-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, ZaIu5jazSnsinbb3vZhHBO9lrBVJCgRI8IjC4zhbcNtM1lPxEbteTK690v1UB3gY rnBLdqnDyBtLGzmYqo7IGg== 0000950132-95-000234.txt : 19950721 0000950132-95-000234.hdr.sgml : 19950721 ACCESSION NUMBER: 0000950132-95-000234 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950719 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYSTONE FINANCIAL INC CENTRAL INDEX KEY: 0000717809 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232289209 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-91532 FILM NUMBER: 95554726 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 424B3 1 PROSPECTUS RULE 424(b)(3) REGISTRATION NO. 33-91532 [LOGO AND LETTERHEAD OF SHAWNEE FINANCIAL SERVICES CORPORATION APPEARS HERE] July 19, 1995 Dear Shareholder: A Special Meeting of the Shareholders of the Shawnee Financial Services Corporation ("Shawnee") will be held on Tuesday, August 22, 1995, at 11:00 a.m., local time, at the Board Room of The Everett Bank, 115 East Main Street, Everett, Pennsylvania 15537. The purpose of the Special Meeting is to consider and vote upon a proposal to approve an Agreement and Plan of Reorganization and a related Agreement and Plan of Merger (collectively, the "Plan of Merger") providing for the merger of Shawnee into Keystone Financial, Inc. ("Keystone"). Keystone is a bank holding company with its principal office in Harrisburg, Pennsylvania. Through its subsidiary banks, Keystone currently maintains 140 banking offices in central and southeastern Pennsylvania, western Maryland and northeastern West Virginia. If the merger is approved, Shawnee shareholders will receive 6.25 shares of Keystone Common Stock in exchange for each share of Shawnee Common Stock owned by them. Upon consummation of the merger, Shawnee shareholders will no longer hold any interest in Shawnee. Instead, you will be a shareholder of Keystone. Keystone Common Stock is quoted on the NASDAQ National Market System under the symbol "KSTN." Based on the July 13, 1995 closing sale price for Keystone Common Stock of $30.00 per share, the value of the 6.25 shares of Keystone Common Stock being offered for each Shawnee share in the merger would be $187.50. Shareholders should note that the market value of the Keystone Common Stock may change prior to consummation of the merger. SHAREHOLDERS ARE ENCOURAGED TO READ AND CAREFULLY CONSIDER THE ATTACHED PROXY STATEMENT/PROSPECTUS WHICH CONTAINS A MORE COMPLETE DESCRIPTION OF THE TERMS OF THE PROPOSED MERGER AND PROVIDES DETAILED FINANCIAL, BUSINESS AND OTHER INFORMATION CONCERNING SHAWNEE AND KEYSTONE. The Board of Directors of Shawnee has carefully considered the Plan of Merger and believes that the proposed merger is in the best interests of Shawnee and its shareholders. ACCORDINGLY, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE PLAN OF MERGER. All the executive officers and directors of Shawnee have advised Shawnee of their intention to vote the shares of Shawnee Common Stock owned by them in favor of the Plan of Merger. The affirmative vote of the holders of 75% of all outstanding shares of Shawnee Common Stock is necessary for approval of the Plan of Merger. Consummation of the Plan of Merger is also subject to the receipt of regulatory approvals by certain banking authorities that have not been obtained as of this date. Your vote is important regardless of the number of shares you own. We urge you to participate in this significant development by marking, signing, dating and returning promptly the enclosed proxy in the accompanying postage paid, pre-addressed envelope, whether or not you plan to attend the Special Meeting. You will retain the right to vote your shares in person at the Special Meeting if you so desire. All properly executed proxies not previously revoked will be voted at the Special Meeting in accordance with the instructions given on the proxy. Proxies containing no voting instructions regarding the proposal to approve the Plan of Merger will be voted in favor of the merger. Sincerely yours, /s/ SAMUEL K. BOHN Samuel K. Bohn President and Chief Executive Officer SHAWNEE FINANCIAL SERVICES CORPORATION P.O. BOX 149 EVERETT, PENNSYLVANIA 15537 _________________ NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON AUGUST 22, 1995 _________________ TO THE SHAREHOLDERS: NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Shawnee Financial Services Corporation (the "Corporation") will be held on Tuesday, August 22, 1995 at 11:00 a.m., local time, at the Board Room of The Everett Bank, 115 East Main Street, Everett, 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 January 5, 1995, between the Corporation and Keystone Financial, Inc., which provide for the merger of the Corporation into Keystone Financial, Inc. and the conversion of each outstanding share of the Corporation's Common Stock into 6.25 shares of Keystone Common Stock, as described in the accompanying Proxy Statement/Prospectus; 2. Such other matters as may properly come before the meeting or any adjournment thereof. Only shareholders of record at the close of business on June 24, 1995 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 B. Frank Dunkle, Jr., Secretary July 19, 1995 PROXY STATEMENT/PROSPECTUS KEYSTONE FINANCIAL, INC. 501,150 SHARES OF COMMON STOCK, $2 PAR VALUE ISSUABLE IN PROPOSED MERGER WITH SHAWNEE FINANCIAL SERVICES CORPORATION This Proxy Statement/Prospectus is being furnished to the shareholders of Shawnee Financial Services Corporation ("Shawnee") in connection with the solicitation of proxies by its Board of Directors for use at a Special Meeting of Shareholders of Shawnee to be held on August 22, 1995. The purpose of the Special Meeting is to consider a proposed merger (the "Merger") of Shawnee into Keystone Financial, Inc. ("Keystone"). As a result of the Merger, Keystone, which will be the surviving corporation, will acquire all of the assets and liabilities of Shawnee, and the shareholders of Shawnee will become shareholders of Keystone. Each outstanding share of Shawnee Common Stock will be converted in the Merger into 6.25 shares of Keystone Common Stock. The Keystone Common Stock is quoted on the NASDAQ National Market System under the symbol "KSTN." Based on the July 13, 1995 closing sale price for Keystone Common Stock of $30.00 per share, the value of the 6.25 shares of Keystone Common Stock being offered for each Shawnee share in the Merger would be $187.50. Shawnee shareholders should note that the market value of the Keystone Common Stock may change prior to consummation of the Merger. The approximate date on which this Proxy/Statement Prospectus will first be mailed to the shareholders of Shawnee is July 19, 1995. ______________________ THE SHARES OF KEYSTONE COMMON STOCK TO BE ISSUED IN THE MERGER 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 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 in this Proxy Statement/Prospectus, and, if given or made, any such information or representation should not be relied upon as having been authorized by Keystone or Shawnee. This 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 Proxy Statement/Prospectus at any time nor the distribution of Keystone Common Stock hereunder shall imply that the information contained herein is correct as of any time subsequent to its date. ______________________ The date of this Proxy Statement/Prospectus is July 14, 1995. AVAILABLE INFORMATION Keystone has filed with the Securities and Exchange Commission (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 Merger. As permitted by the rules and regulations of the SEC, this Proxy Statement/Prospectus omits certain information, exhibits and undertakings contained in the Registration Statement. The statements contained in this 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 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 Room 1024, 450 Fifth Street, N.W., Washington, D.C., and copies of such material can be obtained at prescribed rates by mail addressed to the SEC, Public Reference Section, Washington, D.C. 20549. Keystone is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files reports, proxy statements and other information with 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 1400, 500 West Madison Street, Chicago, Illinois; and Room 1228, 75 Park Place, New York, New York. Copies of such material can also be obtained at prescribed rates by mail addressed to the SEC, Public Reference Section, Washington, D.C. 20549. Keystone Common Stock is quoted on the NASDAQ National Market System, and such reports, proxy statements and other Keystone information can also be inspected at the offices of NASDAQ Operations, 1735 K Street, N.W., Washington, D.C. THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE CERTAIN DOCUMENTS RELATING TO THE MERGER AND TO KEYSTONE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SEE "PLAN OF MERGER" AND "KEYSTONE DOCUMENTS INCORPORATED BY REFERENCE" BELOW. COPIES OF SUCH DOCUMENTS, INCLUDING THE PLAN OF MERGER, ARE AVAILABLE UPON WRITTEN OR ORAL REQUEST AND WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROXY STATEMENT/PROSPECTUS HAS BEEN DELIVERED. REQUESTS FOR COPIES OF DOCUMENTS INCORPORATED BY REFERENCE HEREIN 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). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST BY A SHAWNEE SHAREHOLDER SHOULD BE MADE NOT LATER THAN JULY 25, 1995. 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 Proxy Statement/Prospectus: 1. Keystone's Annual Report on Form 10-K for the year ended December 31, 1994; 2. Keystone's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995; and 3. 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 Proxy Statement/Prospectus and prior to the date of the Shawnee Special Meeting shall be deemed to be incorporated by reference in this Proxy Statement/Prospectus and to be a part hereof from the date of the filing of such documents. Shawnee 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. -2- KEYSTONE FINANCIAL, INC. AND SHAWNEE FINANCIAL SERVICES CORPORATION _________ PROXY STATEMENT/PROSPECTUS _________ TABLE OF CONTENTS
PAGE ---- SUMMARY............................................................ iii INTRODUCTION Record Date; Voting Rights.................................... 1 Purpose of the Special Meeting................................ 1 Voting and Revocation of Proxies.............................. 2 Solicitation of Proxies....................................... 2 PLAN OF MERGER The Merger.................................................... 2 Background of and Reasons for the Merger...................... 3 Required Vote; Management Recommendation...................... 6 Voting Agreements............................................. 6 Trust Department Shares....................................... 7 Opinion of Shawnee Financial Advisor.......................... 7 Conversion of Shawnee Shares.................................. 11 Tax Consequences to Shawnee Shareholders...................... 12 Boards of Directors Following the Merger...................... 13 Interests of Certain Persons in the Transaction............... 14 Warrant Agreement............................................. 15 Inconsistent Activities....................................... 16 Conduct of Shawnee Business Pending the Merger................ 16 Shawnee Dividend Limitation................................... 16 Conditions to the Merger...................................... 17 Representations and Warranties................................ 17 Amendment, Waiver and Termination............................. 17 Dissenters' Rights of Shawnee Shareholders.................... 18 Restrictions on Resales by Shawnee Affiliates................. 20 Effect of Certain Transactions Involving Keystone............. 21 Expenses...................................................... 21 Effective Date of the Merger.................................. 21 Accounting Treatment.......................................... 22 INFORMATION CONCERNING KEYSTONE KEYSTONE SELECTED FINANCIAL DATA................................. 23 STOCK PRICES AND DIVIDENDS ON KEYSTONE COMMON STOCK.............. 25
-i- INFORMATION CONCERNING SHAWNEE SHAWNEE SELECTED FINANCIAL DATA.................................. 26 SHAWNEE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................. 27 MARKET AND DIVIDEND INFORMATION CONCERNING SHAWNEE COMMON STOCK.......................................... 38 BUSINESS OF SHAWNEE.............................................. 39 MANAGEMENT OF SHAWNEE............................................ 41 CERTAIN BENEFICIAL OWNERS OF SHAWNEE COMMON STOCK................ 43 SHAWNEE'S INDEPENDENT AUDITORS................................... 43 COMPARISON OF KEYSTONE COMMON STOCK AND SHAWNEE COMMON STOCK......................................... 44 LEGAL OPINIONS..................................................... 49 EXPERTS............................................................ 49 OTHER MATTERS...................................................... 49 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......................... 50 ANNEXES I. Opinion of Berwind Financial Group, L.P. to Shawnee......... A-1 II. Statutory Provisions Concerning Dissenters' Rights of Shawnee Shareholders............................. A-3
-ii- SUMMARY THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION WHICH MAY ALSO BE CONTAINED ELSEWHERE IN THIS 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 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 seventh largest bank holding company in Pennsylvania. Its banking subsidiaries are Mid-State Bank and Trust Company, Altoona, Pennsylvania ("Mid-State"); Pennsylvania National Bank and Trust Company, Pottsville, Pennsylvania; Northern Central Bank, Williamsport, Pennsylvania; The Frankford Bank, N.A., Horsham, Pennsylvania; American Trust Bank, Cumberland, Maryland; and American Trust Bank of West Virginia, Inc., Keyser, West Virginia. 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 larger Keystone organization to provide a broad product line and gain operating and management efficiencies through economies of scale. In addition to the traditional banking services provided by its member banks, Keystone has established several nonbanking subsidiaries to deliver an array of services to both Keystone and its customers, including brokerage, mortgage banking, leasing, investments 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 July 13, 1995, the closing sale price for Keystone Common Stock on the NASDAQ National Market System was $30.00. See "Information Concerning Keystone--Stock Prices and Dividends on Keystone Common Stock." At March 31, 1995, Keystone reported consolidated total assets of $4.680 billion, deposits of $3.825 billion and net loans and leases of $3.195 billion. Keystone reported net income of $51,359,000, or $2.20 per share, for the year ended December 31, 1994 and net income of $14,656,000, or $0.63 per share, for the three months ended March 31, 1995. See "Information Concerning Keystone-- Selected Financial Data" and "Keystone Documents Incorporated by Reference." Shawnee Financial Services Corporation ("Shawnee") is a bank holding company with its principal executive offices at 115 East Main Street, Everett, Pennsylvania 15537 (telephone: 814-652-5138). Its sole subsidiary is The Everett Bank, which has four banking offices in Bedford County in central Pennsylvania. See "Information Concerning Shawnee--Business of Shawnee." At March 31, 1995, Shawnee reported consolidated total assets of $71.209 million, deposits of $62.627 million and net loans of $38.752 million. Shawnee reported net income of $727,000, or $9.07 per share, for the year ended December 31, 1994 and net income of $191,000, or $2.38 per share, for the three months ended March 31, 1995. See "Information Concerning Shawnee--Selected Financial Data;" Information Concerning Shawnee--Management's Discussion and Analysis of Financial Condition and Results of Operations;" and "Index to Consolidated Financial Statements." -iii- THE SHAWNEE SPECIAL MEETING The Special Meeting of Shareholders of Shawnee (the "Special Meeting") will be held at 11:00 a.m., local time, on August 22, 1995 at The Everett Bank's Board Room, 115 East Main Street, Everett, Pennsylvania. Only holders of record of Common Stock, par value $10.00 per share, of Shawnee ("Shawnee Common Stock") at the close of business on June 24, 1995 will be entitled to vote at the Special Meeting. At that date, 80,184 shares of Shawnee Common Stock were outstanding, each share being entitled to one vote. See "Introduction." THE MERGER At their Special Meeting, the shareholders of Shawnee will be asked to approve an Agreement and Plan of Reorganization and a related Agreement and Plan of Merger (collectively, the "Plan of Merger") between Keystone and Shawnee. The Plan of Merger provides for the merger of Shawnee into Keystone (the "Merger"). It is contemplated that simultaneously with or following the Merger, The Everett Bank will be merged (the "Bank Merger") into Mid-State, one of Keystone's operating bank subsidiaries. See "Plan of Merger--The Merger." As a result of the Merger, each outstanding share of Shawnee Common Stock will be converted into 6.25 shares of Keystone Common Stock, with cash to be paid in lieu of any fractional share. See "Plan of Merger--Conversion of Shawnee Shares." On July 13, 1995, the closing sale price for Keystone Common Stock on the NASDAQ National Market System was $30.00 per share. REASONS FOR THE MERGER Shawnee. The past several years have evidenced significant changes in the banking industry, including greater regulation at the federal level (both in terms of paperwork and complexity) and significant consolidation among banks. During the first quarter of 1994, the Board of Directors of Shawnee began to consider its goals for the future. These goals included the enhancement of shareholder value, continued service to the Everett area and surrounding communities and continued attention to the needs of its employees. In April 1994, certain representatives of Shawnee were approached by Keystone concerning a possible merger of the two companies. Throughout the summer and fall of 1994, these discussions continued, leading to a definitive proposal in November 1994 for Keystone to acquire Shawnee. This proposal addressed issues relating to the structure of the transaction as a tax-free exchange, and proposed an exchange ratio of 5.849 shares of Keystone Common Stock for each share of Shawnee Common Stock outstanding. Berwind Financial Group, L.P. ("Berwind") was retained by the Board in October 1994 to advise it concerning the financial aspects of a potential merger with Keystone or another party. Berwind has represented many banks in acquisition transactions, acting on behalf of both acquirors and acquirees. Berwind reported its preliminary findings on the value of Shawnee to the Board of Directors in December 1994. Following this presentation, the Board directed Berwind to negotiate with Keystone over the next week to obtain a higher price for Shawnee shareholders while meeting the Board's other, non-financial objectives. Berwind reported back to the Board on December 13, 1994 that Keystone would be willing to increase its offer to 6.25 shares of Keystone Common Stock for each share of Shawnee Common Stock outstanding, which the Board then voted to accept. The Board directed its attorneys to proceed to negotiate a definitive merger agreement with Keystone. This agreement was negotiated between the parties, presented to the Board, and signed on January 5, 1995. Prior to the signing of the Plan of Merger with Keystone, Shawnee received an opinion from its financial advisor to the effect that the Keystone offer was fair to the shareholders of Shawnee. Details of this opinion and Berwind's analysis are set forth in greater detail in this Proxy Statement/Prospectus. See "Plan of Merger--Opinion of Shawnee Financial Advisor." In addition to Berwind's fairness opinion, the Board favored the Merger for various other reasons, including the strength of Keystone as a banking institution and its ability to continue to serve customers in the bank's market, opportunities for The Everett Bank's employees within Keystone's organization -iv- and the significant benefits to Shawnee shareholders resulting from the consideration offered by Keystone and the tax-free nature of the transaction. For a more complete discussion of these reasons, see "Plan of Merger--Background of and Reasons for the Merger." Based upon the above and other factors, the Board unanimously approved the Plan of Merger on January 5, 1995. Shawnee has been contacted periodically by other banking institutions which have expressed an interest in a possible merger. Since beginning its discussions with Keystone last year, three bank holding companies have indicated orally a preliminary interest, and one bank holding company has expressed such an interest by means of a letter. No oral or written offer was made by any of such parties, and Shawnee did not pursue any further contact with these parties. Keystone. For Keystone, the addition of Everett's offices to Mid-State resulting from the Merger and the Bank Merger will provide a natural extension to Mid-State's market area and a bridge between the areas served by Mid-State and American Trust Bank, Keystone's subsidiary headquartered in Cumberland, Maryland. The Merger will enable Mid-State to better serve the agricultural market in eastern Bedford County and to serve this market's larger commercial customers by providing financial products and services which Everett has been unable to provide. VOTE REQUIRED FOR APPROVAL Approval of the Plan of Merger by the shareholders of Shawnee requires the affirmative vote of the holders of at least 75% of the outstanding shares of Shawnee Common Stock. A failure to vote, an abstention or a broker non-vote will have the same legal effect as a vote against the approval of the Plan of Merger. See "Plan of Merger--Required Vote; Management Recommendation." As of June 19, 1995, the directors and executive officers of Shawnee beneficially owned an aggregate of 21.33% of the outstanding Shawnee Common Stock. The directors and executive officers of Shawnee have entered into agreements with Keystone to vote in favor of the Merger shares of Shawnee 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 Merger. These agreements cover an aggregate of 21.33% of the outstanding Shawnee Common Stock. No monetary or other compensation was paid to any Shawnee director or executive officer for entering into these agreements. See "Plan of Merger--Voting Agreements." The Trust Department of Keystone's wholly owned subsidiary, Mid-State, acting in a fiduciary capacity, has voting power over 8.37% of the outstanding Shawnee Common Stock. It is anticipated that these shares will be voted in favor of the Merger. Shawnee was informed in January 1995 by its largest shareholder, June A. Derrick (through her legal representative), that it was Mrs. Derrick's intention to vote her shares in favor of the Merger. Mrs. Derrick presently holds 15.71% of the outstanding Shawnee Common Stock. If Mrs. Derrick were to vote her shares in favor of the Merger, the percentage of the outstanding shares already anticipated to be voted in favor of the Merger would be approximately 45%. There can be no assurance that Mrs. Derrick will vote her shares in this manner. The Merger does not require approval by the shareholders of Keystone. OPINION OF FINANCIAL ADVISOR The investment banking firm of Berwind Financial Group, L.P. has rendered an opinion to Shawnee dated June 30, 1995 that the terms of the Merger are fair, from a financial point of view, to Shawnee and its -v- shareholders. This opinion is attached as Annex I to this Proxy Statement/Prospectus and should be read in its entirety for information as to the matters considered and the assumptions made in rendering such opinion. See "Plan of Merger--Opinion of Shawnee Financial Advisor." BOARD OF DIRECTORS' RECOMMENDATION THE BOARD OF DIRECTORS OF SHAWNEE BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF THE SHAREHOLDERS OF SHAWNEE AND UNANIMOUSLY RECOMMENDS THAT SHAWNEE SHAREHOLDERS VOTE "FOR" APPROVAL OF THE PLAN OF MERGER. SHAWNEE SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. POST-MERGER BOARDS OF DIRECTORS Following the Bank Merger, L. Frank Bittner, presently Chairman of the Board of Directors of Shawnee, will become a member of the Board of Directors of Mid-State. No change in the Board of Directors of Keystone will be made by reason of the Merger. See "Plan of Merger--Boards of Directors Following the Merger." INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION As a director of Mid-State, L. Frank Bittner will receive the same fees as other Mid-State directors, consisting of an annual retainer of $3,500, plus $500 per Board meeting and $200 per Board Committee meeting attended. Samuel K. Bohn, the President and a director of Shawnee and Everett, will be offered $50,000 per year for a two-year period to assist in the post-Merger transition and/or for a covenant not to compete. Ralphard L. Black, Vice President of Shawnee and Executive Vice President of Everett, will be employed as a Vice President of Mid-State without change by reason of the Merger in his salary, which is currently $65,000 per year. It is not intended that any of the remaining directors and executive officers of Shawnee, none of whom are employees, will be retained by Keystone or Mid-State following the Merger. No severance or similar payments will be made to such persons. Keystone has agreed to indemnify Shawnee's directors and officers with respect to events occurring prior to the Merger and to provide such persons with certain directors' and officers' liability insurance coverage. See "Plan of Merger--Interests of Certain Persons in the Transaction." EMPLOYEE MATTERS Keystone has agreed to consider Everett employees for employment within the Keystone organization to permit Everett employees employed by Keystone and its subsidiaries to participate on an equal basis in Keystone's internal open position posting and application procedures. Shawnee and Everett employees who become employees of Keystone and its subsidiaries will be provided employee benefits no less favorable than those provided to other similarly situated employees. Following the Merger, Keystone and Mid-State will perform the respective obligations of Shawnee and Everett with respect to vested benefits accrued under Everett's retirement and profit sharing plans. -vi- TAX CONSEQUENCES No gain or loss for federal or Pennsylvania income tax purposes will be recognized by shareholders of Shawnee on the exchange of their shares for Keystone Common Stock in the Merger, except with respect to cash received in lieu of fractional shares and cash paid to shareholders who elect dissenters' rights. For a more complete description of the Federal and Pennsylvania income tax consequences of the Merger, see "Plan of Merger--Tax Consequences to Shawnee Shareholders." WARRANT AGREEMENT In connection with the Plan of Merger, Shawnee has entered into an agreement granting Keystone a warrant to purchase up to 19.9% of the outstanding Shawnee Common Stock, at an exercise price of $182.81 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 Shawnee. The Warrant Agreement is designed to compensate Keystone for its risks, costs and expenses and the commitment of resources associated with the Plan of Merger in the event the Merger is not consummated due to an attempt by a third person to gain control of Shawnee. The Warrant Agreement may discourage third persons from making competing offers to acquire Shawnee and is intended to increase the likelihood that the Plan of Merger will be consummated in accordance with its terms. Exercise of the warrant for more than 5% of the outstanding Shawnee Common Stock would be subject to the approval of regulatory authorities. See "Plan of Merger--Warrant Agreement." DISSENTERS' RIGHTS Record holders of Shawnee Common Stock who object to the Merger and comply with the prescribed statutory procedures are entitled to have the fair value of their shares determined in accordance with the Pennsylvania Business Corporation Law and paid to them in cash in lieu of the shares of Keystone Common Stock they would otherwise be entitled to receive in the Merger. A copy of the pertinent statutory provisions is attached to this Proxy Statement/Prospectus as Annex II. FAILURE TO FOLLOW SUCH PROVISIONS PRECISELY MAY RESULT IN A LOSS OF DISSENTERS' RIGHTS. See "Plan of Merger--Dissenters' Rights of Shawnee Shareholders." DIFFERENCES IN SHAREHOLDER RIGHTS The rights of the holders of Keystone Common Stock differ in certain respects from those of the holders of Shawnee Common Stock. While for both Shawnee and Keystone certain mergers and other potential change-of-control transactions and certain amendments to the articles of incorporation or by-laws require approval by 75% of the outstanding shares, the types of transactions or amendments subject to the special vote requirements differ between the two companies, and a such transaction or amendment involving Keystone would also require approval by a majority of the shares not beneficially owned by a 20% shareholder. While both Keystone and Shawnee 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 Shawnee, Keystone has established a shareholder rights plan and is subject to certain provisions of the Pennsylvania Business Corporation Law which may discourage outside persons from attempting to acquire control of Keystone or make such an attempt more difficult. Because Keystone Common Stock is publicly traded, holders of Keystone Common Stock are not entitled to dissenters' appraisal rights in a variety of situations in which such rights would be available to shareholders of Shawnee. Unlike Shawnee, 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 Shawnee Common Stock and those of the holders of Keystone Common Stock, see "Comparison of Keystone Common Stock and Shawnee Common Stock." -vii- REGULATORY APPROVALS The Merger requires approval by the Board of Governors of the Federal Reserve System and the Pennsylvania Department of Banking. The Bank Merger requires approval by the FDIC and the Pennsylvania Department of Banking. Applications for these approvals have been filed and are expected to be approved, although no assurances may be given as to whether or when such approvals may be received. CONDITIONS; AMENDMENT; TERMINATION In addition to shareholder and regulatory approval, consummation of the Merger is contingent upon the receipt of certain tax opinions and the satisfaction of a number of other conditions. See "Plan of Merger--Conditions to the Merger." Notwithstanding prior shareholder approval, the Plan of Merger may be amended in any respect other than the ratio for converting Shawnee Common Stock into Keystone Common Stock in the Merger. The Plan of Merger may be terminated, and the Merger abandoned, notwithstanding prior shareholder approval, by mutual agreement of Keystone and Shawnee or by either of them in the event of a material breach by the other party, failure to receive shareholder or regulatory approval or failure to satisfy the conditions to the Merger prior to September 30, 1995 or, in certain circumstances, December 31, 1995. Shawnee may also terminate the Plan of Merger if (1) the average closing bid price for Keystone Common Stock for the 10 trading days ending six trading days prior to the closing date for the Merger is less than $24.86 and (2) such decline in Keystone's stock price exceeds by more than 15% the decline in the NASDAQ Combined Bank Index since January 4, 1995. See "Plan of Merger--Amendment, Waiver and Termination." EFFECTIVE DATE OF THE MERGER It is presently anticipated that if the Plan of Merger is approved by the shareholders of Shawnee, the Merger will become effective in the third quarter of 1995. However, there can be no assurance that all conditions necessary to the consummation of the Merger will be satisfied or, if satisfied, that they will be satisfied in time to permit the Merger to become effective at the anticipated time. See "Plan of Merger--Effective Date of the Merger." EXCHANGE OF CERTIFICATES Instructions on how to effect the exchange of Shawnee Common Stock certificates for Keystone Common Stock certificates will be sent as promptly as practicable after the Merger becomes effective to each shareholder of record of Shawnee immediately prior to the Merger. SHAREHOLDERS SHOULD NOT SEND IN STOCK CERTIFICATES UNTIL THEY RECEIVE WRITTEN INSTRUCTIONS TO DO SO. -viii- PRE-ANNOUNCEMENT PRICES The following table sets forth (i) the closing sale price for Keystone Common Stock on the NASDAQ National Market System on January 5, 1995, the last trading day prior to the first public announcement of the Merger and (ii) an equivalent per share price for Shawnee Common Stock computed by multiplying the closing sale price for Keystone Common Stock on January 5, 1995 by the Merger exchange ratio of 6.25 to 1.
LAST PRE-ANNOUNCEMENT EQUIVALENT PER PRICE SHARE PRICE ----- ----------- Keystone Common Stock................... $29.625 -- Shawnee Common Stock.................... -- $185.16
On July 13, 1995, the closing sale price for Keystone Common Stock was $30.00. Using this price, the equivalent per share price for Shawnee Common Stock would have been $187.50. The last trade of Shawnee Common Stock known to Shawnee management to have occurred prior to announcement of the Merger was a trade of 300 shares of Shawnee Common Stock at $92.00 per share on January 4, 1995 by parties not affiliated with Shawnee. There is no established market for Shawnee Common Stock, and there has been only limited trading in Shawnee Common Stock. Therefore, this price may not necessarily be indicative of the true market value of Shawnee Common Stock. ACCOUNTING TREATMENT Normally, the Merger would be accounted for by Keystone under the pooling- of-interests method of accounting. However, if the number of treasury shares purchased by Keystone under its share repurchase program exceeds certain limits, Keystone may be required to account for the Merger under the purchase method of accounting. See "Plan of Merger--Accounting Treatment." Pro forma financial information concerning the Merger is not included herein since the addition of Shawnee under either accounting method would not have materially affected the Keystone historical financial information as presented. -ix- SELECTED FINANCIAL INFORMATION--(UNAUDITED) The following table sets forth certain historical financial information for Keystone and Shawnee. The addition of Shawnee would not have materially affected the Keystone financial information as presented. This information is based on the consolidated financial statements of Keystone incorporated herein by reference and the consolidated financial statements of Shawnee appearing elsewhere herein and should be read in conjunction with such statements and the related notes.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------------- ---------------------------------------------------------- 1995 1994 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) KEYSTONE Earnings Net interest income..... $ 49,726 $ 45,174 $ 188,418 $ 182,510 $ 177,927 $ 163,734 $ 155,726 Provision for credit losses......... 2,084 1,642 9,484 7,940 16,053 16,323 15,107 Net income.............. 14,656 14,046 51,359 51,349 45,742 40,268 37,720 Per Share Net income.............. $ 0.63 $ 0.60 $ 2.20 $ 2.20 $ 1.99 $ 1.77 $ 1.66 Dividends............... 0.34 0.32 1.30 1.19 1.10 1.02 0.91 Balances at Period End Assets.................. $4,679,942 $4,346,653 $4,706,000 $4,419,726 $4,311,779 $4,120,215 $4,041,232 Deposits................ 3,825,127 3,573,328 3,827,983 3,582,688 3,655,261 3,560,284 3,523,779 Long-term debt.......... 5,528 6,793 6,054 5,990 5,144 2,143 2,989 Shareholders' equity.... 424,632 411,289 407,774 412,880 378,314 348,143 327,092 SHAWNEE Earnings Net interest income..... $ 721 $ 731 $ 3,083 $ 3,036 $ 2,833 $ 2,437 $ 2,101 Provision for loan losses........... 0 0 0 0 0 50 27 Net income.............. 191 194 727 834 728 486 571 Per Share Net income.............. $ 2.38 $ 2.42 $ 9.07 $ 10.35 $ 9.01 $ 6.02 $ 7.10 Dividends............... -- -- 2.70 2.60 2.50 2.40 2.30 Balances at Period End Assets.................. $ 71,209 $ 72,935 $ 69,951 $ 72,392 $ 68,671 $ 61,721 $ 58,905 Deposits................ 62,627 64,332 61,650 64,150 60,947 54,667 51,966 Long-term debt.......... -- -- -- -- -- -- -- Shareholders' equity.... 8,053 7,603 7,581 7,306 6,719 6,193 5,886
-x- 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 Common Stock and (ii) historical and equivalent comparative earnings and book values per share for Shawnee Common Stock. The addition of Shawnee would not have materially affected Keystone's historical earnings and book values per share. The following data is based on the consolidated financial statements of Keystone incorporated herein by reference and the consolidated financial statements of Shawnee appearing elsewhere herein and should be read in conjunction with such statements and the related notes.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------- ------------------------------------------ 1995 1994 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- ---- ---- NET INCOME PER COMMON SHARE Keystone Shareholders Keystone................. $ 0.63 $ 0.60 $ 2.20 $ 2.20 $ 1.99 $ 1.77 $ 1.66 Shawnee Shareholders Shawnee.................. $ 2.38 $ 2.42 $ 9.07 $10.35 $ 9.01 $ 6.02 $ 7.10 Shawnee equivalent (1)... 3.94 3.75 13.75 13.75 12.44 11.06 10.38 BOOK VALUE PER COMMON SHARE Keystone Shareholders Keystone................. $ 18.06 $17.58 $ 17.46 $17.65 $16.29 $15.27 $14.41 Shawnee Shareholders Shawnee.................. $100.43 $94.82 $ 94.55 $91.11 $83.09 $76.58 $72.97 Shawnee equivalent (1)... 112.88 -- 109.13 -- -- -- -- CASH DIVIDENDS DECLARED PER COMMON SHARE (2) Keystone Shareholders Keystone................. $ 0.34 $ 0.32 $ 1.30 $ 1.19 $ 1.10 $ 1.02 $ 0.91 Shawnee Shareholders Shawnee.................. -- -- $ 2.70 $ 2.60 $ 2.50 $ 2.40 $ 2.30 Shawnee equivalent (1)... $ 2.13 $ 2.00 8.13 7.44 6.88 6.38 5.69
_______________________ (1) The Shawnee equivalent per share data represents the historical data of Keystone multiplied by the Merger exchange ratio of 6.25 shares of Keystone Common Stock for each share of Shawnee Common Stock. (2) 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. -xi- KEYSTONE FINANCIAL, INC. AND SHAWNEE FINANCIAL SERVICES CORPORATION ________________ PROXY STATEMENT/PROSPECTUS ________________ INTRODUCTION This Proxy Statement/Prospectus is furnished in connection with the solicitation by the Board of Directors of Shawnee Financial Services Corporation ("Shawnee") of proxies to be voted at a Special Meeting of Shareholders of Shawnee (the "Special Meeting") to be held on Tuesday, August 22, 1995 and at any adjournment or adjournments thereof. The Special Meeting will be held at 11:00 a.m., local time, at the Board Room of The Everett Bank, 115 East Main Street, Everett, Pennsylvania. The approximate date on which this Proxy Statement/Prospectus will first be mailed to the shareholders of Shawnee is July 19, 1995. RECORD DATE; VOTING RIGHTS The Board of Directors of Shawnee has fixed the close of business on June 24, 1995 as the record date for determining the shareholders of Shawnee entitled to notice of and to vote at the Special Meeting. At that date, 80,184 shares of Common Stock, par value $10.00 per share, of Shawnee ("Shawnee Common Stock") were outstanding. Each such share 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 Special Meeting. Shawnee does not have any other outstanding class of capital stock. On June 19, 1995, there were approximately 168 shareholders of record of Shawnee Common Stock. PURPOSE OF THE SPECIAL MEETING At the Special Meeting, the shareholders of Shawnee 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 January 5, 1995 (collectively, the "Plan of Merger"), between Shawnee and Keystone Financial, Inc. ("Keystone"). As more fully described below under "Plan of Merger," the Plan of Merger provides for a merger of Shawnee into Keystone (the "Merger"). In the Merger, each outstanding share of Shawnee Common Stock (other than shares subject to dissenters' rights) will be converted into 6.25 shares of Keystone Common Stock. It is contemplated that simultaneously with or shortly following the Merger, Shawnee's subsidiary, The Everett Bank ("Everett"), will be merged into Mid-State Bank and Trust Company ("Mid-State"), one of Keystone's operating bank subsidiaries. Shawnee has received an opinion of the investment banking firm of Berwind Financial Group, L.P. that the terms of the Merger are fair to the shareholders of Shawnee from a financial point of view. See "Plan of Merger--Opinion of Shawnee Financial Advisor." THE BOARD OF DIRECTORS OF SHAWNEE BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF THE SHAREHOLDERS OF SHAWNEE AND UNANIMOUSLY RECOMMENDS THAT SHAWNEE SHAREHOLDERS VOTE TO APPROVE THE PLAN OF MERGER. VOTING AND REVOCATION OF PROXIES All properly executed proxies not theretofore revoked will be voted at the Special Meeting or any adjournments thereof in accordance with the instructions thereon. Proxies containing no voting instructions will be voted in favor of approval of the Plan of Merger. As to any other matter brought before the Special Meeting and submitted to a shareholder vote, proxies will be voted in accordance with the judgment of the proxyholders named thereon. However, the proxy of any shareholder who votes against approval of the Plan of Merger will not be used to vote in favor of any proposal to adjourn the Special Meeting in the event Shawnee management wishes to adjourn the meeting in order to allow time for the solicitation of additional votes to approve the transaction. 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 Shawnee written notice of such revocation or a later dated proxy or by attending the Special Meeting and voting in person. Attendance at the Special Meeting will not, of itself, constitute a revocation of a proxy. SOLICITATION OF PROXIES In addition to solicitation by mail, directors, officers and employees of Shawnee may solicit proxies from the shareholders of Shawnee in person or by telephone or otherwise. No additional compensation will be paid for such solicitation. 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. Shawnee will bear its own expenses in connection with the solicitation of proxies for the Special Meeting, except that Keystone and Shawnee will each pay 50% of the printing costs related to the solicitation of proxies from Shawnee shareholders. See "Plan of Merger--Expenses." Shawnee estimates that its out-of-pocket expenses in connection with the solicitation of proxies for the Special Meeting will be approximately $5,500, including 50% of total printing costs estimated at $9,000. PLAN OF MERGER This section of the Proxy Statement/Prospectus describes the material terms of the Plan of Merger. The following description does not purport to be complete and is qualified in its entirety by reference to the Plan of Merger, which has been filed with the SEC as an exhibit to the Registration Statement. The Plan of Merger is incorporated in this Proxy Statement/Prospectus by reference to such filing and is available upon request. See "Available Information." THE MERGER The Plan of Merger provides for a merger of Keystone and Shawnee in which Keystone will be the surviving corporation. As a result of the Merger, Keystone will acquire all of the assets and liabilities of Shawnee, and Shawnee will cease to exist as a separate corporation. In the Merger, the shareholders of Shawnee will become shareholders of Keystone. Each of the approximately 80,184 outstanding shares of Shawnee Common Stock (other than shares subject to dissenters' rights) will be converted into 6.25 shares of Keystone Common Stock, with cash to be paid in lieu of any fractional share. See "Conversion of Shawnee Shares." Keystone is a bank holding company with its principal executive offices in Harrisburg, Pennsylvania. The principal subsidiaries of Keystone are Mid-State, Altoona, Pennsylvania; Pennsylvania National Bank and Trust Company, Pottsville, Pennsylvania; Northern Central Bank, Williamsport, Pennsylvania; The Frankford Bank, N.A., Horsham, Pennsylvania; American Trust Bank, Cumberland, Maryland; and American Trust Bank of West -2- Virginia, Inc., Keyser, West Virginia. Keystone's bank subsidiaries operate a combined total of 140 banking offices in central and southeastern Pennsylvania, western Maryland and northeastern West Virginia. See "Summary--The Parties-- Keystone" and "Keystone Documents Incorporated by Reference." Shawnee is a bank holding company with its principal executive offices in Everett, Pennsylvania. Shawnee's sole subsidiary is Everett, which has four banking offices in Bedford County in central Pennsylvania. See "Business of Shawnee." It is contemplated that simultaneously with or shortly following the Merger of Shawnee and Keystone, Everett, Shawnee's bank subsidiary, will be merged into Mid-State, one of Keystone's bank subsidiaries (the "Bank Merger"). The Bank Merger is conditioned upon the prior or simultaneous consummation of the Merger of Shawnee and Keystone. While the Merger of Shawnee and Keystone is not conditioned upon consummation of the Bank Merger, it is a waivable condition to Keystone's obligations to consummate the Merger that the regulatory approvals required for the Bank Merger shall have been received. See "Conditions to the Merger." BACKGROUND OF AND REASONS FOR THE MERGER Shawnee. In the view of Shawnee's management, the past several years have been a period of substantial and rapid change in the banking industry in general. Recent changes in federal and state banking laws and regulations have had a major impact upon the banking industry in Pennsylvania and throughout the United States. In response to these changes, many mergers and consolidations involving banks and bank holding companies have occurred. Further merger activity is likely to occur in the future, resulting in increased concentration levels in banking markets and other significant changes in the competitive environment. These changes are expected to intensify competition in local and regional banking markets. In addition, recent changes in banking laws have significantly increased the severity and complexity of banking regulations, as well as increasing the costs that banks must incur in complying with those regulations. With these considerations in mind, the Board of Directors began to consider its future course of action in early 1994. During the spring of 1994, representatives of Keystone approached Shawnee's senior management to indicate Keystone's interest in pursuing a possible acquisition of Shawnee. A series of initial contacts and preliminary discussions ensued over the next few months, and in June of 1994 Keystone made a preliminary overture to acquire Shawnee. Although no definitive decision had been made by the Board to sell the company at that time, Shawnee's Board decided it would be appropriate to retain legal and financial advisors to assist it in the evaluation of the Keystone proposal and other strategic options. In mid-October 1994, Shawnee retained the investment banking firm of Berwind Financial Group, L.P. ("Berwind"), to act as its financial advisor in connection with any possible transaction with Keystone. Berwind has extensive experience in representing buyers and sellers in commercial transactions, with a particular expertise in the banking industry. Berwind evaluated the business and prospects of Shawnee over the next several months, engaged in discussions with senior management about the same, and prepared an analysis of Shawnee to be presented to the Board. In addition, upon the receipt of a more definitive offer from Keystone in November 1994, Berwind also prepared a preliminary analysis of this offer. The Keystone offer made on November 22, 1994 proposed a tax-free exchange of shares whereby 5.849 shares of Keystone stock would be tendered for each one share of Shawnee stock outstanding. It also stated Keystone's intention to attempt to provide employment opportunity to as many of the bank's employees as possible, consistent with the previous discussions between the parties. At Keystone's closing stock price on November 22, 1994, the aggregate value of the consideration offered to Shawnee's shareholders was $13,835,388. At a meeting of the Shawnee Board of Directors held on December 8, 1994, Shawnee's senior management provided its Board of Directors with reports on the status of the discussions with Keystone, including a discussion of the November 22 proposal. Also, Berwind made detailed presentations regarding the financial consequences of -3- Shawnee remaining as an independent financial institution or affiliating with a larger bank holding company, such as Keystone. Substantial information was provided to the Shawnee Board of Directors regarding the likely future value of Shawnee's common stock under these different scenarios. In addition, evaluating only publicly available information, Berwind discussed with the Shawnee Board the financial condition and operations of Keystone and, in general, other large bank holding companies that might have an interest in making an acquisition in Shawnee's market, and the terms of other recent, comparable transactions. At the conclusion of the December 8th meeting, the Shawnee Board of Directors authorized Berwind to negotiate on its behalf with a view towards obtaining a higher price per share than that presented in the November 22 proposal (5.849 shares of Keystone) while maintaining the Board's interest in protecting its employees and other constituencies. Although not prohibited by Keystone from doing so, the Board did not want to contact other potential acquirors before fully exploring a transaction with Keystone because the Board believed that managerially, operationally and financially Keystone was a very attractive merger partner. Further, the Board believed that there was no guarantee that the Keystone offer (if revised upward), would not be withdrawn or subsequently reduced if such a revised offer was rejected or delayed. At the December 13, 1994 Board meeting, Berwind communicated to the Board of Directors that it was able to achieve an increase in the consideration offered per share from 5.849 shares of Keystone for each share of Shawnee to 6.25 shares of Keystone for each share of Shawnee common stock. Keystone's increased offer was conditioned upon Shawnee's agreeing to begin the negotiation of a definitive merger agreement. Berwind advised that this offer was also subject to Keystone's performing a due diligence review on Shawnee and Shawnee engaging in a similar due diligence review of Keystone. Due diligence refers to the process where legal and financial representatives from each party review the books and records of the other party. Thereafter, the Board authorized its attorneys to negotiate with Keystone with a view toward reaching a definitive merger agreement that would address the legal, financial and social concerns of the Board. Over the next few weeks, representatives of Keystone and Shawnee conducted due diligence investigations of each others' respective operations and negotiated the Plan of Merger. Keystone also informed Shawnee that, as a condition to Keystone's executing the Plan of Merger, Keystone would require the execution by Shawnee of the Warrant Agreement, thereby giving Keystone the ability to protect the benefit of its bargain in the event another acquiror would pay a higher price for Shawnee and the Board of Shawnee would accept such an offer. The Warrant Agreement permits Keystone, under certain circumstances, to acquire up to 19.9% of the shares of Shawnee at a price of $182.81 per share (see "Plan of Merger--Warrant Agreement"). Shawnee has been contacted periodically by other banking institutions which have expressed an interest in a possible merger. Since beginning its discussions with Keystone last year, three bank holding companies have indicated orally a preliminary interest, and one bank holding company has expressed such an interest by means of a letter. Only one of these bank holding companies was larger in asset size than Keystone. No oral or written offer was made by any of such parties, and Shawnee did not pursue any further contact with these parties. On January 5, 1995, the Shawnee Board of Directors met to consider Keystone's acquisition proposal, including the Plan of Merger and the Warrant Agreement. Attorneys from the law firm of Buchanan Ingersoll discussed with the Board of Directors the legal ramifications of the provisions of the merger agreements. Berwind made a detailed presentation regarding the proposal and the alternatives available to Shawnee, and compared the terms of the Keystone proposal to the terms of other comparable transactions. After the presentations, the financial advisor gave the opinion that, from a financial point of view, the offer from Keystone was fair to Shawnee and its shareholders. At Keystone's closing stock price on January 5, 1995, the aggregate value of the consideration offered to Shawnee's shareholders was $14,846,569. For a detailed discussion of the analysis underlying the financial advisor's fairness opinion, see "Plan of Merger--Opinion of Shawnee Financial Advisor." Then, after extensive discussion and consideration, the Board of Directors unanimously voted to accept the Keystone proposal and approve the Plan of Merger and the Warrant Agreement. -4- In reaching its determination to approve the Plan of Merger and the Warrant Agreement, the Shawnee Board of Directors considered a variety of factors, including: (1) The consideration offered by Keystone in the Plan of Merger in relation to the market value, book value and earnings per share of Shawnee on an historical basis; (2) Shawnee's business, results of operations, financial position and prospects for its remaining independent in a rapidly consolidating industry; (3) The management, business, results of operations and financial condition of Keystone, which the Board believes will serve the interests of its shareholders, its employees and the community served by Shawnee after the Merger; (4) The current and historical dividends paid on Shawnee Common Stock and Keystone Common Stock and the significant increase in dividends per year which would result to Shawnee's shareholders from the Merger; (5) The expectation that the Merger will be a tax-free transaction to Shawnee shareholders; (6) The financial terms of other recent business combinations in the banking industry; (7) The financial advice rendered by Berwind, including its opinion to the effect that the exchange ratio contemplated by the Plan of Merger is fair from a financial point of view to Shawnee shareholders; (8) The overall terms of the Plan of Merger, which provided protections for the employees of Shawnee; (9) The overall business environment in the banking industry, including increased competition from larger banks which offer a more diversified portfolio of products and services and the costs of complying with increasingly complex federal and state banking regulation; and (10) The benefit to shareholders of Shawnee by providing them with equity ownership in a larger, publicly traded banking organization and, thereby, increasing the liquidity of their investment. The Board considered factors (1), (4), (5) and (6) of great importance as a means to enhance its shareholders' value over the short, intermediate, and long-term. The Board also believed that factors (3) and (8) were very significant because it hoped that the bank would be able to provide employment and serve its community into the future. Other than the presentation made by Berwind, which provided certain quantifications with respect to recent, comparable transactions, the Board did not independently quantify, or assign weightings to any of the 10 reasons listed above. Further, no negative factors were expressed by the Board with respect to the transaction with Keystone. The Board also considered that the directors of Shawnee, a Pennsylvania corporation, were entitled by statute to consider other factors, in addition to the maximization of shareholder value, in a change of control transaction. These considerations included, but were not limited to, the effect on employment of bank personnel and the effect on the community served by the corporation. The Board of Directors of Shawnee believes that the terms of the proposed Merger are fair to and in the best interests of Shawnee and its shareholders. Shawnee's Board of Directors also believes that the Merger will significantly enhance the ability of Shawnee's offices to satisfy the financial needs of its present customers and the communities served. FOR THESE REASONS, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAWNEE SHAREHOLDERS VOTE TO APPROVE THE MERGER OF SHAWNEE INTO KEYSTONE. -5- Keystone. For Keystone, the Merger is part of a continuing search for areas in which to expand its existing franchise. The central part of Pennsylvania is historically Keystone's primary market area. Keystone views this area as an attractive market and one with which it is familiar. The territory served by Everett provides a bridge between the market areas of Mid- State and American Trust Bank, Keystone's subsidiary headquartered in Cumberland, Maryland. Keystone views the addition of Everett's offices to Mid- State as a natural extension of Mid-State's market which provides Mid-State a means of better serving the agricultural market in eastern Bedford County. Keystone also believes Mid-State can better serve this market's larger commercial customers through the acquisition of Everett because it can provide these customers with financial products and services which Everett has been unable to provide. Finally, Keystone believes the expansion of its market by means of the Merger will result in increased efficiency and cost savings in the delivery of financial services. There were not any particular negative factors considered important by Keystone in its evaluation of the Merger. REQUIRED VOTE; MANAGEMENT RECOMMENDATION Approval of the Plan of Merger requires the affirmative votes of the holders of at least 75% of the outstanding shares of Shawnee Common Stock, voting in person or by proxy at the Shawnee Special Meeting. BECAUSE SHAWNEE SHAREHOLDER APPROVAL REQUIRES THE AFFIRMATIVE VOTES OF 75% OF ALL OUTSTANDING SHAWNEE SHARES, A FAILURE TO VOTE, AN ABSTENTION OR A BROKER NON-VOTE WILL HAVE THE SAME LEGAL EFFECT AS A VOTE BY A SHAWNEE SHAREHOLDER AGAINST APPROVAL OF THE PLAN OF MERGER. THE BOARD OF DIRECTORS OF SHAWNEE UNANIMOUSLY RECOMMENDS THAT SHAWNEE SHAREHOLDERS VOTE "FOR" APPROVAL OF THE PLAN OF MERGER. The Board of Directors of Keystone has approved the Plan of Merger, and under the Pennsylvania Business Corporation Law no approval of the Plan of Merger by the shareholders of Keystone is required. VOTING AGREEMENTS In connection with the Plan of Merger, the directors and executive officers of Shawnee have entered into agreements to vote certain shares of Shawnee Common Stock beneficially owned by them in favor of the Merger. The directors and executive officers of Shawnee have agreed with Keystone that they will vote in favor of the Merger all shares of Shawnee 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 Shawnee Common Stock over which they have or share voting power to be voted in favor of the Merger. In the aggregate, these agreements commit 17,105 shares of Shawnee Common Stock (21.33% of the outstanding shares) to be voted in favor of the Merger. The agreements further provide that with respect to shares of Shawnee Common Stock owned by the Shawnee directors and executive officers as individuals or (to the extent of the director's or executive officer's proportionate voting interest) jointly with other persons (collectively, "Shares"), the directors and executive officers will not until the Merger has been consummated or the 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 Shawnee or Everett 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 Shawnee or Everett or (iii) for the principal purpose of avoiding the director's or executive officer'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 Shawnee or Everett. The agreements are applicable to the directors or executive officers only in their capacities as shareholders and do not affect the exercise of their responsibilities as directors or executive officers. The agreements also do not apply to any shares of Shawnee Common Stock held by a director or executive officer as a trustee or other -6- fiduciary. No monetary or other compensation was paid to any Shawnee director or executive officer 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. TRUST DEPARTMENT SHARES The Trust Department of Mid-State, a wholly owned Keystone subsidiary, acting in a fiduciary capacity, has voting power over 6,708 shares of Shawnee Common Stock, representing 8.37% of the outstanding shares. It is anticipated that these shares will be voted in favor of approval of the Plan of Merger. See "Information Concerning Shawnee--Certain Beneficial Owners of Shawnee Common Stock." OPINION OF SHAWNEE FINANCIAL ADVISOR Shawnee has retained Berwind to act as its financial advisor and to render a fairness opinion in connection with the Merger. Berwind has rendered its opinion to the Board of Directors of Shawnee that, based upon and subject to the various considerations set forth therein, as of January 5, 1995, and as of June 30, 1995, the Merger is fair, from a financial point of view, to the holders of Shawnee Common Stock. The full text of Berwind's opinion as of June 30, 1995, which sets forth the assumptions made, matters considered and limitations of the review undertaken, is attached as Annex I to this Proxy Statement/Prospectus and should be read in its entirety in connection with this Proxy Statement/Prospectus. This section of the Proxy Statement/Prospectus sets forth the material terms of Berwind's opinion; however, the summary of the opinion of Berwind set forth herein is qualified in its entirety by reference to the full text of such opinion attached as Annex I to this Proxy Statement/Prospectus. Shawnee retained Berwind to act as Shawnee's financial advisor in connection with the Merger. Berwind was selected to act as Shawnee's financial advisor based upon its qualifications, expertise and experience. Berwind has knowledge of, and experience with, Pennsylvania banking markets and banking organizations operating in those markets and was selected by Shawnee because of its knowledge of, experience with, and reputation in the financial services industry. In such capacity, Berwind participated in the negotiations with respect to the pricing and other terms of the Merger, but the decision with respect to the Merger exchange ratio was determined by Shawnee in the process of its negotiations with Keystone. On January 5, 1995, Shawnee's Board of Directors approved and executed the Plan of Merger. Berwind delivered an opinion (the January Opinion) to Shawnee's Board stating that, as of such date, the Merger was fair to the shareholders of Shawnee from a financial point of view. Berwind reached the same opinion as of June 30, 1995. The full text of the opinion of Berwind dated as of June 30, 1995, which sets forth assumptions made, matters considered and limits on the review undertaken (the Proxy Opinion), is attached as Annex I to this Proxy Statement/Prospectus. No limitations were imposed by Shawnee's Board of Directors upon Berwind with respect to the investigations made or procedures followed by Berwind in rendering the January Opinion or the Proxy Opinion. In rendering its Proxy Opinion, Berwind: (i) reviewed the historical financial performances, current financial positions and general prospects of Shawnee and Keystone, (ii) reviewed the Plan of Merger, (iii) reviewed and analyzed the stock market performance of Keystone, (iv) studied and analyzed the consolidated financial and operating data of Shawnee and Keystone, (v) considered the terms and conditions of the proposed Merger between Shawnee and Keystone as compared with the terms and conditions of comparable bank mergers and acquisitions, (vi) met and/or communicated with certain members of Shawnee's and Keystone's senior management to discuss -7- their respective operations, historical financial statements and future prospects and (vii) conducted such other financial analyses, studies and investigations as it deemed appropriate. 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 Shawnee's financial forecasts reviewed by Berwind in rendering its opinion, Berwind assumed that such financial forecasts were reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Shawnee as to the future financial performance of Shawnee. Shawnee's senior management reviewed for accuracy and completeness all information concerning Shawnee, including any forecasts, provided to Berwind. Berwind did not make an independent evaluation or appraisal of the assets (including loans) or liabilities of Shawnee 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 Shawnee 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 and presented to Shawnee's Board in connection with the January Opinion and analyzed by Berwind in connection with the January and Proxy Opinions. The data presented herein, including certain financial ratios, were extracted from call report information for The Everett Bank and its peer group of banks. Therefore, comparison ratios derived from this data may insignificantly differ from Shawnee consolidated financial information presented elsewhere in this Proxy Statement/Prospectus because of modest differences between the Shawnee consolidated financial statements and those pertaining solely to The Everett Bank. Comparable Companies and Comparable Acquisition Transaction Analyses. Berwind compared selected financial and operating data for The Everett Bank with those of a peer group of selected banks and bank holding companies with assets between $50 million and $100 million, as of the most recent financial period publicly available, located in Pennsylvania (49 banks). Financial data and operating ratios compared in the analysis of the Everett peer group included but were not limited to: return on average assets, return on average equity, shareholders' equity to assets ratio and certain asset quality ratios. The analysis showed Everett's return on average assets was 1.11% compared to the peer group median of 1.02%, its return on average equity was 10.75% compared to a peer group median of 10.50%, its equity as a percentage of assets was 10.11% versus the peer group median of 9.13%, its nonperforming assets as a percentage of loans and other real estate owned was 0.55% compared to the peer group median of 1.15%, its nonperforming assets as a percentage of equity plus loan loss reserve was 2.86% compared to the peer group median of 7.61% and its loan loss reserve as a percentage of nonperforming assets was 85.98% compared to 106.30%. Berwind also compared selected financial, operating and stock market data for Keystone with those of a peer group of selected commercial banking companies with assets between $2.5 billion and $6 billion, as of the most recent period publicly available, located in Delaware, Maryland, New Jersey, New York, Ohio, Pennsylvania and West Virginia (12 banks). 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. The analysis showed Keystone's return on average assets was 1.15% compared to the peer group median of 1.26%, its return on average equity was 12.67% compared to a peer group median of 13.34%, its shareholders' equity as a percentage of assets was 9.07% versus the peer group median of 8.77%, its nonperforming assets as a percentage of loans and other real estate owned was 0.79% compared to the peer group median of 1.06%, its nonperforming assets as a percentage of shareholders' equity plus loan loss reserve was 5.48% compared to the peer group median of 6.16% and its loan loss reserve as a percentage of nonperforming assets was 168.04% compared to 182.42%. -8- In addition, the analysis showed that Keystone's price per share ($28.1875 on the date of the Proxy Opinion) as a percentage of book value per share was 156.08% compared to the peer group median of 163.08%, its price per share as a percentage of tangible book value was 160.43% compared to the peer group median of 171.90% and its price per share as a multiple of latest twelve months earnings per share of 12.6 compared to the peer group median of 12.3 times. Berwind also compared the multiples of book value, tangible book value and latest twelve months earnings inherent to the Merger with the multiples paid in recent acquisitions of banks and bank holding companies that Berwind deemed comparable. These ratios are generally considered significant by analysts when evaluating a bank acquisition transaction. The transactions deemed comparable by Berwind included both interstate and intrastate acquisitions announced since June 1, 1994, in which the selling institution's assets were between $50 million and $100 million. Berwind compared eighty-two transactions located throughout the country and analyzed those transactions in three groups: a national group (82 banks), a regional group (14 banks) and a performance group (28 banks). The national group included transactions throughout the United States; the regional group included transactions in Maryland, New Jersey, Pennsylvania, Virginia and West Virginia; and the performance group included transactions involving banks with year-to-date return on average assets greater than 0.75% and less than 1.25%. The median values calculated for price per share as a percentage of book value per share were 166.59%, 176.32% and 168.86% for the national, regional and performance group, respectively; the range of price per share as a percentage of tangible book value per share was 166.59%, 176.32% and 168.86% for the national, regional and performance group, respectively; and the range of the price per share as a multiple of latest twelve months earnings per share was 14.2, 17.0 and 16.8 times earnings for the national, regional and performance group, respectively. These medians compare to the Merger's price per share as a percentage of book value per share, price per share as a percentage of tangible book value per share, and price per share as a multiple of latest twelve months earnings per share of 175.41%, 175.41% and 19.5 times, respectively. No company or transaction, however, used in this analysis is identical to Shawnee, Keystone or the 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 Shawnee could produce over a five-year period under different assumptions as to dividend pay out levels, if Shawnee performed in accordance with various earnings growth forecasts. Berwind also estimated the ending value for Shawnee's Common Stock after the five-year period by applying a range of earnings multiples from 8 to 12 to Shawnee's terminal year earnings. The range of multiples used reflected a variety of scenarios regarding the growth and profitability prospects of Shawnee. The dividend streams and terminal values were then discounted to present value using discount rates ranging from 10% to 20%, reflecting different assumptions regarding the rates of return required by holders or prospective buyers of Shawnee's Common Stock. This analysis is generally considered significant by analysts in that it provides an estimate of the value of the bank if it were to remain independent under various earnings and dividends scenarios. The range of present values per fully diluted share of Shawnee Common Stock resulting from these assumptions was $44 to $93 if earnings per share and dividends grow at 2.5% per annum; $49 to $105 at assumed growth rates of 5%; and $55 to $117 at assumed rates of growth of 7.5% per annum. Pro Forma Contribution Analysis. Berwind analyzed the changes in the amount of earnings, book value and dividends represented by one share of Shawnee Common Stock prior to the Merger and 6.25 shares of Keystone Common Stock after the Merger. The analysis considered, among other things, the changes that the Merger would cause to Shawnee's 1994 earnings per share, book value per share and indicated dividends. On a per share equivalent basis, Shawnee's earnings per share increase 50% from $9.07 to $13.64, its tangible book value per share increases 12% from $94.55 to $105.70 and its dividend per share increases 215% from $2.70 to $8.50 per share. In reviewing the pro forma combined earnings, equity and assets of Keystone based on the Merger with -9- Shawnee, Berwind analyzed the contribution that Shawnee would have made to the combined company's earnings, equity and assets as of and for the period ended December 31, 1994. Berwind also reviewed the percentage ownership that Shawnee's stockholders would hold in the combined company. In connection with rendering its January Opinion and Proxy 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 Merger was to some extent a subjective one based on the experience and judgment of Berwind and not merely the result of mathematical analysis 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 Shawnee'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 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 terms of the Merger as set forth in the Plan of Merger, are fair from a financial point of view to Shawnee and its shareholders. In connection with delivering its Proxy Opinion, Berwind updated certain analyses described above to reflect current market conditions and events occurring since the date of the Plan of Merger. Such reviews and updates led Berwind to conclude that it was not necessary to change the conclusions it had reached in connection with rendering the January Opinion. 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, private placements, and valuations for various other purposes and in the determination of adequate consideration in such transactions. Berwind's Proxy 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 Proxy Opinion was delivered; events occurring after the date of its Proxy Opinion could materially affect the assumptions used in preparing its Proxy Opinion. Berwind has not undertaken to reaffirm and revise its Proxy Opinion or otherwise comment upon any events occurring after the date thereof. In delivering its January Opinion and Proxy Opinion, Berwind assumed that in the course of obtaining the necessary regulatory and governmental approvals for the Merger, no restriction will be imposed on Keystone that would have a material adverse effect on the contemplated benefits of the 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 Merger. During Berwind's presentation, and upon its conclusion, Shawnee's Board and its counsel asked questions to better understand the assumptions and limitations of the methodologies employed by Berwind in its analyses. Although the Board relied upon the expertise of Berwind as to the assumptions employed by Berwind, the Board made its own determination as to the reasonableness of Berwind's analyses and as to the adequacy of the consideration offered by Keystone. Pursuant to the terms of the engagement letter dated October 25, 1994, Shawnee has paid Berwind $42,500 for acting as financial advisor in connection with the Merger, including delivering its January and Proxy Opinions. In addition, Shawnee has agreed to pay Berwind approximately $29,000 upon the consummation of the Merger and to reimburse Berwind for its reasonable out-of- pocket expenses. Whether or not the Merger is -10- consummated, Shawnee 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 Proxy Opinion of Berwind as of June 30, 1995, which set forth assumptions made and matters considered, is attached hereto as Annex I to this Proxy Statement/Prospectus. Shawnee's stockholders are urged to read the Proxy Opinion in its entirety. Berwind's Proxy Opinion is directed only to the consideration to be received by Shawnee stockholders in the Merger and does not constitute a recommendation to any holder of Shawnee Common Stock as to how such holder should vote at the Shawnee Special Meeting. THE ABOVE DISCUSSION SETS FORTH THE MATERIAL TERMS OF BERWIND'S PROXY OPINION. HOWEVER, THE FOREGOING PROVIDES ONLY A SUMMARY OF THE PROXY OPINION OF BERWIND AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THAT OPINION, WHICH IS SET FORTH IN ANNEX I TO THIS PROXY STATEMENT/PROSPECTUS. CONVERSION OF SHAWNEE SHARES Exchange Ratio. On the effective date of the Merger, each outstanding share of Shawnee Common Stock (other than shares subject to dissenters' rights) will be converted into 6.25 shares of Keystone Common Stock, with cash to be paid in lieu of the issuance of any fractional share. On July 13, 1995, the closing sale price for Keystone Common Stock reported on the NASDAQ National Market System was $30.00. Surrender of Certificates. As promptly as practicable after the effective date of the Merger, Keystone will send to each shareholder of record of Shawnee immediately prior to the Merger a letter of transmittal containing instructions on how to effect the exchange of Shawnee Common Stock certificates for certificates representing the shares of Keystone Common Stock into which their shares have been converted. SHAWNEE 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 Merger will apply to all whole shares of Keystone Common Stock into which shares of Shawnee Common Stock have been converted in the Merger. However, no former Shawnee shareholder will be entitled to receive any such dividend until such shareholder's Shawnee 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 Merger. Instead, each Shawnee shareholder who surrenders for exchange Shawnee 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 $29.25 for one whole share of Keystone Common Stock. Unexchanged Certificates. On the effective date of the Merger, the stock transfer books of Shawnee will be closed, and no further transfers of Shawnee Common Stock will be made or recognized. Certificates for Shawnee 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. -11- If the Merger becomes effective and any former Shawnee shareholder does not surrender his or her Shawnee 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 Shawnee 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 Shawnee Common Stock--Keystone Shareholder Rights Plan") shall have occurred prior to the effective date of the Merger, then each share of Keystone Common Stock issued in the 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 Merger that Keystone take one of the actions set forth under "Conditions to the Merger" below. Adjustment of Exchange Ratio. The 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 Shawnee Common Stock which occurs prior to the Merger. Although no such adjustments are anticipated, any such adjustment would be proportionate and therefore would not decrease the value of the consideration per preadjustment share of Shawnee Common Stock to be received by Shawnee shareholders in the Merger. TAX CONSEQUENCES TO SHAWNEE SHAREHOLDERS Federal Income Tax. The Plan of Merger requires as a condition to the Merger that each party receive a written opinion of counsel or of independent public accountants that: (1) 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 Shawnee 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 Shawnee as a result of the Merger; (3) Except for cash received in lieu of fractional shares, no gain or loss will be recognized by holders of Shawnee 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 Shawnee will be the same as the basis of the shares of Shawnee Common Stock exchanged therefor; and (5) The holding period of the shares of Keystone Common Stock received by the shareholders of Shawnee will include the period during which the Shawnee Common Stock exchanged therefor was held by the Shawnee shareholder, provided that the Shawnee 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 Shawnee on the exchange of their shares for whole shares of Keystone Common Stock. However, gain or loss will be recognized by Shawnee 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 Shawnee 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 -12- entitled to capital gain or loss treatment if the Shawnee Common Stock was a capital asset in the hands of the shareholder. If any shares of Keystone Common Stock received in the Merger are subsequently sold, gain or loss on the sale should be computed by allocating the cost or other basis of the Shawnee Common Stock exchanged in the 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 Merger will include the holding period for the shares of Shawnee Common Stock exchanged in determining, for example, whether any such gain or loss is a long-term or short- term capital gain or loss. Where a Shawnee shareholder exercises dissenters' rights and receives cash in exchange for Shawnee Common Stock, the cash will be treated as received by the shareholder as a distribution in redemption of the Shawnee Common Stock subject to the provisions and limitations of Section 302 of the Code. The cash received by a dissenting Shawnee shareholder will be treated as if the shares had been sold to Shawnee 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, a Shawnee shareholder should consult with his own personal tax advisor as to the federal, state and local tax consequences of exercising dissenters' rights. Pennsylvania Personal Income Tax. No gain or loss for Pennsylvania personal income tax purposes will be recognized by shareholders of Shawnee who are subject to that tax on the receipt by them of whole shares of Keystone Common Stock in exchange for their Shawnee Common Stock. For Pennsylvania personal income tax purposes, the tax basis for the Keystone Common Stock received by Shawnee shareholders in the Merger (including any fractional share interests to which they are entitled) will be the same as the basis of the Shawnee 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 Shawnee shareholder and then immediately sold by the shareholder to Keystone for the cash received. Cash received by a Shawnee shareholder exercising dissenters' rights will be treated as if the shareholder had sold his or her shares to Shawnee for the cash received and will be taxed accordingly. The foregoing is intended only as a summary of certain federal income tax and Pennsylvania personal income tax consequences of the 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 Merger. Among other things, the summary does not address state income tax consequences in states other than Pennsylvania or any local taxes. Accordingly, it is recommended that Shawnee 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 Merger. BOARDS OF DIRECTORS FOLLOWING THE MERGER No change will be made by reason of the Merger in the Board of Directors of Keystone. At the time the Bank Merger becomes effective, L. Frank Bittner, currently Chairman of the Board of Directors of Shawnee, will be added to the Board of Directors of Mid-State to serve for a term or terms expiring not less than one year after the Merger. The Board of Directors of Mid-State presently consists of 19 directors. If prior to the Merger Mr. Bittner becomes unable or declines to serve as a director of Mid-State, Shawnee shall be entitled to designate a substitute director acceptable to Keystone. -13- INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION Arrangements with Shawnee Directors and Executive Officers. As indicated under the preceding caption, following the Merger L. Frank Bittner, currently Chairman of the Board of Directors of Shawnee and Everett, will become a director of Mid-State. As a director of Mid-State, Mr. Bittner will receive the same fees as other Mid-State directors. Effective July 1, 1995, those fees will consist of an annual retainer of $3,500, payable in shares of Keystone Common Stock, plus $500 per Board meeting and $200 per Board Committee meeting attended. Chairmen of Board Committees receive an additional $500 annual retainer, and directors who participate by telephone in Board or Board Committee meetings receive $100 per meeting. Mid-State has indicated its intention to offer Samuel K. Bohn, the President and a director of Shawnee and Everett, $50,000 per year for a two-year period following the Merger to assist Mid-State in the post-Merger transition and/or in return for a covenant not to compete. It is intended that following the Merger Ralphard L. Black, Vice President of Shawnee and Executive Vice President of Everett, will be employed as a Vice President of Mid-State. There will be no change by reason of the Merger in Mr. Black's salary, which is currently $65,000 per year. It is not intended that any of the remaining directors and executive officers of Shawnee, none of whom are employees, will be retained by Keystone or Mid-State following the Merger. No severance or similar payments will be made to such persons. Shawnee Directors' and Officers' Indemnification and Insurance. Keystone has agreed that following the Merger it will perform the obligations of Shawnee under Shawnee's By-Laws concerning the indemnification of Shawnee's directors and officers with respect to events occurring at or prior to the Merger and will cause Mid-State to perform the obligations of Everett under its By-Laws concerning the indemnification of the directors and officers of Everett with respect to events occurring at or prior to the Bank Merger. The By-Laws of Shawnee generally require Shawnee to indemnify its directors and officers against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any civil, criminal, administrative or investigative proceeding to which such person is a party by reason of having served in such capacity 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 Shawnee and, in the case of any criminal proceeding, had no reasonable cause to believe that his conduct was unlawful. In the case of a suit by or in the right of Shawnee, no indemnification may be made as to any claim, issue or matter as to which the director or officer shall have been found liable for misconduct in the performance of his duty to Shawnee. The By-Laws of Keystone and its subsidiaries contain similar provisions regarding the indemnification of directors and officers. The By-Laws of Everett provide that directors and officers may be indemnified for reasonable expenses actually incurred in connection with any proceeding to which such person is a party by reason of having served in such capacity, except that no indemnification shall be made as to any matter as to which such person is found to have been guilty of or liable for gross neglect of duty or willful misconduct or to have committed an act or failed to perform a duty for which there is a common law or statutory liability, and no person shall be indemnified with respect to any matter which has been the subject of a compromise settlement unless approved by the parent holding company. Keystone has also agreed to use its best efforts to obtain a one-year tail policy of directors' and officers' liability insurance for the directors and officers of Shawnee and Everett with respect to events which occurred prior to the Merger. Such insurance is to be provided on terms substantially equivalent to Shawnee's current directors' and officers' liability policy, which has a $6 million coverage limit, except that the maximum premium Keystone must pay for such policy is limited to $20,000. In addition, for claims made within three years following the Merger and at a time when such tail policy is not in effect, Keystone will indemnify the former directors and officers of Shawnee and Everett against any claim or liability, whether or not indemnifiable under the By-Laws of Shawnee or Everett, if and to the extent that such claim or liability would have been covered under Shawnee's current policy of directors' and officers' liability insurance if such policy were then in effect. -14- Employee Matters. The Plan of Merger provides that Keystone will consider Everett employees for employment within the Keystone organization and that following the Merger Keystone will permit Everett employees employed by Keystone and its subsidiaries to participate on an equal basis with other similarly situated employees in Keystone's internal open position posting and application procedures. Shawnee and Everett employees who become employees of Keystone and its subsidiaries shall be provided employee benefits, including retirement, health and welfare benefits, life insurance, incentive compensation and vacation and severance arrangements, no less favorable than those provided to other similarly situated employees. With respect to group health benefits, Keystone will waive any otherwise applicable waiting periods and preexisting conditions if at the time of the Merger the employee was covered under a similar plan of Shawnee. Following the Merger, Keystone and Mid-State will perform the respective obligations of Shawnee and Everett with respect to vested benefits accrued through the date of the Merger under Everett's retirement and profit sharing plans. WARRANT AGREEMENT In connection with the Plan of Merger, Keystone and Shawnee have entered into an Investment Agreement, and Shawnee has issued to Keystone a Warrant thereunder (collectively, the "Warrant Agreement"), entitling Keystone to purchase up to approximately 19.9% of Shawnee's outstanding Common Stock upon the occurrence of certain events described below. The Warrant Agreement covers 19,921 shares of Shawnee Common Stock at an exercise price of $182.81 per share. The Warrant Agreement is designed to compensate Keystone for its risks, costs and expenses and the commitment of resources associated with the Plan of Merger in the event the Merger is not consummated due to an attempt by a third person to gain control of Shawnee. See also "Expenses" below. Keystone may not exercise or sell its Warrant except upon (i) a willful breach by Shawnee of the Plan of Merger, (ii) the failure of Shawnee's shareholders to approve the Plan of Merger after the announcement by a third person of a bona fide proposal to acquire 10% or more of the Shawnee Common Stock, to acquire, merge or consolidate with Shawnee or to acquire substantially all of Shawnee's assets or Everett, (iii) the acquisition by a third person of 1% or more of the outstanding Shawnee Common Stock if after such acquisition such person would beneficially own 10% or more of the Shawnee 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 Shawnee Common Stock or (v) the entry by Shawnee into an agreement or understanding with a third person for the third person to acquire, merge or consolidate with Shawnee or to acquire substantially all of its assets or Everett (each of the foregoing is hereafter referred to as a "Warrant Event"). No Warrant Event has occurred as of the date of this Proxy Statement/Prospectus, and neither Keystone nor Shawnee 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 Shawnee and is intended to increase the likelihood that the Merger will be consummated in accordance with the terms set forth in the 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 Shawnee 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 Shawnee Common Stock purchased thereunder would be subject to a right of first refusal by Shawnee unless sold in a public offering registered under the Securities Act. Shawnee agrees in the Warrant Agreement to effect such registration if requested. Keystone may require Shawnee to redeem the Warrant or any shares of Shawnee Common Stock purchased thereunder if (i) a third person acquires beneficial ownership of 50% or more of the outstanding Shawnee Common Stock or (ii) a third person acquires, merges or consolidates with Shawnee or acquires substantially all of its assets or Everett (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 -15- connection with the Redemption Event. The per share redemption price for shares of Shawnee 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 Shawnee the right to repurchase shares of Shawnee 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 Shawnee or Everett. The foregoing description is a summary of the material terms 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 Proxy Statement/Prospectus by reference to such filing. INCONSISTENT ACTIVITIES Shawnee has agreed in the Plan of Merger that unless and until the Merger has been consummated or the Plan of Merger has been terminated in accordance with its terms, Shawnee will not (i) solicit or encourage any proposals by a third person to acquire more than 1% of the Shawnee Common Stock, any stock of Everett or any significant portion of its or Everett'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 its or Everett'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, Shawnee 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 Shawnee'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 Shawnee becomes aware of any offer or proposed offer to acquire any shares of Shawnee or Everett or any significant portion or its or Everett's assets, or of any other matter which is reasonably likely to adversely affect the parties' ability to consummate the Merger, Shawnee is required to give immediate notice thereof to Keystone. CONDUCT OF SHAWNEE BUSINESS PENDING THE MERGER Shawnee has agreed in the Plan of Merger that, pending consummation of the Merger, Shawnee and Everett will conduct their businesses only in the ordinary course and that, except as consented to by Keystone, Shawnee and Everett 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; (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. SHAWNEE DIVIDEND LIMITATION Shawnee has agreed in the Plan of Merger that pending the Merger it will not declare or pay dividends on the Shawnee Common Stock other than its regular $2.70 per share dividend declared in 1994 ($0.25 per share declared June 14, 1994, payable July 1, 1994, and $2.45 per share declared December 13, 1994, payable January 1, 1995). In 1995, Shawnee has agreed not to declare or pay dividends exceeding $2.70 per share over the twelve month period, and has further agreed to prorate the dividend based on the $2.70 annual amount, with the prorated dividend to be payable shortly prior to the Merger. -16- CONDITIONS TO THE MERGER In addition to shareholder approval, the Merger is contingent upon the satisfaction of a number of other conditions, including (i) approval of the Merger by the Federal Reserve Board and the Pennsylvania Department of Banking without conditions deemed unduly burdensome by Keystone and the absence of any suit by the United States to prohibit the Merger filed within the 30 days following Federal Reserve Board approval, (ii) receipt of the tax opinion described above (see "Tax Consequences"), (iii) receipt of the agreements of Shawnee affiliates described below under "Restrictions on Resales by Shawnee Affiliates" and (iv) the absence of any judicial or administrative order prohibiting or adversely affecting the Merger or any pending or threatened litigation or administrative proceeding challenging the Merger. Keystone's obligation to consummate the Merger is subject to the additional conditions that the Bank Merger shall have been approved by the Federal Deposit Insurance Corporation ("FDIC") and the Pennsylvania Department of Banking without conditions deemed unduly burdensome by Keystone and that no suit to prohibit the Bank Merger shall have been filed by the United States during the 30 days following FDIC approval. In addition, unless waived, each party's obligation to consummate the Merger is subject to the performance by the other party of its obligations under the 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 Shawnee 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 ratio for converting Shawnee Common Stock into Keystone Common Stock in the Merger shall have been proportionately adjusted as provided in the 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 Shawnee Common Stock upon consummation of the Merger. REPRESENTATIONS AND WARRANTIES The representations and warranties of Keystone and Shawnee contained in the Plan of Merger relate, among other things, to the organization and good standing of Keystone, Shawnee and their subsidiaries; the capitalization of Keystone and Shawnee and ownership of their subsidiaries; the authorization by Keystone and Shawnee of the 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, 1994; the absence of undisclosed litigation; compliance with laws; and the accuracy of this Proxy Statement/Prospectus and of Keystone's Registration Statement of which it is a part. Additional representations and warranties by Shawnee concern payment of taxes; title to properties; the absence of undisclosed equity investments, employment contracts, employee benefit plans or material contracts; and the absence of certain potential environmental liabilities. None of the representations and warranties contained in the Plan of Merger will survive the consummation of the Merger. AMENDMENT, WAIVER AND TERMINATION Notwithstanding prior shareholder approval, the Plan of Merger may be amended in any respect by written agreement between the parties, except that after shareholder approval no amendment may change the rate of exchange of Shawnee Common Stock for Keystone Common Stock in the Merger or change the form of such consideration. Keystone or Shawnee 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 Plan of Merger; and (iv) waive any condition precedent to its obligations under the Plan of Merger other than approval by the shareholders of Shawnee of the Plan of Merger, governmental regulatory approvals required to consummate the Merger, securities registration requirements incident to the issuance of Keystone Common Stock in the Merger, the receipt of the tax opinions described above and the absence of any judicial or administrative order prohibiting the Merger. -17- Notwithstanding prior shareholder approval, the Plan of Merger may be terminated without liability of either party at any time prior to effectiveness of the Merger (i) by mutual consent of Keystone and Shawnee 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 Shawnee shareholders to approve the Plan of Merger at the Special Meeting, (c) a final judicial or regulatory determination denying any regulatory approval required for the Merger or imposing conditions or requirements which Keystone determines to be unduly burdensome or (d) failure to satisfy prior to September 30, 1995 any condition to its obligations to consummate the 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. The deadline for satisfying the conditions to the Merger will be extended to December 31, 1995 if the failure to satisfy such conditions results from a delay in receiving Federal Reserve Board approval. Shawnee may terminate the Plan of Merger if (i) the average of the closing bid prices for Keystone Common Stock on the NASDAQ National Market System for the 10 consecutive trading days ending on the sixth trading day prior to the closing date for the Merger (the "Valuation Period") shall be less than $24.86 (85% of the closing bid price on January 4, 1995) and (ii) the number obtained by dividing such average Keystone bid price by $29.25 (the closing bid price on January 4, 1995) is less than 85% of the number obtained by dividing the average of the NASDAQ Combined Bank Index for the Valuation Period by 708.30 (such index at January 4, 1995). DISSENTERS' RIGHTS OF SHAWNEE SHAREHOLDERS A holder of shares of Shawnee Common Stock is entitled to exercise the rights of a dissenting shareholder under Subchapter D of Chapter 15 ("Subchapter D") of the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), to object to the Plan of Merger and make written demand that Shawnee or Keystone, as the surviving corporation in the Merger, pay in cash the fair value of the shares held as determined in accordance with such statutory provisions. The following summary does not purport to be a complete statement of the provisions of Subchapter D and is qualified in its entirety by reference to such statutory provisions, which (together with Section 1930 of the BCL) are set forth in full as Annex II to this Proxy Statement/Prospectus. A record holder of shares of Shawnee Common Stock may assert dissenters' rights as to fewer than all such shares registered in his name only if he dissents with respect to all the shares beneficially owned by any one person and discloses the name and address of the person or persons on whose behalf he dissents. A beneficial owner of shares of Shawnee Common Stock who is not the record holder of such shares is entitled to assert dissenters' rights with respect to shares held on his behalf only if he submits to Shawnee no later than the time of the assertion of dissenters' rights a written consent of the record holder of such shares. A beneficial owner may not dissent with respect to less than all shares of Shawnee Common Stock owned by him, whether or not the shares so owned by him are registered in his name. In the event that a holder of shares of Shawnee Common Stock wishes to dissent to the Plan of Merger and obtain payment of the fair value of his shares, he must satisfy all the following conditions to acquire any right to payment of the fair value of his shares under Subchapter D: (1) He must file with Shawnee, prior to the vote on the Plan of Merger, a written notice of intention to demand that he be paid the fair value for his shares if the Plan of Merger is effectuated. Neither a proxy indicating a vote against, nor a vote in person against, the Plan of Merger shall constitute the written notice required. (2) He must effect no change in the beneficial ownership of his shares from the date of filing such written notice continuously through the effective date of the Merger. -18- (3) He must not vote his shares in favor of the Plan of Merger. Neither an abstention from voting with respect to, nor failure to vote in person or by proxy against approval of, the Plan of Merger constitutes a waiver of the rights of a dissenting shareholder. However, a signed proxy that is returned without any instruction as to how the proxy should be voted will be voted in favor of approval of the 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 shall not acquire any right to payment of the fair value of his shares under Subchapter D. Each written notice of intention to demand payment must clearly state that the shareholder intends to demand that he be paid the fair value of his shares if the Plan of Merger is effectuated, must provide the name, address and telephone number of the shareholder and should be sent to Shawnee Financial Services Corporation, 115 East Main Street, P.O. Box 149, Everett, Pennsylvania 15537, Attention: Samuel K. Bohn, President. A dissenting shareholder shall retain all other rights of a Shawnee shareholder until those rights are modified by effectuation of the Plan of Merger. If the Plan of Merger is approved by the shareholders of Shawnee by the required vote at the Special Meeting, Shawnee or Keystone shall mail a notice to all dissenters who gave due notice of intention to demand payment of the fair value of their shares and who did not vote in favor of the Plan of Merger. Such notice shall: (1) State where and when a demand for payment must be sent and certificates representing Shawnee shares must be deposited in order to obtain payment. The time set for receipt of the demand and deposit of shares shall be not less than 30 days from the mailing of the notice. (2) Supply a form for demanding payment that includes a request for certification of the date on which the shareholder, or the person on whose behalf the shareholder dissents, acquired beneficial ownership of the shares. (3) Be accompanied by a copy of Subchapter D. The dissenting shareholder must make written demand for payment of the fair value of the shares with respect to which dissent is made and must deposit certificates representing such shares in accordance with the terms of the notice to demand payment sent by Shawnee or Keystone. A shareholder who fails to timely demand payment, or fails to timely deposit certificates, as required by the notice to demand payment, shall not have any right under Subchapter D to receive payment of the fair value of his shares. Within 60 days after the date set for demanding payment and depositing certificates, if the Plan of Merger has not been effectuated, Shawnee or Keystone shall return any certificates that have been deposited. When deposited certificates have been returned, Shawnee or Keystone may at any later time send a new notice to demand payment, which will have a like effect as the original notice. Promptly after effectuation of the Plan of Merger, or upon timely receipt of demand for payment if the Plan of Merger has already been effectuated, Keystone shall either remit to dissenters who have made demand and have deposited their certificates the amount that Keystone estimates to be the fair value of the shares, or shall give written notice that no remittance will be made. The remittance or notice shall be accompanied by: (1) the closing balance sheet and statement of income of Shawnee for the fiscal year ending not more than 16 months before the date of remittance or notice, together with the latest available interim financial statements; (2) a statement of Keystone's estimate of the fair value of the shares; and (3) a notice of the right of the dissenter to demand payment or supplemental payment, as the case may be, accompanied by a copy of Subchapter D. If Keystone does not remit the amount of its estimate of the fair value of the shares, it shall return any certificates that have been deposited. Keystone may make a notation on any such certificates that demand for payment has been made. If Keystone gives notice of its estimate of the fair value of the shares, without remitting such amount, or remits payment of its estimate of the fair value of a dissenter's shares and the dissenter believes that the amount -19- stated or remitted is less than the fair value of his shares, the dissenter may send to Keystone his own estimate of the fair value of the shares, which shall be deemed a demand for payment of such amount or the deficiency. Where the dissenter does not file his own estimate within 30 days after the mailing by Keystone of its remittance or notice, the dissenter shall be entitled to no more than the amount stated on the notice or remitted to him by Keystone. Within 60 days after the latest of (1) effectuation of the Plan of Merger, (2) timely receipt of any demands for payment, or (3) timely receipt of any estimates by dissenters of the fair value of their shares, if any demands for payment remain unsettled, Keystone may file in court an application for relief requesting that the fair value of the shares be determined by the court. All dissenting shareholders, wherever residing, whose demands have not been settled shall be made parties to the proceeding. A copy of the application for relief shall be served on each such dissenter. The court may appoint an appraiser to receive evidence and recommend a decision on the issue of fair value, which appraiser shall have such power and authority as may be specified by the court. Each dissenter who is made a party to the proceeding shall be entitled to recover the amount, if any, by which the fair value of his shares is found to exceed the amount, if any, previously remitted by Keystone, plus interest. If Keystone fails to file an application for relief, any dissenter who made a demand and who has not already settled his claim against Keystone may do so in the name of Keystone at any time within 30 days after the expiration of the 60-day period. If a dissenter does not file an application within such 30- day period, each dissenter entitled to file an application shall be paid Keystone's estimate of the fair value of his shares and no more, and may bring an action to recover any amount not previously remitted. In general, the costs and expenses of any valuation proceeding, including the reasonable compensation and expenses of the appraiser appointed by the court, shall be determined by the court and assessed against Keystone. However, any part of the costs and expenses may be apportioned and assessed as the court deems appropriate against all or some of the dissenting shareholders who are parties to the proceeding and whose action in demanding supplemental payment the court finds to be dilatory, obdurate, arbitrary, vexatious or in bad faith. Fees and expenses of counsel and of experts for the respective parties may be assessed as the court deems appropriate against Keystone and in favor of any or all dissenters if Keystone or Shawnee failed to comply substantially with the requirements of Subchapter D. Such fees and expenses may be assessed against either Keystone or a dissenter, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted in bad faith or in a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights provided by Subchapter D. If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated and should not be assessed against Keystone, it may award to those counsel reasonable fees to be paid out of the amounts awarded to the dissenters who were benefited. SHAWNEE 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 SUBCHAPTER D. RESTRICTIONS ON RESALES BY SHAWNEE AFFILIATES The shares of Keystone Common Stock issuable in the Merger have been registered under the Securities Act, and such shares will generally be freely tradeable by the Shawnee shareholders who receive Keystone shares as a result of the Merger. However, this registration does not cover resales by Shawnee shareholders who may be deemed to control or be under common control with Shawnee and who therefore may be deemed "affiliates" of -20- Shawnee 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 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 Shawnee will notify those persons whom it believes may be such affiliates. The Plan of Merger requires as a condition to the Merger that each such Shawnee affiliate enter into an agreement not to sell the shares of Keystone Common Stock acquired in the Merger except in accordance with the requirements of the Securities Act and the regulations thereunder. EFFECT OF CERTAIN TRANSACTIONS INVOLVING KEYSTONE The 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 Plan of Merger and the 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 Plan of Merger shall be appropriately amended so that Shawnee shareholders will receive in the Merger, for each share of Shawnee Common Stock held, 6.25 times the consideration paid in such transaction for shares of Keystone Common Stock. 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, Shawnee is not required to amend or waive this condition. As of the date of this 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. EXPENSES Keystone and Shawnee will each pay 50% of (1) all printing costs related to securities registration and the solicitation of proxies for the Special Meeting, (2) all filing fees and legal and accounting fees and expenses related to the tax opinion referred to above and to the regulatory approvals required for the Merger and (3) the fees of Berwind Financial Group, L.P., Shawnee's financial advisor, except that the portion of such fees payable by Keystone shall be limited to $26,250. Each party will pay its own other expenses incurred in connection with the Plan of Merger. However, the Plan of Merger provides that if the Merger is not consummated as a direct or indirect consequence of a change of control of Shawnee, Shawnee shall reimburse Keystone for all of its reasonable out-of-pocket expenses incurred in connection with the Plan of Merger. EFFECTIVE DATE OF THE MERGER It is presently anticipated that if the Plan of Merger is approved by the shareholders of Keystone and Shawnee, the Merger will become effective in the third quarter of 1995. However, as noted above, consummation of the 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 Merger will be satisfied or, if satisfied, that they will be satisfied in time to permit the Merger to become effective within the anticipated time frame. In addition, as also noted above, Keystone and Shawnee retain the power to abandon the Merger or to extend the time for performance of conditions or obligations necessary to its consummation, notwithstanding prior shareholder approval. -21- ACCOUNTING TREATMENT Normally, the Merger would be accounted for by Keystone under the pooling- of-interests method of accounting, which views the Merger as a uniting of the separate ownership interests of Keystone and Shawnee through an exchange of shares. However, if the number of treasury shares purchased by Keystone under its share repurchase program exceeds certain limits, Keystone may be required to account for the Merger under the purchase method of accounting. Under the pooling-of-interests method, the financial statements of the merged company normally reflect the combined historical financial data of the merging companies, subject only to certain adjustments to the capital accounts to reflect the share exchange of shares. However, due to the immaterial impact of the Merger on Keystone's previously reported results, it is anticipated that Keystone's historical financial statements would not be restated if the Merger is accounted for as a pooling-of-interests. If the Merger is accounted for under the purchase method, the assets and liabilities of Shawnee acquired in the Merger will be recorded by Keystone for financial reporting purposes at their market values as of the date of the Merger, and any excess of the consideration paid over the net market values acquired will be recorded and amortized as goodwill. Pro forma financial information concerning the Merger is not included herein since the addition of Shawnee under either accounting method would not have materially affected the Keystone historical financial information as presented. -22- 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."
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------------- ------------------------------------------------------------------- 1995 1994 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) OPERATIONS: Interest income.............. $ 88,758 $ 73,515 $ 313,202 $ 307,755 $ 330,645 $ 365,516 $ 377,048 Interest expense............. 39,032 28,341 124,784 125,245 152,718 201,782 221,322 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net interest income.......... 49,726 45,174 188,418 182,510 177,927 163,734 155,726 Provision for credit losses.. 2,084 1,642 9,484 7,940 16,053 16,323 15,107 Noninterest income........... 11,486 11,279 44,629 45,819 39,276 33,563 29,185 Noninterest expense.......... 37,933 35,416 151,723 148,003 138,840 127,896 120,501 Income tax expense........... 6,539 5,349 20,481 21,037 16,568 12,810 11,583 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income................... $ 14,656 $ 14,046 $ 51,359 $ 51,349 $ 45,742 $ 40,268 $ 37,720 =========== =========== =========== =========== =========== =========== =========== Pre-tax security gains, included in above.......... $ 32 $ 611 $ 834 $ 1,669 $ 1,750 $ 1,976 $ 84 PER SHARE: Net income................... $ 0.63 $ 0.60 $ 2.20 $ 2.20 $ 1.99 $ 1.77 $ 1.66 Dividends.................... 0.34 0.32 1.30 1.19 1.10 1.02 0.91 Dividend payout ratio........ 54.00% 53.30% 59.22% 54.01% 55.27% 57.58% 54.89% Average shares outstanding................ 23,431,267 23,423,767 23,395,425 23,304,618 22,983,908 22,732,729 22,700,587 BALANCES AT PERIOD END: Loans and leases............. $ 3,237,611 $ 2,800,225 $ 3,193,405 $ 2,775,198 $ 2,785,335 $ 2,821,302 $ 2,762,647 Allowance for credit losses.............. 43,109 40,175 42,440 40,181 38,940 35,770 32,299 Total assets................. 4,679,942 4,346,653 4,706,000 4,419,726 4,311,779 4,120,215 4,041,232 Deposits..................... 3,825,127 3,573,328 3,827,983 3,582,688 3,655,261 3,560,284 3,523,779 Long-term debt............... 5,528 6,793 6,054 5,990 5,144 2,143 2,989 Shareholders' equity......... 424,632 411,289 407,774 412,880 378,314 348,143 327,092 Book value per share......... 18.06 17.58 17.46 17.65 16.29 15.27 14.41 SELECTED RATIOS: Return on average assets..... 1.26% 1.31% 1.16% 1.19% 1.08% 0.98% 0.96% Return on average equity..... 14.33 13.81 12.71 12.98 12.58 11.87 11.82 Interest rate spread......... 3.96 4.04 4.04 4.07 4.02 3.66 3.51 Net interest margin.......... 4.63 4.60 4.63 4.63 4.67 4.48 4.45 Average equity to average assets............. 8.82 9.47 9.09 9.13 8.62 8.29 8.10 Loans to deposits at period end.............. 84.64 78.36 83.42 77.46 76.20 79.24 78.40
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THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------------- ------------------------------------------------------------------- 1995 1994 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) SELECTED RATIOS (CONTINUED): Allowance for credit losses to loans at period end............. 1.33 1.43 1.33 1.45 1.40 1.27 1.17 Nonperforming assets to loans and ORE................... 0.79 1.34 0.95 1.32 1.66 1.51 1.17 Loans 90 days past due............ 0.28 0.26 0.24 0.14 0.22 0.30 0.53 Total risk elements to loans and ORE at period end (1)........... 1.07 1.60 1.19 1.46 1.88 1.81 1.70 RISK-ADJUSTED CAPITAL RATIOS: Leverage ratio.................... 9.14% 9.42% 8.84% 9.18% 8.66% 8.30% 7.81% "Tier 1" capital ratio............ 13.39 14.86 12.96 14.05 13.06 12.21 11.21 "Total" capital ratio............. 14.64 16.11 14.21 15.30 14.26 13.44 12.36
_____________ (1) Total risk elements include nonperforming assets and loans past due 90 days or more. -24- 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, in each case as reported by NASDAQ, and the cash dividends per share declared on Keystone Common Stock for such periods.
QUARTERLY CLOSING SALES CASH PRICE RANGE DIVIDENDS ----------------------- HIGH LOW DECLARED ---- --- -------- 1993 First Quarter............ $34.00 $29.00 $ .29 Second Quarter........... 34.50 30.75 .29 Third Quarter............ 31.75 28.25 .29 Fourth Quarter........... 32.50 29.75 .32 ---- $1.19 ===== 1994 First Quarter............ $32.25 $27.50 $ .32 Second Quarter........... 32.00 27.75 .32 Third Quarter............ 32.00 27.75 .32 Fourth Quarter........... 30.25 27.25 .34 ---- $1.30 ===== 1995 First Quarter............ $30.25 $26.25 $ .34 Second Quarter........... 29.125 26.75 .34 Third Quarter (through July 13, 1995).......... 30.00 27.75 --
On January 5, 1995, the last NASDAQ trading day prior to the public announcement of the Merger, the closing sale price for the Keystone Common Stock was $29.625. On July 13, 1995, the closing sale price for the Keystone Common Stock was $30.00. On April 30, 1995, there were approximately 23,509,609 shares of Keystone Common Stock outstanding. On March 31, 1995 Keystone had approximately 10,790 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. -25- INFORMATION CONCERNING SHAWNEE SHAWNEE FINANCIAL SERVICES CORPORATION SELECTED FINANCIAL DATA The following unaudited table of selected financial data should be read in conjunction with Shawnee Management's Discussion and Analysis of Financial Condition and Results of Operations, which follows, and with Shawnee's consolidated financial statements and the related notes, which begin on page F-1.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------------- ------------------------------------------------ 1995 1994 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) OPERATIONS: Interest income................... $ 1,263 $ 1,238 $ 5,090 $ 5,074 $ 5,033 $ 5,480 $ 5,460 Interest expense.................. 542 507 2,007 2,039 2,199 2,993 3,332 ------- ------- ------- ------- ------- ------- ------- Net interest income............... 721 731 3,083 3,036 2,833 2,487 2,128 Provision for loan losses......... 0 0 0 0 0 50 27 Noninterest income................ 40 42 145 158 69 89 303 Noninterest expense............... 509 507 2,259 2,093 1,967 1,930 1,681 Income tax expense................ 61 72 242 266 207 110 152 ------- ------- ------- ------- ------- ------- ------- Net income........................ $ 191 $ 194 $ 727 $ 834 $ 728 $ 486 $ 571 ======= ======= ======= ======= ======= ======= ======= Pre-tax security gains (losses), included in above............... $ -- $ -- $ -- $ 1 $ (22) $ (1) $ 188 PER SHARE: Net income........................ $ 2.38 $ 2.42 $ 9.07 $ 10.35 $ 9.01 $ 6.02 $ 7.10 Dividends......................... -- -- 2.70 2.60 2.50 2.40 2.30 Dividend payout ratio............. N/A N/A 29.77% 24.98% 27.75% 39.95% 32.48% Average shares outstanding..................... 80,184 80,184 80,184 80,600 80,870 80,870 80,670 BALANCES AT PERIOD END: Loans............................. $38,915 $38,659 $40,044 $39,016 $31,231 $30,647 $31,920 Allowance for loan losses......... 184 185 184 184 196 207 179 Total assets...................... 71,209 72,935 69,951 72,392 68,671 61,721 58,905 Deposits.......................... 62,627 64,332 61,650 64,150 60,947 54,667 51,966 Long-term debt.................... -- -- -- -- -- -- -- Shareholders' equity.............. 8,053 7,603 7,581 7,306 6,719 6,193 5,866 Book value per share.............. 100.43 94.82 94.55 91.11 83.09 76.58 72.97 SELECTED RATIOS: Return on average assets.......... 1.12% (3) 1.13% 1.01% 1.18% 1.16% 0.79% 0.98% Return on average equity.......... 10.60 (3) 11.55 9.69 12.28 11.83 8.52 10.18 Interest rate spread.............. 3.70 3.81 3.92 3.94 3.99 3.16 2.73 Net interest margin............... 4.40 4.35 4.51 4.51 4.72 4.30 3.95 Average equity to average assets.................. 10.49 9.59 10.52 10.31 10.68 9.31 9.58 Loans to deposits at period end................... 61.81 59.71 62.79 60.53 50.92 55.68 61.08
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THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------------- ------------------------------------------------ 1995 1994 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) SELECTED RATIOS (CONTINUED): Allowance for loan losses to loans at period end............. 0.47 0.48 0.48 0.47 0.63 0.68 0.56 Nonperforming assets to loans and ORE................... 0.44 (3) 0.44 0.44 0.44 0.56 -- 0.25 Loans 90 days past due............ 0.25 0.33 0.10 0.14 0.09 0.23 0.25 Total risk elements to loans and ORE at period end (1)........... 0.69 0.77 0.54 0.58 0.65 0.23 0.50 RISK-ADJUSTED CAPITAL RATIOS: Leverage ratio.................... 11.25% (2) 11.14% (2) (2) (2) (2) "Tier 1" capital ratio............ 14.04 (2) 14.03 (2) (2) (2) (2) "Total" capital ratio............. 14.36 (2) 14.36 (2) (2) (2) (2)
________________ (1) Total risk elements include nonperforming assets and loans past due 90 days or more. (2) These numbers are not available. (3) The consolidated numbers presented for Shawnee differ marginally from those for The Everett Bank, as computed by Berwind. The Everett-only percentages for return on average assets, return on average equity and nonperforming assets to loans and ORE, as computed by Berwind, were 1.11%, 10.75% and 0.55%, respectively. See "Plan of Merger--Opinion of Shawnee Financial Advisor." SHAWNEE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The disclosures called for by SEC Industry Guide 3, which detail many aspects of a banking company's financial condition and results of operations, are generally required by the SEC for banking companies subject to the SEC's periodic reporting requirements. Shawnee is not subject to the SEC's periodic reporting requirements. Shawnee does not in its ordinary course maintain the information necessary to compile many of the disclosures required pursuant to Guide 3 and compiling such information would be very expensive and time consuming. Therefore, Shawnee is not providing all disclosures required by Guide 3 to shareholders. Shawnee believes it is providing shareholders with all material information concerning the company and its operations (including elements of the bank's loan portfolio) for shareholders to make an investment decision in favor or against the proposed Merger. -27- 1994 VERSUS 1993 Net Income Net income decreased year to year by 12.86% from 834,494 in 1993 to $727,198 in 1994. The principal reasons for this decline were an increased cost of funds, resulting from several interest rate hikes by the Federal Reserve Board during the year, and an increase in certain expenses, relating to increased staff levels and the phase-in of certain newer technologies. The bank remained solidly profitable, however, although net income per share fell from $10.35 in 1993 to $9.07 in 1994.
YEARS ENDED DECEMBER 31, -------------------------- 1994 1993 % CHANGE ---- ---- -------- INTEREST INCOME Loans................................ $3,443,191 $3,403,912 1.15% Investment Securities................ 1,273,873 1,253,638 1.61% Interest-bearing Deposits............ 79,073 208,369 (62.05%) Federal Funds Sold................... 293,477 208,404 40.82% ---------- ---------- 5,089,614 5,074,323 .30% INTEREST EXPENSE Deposits............................. 2,007,075 2,038,678 (1.55%) ---------- ---------- NET INTEREST INCOME................. 3,082,539 3,035,645 1.54% Provision for Loan Losses............ 0 0 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.......... 3,082,539 3,035,645 1.54% OTHER INCOME Service Fees......................... 79,510 69,874 13.79% Other................................ 65,256 75,179 (13.20%) Net Investment Gains................. 0 9,300 Gain on Sale of Equipment............ 0 3,700 ---------- ---------- 144,766 158,053 (8.41%) OTHER EXPENSES Salaries............................. 913,234 829,935 10.04% Pension and Other Employee Benefits.. 223,195 230,393 (3.12%) Occupancy Expense.................... 121,905 115,601 5.45% Depreciation......................... 210,583 213,394 (1.32%) Other................................ 790,263 703,407 12.35% ---------- ---------- 2,259,180 2,092,730 7.95% ---------- ---------- INCOME BEFORE INCOME TAXES.......... 968,125 1,100,968 (12.07%) PROVISION FOR INCOME TAXES........... 240,927 266,474 (9.59%) ---------- ---------- NET INCOME.......................... $ 727,198 $ 834,494 (12.86%) ========== ========== NET INCOME PER SHARE................. $ 9.07 $ 10.35 (12.37%) ========== ==========
-28- Net Interest Income Interest income was virtually unchanged year to year ($5,089,614 in 1994 vs. $5,074,323 in 1993), with a decrease of income from interest-bearing deposits held by the bank in other institutions being offset by an increase in income from federal funds sold. The latter are instruments sold to other banks to meet short-term liquidity needs. Interest on loans grew only 1.15% year to year, with growth occurring primarily in the real estate loan area. The return on average earning assets dropped from 7.74% in 1993 to 7.68% in 1994, as the general decline in interest rates from 1993 levels was the primary driver of these lower asset yields. The Bank's net interest margin (i.e., the difference between the cost of funds for the bank and the cost at which it can lend these funds) remained the same in 1994 as in 1993 at 4.51%. Management anticipates a decline in net interest margins in 1995 if short-term interest rates continue to rise. Interest Expense Interest expense remained practically unchanged year to year, although deposits decreased by approximately $2.5 million year to year. The effects of the Federal Reserve's interest rate policy began to have a greater effect during the later part of 1994, reflecting an increased cost of funds which is expected to continue into 1995. An increase in the bank's cost of funds is also likely because the bank must compete against various bank and non-bank institutions to retain or expand its deposit base. Provision for Loan Losses Non-performing assets as a percentage of total assets remained at comparable levels year to year. Shawnee's allowance for loan losses was $184,000 at the end of 1994 and represented .48% of loans. The allowance at the end of 1993 was $184,000, or .47% of loans. Total risk elements, which include nonperforming assets and loans 90 days past due, decreased from .58% of loans at the end of 1993 to .52% of loans at December 31, 1994. Shawnee's 1994 provision was consistent with the volume of net charge-offs and responsive to overall asset quality trends, and the allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb potential losses in its loan portfolio. The breakdown of the categories for loan loss reserves were as follows for both 1994 and 1993: Real Estate Loans $ 30,000 Installment Loans $ 40,000 Commercial Loans $114,000
Other than as disclosed in this Management's Discussion and Analysis or elsewhere in this Proxy Statement/Prospectus, Shawnee management is unaware of any potential problem loans. Further, the Bank does not make any foreign loans, nor is it aware of any significant concentration of loans. Non-Interest Income Other income, which includes revenues from service fees, was also flat year to year ($144,766 in 1994 vs. $158,043 in 1993). Gains on the sales of securities in 1993 matched increases in service fees and other revenues in 1994. -29- Non-Interest Expense Other expenses, which includes salaries, employee benefits and expenses related to the maintenance and upkeep of the bank's properties, rose 7.9% year to year. Salary expense increased as a result of increased staff levels added during the year. In addition, increased occupancy expense, insurance expense and expenses related to the continuing phase-in of several automated teller machines ("ATMs") affected costs significantly. While expenses relating to operation of ATMs currently exceed revenues, management believes that the attractiveness to customers of ATMs makes them worthwhile, and that this imbalance will equalize over time. Book Value and Dividends Book value continued its historic climb to $94.55 in 1994 from $91.11 in 1993. This occurred notwithstanding the implementation of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which negatively impacted shareholders' equity by $235,119, or $2.93 per share. As required by SFAS No. 115, implemented on January 1, 1994, management classified its entire securities portfolio as available for sale due to the identification of circumstances which could result in the securities not being held to maturity. In 1994 Shawnee raised its dividend to $2.70 per share from $2.60 per share in 1993, continuing its historical pattern of increasing annual dividends. Other Key Indices As of December 31, 1994, the average yields on the Bank's interest generating assets were as follows: Loans 8.82% Investments 6.38% Interest-bearing deposits 4.11% Federal Funds 4.21%
The average cost for customers' deposits was 3.59%. Return on average assets (ROA) and return on average equity (ROE) were 1.01% and 9.69%, respectively, for 1994 versus 1.18% and 12.28% for 1993. These ratios indicate to shareholders how well their money is being employed by Shawnee and compare favorably with other banks of similar size. The declines in ROA and ROE were largly due to the decrease in earnings year to year. The decline in ROE was proportionately greater than that of ROA because the capital base of Shawnee continued to increase given the Bank's overall profitability, while the Bank's asset size fell slightly. Capital Resources The Bank is required to maintain certain levels of capital in accordance with regulations of the FDIC. The minimum guidelines for the ratio of total capital to risk-weighted assets (including certain off-balance-sheet activities, such as standby letters of credit) is 8%. At least 4% of the total capital must be "Tier I Capital" or core capital, which may be composed of common equity, retained earnings and a limited amount of perpetual preferred stock, less goodwill and intangible assets other than purchased mortgage servicing rights acquired after February 18, 1992. The remainder may consist of subordinated debt, cumulative preferred stock and a limited amount of loan loss reserves ("Tier II Capital"). In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide a minimum leverage ratio of tangible equity (shareholders' equity less disallowed intangibles) to adjusted average quarterly assets equal to 3% for bank holding companies that meet certain specified criteria. The Bank's capital levels and capital requirements as of December 31, 1994, are set forth in the following table: -30-
FDIC MINIMUM SHAWNEE'S CAPITAL IN EXCESS CAPITAL ACTUAL OF MINIMUM REQUIREMENTS CAPITAL REQUIREMENTS --------------------- ------------------- AS % OF % OF % OF ADJUSTED ADJUSTED ADJUSTED TOTAL TOTAL TOTAL ASSETS AMOUNT ASSETS AMOUNT ASSETS ------ ------ ------ ------ ------ Risk-Based Capital: Tier 1 Capital...... 4.00% $7,816,000 14.03% $784,000 10.03% Tier 2 Capital...... $ 184,000 0.33% $184,000 0.33% Total Capital..... 8.00% $8,000,000 14.36% $509,000 6.36% Leverage Ratio....... 3.00% $7,816,000 11.14% $636,000 8.14%
As of December 31, 1994, Shawnee complied with all capital levels required by the FDIC. -31- 1993 versus 1992 Net Income Net income in 1993 reached an historic high as a result of a very favorable net interest margin (i.e., the difference between the cost of funds for the Bank and the cost at which it can lend these funds). This was coupled with a stronger economy in 1993 than in 1992 and lower interest rates, causing business and individuals to increase their demand for loans. On a year-to-year basis, net income increased almost 15% from $728,484 in 1992 to $834,494 in 1993, and net income per share increased from $9.01 to $10.35.
YEARS ENDED DECEMBER 31, ------------------------ 1993 1992 % CHANGE ---- ---- -------- INTEREST INCOME Loans................................ $3,403,912 $3,255,668 4.55% Investment Securities................ 1,253,638 1,334,187 (6.04%) Interest-bearing Deposits............ 208,369 272,788 (23.62%) Federal Funds Sold................... 208,404 170,177 22.46% ---------- ---------- 5,074,323 5,032,920 .82% INTEREST EXPENSE Deposits............................. 2,038,678 2,199,492 (7.31%) ---------- ---------- NET INTEREST INCOME................. 3,035,645 2,833,328 7.14% Provision for Loan Losses............ 0 0 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.......... 3,035,645 2,833,328 7.14% OTHER INCOME Service Fees......................... 69,874 42,773 63.36% Other................................ 75,179 48,629 54.60% Net Investment Gains................. 9,300 (21,950) Gain on Sale of Equipment............ 3,700 0 100.00% ---------- ---------- 158,053 69,452 127.57% OTHER EXPENSES Salaries............................. 829,935 728,183 13.97% Pension and Other Employee Benefits.. 230,393 217,382 5.99% Occupancy Expense.................... 115,601 134,290 (13.92%) Depreciation......................... 213,394 176,734 20.74% Other................................ 703,407 710,532 (1.00%) ---------- ---------- 2,092,730 1,967,121 6.39% ---------- ---------- INCOME BEFORE INCOME TAXES.......... 1,100,968 935,659 17.67% PROVISION FOR INCOME TAXES........... 266,474 207,175 28.62% ---------- ---------- NET INCOME.......................... $ 834,494 $ 728,484 14.55% ========== ========== NET INCOME PER SHARE................. $ 10.35 $ 9.01 14.87% ========== ==========
-32- Net Interest Income Lending increased substantially in 1993. In particular, lending in the mortgage, installment and commercial sectors was up approximately 25% year to year. This resulted in interest income from loans increasing $148,244 or 4.5%. This was partially offset by less income from the Bank's holdings of investment securities, as interest rates declined over the course of the year. Interest Expense Interest expense declined to $2,038,678 (7.31%) from 1992 to 1993, notwithstanding an increase in deposits of approximately $3.2 million year to year. This decrease was a result of the Federal Reserve Board's move to lower interest rates through most of 1993, thereby decreasing the interest the Bank was required to pay on depositor's accounts. The Bank's net interest margin decreased from 4.72% to 4.51% year to year. Provision for Loan Losses Shawnee's allowance for loan losses fell slightly from 1992 to 1993 from $195,788 to $184,118. This reflected an improvement in the economy but remained at a level that management believed was adequate to absorb possible losses on loans that may become uncollectible. Non-Interest Income Other income increased significantly year to year ($158,053 vs. $69,452). Increased service fee income and gains from the sale of investment securities accounted for the bulk of the difference year to year. Non-Interest Expense Other expenses increased 6.3% from 1992. Salary expense increased significantly as a result of a raise effected during the year and an increase in staff levels. In addition, certain other expenses increased as a result of costs related to the expansion to a branch office in Loysburg, Pennsylvania (and related depreciation increase) and the addition of three drive-up ATMs and one interior ATM. Also, a change in accounting principle, SFAS 109 (Accounting for Income Taxes) resulted in a deferred benefit of $24,621 in 1993. Book Value and Dividends Given the increase in net income of 15% year to year, book value per share increased to $91.11 in 1993 from $83.09 in 1992, a boost of 9.65% year to year. Shawnee also increased its dividend from $2.50 to $2.60. Other Key Indices Other measures of overall performance, including return on assets and return on equity, also improved from 1992 to 1993, from 1.16% to 1.18%, and from 11.83% to 12.28%, respectively. INTEREST RATE SENSITIVITY AND LIQUIDITY The objective of the Corporation's asset/liability management policy is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Consistent with conservative banking practices, the Asset/Liability Management Committee recommends the allocation of funds within prescribed guidelines to achieve specified target goals for Return on Equity and Return on Assets. These guidelines are established to reduce the bank's level of risk to fluctuating interest rates, while leaving open the possibility of capitalizing on favorable trends. -33- The following table summarizes the Corporation's interest rate sensitivity or gap position, which is the estimated aggregate maturity and repricing of interest earning assets and interest bearing liabilities, at December 31, 1994: INTEREST RATE SENSITIVITY
90-Day 90-Day 180-Day 180-Day 365-Day 365-Day Volume Yield Volume Yield Volume Yield ------ ----- ------ ----- ------ ----- (Dollars in Thousands) ASSETS Beginning Balance 0 0.00% $14,496,879 7.55% $17,952,970 7.63% U.S. Governments $ 200,000 7.06% 300,000 5.29% 300,000 6.08% Government Agencies 700,000 7.71% 300,000 8.88% 200,000 6.79% Municipals 85,000 11.25% 100,000 8.47% 300,000 6.74% Certificates 793,000 5.26% 298,000 5.38% 297,000 6.54% Other Securities 100,000 9.20% 200,000 6.20% 200,000 5.81% Federal Funds 5,900,000 5.75% 0 0.00% 0 0.00% PHEAA 1,496,215 7.83% 0 0.00% 0 0.00% Demand Loans 2,369,199 10.66% 0 0.00% 0 0.00% Tax Free Loans 4,200 7.42% 4,200 7.42% 43,400 7.42% Real Estate Loans 960,329 9.12% 490,476 8.94% 808,495 8.97% Installment 1,888,936 8.94% 1,763,415 8.66% 3,577,361 7.80% ----------- ----------- ----------- TOTAL RATE SENSITIVE ASSETS $14,496,879 7.55% $17,952,970 7.63% $23,684,226 7.64% LIABILITIES Beginning Balance 0 0.00% $18,075,439 4.02% $22,232,594 4.06% Super-Nov $ 507,009 2.50% 0 0.00% 0 0.00% MMDA 5,774,297 3.00% 0 0.00% 0 0.00% IRAs 3,976,716 6.09% 0 0.00% 0 0.00% $100,000 CDs 2,346,261 4.29% 200,000 4.25% 202,000 4.98% Other CDs 5,471,155 3.63% 3,957,155 4.22% 3,199,964 4.60% ----------- ----------- ----------- TOTAL RATE SENSITIVE LIABILITIES $18,075,439 4.02% $22,232,594 4.06% $25,634,558 4.14% Total Assets: $70,802,682 Total Equity: $ 7,682,285 RSA/RSL 0.80 0.81 0.92 GAP (RSA-RSL) (3,578,560) (4,279,624) (1,950,332) GAP/Total Assets -5.05% -6.04% -2.75%
As measured by the one-year cumulative sensitivity gap at December 31, 1994, the Corporation was liability sensitive such that the maturity and repricing of interest bearing liabilities exceeded interest earning assets. As discussed elsewhere in this Management's Discussion and Analysis, short-term market interest rates rose dramatically in 1994 as a result of the Federal Reserve's efforts to slow the economy by raising the federal funds rate. Long- term rates have also risen but not to the same extent as short-term rates. Management expects these rate increases to continue into 1995. The focus in 1994 was to reduce the Corporation's sensitivity to rising interest -34- rates to the extent possible while limiting the negative impact on earnings. Measures in 1994 to reduce the liability-sensitive position included adjusting lending rates upward to reflect the increased costs on deposits, subject to competitive factors, as well as increasing investments in higher-yielding, longer-term government agency investments (many of which remain subject to calls prior to maturity). On a quarterly basis, or as may be necessitated by significant changes in the marketplace, the Committee reviews its asset/liability management policy. Factors considered by the Committee in evaluating interest rate risk include, but are not limited to, the current interest rate outlook nationally and locally, current forecasts on loans and deposits, various rate-sensitive asset- to-liabilities ratios, and current and projected liquidity needs. Shawnee manages its liquidity position by continually evaluating its funding needs and the cost and terms of funding sources. The Corporation has sufficient sources of funds available to meet its routine operational cash needs by virtue of its monetary assets and liabilities. The Corporation does not borrow to meet its long-term liquidity needs. Net cash from operating activities in 1994 was provided by net income, increased by non-cash related items such as depreciation expense. Net cash from investing activities was primarily redeployed in the purchase of investment securities. Interest bearing accounts were decreased to offset an approximate $2.5 million decline in customer deposits. Federal funds sold and repayments on loans provide sources of short-term liquidity. In addition, the Corporation's securities portfolio provides liquidity due to the active markets for the securities held. -35- THREE MONTHS ENDED MARCH 31, 1995 VERSUS THREE MONTHS ENDED MARCH 31, 1994 Net Income Net income decreased marginally quarter to quarter by .98% from $194,000 in 1994 to $191,000 in 1995. The principal reason for this decline was a higher overall level of interest paid on deposits. Net income per share slipped from $2.42 to $2.38.
THREE MONTHS ENDED MARCH 31, ----------------------------------------------- 1995 1994 ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) INTEREST INCOME Loans................................ $ 841 $ 839 Investment Securities................ 298 316 Interest-bearing Deposits............ 14 31 Federal Funds Sold................... 110 52 -------------- -------------- 1,263 1,238 INTEREST EXPENSE Deposits............................. 542 507 -------------- -------------- NET INTEREST INCOME................ 721 731 Provision for Loan Losses............ 0 0 -------------- -------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.......... 721 731 OTHER INCOME Service Fees......................... 13 20 Other................................ 27 22 -------------- -------------- 40 42 OTHER EXPENSES Salaries............................. 206 209 Pension and Other Employee Benefits.. 42 47 Occupancy Expense.................... 33 33 Depreciation......................... 53 53 Other................................ 175 165 -------------- -------------- 509 507 -------------- -------------- INCOME BEFORE INCOME TAXES......... 252 266 PROVISION FOR INCOME TAXES........... 61 72 -------------- -------------- NET INCOME......................... $ 191 $ 194 ============== ============== NET INCOME PER SHARE................. $ 2.38 $ 2.42 ============== ============== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING................... 80,184 80,184 ============== ==============
-36- Net Interest Income Interest income increased 2% quarter to quarter from $1,238,000 in 1994 to $1,263,000 in 1995. Interest earned from federal funds sold increased significantly on higher volumes, offset partially by a decrease on investment securities income. This reflected the bank's overall move toward lessening the maturities of its investments in light of a trend of increasing interest rate moves by the Federal Reserve Board. Interest income from loans was flat quarter to quarter ($839,000 in 1994 versus $841,000 in 1995) with the overall level of loans remaining fairly constant quarter to quarter as well. The return on average earning assets decreased slightly from 1.13% to 1.12% from 1994 to 1995. The increase in interest expense accounted for the change. The bank's net interest margin (i.e., the difference between the cost of funds for the bank and the cost at which it can lend these funds) increased in 1995 as compared to 1994, 4.40% versus 4.35%. The principal factor causing the increase in net interest margin was an overall rise in the level of non- interest-bearing deposits during the first quarter of 1995. Interest Expense Interest expense on deposits increased significantly year to year from $507,000 in 1994 to $542,000 in 1995, or 6.9%. The increase in the expense was due primarily to the increase in short-term interest rates during the period. In addition, competitive pressures in the bank's market area required it to offer higher yields to maintain its deposit base at prior levels. Provision for Loan Losses Nonperforming loans as a percentage of total average assets remained approximately the same quarter to quarter (.238% versus .235%). Shawnee did not increase its allowance for loan losses during the first quarter of 1995 and did not experience any increase in nonperforming loans during the period. Total risk elements, which include nonperforming assets and loans 90 days past due, decreased from .77% of loans in 1994 to .69% of loans in 1995. The Bank's provision for loan losses continued to be consistent with the volume of net charge-offs and responsive to overall asset quality trends. The provision is maintained at a level which management believes to be adequate to absorb potential losses in its portfolio. Non-Interest Income Other income was flat quarter to quarter ($40,000 in 1995 versus $42,000 in 1994). A slight decrease in service fee income was offset by a small increase in other income. Non-Interest Expense The overall level of non-interest expenses necessary for the operation of the bank remained constant quarter to quarter ($509,000 in 1995 versus $507,000 in 1994). Salaries and benefits decreased slightly by 3.1%. Other expenses, which included an increase in the cost of FDIC insurance, increased by 6.1%. Book Value and Dividends Book value per share increased significantly during the first quarter of 1995 to $100.43 per share from $94.55 at the end of 1994. The increase was due to the continued profitability of the bank ($2.38 per share during the quarter) as well as a turnaround in the value of the securities portfolio held by the bank from a net unrealizable holding loss of $235,000 at the end of 1994 to a net unrealized holding gain of $46,000 at the end of the first -37- quarter of 1995. The bank holds these securities as "available for sale" but has no present intention of liquidating these securities. Shawnee paid a dividend of $2.45 per share in January, 1995. Shawnee has historically paid its second, and larger, dividend in January of each year. Pursuant to the Plan of Merger, Shawnee is permitted to pay an additional dividend in 1995 based on a pro-ration of $2.70 per share divided by the number of months until the merger is consummated. Shawnee anticipates paying a dividend of $1.35 per share at the end of June. Other Key Indices Return on average assets (ROA) and return on average equity (ROE) were 1.12% and 10.60% for the first quarter of 1995. These ratios indicate to shareholders how well Shawnee is employing the bank's assets to create income and how well the bank is employing shareholders' equity to create income. ROA decreased slightly quarter to quarter (1.13% vs 1.12%) due to slightly lower levels of income on a marginally higher asset base, and ROE declined from 11.55% to 10.60% due primarily to higher overall levels of shareholders' equity because of the turnaround in the value of the securities portfolio. Liquidity On a quarterly basis, or as may be necessitated by significant changes in the marketplace, the bank, through its Asset and Liability Committee ("ALCO") reviews its asset/liability management policy. During the first quarter the bank increased loan rates including mortgage rates, in particular, to reflect changes in the overall market and increased the rates paid on deposits to maintain its deposit base and counter competitive pressures. Shawnee manages its liquidity position by continually evaluating its funding needs and the cost and terms of funding sources. Net cash from operating activities during the first quarter was provided by net income, increased by non-cash related items such as depreciation expense, for a net overall increase of $250,000. Net cash flows from investing activities during the quarter, including proceeds from the maturities of investment securities, were primarily redeployed by purchasing additional investment securities. The bank was also able to marginally increase loans during the quarter, reversing a decline in lending of $352,000 during the fourth quarter of 1994. Areas of lending which increased included student loans and commercial loans. Overall, net cash provided by investing activities increased by $247,000 during the quarter. The net level of deposits increased by $795,000 during the first quarter. This was primarily due to the bank's increase in demand deposits of 12.8%. Cash flows were decreased by the payment of a dividend in the first quarter. Overall, net cash and cash equivalents increased by $1,277,000 during the quarter. In addition, federal funds sold and repayments on loans provide sources of short-term liquidity. Further, Shawnee's securities portfolio provides liquidity due to the active markets for the securities held. MARKET AND DIVIDEND INFORMATION CONCERNING SHAWNEE COMMON STOCK There has never been an organized public trading market for Shawnee Common Stock. Shawnee Common Stock is traded occasionally in the over-the-counter market. At the present time, there are no securities dealers which make a market for Shawnee Common Stock, and NASDAQ does not report prices for trades of Shawnee Common Stock. While Shawnee's management from time to time receives information concerning trades of Shawnee Common Stock, it does not have any reliable basis on which to provide information concerning trades of Shawnee Common Stock, and it does not have any reliable basis on which to provide information concerning -38- historical ranges of trading prices or bid-and-asked quotations. On January 4, 1995, prior to the announcement of the Shawnee Merger, 300 shares of Shawnee Common Stock were traded by parties not affiliated with Shawnee at a price of $92 per share. Because of the limited trading in Shawnee Common Stock, this price should not necessarily be considered as indicative of Shawnee Common Stock's true market value. For 1994, Shawnee declared an annual dividend of $2.70 per share. For 1993, the annual dividend was $2.60 per share. Under the terms of the Plan of Merger, Shawnee is permitted to pay prior to the effective date of the Merger a prorated dividend for 1995 based on the annual rate of $2.70 per share. The amount of this dividend will depend upon the timing of the merger and of the record date for the first Keystone dividend following the Merger. While banking laws and regulations limit the amount of dividends that may be paid by Shawnee, these laws and regulations would not currently restrict the payment by Shawnee of dividends at Shawnee's historical rates. BUSINESS OF SHAWNEE HISTORY AND BUSINESS The Everett Bank was incorporated on December 21, 1949 as a Pennsylvania banking institution. In 1986, the shareholders of The Everett Bank approved a reorganization into a holding company structure, whereby The Everett Bank became the sole subsidiary of the newly-created Shawnee Financial Services Corporation ("Shawnee"). Shawnee's headquarters are located at 115 East Main Street, Everett, Pennsylvania 15537, a two-story building in downtown Everett which contains a full service banking facility and the central administration offices of Shawnee. Shawnee, through its sole subsidiary, The Everett Bank, transacts business with customers primarily within its local trade area, which is concentrated in Bedford County, Pennsylvania. Shawnee engages in a full-service commercial banking business within the vicinity of its service area. It offers various loan services, including secured and non-secured commercial and consumer loans, construction and mortgage loans, all types of deposit services, including check services, and interest-bearing demand, savings and other time deposits. Shawnee's business is not seasonal in nature, but does vary with the business cycle. In addition, as a community bank, Shawnee's profitability is impacted by the commercial activity in Bedford County. As of March 31, 1995, The Everett Bank had total assets of approximately $71,209,000, total shareholders' equity of approximately $8,053,000, and total deposits and liabilities of approximately $62,627,000. Major classifications of loans are summarized as follows:
MARCH 31, DECEMBER 31, ------------------------ 1995 1994 1993 ----------- ----------- ----------- Commercial........................ $ 2,339,866 $ 2,387,347 $ 3,760,268 Real Estate - Construction........ 471,293 1,201,212 582,979 Real Estate - Mortgage............ 16,738,711 16,011,682 15,271,983 Installment Loans to Individuals.. 18,563,650 18,694,713 19,391,395 Other............................. 1,657,331 1,564,913 1,284,900 ----------- ----------- ----------- $39,830,651 $39,859,867 $40,291,525
In addition to its main office in Everett, the Bank has three branch offices located in Bedford, Breezewood and Loysburg, Pennsylvania. All of these facilities are owned by Shawnee. Management believes all such -39- facilities are in good repair and well suited to their current uses. The Northern Bedford County branch office in Loysburg was significantly updated and expanded in 1993. In the past two years, the Bank added four automated teller machines ("ATMs") to various locations. These machines permit customers to conduct routine banking transactions 24 hours a day, and all but one are located on the premises of a banking office. All the ATMs are part of the MAC Network, which consists of over 14,000 ATMs owned by numerous banks and savings and loans in over 16 states. As of December 31, 1994, the Bank had 38 full-time employees and seven part-time employees. The Bank believes its relationship with its employees to be good. COMPETITION The Everett Bank competes actively with other commercial banks and savings and loans in its area, many of which are larger than The Everett Bank, as well as with major banking and financial institutions headquartered elsewhere. The Everett Bank is generally competitive with all competing financial institutions in its service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. Recently, a number of competitors have begun to offer enhanced financial services and products, including mutual funds, to their customers which The Everett Bank does not offer. REGULATION AND SUPERVISION Shawnee is a bank holding company, registered as such with the Federal Reserve Board under the Bank Holding Company Act of 1956. As a bank holding company, Shawnee is required to file with the Federal Reserve Board an annual report and other information. The Federal Reserve Board is also empowered to make examinations and inspections of Shawnee and its subsidiary. In addition, The Everett Bank is subject to the supervision of and is regularly examined by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation ("FDIC"), and is subject to certain regulations of the Federal Reserve Board. The areas of operation of The Everett Bank which are subject to regulation by federal and Pennsylvania laws, regulations and regulatory agencies include reserves against deposits, maximum interest rates for specific classes of loans, truth-in-lending and truth-in-savings disclosure, permissible types of loans and investments, mergers and acquisitions, issuance of securities, payment of dividends, Community Reinvestment Act evaluations, establishment of branches and other aspects of operations. Shawnee is not a reporting company under the Exchange Act and is therefore not required to file reports with the Securities and Exchange Commission. Shawnee has regularly provided its shareholders with an Annual Report which has included audited financial statements. -40- MANAGEMENT OF SHAWNEE The table below provides information concerning the Board of Directors and executive officers of Shawnee. Share ownership information contained in the table reflects beneficial ownership (see note (1) to the table) of Shawnee Common Stock as of June 19, 1995, and is based upon information furnished by or on behalf of the persons referred to in the table.
AMOUNT AND PERCENTAGE NATURE OF OF DIRECTOR BENEFICIAL OUTSTANDING OF OWNERSHIP OF SHAWNEE NAME, PRINCIPAL OCCUPATION DURING THE SHAWNEE SHAWNEE COMMON COMMON PAST FIVE YEARS, OTHER DIRECTORSHIPS AGE SINCE STOCK (1)(2) STOCK - ------------------------------------ --- ----- ------------ ----- Term Ending in 1998: Samuel K. Bohn............................ 66 1986 3,000 3.74% Director and President of Shawnee; Director, President and Secretary of The Everett Bank Stephen G. McCahan, Jr.................... 63 1986 225 (3) Director of Shawnee; Director of The Everett Bank; President of Everett Rexall Pharmacy Inc., Everett and Saxon, Pennsylvania Barry R. Scatton.......................... 48 1988 220 (3) Director of Shawnee; Director of The Everett Bank; Attorney-at-Law, Bedford County, Pennsylvania Term Ending in 1997: Constance B. Cragan....................... 45 1993 240 (3) Director of Shawnee; Director of The Everett Bank; Owner of Cragan Insurance Agency B. Frank Dunkle, Jr....................... 66 1986 1,700 2.12% Director and Secretary of Shawnee; Director, Vice President and Assistant Secretary of The Everett Bank; Owner and Tax Consultant for B. F. Dunkle Services, Everett, Pennsylvania Carl R. Feather........................... 55 1993 200 (3) Director of Shawnee; Director of The Everett Bank; Owner, Feather Mobile Home Sales
-41-
AMOUNT AND PERCENTAGE NATURE OF OF DIRECTOR BENEFICIAL OUTSTANDING OF OWNERSHIP OF SHAWNEE NAME, PRINCIPAL OCCUPATION DURING THE SHAWNEE SHAWNEE COMMON COMMON PAST FIVE YEARS, OTHER DIRECTORSHIPS AGE SINCE STOCK (1)(2) STOCK - ------------------------------------ --- ----- ------------ ----- Term Ending in 1996: L. Frank Bittner........................... 66 1986 8,648 (4) 10.79% Chairman of the Board of Shawnee; Chairman of the Board of The Everett Bank; President of Breezewood Enterprises and Snyder's Gateway, a truck stop gasoline, restaurant and rest stop complex in Breezewood, Pennsylvania John H. Jordan............................. 88 1986 2,420 3.02% Director and Treasurer of Shawnee; Director and Vice President of The Everett Bank; Attorney-at-Law, Bedford County, Pennsylvania Other Executive Officers Ralphard L. Black.......................... 52 -- 452 (3) Vice President of Shawnee, Executive Vice President of The Everett Bank, not a director All directors and executive officers of Shawnee as a group (9 persons)............................... 17,105 21.33%
_______________ (1) Under regulations of the Securities and Exchange Commission, a person who has or shares voting or investment power with respect to a security is considered a beneficial owner of the security. Voting power is the power to vote or direct the voting of shares, and investment power is the power to dispose of or direct the disposition of shares. Unless otherwise indicated in the other footnotes below, each director and officer has sole voting power and sole investment power with respect to the shares indicated opposite his name in the table . (2) Includes 5,652 shares held jointly with spouses. (3) Less than one percent of the outstanding shares. (4) Includes 3,846 shares held by Alice C. Bittner, wife of L. Frank Bittner, for which Mr. Bittner disclaims beneficial ownership. Each of the persons listed above has held the position described above or other executive positions with the same entity (or a subsidiary thereof) for at least the past five years. -42- CERTAIN BENEFICIAL OWNERS OF SHAWNEE COMMON STOCK The following table sets forth, as of June 19, 1995, and as to each person who owns of record, or who is known by the Board of Directors of Shawnee to be the beneficial owner of, more than 5% of the outstanding shares of Shawnee Common Stock, the name and address of such person, the number of shares beneficially owned and the percentage of the outstanding shares of Shawnee Common Stock so owned:
PERCENTAGE OF OUTSTANDING AMOUNT AND NATURE OF SHAWNEE NAME AND ADDRESS BENEFICIAL OWNERSHIP COMMON STOCK - ---------------- -------------------- ------------ L. Frank Bittner (1) 8,648 10.79% Everett, Pennsylvania June A. Derrick 12,600 15.71% Everett, Pennsylvania Mid-State Bank and Trust Company (2) 6,708 8.37% Altoona, Pennsylvania
_______________ (1) Includes 3,856 shares held by Alice C. Bittner, wife of L. Frank Bittner, for which Mr. Bittner disclaims beneficial ownership. (2) Mid-State is a wholly owned bank subsidiary of Keystone. These shares are held by Mid-State in a fiduciary capacity, as trustee of a trust under which Mid-State has sole voting and investment power over the shares. It is anticipated that these shares will be voted in favor of approval of the Plan of Merger. The amount shown in the table does not include 300 shares of Shawnee Common Stock held by Mid-State in a custodial account over which it has no voting or investment power. SHAWNEE'S INDEPENDENT AUDITORS Edwards Leap & Sauer, Inc., Shawnee's auditors since 1966, have been selected to serve as Shawnee's independent auditors for 1995. Services provided to Shawnee by Edwards Leap & Sauer, Inc. include examination of Shawnee's financial statements and consultation in connection with accounting-related and tax matters. It is not expected that a representative of Edwards Leap & Sauer, Inc. will attend the Shawnee Special Meeting. -43- COMPARISON OF KEYSTONE COMMON STOCK AND SHAWNEE COMMON STOCK GENERAL Upon consummation of the Merger, shareholders of Shawnee will become shareholders of Keystone. Since the Articles of Incorporation ("Articles") and By-Laws of Keystone and Shawnee are not the same, the Merger will result in certain changes in the rights of the holders of Shawnee Common Stock. The material differences in the rights of holders of Keystone Common Stock and Shawnee Common Stock are discussed below. VOTING RIGHTS General. The holders of Keystone Common Stock, like the holders of Shawnee 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 Shawnee 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. Shawnee's Articles require that certain transactions involving Shawnee be approved by the vote of the holders of at least 75% of the outstanding shares of Shawnee Common Stock. The transactions subject to Shawnee's special voting requirements are a merger, consolidation, liquidation or dissolution of Shawnee or any action that would result in the sale or other disposition of all or substantially all of the assets of Shawnee. -44- BOARD OF DIRECTORS Classified Boards. The Articles of Keystone and the By-Laws of Shawnee 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. Shawnee's By-Laws provide that Shawnee's Board of Directors shall consist of not less than six nor more than 25 directors, and that within those limits the Board may fix the number of directors. Vacancies on the Shawnee Board, including vacancies resulting from an increase in the number of directors, may be filled by a majority vote of the remaining directors (though less than a quorum). Directors elected by the Board to fill vacancies serve for the remainder of the term of the class to which they have been elected. The shareholders of Shawnee can also change the number of Shawnee directors by amending the By-Laws 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. Shawnee's Articles and By-Laws are silent as to removal of directors by shareholder vote. Under the Pennsylvania Business Corporation Law ("BCL"), because Shawnee has a 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 Shawnee 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 Shawnee Common Stock. Nomination of Director Candidates. The Articles of Keystone and the By- Laws of Shawnee 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. Shawnee's By-Laws require the notice to be given not less than 60 days prior to the meeting at which the election is to be held. AMENDMENT OF ARTICLES AND BY-LAWS Proposal of amendments. Because Shawnee does not have a class of securities registered under the Exchange Act, the BCL provides that amendments to Shawnee's Articles may be proposed either (1) by the Board of Directors or (2) by a petition of the holders of not less than 10% of the outstanding Shawnee Common Stock. Under the BCL, because Keystone's Common Stock is registered under the Exchange Act, the shareholders of Keystone are not entitled by statute to propose amendments to Keystone's Articles. Any amendment to Keystone's Articles must first be proposed by Keystone's Board of Directors. Any shareholder of Shawnee or Keystone may propose an amendment to the corporation's By-Laws. Approval of Amendments. 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 -45- beneficially owned by an interested shareholder to approve any amendment to Keystone's Articles or By-Laws. 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. Under applicable provisions of the BCL, such amendments may be adopted by a majority of the votes cast at a meeting of Keystone shareholders. Except as to matters for which a shareholder vote is required by statute, Keystone's Board may also amend the By-Laws without shareholder approval by a vote including a majority of the disinterested directors then in office. Shawnee's Articles require the vote of the holders of at least 75% of the outstanding Shawnee Common Stock to approve any amendment of the special shareholder vote provisions described above under "Voting Rights--Special Votes for Certain Transactions." Under applicable provisions of the BCL, amendments to other provisions of Shawnee's Articles may be approved by a majority of the votes cast at a meeting of Shawnee shareholders. Shawnee's By-Laws require the vote of the holders of at least 75% of the outstanding Shawnee Common Stock to adopt any amendment to the By-Laws of Shawnee. Except as to matters for which a shareholder vote is required by statute, Shawnee's Board may also amend the By-Laws without shareholder approval by a majority vote of the members of the Board. 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 eight one-thousandths (8/1,000ths) 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 eight 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 eight 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 tradeable. 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 -46- 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 eight 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. Prior to the Distribution Date, the terms of the Rights may be amended by the Board of Directors in any respect whatever, without the consent of the holders of the Rights, 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 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. Because it does not have a class of securities registered under the Exchange Act, Shawnee is not subject to these provisions. Under Section 2538 of the BCL, any merger, consolidation, share exchange or sale of assets between Keystone or a subsidiary and any Keystone shareholder, any division of Keystone in which any Keystone 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 Keystone 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 Keystone 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 Keystone's 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 Keystone shareholders would be entitled to cast in an election of directors, any other Keystone 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 Keystone shares representing 20% or more of the voting power in an election of Keystone -47- directors unless (1) the business combination or the acquisition of the 20% interest is approved by Keystone's Board of Directors 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. 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. Neither the Keystone nor Shawnee Common Stock is listed on a national securities exchange. However, Keystone currently has more than 2,000 shareholders of record, and Shawnee currently has fewer than 2,000 shareholders of record. Shareholders of Shawnee will have the right to dissent from the Merger. See "Plan of Merger--Dissenters' Rights of Shawnee Shareholders." PREFERRED STOCK Shawnee's Articles do not authorize any class of stock other than Shawnee 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 Shawnee 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 -48- 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 Shawnee, whether voluntary or involuntary, the holders of Keystone or Shawnee 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 Shawnee Common Stock. Holders of fully paid shares of Keystone or Shawnee Common Stock are not subject to any liability for further calls or assessments. LEGAL OPINIONS Opinions with respect to certain legal matters in connection with the Merger will be rendered by Reed Smith Shaw & McClay, Pittsburgh, Pennsylvania, as counsel for Keystone, and by Buchanan Ingersoll Professional Corporation, Pittsburgh, Pennsylvania, as counsel for Shawnee. EXPERTS The consolidated financial statements of Keystone incorporated by reference in Keystone's Annual Report (Form 10-K) for the year ended December 31, 1994 have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in auditing and accounting. The consolidated financial statements of Shawnee appearing on pages F-2 through F-18 of this Proxy Statement/Prospectus have been audited by Edwards, Leap & Sauer, independent auditors, whose report thereon is included herein on page F-1. Such financial statements have been included herein in reliance upon such report, given upon the authority of said firm as experts in auditing and accounting. OTHER MATTERS The management of Shawnee does not know of any other matters intended to be presented for shareholder action at the Special Meeting. If any other matter does properly come before the Special Meeting and is put to a shareholder vote, the proxies solicited hereby will be voted in accordance with the judgment of the proxyholders named thereon. -49- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- SHAWNEE FINANCIAL SERVICES CORPORATION AND SUBSIDIARY: Audited Annual Financial Statements: Report of Independent Auditors.................................. F-1 Consolidated Balance Sheets as of December 31, 1994 and 1993.... F-2 Consolidated Statements of Income for the years ended December 31, 1994, 1993 and 1992............................ F-3 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1994, 1993 and 1992............ F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992............................ F-5 Notes to Consolidated Financial Statements...................... F-6 Unaudited Interim Financial Statements Consolidated Balance Sheets as of March 31, 1995 and December 31, 1994 (unaudited)........................................ F-19 Consolidated Statements of Income for three-month periods ended March 31, 1995 and 1994 (unaudited)......................... F-20 Consolidated Statements of Changes in Stockholders' Equity for three-month periods ended March 31, 1995 and 1994 (unaudited)................................................. F-21 Consolidated Statements of Cash Flows for three-month periods ended March 31, 1995 and 1994 (unaudited)................... F-22 Notes to Consolidated Financial Statements (unaudited).......... F-23 -50- INDEPENDENT AUDITORS' REPORT [LETTERHEAD OF EDWARDS, LEAP AND SAUER] To the Board of Directors Shawnee Financial Services Corporation Everett, Pennsylvania We have audited the accompanying consolidated balance sheets of Shawnee Financial Services Corporation and Subsidiary, as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years ended December 31, 1994, 1993 and 1992. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Shawnee Financial Services Corporation and Subsidiary, as of December 31, 1994 and 1993, and the results of its operations and its cash flows for the years ended December 31, 1994, 1993 and 1992 in conformity with generally accepted accounting principles. As discussed in Note A to the financial statements, the Bank changed its method of accounting for investment securities by adopting Financial Accounting Standards Board No. 115 "Accounting for Certain Investments in Debt and Equity Securities." s/ Edwards, Leap & Sauer EDWARDS, LEAP & SAUER Hollidaysburg, Pennsylvania January 31, 1995 F-1 CONSOLIDATED BALANCE SHEETS SHAWNEE FINANCIAL SERVICES CORPORATION
DECEMBER 31, ------------------------- 1994 1993 ---------- ---------- ASSETS Cash and due from banks $ 2,978,991 $ 2,993,064 Interest-bearing deposits 1,091,000 3,954,000 Investment securities 18,227,117 18,349,962 (market value of $19,288,735 for 1993) Federal funds sold 5,900,000 5,250,000 Loans, net 38,707,461 38,831,713 Premises and equipment, net 2,194,054 2,382,203 Other assets 852,311 630,576 ----------- ----------- Total assets $69,950,934 $72,391,518 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits Non-interest-bearing $ 7,867,090 $ 7,679,608 Interest-bearing 53,783,190 56,470,387 ----------- ----------- Total deposits 61,650,280 64,149,995 Dividends payable 196,451 188,432 Accrued interest and other liabilities 522,915 747,385 ----------- ----------- Total liabilities 62,369,646 65,085,812 STOCKHOLDERS' EQUITY Capital stock, $10 par value, 1,000,000 shares authorized; 80,870 shares issued of which 80,184 are outstanding 808,700 808,700 Surplus 671,935 671,935 Retained earnings 6,387,222 5,876,521 Net unrealized holding losses on securities available for sale (235,119) 0 ----------- ----------- 7,632,738 7,357,156 Less: treasury stock, 686 shares at cost (51,450) (51,450) ----------- ----------- Total stockholders' equity 7,581,288 7,305,706 ----------- ----------- Total liabilities and stockholders' equity $69,950,934 $72,391,518 =========== ===========
The accompanying notes are an integral part of the financial statements. F-2 CONSOLIDATED STATEMENTS OF INCOME SHAWNEE FINANCIAL SERVICES CORPORATION
YEARS ENDED DECEMBER 31, --------------------------------------- 1994 1993 1992 ----------- ----------- ----------- INTEREST INCOME Loans $ 3,443,191 $ 3,403,912 $ 3,255,668 Investment securities 1,273,873 1,253,638 1,334,187 Interest-bearing deposits 79,073 208,369 272,788 Federal funds sold 293,477 208,404 170,177 ----------- ----------- ----------- 5,089,614 5,074,323 5,032,820 INTEREST EXPENSE Deposits 2,007,075 2,038,678 2,199,492 ----------- ----------- ----------- NET INTEREST INCOME 3,082,539 3,035,645 2,833,328 PROVISION FOR LOAN LOSSES 0 0 0 ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,082,539 3,035,645 2,833,328 OTHER INCOME Service fees 79,510 69,874 42,773 Other 65,256 75,179 48,629 Net investment gains (losses) 0 9,300 (21,950) Gain on sale of equipment 0 3,700 0 ----------- ----------- ----------- 144,766 158,053 69,452 OTHER EXPENSES Salaries 913,234 829,935 728,183 Pension and other employee benefits 223,195 230,393 217,382 Occupancy expense 121,905 115,601 134,290 Depreciation 210,583 213,394 176,734 Other 790,263 703,407 710,532 ----------- ----------- ----------- 2,259,180 2,092,730 1,967,121 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 968,125 1,100,968 935,659 PROVISION FOR INCOME TAXES 240,927 266,474 207,175 ----------- ----------- ----------- NET INCOME $ 727,198 $ 834,494 $ 728,484 =========== =========== =========== NET INCOME PER SHARE OF CAPITAL STOCK $ 9.07 $ 10.35 $ 9.01 =========== =========== ===========
The accompanying notes are an integral part of the financial statements. F-3 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SHAWNEE FINANCIAL SERVICES CORPORATION YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NET UNREALIZED CAPITAL RETAINED HOLDING TREASURY STOCK SURPLUS EARNINGS LOSSES STOCK TOTAL ------- --------- -------- ------ --------- --------- Balance at December 31, 1991 $ 808,700 $ 659,965 $ 4,724,196 $ 6,192,861 Net income 728,484 728,484 Cash dividends (202,175) (202,175) --------- --------- ----------- ----------- --------- ------------ Balance at December 31, 1992 808,700 659,965 5,250,505 6,719,170 Net income 834,494 834,494 Cash dividends (208,478) (208,478) Treasury stock purchased $(171,600) (171,600) Treasury stock sold 11,970 120,150 132,120 --------- ---------- ----------- ---------- --------- ----------- Balance at December 31, 1993 808,700 671,935 5,876,521 (51,450) 7,305,706 Net income 727,198 727,198 Cash dividends (216,497) (216,497) Net unrealized holding losses on securities available for sale $(235,119) (235,119) --------- ---------- ----------- ---------- --------- ---------- Balance at December 31, 1994 $ 808,700 $ 671,935 $ 6,387,222 $ (235,119) $ (51,450) $ 7,581,288 ========= ========= =========== ========== ========= ===========
The accompanying notes are an integral part of the financial statements. F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS SHAWNEE FINANCIAL SERVICES CORPORATION
YEARS ENDED DECEMBER 31, --------------------------------------------- 1994 1993 1992 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 727,198 $ 834,494 $ 728,484 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 210,583 213,394 176,734 (Gain) loss on sale of investment securities 0 (9,300) 21,950 (Gain) on sale of equipment 0 (3,700) 0 Increase in other assets (100,613) (154,274) (23,867) (Decrease) increase in accrued interest and other liabilities (224,470) (75,220) 135,902 --------- --------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 612,698 805,394 1,039,203 CASH FLOWS FROM INVESTING ACTIVITIES Net decrease in interest-bearing deposits 2,863,000 1,981,000 999,000 Proceeds from sales and maturities of investment securities 4,930,000 17,537,031 14,280,178 Purchase of investment securities (5,163,396) (17,131,463) (17,559,334) Net decrease (increase) in loans 124,252 (7,796,985) (594,145) Premises and equipment expenditures (22,434) (443,626) (93,888) Proceeds from sale of equipment 0 3,700 0 ---------- ----------- ----------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 2,731,422 (5,850,343) (2,968,189) CASH FLOWS FROM FINANCING ACTIVITIES Net (decrease) increase in deposits (2,499,715) 3,202,900 6,279,990 Proceeds from sale of treasury stock 0 132,120 0 Purchase of treasury stock 0 (171,600) 0 Dividends paid (208,478) (202,089) (194,003) ----------- ----------- ----------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (2,708,193) 2,961,331 6,085,987 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 635,927 (2,083,618) 4,157,001 Cash and cash equivalents at beginning of year 8,243,064 10,326,682 6,169,681 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,878,991 $ 8,243,064 $10,326,682 =========== =========== ===========
The accompanying notes are an integral part of the financial statements. F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SHAWNEE FINANCIAL SERVICES CORPORATION NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Shawnee Financial Services Corporation and its wholly-owned subsidiary, The Everett Bank. All significant intercompany accounts have been eliminated in the consolidation. INVESTMENT SECURITIES: In May 1993, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Statement No. 115 requires all investments in debt and equity securities to be classified into three categories. Securities which management has positive intent and ability to hold until maturity are classified as held to maturity. Securities held to maturity are stated at cost, adjusted for amortization of premium and accretion of discount, computed primarily under the interest method. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. All other securities are classified as available for sale securities. Unrealized holding gains and losses for trading securities are included in earnings. Unrealized gains and losses for available for sale securities are excluded from earnings and reported as a net amount and separate component of stockholders' equity until realized. As required by Statement No. 115, management implemented the standard on January 1, 1994 and classified its entire securities portfolio as available for sale due to the identification of circumstances which could result in the securities not being held to maturity. Circumstances resulting in securities sales could include, but are not limited to, changes in market interest rates, changes in prepayment risk, income tax considerations, and liquidity needs. At this time, management has no intention of establishing a trading securities classification. Interest and dividends on securities are reported as interest income. Gains and losses realized on sales of securities represent the differences between net proceeds and carrying values determined by the specific identification method. LOANS AND ALLOWANCE FOR LOAN LOSSES: Loans are stated at unpaid principal balances, less the allowance for loan losses and net unearned discounts. Unearned discounts on installment loans are recognized as income over the term of the loans using a method that approximates the interest method. Loans are placed on nonaccrual when a loan is specifically determined to be impaired. Any unpaid interest previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. The allowance for loan losses is maintained at a level which, in management's judgement, is adequate to absorb potential losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibilty of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans generally are determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHAWNEE FINANCIAL SERVICES CORPORATION NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method and accelerated methods over the estimated useful lives of the assets ranging from 3 to 40 years. Expenditures for maintenance and repairs are charged to expense as incurred. Cost of major additions or improvements are capitalized. When premises and equipment are removed or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to income. INCOME TAXES: In February 1992, the FASB issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Statement No. 109 requires a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Effective January 1, 1993, management adopted Statement No. 109 and reported the cumulative effect of that change in the method of accounting for income taxes in the accompanying 1993 statement of income. EARNINGS PER SHARE: Earnings per share are calculated on the basis of the weighted average number of common shares outstanding. CASH FLOW INFORMATION: For purposes of the Statements of Cash Flows, cash and cash equivalents are defined as those amounts included in the balance sheet captions Cash and due from banks and Federal funds sold. Cash payments for interest in 1994, 1993 and 1992 were $2,185,657, $1,997,160 and $2,079,466, respectively. Cash payments for income taxes for 1994, 1993 and 1992 were $339,249, $281,575 and $145,549, respectively. RECLASSIFICATIONS: Certain amounts in 1993 and 1992 have been reclassified to conform with the 1994 presentation. F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHAWNEE FINANCIAL SERVICES CORPORATION NOTE B - INVESTMENT SECURITIES Securities available for sale consisted of the following:
December 31, 1994 ------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ---------- ---------- ----------- U.S. Treasury securities $ 5,691,352 $ 2,815 $ 206,123 $ 5,488,044 Obligations of other U.S. government agencies 8,296,813 16,590 351,939 7,961,464 Obligations of states and political subdivisions 3,184,621 47,069 53,157 3,178,533 Stocks 216,235 214,680 0 430,915 Corporate notes 1,194,337 196 26,372 1,168,161 ----------- -------- -------- ----------- $18,583,358 $ 281,350 $ 637,591 $18,227,117 =========== ========== ========== =========== December 31, 1993 ------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ---------- ---------- ----------- U.S. Treasury securities $ 5,293,058 $ 162,308 $ 2,689 $ 5,452,677 Obligations of other U.S. government agencies 7,899,117 285,454 4,932 8,179,639 Obligations of states and political subdivisions 3,614,578 192,642 755 3,806,465 Stocks 216,235 257,814 0 474,049 Corporate notes 1,326,974 49,663 732 1,375,905 ----------- ---------- ---------- ----------- $18,349,962 $ 947,881 $ 9,108 $19,288,735 =========== ========== ========== ===========
The amortized cost and estimated market values as of December 31, 1994, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHAWNEE FINANCIAL SERVICES CORPORATION NOTE B - INVESTMENT SECURITIES (CONTINUED)
Amortized Estimated Cost Market Value ----------- ------------ Due in one year or less $ 3,084,929 $ 3,076,654 Due after one year through five years 12,834,310 12,363,185 Due after five years through ten years 2,353,339 2,262,452 Due after ten years 94,545 93,911 ----------- ----------- 18,367,123 17,796,202 Stocks 216,235 430,915 ----------- ----------- Total $18,583,358 $18,227,117 =========== ===========
Investment securities with a carrying amount of approximately $5,300,000 at December 31, 1994 were pledged to secure deposits as required or permitted by law. NOTE C - LOANS Major classifications of loans are as follows:
December 31, ------------------------ 1994 1993 ----------- ----------- Commercial Real estate - construction $ 2,387,347 $ 3,760,268 Real estate - mortgage 1,201,212 582,979 Installment loans to individuals 16,011,682 15,271,983 Other 18,694,713 19,391,395 1,564,913 1,284,900 ----------- ----------- Less: Unearned discount 39,859,867 40,291,525 Allowance for loan losses 968,419 1,275,694 183,987 184,118 ----------- ----------- Net Loans $38,707,461 $38,831,713 =========== ===========
The Bank's primary business activity is with customers located within its local trade area which is concentrated in Bedford County, Pennsylvania. Commercial, residential and personal loans are granted. Although the loan portfolio is diversified, loans outstanding to individuals and businesses are dependent upon local economic conditions in the immediate trade area. Loans on which the accrual of interest has been discontinued amounted to $170,600 at December 31, 1994 and 1993. The gross amount of interest which would have been recorded if all such loans had been accruing interest at their original terms from the date of being placed on nonaccrual is $53,399 for 1994 and $37,949 for 1993. F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHAWNEE FINANCIAL SERVICES CORPORATION NOTE C - LOANS (CONTINUED) In the normal course of business, loans are extended to directors and executive officers and their associates. In management's opinion, all of these loans are on substantially the same terms and conditions as loans to other individuals and businesses of comparable creditworthiness. A summary of loans to executive officers and directors, including associates of such persons, is as follows:
1994 ---------- Loans at beginning of year $ 953,473 New loans 1,315,202 Loan payments (438,942) ---------- Loans at end of year $1,829,733 ==========
Changes in the allowance for loan losses were as follows:
1994 1993 1992 ---------- ---------- ---------- Balance, beginning of year $ 184,118 $ 195,788 $ 206,503 Provision charged to operations 0 0 0 Loans charged off (10,623) (15,135) (15,731) Recoveries 10,492 3,465 5,016 ---------- ---------- ---------- $ 183,987 $ 184,118 $ 195,788 ========== ========== ==========
NOTE D - PREMISES AND EQUIPMENT Major classes of premises and equipment are summarized as follows:
December 31, --------------------------- 1994 1993 ---------- ---------- Land $ 337,247 $ 337,247 Buildings and improvements 1,839,486 1,839,486 Furniture and equipment 1,541,516 1,519,082 ---------- ---------- 3,718,249 3,695,815 Less: Accumulated depreciation 1,524,195 1,313,612 ---------- ---------- $2,194,054 $2,382,203 ========== ==========
Depreciation expense amounted to $210,583, $214 and $176,734 for the years ended December 31, 1994, 1993 and 1992, respectively. F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHAWNEE FINANCIAL SERVICES CORPORATION NOTE E - INCOME TAXES As discussed in Note A, management implemented Statement No. 109 as of January 1, 1993. The cumulative effect of this change in accounting for income taxes was a deferred benefit of $24,621 as of January 1, 1993 and is reported in the statement of income for the year ended December 31, 1993. The provision for income taxes consist of:
1994 1993 1992 ---------- ---------- ---------- Current $ 234,167 $ 287,752 $ 207,175 Deferred 6,760 (21,278) 0 ---------- ---------- ---------- Total $ 240,927 $ 266,474 $ 207,175 ========== ========== ==========
The significant components of temporary differences under Statement No. 109 for 1994 and 1993 are as follows:
1994 1993 ---------- ----------- Provision for loan losses $ 838 $ (12,307) Depreciation 1,243 18,586 Other 4,679 (27,557) ---------- ----------- Total $ 6,760 $ (21,278) ========== ===========
A reconciliation of the federal statutory tax rate to the effective tax rate applicable to income before income taxes follows:
1994 1993 1992 ------------------- ------------------- ------------------- % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income ------ ------ ------ ------ ------ ------ Provision at statutory rate $329,163 34.0% $374,329 34.0% $318,124 34.0% Effect of tax free income (79,737) (8.2) (91,560) (8.3) (98,917) (9.1) Non-deductible interest expense 7,507 .8 9,016 .8 10,945 1.0 Other (16,006) (1.7) (25,311) (2.3) (22,977) (3.8) -------- ---- -------- ---- -------- ---- Actual tax expense and effective rate $240,927 24.9% $266,474 24.2% $207,175 22.1% ======== ==== ======== ==== ======== ====
F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHAWNEE FINANCIAL SERVICES CORPORATION NOTE E - INCOME TAXES (CONTINUED) The deferred tax assets and deferred tax liabilities recorded on the balance sheet as of December 31, 1994 are as follows:
Deferred Tax ------------------------------ Assets Liabilities ----------- ----------- Provision for loan losses $ 11,469 $ 0 Depreciation 0 19,530 Pension expense 21,505 0 Unrealized holding losses on available for sale securities 121,122 0 Other 1,074 0 ----------- ----------- $ 155,170 $ 19,530 =========== ===========
NOTE F - PENSION PLANS The Bank has a non-contributory defined benefit pension plan covering substantially all employees meeting minimum age and service requirements. The plan generally provides benefits based on years of credited service and final average earnings. The current funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Pension plan assets are primarily mortgage-backed securities. Changes in plan assets values attributable to differences between actual and expected returns on plan assets are deferred as unrecognized gains or losses and included in the determination of the pension cost over time. Net pension expense for 1994, 1993 and 1992 consisted of the following:
1994 1993 1992 ----------- ----------- ----------- Service-cost benefits earned during the year $ 36,689 $ 40,392 $ 30,737 Interest accrued on projected benefit obligation 69,765 60,414 54,025 Actual return on plan assets (71,332) (68,615) (66,664) Net amortization and deferral 2,163 8,180 11,477 ----------- ----------- ----------- Net pension expense $ 37,285 $ 40,371 $ 29,575 =========== =========== ===========
F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHAWNEE FINANCIAL SERVICES CORPORATION NOTE F - PENSION PLANS (CONTINUED) The following table sets forth the plan's funded status and amounts recognized in the accompanying balance sheets at December 31, 1994 and 1993:
1994 1993 ------------ ----------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits (based upon retirement date) of $749,134 and $653,449 for 1994 and 1993, respectively. $ (759,580) $(707,501) =========== ========= Projected benefit obligation $(1,034,990) $(904,102) Plan assets at fair value 957,705 838,531 ----------- --------- Projected benefit obligation in excess of plan assets (77,285) (65,571) Unrecognized actuarial gain 54,449 31,072 Unrecognized prior service costs 9,642 10,177 Unrecognized transition credit (49,518) (52,588) ----------- --------- Prepaid (accrued) pension costs included in the balance sheet $ (62,712) $ (76,910) =========== =========
The projected benefit obligation was determined using an assumed discount rate of 7.5% for 1994 and 1993 and 5.5% for 1992. The expected rate of increase in compensation was 5.5% for each year and the assumed rate of return on plan investment earnings was 7.5% for 1994 and 1993 and 8.0% for 1992. The Bank maintains a profit sharing plan covering substantially all employees. Contributions to the plan are at the discretion of the Board of Directors. Amounts charged to operations during 1994, 1993 and 1992 were $0, $30,792 and $48,025, respectively. NOTE G - COMMITMENTS AND CONTINGENCIES In the normal course of business, there are various outstanding commitments and certain contingent liabilities which are not reflected in the accompanying financial statements. These commitments and contingent liabilities represent financial instruments with off-balance-sheet risk. The contract or notional amounts of those instruments were comprised of commitments to extend credit approximating $912,700 and $1,780,000 as of December 31, 1994 and 1993, respectively. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The same credit policies are used in making commitments and conditional obligations as for on-balance-sheet instruments. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation. The terms are typically for a one year period, with an annual renewal option subject to prior approval by management. F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHAWNEE FINANCIAL SERVICES CORPORATION NOTE G - COMMITMENTS AND CONTINGENCIES (CONTINUED) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. These commitments are comprised primarily of available commercial and personal lines of credit. The exposure to loss under these commitments is limited by subjecting them to credit approval and monitoring procedures. Substantially all of the commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of the loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan loses. Since some of the commitments are expected to expire without being drawn upon, the total contractual amounts do not necessarily represent future funding requirements. The Bank is involved in various legal actions from normal business activities. Management believes that the liability, if any, arising from such actions will not have a material adverse effect on the Bank's financial position. NOTE H - RECENT ACCOUNTING PRONOUNCEMENTS During 1992, the FASB issued Statement No. 107 "Disclosures about Fair Value of Financial Instruments" which is effective for fiscal years ending after December 15, 1992, except for entities with less than $150 million in total assets. For those entities, the effective date is for fiscal years ending after December 15, 1995. Statement No. 107 requires disclosure of the fair value of financial instruments, both assets and liabilities recognized and not recognized in the financial statements, with exceptions for certain financial instruments. In May 1993, the FASB issued Statement No. 114 "Accounting by Creditors for Impairment of a Loan" which is effective for fiscal years beginning after December 15, 1994. Statement No. 114 addresses the methods to be used by a creditor to measure the impairment of a loan and the proper recognition of a change in the value of an impaired loan. In October 1994, the FASB issued Statement No. 118 "Accounting by Creditors for Impairment of a Loan -Income Recognition and Disclosure" which amends Statement No. 114 by allowing creditors to use existing methods for recognizing interest income on impaired loans. Statement No. 118 is effective concurrent with the effective date of Statement No. 114. In October 1994, the FASB issued Statement No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" which is effective for calendar year 1994 financial statements, except for entities with less than $150 million in total assets having a one year delay. Statement No. 119 primarily requires disclosures about the amounts, nature and terms of derivatives that do not fall under FASB's Statement No. 105 "Disclosures of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk." Management is currently evaluating the combined financial statement impact of these statements. F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHAWNEE FINANCIAL SERVICES CORPORATION NOTE I - SUBSEQUENT EVENT (PROPOSED MERGER) On January 5, 1995, Shawnee Financial Services Corporation entered into a preliminary merger agreement with Keystone Financial, Inc., a Pennsylvania corporation (Keystone). Under the terms of the agreement, Shawnee will be merged with and into Keystone, which will be the surviving corporation. Each outstanding share of Shawnee's common stock will be converted into 6.25 shares, subject to adjustment, of Keystone common stock, par value $2.00 per share. Simultaneously with or following the merger, Shawnee's subsidiary, The Everett Bank, will be merged with and into Mid-State Bank and Trust Company, a Pennsylvania bank and trust company and wholly-owned subsidiary of Keystone. Management believes the merger will be finalized during 1995. F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHAWNEE FINANCIAL SERVICES CORPORATION NOTE J - PARENT COMPANY ONLY - CONDENSED FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS
December 31, ------------------------- 1994 1993 ------------- --------- ASSETS Cash $ 285,427 $ 290,723 Taxes receivable 27,485 17,507 Investment in subsidiary 7,163,929 6,959,483 Furniture and equipment 172,262 234,026 Other assets 137,970 0 ---------- ---------- Total assets $7,787,073 $7,501,739 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Dividends payable $ 196,451 $ 188,433 Deferred tax liability 9,334 7,600 ---------- ---------- Total liabilities 205,785 196,033 STOCKHOLDERS' EQUITY Capital stock 808,700 808,700 Additional paid-in capital 671,935 671,935 Retained earnings 6,387,222 5,876,521 Net unrealized holding losses on securities available for sale (235,119) 0 ---------- ---------- 7,632,738 7,357,156 Less: treasury stock, 686 shares at cost (51,450) (51,450) ---------- ---------- Total stockholders' equity 7,581,288 7,305,706 ---------- ---------- Total liabilities and stockholders' equity $7,787,073 $7,501,739 ========== ==========
F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHAWNEE FINANCIAL SERVICES CORPORATION NOTE J - PARENT COMPANY ONLY - CONDENSED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF INCOME
Years Ended December 31, --------------------------------- 1994 1993 1992 --------- --------- -------- INCOME Dividend income $216,497 $208,478 $202,175 Gain on sale of asset 0 3,700 0 -------- -------- -------- 216,497 212,178 202,175 GENERAL AND ADMINISTRATIVE EXPENSES Depreciation 71,720 50,322 0 Miscellaneous 4,017 4,760 3,873 -------- -------- -------- 75,737 55,082 3,873 -------- -------- -------- INCOME BEFORE INCOME TAXES 140,760 157,096 198,302 INCOME TAXES CREDIT (25,751) (9,907) (1,317) -------- -------- -------- INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 166,511 167,003 199,619 EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 560,687 667,492 528,865 -------- -------- -------- NET INCOME $727,198 $834,495 $728,484 ======== ======== ========
F-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHAWNEE FINANCIAL SERVICES CORPORATION NOTE J - PARENT COMPANY ONLY - CONDENSED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, ---------------------------------- 1994 1993 1992 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 727,198 $ 834,495 $ 728,484 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of asset 0 (3,700) 0 Depreciation 71,720 50,322 0 Equity in undistributed earnings of subsidiary (560,687) (667,492) (528,865) Increase (decrease) in cash due to changes in assets and liabilities: Taxes receivable (9,978) (16,190) (666) Other assets (16,848) 0 0 Deferred tax liability 1,734 7,600 0 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 213,139 205,035 198,953 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (9,957) (284,398) 0 Proceeds from sale of equipment 0 3,750 0 --------- --------- --------- NET CASH USED BY INVESTING ACTIVITIES (9,957) (280,648) 0 CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (208,478) (202,088) (194,003) Purchase of treasury stock 0 (171,600) 0 Proceeds from sale of treasury stock 0 132,120 0 --------- --------- --------- NET CASH USED BY FINANCING ACTIVITIES (208,478) (241,568) (194,003) --------- --------- --------- NET (DECREASE) INCREASE IN CASH (5,296) (317,181) 4,950 Cash at beginning of year 290,723 607,904 602,954 --------- --------- --------- CASH AT END OF YEAR $ 285,427 $ 290,723 $ 607,904 ========= ========= =========
F-18 CONSOLIDATED BALANCE SHEETS SHAWNEE FINANCIAL SERVICES CORPORATION (UNAUDITED) (IN THOUSANDS)
MARCH 31, DECEMBER 31, 1995 1994 ----------- ------------ ASSETS Cash and due from banks $ 2,606 $ 2,979 Interest-bearing deposits 893 1,091 Investment securities 18,557 18,227 Federal funds sold 7,550 5,900 Loans, net 38,752 38,708 Premises and equipment, net 2,137 2,194 Other assets 714 852 ----------- ------------ Total assets $ 71,209 $ 69,951 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits Non-interest-bearing $ 8,877 $ 7,867 Interest-bearing 53,750 53,783 ----------- ------------ Total deposits 62,627 61,650 Dividends payable 0 197 Accrued interest and other liabilities 529 523 ----------- ------------ Total liabilities 63,156 62,370 STOCKHOLDERS' EQUITY Capital stock, $10 par value, 1,000,000 shares authorized; 80,870 shares issued of which 80,184 are outstanding 809 809 Surplus 672 672 Retained earnings 6,578 6,387 Net unrealized holding gains (losses) on securities available for sale 46 (235) ----------- ------------ 8,105 7,633 Less: treasury stock, 686 shares at cost (52) (52) ----------- ------------ Total stockholders' equity 8,053 7,581 ----------- ------------ Total liabilities and stockholders' equity $ 71,209 $ 69,951 =========== ============
See notes to consolidated financial statements. F-19 CONSOLIDATED STATEMENTS OF INCOME SHAWNEE FINANCIAL SERVICES CORPORATION (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
THREE MONTHS ENDED MARCH 31, ---------------------------- 1995 1994 ----------- ------------ INTEREST INCOME Loans $ 841 $ 839 Investment securities 298 316 Interest-bearing deposits 14 31 Federal funds sold 110 52 ----------- ----------- 1,263 1,238 INTEREST EXPENSE Deposits 542 507 ----------- ----------- NET INTEREST INCOME 721 731 PROVISION FOR LOAN LOSSES 0 0 ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 721 731 OTHER INCOME Service fees 13 20 Other 27 22 ----------- ----------- 40 42 OTHER EXPENSES Salaries 206 209 Pension and other employee benefits 42 47 Occupancy expense 33 33 Depreciation 53 53 Other 175 165 ----------- ----------- 509 507 ----------- ----------- INCOME BEFORE INCOME TAXES 252 266 PROVISION FOR INCOME TAXES 61 72 ----------- ----------- NET INCOME $ 191 $ 194 =========== =========== NET INCOME PER SHARE OF CAPITAL STOCK $ 2.38 $ 2.42 =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 80,184 80,184 =========== ===========
See notes to consolidated financial statements. F-20 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SHAWNEE FINANCIAL SERVICES CORPORATION THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) (IN THOUSANDS)
NET UNREALIZED HOLDING CAPITAL RETAINED GAINS TREASURY STOCK SURPLUS EARNINGS (LOSSES) STOCK TOTAL ------- ------- -------- -------- --------- ------- Balance at December 31, 1993 $ 809 $ 672 $ 5,877 $ 0 $ (52) $ 7,306 Net income 194 194 Net unrealized holding gains on securities available for sale 290 290 ---------- ---------- ---------- ---------- ---------- --------- Balance at March 31, 1994 $ 809 $ 672 $ 6,071 $ 290 $ (52) $ 7,790 ========== ========== ========== ========== ========== ========= Balance at December 31, 1994 $ 809 $ 672 $ 6,387 $ (235) $ (52) $ 7,581 Net income 191 191 Net unrealized holding gains on securities available for sale 281 281 ---------- ---------- ---------- ---------- ---------- --------- Balance at March 31, 1995 $ 809 $ 672 $ 6,578 $ 46 $ (52) $ 8,053 ========== ========== ========== ========== ========== =========
See notes to consolidated financial statements. F-21 CONSOLIDATED STATEMENTS OF CASH FLOWS SHAWNEE FINANCIAL SERVICES CORPORATION (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ----------------------------- 1995 1994 ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 191 $ 194 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 53 53 Loss on disposal of equipment 6 0 (Increase) decrease in other assets (6) 14 Increase (decrease) in accrued interest and other liabilities 6 (130) ---------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 250 131 CASH FLOWS FROM INVESTING ACTIVITIES Net decrease in interest-bearing deposits 198 1,389 Proceeds from maturities of investment securities 1,095 1,172 Purchase of investment securities (1,000) (1,591) Net (increase) decrease in loans (44) 352 Premises and equipment expenditures (2) (3) ---------- ----------- NET CASH PROVIDED BY INVESTING ACTIVITIES 247 1,319 CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 977 182 Dividends paid (197) (188) ---------- ----------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 780 (6) ---------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 1,277 1,444 Cash and cash equivalents at beginning of period 8,879 8,243 ---------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,156 $ 9,687 ========== ===========
See notes to consolidated financial statements. F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (SELECTED INFORMATION - SUBSTANTIALLY ALL DISCLOSURES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ARE NOT INCLUDED) SHAWNEE FINANCIAL SERVICES CORPORATION NOTE A - BASIS OF PRESENTATION Management Representation: The accompanying consolidated financial statements, - ------------------------- which are unaudited, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1995 are not necessarily indicative of the results that may be expected for the year ended December 31, 1995. The interim consolidated financial statements and the following discussion should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Corporation's audited financial statements for the years ended December 31, 1994 and 1993. NOTE B - CASH FLOW DISCLOSURES (IN THOUSANDS) Supplemental Disclosures: Cash paid during the first three months of the year - ------------------------ for interest and income taxes were as follows:
1995 1994 ----- ----- Interest $ 471 $ 469 Income taxes 0 66 Non Cash Transactions: - --------------------- Recorded unrealized gains on securities available for sale 425 439 Deferred income taxes on recorded unrealized gains on securities available for sale 144 149
NOTE C - EARNINGS PER SHARE Earnings per common share are based on the weighted average number of common shares outstanding during each period. F-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (SELECTED INFORMATION - SUBSTANTIALLY ALL DISCLOSURES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ARE NOT INCLUDED) SHAWNEE FINANCIAL SERVICES CORPORATION NOTE D - INVESTMENT SECURITIES In May 1993, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Statement No. 115 requires all investments in debt and equity securities to be classified into three categories. Securities which management has positive intent and ability to hold until maturity are classified as held to maturity. Securities held to maturity are stated at cost, adjusted for amortization of premium and accretion of discount, computed primarily under the interest method. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. All other securities are classified as available for sale securities. Unrealized holding gains and losses for trading securities are included in earnings. Unrealized holding gains and losses for available for sale securities are excluded from earnings and reported as a net amount and separate component of stockholders' equity until realized. As required by Statement No. 115, management implemented the standard on January 1, 1994 and classified its entire securities portfolio as available for sale due to the identification of circumstances which could result in the securities not being held to maturity. Circumstances resulting in securities sales could include, but are not limited to, changes in market interest rates, changes in prepayment risk, income tax considerations, and liquidity needs. At this time, management has no intention of establishing a trading securities classification. NOTE E - RECENT ACCOUNTING PRONOUNCEMENTS Prior to 1993, the FASB issued Statement No. 107 "Disclosure about Fair Value of Financial Instruments" which is effective for fiscal years ending after December 15, 1992, except for entities with less than $150 million in total assets. For those entities, the effective date is for fiscal years ending after December 15, 1995. Statement No. 107 requires disclosure of the fair value of financial instruments, both assets and liabilities recognized and not recognized in the financial statements, with exceptions for certain financial instruments. In May 1993, the FASB issued Statement No. 114 "Accounting By Creditors for Impairment of a Loan" which is effective for fiscal years beginning after December 15, 1994. Statement No. 114 addresses the methods to be used by a creditor to measure the impairment of a loan and the proper recognition of a change in the value of an impaired loan. In October 1994, the FASB issued Statement No. 118 "Accounting by Creditors for Impairment of a Loan -Income Recognition and Disclosure" which amends Statement No. 114 by allowing creditors to use existing methods for recognizing interest income on impaired loans. Statement No. 118 is effective concurrent with the effective date of Statement No. 114. In October 1994, the FASB issued Statement No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" which is effective for calendar year 1994 financial statements, except for entities with less than $150 million in total assets having a one year delay. Statement No. 119 primarily requires disclosures about the amounts, nature and terms of derivatives that do not fall under FASB's Statement No. 105 "Disclosures of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk." F-24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (SELECTED INFORMATION - SUBSTANTIALLY ALL DISCLOSURES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ARE NOT INCLUDED) SHAWNEE FINANCIAL SERVICES CORPORATION NOTE E - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) Management implemented the above applicable standards for the three months ended March 31, 1995 and determined that the combined financial statement impact of these statements was not material. Management is currently evaluating the financial statement impact of Statement No. 107. NOTE F - PROPOSED MERGER On January 5, 1995, Shawnee Financial Services Corporation entered into a merger agreement with Keystone Financial, Inc., a Pennsylvania corporation (Keystone). Under the terms of the agreement, Shawnee will be merged with and into Keystone, which will be the surviving corporation. Each outstanding share of Shawnee's common stock will be converted into 6.25 shares, subject to adjustment, of Keystone common stock, par value $2.00 per share. Simultaneously with or following the merger, Shawnee's subsidiary, The Everett Bank, will be merged with and into Mid-State Bank and Trust Company, a Pennsylvania bank and trust company and wholly-owned subsidiary of Keystone. Management believes the merger will be finalized during 1995. F-25 ANNEX I BERWIND FINANCIAL GROUP, L.P. Investment Banking Merchant Banking June 30, 1995 Board of Directors Shawnee Financial Services Corporation 115 East Main Street Everett, PA 15537 Directors: You have requested our opinion as to the fairness, from a financial point of view, to the shareholders of Shawnee Financial Services Corporation ("Shawnee") of the financial terms of the proposed merger whereby Shawnee will be merged into Keystone Financial, Inc. ("Keystone"). The terms of the proposed merger (the "Proposed Merger") between Shawnee and Keystone are set forth in the Agreement and Plan of Reorganization (the "Agreement") dated January 5, 1995, and provide that each outstanding share of Shawnee common stock will be converted into 6.25 shares of Keystone common stock subject to certain terms and conditions as detailed in the Agreement. 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 asset and security transactions, including mergers, acquisitions, private placements and valuations 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 Shawnee and Keystone, (ii) reviewed the Agreement, (iii) reviewed the Proxy Statement/Prospectus, (iv) reviewed and analyzed stock market performance of Keystone, (v) studied and analyzed the consolidated financial and operating data of Shawnee and Keystone, (vi) considered the terms and conditions of the Proposed Merger between Shawnee and Keystone as compared with the terms and conditions of comparable bank mergers and acquisitions, (vii) met and/or communicated with certain members of Shawnee's and Keystone's senior managements to discuss their respective operations, historical financial statements, and future prospects, 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 Shawnee and Keystone, and their respective officers, directors, auditors, counsel and other agents, and on filings, releases and other information issued by Shawnee and Keystone, 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 Shawnee and Keystone 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-1 3000 CENTRE SQUARE WEST, 1500 MARKET STREET, PHILADELPHIA, PENNSYLVANIA 19102, PHONE (215) 575-2395, FAX: (215) 564-5402 Board of Directors June 30, 1995 Page 2 With regard to financial and other information relating to the general prospects of Shawnee and Keystone, we have assumed that such information has been reasonably prepared and reflects the best currently available estimates and judgments of the managements of Shawnee and Keystone as to Shawnee's and Keystone'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, and in preparation of the final proxy statement, no conditions will be imposed that will have a material adverse effect on the contemplated benefits of the Proposed Merger to Shawnee. Our opinion is based upon information provided to us by the managements of Shawnee and Keystone, 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 Shawnee and does not constitute a recommendation to Shawnee's shareholders as to how such shareholders should vote on the Agreement. Based on the foregoing, it is our opinion that, as of the date hereof, the Proposed Merger between Shawnee and Keystone is fair, from a financial point of view, to the shareholders of Shawnee. Sincerely, /s/ Berwind Financial Group, L.P. BERWIND FINANCIAL GROUP, L.P. A-2 ANNEX II STATUTORY PROVISIONS CONCERNING DISSENTERS' RIGHTS OF SHAWNEE SHAREHOLDERS PENNSYLVANIA BUSINESS CORPORATION LAW OF 1988 SUBCHAPTER D.--DISSENTERS RIGHTS (S) 1571. APPLICATION AND EFFECT OF SUBCHAPTER. (a) GENERAL RULE.--Except as otherwise provided in subsection (b), any shareholder of a business corporation shall have the right to dissent from, and to obtain payment of the fair value of his shares in the event of, any corporate action, or to otherwise obtain fair value for his shares, where this part expressly provides that a shareholder shall have the rights and remedies provided in this subchapter. See: Section 1906(c) (relating to dissenters rights upon special treatment). Section 1930 (relating to dissenters rights). Section 1931(d) (relating to dissenters rights in share exchanges). Section 1932(c) (relating to dissenters rights in asset transfers). Section 1952(d) (relating to dissenters rights in division). Section 1962(c) (relating to dissenters rights in conversion). Section 2104(b) (relating to procedure). Section 2324 (relating to corporation option where a restriction on transfer of a security is held invalid). Section 2325(b) (relating to minimum vote requirement). Section 2704(c) (relating to dissenters rights upon election). Section 2705(d) (relating to dissenters rights upon renewal of election). Section 2907(a) (relating to proceedings to terminate breach of qualifying conditions) Section 7104(b)(3) (relating to procedure). (b) EXCEPTIONS.-- (1) Except as otherwise provided in paragraph (2), the holders of the shares of any class or series of shares that, at the record date fixed to determine the shareholders entitled to notice of and to vote at the meeting at which a plan specified in any of section 1930, 1931(d), 1932(c) or 1952(d) is to be voted on, are either: (i) listed on a national securities exchange; or A-3 (ii) held of record by more than 2,000 shareholders; shall not have the right to obtain payment of the fair value of any such shares under this subchapter. (2) Paragraph (1) shall not apply to and dissenters rights shall be available without regard to the exception provided in that paragraph in the case of: (i) Shares converted by a plan if the shares are not converted solely into shares of the acquiring, surviving, new or other corporation or solely into such shares and money in lieu of fractional shares. (ii) Shares of any preferred or special class unless the articles, the plan or the terms of the transaction entitle all shareholders of the class to vote thereon and require for the adoption of the plan or the effectuation of the transaction the affirmative vote of a majority of the votes cast by all shareholders of the class. (iii) Shares entitled to dissenters rights under section 1906(c) (relating to dissenters rights upon special treatment). (3) The shareholders of a corporation that acquires by purchase, lease, exchange or other disposition all or substantially all of the shares, property or assets of another corporation by the issuance of shares, obligations or otherwise, with or without assuming the liabilities of the other corporation and with or without the intervention of another corporation or other person, shall not be entitled to the rights and remedies of dissenting shareholders provided in this subchapter regardless of the fact, if it be the case, that the acquisition was accomplished by the issuance of voting shares of the corporation to be outstanding immediately after the acquisition sufficient to elect a majority or more of the directors of the corporation. (c) GRANT OF OPTIONAL DISSENTERS RIGHTS.--The bylaws or a resolution of the board of directors may direct that all or a part of the shareholders shall have dissenters rights in connection with any corporate action or other transaction that would otherwise not entitle such shareholders to dissenters rights. (d) NOTICE OF DISSENTERS RIGHTS.--Unless otherwise provided by statute, if a proposed corporate action that would give rise to dissenters rights under this subpart is submitted to a vote at a meeting of shareholders, there shall be included in or enclosed with the notice of meeting: (1) a statement of the proposed action and a statement that the shareholders have a right to dissent and obtain payment of the fair value of their shares by complying with the terms of this subchapter; and (2) a copy of this subchapter. (e) OTHER STATUTES.--The procedures of this subchapter shall also be applicable to any transaction described in any statute other than this part that makes reference to this subchapter for the purpose of granting dissenters rights. (f) CERTAIN PROVISIONS OF ARTICLES INEFFECTIVE.--This subchapter may not be relaxed by any provision of the articles. (g) CROSS REFERENCES.--See sections 1105 (relating to restriction on equitable relief), 1904 (relating to de facto transaction doctrine abolished) and 2512 (relating to dissenters rights procedure). A-4 (S) 1572. DEFINITIONS. The following words and phrases when used in this subchapter shall have the meanings given to them in this section unless the context clearly indicates otherwise: "CORPORATION." The issuer of the shares held or owned by the dissenter before the corporate action or the successor by merger, consolidation, division, conversion or otherwise of that issuer. A plan of division may designate which of the resulting corporations is the successor corporation for purpose of this subchapter. The successor corporation in a division shall have sole responsibility for payments to dissenters and other liabilities under this subchapter except as otherwise provided in the plan of division. "DISSENTER." A shareholder or beneficial owner who is entitled to and does assert dissenters rights under this subchapter and who has performed every act required up to the time involved for the assertion of those rights. "FAIR VALUE." The fair value of shares immediately before the effectuation of the corporate action to which the dissenter objects, taking into account all relevant factors, but excluding any appreciation or depreciation in anticipation of the corporate action. "INTEREST." Interest from the effective date of the corporate action until the date of payment at such rate as is fair and equitable under all of the circumstances, taking into account all relevant factors including the average rate currently paid by the corporation on its principal bank loans. (S) 1573. RECORD AND BENEFICIAL HOLDERS AND OWNERS. (a) RECORD HOLDERS OF SHARES.--A record holder of shares of a business corporation may assert dissenters rights as to fewer than all of the shares registered in his name only if he dissents with respect to all the shares of the same class or series beneficially owned by any one person and discloses the name and address of the person or persons on whose behalf he dissents. In that event, his rights shall be determined as if the shares as to which he has dissented and his other shares were registered in the names of different shareholders. (b) BENEFICIAL OWNERS OF SHARES.--A beneficial owner of shares of a business corporation who is not the record holder may assert dissenters rights with respect to shares held on his behalf and shall be treated as a dissenting shareholder under the terms of this subchapter if he submits to the corporation not later than the time of the assertion of dissenters rights a written consent of the record holder. A beneficial owner may not dissent with respect to some but less than all shares of the same class or series owned by the owner, whether or not the shares so owned by him are registered in his name. (S) 1574. NOTICE OF INTENTION TO DISSENT. If the proposed corporate action is submitted to a vote at a meeting of shareholders of a business corporation, any person who wishes to dissent and obtain payment of the fair value of his shares must file with the corporation, prior to the vote, a written notice of intention to demand that he be paid the fair value for his shares if the proposed action is effectuated, must effect no change in the beneficial ownership of his shares from the date of such filing continuously through the effective date of the proposed action and must refrain from voting his shares in approval of such action. A dissenter who fails in any respect shall not acquire any right to payment of the fair value of his shares under this subchapter. Neither a proxy nor a vote against the proposed corporate action shall constitute the written notice required by this section. A-5 (S) 1575. NOTICE TO DEMAND PAYMENT. (a) GENERAL RULE.--If the proposed corporate action is approved by the required vote at a meeting of shareholders of a business corporation, the corporation shall mail a further notice to all dissenters who gave due notice of intention to demand payment of the fair value of their shares and who refrained from voting in favor of the proposed action. If the proposed corporate action is to be taken without a vote of shareholders, the corporation shall send to all shareholders who are entitled to dissent and demand payment of the fair value of their shares a notice of the adoption of the plan or other corporate action. In either case, the notice shall: (1) State where and when a demand for payment must be sent and certificates for certificated shares must be deposited in order to obtain payment. (2) Inform holders of uncertificated shares to what extent transfer of shares will be restricted from the time that demand for payment is received. (3) Supply a form for demanding payment that includes a request for certification of the date on which the shareholder, or the person on whose behalf the shareholder dissents, acquired beneficial ownership of the shares. (4) Be accompanied by a copy of this subchapter. (b) TIME FOR RECEIPT OF DEMAND FOR PAYMENT.--The time set for receipt of the demand and deposit of certificated shares shall be not less than 30 days from the mailing of the notice. (S) 1576. FAILURE TO COMPLY WITH NOTICE TO DEMAND PAYMENT, ETC. (a) EFFECT OF FAILURE OF SHAREHOLDER TO ACT.--A shareholder who fails to timely demand payment, or fails (in the case of certificated shares) to timely deposit certificates, as required by a notice pursuant to section 1575 (relating to notice to demand payment) shall not have any right under this subchapter to receive payment of the fair value of his shares. (b) RESTRICTION ON UNCERTIFICATED SHARES.--If the shares are not represented by certificates, the business corporation may restrict their transfer from the time of receipt of demand for payment until effectuation of the proposed corporate action or the release of restrictions under the terms of section 1577(a) (relating to failure to effectuate corporate action). (c) RIGHTS RETAINED BY SHAREHOLDER.--The dissenter shall retain all other rights of a shareholder until those rights are modified by effectuation of the proposed corporate action. (S) 1577. RELEASE OF RESTRICTIONS OR PAYMENT FOR SHARES. (a) FAILURE TO EFFECTUATE CORPORATE ACTION.--Within 60 days after the date set for demanding payment and depositing certificates, if the business corporation has not effectuated the proposed corporate action, it shall return any certificates that have been deposited and release uncertificated shares from any transfer restrictions imposed by reason of the demand for payment. (b) RENEWAL OF NOTICE TO DEMAND PAYMENT.--When uncertificated shares have been released from transfer restrictions and deposited certificates have been returned, the corporation may at any later time send a new notice conforming to the requirements of section 1575 (relating to notice to demand payment), with like effect. A-6 (c) PAYMENT OF FAIR VALUE OF SHARES.--Promptly after effectuation of the proposed corporate action, or upon timely receipt of demand for payment if the corporate action has already been effectuated, the corporation shall either remit to dissenters who have made demand and (if their shares are certificated) have deposited their certificates the amount that the corporation estimates to be the fair value of the shares, or give written notice that no remittance under this section will be made. The remittance or notice shall be accompanied by: (1) The closing balance sheet and statement of income of the issuer of the shares held or owned by the dissenter for a fiscal year ending not more than 16 months before the date of remittance or notice together with the latest available interim financial statements. (2) A statement of the corporation's estimate of the fair value of the shares. (3) A notice of the right of the dissenter to demand payment or supplemental payment, as the case may be, accompanied by a copy of this subchapter. (d) FAILURE TO MAKE PAYMENT.--If the corporation does not remit the amount of its estimate of the fair value of the shares as provided by subsection (c), it shall return any certificates that have been deposited and release uncertificated shares from any transfer restrictions imposed by reason of the demand for payment. The corporation may make a notation on any such certificate or on the records of the corporation relating to any such uncertificated shares that such demand has been made. If shares with respect to which notation has been made shall be transferred, each new certificate issued therefor or the records relating to any transferred uncertificated shares shall bear a similar notation, together with the name of the original dissenting holder or owner of such shares. A transferee of such shares shall not acquire by such transfer any rights in the corporation other than those which the original dissenter had after making demand for payment of their fair value. (S) 1578. ESTIMATE BY DISSENTER OF FAIR VALUE OF SHARES. (a) GENERAL RULE.--If the business corporation gives notice of its estimate of the fair value of the shares, without remitting such amount, or remits payment of its estimate of the fair value of a dissenter's shares as permitted by section 1577(c) (relating to payment of fair value of shares) and the dissenter believes that the amount stated or remitted is less than the fair value of his shares, he may send to the corporation his own estimate of the fair value of the shares, which shall be deemed a demand for payment of the amount or the deficiency. (b) EFFECT OF FAILURE TO FILE ESTIMATE.--Where the dissenter does not file his own estimate under subsection (a) within 30 days after the mailing by the corporation of its remittance or notice, the dissenter shall be entitled to no more than the amount stated in the notice or remitted to him by the corporation. (S) 1579. VALUE PROCEEDINGS GENERAL. (a) GENERAL RULE.--Within 60 days after the latest of: (1) effectuation of the proposed corporate action; (2) timely receipt of any demands for payment under section 1575 (relating to notice to demand payment); or (3) timely receipt of any estimates pursua nt to section 1578 (relating to estimate by dissenter of fair value of shares); if any demands for payment remain unsettled, the business corporation may file in court an application for relief requesting that the fair value of the shares be determined by the court. A-7 (b) MANDATORY JOINDER OF DISSENTERS.--All dissenters, wherever residing, whose demands have not been settled shall be made parties to the proceeding as in an action against their shares. A copy of the application shall be served on each such dissenter. If a dissenter is a nonresident, the copy may be served on him in the manner provided or prescribed by or pursuant to 42 Pa. C.S. Ch. 53 (relating to bases of jurisdiction and interstate and international procedure). (c) JURISDICTION OF THE COURT.--The jurisdiction of the court shall be plenary and exclusive. The court may appoint an appraiser to receive evidence and recommend a decision on the issue of fair value. The appraiser shall have such power and authority as may be specified in the order of appointment or in any amendment thereof. (d) MEASURE OF RECOVERY.--Each dissenter who is made a party shall be entitled to recover the amount by which the fair value of his shares is found to exceed the amount, if any, previously remitted, plus interest. (e) EFFECT OF CORPORATION'S FAILURE TO FILE APPLICATION.--If the corporation fails to file an application as provided in subsection (a), any dissenter who made a demand and who has not already settled his claim against the corporation may do so in the name of the corporation at any time within 30 days after the expiration of the 60-day period. If a dissenter does not file an application within the 30-day period, each dissenter entitled to file an application shall be paid the corporation's estimate of the fair value of the shares and no more, and may bring an action to recover any amount not previously remitted. (S) 1580. COSTS AND EXPENSES OF VALUATION PROCEEDINGS. (a) GENERAL RULE.--The costs and expenses of any proceeding under section 1579 (relating to valuation proceedings generally), including the reasonable compensation and expenses of the appraiser appointed by the court, shall be determined by the court and assessed against the business corporation except that any part of the costs and expenses may be apportioned and assessed against all or some of the dissenters who are parties and whose action in demanding supplemental payment under section 1578 (relating to estimate by dissenter of fair value of shares) the court finds to be dilatory, obdurate, arbitrary, vexatious or in bad faith. (b) ASSESSMENT OF COUNSEL FEES AND EXPERT FEES WHERE LACK OF GOOD FAITH APPEARS.--Fees and expenses of counsel and of experts for the respective parties may be assessed as the court deems appropriate against the corporation and in favor of any or all dissenters if the corporation failed to comply substantially with the requirements of this subchapter and may be assessed against either the corporation or a dissenter, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted in bad faith or in a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights provided by this subchapter. (c) AWARD OF FEES FOR BENEFITS TO OTHER DISSENTERS.--If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated and should not be assessed against the corporation, it may award to those counsel reasonable fees to be paid out of the amounts awarded to the dissenters who were benefited. A-8 SHAWNEE FINANCIAL SERVICES CORPORATION PROXY FOR SPECIAL MEETING OF SHAREHOLDERS THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints Ronald R. McFarland, Everett, Pennsylvania, and Frederick M. Shumaker, Bedford, Pennsylvania, or either of them, as proxies, with full power of substitution, to vote all shares of Common Stock of Shawnee Financial Services Corporation which the undersigned is entitled to vote at the Special Meeting of Shareholders to be held August 22, 1995 and at any adjournment 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 January 5, 1995 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 6.25 shares of Keystone Common Stock, as described in the Proxy Statement/Prospectus............ FOR [_] AGAINST [_] ABSTAIN [_] 2. To vote in their discretion on such other matters as may properly come before the meeting or any adjournment 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:___________________________, 1995 _______________________________________ 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. -----END PRIVACY-ENHANCED MESSAGE-----