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By offering products, services, and an approach to the marketplace designed to set us apart in attracting customers, we are seizing opportunities in a rapidly-growing financial services industry and responding to aggressive competitors.
Our approach is aimed at giving customers unique advantages from doing business with us. We provide a full range of products, competitive rates, and a personal representative who simplifies contact, eases access, and brings all our resources together in serving each customer. This exceptionally close to the source personal touch is made possible by our supercommunity approach to banking.
It is a structure to facilitate satisfying customers while operating efficiently. This structure helps us achieve market power by segmenting customers and developing at the corporate level appropriate products for each group, then delivering these products and services through our five local banking organizations. It also is enabling us to create a lower cost operating structure by centralizing support activities and such specialty business units as mortgage, trust and investment, and our dealer center.
By meeting more of our customers' financial needs, we can increase revenues. By leveraging our structure to gain economies of scale throughout our operations, we can improve profitability. Both aspects of performance must be managed because of the magnitude of the obstacles we face.
| Americans are accumulating and investing assets in numbers never imagined. |
However, the drive to serve this growing customer base also is producing excess capacity within the banking industry, and competition from specialists in lending and investment. Furthermore, indications are the economy will grow at a slower pace, challenging banks to find ways to generate revenues, serve customers better, and be more cost-efficient. Some banks are trying to create an advantage by getting bigger. Nonbanks, including finance companies, mortgage houses, mutual funds, and brokerages, are trying to gain customers by focusing on the most profitable segments and using their regulatory and oversight advantages to offer attractive pricing based on lower costs and operating efficiencies.
This market environment also is serving to educate consumers on their choices and make them more demanding - of higher returns, better rates, lower costs, and more convenience.
Banks also have to deal with the inherent disadvantage caused by a regulatory imbalance that supports nonbank participants - the expense of being a part of the banking industry. To date, efforts by the banking industry to level the playing field by reducing suffocating and costly regulations are meeting with little success. Regulations and the high-cost burden restrict our ability to make the transition from being a commercial bank to functioning as an efficient full-scale financial services provider.
Bringing Home Health to More People
"It would be hard to find a better example of service to the community than the work being done by Home Nursing Agency. It has been helping people in need since the mid-1960s, first in Blair County and now in eight Pennsylvania counties. The home health care organization serves more than 16,000 people a year, giving nursing, nutritional aid, pediatric health support, case management, oncology, and virtually all types of therapeutic care.""Mid-State Bank has been working with the Agency for more than 10 years, providing business lines of credit, loans for specific programs, mortgages for additional buildings, and checking and deposit accounts as well as trust relationships. The bank also is beginning a direct deposit program for Agency employees."
"We helped the Agency take a giant step in its services last summer by issuing letters of credit for a state economic development loan that enabled it to buy a building to house three vital programs, including WIC (Women, Infants and Children), which gives nutritional support and supplemental foods to pregnant women as well as infants and young children."
"We're pleased to be playing such an important role in enabling this community organization to help thousands of citizens every year."
Michael J. Settimio
Assistant Vice President
Mid-State Bank
We are addressing the challenge of lending and deposit competitors by creating product packages that meet the needs of specific customer segments, combining lending, saving and investment products, and a variety of financial services while adding incentives and services.
We are positioning Keystone as the residential lender of choice by organizing our mortgage activity in a specialty company to give us critical mass in product development and processing efficiency, while still providing prompt personal service throughout our market. We also are expanding other credit operations, for example, automobile lending both for dealers and consumers, while again centralizing operations for efficiency. Finally, we are addressing the challenge of investment and trust competitors by acquiring an investment management firm with consistently high return performance over the last several years.
| Positive momentum in implementing programs to grow revenues consistently from year to year while reducing overhead costs convinces us that this structure can also serve as the basis for achieving superior shareholder returns. |
We believe we can gain a clear competitive advantage by delivering all these products and services locally through our relationship bankers. Consumers and businesses perceive banks to be important players in the economic health of their communities. Our reputation and core philosophy are based on being responsive to community needs. This philosophy has been practiced steadfastly since Keystone was formed in 1984. We are succeeding in this competitive financial environment by distinguishing ourselves in the ways we produce results for customers, thereby engendering their trust.
Our supercommunity banking structure supports our strategic direction. It gives us products valued by customers, which generate revenues, production control from the holding company, and a micro-market focus through our separate banks serving distinct natural markets. Among its benefits, the structure disciplines us to maintain a market/customer focus, provides efficient, high-quality support services, and offers an attractive merger alternative to banks want-ing to continue their important economic role in the community.
Positive momentum that grows revenues consistently from year to year while reducing overhead costs convinces us that this structure can also serve as the basis for achieving superior shareholder returns.
Financing a Growing Car Industry
"Blaise Alexander is the entrepreneur's entrepreneur. Over the last 15 years, his name has become synonymous with automobiles. He bought his first car dealership in 1980 in Montour-sville. Following a string of acquisitions, he now operates major dealerships in Lock Haven, Bloomsburg, Sunbury, and Shamokin Dam, selling most makes from the General Motors, Chrysler, Ford, and Toyota families.""Blaise also runs a leasing company, and obtains all of his "floor plan" financing for his extensive vehicle inventory from Keystone. We have been his source of financing since the beginning in 1980 when Blaise was assembling his business plan. We provide his company's lines of credit, handle all his corporate accounts, and work with him in his personal and family banking and investment programs. Just as quality products and excellent service are the keys for Blaise in his car business, they also are the keys for us in working with Blaise and other important customers."
"The name Blaise Alexander also is gaining recognition on the racing circuit. Blaise R. Alexander ran five races in the ARCA competition last year, did very well, and is preparing for a full season in 1996. Watch for him at Daytona, Talladega, Atlanta, Darlington, the Poconos, and other tracks as the season unfolds."
Bob Kurtyka
Senior Vice President
Northern Central Bank
Efforts to increase revenues center on managing net interest income effectively and building other sources of income from fee-based services. Programs to attract loan and deposit customers by focusing on their life-cycle needs helps us create net interest income gains. Based on three years of segmentation study, we have prioritized market segments and created product packages for customers fitting certain life-cycle profiles.
For example, KeySource is a package for working couples with children at home or grown. It combines investment planning and management with basic banking needs, offering higher yield savings options, loan advantages, free checking and Key Check card, and discounts on phone bill paying. KeySource customers can tap Keystone's Investment Planning Resource Center, which provides educational materials, seminars, and personal counseling to help create an investment strategy to meet specific needs.
KeySolutions enables customers to pay off various debts at reduced interest cost while systematically building a savings program at the same time.
Similar packages have been developed for customers in other life-cycle stages as part of an ongoing segment-sensitive product development program.
We also are expanding our financial product offerings, including new index money market accounts and variable rate CDs, both designed to compete with mutual funds, brokerage products, and other investment instruments in attracting funds. They provide competitive rates, product flexibility, and ease of access.
| The acquisition of Martindale Andres gives us a team of highly-successful specialists to manage the trust and investment portfolios of our customers. |
As a result, we now have an investment management structure aimed at achieving superior returns for customers. We will be targeting a broad investment marketplace of institutions and individuals. Customers access this investment expertise through their local Keystone banks and relationship managers.
Income from mortgage operations continues to grow. Volume, market, and operating gains result from consolidating residential lending in a specialty affiliate company, with local experts at all our banks. Benefits include building substantial market presence, broadening our product line, increasing efficiency, and improving our timeliness in cycling loan applications - an important competitive advantage. New Loan ProspectorTM software system, for example, can process residential mortgage requests in just 15 minutes.
We also are turning our automobile financing operation into a sizable fee producer by selling portions of our loan production in securitized transactions, while continuing to service the loans. We securitized and sold part of our portfolio in 1995 and are likely to sell production on a continuing basis.
Keystone is currently generating over $250 million in car loans per year. By providing loans to dealers for their inventory, and to consumers to buy cars, we are helping finance the growth of dealerships and making it possible for many individuals and families to purchase cars each year. The securitization of indirect loans frees funds from our balance sheet while allowing us to increase servicing income, attract more car dealers as customers, and make many other types of loans, thereby diversifying our portfolio. And, we are realizing economies of scale through increased loan volume to drive down unit costs.
Financial Partner in a Young Doctor's Life
"Helping young professionals build a solid financial base as they advance their careers and their families grow is an important and valuable function for a bank. Dr. Robert M. Kimmel is a plastic surgeon affiliated with the Good Samaritan Regional Medical Center in Pottsville. He joined the hospital in 1994 after training in Allentown.""Upon arrival, Dr. Kimmel and his wife, Cheryl, began house and mortgage hunting, finding satisfaction on both counts. We worked carefully to determine the best mortgage arrangement to meet their needs and the relationship has been building ever since. The Kimmel's also have an installment loan for their vehicle, checking and savings accounts, CDs, an IRA, and have started savings programs for their three children."
"Community activities are important to the Kimmel's, and to me as well. They can be quite enjoyable and highly satisfying, providing opportunities to meet good people and help the community in important ways. I have found this to be especially the case in helping raise funds for the United Way and March of Dimes, and in my roles as secretary of the Schuylkill County Fair and foundation that runs the fair."
S. Kay Williams
Assistant Vice President/
Community Office Manager
Pennsylvania National Bank
Underway now is a comprehensive review of our present facilities. The emerging network will combine full-service community "visionary" offices, offices combining personal service and electronic convenience, and express electronic facilities. Local market demographics are determining the best types of facilities at each location throughout our marketplace.
| Customers gain the convenience of one contact, unifying a network of specialists in providing a cohesive, composite financial plan. |
Satisfying convenience and full-service wishes, these visionary offices enable customers to choose from express counters, an ATM, help from our talented, multiskilled staff, or the resources of a financial counselor.
Convenience and full-service opportunity will be combined in the planned new Phone Center. It will give customers normal and after hours convenience in obtaining information, conducting routine transactions, and contacting a Keystone counselor. We will be using the center to receive and initiate calls, applying our extensive demographic research base to identify additional customer finance needs.
What will clearly distinguish our delivery system from competitors is our relationship banking approach. Our "people first" strategy contrasts with competitors who take people out of the service equation. Begun two years ago with business clients, relationship banking is now being extended to the rest of our customer base, geared to local market demographics to satisfy the needs of customers of each community bank.
In optimizing relationships, our employees take responsibility for all the financial needs of their customers, working with our lending, saving, investment planning, and other specialists. Customers have an advocate who knows their business, family, or personal financial needs, and can marshal resources to create the most cost-effective solutions. Customers gain the convenience of one contact, unifying a network of specialists in providing a cohesive, composite financial plan.
We believe this approach is a superior way of serving customers in contrast with fragmented pieces from several providers that may even be in conflict. By helping customers obtain more value from their financial provider, we build longer term relationships that involve use of more products and services, creating opportunities to increase revenues and profitability.
Our focus is on building a culture that makes our unique form of relationship banking successful. This effort represents more than a structural approach; it is our service philosophy. The essence of relationship banking will be found in teams of caring, highly-motivated, and skilled people.
Helping a Business Grow
"We have been partners in the growth of Wood Products Inc. since 1972. This highly-successful Oakland, Maryland, company harvests oak, cherry, and other types of Appalachian hardwoods. Its customers are found throughout the world.""We work closely with owner Max Messenger, providing business checking, cash management services, business loans, and letters of credit to support the company's bidding on state and local government timber projects."
"Wood Products and American Trust also team up in supporting a number of community programs in Garrett County, Maryland, including an annual charity golf tournament. Also, I'm a board member of Garrett County Community Action, which provides help to low- and moderate-income citizens." "The relationship with Wood Products is a true partnership. It's exciting to us to be a part of the growth of a business and our local economy."
Michael Baylor
Senior Relationship Manager
American Trust Bank
In bringing this process to fruition, we are defining the necessary skills to succeed, identifying the right people to fill key positions throughout the company, and intensifying training programs, including certification courses. Pivotal in this effort is enabling employees to develop multiple skills to deliver superior customer service and fully exploit new technology-based efficiency tools.
Compensation systems are being redesigned to attract and retain the best people. These systems reward employees for achieving sales, service, and improved efficiency goals through stock purchase plans, stock options, and other long-term incentives. Encouraging employees to be shareholders links their professional and personal success with company efforts to improve financial results and the value of our stock.
In the future, we expect to have fewer employees, who are more highly skilled, motivated, and better compensated, focused on achieving measurable results in delivering superior customer service and continually refining our operating systems to fully leverage our supercommunity banking structure.
Investment Funds to Expand Hospital Services
"There is a great deal of business and personal satisfaction to be gained in knowing that your efforts are truly helping people. That's the way it is in our work with the Frankford Hospital Foundation in northeast Philadelphia. Thanks to our success in managing the Foundation's investment portfolio, the Hospital is able to expand its services to patients.""Returns have enabled the Hospital to set up an outpatient neonatal service, providing home health care for women during their pregnancy and after the baby is born. Frankford also has begun a free van shuttle service for patients from home to the Hospital and cancer center."
"While our investment relationship is just over a year old, Frankford Bank has been providing custodial services to the Foundation for many years. These include record keeping, bill payment, collection, and reinvestment of funds from credit lines extended to physicians affiliated with the Hospital. We also provide financial services directly to Frankford Hospital. It's a good feeling to know how much value is being derived."
Alfred J. Vogel
Vice President
Key Trust Company
Frankford Bank
Building on these components of value, we are convinced that we are pursuing winning strategies to be the customer's choice of a full-scale financial services provider in the future, and our focus on this strategic direction will create increased shareholder value.
Among newer programs, Keystone's Frankford Bank is contributing $500,000 in $50,000 increments over 10 years to support the neighborhood revitalization program of the Frankford Group Ministry in Philadelphia. The Ministry also was awarded $1.2 million in contributions over three years by the Pew Charitable Trust Foundation, along with funds from other organizations. Money is being used to restore homes for ownership and rental, and revitalize the business district, with opportunities to incubate new businesses and create jobs.
Relationships that grew from the program also motivated the Pew Foundation to hire Frankford Bank's Key Trust subsidiary as an investment manager.
In another program, Northern Central Bank is helping recharge the neighborhoods around Lycoming College in Williamsport. The bank and college are teaming up to offer 100% financing of homes purchased near the college. The college deposits 5% of the sale price with the bank, which provides the loan through Keystone's mortgage company. The goal of the college is to revitalize its neighborhood.
Success of the program is causing local governments and major institutions in the community to consider similar programs, for example, Williamsport Hospital, which is getting ready to offer loans for homes in its area.
Keystone also is being aggressive about offering special interest rate mortgages to families with low and moderate incomes. In 1995, the company provided some 583 loans, totalling over $42 million to first-time home buyers under FHA, VA, and its Key Opportunity Mortgage programs.
