addresses as may hereafter be furnished by the addressee party. All such notices and other communications shall be deemed to have been duly given as follows: when delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if delivered by mail; when receipt acknowledged, if telecopied; and the next business day after being delivered to an overnight delivery service. 8.7. Expenses. Each party shall pay its own expenses incident to preparing -------- for, entering into and carrying out this Agreement and to the consummation of the Merger, including fees of its accountants, attorneys and investment advisors, except that it is agreed that (i) each party shall pay the cost of printing and mailing the final Proxy Statement/Prospectus and other proxy materials to the shareholders of such party, (ii) each party shall pay one-half of the cost of the tax opinion referred to in Section 2.1(d) and (iii) the cost of printing and filing the Registration Statement and any blue sky materials and the costs of preparing and filing the applications for the regulatory approvals referred to in Section 2.1(b) hereof are expenses of Keystone. Notwithstanding the foregoing, if the Merger is not effected as a consequence, directly or indirectly, of a change in control of FTC or Keystone which would require the filing of a report under Item 1 of Form 8-K under the Exchange Act, the party experiencing the change of control shall reimburse the other party for all of its reasonable out-of-pocket expenses incurred in connection with this Agreement and the transactions contemplated hereby. 8.8. Brokers. Keystone and FTC each represents and warrants that except as ------- disclosed in writing to the other party on or prior to the date hereof, neither it nor any of its subsidiaries is obligated to pay any brokerage commissions, finder's fees or other like payments in connection with the transactions contemplated hereby. Each party agrees to pay or discharge, and to indemnify and hold the other and its subsidiaries harmless from and against, any and all claims or liabilities for brokerage commissions, finder's fees and other like payments incurred by such party or its subsidiaries in connection with the transactions contemplated hereby. 8.9. Survival. The representations and warranties of the parties contained -------- herein or in any document, schedule or certificate delivered in connection herewith will not survive the Closing and Effective Time but will expire with and be terminated and extinguished by the consummation of the Merger contemplated hereby. 8.10. Successors and Assigns; No Third Party Beneficiaries. Neither this ---------------------------------------------------- Agreement nor the Merger Agreement, nor any of the rights or obligations of the parties hereunder or thereunder, may be assigned by either party, whether by operation of law or otherwise, without the prior written consent of the other party. Subject to the preceding sentence, this Agreement and the Merger Agreement will be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. Except as provided in Section 8.12, this Agreement is not intended to confer any right or benefit upon any person other than the parties hereto, and no provision hereof shall be enforceable other than by the parties hereto and their successors and permitted assigns. 8.11. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the Commonwealth of Pennsylvania without regard to principles of conflicts of laws thereof. 8.12. Indemnification. --------------- (a) Keystone agrees that, to the extent permitted by law, all rights to indemnification and limitation of liability now existing in favor of the current or former directors or officers of FTC and the FTC Subsidiaries as provided in their respective charters or by-laws shall survive the Merger and that following -22- the Merger, to the extent permitted by law, Keystone (with respect to obligations of FTC) or such FTC Subsidiary (with respect to obligations of FTC Subsidiaries) shall honor such obligations in accordance with their respective terms with respect to events, acts or omissions occurring prior to the Effective Time. (b) Keystone agrees that following the Merger, any amendment to the provisions of the charter or by-laws of any FTC Subsidiary referred to in Section 8.12(a) which would have the effect of reducing or hindering the rights of indemnity or limitation of liability currently afforded under such provisions to the current or former directors or officers of any FTC Subsidiary shall operate prospectively only and shall not apply to events, acts or omissions occurring prior to the adoption thereof. (c) In the event that Keystone or an FTC Subsidiary or its successors or assigns (i) consolidates with or merges into another person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties or assets to any person, then, and in each such case, proper provisions shall be made so that the successor or transferee in such transaction shall assume the obligations of Keystone or such FTC Subsidiary set forth in this Section 8.12, it being understood that that the provisions of this paragraph shall be satisfied if the effect of such transaction is that the successor or transferee assumes such obligations by operation of law. 8.13. FTC Bank Subsidiaries. It is Keystone's present intention that the --------------------- charter of at least one of FTC's bank subsidiaries shall survive the Merger. 8.14. Keystone Benefit Plans. As soon as administratively practicable ---------------------- following the Merger, Keystone shall take appropriate action so that employees of the FTC Subsidiaries and employees of FTC who become employees of Keystone shall be entitled to participate in generally applicable Keystone employee benefit plans on the same basis as other similarly situated employees of Keystone and its subsidiaries. Prior service of such employees with FTC or an FTC Subsidiary shall be counted in -23- determining eligibility to participate in such plans and for purposes of vesting of benefits, but shall not be counted for purposes of benefit accrual. IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this Agreement as of the day and year first above written. [CORPORATE SEAL] Attest: FINANCIAL TRUST CORP /s/ Lauren L. Schutt By /s/ Ray L. Wolfe - ------------------------------------- ------------------------------------ Lauren L. Shutt, Ray L. Wolfe, Chairman Secretary and Chief Executive Officer [CORPORATE SEAL] Attest: KEYSTONE FINANCIAL, INC. /s/ Ben G. Rooke By /s/ Carl L. Campbell - ------------------------------------- ------------------------------------ Ben G. Rooke, Carl L. Campbell, President Secretary and Chief Executive Officer -24- APPENDIX A AGREEMENT AND PLAN OF MERGER ---------------------------- THIS AGREEMENT dated as of December 19, 1996 between KEYSTONE FINANCIAL, INC., a Pennsylvania corporation ("Keystone"), and FINANCIAL TRUST CORP, a Pennsylvania corporation ("FTC"), W I T N E S S E T H: ------------------- WHEREAS, Keystone and FTC have entered into an Agreement and Plan of Reorganization of even date herewith (the "Reorganization Agreement") which provides, among other things, for the merger of FTC and Keystone (the "Merger"); NOW, THEREFORE, in consideration of their mutual covenants and agreements contained herein and in the Reorganization Agreement, and for the purpose of stating the method, terms and conditions of the Merger, including the rights of the shareholders of FTC, and such other details and provisions as are deemed desirable, the parties hereto, intending to be legally bound hereby, agree as follows: 1. The Merger. Subject to the terms and conditions of this Agreement and the ---------- Reorganization Agreement, and in accordance with the laws of the Commonwealth of Pennsylvania, at the Effective Time (as defined in Section 8.1 of the Reorganization Agreement) FTC shall be merged with and into Keystone, which shall be the surviving corporation. 2. Articles of Incorporation and By-Laws. The Articles of Incorporation and ------------------------------------- By-Laws of Keystone as in effect immediately prior to the Effective Time shall be the Articles of Incorporation of the surviving corporation. 3. Board of Directors. Upon the merger becoming effective, the Board of ------------------ Directors of the surviving corporation shall consist of: (a) the persons who where directors of Keystone immediately prior to the Merger, without change in their respective terms of office by reason of the Merger; (b) Ray L. Wolfe, the Chairman and Chief Executive Officer of FTC, to serve, subject to the By-Laws of Keystone and any other applicable qualifications, for a term expiring at the Annual Meeting of Shareholders of Keystone in 2000; and (c) two additional persons to be designated by FTC, subject to the approval of Keystone, to serve, subject to the By-Laws of Keystone and any other applicable qualifications, for terms expiring at the Annual Meetings of Shareholders of Keystone in 1998 and 1999. If prior to the Effective Time Ray L. Wolfe or either of such persons designated by FTC becomes unable to serve or declines to serve as a director of Keystone, FTC shall be entitled to designate a substitute director acceptable to Keystone. If Ray L. Wolfe shall be available and willing to serve as a director of Keystone following the Merger as hereinabove provided, then upon the Merger becoming effective he shall, without A-1 necessity of further action, be deemed to have been elected as Chairman of the Board of Directors of Keystone, to serve in such capacity in accordance with the By-Laws of Keystone. 4. Conversion of FTC Shares. (a) Subject to the provisions of Section 5 ------------------------ hereof with respect to the payment of fractional shares in cash, upon the Merger becoming effective, each share of Common Stock, par value $5.00 per share, of FTC ("FTC Common Stock") shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into and become a right to receive 1.65 shares (the "Exchange Ratio") of Common Stock, par value $2.00 per share, of Keystone ("Keystone Common Stock"). No change will be made by reason of the Merger in the shares of Keystone Common Stock outstanding immediately prior to the Effective Time. (b) If after the date of this Agreement and prior to the Effective Time the number of outstanding shares of Keystone Common Stock or FTC Common Stock shall have been increased or decreased by reason of a dividend payable in shares of Common Stock or a split or combination of outstanding shares, or if pursuant to Section 24 of the Keystone Rights Agreement (as defined in the Reorganization Agreement) all Rights (as defined in the Keystone Rights Agreement) then outstanding (other than Rights which have become void pursuant to Section 7(f) of the Keystone Rights Agreement) shall have been exchanged for shares of Keystone Common Stock, then the Exchange Ratio shall be adjusted (a) in the case of any such event involving the Keystone Common Stock by multiplying the Exchange Ratio by a fraction the numerator of which shall be the number of shares of Keystone Common Stock issued and outstanding immediately after such event and the denominator of which shall be the number of shares of Keystone Common Stock issued and outstanding immediately prior to such event and (b) in the case of any such event involving the FTC Common Stock by multiplying the Exchange Ratio by a fraction the numerator of which shall be the number of shares of FTC Common Stock issued and outstanding immediately prior to such event and the denominator of which shall be the number of shares of FTC Common Stock issued and outstanding immediately after such event. The Exchange Ratio shall also be appropriately adjusted to reflect any capital reorganization involving the reclassification of the Keystone Common Stock or the FTC Common Stock subsequent to the date of this Agreement and prior to the Effective Time. Similar adjustments shall be made to the amount payable in lieu of fractional shares. 5. Surrender and Exchange of FTC Certificates. As promptly as practicable ------------------------------------------ after the Effective Time, Keystone shall cause to be sent to each person who immediately prior to the Effective Time was a holder of record of FTC Common Stock transmittal materials and instructions for surrendering certificates for FTC Common Stock ("Old Certificates") in exchange for a certificate or certificates for the number of whole shares of Keystone Common Stock to which such person is entitled under Section 4 hereof. No certificates for fractional shares of Keystone Common Stock shall be issued in connection with the Merger. In lieu thereof, Keystone shall issue to any holder of FTC Common Stock certificates otherwise entitled to a fractional share, upon surrender of such certificates in accordance with the instructions furnished by Keystone, a check for an amount of cash equal to the fraction of a share of Keystone Common Stock represented by the certificates so surrendered multiplied by the value of $26.50 for one whole share of Keystone Common Stock. If any dividend on Keystone Common Stock is declared after the Effective Time, the declaration shall include dividends on all whole shares of Keystone Common Stock into which shares of FTC Common Stock have been converted under this Agreement, but no former holder of record of FTC Common Stock shall be entitled to receive payment of any such dividend until surrender of the shareholder's Old Certificates shall have been effected in accordance with the instructions furnished by Keystone. Upon surrender for exchange of a shareholder's Old Certificates, such shareholder shall be entitled to receive A-2 from Keystone an amount equal to all such dividends (without interest thereon and less the amount of taxes, if any, which may have been imposed or paid thereon) declared, and for which the payment date has occurred, on the whole shares of Keystone Common Stock into which the shares represented by such Old Certificates have been converted. After the Effective Time, there shall be no transfer on the stock transfer books of FTC or Keystone of shares of FTC Common Stock. If Old Certificates are presented for transfer after the Effective Time, they shall be canceled and certificates representing whole shares of Keystone Common Stock (and a check in lieu of any fractional share) shall be issued in exchange therefor as provided herein. 6. Failure to Surrender Old Certificates. In the event that any Old ------------------------------------- Certificates have not been surrendered for exchange in accordance with Section 5 hereof on or before the second anniversary of the Effective Time, Keystone may at any time thereafter, with or without notice to the holders of record of such Old Certificates, sell for the accounts of any or all of such holders pursuant to Section 1532 of the Pennsylvania Business Corporation Law any or all of the shares of Keystone Common Stock which such holders are entitled to receive under Section 4 hereof (the "Unclaimed Shares"). Any such sale may be made by public or private sale or sale at any broker's board or on any securities exchange in such manner and at such times as Keystone shall determine. If in the opinion of counsel for Keystone it is necessary or desirable, any Unclaimed Shares may be registered for sale under the Securities Act of 1933 and applicable state laws. Keystone shall not be obligated to make any sale of Unclaimed Shares if it shall determine not to do so, even if notice of sale of the Unclaimed Shares has been given. The net proceeds of any such sale of Unclaimed Shares shall be held for the holders of the unsurrendered Old Certificates whose Unclaimed Shares have been sold, to be paid to them upon surrender of their Old Certificates. From and after any such sale, the sole right of the holders of the unsurrendered Old Certificates whose Unclaimed Shares have been sold shall be the right to collect the net sale proceeds held by Keystone for their respective accounts, and such holders shall not be entitled to receive any interest on such net sale proceeds held by Keystone. 7. Termination and Amendment. Notwithstanding prior approval by the ------------------------- shareholders of FTC, this Agreement shall be terminated and the Merger shall be abandoned in the event that prior to the Effective Time the Reorganization Agreement is terminated as provided therein. If there is such termination after the delivery of Articles of Merger to the Pennsylvania Department of State, the parties shall execute and file prior to the Effective Time with such Department a statement of termination pursuant to Section 1902 of the Pennsylvania Business Corporation Law. Notwithstanding prior approval by the shareholders of FTC or Keystone, this Agreement may be amended in any respect in the manner and subject only to the limitations set forth in Section 7.1 of the Reorganization Agreement. 8. Counterparts; Headings. This Agreement may be executed in several ---------------------- counterparts, and by the parties hereto on separate counterparts, each of which will constitute an original. The headings and captions contained herein are for reference purposes only and do not constitute a part hereof. A-3 9. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this Agreement as of the day and year first above written. [CORPORATE SEAL] Attest: FINANCIAL TRUST CORP /s/ Lauren L. Shutt By /s/ Ray L. Wolfe - ------------------------------------ --------------------------------- Lauren L. Shutt, Ray L. Wolfe, Chairman Secretary and Chief Executive Officer [CORPORATE SEAL] Attest: KEYSTONE FINANCIAL, INC. /s/ Ben G. Rooke By /s/ Carl L. Campbell - ------------------------------------ --------------------------------- Ben G. Rooke, Carl L. Campbell, President Secretary and Chief Executive Officer A-4 EX-4.1 3 RESTATED ARTICLES OF INCORPORATION EXHIBIT 4.1 RESTATED ARTICLES OF INCORPORATION OF KEYSTONE FINANCIAL, INC. (As Amended Through July 29, 1996) 1. Corporate Name. The name of the Corporation is Keystone Financial, Inc. 2. Registered Office. The location and post office address of the Corporation's registered office in this Commonwealth is One Keystone Plaza, North Front and Market Streets, Harrisburg, Pennsylvania 17101. 3. Purposes. The purpose or purposes for which the Corporation is incorporated are to engage in and do any lawful act concerning any or all lawful business for which corporations may be incorporated under the Pennsylvania Business Corporation Law. 4. Governing Statute. The Corporation is incorporated under the Pennsylvania Business Corporation Law. 5. Term Of Existence. The term for which the Corporation is to exist is perpetual. 6. Capital Stock. The aggregate number of shares which the Corporation shall have authority to issue is 83,000,000, of which 8,000,000 shares shall be Preferred Stock, par value $1.00 per share, issuable in one or more series, and 75,000,000 shares shall be Common Stock, par value $2.00 per share. The description of each such class of shares and a statement of the authority hereby vested in the Board of Directors of the Corporation to divide the Preferred Stock into series and to fix and determine the designations, preferences, voting rights, qualifications, privileges, limitations, options, conversion rights, restrictions and other special or relative rights to be granted to or imposed upon the shares of each class and series is as follows: A. Preferred Stock. The Board of Directors is hereby expressly authorized, at any time or from time to time, to divide any or all of the shares of the Preferred Stock into one or more series, and in the resolution or resolutions establishing a particular series, before issuance of any of the shares thereof, to fix and determine the number of shares and the designation of such series, so as to distinguish it from the shares of all other series and classes, and to fix and determine the preferences, voting rights, qualifications, privileges, limitations, options, conversion rights, restrictions and other special or relative rights of the Preferred Stock or of such series, to the fullest extent now or hereafter permitted by the laws of the Commonwealth of Pennsylvania, including, but not limited to, variations between different series in the following respects: (a) the distinctive designation of such series and the number of shares which shall constitute such series, which number may be increased or decreased (but not below the number of shares thereof then outstanding) from time to time by the Board of Directors; (b) the annual dividend rate for such series, and the date or dates from which dividends shall commence to accrue; (c) the price or prices at which, and the terms and conditions on which, the shares of such series may be made redeemable; (d) the purchase or sinking fund provisions, if any, for the purchase or redemption of shares of such series; (e) the preferential amount or amounts payable upon shares of such series in the event of the liquidation, dissolution or winding up of the Corporation; (f) the voting rights, if any, of shares of such series; (g) the terms and conditions, if any, upon which shares of such series may be converted and the class or classes or series of shares of the Corporation into which such shares may be converted; (h) the relative seniority, parity or junior rank of such series as to dividends or assets with respect to any other classes or series of stock then or thereafter to be issued; and (i) such other terms, qualifications, privileges, limitations, options, restrictions and special or relative rights and preferences, if any, of shares of such series as the Board of Directors may, at the time of such resolutions, lawfully fix and determine under the laws of the Commonwealth of Pennsylvania. Unless otherwise provided in a resolution establishing any particular series, the aggregate number of authorized shares of Preferred Stock may be increased by an amendment of the Articles approved solely by a majority vote of the outstanding shares of Common Stock (or solely with a lesser vote of the Common Stock, or solely by action of the Board of Directors, if permitted by law at any time). All shares of any one series shall be alike in every particular, except with respect to the accrual of dividends prior to date of issuance. B. Common Stock. Except for and subject to those rights expressly granted to holders of the Preferred Stock or any series thereof by resolution or resolutions adopted by the Board of Directors pursuant to paragraph A of this Article 6 and except as may be provided by the laws of the Commonwealth of Pennsylvania, holders of the Common Stock shall have exclusively all other rights of shareholders. All shares of Common Stock issued or to be issued shall be alike in every particular. 7. 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 Article 7 shall not apply to any action, suit or proceeding filed prior to January 27, 1987, nor to any breach of performance of duty or any failure of performance of duty by a director of the -2- Corporation occurring prior to January 27, 1987. The provisions of this Article shall be deemed to be a contract with each director of the Corporation who serves as such at any time while this Article is in effect, and each such director shall be deemed to be so serving in reliance on the provisions of this Article. Any amendment or repeal of this Article or adoption of any By-Law or other provision of the Articles of the Corporation which has the effect of increasing director liability shall operate prospectively only and shall not affect any action taken, or any failure to act, prior to the adoption of such amendment, repeal, By-Law or other provision. 8. Board Of Directors. 8.1. Number, Election, Etc. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors comprised as follows: (a) Number. The Board of Directors shall consist of such number of persons as may from time to time be fixed by the Board pursuant to a resolution adopted by a majority vote of the Disinterested Directors then in office, plus such number of additional directors as the holders of any class or series of stock having a preference over the Common Stock as to dividends or assets, voting separately as a class or series, shall have the right from time to time to elect. (b) Classes, Election and Terms. The directors elected by the holders of Voting Stock shall be classified in respect of the time for which they shall severally hold office by dividing them into three classes, 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 meeting. Each director shall hold office for the term for which elected and until his or her successor shall be elected and shall qualify. (c) Removal of Directors. Any director, any class of directors or the entire Board of Directors may be removed from office by shareholder vote at any time, without assigning any cause, but only if shareholders entitled to cast at least 75% of the votes which all shareholders would be entitled to cast at an annual election of directors or of such class of directors shall vote in favor of such removal; provided, however, that the shareholders shall have such power of removal without cause only if and so long as the general corporate law of the Corporation's state of incorporation specifically mandates such power. If such power of removal without cause is not mandated by statute, the shareholders may remove a director or directors from office at any time only for cause and only if, in addition to any vote required by any other provision of law, these Articles or the By-Laws of the Corporation, such removal is approved by the affirmative vote of at least a majority of the voting power of the outstanding shares of Voting Stock of the Corporation which are not beneficially owned by an Interested Shareholder. (d) Vacancies. Vacancies in the members of the Board of Directors elected by the holders of Voting Stock, including vacancies resulting from an increase in the number of directors, shall be filled only by a majority vote of the Disinterested Directors 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. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. -3- (e) Nominations of Director Candidates. Nominations for the election of directors may be made only by the Board of Directors or a committee appointed by the Board of Directors or by any holder of record of stock entitled to vote in the election of the directors to be elected; but a nomination may be made by a shareholder only if written notice of such nomination has been received by the Secretary of the Corporation not later than 120 days in advance of the meeting at which the election is to be held. Each such notice shall set forth: (1) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (2) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (3) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (4) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated by the Board of Directors; and (5) the consent of each nominee to serve as a director of the Corporation if so elected. Only candidates who have been nominated in accordance with this Section 8.1(e) shall be eligible for election by the shareholders as directors of the Corporation. 8.2. Exception For Preferred Stock. Whenever the holders of any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or assets shall have the right, voting separately as a class or series, to elect one or more directors of the Corporation or to take any other action, none of the provisions of Section 8.1 shall apply with respect to the director or directors elected or the action taken by the holders of such class or series. 8.3. Authority To Amend By-Laws. The Board of Directors may adopt, amend and repeal the By-Laws with respect to those matters which are not, by statute, reserved exclusively to the shareholders, provided that such power may be exercised only by a vote including a majority of the Disinterested Directors then in office. No By-Law may be adopted, amended or repealed by the shareholders unless, in addition to any other affirmative vote required by law, these Articles or otherwise, such action is approved by the affirmative votes of (a) the holders of at least 75% of the voting power of all then outstanding shares of Voting Stock, voting together as a single class, and (b) the holders of at least a majority of the voting power of the then outstanding shares of Voting Stock which are not beneficially owned by an Interested Shareholder, voting together as a single class; provided, however, that the additional affirmative votes required by this Section 8.3 shall not apply to any shareholder adoption, amendment or repeal of any By-Law provision if (a) such action is recommended and submitted to the shareholders for their consideration by the affirmative vote of a majority of the Disinterested Directors and (b) at the time of such recommendation the Disinterested Directors constitute at least a majority of the full Board of Directors, excluding any directors elected by the holders of any class or series of stock having a preference over the Common Stock as to dividends or assets. 9. Vote Required For Certain Transactions. 9.1. Special Vote For Certain Transactions. In addition to any affirmative vote required by law, these Articles or otherwise, and except as otherwise expressly provided in Section 9.2: (a) any merger, consolidation or share exchange of the Corporation or any Subsidiary with (1) any Interested Shareholder or with (2) any other person (whether or not itself an Interested Shareholder) which is, or after such merger, consolidation or share exchange would be, an Affiliate -4- or Associate of an Interested Shareholder or which does not include in its articles of incorporation the substance of the terms of this Article 9, in each case without regard to which person is the surviving person; (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition or security arrangement, investment, loan, advance, guarantee, agreement to purchase, agreement to pay, extension of credit, joint venture participation or other arrangement (in one transaction or a series of transactions) to, with or for the benefit of any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder involving any assets, securities or commitments of the Corporation or any Subsidiary having an aggregate Fair Market Value and/or involving aggregate commitments equal to 5% or more of Total Assets; (c) the issuance or transfer by the Corporation or any Subsidiary to any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary having an aggregate Fair Market Value equal to 5% or more of Total Assets; (d) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder; (e) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity securities or securities convertible into equity securities of the Corporation or any Subsidiary which is directly or indirectly beneficially owned by any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder; or (f) any other transaction or series of transactions similar in purpose or effect to, or any agreement, contract or other arrangement providing for, any one or more of the transactions specified in the foregoing subparagraphs (a) through (e); shall require the affirmative votes of (i) the holders of at least 75% of the voting power of all then outstanding shares of Voting Stock, voting together as a single class, and (ii) the holders of at least a majority of the voting power of the then outstanding shares of Voting Stock which are not beneficially owned by such Interested Shareholder, voting together as a single class. Such affirmative votes shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. 9.2. Exception To Special Vote Requirements. The provisions of Section 9.1 shall not be applicable to any transaction, and such transaction shall require only such affirmative vote (if any) as is required by law, any other provision of these Articles, any agreement with any national securities exchange or otherwise, if the transaction shall have been approved by a majority of the Disinterested Directors. 10. Definitions; Interpretation; Amendments. 10.1. Definitions. For The Purposes Of Articles 8, 9, 10 And 11 Of These articles: -5- (a) A "person" shall mean any individual, firm, corporation, partnership, joint venture, trust or other entity and shall include any group comprised of any person and any other person with whom such person or any Affiliate or Associate of such person has any agreement, arrangement or understanding, directly or indirectly, for the purpose of acquiring, holding, voting or disposing of Voting Stock. As used herein, the pronouns "which", "that" and "it" in relation to persons that are individuals shall be construed to mean "who" or "whom", "he" or "she" and "him" or "her", as appropriate. (b) "Interested Shareholder" at any particular time shall mean any person (other than the Corporation or a Subsidiary, or an employee benefit plan of the Corporation or a Subsidiary, or a trustee or fiduciary of any such plan when acting in such capacity) which: (1) is at such time the beneficial owner, directly or indirectly, of more than 20% of the voting power of the outstanding Voting Stock; (2) is at such time an Affiliate of the Corporation and at any time within the two-year period immediately prior to such time was the beneficial owner, directly or indirectly, of more than 20% of the voting power of the then outstanding Voting Stock; or (3) is at such time an assignee of or has otherwise succeeded to the beneficial ownership of any shares of Voting Stock which were at any time within the two-year period immediately prior to such time beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. With respect to any particular transaction, the term "Interested Shareholder" means any Interested Shareholder involved in such transaction, any Affiliate or Associate of such Interested Shareholder and any other member of a group acting in concert with such Interested Shareholder. (c) A person shall be a "beneficial owner" of any shares of Voting Stock: (1) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; (2) which such person or any of its Affiliates or Associates has (A) the right to acquire (whether or not such right is exercisable immediately) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, revocation of a trust, or otherwise, or (B) the right to vote, or to direct the voting of, pursuant to any agreement, arrangement or understanding; or (3) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. For the purposes of determining whether a person is an Interested Shareholder pursuant to paragraph (b) of this Section 10.1, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned by an Interested Shareholder through application of this paragraph (c) but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or -6- understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise. (d) An "Affiliate" of a specified person shall mean any person which, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the person specified. (e) An "Associate" of a specified person shall mean (1) any director, officer or partner of, or any beneficial owner, directly or indirectly, of 5% or more of any class of equity security of, such person or any of its Affiliates, (2) any corporation or organization (other than the Corporation or a Subsidiary) of which such person is a director, officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities, (3) any trust or other estate (other than an employee benefit plan of the Corporation or a Subsidiary) in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity, (4) any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the Corporation or any of its parents or Subsidiaries and (5) any investment company registered under the Investment Company Act of 1940 for which such person or any Affiliate or Associate of such person serves as investment advisor. (f) "Subsidiary" shall mean any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation, as well as any Affiliate of the Corporation which is controlled by the Corporation; provided, however, that for purposes of the definition of Interested Shareholder set forth in paragraph (b) of this Section 10.1, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. (g) "Disinterested Director" shall mean a director of the Corporation who is not an Interested Shareholder or an Affiliate, Associate or representative of an Interested Shareholder and either (1) was a director of the Corporation immediately prior to the time the Interested Shareholder became an Interested Shareholder or (2) is a successor to a Disinterested Director and is recommended or elected to succeed a Disinterested Director by a majority of the then Disinterested Directors. Whenever the holders of any class or series of stock having a preference over the Common Stock as to dividends or assets shall have the right, voting separately as a class or series, to elect one or more directors of the Corporation, the term "Disinterested Director" shall not include any director elected by the holders of such class or series. As used with respect to any particular transaction in Article 9 or with respect to a determination or interpretation as to such transaction under Section 10.1(h) or Section 10.2, the term "Disinterested Director" shall include all directors who are Disinterested Directors with respect to the Interested Shareholders involved in such transaction. In all other cases, unless the context otherwise clearly requires, the term "Disinterested Director" shall mean only those directors who are Disinterested Directors with respect to all persons who are then Interested Shareholders. (h) "Fair Market Value" shall mean (1) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the consolidated transactions reporting system, or, if such stock is not quoted on such system, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing sale price or, if none, the highest closing bid quotation with respect to a share of such stock -7- during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotation System or any similar system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined in good faith by a majority vote of the Disinterested Directors; and (2) in the case of property other than stock or cash, the fair market value of such property on the date in question as determined in good faith by a majority vote of the Disinterested Directors or by a qualified appraiser retained by them for such purpose. (i) "Voting Stock" shall mean capital stock of the Corporation entitled to vote generally in an annual election of directors of the Corporation. (j) "Total Assets" shall mean the consolidated total assets of the Corporation and its consolidated subsidiaries as of the close of the most recent fiscal quarter ended on or prior to the date of the first public announcement of the transaction in question, as shown on the consolidated balance sheet published by the Corporation for such quarter. (k) "Substantial Part" shall mean more than twenty percent of the total consolidated assets of the Corporation, as shown on its consolidated balance sheet as of the end of the most recent fiscal year. 10.2. Powers Of The Disinterested Directors. The Disinterested Directors, by a majority vote, are authorized to interpret all the terms and provisions of these Articles and to determine, on the basis of information known to them after reasonable inquiry, any fact necessary to determine compliance with any such term or provision including, without limitation (a) whether a person is an Interested Shareholder, (b) the number of shares of Voting Stock beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another person, (d) whether any articles of incorporation provision required by Section 9.1(a) complies with such Section and is valid and enforceable and (e) whether the assets which are the subject of any transaction referred to in Section 9.1(b) have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any transaction referred to in Section 9.1(c) has, an aggregate Fair Market Value equal to 5% or more of Total Assets. Any such interpretation or determination made in good faith shall be binding and conclusive for all purposes of these Articles. 10.3. Amendment, Repeal, Etc. In addition to any affirmative vote required by law, these Articles or otherwise, any amendment, alteration, change or repeal of any provision of these Articles, or the adoption of any new provision thereof, shall require the affirmative votes of (a) the holders of at least 75% of the voting power of all then outstanding shares of Voting Stock, voting together as a single class, and (b) the holders of at least a majority of the voting power of the then outstanding shares of Voting Stock which are not beneficially owned by any Interested Shareholder, voting together as a single class; provided, however, that the additional affirmative votes required by this Section 10.3 shall not apply to any amendment, alteration, change, repeal or provision if (a) it is recommended and submitted to the shareholders for their consideration by the affirmative vote of a majority of the Disinterested Directors and (b) at the time of such recommendation the Disinterested Directors constitute at least a majority of the full Board of Directors, excluding any directors elected by the holders of any class or series of stock having a preference over the Common Stock as to dividends or assets. 11. Consideration Of Other Factors. The Board of Directors of the Corporation, when evaluating any proposal: -8- (a) involving a tender or exchange offer for any security of the Corporation; (b) to merge with or consolidate the Corporation with another corporation or person; or (c) to purchase or otherwise acquire all or a Substantial Part of the properties or assets of the Corporation, shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation and its shareholders, give due consideration to all relevant factors, including without limitation, the economic effect, both immediate and long-term, upon the Corporation's shareholders, including shareholders, if any, not to participate in the transaction, the social and economic effects on the employees, suppliers and customers of, and others dealing with, the Corporation or any of its subsidiaries and on the communities in which the Corporation and its subsidiaries operate or are located. The definitions set forth in Section 10.1 of Article 10 of these Articles shall apply to this Article 11. 12. No Cumulative Voting. The shareholders shall not have the right of cumulative voting. -9- EX-5.1 4 CONSENT OF RSS & M EXHIBIT 5.1 REED SMITH SHAW & MCCLAY 435 SIXTH AVENUE MAILING ADDRESS: HARRISBURG, PA P.O. BOX 2009 PITTSBURGH, PENNSYLVANIA 15219-1886 McLEAN, VA PITTSBURGH, PA 15230-2009 NEW YORK, NY 412-288-3131 NEWARK, NJ WRITER'S DIRECT NUMBERS: PHILADELPHIA, PA FAX 412-288-3063 PRINCETON, NJ WASHINGTON, DC
January 23, 1997 Keystone Financial, Inc. One Keystone Plaza Front and Market Streets P.O. Box 3660 Harrisburg, Pennsylvania 17105-3660 Re: Keystone Financial, Inc. Registration Statement on Form S-4 re Shares of Common Stock Issuable in Mergers with (1) Financial Trust Corp and (2) First Financial Corporation of Western Maryland ------------------------------------------------------------------ Gentlemen: We have acted as counsel to Keystone Financial, Inc. ("Keystone") in connection with: 1. The Agreement and Plan of Reorganization and the related Agreement and Plan of Merger, each dated as of December 19, 1996 (collectively, the "FTC Plan of Merger"), between Keystone and Financial Trust Corp, a Pennsylvania corporation ("FTC"). The FTC Plan of Merger provides for the merger of FTC with and into Keystone (the "FTC Merger"). At the time the FTC Merger becomes effective, each issued and outstanding share of common stock, par value $5.00 per share, of FTC ("FTC Common Stock") will be converted into the right to receive 1.65 shares of common stock, par value $2.00 per share, of Keystone ("Keystone Common Stock"). 2. The Agreement and Plan of Merger dated as of November 26, 1996 (the "FFWM Plan of Merger") between Keystone and First Financial Corporation of Western Maryland, a Delaware corporation ("FFWM"). The FFWM Plan of Merger provides for the merger of FFWM with and into Keystone (the "FFWM Merger"). At the time the FFWM Merger becomes effective, each issued and outstanding share of common stock, par value $1.00 per share, of FFWM ("FFWM Common Stock") (other than shares as to which the holders exercise dissenters' rights) will be converted into the right to receive either (1) 1.29 shares of Keystone Common Stock or (2) cash in the amount provided in the FFWM Plan of Merger, as elected by the holder thereof or as otherwise determined as provided in the FFWM Plan of Merger. We are also acting as counsel to Keystone in connection with the Registration Statement on Form S-4 (the "Registration Statement") to be filed by Keystone with the Securities and Exchange Commission for the purpose of registering under the Securities Act of 1933, as amended, the shares of Keystone Common Stock into which outstanding FTC and FFWM Common Stock may be converted in the Mergers. This opinion is being furnished to you for the purpose of being filed as an Exhibit to the Registration Statement. In connection with this opinion we have examined, among other things: (1) executed copies of the FTC Plan of Merger and of the FFWM Plan of Merger; Reed Smith Shaw & McClay Keystone Financial, Inc. -2- January 23, 1997 (2) a copy certified to our satisfaction of the Restated Articles of Incorporation of Keystone as in effect on the date hereof; (3) copies certified to our satisfaction of resolutions adopted by the Board of Directors of Keystone on November 21 and December 16, 1996 and on January 23, 1997, including resolutions approving the FTC and FFWM Plans of Merger; and (4) such other documents, corporate proceedings, statutes and decisions as we considered necessary to enable us to furnish this opinion. We have assumed for the purposes of this opinion that: (1) the FTC Plan of Merger has been duly and validly authorized, executed and delivered by FTC; (2) the FTC Merger will be consummated in accordance with the terms of the FTC Plan of Merger; (3) the FFWM Plan of Merger has been duly and validly authorized, executed and delivered by FFWM; and (4) the FFWM Merger will be consummated in accordance with the terms of the FFWM Plan of Merger. Based upon the foregoing, we are pleased to advise you that, in our opinion: (1) the shares of Keystone Common Stock into which the outstanding FTC Common Stock will be converted in the FTC Merger will, at the time such Merger becomes effective, be duly authorized, validly issued, fully paid and nonassessable shares of Keystone Common Stock; and (2) the shares of Keystone Common Stock into which outstanding FFWM Common Stock will be converted in the FFWM Merger will, at the time such Merger becomes effective, be duly authorized, validly issued, fully paid and nonassessable shares of Keystone Common Stock. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the reference to us under the caption "Legal Opinions" in the Joint Proxy Statement/Prospectus forming a part of the Registration Statement. Yours truly, /s/ Reed Smith Shaw & McClay REED SMITH SHAW & McCLAY EX-23.1 5 CONSENT OF ERNST & YOUNG EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-4) and the related Joint Proxy Statement/Prospectus of Keystone Financial, Inc. for the registration of 15,903,416 shares of its common stock and to the incorporation by reference therein of our report dated January 31, 1996 with respect to the consolidated financial statements of Keystone Financial, Inc. and subsidiaries included in its Annual Report (Form 10-K) for the year ended December 31, 1995, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP ERNST & YOUNG LLP Pittsburgh, Pennsylvania January 22, 1997 EX-23.2 6 CONSENT OF ERNST & YOUNG EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-4) and the related Joint Proxy Statement/Prospectus of Keystone Financial, Inc. for the registration of 15,903,416 shares of its common stock and to the incorporation by reference therein of our report dated March 1, 1996, with respect to the consolidated financial statements of Financial Trust Corp and subsidiaries included in its Annual Report (Form 10-K) for the year ended December 31, 1995, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP ERNST & YOUNG LLP Harrisburg, Pennsylvania January 21, 1997 EX-23.3 7 CONSENT OF KPMG PEAT MARWICK EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in this Registration Statement on Form S-4 of Keystone Financial, Inc. and the related Joint Proxy Statement/Prospectus of our report dated August 1, 1996, with respect to the consolidated financial statements of First Financial Corporation of Western Maryland and subsidiaries as of June 30, 1996 and 1995 and for each of the years in the three-year period ended June 30, 1996, which report is incorporated by reference in the Annual Report on Form 10-K filed by First Financial Corporation of Western Maryland for the year ended June 30, 1996, and to the reference to our firm under the heading "Experts" in the Registration Statement and the related Joint Proxy Statement/Prospectus. Our report refers to a change in the method of accounting for income taxes during 1994 and for loan impairment and mortgage servicing rights during 1996. /s/ KPMG Peat Marwick LLP KPMG PEAT MARWICK LLP Pittsburgh, Pennsylvania January 21, 1997 EX-23.5 8 CONSENT OF PERSON TO BECOME DIRECTOR EXHIBIT 23.5 CONSENT OF PERSON NAMED AS ABOUT TO BECOME A DIRECTOR The undersigned hereby consents to the references to him as a prospective director of the registrant, Keystone Financial, Inc., in the Joint Proxy Statement/ Prospectus forming a part of this Registration Statement on Form S-4. /s/ Ray L. Wolfe January 22, 1997 - ------------------ Ray L. Wolfe EX-23.9 9 CONSENT OF COOPERS & LYBRAND EXHIBIT 23.9 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in this Registration Statement on Form S-4 and the related Joint Proxy Statement/Prospectus of Keystone Financial, Inc. of our report dated January 14, 1994, except for Note 13 as to which the date is January 18, 1994, on our audits of the consolidated financial statements of The Frankford Corporation and subsidiaries for the year ended December 31, 1993, which report is included in the Annual Report on Form 10-K of Keystone Financial, Inc. for the year ended December 31, 1995. /s/ Coopers & Lybrand, L.L.P. COOPERS & LYBRAND L.L.P. Philadelphia, Pennsylvania January 14, 1997 EX-23.10 10 CONSENT OF DELOITTE & TOUCHE EXHIBIT 23.10 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Registration Statement of Keystone Financial, Inc. on Form S-4 and the related Joint Proxy Statement/Prospectus of our report with respect to the consolidated financial statements of Elmwood Bancorp, Inc. and subsidiary for the year ended December 31, 1993, dated January 24, 1994, appearing in the Annual Report on Form 10-K of Keystone Financial, Inc. for the year ended December 31, 1995. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania January 22, 1997 EX-23.11 11 CONSENT OF KPMG PEAT MARWICK EXHIBIT 23.11 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in this Registration Statement on Form S-4 of Keystone Financial, Inc. and the related Joint Proxy Statement/Prospectus of our report dated January 28, 1994, with respect to the consolidated financial statements of WM Bancorp and subsidiaries for the year ended December 31, 1993, which report is included in the Annual Report on Form 10-K filed by Keystone Financial, Inc. for the year ended December 31, 1995, and to the reference to our firm under the heading "Experts" in the Registration Statement and the related Joint Proxy Statement/Prospectus. Our report refers to a change in the method of accounting for income taxes and certain investment securities during 1993. /s/ KPMG Peat Marwick LLP KPMG PEAT MARWICK LLP Pittsburgh, Pennsylvania January 21, 1997 EX-23.12 12 CONSENT OF SMITH ELLIOTT KEARNS & CO. EXHIBIT 23.12 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-4) and the related Joint Proxy Statement/Prospectus of Keystone Financial, Inc. for the registration of 15,906,416 shares of its common stock and to the incorporation by reference of our report dated January 13, 1995 with respect to the financial statements of Washington County National Bank for the two years ended December 31, 1994 (not presented separately herein) which report is incorporated by reference in the Annual Report on Form 10-K of Financial Trust Corp for the year ended December 31, 1995, filed with the Securities and Exchange Commission. /s/ Smith Elliott Kearns & Company, LLC SMITH ELLIOTT KEARNS & COMPANY, LLC Hagerstown, Maryland January 21, 1997 EX-99.1 13 LETTER TO SHAREHOLDERS EXHIBIT 99.1 [Preliminary Copy] [LOGO] February ______, 1997 Dear Shareholder: You are cordially invited to attend a Special Meeting of Shareholders of Keystone Financial, Inc., to be held on Monday, March 17, 1997, at 9:00 a.m., local time, at the Wildwood Conference Center, Harrisburg Area Community College, One HACC Drive, Harrisburg, Pennsylvania. A Notice and Proxy Statement for the meeting follow, and a proxy card and return envelope are enclosed. At this Special Meeting, you will be asked to vote on a proposed merger with Financial Trust Corp, Carlisle, Pennsylvania ("FTC"). As a result of this merger, FTC's bank and nonbank subsidiaries will become subsidiaries of the Corporation, and the FTC shareholders will become Corporation shareholders. Acquisition of FTC's subsidiary banks will increase our growing presence in the south central Pennsylvania and western Maryland banking markets. The accompanying Proxy Statement also describes a proposed merger in which First Federal Savings Bank of Western Maryland will be merged into American Trust Bank, N.A., a Keystone subsidiary bank. YOUR BOARD OF DIRECTORS BELIEVES THAT THE PROPOSED MERGER WITH FTC DESCRIBED IN THE PROXY STATEMENT IS IN THE BEST INTEREST OF ALL SHAREHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL OF THIS MERGER. Your participation as a shareholder in the affairs of the Corporation is encouraged. It is important that your stock be represented at the Meeting, whether or not you are personally able to be present. Accordingly, PLEASE PROMPTLY SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE POSTAGE PAID ENVELOPE PROVIDED FOR YOUR CONVENIENCE. You are urged to do so even if you plan to attend the meeting. Your prompt cooperation and support will be greatly appreciated. The Corporation's 1997 Annual Meeting of Shareholders will be held on May 22, 1997. A Notice and Proxy Statement for that Meeting, along with the Corporation's 1996 Annual Report, will be sent to you in late March. Sincerely, Carl L. Campbell President and Chief Executive Officer EX-99.2 14 NOTICE OF SPECIAL MEETING EXHIBIT 99.2 [Preliminary Copy] KEYSTONE FINANCIAL, INC. [LOGO] One Keystone Plaza Front and Market Streets P.O. Box 3660 Harrisburg, Pennsylvania 17105-3660 -------------------- NOTICE OF SPECIAL MEETING OF SHAREHOLDERS To Be Held on March 17, 1997 -------------------- TO THE SHAREHOLDERS: NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Keystone Financial, Inc. (the "Corporation") will be held on Monday, March 17, 1997 at 9:00 a.m., local time, at the Wildwood Conference Center, Harrisburg Area Community College, One HACC Drive, Harrisburg, Pennsylvania, for the purpose of considering and acting upon the following: 1. Approval of the Agreement and Plan of Reorganization and the Agreement and Plan of Merger, each dated as of December 19, 1996, between the Corporation and Financial Trust Corp, which provide for the merger into the Corporation of Financial Trust Corp and are described in the accompanying Joint Proxy Statement/Prospectus; 2. Such other matters as may properly come before the Special Meeting or any adjournments thereof. Only shareholders of record at the close of business on February 3, 1997 are entitled to notice of and to vote at the Special Meeting. ALL SHAREHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY, WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING. If you attend the meeting you may, if you wish, withdraw your proxy and vote your shares in person. By Order of the Board of Directors Ben G. Rooke, Secretary February ______, 1997 EX-99.3 15 PROXY CARD (KEYSTONE) EXHIBIT 99.3 [Preliminary Copy] KEYSTONE FINANCIAL, INC. PROXY FOR SPECIAL MEETING OF SHAREHOLDERS ----------------------------------------- This Proxy is Solicited on Behalf of the Board of Directors The undersigned hereby appoints Paul I. Detwiler, Jr., Max A. Messenger and F. Dale Schoeneman, or any of them, as proxies, with full power of substitution, to vote all shares of Common Stock of Keystone Financial, Inc. which the undersigned is entitled to vote at the Special Meeting of Shareholders to be held March 17, 1997 and at any adjournments thereof, as follows: The Board of Directors recommends a vote "FOR" Item 1. 1. Approval of the Agreement and Plan of Reorganization and the Agreement and Plan of Merger dated as of December 19, 1996 between the Corporation and Financial Trust Corp, which provide for the merger of Financial Trust Corp into the Corporation and the conversion of each outstanding share of the Financial Trust Corp's Common Stock into 1.65 shares of the Corporation's Common Stock, as described in the Joint Proxy Statement/Prospectus........ FOR [_] AGAINST [_] ABSTAIN [_] 2. To vote in their discretion on such other matters as may properly come before the Special Meeting or any adjournments thereof. (continued) This proxy, when properly executed, will be voted in the manner directed herein. If no direction is made, this proxy will be voted FOR Item 1. Dated: , 1997 ----------------------------------- ----------------------------------------------- Signature ----------------------------------------------- Signature Please sign exactly as name appears hereon. For joint accounts, each joint owner should sign. When signing as attorney, executor, administrator, trustee or guardian, please give your full title as such. If a corporation, please sign the full corporate name by President or other authorized officer, giving your full title as such. If a partnership, please sign in the partnership name by authorized person, giving your full title as such. PLEASE MARK, DATE, EXECUTE AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED ENVELOPE. EX-99.4 16 LETTER TO SHAREHOLDER EXHIBIT 99.4 [Preliminary Copy] [LOGO] February ______, 1997 Dear Shareholder: You are cordially invited to attend a Special Meeting of Shareholders of Financial Trust Corp to be held on Tuesday, March 18, 1997, at 1:00 p.m., local time, at 1415 Ritner Highway, Carlisle, Pennsylvania. A Notice and Proxy Statement for the meeting follow, and a proxy card and return envelope are enclosed. At this Special Meeting you will be asked to vote on a proposed merger with Keystone Financial, Inc., Harrisburg, Pennsylvania ("Keystone"). As a result of this merger, the Corporation will be merged with and into Keystone. The merger will result in the conversion of each outstanding share of the Corporation's Common Stock into 1.65 shares of Keystone Common Stock. Your Board of Directors believes that this merger is in your best interest and that of our community. YOUR BOARD OF DIRECTORS BELIEVES THAT THE PROPOSED MERGER WITH KEYSTONE DESCRIBED IN THE PROXY STATEMENT IS IN THE BEST INTEREST OF ALL SHAREHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL OF THIS MERGER. Your participation as a shareholder in the affairs of the Corporation is encouraged. It is important that your stock be represented at the Special Meeting, whether or not you are personally able to be present. Accordingly, PLEASE PROMPTLY SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE POSTAGE PAID ENVELOPE PROVIDED FOR YOUR CONVENIENCE. You are urged to do so even if you plan to attend the meeting. Your prompt cooperation and support will be greatly appreciated. Sincerely, Ray L. Wolfe Chairman and Chief Executive Officer EX-99.5 17 NOTICE OF SPECIAL MEETING EXHIBIT 99.5 [Preliminary Copy] FINANCIAL TRUST CORP 1415 Ritner Highway Carlisle, Pennsylvania 17013 -------------------- NOTICE OF SPECIAL MEETING OF SHAREHOLDERS To Be Held on March 18, 1997 -------------------- TO THE SHAREHOLDERS: NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Financial Trust Corp (the "Corporation") will be held on Tuesday, March 18, 1997 at 1:00 p.m., local time, at 1415 Ritner Highway, Carlisle, Pennsylvania, for the purpose of considering and acting upon the following: 1. Approval of the Agreement and Plan of Reorganization and the Agreement and Plan of Merger, each dated as of December 19, 1996, between the Corporation and Keystone Financial, Inc., a Pennsylvania corporation ("Keystone"), which provide for the merger of the Corporation into Keystone and the conversion of each outstanding share of the Corporation's Common Stock into 1.65 shares of Keystone Common Stock, as described in the accompanying Joint Proxy Statement/Prospectus; 2. Such other matters as may properly come before the Special Meeting or any adjournments thereof. Only shareholders of record at the close of business on January 31, 1997 are entitled to notice of and to vote at the Special Meeting. ALL SHAREHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING. If you attend the Special Meeting you may, if you wish, withdraw your proxy and vote your shares in person. By Order of the Board of Directors Lauren L. Shutt, Secretary February ______, 1997 EX-99.6 18 PROXY CARD (FINANCIAL TRUST) EXHIBIT 99.6 [Preliminary Copy] FINANCIAL TRUST CORP PROXY FOR SPECIAL MEETING OF SHAREHOLDERS ----------------------------------------- This Proxy is Solicited on Behalf of the Board of Directors The undersigned hereby appoints Robert W. Chilton and Robert M. Frey, Esq., or either of them, as proxies, with full power of substitution, to vote all shares of Common Stock of Financial Trust Corp which the undersigned is entitled to vote at the Special Meeting of Shareholders to be held March 18, 1997 and at any adjournments thereof, as follows: The Board of Directors recommends a vote "FOR" Item 1. 1. Approval of the Agreement and Plan of Reorganization and the Agreement and Plan of Merger dated as of December 19, 1996 between the Corporation and Keystone Financial, Inc., which provide for the merger of the Corporation into Keystone and the conversion of each outstanding share of the Corporation's Common Stock into 1.65 shares of Keystone Common Stock, as described in the Joint Proxy Statement/Prospectus ....................... FOR [_] AGAINST [_] ABSTAIN [_] 2. To vote in their discretion on such other matters as may properly come before the Special Meeting or any adjournments thereof. (continued) This proxy, when properly executed, will be voted in the manner directed herein. If no direction is made, this proxy will be voted FOR Item 1. Dated: , 1997 ------------------------------------ ------------------------------------------------ Signature ------------------------------------------------ Signature Please sign exactly as name appears hereon. For joint accounts, each joint owner should sign. When signing as attorney, executor, administrator, trustee or guardian, please give your full title as such. If a corporation, please sign the full corporate name by President or other authorized officer, giving your full title as such. If a partnership, please sign in the partnership name by authorized person, giving your full title as such. PLEASE MARK, DATE, EXECUTE AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED ENVELOPE. EX-99.7 19 INVESTMENT AGREEMENT EXHIBIT 99.7 CONFORMED COPY INVESTMENT AGREEMENT -------------------- THIS AGREEMENT dated as of December 19, 1996 (the "Agreement") between --------- KEYSTONE FINANCIAL, INC. ("Keystone") and FINANCIAL TRUST CORP (the -------- "Corporation"), ----------- W I T N E S S E T H: ------------------- WHEREAS, Keystone and the Corporation have, simultaneously with executing this Agreement, entered into an Agreement and Plan of Reorganization and an Agreement and Plan of Merger dated as of the date hereof (collectively, the "Plan"); and ---- WHEREAS, as a condition to Keystone's entry into the Plan and in consideration of such entry, the Corporation has agreed to issue to Keystone, on the terms and conditions set forth herein, warrants entitling Keystone to purchase up to an aggregate of 2,113,706 shares (the "Shares") of the ------ Corporation's common stock, par value $5.00 per share (the "Common Stock"); ------------ NOW, THEREFORE, in consideration of the execution of the Plan and the agreements herein contained, Keystone and the Corporation, each intending to be legally bound, agree as follows: 1. Concurrently with the execution of the Plan and this Agreement, the Corporation shall issue to Keystone a warrant or warrants in the form of Attachment A hereto (the "Warrant", which term as used herein shall include any ------- warrants issued upon transfer or exchange of the original Warrant or pursuant to Paragraph 8 of this Agreement) to purchase up to 2,113,706 Shares of the Common Stock. Each Warrant shall be exercisable at a price per Share of $43.725, subject to adjustment as therein provided (the "Exercise Price"). So long as the -------------- Warrant is outstanding and unexercised, the Corporation shall at all times maintain and reserve, free from preemptive rights, such number of authorized but unissued or treasury shares of Common Stock as may be necessary so that the Warrant may be exercised without additional authorization of Common Stock after giving effect to all other options, warrants, convertible securities and other rights to acquire shares of Common Stock at the time outstanding. The Corporation represents and warrants that it has duly authorized the issuance of the Shares upon exercise of the Warrant and covenants that the Shares issued upon exercise of the Warrant shall be duly authorized, validly issued and fully paid and nonassessable and subject to no preemptive rights. The Warrant and the Shares are hereinafter collectively referred to, from time to time, as the "Securities". ---------- So long as the Warrant is owned by Keystone, in no event shall Keystone exercise the Warrant for a number of shares of Common Stock, which when added to the number of shares of Common Stock owned or controlled by Keystone (otherwise than in a fiduciary capacity) would result in Keystone owning or controlling (otherwise than in a fiduciary capacity) more than 19.9% of the shares of Common Stock issued and outstanding immediately after giving effect to such exercise. 2. Subject to the terms and conditions hereof, Keystone may exercise or sell the Warrant, in whole or in part, upon: (i) a willful breach of the Plan by the Corporation which would permit termination of the Plan by Keystone; (ii) the failure of the Corporation's shareholders to approve the Plan at a meeting called for such purpose after the announcement by any person (other than Keystone or any of its affiliates) of a bona fide offer or proposal to acquire 10% or more of the Common Stock, or to acquire, merge or consolidate with the Corporation or any FTC Subsidiary, as such term is defined the Plan (hereinafter called a "Corporation Subsidiary"), or to purchase or acquire all or substantially all of the assets of the Corporation or any Corporation Subsidiary; (iii) the acquisition by any person (other than Keystone or any of its affiliates) after the date of this Agreement of beneficial ownership of 1% or more of the outstanding Common Stock if following such acquisition such person would beneficially own 10% or more of the Common Stock, in each case exclusive of shares of Common Stock sold directly or indirectly to such person by Keystone or any of its affiliates; (iv) any person (other than Keystone or any of its affiliates) shall have commenced a bona fide tender or exchange offer, or shall have filed an application with an appropriate bank regulatory authority with respect to a publicly announced offer, to purchase or acquire securities of the Corporation such that, upon consummation of such offer, such person would own, control or have the right to acquire 10% or more of the Common Stock (before giving effect to any exercise of the Warrant); or (v) the Corporation or any Corporation Subsidiary shall have entered into an agreement or other understanding with a person (other than Keystone or any of its affiliates) for such person to acquire, merge or consolidate with the Corporation or any Corporation Subsidiary or to purchase or acquire all or substantially all of the assets of the Corporation or any Corporation Subsidiary. As used in this Paragraph 2, "person" and "beneficial ownership" shall have the same meanings as in the Warrant. Notwithstanding the foregoing, the Corporation shall not be obligated to issue Shares upon exercise of the Warrant (i) in the absence of any required governmental or regulatory approval or consent necessary for the Corporation to issue the Shares or for Keystone to exercise the Warrant or prior to the expiration or termination of any waiting period required by law or (ii) so long as any injunction or other order, decree or ruling issued by any federal or state court of competent jurisdiction is in effect which prohibits the sale or delivery of the Shares. Keystone's right to exercise the Warrant shall terminate and be of no further effect, except as to notices of exercise given prior thereto, upon termination of the Warrant as provided in Paragraph 10 thereof. Any sale of the Warrant, in whole or in part, or any of the Shares by Keystone, other than a registered public offering pursuant to Paragraph 3 hereof or a sale to a majority-owned subsidiary of Keystone, shall be subject to the right of first refusal of the Corporation (or any assignee or assignees of the Corporation the identity of whom or which prior to the date thereof has been given to Keystone) to purchase all, but not less than all, of the portion of the Warrant or such Shares covered by Keystone's notice of its intention to make such sale at a price equal to the written offer price which Keystone receives from a third party (other than a majority-owned subsidiary of Keystone) and intends to accept. The right of first refusal shall terminate 15 days after notice of Keystone's intention to sell has been delivered to the Corporation. If an offer is made for a consideration which in whole or in part consists of other than cash, the value of the noncash portion of the consideration shall be determined by a recognized investment banking firm selected jointly by Keystone and the Corporation, and such determination shall in no event be made later than the fifth day after notice of Keystone's intention to sell has been delivered to the Corporation. In the event of the failure or refusal of the Corporation to purchase the portion of the Warrant or all the Shares covered by Keystone's notice of intention to sell, Keystone may, within 30 days from the date of such notice, unless additional time is needed to give notification to or to obtain approval from any governmental or regulatory authority and, if so required, within 30 days after the date on which the required notification period has expired or been terminated or such approval has been obtained and any requisite waiting period with respect thereto has passed, sell all, but not less than all, of the portion of the Warrant or such Shares covered by such notice to such proposed transferee at no less than the price specified and on terms no more favorable to the buyer than those set forth in the notice. 3. If, at any time after the Warrant may be exercised or sold and on or before June 30, 1999, the Corporation shall receive a written request therefor from Keystone, the Corporation shall prepare, file and keep current a shelf registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering the Warrant and/or the Shares, and shall use its ---------- best efforts to cause such registration statement to become effective and remain current for a period of not more than 245 days. Without the written consent of Keystone, neither the Corporation nor any other holder of securities of the Corporation -2- (other than any other holder who as of the date hereof has contractual right to do so) may include securities in such registration statement. The Corporation shall not be obligated to make effective more than one registration statement pursuant to this Section 3. 4. If and whenever the Corporation is required by the provisions of Paragraph 3 hereof to effect the registration of any of the Securities under the Securities Act, the Corporation will: (a) prepare and file with the Securities and Exchange Commission (the "SEC") such amendments to such registration statement and supplements to --- the prospectus contained therein as may be necessary to keep such registration statement current for a period of not more than 245 days; (b) furnish to Keystone and to Keystone's underwriters of the Securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as Keystone or such underwriters may reasonably request in order to facilitate the public offering of the Securities; (c) use its best efforts to register or qualify the Securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as Keystone or such underwriters may reasonably request; provided that the Corporation shall not be required by virtue hereof to submit to jurisdiction or to furnish a general consent to service of process in any state; (d) notify Keystone, promptly after the Corporation shall receive notice thereof, of the time when such registration statement has become effective or any supplement or amendment to any prospectus forming a part of such registration statement has been filed; (e) notify Keystone promptly of any request by the SEC for the amending or supplementing of such registration statement or prospectus or for additional information; (f) prepare and file with the SEC, promptly upon the request of Keystone, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for Keystone and the Corporation, are required under the Securities Act or the rules and regulations promulgated thereunder in connection with the distribution of the Securities by Keystone; (g) prepare and promptly file with the SEC such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such Securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which such prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; (h) advise Keystone, promptly after it shall receive notice or obtain knowledge, of the issuance of any stop order by the SEC suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; and -3- (i) at the request of Keystone, furnish on the date or dates provided for in the underwriting agreement: (i) an opinion or opinions of counsel to the Corporation for the purposes of such registration, addressed to the underwriters and to Keystone, covering such matters as such underwriters and Keystone may reasonably request and as are customarily covered by issuer's counsel at that time; and (ii) a letter or letters from the independent certified public accountants of the Corporation, addressed to the underwriters and to Keystone, covering such matters as such underwriters or Keystone may reasonably request, in which letters such accountants shall state (without limiting the generality of the foregoing) that they are independent certified public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements and other financial data of the Corporation included in the registration statement or any amendment or supplement thereto comply in all material respects with the applicable accounting requirements of the Securities Act. 5. With respect to the registration requested pursuant to Paragraph 3 hereof, the following fees, costs and expenses shall be borne by the Corporation: All registration, filing and NASD fees, printing and engraving expenses, fees and disbursements of the Corporation's counsel and accountants and all legal fees and disbursements and other expenses of the Corporation to comply with state securities or blue sky laws of any jurisdictions in which the Securities to be offered are to be registered or qualified. Fees and disbursements of counsel and accountants for Keystone, underwriting discounts and commissions and transfer taxes for Keystone and any other expenses incurred by Keystone shall be borne by Keystone. 6. In connection with any registration statement: (a) The Corporation will indemnify and hold harmless Keystone, any underwriter (as defined in the Securities Act) for Keystone, and each person, if any, who controls Keystone or such underwriter (within the meaning of the Securities Act) from and against any and all loss, damage, liability, cost or expense to which Keystone or any such underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such loss, damage, liability, cost or expense arises out of or is caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus or preliminary prospectus contained therein or any amendment or supplement thereto, or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; provided, however, that the Corporation will not be -------- ------- liable in any such case to the extent that any such loss, damage, liability, cost or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by Keystone, such underwriter or such controlling person in writing specifically for use in the preparation thereof. (b) Keystone will indemnify and hold harmless the Corporation, any underwriter (as defined in the Securities Act), and each person, if any, who controls the Corporation or such underwriter (within the meaning of the Securities Act) from and against any and all loss, damage, liability, cost or expense to which the Corporation or any such underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such loss, damage, liability, cost or expense arises out of or is caused by any untrue or alleged untrue statement of any material fact contained in such registration statement, any prospectus or preliminary prospectus contained therein or any amendment or supplement thereto, or arises out of or is based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not -4- misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in conformity with written information furnished by Keystone specifically for use in the preparation thereof. (c) Promptly after receipt by an indemnified party pursuant to the provisions of subparagraph (a) or (b) of this Paragraph 6 of any claim in writing or of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party pursuant to the provisions of said subparagraph (a) or (b), promptly notify the indemnifying party of the receipt of such claim or notice of the commencement of such action, but the omission to so notify the indemnifying party will not relieve it from any liability which it may otherwise have to any indemnified party hereunder. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, that if the defendants in any -------- ------- action include both the indemnified party and the indemnifying party and there is a conflict of interest which would prevent counsel for the indemnifying party from also representing the indemnified party, the indemnified party or parties shall have the right to select one separate counsel to participate in the defense of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of said subparagraph (a) or (b) for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the provisions of the preceding sentence, (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. (d) If recovery is not available under the foregoing indemnification provisions, for any reason other than as specified therein, the parties entitled to indemnification by the terms thereof shall be entitled to contribution to liabilities and expenses, except to the extent that contribution is not permitted under Section 11(f) of the Securities Act. In determining the amount of contribution to which the respective parties are entitled, there shall be considered the parties' relative knowledge and access to information concerning the matter with respect to which the claim was asserted, the opportunity to correct and/or prevent any statement or omission, and any other equitable considerations appropriate under the circumstances. Keystone and the Corporation agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation even if the underwriters and Keystone as a group were considered a single entity for such purpose. 7. Subject to applicable regulatory restrictions, from and after the date on which any event described in the second paragraph of this Paragraph 7 occurs, the Holder as defined in the Warrant (which shall include a former Holder) who has exercised the Warrant in whole or in part shall have the right to require the Corporation to redeem some or all of the Shares at a redemption price per share (the "Redemption Price") equal to the highest of (i) 110% of the Exercise ---------- ----- Price, (ii) the highest price paid or agreed to be paid for any share of Common Stock by an Acquiring Person (as defined in the Warrant) during the twelve months immediately preceding the date notice of the election to require redemption -5- is given by the Holder under the third paragraph of this Paragraph 7 (as appropriately adjusted to reflect any of the events described in Paragraph 7(A) of the Warrant) and (iii) in the event of a sale of all or substantially all of the Corporation's assets, any Corporation Subsidiary or all or substantially all of any Corporation Subsidiary's assets, (x) the sum of the price paid in such sale for such assets and the current market value of the remaining assets of the Corporation as determined by a recognized investment banking firm selected by such Holder, divided by (y) the number of shares of Common Stock then outstanding. If the price paid consists in whole or in part of securities or assets other than cash, the value of such securities or assets shall be their then current market value as determined by a recognized investment banking firm selected by the Holder. The Holder's right to require the Corporation to redeem some or all of the Shares under this Paragraph 7 shall expire at the close of business on the later of (1) the 180th day following the occurrence of any event described in the second paragraph of this Paragraph 7 and (2) July 19, 1998. The redemption rights provided in this Paragraph 7 shall become exercisable upon the occurrence of any of the following events: (i) the acquisition by any person (other than Keystone or any subsidiary of Keystone) of beneficial ownership of 50% or more of the Common Stock (before giving effect to any exercise of the Warrant) exclusive of shares of Common Stock sold directly or indirectly to such person by Keystone or (ii) a transaction of the type specified in Paragraph 2(v) shall have been consummated. As used in this Paragraph 7 "person" and "beneficial ownership" shall havethe same meanings as ------ ---------- --------- in the Warrant. The Holder may exercise its right to require the Corporation to redeem some or all of the Shares pursuant to this Paragraph 7 by surrendering for such purpose to the Corporation at its principal office, within the time period specified in the second preceding paragraph, a certificate or certificates representing the number of Shares to be redeemed accompanied by a written notice stating that it elects to require the Corporation to redeem all or a specified number of such Shares in accordance with the provisions of this Paragraph 7. As promptly as practicable, and in any event within five business days after the surrender of such certificates and the receipt of such notice relating thereto, the Corporation shall deliver or cause to be delivered to the Holder the applicable Redemption Price for the Shares which it is not then prohibited under applicable law or regulation from redeeming, and, if the Holder has given the Corporation notice that less than the full number of Shares evidenced by the surrendered certificate or certificates are to be redeemed, a new certificate or certificates, of like tenor, for the number of Shares evidenced by such surrendered certificate or certificates, less the number of Shares redeemed. To the extent that the Corporation is prohibited under applicable law or regulation, or by judicial or administrative action, from redeeming all of the Shares as to which the Holder has given notice to redeem hereunder, the Corporation shall immediately notify the Holder and thereafter deliver or cause to be delivered to the Holder the applicable Redemption Price for such number of the Shares as it is not prohibited from redeeming within five business days after the date on which the Corporation is no longer so prohibited; provided, -------- however, that, at the option of Keystone, at any time after receipt of such - ------- notice from the Corporation, the Corporation shall deliver to the Holder a certificate for such number of the Shares as it is then prohibited from redeeming, or, at the Holder's option, all the Shares, and the Corporation shall have no further obligation to redeem such Shares. 8. In the event that the Corporation issues any additional shares of Common Stock after the date of this Agreement, the Corporation shall issue additional warrants to Keystone, such that, after such issuance, the number of shares of Common Stock subject to all warrants hereunder, together with any shares of Common Stock previously issued pursuant hereto, equals 19.9% of the sum of (1) the number of shares of Common Stock issued and outstanding following such issuance and (2) the number of shares of Common Stock subject to all warrants hereunder. Such additional warrants shall be identical to the Warrant. -6- 9. The Corporation will not enter into any transaction described in (a), (b) or (c) of Paragraph 6(A) of the Warrant unless the Acquiring Corporation (as defined in the Warrant) assumes in writing, in form and substance satisfactory to the Holder, all the obligations of the Corporation hereunder. 10. If Keystone acquires Shares and, during the period ending on the later of (1) one year after the date of such acquisition or (2) June 19, 1998 the merger contemplated by the Plan has not been completed, then, during the thirty- day period commencing at the expiration of such period the Corporation shall have the right to repurchase all (but not less than all) of such Shares of Common Stock so acquired by Keystone and held by Keystone at the time of such repurchase at a price equal to the sum of (a)(i) the greater of the current market price or the Exercise Price paid for such Shares, multiplied by (ii) the number of such Shares so acquired, plus (b) Keystone's after-tax carrying cost. For the purposes of this calculation, the "current market price" shall mean the average of the closing sale prices for the Common Stock for the 25 trading days immediately preceding the repurchase, as quoted on the NASDAQ National Market System, and Keystone's pre-tax carrying cost shall be equal to interest on the Exercise Price paid for such Shares so purchased from the date of purchase at the prime rate of interest established by Mellon Bank, N.A. as in effect throughout such period, less any dividends received on such Shares so purchased. 11. To the extent that Keystone acquires Shares, and until the Corporation's rights (if any) to redeem such Shares pursuant to Paragraph 10 of this Agreement have expired, Keystone agrees to vote such Shares in accordance with the recommendation of the Board of Directors of the Corporation so long as at least a majority of such Board of Directors is the same as on the date hereof, except as to voting in connection with mergers, acquisitions, liquidations or sales or other dispositions of assets involving the Corporation or any Corporation Subsidiary, in which instance no such restrictions shall apply, provided, however, that the covenant contained in this Paragraph 11 shall not apply to any Holder other than Keystone or one of its subsidiaries. 12. Without limiting the foregoing or any remedies available to Keystone, it is specifically acknowledged that Keystone would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of the obligations of any person subject to, this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed in counterparts by their duly authorized officers and their corporate seals to be hereunto affixed, all as of the day and year first above written. [CORPORATE SEAL] Attest: FINANCIAL TRUST CORP /s/ Lauren L. Shutt By /s/ Ray L. Wolfe - ----------------------------- ------------------------------ Lauren L. Shutt, Ray L. Wolfe, Chairman Secretary and Chief Executive Officer -7- [CORPORATE SEAL] Attest: KEYSTONE FINANCIAL, INC. /s/ Ben G. Rooke By /s/ Carl L. Campbell - ----------------------------- ------------------------------ Ben G. Rooke, Carl L. Campbell, President Secretary and Chief Executive Officer -8- ATTACHMENT A WARRANT to Purchase up to 2,113,706 Shares of Common Stock of Financial Trust Corp This is to certify that, for value received, FINANCIAL, INC. ("Keystone") or -------- any permitted transferee (Keystone or such transferee hereinafter called the "Holder") is entitled to purchase, subject to the provisions of this Warrant and ------ of the Agreement (as hereinafter defined), from FINANCIAL TRUST CORP (the "Corporation"), at any time on or after the date hereof, an aggregate of up to ----------- 2,113,706 fully paid and nonassessable shares of common stock, par value $5.00 per share (the "Common Stock"), of the Corporation at a price per share equal to ------ ----- $43.725, subject to adjustment as herein provided (the "Exercise Price"). -------- ----- 1. Exercise of Warrant. Subject to the provisions hereof and the limitations ------------------- set forth in Paragraph 2 of an Investment Agreement dated as of December 19, 1996 by and between Keystone and the Corporation (the "Agreement") executed and --------- delivered in connection with an Agreement and Plan of Reorganization and an Agreement and Plan of Merger dated as of December 19, 1996 between Keystone and the Corporation (collectively, the "Plan"), this Warrant may be exercised at any ---- time or from time to time on or after the date hereof. This Warrant shall be exercised by presentation and surrender hereof to the Corporation at the principal office of the Corporation, accompanied by (i) a written notice of exercise, (ii) payment to the Corporation, for the account of the Corporation, of the Exercise Price for the number of shares of Common Stock specified in such notice and (iii) a certificate of the Holder specifying the event or events which have occurred which entitle the Holder to exercise this Warrant. The Exercise Price for the number of shares of Common Stock specified in the notice shall be payable in immediately available funds. This Warrant may not be exercised in part for less than 250,000 shares, except (i) for an initial exercise resulting in ownership of approximately 5% of the outstanding shares of Common Stock after giving effect to the exercise, (ii) as limited by applicable law, regulation or regulatory order or (iii) when this Warrant becomes exercisable for less than 250,000 shares, the remaining shares for which it is then exercisable. Upon such presentation and surrender, the Corporation shall issue promptly (and within two business days if requested by the Holder) to the Holder or its assignee, transferee or designee the shares of Common Stock to which the Holder is entitled hereunder. If this Warrant should be exercised in part only, the Corporation shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the shares of Common Stock purchasable hereunder. Upon receipt by the Corporation of this Warrant, in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Corporation may then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to the Holder. The Corporation shall pay all expenses, and any and all United States federal, state and local taxes and other charges, that may be payable in connection with the preparation, issue and delivery of stock certificates pursuant to this Paragraph 1 in the name of the Holder or its assignee, transferee or designee. A-1 2. Reservation of Shares; Preservation of Rights of Holder. The Corporation ------------------------------------------------------- shall at all times while this Warrant is outstanding and unexercised maintain and reserve, free from preemptive rights, such number of authorized but unissued or treasury shares of Common Stock as may be necessary so that this Warrant may be exercised without additional authorization of Common Stock after giving effect to all other options, warrants, convertible securities and other rights to acquire shares of Common Stock at the time outstanding. The Corporation further agrees (i) that it will not, by charter amendment or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder or under the Agreement by the Corporation, (ii) that it will use its best efforts to take all action (including (A) complying with all premerger notification, reporting and waiting period requirements specified in 15 U.S.C. (S)18a and the regulations promulgated thereunder and (B) in the event that under the Bank Holding Company Act of 1956, the Change in Bank Control Act, the Pennsylvania Banking Code of 1965 or any other law, prior approval of the Board of Governors of the Federal Reserve System (the "Board"), the Office of the ----- Comptroller of the Currency (the "OCC"), the Federal Deposit Insurance --- Corporation (the "FDIC"), the Pennsylvania Department of Banking (the ---- "Department") and/or any other regulatory agency is necessary before this ---------- Warrant may be exercised, cooperating fully with the Holder in preparing any and all such applications and providing such information to the Board, the OCC, the FDIC, the Department and/or any such other regulatory agency as such agencies may require) in order to permit the Holder to exercise this Warrant and the Corporation duly and effectively to issue shares of its Common Stock hereunder, and (iii) that it will promptly take all action necessary to protect the rights of the Holder against dilution as provided herein. 3. Fractional Shares. The Corporation shall not be required to issue ----------------- fractional shares of Common Stock upon exercise of this Warrant but shall pay for such fraction of a share in cash or by certified or official bank check in an amount equal to the product of such fraction of a share and the Exercise Price. 4. Exchange, Transfer or Loss of Warrant. This Warrant is exchangeable or, ------------------------------------- subject to Paragraph 2 of the Investment Agreement, transferable, without expense, at the option of the Holder, upon presentation and surrender hereof at the principal office of the Corporation for other Warrants of different denominations entitling the Holder to purchase in the aggregate the same number of shares of Common Stock purchasable hereunder. The term "Warrant" as used ------- herein includes any Warrants for which this Warrant may be exchanged. Upon receipt by the Corporation of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Corporation will execute and deliver a new Warrant of like tenor and date. This Warrant may not be exercised or sold except in accordance with the terms of the Agreement. 5. Redemption. (A) Subject to applicable regulatory restrictions, from and ---------- after the date on which any event described in the second paragraph of Paragraph 7 of the Agreement occurs, the Holder shall have the right to require the Corporation to redeem this Warrant at a redemption price (the "Redemption ---------- Amount") equal to the highest of (i) the number of shares of Common Stock for - ------ which this Warrant is then exercisable (the "Conversion Number") multiplied by ---------- ------ the Exercise Price multiplied by .10, (ii)(x) the highest price paid or agreed to be paid for any share of Common Stock by the Acquiring Person (as hereinafter defined) during the twelve months immediately preceding the date notice of the election to require redemption is given by the Holder under Paragraph 5(B) (such price to be appropriately adjusted to reflect the effect of any of the events described in Paragraph 7(A) hereof), less the Exercise Price, multiplied by (y) the Conversion Number, and (iii) in the event of the sale of all or substantially A-2 all of the assets of the Corporation, any Corporation Subsidiary (as defined in the Agreement) or all or substantially all of the assets of any Corporation Subsidiary, the Conversion Number multiplied by (x)(I) the sum of (a) the price paid for such assets, (b) the current market value of the remaining assets of the Corporation, as determined by a recognized investment banking firm selected by the Holder, and (c) the Exercise Price multiplied by the Conversion Number, divided by (II) the sum of the number of shares of Common Stock then outstanding and the Conversion Number, less (y) the Exercise Price. If, for the purpose of this calculation or calculating the Assigned Value (as hereinafter defined), the price paid consists in whole or in part of securities or assets other than cash, the value of such securities or assets shall be their then current market value as determined by a recognized investment banking firm selected by the Holder. The Holder's right to require the Corporation to redeem this Warrant under this Paragraph 5 shall expire at the close of business on the later of (1) the 180th day following the occurrence of any event described in the second paragraph of Paragraph 7 of the Agreement and (2) July 19, 1998. (B) The Holder of this Warrant may exercise its right to require the Corporation to redeem this Warrant pursuant to this Paragraph 5 by surrendering for such purpose to the Corporation, at its principal office, within the period specified above, this Warrant accompanied by a written notice stating that the Holder elects to require the Corporation to redeem this Warrant in accordance with the provisions of this Paragraph 5. As promptly as practicable, and in any event within ten business days after the surrender of this Warrant and the receipt of such notice relating thereto, the Corporation shall deliver or cause to be delivered to the Holder the Redemption Amount therefor or the portion thereof which it is not then prohibited under applicable law and regulation from delivering to the Holder. To the extent that the Corporation is prohibited under applicable law or regulation, or as a result of administrative or judicial action, from redeeming this Warrant in full, the Corporation shall immediately notify the Holder and thereafter deliver or cause to be delivered to the Holder the portion of the Redemption Amount which it is no longer prohibited from delivering to the Holder within five business days after the date on which the Corporation is no longer so prohibited; provided, however, that, at the option of the Holder, at -------- ------- any time after receipt of such notice, the Corporation shall deliver to the Holder a new Warrant evidencing the right of the Holder to purchase that number of shares of Common Stock obtained by multiplying the Conversion Number in effect at such time by a fraction, the numerator of which is the Redemption Amount less the portion thereof (if any) theretofore delivered to the Holder and the denominator of which is the Redemption Amount, and the Corporation shall have no further obligation to redeem such new Warrant. (C) As used in this Warrant the following terms have the meanings indicated: (a) "Acquiring Person" shall mean any "Person" (hereinafter ---------------- defined) who or which shall be the "Beneficial Owner" (as hereinafter defined) of 10% or more of the Common Stock; (b) A "Person" shall mean any individual, firm, corporation or ------ other entity and include as well any syndicate or group deemed to be a "person" by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended; (c) A Person shall be a "Beneficial Owner" of all securities: ---------------- (i) which such Person or any of its "Affiliates" (as hereinafter defined) or "Associates" (as hereinafter defined) beneficially owns, directly or indirectly; and (ii) which such Person or any of its Affiliates or Associates has (1) the right to acquire (whether such right is exercisable immediately or only after the passage of time or A-3 otherwise) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (2) the right to vote pursuant to any agreement, arrangement or understanding; and (d) "Affiliate" and "Associate" shall have the respective meanings --------- --------- ascribed to such terms in Rule 12b-2 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934, as amended, as in effect on the date of the Agreement. 6. Certain Transactions. (A) In case the Corporation (a) shall consolidate -------------------- with or merge into any Person, other than the Holder or one of its Affiliates, and shall not be the continuing or surviving corporation of such consolidation or merger, (b) shall permit any Person, other than the Holder or one of its Affiliates, to merge into the Corporation and the Corporation shall be the continuing or surviving corporation, but, in connection with such merger, the then outstanding shares of Common Stock shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property or shall represent less than 50% of the shares of Common Stock immediately after giving effect to the merger, or (c) shall sell or otherwise transfer all or substantially all of its assets, any Corporation Subsidiary or all substantially all of the any Corporation Subsidiary's assets to any Person, other than the Holder or one of its Affiliates, then, and in each such case, the agreement governing such transaction shall make proper provision so that this Warrant shall (at the option of the Holder, in whole or in part), upon the consummation of any such transaction and upon the terms and conditions set forth herein, be converted into, or exchanged for, a warrant, at the option of the Holder, of either (I) the Acquiring Corporation (as hereinafter defined), (II) any company which controls the Acquiring Corporation, or (III) in the case of a merger described in clause (A)(b), the Corporation, in which case such warrant shall be a newly issued warrant (in any such case, the "Substitute Warrant"). ---------- ------- (B) The following terms have the meanings indicated: (a) "Acquiring Corporation" shall mean (I) the continuing or --------------------- surviving corporation of a consolidation or merger with the Corporation (if other than the Corporation), (II) the corporation merging into the Corporation in a merger in which the Corporation is the continuing or surviving person and in connection with which the then outstanding shares of Common Stock are changed into or exchanged for stock of other securities of any other Person or cash or any other property or shall represent less than 50% of the shares of Common Stock immediately after giving effect to the merger, and (III) the transferee of all or substantially all of the Corporation's assets, any Corporation Subsidiary or all or substantially all of any Corporation Subsidiary's assets; (b) "Substitute Common Stock" shall mean the common stock issued ----------------------- by the issuer of the Substitute Warrant; (c) "Assigned Value" shall mean the Redemption Price per share of -------------- Common Stock (as defined in Paragraph 7 of the Agreement) multiplied by the Conversion Number; (d) "Average Price" shall mean the average closing price (or if ------------- unavailable, the average of the daily averages of the closing bid and asked prices) of a share of Substitute Common Stock for the one year immediately preceding the consolidation, merger or sale in question, but in no event higher than the closing price (or average of the closing bid and asked prices) of a share of Substitute Common Stock on the day preceding such consolidation, merger or sale; provided that if the Corporation is the issuer of the Substitute Warrant, the Average Price shall be computed with respect to a share of the common stock issued by the Person merging into the Corporation or by A-4 by any company which controls such Person, as the Holder may elect. If the Average Price cannot be computed as aforesaid because neither closing prices nor closing bid and asked prices are available for such one-year period, then the Average Price shall be the average fair market value of a share of Substitute Common Stock for such period (but in no event higher than the fair market value on the day preceding such consolidation, merger or sale) as determined by a recognized investment banking firm selected by Keystone. (C) The Substitute Warrant shall have the same terms as this Warrant provided that if the terms of the Substitute Warrant cannot, for legal reasons, be the same as this Warrant, such terms shall be as similar as possible and in no event less advantageous to the Holder. The issuer of the Substitute Warrant shall also enter into an agreement with the then Holder of the Substitute Warrant in substantially the same form as the Agreement, which shall be applicable to the Substitute Warrant. For purposes of the Substitute Warrant and such agreement, any event referred to in Paragraph 2 or Paragraph 7 of the Agreement shall be deemed to have occurred when it occurred with respect to the Corporation. (D) The Substitute Warrant shall be immediately exercisable for such number of shares of Substitute Common Stock as is equal to the Assigned Value divided by the Average Price. The exercise price of the Substitute Warrant per share of Substitute Common Stock shall be equal to the Exercise Price multiplied by a fraction in which the numerator is the Conversion Number and the denominator is the number of shares of Substitute Common Stock for which the Substitute Warrant is exercisable. (E) In no event, pursuant to any of the foregoing paragraphs, shall the Substitute Warrant be exercisable for more than 19.9% of the aggregate of the outstanding shares of Substitute Common Stock and the shares of Substitute Common Stock issuable upon exercise of the Substitute Warrant. 7. Adjustment. The number of shares of Common Stock purchasable upon the ---------- exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time as provided in this Paragraph 7: (A)(1) In case the Corporation shall pay or make a dividend or other distribution on any class of capital stock of the Corporation in Common Stock, the number of shares of Common Stock purchasable upon exercise of this Warrant shall be increased by multiplying such number of shares by a fraction of which the denominator shall be the number of shares of Common Stock outstanding at the close of business on the day immediately preceding the date of such distribution and the numerator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such increase to become effective immediately after the opening of business on the day following such distribution, provided, however, that in no event shall the Warrant be -------- ------- exercised for more than 19.9% of the shares of Common Stock issued and outstanding following such exercise. (2) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the number of shares of Common Stock purchasable upon exercise of this Warrant at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the number of shares of Common Stock purchasable upon exercise of this Warrant at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately decreased, such increase or decrease, as the case may be, to become effective immediately after the opening of business on the day following the day A-5 upon which such subdivision or combination becomes effective, provided, -------- however, that in no event shall the Warrant be exercised for more than - ------- 19.9% of the shares of Common Stock issued and outstanding following such exercise. (3) The reclassification (excluding any transaction in which a Substitute Warrant would be issued) of Common Stock into securities (other than Common Stock) and/or cash and/or other consideration shall be deemed to involve a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number or amount of securities and/or cash and/or other consideration outstanding immediately thereafter and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective", or "the day upon which such combination becomes effective", as the case may be, within the meaning of clause (2) above. (4) The Corporation may make such increases in the number of shares of Common Stock purchasable upon exercise of this Warrant, in addition to those required by this subparagraph (A), as shall be determined by its Board of Directors to be advisable in order to avoid taxation so far as practicable of any dividend of stock or stock rights or any event treated as such for federal income tax purposes to the recipients. (B) Whenever the number of shares of Common Stock purchasable upon exercise of this Warrant is adjusted as herein provided, the Exercise Price shall be adjusted by a fraction in which the numerator is equal to the number of shares of Common Stock purchasable prior to the adjustment and the denominator is equal to the number of shares of Common Stock purchasable after the adjustment. (C) For the purpose of this Paragraph 7, the term "Common Stock" shall include any shares of the Corporation of any class or series which has no preference or priority in the payment of dividends or in the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation and which is not subject to redemption by the Corporation. 8. Notice. (A) Whenever the number of shares for which this Warrant is ------ exercisable is adjusted as provided in Paragraph 7, the Corporation shall promptly compute such adjustment and mail to the Holder a certificate, signed by a principal financial officer of the Corporation, setting forth the number of shares of Common Stock for which this Warrant is exercisable as a result of such adjustment, a brief statement of the facts requiring such adjustment and the computation thereof and when such adjustment will become effective. (B) Upon the occurrence of any event which results in this Warrant becoming redeemable, as provided in Paragraph 5, the Corporation shall promptly notify the Holder of such event; and promptly compute the Redemption Amount and furnish to the Holder a certificate, signed by a principal financial officer of the Corporation, setting forth the Redemption Amount and the basis and computation thereof. (C) Upon the occurrence of an event which results in this Warrant becoming convertible into, or exchangeable for, the Substitute Warrant, as provided in Paragraph 6, the Acquiring Corporation and the Corporation shall promptly notify the Holder of such event; and, upon receipt from the Holder of its choice as to the issuer of the Substitute Warrant, the Acquiring Corporation and the Corporation shall promptly compute the number of shares of Substitute Common Stock for which the Substitute Warrant is exercisable and furnish to the Holder a certificate, signed by a principal financial officer of each of the Acquiring A-6 Corporation and the Corporation, setting forth the number of shares of Substitute Common Stock for which the Substitute Warrant is exercisable, a computation thereof and when such adjustment will become effective. 9. Rights of the Holder. (A) Without limiting the foregoing or any remedies -------------------- available to the Holder, it is specifically acknowledged that the Holder would not have an adequate remedy at law for any breach of the provision of this Warrant and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of the obligations of any Person subject to, this Warrant. (B) Except as provided in the third paragraph of Paragraph 1 hereof, the Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Corporation. 10. Termination. This Warrant and the rights conferred hereby shall ----------- terminate (i) upon a willful breach of the Agreement by Keystone, (ii) at the Effective Time of the Merger pursuant to the Plan, (iii) upon a valid termination of the Plan prior to the occurrence of an event described in Paragraph 2 of the Agreement or (iv) upon the failure of the shareholders of the Corporation to approve the Merger by the required vote at a meeting duly called and held in accordance with the requirements of Section 6.03 of the Agreement and Plan of Reorganization prior to the occurrence of an event described in Paragraph 2 of the Agreement and (v) to the extent this Warrant has not previously been exercised, at the close of business on the later of (A) July 19, 1998 and (B) 12 months after the occurrence of an event described in Paragraph 2 of the Agreement, provided that such termination pursuant to this clause (v) shall not affect any redemption under Paragraph 5 as to which exercise under Paragraph 5(B) has previously occurred. 11. Securities Act Representation. The Holder, by acceptance hereof, agrees ----------------------------- that, unless the shares of Common Stock issuable upon exercise hereof have been registered under the Securities Act of 1933, as amended, (the "Securities Act") -------------- and any other applicable securities laws for sale or other disposition by the Holder, it will deliver to the Corporation upon the exercise hereof a written representation that it is acquiring the shares of Common Stock issuable upon the exercise hereof solely for its own account and not with a view to the distribution thereof within the meaning of the Securities Act and that any certificate or certificates representing such shares may bear a legend to the effect that such shares may not be sold except pursuant to an effective registration statement under the Securities Act or any exemption from registration thereunder and registration or qualification under any other applicable securities laws or exemptions therefrom. 12. Governing Law. This Warrant shall be governed by, and interpreted in ------------- accordance with, the substantive laws of the Commonwealth of Pennsylvania. Dated: December 19, 1996 [CORPORATE SEAL] Attest: FINANCIAL TRUST CORP By - ---------------------------------- ------------------------------------- Lauren L. Shutt, Ray L. Wolfe, Chairman Secretary and Chief Executive Officer A-7 EX-99.8 20 DIRECTOR'S AGREEMENT (FINANCIAL TRUST) EXHIBIT 99.8 Financial Trust Corp 1415 Ritner Highway Carlisle, Pennsylvania 17013 December 19, 1996 Keystone Financial, Inc. One Keystone Plaza Front & Market Streets P.O. Box 3660 Harrisburg, PA 17105-3660 Gentlemen: The undersigned understands that Keystone Financial, Inc. ("Keystone") is about to enter into an Agreement and Plan of Reorganization and an Agreement and Plan of Merger (collectively, the "Merger Agreements") with Financial Trust Corp ("FTC"). The Merger Agreements provide for the merger of FTC into Keystone (the "Merger") and the conversion of outstanding shares of FTC Common Stock into Keystone Common Stock in accordance with the formula therein set forth. In order to induce Keystone to enter into the Merger Agreements, and intending to be legally bound hereby, the undersigned represents, warrants and agrees that at the FTC Shareholders' Meeting contemplated by Section 6.3 of the Agreement and Plan of Reorganization and any adjournment thereof the undersigned will, in person or by proxy, vote or cause to be voted in favor of the Merger Agreements and the Merger the shares of FTC Common Stock beneficially owned by the undersigned individually or, to the extent of the undersigned's proportionate voting interest, jointly with other persons, as well as (to the extent of the undersigned's proportionate voting interest) any other shares of FTC Common Stock over which the undersigned may hereafter acquire beneficial ownership in such capacities (collectively, the "Shares"). Subject to the final paragraph of this agreement, the undersigned further agrees that he will use his best efforts to cause any other shares of FTC Common Stock over which he has or shares voting power to be voted in favor of the Merger Agreements and the Merger. The undersigned further represents, warrants and agrees that until the earlier of (i) the consummation of the Merger or (ii) the termination of the Merger Agreements in accordance with their terms, the undersigned will not, directly or indirectly: (a) vote any of the Shares, or cause or permit any of the Shares to be voted, in favor of any other merger, consolidation, plan of liquidation, sale of assets, reclassification or other transaction involving FTC or any of its subsidiaries which would have the effect of any person other than Keystone or an affiliate acquiring control over FTC, any of its subsidiaries or any substantial portion of the assets of FTC or any of its subsidiaries. As used herein, the term "control" means (1) the ability to direct the voting of 10% or more of the outstanding voting securities of a person having ordinary voting power in the election of directors or in the election of any other body having similar functions or (2) the ability to direct the management and policies of a person, whether through ownership of securities, through any contract, arrangement or understanding or otherwise. (b) sell or otherwise transfer any of the Shares, or cause or permit any of the Shares to be sold or otherwise transferred (i) pursuant to any tender offer, exchange offer or similar proposal made by any person other than Keystone or an affiliate, (ii) to any person seeking to obtain control of FTC, any of its subsidiaries or any substantial portion of the assets of FTC or any of its subsidiaries or to any other person (other than Keystone or an affiliate) under circumstances where such sale or transfer may reasonably be expected to assist a person seeking to obtain such control or (iii) for the principal purpose of avoiding the obligations of the undersigned under this agreement. It is understood and agreed that this agreement relates solely to the capacity of the undersigned as a shareholder or other beneficial owner of the Shares and is not in any way intended to affect the exercise by the undersigned of the undersigned's responsibilities as a director or officer of FTC or any of its subsidiaries. It is further understood and agreed that the term "Shares" shall not include any securities beneficially owned by the undersigned as a trustee or fiduciary, and that this agreement is not in any way intended to affect the exercise by the undersigned of the undersigned's fiduciary responsibility in respect of any such securities. Very truly yours, ------------------------------------------ Accepted and Agreed to: KEYSTONE FINANCIAL, INC. By ----------------------------- Title -------------------------- -2- Name of Director or Officer: ---------------------------- Shares of FTC Common Stock Beneficially Owned As of December 19, 1996 ----------------------- Capacity of Name(s) of Director/Officer's Number of Record Owner(s) Beneficial Ownership Shares - --------------- -------------------- --------- -3- EX-99.9 21 EMPLOYMENT AGREEMENT EXHIBIT 99.9 EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into this 19th day of December, 1996, by and between KEYSTONE FINANCIAL, INC. ("Keystone"), and RAY L. WOLFE, of Carlisle, Pennsylvania ("Mr. Wolfe"). W I T N E S S E T H: WHEREAS, Keystone and Financial Trust Corp have entered into an Agreement and Plan of Reorganization and an Agreement and Plan of Merger (collectively, the "Agreements") whereby, at the "Effective Time" (as described in the Agreements), Financial Trust Corp will merge with and into Keystone, and WHEREAS, Mr. Wolfe is currently employed by Financial Trust Corp as it's Chairman and Chief Executive Officer and possesses valuable knowledge and skills that have contributed to the successful operation of Financial Trust Corp, and WHEREAS, subsequent to the closing of the transaction contemplated by the Agreements, Keystone desires to employ Mr. Wolfe and Mr. Wolfe is willing to become employed by Keystone. NOW, THEREFORE, in consideration of the following rights and benefits and intending to be legally bound, Keystone agrees to employ Mr. Wolfe, and Mr. Wolfe hereby agrees to serve Keystone, upon the following terms and conditions: 1. Term. Mr. Wolfe's employment by Keystone shall commence as of the Effective Time and shall continue thereafter for a period of three (3) years, subject to the extension described in Paragraph 6 hereof. 2. Office. Effective as of the Effective Time and continuing until the Annual Meeting of Keystone in 1998, Keystone agrees to employ Mr. Wolfe as its Chairman. Thereafter, Mr. Wolfe agrees to serve Keystone in such senior executive capacities as may be mutually agreed upon from time to time by the Chief Executive Officer of Keystone and Mr. Wolfe. Mr. Wolfe shall use his best energies and abilities in the performance of his duties hereunder. 3. Compensation. During the term of employment described in Paragraph 1, Keystone shall pay Mr. Wolfe an all inclusive, aggregate annual amount of Three Hundred and Fifty Thousand Dollars ($350,000). Such amount shall be inclusive of any amounts which would have currently been paid to Mr. Wolfe but for his election to have such amounts deferred to a later date under the terms of a non- qualified deferral arrangement offered by Keystone, as well as any contributions Keystone shall be required to contribute as "matching" contributions to any plan or arrangement, qualified or nonqualified, in which Mr. Wolfe may participate from time to time. 4. Benefits. During the term of his employment hereunder, Mr. Wolfe shall be covered by such life, health, major medical, disability and other welfare benefit plans and any pension, profit sharing or similar qualified retirement plans as are available generally to employees of Keystone. Keystone shall reimburse Mr. Wolfe for all reasonable and customary out-of-pocket expenses incurred by him in the ordinary course of Keystone's business as are provided to senior executive employees of Keystone, including the use of an automobile and the payment of dues for membership in one local country club. 5. Termination of Employment. This Agreement, and the compensation and benefits described herein may not be terminated by Keystone except for a breach of the provisions of Paragraph 7 hereof. However, in the event of Mr. Wolfe's death, total and permanent disability or other substantial incapacity which is reasonably expected to be of more than six months duration, Mr. Wolfe's employment shall be terminated at the end of the month in which such death occurred or a permanent disability or substantial incapacity was determined to exist by Keystone. Permanent disability or substantial incapacity shall be conclusively established by Mr. Wolfe's qualification for benefits under Keystone's long term disability plan or qualification for Social Security disability benefits and may be determined by an express finding of permanent disability or substantial incapacity by the Board of Directors. Upon the occurrence of Mr. Wolfe's death or the determination of Mr. Wolf's' permanent disability or substantial incapacity, this Agreement shall immediately terminate and Keystone shall be released from all further responsibilities hereunder. 6. Extension of Term; Stand-by Consulting Agreement. Acknowledging Mr. Wolfe's extensive knowledge and highly valuable skills, Keystone desires to have the opportunity to call on such knowledge and skills from time to time during the period beginning at the end of the initial term of employment described in Paragraph 1 and ending upon Mr. Wolfe's sixty-fifth (65th) birthday. Accordingly, Mr. Wolfe agrees to make himself available to advise and consult with Keystone from time to time during this extended term, upon reasonable advance notice from Keystone. In consideration of Mr. Wolfe's agreement to make himself available as described herein, Keystone shall compensate Mr. Wolf at a rate of One Hundred and Seventy Seven Thousand Dollars ($177,000) per annum, and provide Mr. Wolf with Keystone's regular medical care benefits during such period. The payment by Keystone of such compensation and benefits are subject to the provisions of Paragraph 7. Mr. Wolfe shall be considered an employee of Keystone during this period and all federal, state and local income and employment tax withholding and payments shall be made. 7. Acceleration of Payments Upon a "Change of Control". Upon the occurrence of a "Change of Control" (as defined below) during the initial or extended term of this agreement, Mr. Wolfe shall have the unilateral right, upon written notice provided pursuant to Paragraph 10, to accelerate the payment of the aggregate amount of future cash compensation which would be payable to Mr. Wolfe pursuant to Paragraphs 3 and/or 6 hereof. Within sixty days following receipt of written notice from Mr. Wolfe, Keystone shall pay the balance of the future cash compensation due Mr. Wolfe under this Agreement in a single lump sum. Payment of such sum shall release and relieve Keystone from all further obligations hereunder, including the obligation to pay or make available to Mr. Wolfe any employee benefits other than as may be required by law. Notwithstanding such accelerated payment, Mr. Wolfe expressly agrees to honor and abide by the provisions of Paragraph 8 hereof, the violation of which may be enforced by Keystone in a suit at law or in equity without regard to Paragraph 13. For purposes of thisParagraph, "Change of Control" means the occurrence of any one of the following events: (a) Keystone acquires actual knowledge that any Person (other than Keystone, any subsidiary of Keystone, any employee benefit plan of Keystone or any 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 Keystone entitling such Person to a majority of the voting power of Keystone's Voting Stock; -2- (b) A majority of the Board of Directors of Keystone ("Board") shall consist of persons other than (i) persons who were members of the Board immediately following the Effective Time, or (ii) persons (A) whose nomination or election as directors of Keystone was approved by at least two-thirds of the then members of the Board (excluding any director referred to in clause (B) of this paragraph) who either were directors of Keystone on such date 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 Keystone entitling such Person to 10% or more of the voting power of Keystone'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 Keystone) subject to Rule 14a-11 or any successor rule and relating to the election or removal of any directors of Keystone; or (c) Keystone and/or any of its subsidiaries 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 Keystone immediately prior to such Business Combination (excluding any party, other than Keystone 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 Keystone and its consolidated subsidiaries immediately prior to the Business Combination constituting at least 65% of Total Assets. As used in this definition of "Change of Control," (1) the terms "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 hereof, and (2) the uncapitalized term "subsidiary," when used with respect to a specified Person, shall mean any corporation of which such Person owns, directly or indirectly through subsidiaries, a majority of each class of equity security having ordinary voting power in an election of directors. Following a Change of Control defined in paragraph (3), the term "Keystone" as used herein, shall mean the Person which following such Change of Control holds the largest percentage of Keystone's Total Assets, including for this purpose Total Assets which are held by such Person directly or indirectly through one or more subsidiaries. Keystone 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 Keystone hereunder. 8. Non-Disclosure and Non-Competition. Mr. Wolfe recognizes and acknowledges that during the course of his employment with Financial Trust Corp, and during the course of his future employment with Keystone, he has acquired and/or may subsequently acquire privileged and confidential information concerning Financial Trust Corp's and/or Keystone's current and prospective customers, their methods and ways of doing business, their plans and goals for future activities and other confidential or proprietary information belonging to Financial Trust Corp or Keystone or relating to Financial Trust Corp's or Keystone's affairs (collectively referred to herein as the "Confidential Information"). Mr. Wolfe further acknowledges and agrees that the Confidential Information is the property of Keystone and that any misappropriation or unauthorized use or disclosure of the Confidential Information would constitute a breach of trust and could cause irreparable injury to Keystone, and that it is essential to the protection of -3- Keystone and its good will, and to the maintenance of Keystone's competitive position that the Confidential Information be kept secret and not be disclosed to others or used to Mr. Wolfe's own advantage or the advantage of others. Accordingly, Mr. Wolfe agrees that: (a) Non-Disclosure of Confidential Information. During his employment ------------------------------------------ hereunder and thereafter Mr. Wolfe shall hold and safeguard the Confidential Information in trust for Keystone, its successors and assigns; that he shall not, without the prior written consent of Keystone, misappropriate or disclose or make available to anyone for use outside Keystone at any time, either during his employment or subsequent to the termination of his employment, any of the Confidential Information, whether or not developed by Mr. Wolfe; and (b) Restrictions on Competition. Further, Mr. Wolfe agrees that he --------------------------- shall not, either during his employment with Keystone or during the period beginning on the date of his termination of employment and ending on the last day of the 24th month thereafter, without first obtaining the written consent of the Board of Directors of Keystone, directly or indirectly, as an officer, director, employee, consultant, agent, partner, joint venturer, proprietor or other, engage in, become interested in or assist any business which is in competition with Keystone or any of its subsidiaries in the areas of commercial banking, mortgage banking, leasing or the taking of deposits, and is located or operating in any of the counties in which Keystone or any of its present or future subsidiaries may now or at any time prior to the termination of Mr. Wolfe's employment have offices, or any of the counties contiguous thereto, other than as a shareholder holding not more than 1% of the outstanding shares of any class of securities registered under the Securities Exchange Act of 1934. 9. Notices. All notices, demands or other communications which may, or are required to, be provided in connection with this Agreement shall be in writing and mailed by certified mail, return receipt requested, addressed to the respective parties as follows: If to Keystone, at - Keystone Financial, Inc. P.O. Box 3660 Harrisburg, PA 17105-3660 If to Mr. Wolfe, at - Mr. Ray L. Wolfe 41 Ladnor Lane Carlisle, PA 17013; or to such other address as the addressee party may, from time to time, specify by written notice to the other. 10. Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 11. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of Keystone, any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all -4- or substantially all of the business and/or assets of Keystone, or to any assignee thereof. This Agreement and all rights of the Mr. Wolfe hereunder shall inure to the benefit of and be enforceable by Mr. Wolfe or Mr. Wolfe's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 12. Counterparts, Section Headings. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. The section headings of this Agreement are for convenience of reference only and shall not affect the construction or interpretation of any of the provisions hereof. 13. Arbitration. In the event that any disagreement or dispute shall arise between the parties concerning this Agreement, the same shall be submitted to binding arbitration in the City of Harrisburg, Pennsylvania pursuant to the rules of the American Arbitration Association, and 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. 14. Entire Agreement. This Agreement embodies the entire understanding between the parties relating the amounts payable to the Mr. Wolfe hereunder in the event of his termination of employment with Keystone and no change, alteration or modification hereof may be made except in writing signed by all parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. ATTEST: KEYSTONE FINANCIAL, INC. /s/ Ben G. Rooke /s/ Carl L. Campbell - -------------------------------- ---------------------------------- Ben G. Rooke, Secretary Carl L. Campbell, President and Chief Executive Officer WITNESS: RAY L. WOLFE /s/ Lauren L. Shutt /s/ Ray L. Wolfe - -------------------------------- ---------------------------------- -5- EX-99.10 22 LETTER TO SHAREHOLDERS EXHIBIT 99.10 [Preliminary Copy] [LOGO] February __, 1997 Dear Shareholder: You are cordially invited to attend a Special Meeting of Shareholders of First Financial Corporation of Western Maryland, to be held on Monday, March 17, 1997, at 10:00 a.m., local time, at the Holiday Inn, 100 South George St., Cumberland, Maryland. A Notice and Proxy Statement for the meeting follow, and a proxy card and return envelope are enclosed. At this Special Meeting you will be asked to vote on a proposed merger with Keystone Financial, Inc., Harrisburg, Pennsylvania ("Keystone"). As a result of this merger, the Corporation will be merged with and into Keystone and the Corporation's subsidiary savings bank will be merged with and into Keystone's subsidiary American Trust Bank. The merger will result in the conversion of each outstanding share of the Corporation's Common Stock into either 1.29 shares of Keystone Common Stock or an equivalent amount in cash, as selected by you in compliance with the terms of such election. Your Board of Directors believe that this merger is in your best interest and that of our community. YOUR BOARD OF DIRECTORS BELIEVES THAT THE PROPOSED MERGER WITH KEYSTONE DESCRIBED IN THE PROXY STATEMENT IS IN THE BEST INTEREST OF ALL SHAREHOLDERS AND RECOMMENDS A VOTE "FOR" APPROVAL OF THIS MERGER. Your participation as a shareholder in the affairs of the Corporation is encouraged. It is important that your stock be represented at the Special Meeting, whether or not you are personally able to be present. Accordingly, PLEASE PROMPTLY SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE POSTAGE PAID ENVELOPE PROVIDED FOR YOUR CONVENIENCE. You are urged to do so even if you plan to attend the meeting. Your prompt cooperation and support will be greatly appreciated. Sincerely, Patrick J. Coyne Chairman, President and Chief Executive Officer EX-99.11 23 NOTICE OF SPECIAL MEETING EXHIBIT 99.11 [Preliminary Copy] FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND 118 Baltimore Street Cumberland, Maryland 21502 -------------------- NOTICE OF SPECIAL MEETING OF SHAREHOLDERS To Be Held on March 17, 1997 -------------------- TO THE SHAREHOLDERS: NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of First Financial Corporation of Western Maryland (the "Corporation") will be held on Monday, March 17, 1997 at 10:00 a.m., local time, at the Holiday Inn, 100 South George Street, Cumberland, Maryland, for the purpose of considering and acting upon the following: 1. Approval of the Agreement and Plan of Merger, dated as of November 26, 1996, between the Corporation and Keystone Financial, Inc., a Pennsylvania corporation ("Keystone"), which provides for the merger of the Corporation into Keystone and the conversion of each outstanding share of the Corporation's Common Stock into either 1.29 shares of Keystone Common Stock or an equivalent amount in cash, as elected by each shareholder in the manner and subject to the limitations described in the accompanying Joint Proxy Statement/Prospectus; 2. Such other matters as may properly come before the Special Meeting or any adjournments thereof. Only shareholders of record at the close of business on January 31, 1997 are entitled to notice of and to vote at the Special Meeting. ALL SHAREHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING. If you attend the Special Meeting you may, if you wish, withdraw your proxy and vote your shares in person. By Order of the Board of Directors Patrick J. Coyne Chairman, President and Chief Executive Officer February ______, 1997 EX-99.12 24 PROXY CARD (FIRST FINANCIAL) EXHIBIT 99.12 [Preliminary Copy] FIRST FINANCIAL CORPORATION OF WESTERN MARYLAND PROXY FOR SPECIAL MEETING OF SHAREHOLDERS ----------------------------------------- This Proxy is Solicited on Behalf of the Board of Directors The undersigned hereby appoints Cheston H. Browning, III, L. Fred Dean, Morton W. Peskin, Jr. and R. Thomas Thayer, Jr., or any of them, as proxies, with full power of substitution, to vote all shares of Common Stock of First Financial Corporation of Western Maryland ("FFWM") which the undersigned is entitled to vote at the Special Meeting of Shareholders to be held March 17, 1997 and at any adjournments thereof, as follows: The Board of Directors recommends that shareholders vote "FOR" Item 1 and "AUTHORITY GRANTED" on Item 2. 1. Approval of the Agreement and Plan of Merger dated as of November 26, 1996 between FFWM and Keystone Financial, Inc., which provide for the merger of FFWM into Keystone and the conversion of each outstanding share of FFWM Common Stock into either 1.29 shares of Keystone Common Stock or an equivalent amount of cash, as described in the Joint Proxy Statement/Prospectus................ FOR [_] AGAINST [_] ABSTAIN [_] 2. To vote in their discretion on such other matters as may properly come before the Special Meeting or any adjournments thereof. AUTHORITY GRANTED [_] AUTHORITY WITHHELD [_] This proxy, when properly executed, will be voted in the manner directed herein. If no direction is made, this proxy will be voted FOR Item 1 and the authority provided by Item 2 will be deemed GRANTED. PLEASE MARK, DATE, EXECUTE AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED ENVELOPE. EACH SHAREHOLDER SHOULD ALSO READ AND COMPLETE THE FORM OF ELECTION ON THE REVERSE SIDE OF THIS CARD, REGARDLESS OF WHETHER THE SHAREHOLDER VOTES "FOR" OR "AGAINST" THE PROPOSED MERGER. (continued) FORM OF ELECTION The undersigned shareholder of First Financial Corporation of Western Maryland ("FFWM") hereby elects to receive, upon the proposed merger (the "Merger") of FFWM into Keystone Financial, Inc. ("Keystone") becoming effective, in exchange for each share of FFWM Common Stock held by the undersigned, either: [_] 1.29 shares of Keystone Common Stock or [_] Cash in an amount equal to 1.29 times the average of the closing bid prices for Keystone Common Stock for the 20 NASDAQ trading days ending with the sixth trading day before the closing date for the Merger Only one of the two blocks may be checked. ALL SHARES OF FFWM COMMON STOCK REGISTERED IN THE NAME OF AN FFWM SHAREHOLDER WHOSE FORM OF ELECTION IS NOT RECEIVED BY FFWM PRIOR TO 10:00 A.M., LOCAL TIME, ON MARCH 17, 1997 OR WHO DOES NOT INDICATE A CHOICE ABOVE WILL BE CONVERTED INTO EITHER KEYSTONE COMMON STOCK OR CASH IN ACCORDANCE WITH THE PROCEDURES DESCRIBED IN THE JOINT PROXY STATEMENT/PROSPECTUS. THE EFFECTIVENESS OF ANY ELECTION BY AN FFWM SHAREHOLDER IS SUBJECT TO THE LIMITATIONS AND PROCEDURES DESCRIBED IN THE JOINT PROXY STATEMENT/PROSPECTUS. Any FFWM shareholder who has submitted a Form of Election may change it by submitting to FFWM a revised Form of Election (or a facsimile thereof) which is received by FFWM prior to 10:00 a.m., local time, on March 17, 1997. At such time Elections will become irrevocable except to the extent changes are permitted or made in order to satisfy the limitations on Elections described in the Joint Proxy Statement/Prospectus. Dated: , 1997 ------------------------------------- -------------------------------------------------- Signature -------------------------------------------------- Signature Please sign exactly as name appears hereon. For joint accounts, each joint owner should sign. When signing as attorney, executor, administrator, trustee or guardian, please give your full title as such. If a corporation, please sign the full corporate name by President or other authorized officer, giving your full title as such. If a partnership, please sign in the partnership name by authorized person, giving your full title as such. EX-99.14 25 DIRECTOR'S AGREEMENT (FIRST FINANCIAL) EXHIBIT 99.14 November 26, 1996 Keystone Financial, Inc. One Keystone Plaza Front & Market Streets P.O. Box 3660 Harrisburg, Pennsylvania 17105-3660 Gentlemen: The undersigned director of First Financial Corporation of Western Maryland (the "Company") understands that Keystone Financial, Inc. (the "Acquiror") is about to enter into an Agreement and Plan of Merger (the "Merger Agreement") with the Company. The Merger Agreement provides for the merger of the Company with and into the Acquiror (the "Merger") and the conversion of outstanding shares of Company Common Stock into Acquiror Common Stock or cash in accordance with the terms therein set forth. In order to induce Keystone to enter into the Merger Agreement, and intending to be legally bound hereby, the undersigned represents, warrants and agrees that at the meeting of the Company's shareholders contemplated by Section 5.2 of the Merger Agreement and any adjournment thereof the undersigned will, in person or by proxy, vote or cause to be voted in favor of the Merger Agreement and the Merger the shares of Company Common Stock beneficially owned by the undersigned individually or, to the extent of the undersigned's proportionate voting interest, jointly with other persons, as well as (to the extent of the undersigned's proportionate voting interest) any other shares of Company Common Stock over which the undersigned may hereafter acquire beneficial ownership in such capacities (collectively, the "Shares"). Subject to the final paragraph of this agreement, the undersigned further agrees that he will use his best efforts to cause any other shares of Company Common Stock over which he has or shares voting power to be voted in favor of the Merger Agreement and the Merger. The undersigned further represents, warrants and agrees that until the earlier of (i) the consummation of the Merger or (ii) the termination of the Merger Agreement in accordance with its terms, the undersigned will not, directly or indirectly: (a) vote any of the Shares, or cause or permit any of the Shares to be voted, in favor of any other merger, consolidation, plan of liquidation, sale of assets, reclassification or other transaction involving the Company or First Federal Savings Bank of Western Maryland (the "Bank") which would have the effect of any person, other than the Acquiror or an affiliate of the Acquiror, acquiring control over the Company, the Bank or any substantial portion of the assets of the Company or the Bank. As used herein, the term "control" means (1) the ability to direct the voting of 10% or more of the outstanding voting securities of a person having ordinary voting power in the election of directors or in the election of any other body having similar functions or (2) the ability to direct the management and policies of a person, whether through ownership of securities, through any contract, arrangement or understanding or otherwise. (b) sell or otherwise transfer any of the Shares, or cause or permit any of the Shares to be sold or otherwise transferred (i) pursuant to any tender offer, exchange offer or similar proposal made by any person other than the Acquiror or an affiliate of the Acquiror, (ii) to any person known by the undersigned to be seeking to obtain control of the Company, the Bank or any substantial portion of the assets of the Company or the Bank or to any other person (other than the Acquiror or an affiliate of the Acquiror) under circumstances where such sale or transfer may reasonably be expected to assist a person seeking to obtain such control or (iii) for the principal purpose of avoiding the obligations of the undersigned under this agreement. It is understood and agreed that this agreement relates solely to the capacity of the undersigned as a shareholder or other beneficial owner of the Shares and is not in any way intended to affect the exercise by the undersigned of the undersigned's responsibilities as a director or officer of the Company or the Bank. It is further understood and agreed that the term "Shares" shall not include any securities beneficially owned by the undersigned as a trustee or fiduciary, and that this agreement is not in any way intended to affect the exercise by the undersigned of the undersigned's fiduciary responsibility in respect of any such securities. Very truly yours ---------------------------------- Name: Accepted and Agreed to: KEYSTONE FINANCIAL, INC. By: -------------------------------- Name: Carl L. Campbell Title: President and Chief Executive Officer -2- Name of Director: ------------------------- Shares of Company Common Stock Beneficially Owned As of November 26, 1996 ----------------------- Name(s) of Capacity of Director's Number of Record Owner(s) Beneficial Ownership Shares - --------------- ---------------------- --------- -3- -----END PRIVACY-ENHANCED MESSAGE-----