UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________to________________
Commission file Number: 2-88927
FIRST KEYSTONE CORPORATION
(Name of small business issuer in its charter)
PENNSYLVANIA 23-2249083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
111 West Front Street, Berwick,
Pennsylvania 18603
(Address of principal executive (Zip Code)
offices)
Issuer's telephone number, including area code: (717) 752-3671
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $2.00 per share.
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No______
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the year ended December 31, 1995, are
$17,605,694.
The aggregate market value of the voting stock held by non-
affiliates computed by reference to the price as of March 18, 1996, is
$26,939,700.
The number of shares outstanding of the issuer's Common Stock, as
of March 18, 1996, was 889,147 shares of Common Stock, par value $2.00 per
share.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and III - Definitive Proxy Statement, Notice of Annual
Meeting and Form of Proxy for the Annual Meeting
of Shareholders to be held April 16, 1996.
Part II - Annual Report to Shareholders for Fiscal Year
Ended December 31, 1995.
<PAGE>
FIRST KEYSTONE CORPORATION
FORM 10-KSB
PART I
Item 1. DESCRIPTION OF THE BUSINESS
General
First Keystone Corporation (the "Corporation"), a Pennsylvania
business corporation, is a bank holding company, registered with and
supervised by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). The Corporation was incorporated on July 6,
1983, and commenced operations on July 2, 1984, upon consummation of the
acquisition of all of the outstanding stock of The First National Bank of
Berwick (the "Bank"). Since commencing operations, the Corporation's
business has consisted primarily of managing and supervising the Bank, and
its principal source of income has been dividends paid by the Bank. The
Corporation has one wholly-owned subsidiary, the Bank. At December 31,
1995, the Corporation had total consolidated assets, deposits and
stockholders' equity of approximately $226.0 million, $187.3 million and
$25.4 million, respectively.
The Bank was organized in 1864. The Bank is a national banking
association that is a member of the Federal Reserve System and the deposits
of which are insured by the Federal Deposit Insurance Corporation (the
"FDIC"). The Bank, having five branch locations (three branches within
Columbia County and two branches within Luzerne County, Pennsylvania), is a
full service commercial bank providing a wide range of services to
individuals and small to medium sized businesses in its Northeastern
Pennsylvania market area, including accepting time, demand, and savings
deposits and making secured and unsecured commercial, real estate and
consumer loans.
FKC Realty Corporation commenced operations July 2, 1984. It's
major asset is a parcel of real estate currently utilized for parking
located in Berwick, Pennsylvania and its only source of income is parking
fees. On December 29, 1995, FKC Realty, Inc., a wholly owned realty
subsidiary of the Corporation, was liquidated. Transfer of assets in
liquidation were at book value to the Corporation and bank subsidiary. No
gain or loss is recognized in these consolidated financial statements.
Supervision and Regulation - Corporation
The Corporation is subject to the jurisdiction of the Securities
and Exchange Commission ("SEC") and of state securities laws administrators
for matters relating to the offering and sale of its securities. The
Corporation is currently subject to the SEC's rules and regulations
relating to periodic reporting in accordance with Section 13 of the
Securities Exchange Act of 1934. Furthermore, the Company qualifies as a
"small business issuer" as that term is defined under Item 10 of Regulation
S-B of the SEC, and has elected to make its SEC filings under the
disclosure requirements afforded to small business issuers.
1
<PAGE>
The Corporation is also subject to the provisions of the Bank
Holding Company Act of 1956, as amended ("Bank Holding Company Act"), and
to supervision by the Federal Reserve Board. The Bank Holding Company Act
requires the Corporation to secure the prior approval of the Federal
Reserve Board before it owns or controls, directly or indirectly, more than
5% of the voting shares of substantially all of the assets of any
institution, including another bank. In addition, the Bank Holding Company
Act has been amended by the Riegle-Neal Interstate Banking and Branching
Efficiency Act which permits bank holding companies to acquire a bank
located in any state, subject to certain limitations and restrictions as
more fully described below.
A bank holding company is prohibited from engaging in or
acquiring direct or indirect control of more than 5% of the voting shares
of any company engaged in non-banking activities unless the Federal Reserve
Board, by order or regulation, has found such activities to be so closely
related to banking or managing or controlling banks as to be a proper
incident thereto. In making this determination, the Federal Reserve Board
considers whether the performance of these activities by a bank holding
company would offer benefits to the public that outweigh possible adverse
effects.
The Bank Holding Company Act also prohibits acquisitions of
control of a bank holding company, such as the Corporation, without prior
notice to the Federal Reserve Board. Control is defined for this purpose
as the power, directly or indirectly, to direct the management or policies
of a bank holding company or to vote twenty-five percent (25%) (or ten
percent (10%), if no other person or persons acting on concert, holds a
greater percentage of the Common Stock) or more of the Corporation's Common
Stock.
The Corporation is required to file an annual report with the
Federal Reserve Board and any additional information that the Federal
Reserve Board may require pursuant to the Bank Holding Company Act. The
Federal Reserve Board may also make examinations of the Corporation and any
or all of its subsidiaries. Further, under Section 106 of the 1970
amendments to the Bank Holding Company Act and the Federal Reserve Board's
regulations, a bank holding company and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with any
extension of credit or provision of credit or provision of any property or
services. The so-called "Anti-tie-in" provisions state generally that a
bank may not extend credit, lease, sell property or furnish any service to
a customer on the condition that the customer provide additional credit or
service to the bank, to its bank holding company or to any other subsidiary
of its bank holding company or on the condition that the customer not
obtain other credit or service from a competitor of the bank, its bank
holding company or any subsidiary of its bank holding company.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit
to the bank holding company or any of its subsidiaries, on investments in
the stock or other securities of the bank holding company and on taking of
such stock or securities as collateral for loans to any borrower.
2
<PAGE>
Permitted Non-Banking Activities
The Federal Reserve Board permits bank holding companies to
engage in non-banking activities so closely related to banking, managing or
controlling banks as to be a proper incident thereto. The Corporation does
not at this time engage in any of these non-banking activities, nor does
the Corporation have any current plans to engage in any other permissible
activities in the foreseeable future.
Legislation and Regulatory Changes
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and
other financial institutions are frequently made in Congress, and before
various bank regulatory agencies. No prediction can be made as to the
likelihood of any major changes or the impact such changes might have on
the Corporation and its subsidiary bank. Certain changes of potential
significance to the Corporation which have been enacted recently and others
which are currently under consideration by Congress or various regulatory
agencies are discussed below.
On September 29, 1994, President Clinton signed into law the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking and Branch Act"). The legislation permits interstate
banking twelve months after its enactment into law. Bank holding
companies, pursuant to an amendment to the Bank Holding Company act, can
acquire a bank located in any state, as long as the acquisition does not
result in the bank holding company controlling more than 10 percent of the
deposits in the United States, or 30 percent of the deposits in the target
bank's state. The legislation permits states to waive the concentration
limits and require tat the target institution be in existence for up to
five years before it can be acquired by an out-of-state bank or bank
holding company. Interstate branching and merging of existing banks is
permitted after three years from the enactment of the Interstate Banking
and Branching Act, if the bank is adequately capitalized and demonstrates
good management. Branch merging will be permitted earlier if a state
undertakes to enact a law which allows it and states may also enact a law
to permit banks to branch de novo. See also, pages 17 and 18 of
Registrant's 1995 Annual Report, which is incorporated by reference herein.
The Interstate Banking and Branching Act also amends the International
Banking Act to allow a foreign bank to establish and operate a federal
branch or agency upon approval of the appropriate federal and state banking
regulator. As a national bank, the Bank currently can relocate its main
office across state lines by utilizing a provision in the National Bank Act
which permits such relocation to a location not more than thirty miles from
its existing main office. In effect, a national bank can thereby move
across state lines as long as the relocation does not exceed thirty miles,
and also retain as branches the offices located in the original state.
The Federal Reserve Board, the FDIC and the Comptroller of the
Currency ("Comptroller") have issued certain risk-based capital guidelines,
which supplement existing capital requirements. The guidelines require all
United States banks and bank holding companies to maintain a minimum risk-
based capital ratio of 8 percent (of which at least 4 percent must be
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<PAGE>
in the form of common stockholders' equity). Assets are assigned to five
risk categories, with higher levels of capital being required for the
categories perceived as representing greater risk. The required capital
will represent equity and (to the extent permitted) nonequity capital as a
percentage of total risk-weighted assets. The risk-based capital rules are
designed to make regulatory capital requirements more sensitive to
differences in risk profiles among banks and bank holding companies and to
minimize disincentives for holding liquid assets. On the basis of an
analysis of the rules and the projected composition of the Registrant's
consolidated assets, it is not expected that such risk-based capital rules
will have a material effect on the Registrant's business and capital plans.
The Bank has capital ratios exceeding the regulatory requirements.
<TABLE>
Regulatory Capital Requirements
<CAPTION>
The following table presents the Corporation's capital ratios at
December 31, 1995:
<S> <C>
Tier I Capital $ 23,335,000
Tier II Capital 1,681,000
Total Capital 25,016,000
Adjusted Total Average Assets $220,848,000
Total Adjusted Risk-Weighted Assets <F1> 134,117,000
Tier I Risk-Based Capital Ratio <F2> 17.40%
Required Tier I Risk-Based Capital Ratio 4.00%
Excess Tier I Risk-Based Capital Ratio 13.40%
Total Risk-Based Capital Ratio <F3> 18.65%
Required Total Risk-Based Capital Ratio 8.00%
Excess Total Risk-Based Capital Ratio 10.65%
Tier I Leverage Ratio <F4> 10.22%
Required Tier I Leverage Ratio 3.00%
Excess Tier I Leverage Ratio 7.22%
______________________________
<FN>
<F1>
Includes off-balance sheet items at credit-equivalent values.
<F2>
Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I Capital
to Adjusted Total Risk-Weighted Assets.
<F3>
Total Risk-Based Capital Ratio is defined as the ratio of Tier I and Tier
II Capital to Total Adjusted Risk-Weighted Assets.
<F4>
Tier I Leverage Ratio is defined as the ratio of Tier I Capital to Adjusted
Total Average Assets.
</FN>
</TABLE>
The Corporation was required to implement, on January 1, 1995,
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("FASB 115"). For
regulatory capital reporting purposes, FASB 115 changed the composition of
stockholders' equity in financial statements prepared in accordance with
generally accepted accounting principles by including as a separate
component of equity the
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<PAGE>
amount of net unrealized holding gains or losses on debt and equity
securities that are deemed to be available-for-sale. The implementation of
FASB 115 did not have a material effect during 1995 on the regulatory
capital ratios of the Corporation.
Effective January 27, 1995, the FDIC has issued a final rule with
respect to the implementation of FASB 115 for regulatory capital reporting
purposes. Under this final rule, net unrealized holding losses on
available-for-sale equity securities (but not debt securities) with readily
determinable fair values will be included (i.e., deducted) when calculating
the Corporation's consolidated Tier I Capital. All other unrealized
holding gains and losses on available-for-sale securities will be excluded
(i.e., not deducted) from the Corporation's consolidated Tier I Capital.
Based upon the composition of the Corporation's investment portfolio as of
the filing date of this report, such final rule will have no material
effect on the Corporation's Tier I Capital.
The Corporation's ability to maintain the required levels of
capital is substantially dependent upon the success of the Corporation's
capital and business plans; the impact of future economic events on the
Corporation's loan customers; and the Corporation's ability to manage its
interest rate risk and investment portfolio and control its growth and
other operating expenses.
Pending Legislation
Various congressional bills and other proposals have proposed a
sweeping overhaul of the banking system, including provision for:
limitations on deposit insurance coverage; changing the timing and method
financial institutions use to pay for deposit insurance; expanding the
poser of banks by removing the restriction on bank underwriting activities;
and tightening the regulation of bank derivatives activities; allowing
commercial enterprises to own banks. Set forth below are some of the
proposals advanced by the federal banking agencies.
Congress is currently considering legislative reform centered on
repealing the Glass-Steagall Act which prohibits commercial banks from
engaging in the securities industry. During the course of the legislative
reform, three major initiatives have been proposed to remove these
barriers. All three initiatives include various firewalls to protect the
integrity of the insured financial institution. The initiative, proposed
by the House Banking Committee Chairman, James Leach, is the most
significant. Leach's proposal, which has been adopted by the House Banking
Committee, would require a financial services holding company structure
which would be permitted to own a bank an a separately capitalized
securities firm. Banks, however, would be prohibited from affiliating with
insurance companies or non-financial firms. The holding company would be
regulated by the Federal Reserve Board, and its subsidiaries would be
supervised by the applicable regulator based on their respective functions.
Alternatively, the proposal would also allow a securities firm to establish
an investment bank holding company to own an uninsured wholesale financial
institution and a securities unit.
Legislation providing regulatory relief to banks was introduced
in late 1995 by Senator Alfonse D'Amato. The legislation would cut the
banking industry's paper work, protect institutions from environmental
lender
5
<PAGE>
liability, extend the examination cycle for healthy banks with assets of
less than $250 million to two years, and expand the exemption from Home
Mortgage Data reporting to banks with $50 million in assets or less. The
legislation, however, also includes measures requiring banks to disclose to
consumers their credit reports.
The Comptroller is proposing to revise regulations governing
national bank's fiduciary activities. The proposal would abolish a number
of restrictions on the way national banks pay trust customers withdrawing
collective investment funds (collective investment funds allow banks to
pool their trust accounts, rather than investing the money in each account
separately). Currently, national banks are required to pay trust customers
in cash or a proportional share of the investments in the fund or a
combination of both. The proposal abolishes this requirement. Instead,
the Comptroller would defer to state fiduciary laws, state courts, or the
specific terms of the collective investment fund. The proposal would also
allow national banks that manage collective investment funds to delegate
investment decisions to affiliated or unaffiliated advisors.
Management has no way of anticipating whether these measures will
be enacted or if enacted, their impact on the Company's financial position
and reported results of operation. As a consequence of the extensive
regulation of commercial banking activities in the United States, the
Company's and the Bank;'s business is particularly susceptible to being
affected by federal and state legislation and regulations that may increase
the costs of doing business. Se also, page 18 of Registrant's 1995 Annual
Report, which is incorporated herein by reference.
Effects of Inflation
Inflation has some impact on the company's and the Bank's
operating costs. Unlike many industrial companies, however, substantially
all of the Bank's assets and liabilities are monetary in nature. As a
result, interest rates have a more significant impact on the Company's and
the Bank's performance than the general level of inflation. Over short
periods of time, interest rates may not necessarily move in the same
direction or in the same magnitude as prices of goods and services.
Effect of Government Monetary Policies
The earnings of the Corporation are and will be affected by
domestic economic conditions and the monetary and fiscal policies of the
United States government and its agencies.
The monetary policies of the Federal Reserve Board have had, and
will likely continue to have, an important impact on the operating results
of commercial banks through its power to implement national monetary policy
in order, among other things, to curb inflation or combat a recession. The
Federal Reserve Board has a major effect upon the levels of bank loans,
investments and deposits through its open market operations in United
States government securities and through its regulations of, among other
things, the
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<PAGE>
discount rate on borrowings of member banks and the reserve requirements
against member bank deposits. It is not possible to predict the nature and
impact of future changes in monetary and fiscal policies.
Environmental Regulation
There are several federal and state statutes which regulate the
obligations and liabilities of financial institutions pertaining to
environmental issues. In addition, to the potential for attachment of
liability resulting from its own actions, a bank may be held liable under
certain circumstances for the actions of its borrowers, or third parties,
when such actions result in environmental problems on properties that
collateralize loans held by the bank. Further, the liability has the
potential to far exceed the original amount of the loan issued by the Bank.
Currently, neither the Corporation nor the Bank is a party to any pending
legal proceeding pursuant to any environmental statute, nor is the
Corporation and the Bank aware of any circumstances which may give rise to
liability under any such statute.
History and Business - Bank
The Bank's legal headquarters are located at 111 West Front
Street, Berwick, Pennsylvania.
As of December 31, 1995, the Bank had total assets of
$224,995,788, total shareholders' equity of $20,935,255 and total deposits
and other liabilities of $204,060,533.
The Bank engages in a full-service commercial banking business,
including accepting time and demand deposits, and making secured and
unsecured commercial and consumer loans. The Bank's business is not
seasonal in nature. Its deposits are insured by the FDIC to the extent
provided by law.
At December 31, 1995, the Bank had seventy-four (76) full-time
employees and thirty-three (30) part-time employees. In the opinion of
management, the Bank enjoys a satisfactory relationship with its employees.
The Bank is not a party to any collective bargaining agreement.
Competition - Bank
The Bank competes actively with other area commercial banks and
savings and loan associations, many of which are larger than the Bank, as
well as with major regional banking and financial institutions. The Bank's
major competitors in its home county of Columbia are: First Columbia Bank
& Trust Co. of Bloomsburg, PNC Bank, N.A., CCFNB, Mellon Bank, N.A. of
Wilkes-Barre and Franklin First Savings Bank of Wilkes-Barre. Except with
respect to First Columbia Bank & Trust Co. and CCFNB, all of the Bank's
major competitors are larger than it in terms of assets. The 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.
7
<PAGE>
Supervision and Regulation - Bank
The operations of the Bank are subject to federal and state
statutes applicable to banks chartered under the banking laws of the United
States, to members of the Federal Reserve System and to banks whose
deposits are insured by the FDIC. Bank operations are also subject to
regulations of the OCC, the Federal Reserve Board and the FDIC.
The primary supervisory authority of the Bank is the OCC, which
regulates and examines the Bank. The OCC has the authority under the
Financial Institutions Supervisory Act to prevent a national bank from
engaging in an unsafe or unsound practice in conducting its business.
Federal and state banking laws and regulations govern, among
other things, the scope of a bank's business, the investments a bank may
make, the reserves against deposits a bank must maintain, loans a bank
makes and collateral it takes, and the activities of a bank with respect to
mergers and consolidations and the establishment of branches.
As a subsidiary of a bank holding company, the Bank is subject to
certain restrictions imposed by the Federal Reserve Act on any extensions
of credit to the bank holding company or its subsidiaries, on investments
in the stock or other securities of the bank holding company or its
subsidiaries and on taking such stock or securities as collateral for
loans. The Federal Reserve Act and Federal Reserve Board regulations also
place certain limitations and reporting requirements on extensions of
credit by a bank to principal shareholders of its parent holding company,
among others, and to related interests of such principal shareholders. In
addition, such legislation and regulations may affect the terms upon which
any person becoming a principal shareholder of a holding company may obtain
credit from banks with which the subsidiary bank maintains a correspondent
relationship.
From time to time, various types of federal and state legislation
have been proposed that could result in additional regulations of, and
restrictions on, the business of the Bank. It cannot be predicted whether
any such legislation will be adopted or how such legislation would affect
the business of the Bank. As a consequence of the extensive regulation of
commercial banking activities in the United States, the Bank's business is
particularly susceptible to being affected by federal legislation and
regulations that may increase the costs of doing business.
Under the Federal Deposit Insurance Act, the OCC possesses the
power to prohibit institutions regulated by it (such as the Bank) from
engaging in any activity that would be an unsafe and unsound banking
practice and in violation of the law.
Under the Community Reinvestment Act of 1977, as amended ("CRA"),
the Comptroller is required to assess the record of all financial
institutions regulated by it to determine if these institutions are meeting
the credit needs of the community (including low and moderate income
neighborhoods) which they serve and to take this record into account in its
evaluation of any application made by any of such institutions for, among
other things, approval of a branch or other deposit facility, office
relocation, a merger or any acquisition of bank shares. The Financial
Institutions Reform, Recovery and Enforcement Act
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<PAGE>
of 1989 amended the CRA to require, among other things that the Comptroller
make publicly available the evaluation of a bank's record of meeting the
credit needs of its entire community, including low and moderate income
neighborhoods. This evaluation will include a descriptive rating
("outstanding", "satisfactory", "needs to improve" or "substantial
noncompliance") and a statement describing the basis for the rating. These
ratings are publicly disclosed.
In April 1995, regulators revised the CRA with an emphasis on
performance over process and documentation. Under the revised rules, the
five-point rating scale is still utilized; however, the 12 assessment
factors have been replaced with a three-prong test whereby examiners assign
a numerical score for a bank's performance in each of three areas:
lending, service and investment. The area of lending is weighted to
increase its importance in the application of the test. The rule became
effective July 1, 1995.
Under the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), institutions must be classified in one of five defined
categories as illustrated below (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized).
<TABLE>
<CAPTION>
Total Tier 1 Under a
Risk- Risk- Tier 1 Capital
Based Based Leverage Order
Ratio Ratio Ratio of
Direc-
tive
<S> <C> <C> <C> <C>
CAPITAL CATEGORY
Well capitalized > = 10.0 > = 6.0 > = 5.0 No
Adequately capitalized > = 8.0 > = 4.0 > = 4.0 <F1>
Undercapitalized <8.0 <4.0 <4.0 <F1>
Significantly
undercapitalized <6.0 <3.0 <3.0
Critically
undercapitalized < = 2.0
<FN>
<F1>
3.0 for those banks having the highest available regulatory rating.
</FN>
</TABLE>
9
<PAGE>
In the event an institution's capital deteriorates to the
undercapitalized category or below, FDICIA prescribes and increasing amount
of regulatory intervention, including: (1) the institution by a bank of a
capital restoration plan and a guarantee of the plan by a parent
institution; and (2) the placement of a hold on increases in assets, number
of branches or lines of business. If capital has reached the significantly
or critically undercapitalized levels, further material restrictions can be
imposed, including restrictions on interest payable on accounts, dismissal
of management and (in critically undercapitalized situations) appointment
of a receiver. For well capitalized institutions, FDICIA provides
authority for regulatory intervention where the institution is deemed to be
engaging in unsafe or unsound practices or receives a less than
satisfactory examination report rating for asset quality, management,
earnings or liquidity. All but well capitalized institutions are
prohibited from accepting brokered deposits without prior regulatory
approval.
Under FDICIA, financial institutions are subject to increased
regulatory scrutiny and must comply with certain operational, managerial
and compensation standards to be developed by Federal Reserve Board
regulations. FDICIA also requires the regulators to issue new rules
establishing certain minimum standards to which an institution must adhere
including standards requiring a minimum ratio of classified assets to
capital, minimum earnings necessary to absorb losses and minimum ratio of
market value to book value for publicly held institutions. Additional
regulations are required to be developed relating to internal controls,
loan documentation, credit underwriting, interest rate exposure, asset
growth and excessive compensation, fees and benefits.
Annual full-scope, on site examinations are required for all the
FDIC-insured institutions except institutions with assets under $100
million which are well capitalized, well-managed and not subject to a
recent change in control, in which case, the examination period is every 18
months. Banks with total assets of $500 million or more as of the
beginning of the fiscal year, are required to submit to their supervising
federal and state banking agencies a publicly available annual audit
report. The independent accountants of such bank shall attest to the
accuracy of management's report. The accounts shall also monitor
management's compliance with governing laws and regulations. In addition,
such bank also is required to select an independent audit committee
composed of outside directors who are independent of management, to review
with management and the independent accountants, the reports that must be
submitted to the bank regulatory agencies. If the independent accountants
resign or are dismissed, written notification must be given to the bank's
supervising government banking agencies.
FDICIA also requires that banking agencies reintroduce loan-to-
value ("LTV") ratio regulations which were previously repealed by the 1982
Act. LTV's will limit the amount of money a financial institution may lend
to a borrower, when the loan is secured by real estate, to no more than a
percentage to be set by regulation of the value of the real estate.
A separate subtitle within FDICIA, called the "Bank Enterprise
Act of 1991", requires "truth-in-savings" on consumer deposit accounts so
that consumers can make meaningful comparisons between the competing claims
of banks with regard to deposit accounts and products. Under this
provision, the Bank is required to provide information to depositors
concerning the terms of their
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deposit accounts, and in particular, to disclose the annual percentage
yield. There are some operational costs of complying with the Truth-In-
Savings law.
Management believes that full implementation of FDICIA has had no
material impact on liquidity, capital resources or reported results of
operation. If FDIC insurance premiums assessments increase in the future,
Management believes such future increase many have a material impact on
future reported results of operations.
Under the Bank Secrecy Act ("BSA"), the Bank is required to
report to the Internal Revenue Service currency transactions of more than
$10,000 or multiple transactions of which the Bank is aware in any one day
that aggregate in excess of $10,000. Civil and criminal penalties are
provided under the BSA for failure to file a required report, for failure
to supply information required by the BSA or for filing a false or
fraudulent report.
From time to time, various types of federal and state legislation
have been proposed that could result in additional regulation of, and
restrictions on, the business of the Bank. It cannot be predicted whether
any such legislation will be adopted or, if adopted, how such legislation
would affect the business of the bank. As a consequence of the extensive
regulation of commercial banking activities in the United States, the
Bank's business is particularly susceptible to being affected by federal
legislation and regulations that may increase the costs of doing business.
Concentration
The Corporation and Bank are not dependent for deposits nor
exposed by loan concentrations to a single customer or to a small group of
customers the loss of any one or more of which would have a materially
adverse effect on the financial condition of the Corporation or the Bank.
<TABLE>
ITEM 2. DESCRIPTION OF PROPERTIES
The Corporation owns no property other than through its subsidiaries.
These are:
<CAPTION>
Type of Square
Location Ownership Footage Use
<S> <C> <C> <C>
The First National
Bank of Berwick
Offices:
Columbia County, PA
111 W. Front Street,
Berwick Owned 12,500 Administrative
office, banking
and trust services
and computer
department.
2nd & Market Streets, Owned Land Area No buildings, held
Berwick for possible
expansion.
1.45 Acres Present use,
parking.
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<PAGE>
701 Freas Avenue,
Berwick Owned 3,744 Banking services.
2401 New Berwick
Highway, Bloomsburg Leased 2,000 Banking services.
Annual
Rental
$21,800
U.S. Route 11 & Owned Land Area No buildings,
Central Road, 1.11 Acres held for
Bloomsburg expansion.
Present use,
rental.
Third & Race Streets, Owned 2,500 Banking services.
Mifflinville
Luzerne County, PA
Salem Township Owned 3,700 Banking
Post Office Address - services.
400 Fowler Avenue,
Berwick
West Third Street, Leased 2,300 Banking
Nescopeck Annual services.
Rental
$8,400
</TABLE>
It is Management's opinion that the facilities currently utilized
are suitable and adequate for current and immediate future purposes.
ITEM 3. LEGAL PROCEEDINGS
The caption "Legal Matters" contained in the Corporation's Annual
Report filed as Exhibit 13 hereto is incorporated in its entirety by
reference under this Item 3.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Part II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's Common Stock is traded on a limited basis in
the local over the counter market. The following table sets forth: (1)
the quarterly high and low prices for a share of the Corporation's Common
Stock during the periods indicated as reported by the management of the
Corporation and (2) quarterly dividends on a share of the Common Stock with
respect to each quarter since January 1, 1994. The following quotations
represent prices
12
<PAGE>
between buyers and sellers and do not include retail markup, markdown or
commission. They may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Stock Prices
Dividends
High Low Declared
<S> <C> <C> <C>
1994:
First quarter $32.25 $32.25 $.270
Second quarter $35.00 $27.00 $.270
Third quarter $35.00 $35.00 $.270
Fourth quarter $35.00 $35.00 $.290
1995:
First quarter $35.00 $35.00 $.290
Second quarter $35.00 $35.00 $.290
Third quarter $37.00 $35.00 $.290
Fourth quarter $37.00 $37.00 $.310
</TABLE>
As of December 31, 1995, the Corporation had approximately 562
shareholders of record.
The Corporation has paid dividends since commencement of business
in 1984. It is the present intention of the Corporation's Board of
Directors to continue the dividend payment policy; however, further
dividends must necessarily depend upon earnings, financial condition,
appropriate legal restrictions and other factors relevant at the time the
Board of Directors of the Corporation considers dividend policy. Cash
available for dividend distributions to shareholders of the Corporation
must initially come from dividends paid by the Bank to the Corporation.
Therefore, the restrictions on the Bank's dividend payments are directly
applicable to the Corporation.
The OCC has issued rules governing the payment of dividends by
national banks. Consequently, the Bank which is subject to these rules,
may not pay dividends from capital (unimpaired common and preferred stock
outstanding) but only from retained earnings after deducting losses and bad
debts therefrom. "Bad debts" are defined as matured obligations in which
interest is past due and unpaid for ninety (90) days, but do not include
well-secured obligations that are in the process of collection.
Previously, the Bank was permitted to add the balances in its allowance for
loan and lease losses in determining retained earnings, but the OCC's new
regulations prohibit that practice. However, to the extent that (1) the
Bank has capital surplus in an amount in excess of common capital and
(2) if the Bank can prove that such surplus resulted from prior period
earnings, the Bank, upon approval of the OCC, may transfer earned surplus
to retained earnings and thereby increase its divided policy capacity.
If, however, the Bank has insufficient retained earnings to pay a
dividend, the OCC's regulations allow the Bank to reduce its capital to a
specified level and to pay dividends upon receipt of the approval of the
OCC as well as that of the holders of two-thirds of the outstanding shares
of the
13
<PAGE>
Common Stock. The Bank is allowed to pay dividends no more frequently than
quarterly. Moreover, the Bank must obtain the OCC's approval before paying
a dividend if the total of all dividends declared by the Bank in any
calendar year would exceed the total of (1) the Bank's net profits for that
year plus (2) its retained net profits for the preceding two years less
(3) any required transfers to surplus or a fund for the retirement of
preferred stock.
The Bank may not pay any dividends on its capital stock during
the period in which it may be in default in the payment of its assessment
for the deposit insurance premium due to the FDIC, nor may it pay dividends
on Common Stock until any cumulative dividends on the Bank's preferred
stock (if any) have been paid in full. The Bank has never been in default
in the payments of its assessments to the FDIC; and, moreover, the Bank has
no outstanding preferred stock. In addition, under the Federal Deposit
Insurance Act (912 U.S.C. Section 1818), dividends cannot be declared and
paid if the OCC obtains a cease and desist order because such payment would
constitute an unsafe and unsound banking practice. As of December 31,
1995, there was $4,646,920 in unrestricted retained earnings and net income
available at the Bank that could be paid as a dividend to the Corporation
under the current OCC regulations.
Dividend Restrictions on the Corporation
Under the Pennsylvania Business Corporation Law of 1988, as
amended (the "BCL"), the Corporation may not pay a dividend if, after
giving effect thereto, either (a) the Corporation would be unable to pay
its debts as they become due in the usual course of business or (b) the
Corporation's total assets would be less than its total liabilities. The
determination of total assets and liabilities may be based upon: (i)
financial statements prepared on the basis of generally accepted accounting
principles, (ii) financial statements that are prepared on the basis of
other accounting practices and principles that are reasonable under the
circumstances, or (iii) a fair valuation or other method that is reasonable
under the circumstances.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in the Corporation's Annual
Report filed as Exhibit 13 hereto is incorporated in its entirety by
reference under this Item 6.
ITEM 7. FINANCIAL STATEMENTS
The Corporation's Consolidated Financial Statements and notes
thereto contained in the Annual Report filed as Exhibit 13 hereto are
incorporated in their entirety by reference under this Item 7.
14
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The captions "Information As To Nominees, Directors and Executive
Officers," "Principal Officers of the Corporation," "Principal Officers of
the Bank" and "Compliance with Section 16(a) of the Securities Act of 1934"
contained in the Corporation's Definitive Proxy Statement filed at Exhibit
99 hereto is incorporated in their entirety by reference under this Item 9.
ITEM 10. EXECUTIVE COMPENSATION
The caption "Executive Compensation" contained in the
Corporation's Definitive Proxy Statement filed as Exhibit 99 hereto is
incorporated in its entirety by reference under this Item 10.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The caption "Principal Beneficial Owners of the Corporation's
Stock" contained in the Corporation's Definitive Proxy Statement filed as
Exhibit 99 hereto is incorporated in its entirety by reference under this
Item 11.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Transactions"
contained in the Corporation's Definitive Proxy Statement filed as Exhibit
99 hereto is incorporated in its entirety by reference under this Item 12.
15
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-B:
Exhibit Number Referred to
Item 601 of Regulation S-B Description of Exhibit
2 None.
3i Hereby incorporated by reference,
previously
filed with the Commission.
3ii Hereby incorporated by reference,
previously
filed with the Commission.
4 None.
9 None.
10 None.
11 None.
13 Annual Report to Shareholders for Fiscal
Year Ended December 31, 1995.
Exhibit Number Referred to
Item 601 of Regulation S-B Description of Exhibit
16 None.
18 None.
21 List of Subsidiaries of the Corporation
filed at Exhibit 22 to Form 10-KSB for
the year ended December 31, 1995, and
hereby incorporated by reference.
23 Consent of Independent Auditors.
24 None.
27 Financial Data Schedule.
99 Definitive Proxy Statement, Notice of
Annual Meeting and Form of Proxy for the
Annual Meeting of Shareholders to be held
April 16, 1996.
(b) Reports on Form 8-K.
The Corporation has filed no reports on Form 8-K during the last
quarter of the fiscal year ended December 31, 1995.
16
<PAGE>
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
Exhibit Description Page
<S> <C> <C>
13 Annual Report to Shareholders for
Fiscal Year Ended December 31, 1995 22
21 List of Subsidiaries of the
Issuer 23
23 Consent of Independent Auditors 25
27 Financial Data Schedule 27
99 Definitive Proxy Statement, Notice of
Annual Meeting and Form of Proxy for
the Annual Meeting of Shareholders
to be held April 16, 1996 28
17
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST KEYSTONE CORPORATION
(Issuer)
By: /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and Chief Executive Officer
Date: March 29, 1996
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By: /s/ John L. Coates
John L. Coates
Secretary and Director
Date: March 29, 1996
By: /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President, Chief Executive
Officer and Director
(Chief Executive Officer
and Principal Financial
Officer)
Date: March 29, 1996
18
<PAGE>
By: /s/ John E. Arndt
John E. Arndt
Director
Date: March 29, 1996
By: /s/ Budd L. Beyer
Budd L. Beyer
Director
Date: March 29, 1996
By: /s/ Robert E. Bull
Robert E. Bull
Chairman of the Board
and Director
Date: March 29, 1996
By: /s/ Dudley P. Cooley
Dudley P. Cooley
Director
Date: March 29, 1996
By: /s/ Frederick E. Crispin, Jr.
Frederick E. Crispin, Jr.
Director
Date: March 29, 1996
19
<PAGE>
By: /s/ Stanley E. Oberrender
Stanley E. Oberrender
Director
Date: March 29, 1996
By: /s/ David R. Saracino
David R. Saracino
Treasurer and Assistant Secretary
(Principal Accounting Officer)
Date: March 29, 1996
By: /s/ F. Stuart Straub
F. Stuart Straub
Director
Date: March 29, 1996
By:
Robert J. Wise
Director
Date: March 29, 1996
20
<PAGE>
List of Attached Exhibits
13 Annual Report to Stockholders
21 Subsidiaries of First Keystone Corporation
23 Consent of Independent Auditors
27 Financial Data Schedule
99 Definitive Proxy Statement, Notice of Annual Meeting and Form
of Proxy for the Annual Meeting of shareholders to be held
April 16, 1996
CVR Cover letter to the SEC
21
<PAGE>
</TABLE>
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
FOR FISCAL YEAR ENDED DECEMBER 31, 1995
22
<PAGE>
<LOGO>
1995
ANNUAL
REPORT
FIRST
KEYSTONE
CORPORATION
<PAGE>
The Corporation
First Keystone Corporation is a bank holding company incorporated under the
Pennsylvania Business Corporation Laws. Its assets consists primarily of
the assets of its wholly-owned subsidiary, The First National Bank of
Berwick.
The First National Bank of Berwick serves an area of approximately 300
square miles in Columbia and Lower Luzerne Counties. The Bank engages in
general banking business and also provides fiduciary services.
Corporation's Annual Report and
Form 10-KSB
A copy of the Corporation's Annual Report and Form 10-KSB, as filed with
the Securities and Exchange Commission, will be furnished upon request.
Address requests to:
J. Gerald Bazewicz, President
First Keystone Corporation
P. O. Box 287
Berwick, PA 18603-0287
Telephone: (717) 752-3671
Annual Meeting
The Annual Meeting of shareholders will be held on April 16, 1996, at 9:00
a.m. The location will be at the Main Office of The First National Bank of
Berwick, located at 111 West Front Street, Berwick, Pennsylvania.
Contents
2 Financial Data
3 President's Letter
4 Consolidated Balance
Sheets
5 Consolidated Statements of
Income
6 Consolidated Statements of
Stockholders' Equity
7 Consolidated Statements of
Cash Flows
8 Notes to Consolidated
Financial Statements
23 Report of Independent
Certified Public
Accountants
24 Management's Discussion
and Analysis
38 Directors and Officers
40 Office Locations
<PAGE>
<TABLE>
SUMMARY OF SELECTED FINANCIAL DATA
<CAPTION>
(Amounts in thousands,
except per share) 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income $ 16,637 $ 13,731 $ 13,734 $ 14,010 $ 13,729
Interest expense 8,271 6,353 6,519 7,438 8,115
Net interest
income 8,366 7,378 7,215 6,572 5,614
Provision for loan
losses 372 31 518 711 360
Investment securities
gains (losses) 5 180 70 100 136
Net income $ 3,486 $ 3,115 $ 3,101 $ 2,324 $ 1,935
Per Common Share
Net income $ 4.31 $ 3.85 $ 3.84 $ 2.89 $ 2.41
Cash dividends 1.18 1.10 .95 .85 .78
Balance Sheet Data
Assets $226,033 $206,864 $201,270 $187,795 $165,232
Investment securities 88,125 79,946 86,054 73,755 63,489
Net loans 126,046 116,383 106,500 101,864 93,489
Deposits 187,320 172,280 165,731 162,897 144,423
Stockholders' equity 25,399 20,788 18,577 16,210 14,417
Performance Ratios
Return on average
assets 1.58% 1.54% 1.58% 1.31% 1.25%
Return on average
equity 15.24% 15.34% 17.56% 14.68% 13.71%
Dividend payout ratio 27.36% 28.55% 24.79% 29.61% 32.49%
Average equity to
average assets
ratio 10.36% 10.05% 9.02% 8.93% 9.18%
</TABLE>
2 First Keystone Corporation
<PAGE>
To Our Shareholders
First Keystone Corporation, and its principal subsidiary, The First
National Bank of Berwick, have completed another record year in 1995. In
fact, 1995 represents the thirteenth consecutive year of record earnings
for your company.
Net income for 1995 was $3,486,193, or $4.31 per share, an increase of
11.9% over net income of $3,114,593, or $3.85 per share reported in 1994.
Earnings were positively affected in 1995 by increased net interest income
as a result of our improved net interest margin. Our return on average
assets was 1.58% in 1995 and our return on average equity was 15.24%. This
earnings performance level continues to compare very favorably with our
peer financial institutions and ranks First Keystone among the most
profitable in its peer group.
Another area of financial strength is our equity capital. Total
stockholders' equity increased to $25,399,461 as of year-end 1995. Average
stockholders' equity to average assets increased to 10.36% in 1995 as
compared to 10.05% in 1994. Our strong equity base provides an excellent
foundation for future growth and continued improved shareholder value.
During 1995 total assets and total deposits also reached new record levels.
As of December 31, 1995, total assets were $226,033,263, an increase of
9.3% over 1994. Total deposits increased to $187,320,087 as of year-end
1995, an increase of 8.7% over 1994.
Our strong earnings performance, sound balance sheet, and excellent
capital position afforded an opportunity for our Board of Directors to
increase the cash dividend paid per share to $1.18 in 1995 from $1.10 in
1994, an increase of 7.3%. In addition, in January 1996, a 10% stock
dividend was declared payable in mid February 1996.
Our increased net interest income in 1995 was made possible largely
through our efforts to increase our outstanding loans. Total loans net of
unearned interest increased to $127,957,535, an increase of 8.3% over 1994.
Loan quality remains excellent with past-dues at manageable levels and non-
accruals and restructured loans less than industry averages. We feel our
reserve, or allowance for loan losses, which increased by $213,719 in 1995
to $2,015,236, or 1.57% of loans is sufficient against potential future
problem loans. Additional details on our loan portfolio and other related
financial information may be found in the Management's Discussion and
Analysis section of this annual report.
During 1995 we celebrated the first anniversary of our Mifflinville
office. Results continue to be very encouraging as the office's customer
base, asset level, and deposits increase. In 1995, we opened the first
drive-up ATM in the Berwick market at the corner of Market Street and
Second Street. This ATM has had very strong usage to date. Through our
technology based products - check imaging and "TouchPhone", a telephone
banking service we continue to provide our customers with some of the
latest in state of the art banking services. Finally, in the fourth
quarter of 1995 we introduced Performance Plus our guarantee of quality
service. In fact, for any bank error The First National Bank of Berwick
will pay $10.00 for the inconvenience caused.
Regretfully, since our last annual meeting, Arthur E. Arndt, Jr., our
corporate secretary and a member of our Board of Directors since 1976,
died. Mr. Arndt's support and guidance will be missed. We are happy to
welcome John Arndt as a new member of our Board of Directors. His energy
and dedication should prove invaluable.
In 1996, the economy is expected to perform positively. The possibility
of the economy stumbling into recession seems increasingly remote.
However, economic growth is expected to be quite slow in 1996. To date,
interest rate reductions have done little to spur increased economic
growth. Further interest rate reductions are likely as we move through
1996.
Thank you to our Board of Directors for its guidance and our Officers
and employees for their continued dedication to providing quality customer
service. Finally, thanks to our customers and shareholders for their
loyalty, continued support and confidence.
/s/ J. Gerald Bazewicz
J. Gerald Bazewicz, President
1995 Annual Report 3
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 and 1994
<CAPTION>
1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,656,866 $ 4,811,770
Interest-bearing deposits in other banks 1,962,946 484,519
Investment securities available for sale
carried at estimated fair value 64,703,806 52,153,036
Investment securities held to maturity,
estimated fair value 1995 $23,439,296;
1994 $26,908,978 23,421,484 27,792,891
Mortgages held for resale 103,900 -
Loans, net of unearned income 127,957,535 118,184,120
Allowance for loan losses (2,015,236) (1,801,517)
Net loans $125,942,299 $116,382,603
Premises and equipment 3,066,001 3,029,329
Other real estate owned - 235,000
Accrued interest receivable 1,875,368 1,272,519
Other assets 300,593 702,339
TOTAL ASSETS $ 226,033,263 $ 206,864,006
LIABILITIES
Deposits:
Non-interest bearing $ 17,621,563 $ 16,682,464
Interest bearing 169,698,524 155,597,311
Total Deposits $187,320,087 $172,279,775
Short-term borrowings 4,358,601 5,484,614
Long-term borrowings 7,000,000 7,500,000
Accrued interest and other expenses 1,180,110 781,727
Other liabilities 775,004 29,819
TOTAL LIABILITIES $ 200,633,802 $ 186,075,935
STOCKHOLDERS' EQUITY
Preferred stock, par value $10.00
per share; authorized
500,000 shares; no shares issued $ - $ -
Common stock, par value $2.00 per
share; authorized 3,000,000 shares;
issued 808,429 shares 1995 and 1994 1,616,858 1,616,858
Surplus 3,829,266 3,829,266
Retained earnings 17,888,934 15,356,687
Unrealized gain (loss) on investment
securities available for sale,
net of taxes 2,064,403 (14,740)
TOTAL STOCKHOLDERS' EQUITY $ 25,399,461 $ 20,788,071
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 226,033,263 $ 206,864,006
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4 First Keystone Corporation
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
<CAPTION>
1995 1994
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable $10,569,702 $ 9,179,252
Tax exempt 290,578 195,199
Interest and dividends on investment
securities:
Taxable interest 3,887,673 2,894,880
Tax exempt interest 1,631,495 1,306,861
Dividends 107,443 94,953
Interest on federal funds sold - -
Interest on deposits in banks 149,793 60,176
TOTAL INTEREST INCOME $16,636,684 $13,731,321
INTEREST EXPENSE
Interest on deposits $ 7,450,453 $ 5,736,505
Interest on short-term borrowings 236,928 215,721
Interest on long-term borrowings 583,469 400,907
TOTAL INTEREST EXPENSE $ 8,270,850 $ 6,353,133
NET INTEREST INCOME $ 8,365,834 $ 7,378,188
PROVISION FOR LOAN LOSSES 372,448 31,233
NET INTEREST INCOME AFTER
PROVISION
FOR LOAN LOSSES $ 7,993,386 $ 7,346,955
NON-INTEREST INCOME
Fiduciary activities income $ 349,809 $ 294,831
Service charges and fees 572,535 472,922
Other operating income 41,825 43,755
Investment securities gains
- net 4,841 180,284
TOTAL NON-INTEREST INCOME $ 969,010 $ 991,792
NON-INTEREST EXPENSE
Salaries and wages $ 1,659,468 $ 1,534,129
Pensions and other employee
benefits 603,182 587,775
Occupancy expense, net 292,731 273,746
Furniture and equipment expense 456,013 401,378
FDIC insurance 199,953 377,154
Other operating expense 1,345,098 1,133,909
TOTAL NON-INTEREST EXPENSE $ 4,556,445 $ 4,308,091
Income before income taxes and
cumulative effect of a
change in accounting principle $ 4,405,951 $ 4,030,656
Income tax expense 919,758 916,063
Income before cumulative effect of
a change in accounting principle $ 3,486,193 $ 3,114,593
Cumulative effect of a change in
accounting principle
relating to income taxes - -
NET INCOME $ 3,486,193 $ 3,114,593
PER SHARE DATA
Income before cumulative
effect of a change in
accounting principle $ 4.31 $ 3.85
Cumulative effect of a change in
accounting principle - -
Net income $ 4.31 $ 3.85
Cash dividends $ 1.18 $ 1.10
Weighted average shares outstanding 808,429 808,429
The accompanying notes are an integral part if these consolidated financial
statements.
<CAPTION>
1993
<S> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable $ 8,766,286
Tax exempt 187,494
Interest and dividends on investment
securities:
Taxable interest 3,184,410
Tax exempt interest 1,419,401
Dividends 85,980
Interest on federal funds sold 16,358
Interest on deposits in banks 74,030
TOTAL INTEREST INCOME $13,733,959
INTEREST EXPENSE
Interest on deposits $ 6,123,214
Interest on short-term borrowings 156,643
Interest on long-term borrowings 238,714
TOTAL INTEREST EXPENSE $ 6,518,571
NET INTEREST INCOME $ 7,215,388
PROVISION FOR LOAN LOSSES 518,242
NET INTEREST INCOME AFTER
PROVISION
FOR LOAN LOSSES $ 6,697,146
NON-INTEREST INCOME
Fiduciary activities income $ 349,968
Service charges and fees 438,682
Other operating income 38,910
Investment securities gains
- net 69,906
TOTAL NON-INTEREST INCOME $ 897,466
NON-INTEREST EXPENSE
Salaries and wages $ 1,427,655
Pensions and other employee
benefits 567,557
Occupancy expense, net 253,946
Furniture and equipment expense 371,386
FDIC insurance 373,532
Other operating expense 1,119,042
TOTAL NON-INTEREST EXPENSE $ 4,113,118
Income before income taxes and
cumulative effect of a
change in accounting principle $ 3,481,494
Income tax expense 697,750
Income before cumulative effect of
a change in accounting principle $ 2,783,744
Cumulative effect of a change in
accounting principle
relating to income taxes 317,433
NET INCOME $ 3,101,177
PER SHARE DATA
Income before cumulative
effect of a change in
accounting principle $ 3.45
Cumulative effect of a change in
accounting principle .39
Net income $ 3.84
Cash dividends $ .95
Weighted average shares outstanding 806,971
The accompanying notes are an integral part if these consolidated financial
statements.
</TABLE>
1995 Annual Report 5
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
<CAPTION>
Common Retained
Stock Surplus Earnings
<S> <C> <C> <C>
BALANCE at DECEMBER 31, 1992 $1,470,000 $1,590,225 $13,169,221
Net Income $ - $ - $ 3,101,177
Cash dividends -
$.95 per share - - (768,657)
10% stock dividend 146,858 2,221,227 (2,368,085)
Dividends paid in lieu of
fractional shares - - (2,290)
Treasury stock purchased -
3,475 shares - - -
Sale of treasury stock -
4,196 shares resulting
in a gain of $17,814 - 17,814 -
BALANCE at DECEMBER 31, 1993 $1,616,858 $3,829,266 $13,131,366
Cumulative effect as of
January 1, 1994, relating
to change in accounting
principle applicable to
investment securities
available for sale,
net of taxes $ - $ - $ -
Net Income - - $ 3,114,593
Cash dividends -
$1.10 per share - - (889,272)
Change in unrealized gain
(loss) on investment
securities available for
sale, net of taxes - - -
BALANCE at DECEMBER 31, 1994 $1,616,858 $3,829,266 $15,356,687
Net Income $ - $ - $ 3,486,193
Cash Dividends -
$1.18 per share - - (953,946)
Change in unrealized gain
(loss) on investment
securities available for
sale, net of taxes - - -
BALANCE at DECEMBER 31, 1995 $1,616,858 $3,829,266 $17,888,934
The accompanying notes are an integral part of these consolidated financial
statements.
<CAPTION>
Net
Unrealized
Gain (Loss)
On Investment
Securities
Treasury Available
Stock For Sale Total
<S> <C> <C> <C>
BALANCE at DECEMBER 31, 1992 $ (19,336) $ - $16,210,110
Net Income $ - $ - $ 3,101,177
Cash dividends -
$.95 per share - - (768,657)
10% stock dividend - - -
Dividends paid in lieu of
fractional shares - - (2,290)
Treasury stock purchased -
3,475 shares (98,169) - (98,169)
Sale of treasury stock -
4,196 shares resulting
in a gain of $17,814 117,505 - 135,319
BALANCE at DECEMBER 31, 1993 $ - $ - $18,577,490
Cumulative effect as of
January 1, 1994, relating
to change in accounting
principle applicable to
investment securities
available for sale,
net of taxes $ - $2,175,724 $ 2,175,724
Net Income - - 3,114,593
Cash dividends -
$1.10 per share - - (889,272)
Change in unrealized gain
(loss) on investment
securities available for
sale, net of taxes - (2,190,464) (2,190,464)
BALANCE at DECEMBER 31, 1994 $ - $ (14,740) $20,788,071
Net Income $ - $ - $ 3,486,193
Cash Dividends -
$1.18 per share - - (953,946)
Change in unrealized gain
(loss) on investment
securities available for
sale, net of taxes - 2,079,143 2,079,143
BALANCE at DECEMBER 31, 1995 $ - $2,064,403 $25,399,461
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
6 First Keystone Corporation
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
<CAPTION>
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,486,193 $ 3,114,593
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision for loan losses 372,448 31,233
Depreciation 311,636 295,327
Premium amortization on
investment securities 254,510 315,008
Discount accretion on
investment securities (141,052) (43,119)
Deferred income taxes (benefit) (29,421) 88,542
Cumulative effect of a change
in accounting principle
relating to income taxes - -
Gain on sales of investment
securities (4,841) (180,284)
Gain on sale of premises and
equipment (2,342) -
(Gain) loss on sale of other
real estate owned 37,155 (3,730)
(Increase) decrease in accrued
interest receivable (602,849) 28,256
(Increase) decrease in other
assets - net 100,671 (70,258)
Increase (decrease) in accrued
interest and other expenses 398,383 (43,889)
Increase (decrease) in other
liabilities - net (7,395) (61,521)
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 4,173,096 $ 3,470,158
INVESTING ACTIVITIES
Purchases of investment securities
available for sale $(36,711,805) $(19,799,911)
Proceeds from sales of investment
securities available for sale 22,461,737 19,505,870
Proceeds from maturities and
redemptions
of investment securities available
for sale 6,424,757 5,757,254
Purchases of investment securities
held to maturity (5,608,356) (4,345,463)
Proceeds from sale of investment
securities - -
Proceeds from maturities and redemption
of investment securities held to
maturity 8,307,905 4,889,106
Net increase in loans (10,218,544) (10,148,833)
Proceeds from sales of loans 182,500 -
Proceeds from sale of premises and
equipment 3,000 -
Purchases of premises and equipment (348,965) (591,525)
Proceeds from sale of other real
estate owned 197,845 8,730
NET CASH USED IN INVESTING
ACTIVITIES $(15,309,926) $ (4,724,772)
FINANCING ACTIVITIES
Net increase in deposits $ 15,040,312 $ 6,549,062
Net increase (decrease) in short-term
borrowings (1,126,013) (4,559,871)
Proceeds from long-term borrowings 1,000,000 3,500,000
Repayment of long-term borrowings (1,500,000) (2,000,000)
Proceeds from sale of treasury stock - -
Acquisition of treasury stock - -
Cash dividends paid (953,946) (889,272)
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 12,460,353 $ 2,599,919
Increase (decrease) in cash and
cash equivalents $ 1,323,523 $ 1,345,305
Cash and cash equivalents at beginning
of year 5,296,289 3,950,984
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 6,619,812 $ 5,296,289
The accompany notes are an integral part of these consolidated financial
statements.
<CAPTION>
1993
<S> <C>
OPERATING ACTIVITIES
Net income $ 3,101,177
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision for loan losses 518,242
Depreciation 274,409
Premium amortization on
investment securities 359,238
Discount accretion on
investment securities (44,406)
Deferred income taxes (benefit) (183,468)
Cumulative effect of a change
in accounting principle
relating to income taxes (317,433)
Gain on sales of investment
securities (69,906)
Gain on sale of premises and
equipment -
(Gain) loss on sale of other
real estate owned (19,244)
(Increase) decrease in accrued
interest receivable 27,523
(Increase) decrease in other
assets - net 13,463
Increase (decrease) in accrued
interest and other expenses 136,126
Increase (decrease) in other
liabilities - net 56,822
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 3,852,543
INVESTING ACTIVITIES
Purchases of investment securities
available for sale $ -
Proceeds from sales of investment
securities available for sale -
Proceeds from maturities and
redemptions
of investment securities available
for sale -
Purchases of investment securities
held to maturity (36,224,417)
Proceeds from sale of investment
securities 6,793,500
Proceeds from maturities and redemption
of investment securities held to
maturity 16,886,579
Net increase in loans (5,154,017)
Proceeds from sales of loans -
Proceeds from sale of premises and
equipment -
Purchases of premises and equipment (290,269)
Proceeds from sale of other real
estate owned 121,300
NET CASH USED IN INVESTING
ACTIVITIES $(17,867,324)
FINANCING ACTIVITIES
Net increase in deposits $ 2,833,335
Net increase (decrease) in short-term
borrowings 5,105,014
Proceeds from long-term borrowings 3,000,000
Repayment of long-term borrowings -
Proceeds from sale of treasury stock 135,319
Acquisition of treasury stock (98,169)
Cash dividends paid (770,947)
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 10,204,552
Increase (decrease) in cash and
cash equivalents $ (3,810,229)
Cash and cash equivalents at beginning
of year 7,761,213
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 3,950,984
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
1995 Annual Report 7
<PAGE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements for Years Ended December 31,
1995, 1994, and 1993
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Keystone Corporation
and Subsidiaries (the "Corporation") conform to generally accepted
accounting principles and to general practices within the banking industry.
The more significant policies follow:
Principles of Consolidation
The consolidated financial statements include the accounts of First
Keystone Corporation and its wholly-owned subsidiaries, The First National
Bank of Berwick and FKC Realty Corporation. All significant inter-company
balances and transactions have been eliminated in consolidation.
Nature of Operations
The Corporation provides full banking services, including trust
services, through its subsidiary, The First National Bank of Berwick, to
individuals and corporate customers. The Bank has six offices covering an
area of approximately 300 square miles in Columbia and Lower Luzerne
Counties. The Corporation and its banking subsidiary are subject to
regulation of the Office of the Comptroller of the Currency, The Federal
Deposit Insurance Corporation, and the Federal Reserve Bank of
Philadelphia.
Use of Estimates
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of these consolidated financial statements and the
reported amounts of income and expenses during the reporting periods.
Actual results could differ from those estimates.
Investment Securities
The Corporation adopted Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
as required January 1, 1994. As a result of adopting Statement No. 115,
the Corporation classified investment securities into two categories:
those to be held to maturity and those available for sale. In accordance
with the Statement, prior period consolidated financial statements have not
been restated to reflect the change in accounting principle. The
cumulative effect, as of January 1, 1994, of adopting Statement No. 115
increased Stockholders' Equity in the amount of $2,175,724 (net of deferred
income tax of $1,147,985) to reflect the net unrealized gain on investment
securities classified as available for sale.
The classification of investment securities into categories held to
maturity or available for sale is initially determined at the date the
security is purchased and is reevaluated at each balance sheet date. Debt
securities are classified as held to maturity when the Corporation has the
ability and positive intent to hold the securities to maturity. Investment
securities held to maturity are carried at cost adjusted for amortization
of premium and accretion of discount to maturity.
Debt securities not classified as held to maturity and equity
securities are included in the available for sale category and are carried
at fair value. The amount of any unrealized gain or loss is reported as a
separate component of Stockholders' Equity net of the effect of deferred
income tax. Management's decision to sell available for sale securities is
based on changes in economic conditions controlling the sources and
applications of funds, terms, availability of and yield of alternative
investments, interest rate risk and the need for liquidity.
On November 15, 1995, the Financial Accounting Standards Board (FASB)
published a special report, "A Guide to Implementation of Statement No. 115
on Accounting for Certain Investments in Debt and Equity Securities." The
report included a provision that allowed banks a one-time opportunity to
reclassify (at fair value) held-to-maturity securities without calling into
question their intent to hold other debt securities to maturity in the
future. The reclassifications had to be made in conjunction with
implementation of the supplemental guidance by December 31, 1995. The
Corporation did not make any reclassifications as allowed under this
special provision.
The cost of debt securities classified as held to maturity or
available for sale is adjusted for amortization of premiums and accretion
of discounts to maturity, or in the case of mortgage-backed security, over
the estimated life of the security. Such amortization and accretion, as
well as interest and dividends is included in interest from investments.
Realized gains and losses are included in net investment securities gains.
The cost of investment securities sold, redeemed or matured is based on the
specific identification method.
Mortgages Held for Resale
Mortgages held for resale are valued at the lower of cost or market.
8 First Keystone Corporation
<PAGE>
Loans
Loans are stated at their outstanding unpaid principal balances, net
of any deferred fees or costs, unearned income and the allowance for loan
losses. Interest on installment loans is recognized as income over the
term of each loan, generally, by the "actuarial method". Interest on other
loans is primarily recognized based upon the principal amount outstanding.
Loan origination fees and certain direct loan origination costs have been
deferred and the net amount amortized using the interest method over the
contractual life of the related loans as an interest yield adjustment.
Non-Accrual Loans - Generally, a loan (including a loan impaired under
Statement of Financial Accounting Standards No. 114) is classified as non-
accrual and the accrual of interest on such loan is discontinued when the
contractual payment of principal or interest has become 90 days past due or
management has serious doubts about further collectibility of principal or
interest, even though the loan currently is performing. A loan may remain
on accrual status if it is in the process of collection and is either
guaranteed or well secured. When a loan is placed on non-accrual status,
unpaid interest credited to income in the current year is reversed and
unpaid interest accrued in prior years is charged against the allowance for
loan losses. Potential problem loans are identified by management as a
part of its loan review process.
Income recognition is in accordance with Statement of Financial
Accounting Standards No. 118. Certain non-accrual loans may continue to
perform, that is, payments are still being received. Generally, the
payments are applied to principal. These loans remain under constant
scrutiny and if performance continues, interest income may be recorded on a
cash basis based on management's judgement as to collectibility of
principal.
Allowance for Loan Losses - The allowance for loan losses is established
through provisions for loan losses charged against income. Loans deemed to
be uncollectible are charged against the allowance for loan losses, and
subsequent recoveries, if any, are credited to the allowance.
As of January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No.114, "Accounting by Creditors for Impairment of a
Loan" as amended by Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure." Under the new standards, the 1995 allowance for loan losses
related to loans that are identified for evaluation in accordance with
Statement No. 114 is based on discounted cash flows using the loan's
initial effective interest rate or the fair value of the collateral for
certain collateral dependent loans. Prior to 1995, the allowance for loan
losses related to these loans was based on undiscounted cash flows or the
fair value of the collateral for collateral dependent loans. Statement No.
118 allows the continued use of existing methods for income recognition on
impaired loans and amends disclosure requirements to require information
about the recorded investment in certain impaired loans and related income
recognition on those loans. The allowance for loan losses is maintained at
a level estimated by management to be adequate to absorb potential loan
losses. Management's periodic evaluation of the adequacy of the allowance
for loan losses is based on the Corporation's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may
affect the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral, composition of
the loan portfolio, current economic conditions, and other relevant
factors. This evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows expected to
be received on impaired loans that may be susceptible to significant
change.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation computed principally on the straight-line method over the
estimated useful lives of the assets. Maintenance and minor repairs are
charged to operations as incurred. The cost and accumulated depreciation
of the premises and equipment retired or sold are eliminated from the
property accounts at the time of retirement or sale, and the resulting gain
or loss is reflected in current operations.
Other Real Estate Owned
Other real estate owned is comprised of property acquired through a
foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure and
loans classified as in-substance foreclosure. In accordance with Statement
No. 114, a loan is classified as in-substance foreclosure when the
Corporation has taken possession of the collateral regardless of whether
formal foreclosure proceedings take place. Other real estate owned is
recorded at fair value at the date of foreclosure establishing a new cost
basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of (1) cost or (2)
fair value minus estimated costs to sell. Income and expenses from
operations of other real estate owned and changes in the valuation
allowance are included in loss on other real estate owned.
Advertising Costs
Advertising costs are expensed as the costs are incurred. Advertising
expenses amounted to $107,541, $114,124 and $100,742 for 1995, 1994, and
1993, respectively.
1995 Annual Report 9
<PAGE>
Contributions (Charitable)
The Corporation adopted Statement of Financial Accounting Standard No.
116 "Accounting for Contributions Received and Contributions Made." Under
this Statement, the entire amount of contributions in the form of
unconditional promises to pay (bona fide pledges) must be accrued and
reflected as a contribution expense in the year of the pledge. The
measurement of the accrual required is based on the present value of future
cash flows using a current market discount rate. A prospective change is
permitted, however, the Corporation has elected not to reflect the
cumulative effect of the change due to implementing Statement No. 116 at
January 1, 1995, since the amount at that date was not significant.
Charitable Pledges Payable at December 31, 1995, calculated as required
under Statement No. 116 are $13,100.
Income Taxes
The Corporation adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" as required on January 1, 1993. As
permitted by Statement No. 109, prior year's consolidated financial
statements have not been restated to reflect the change in accounting
method. The cumulative effect as of January 1, 1993, of adopting Statement
No. 109 increased consolidated net income by $317,433, or $.39 per share.
Under this Statement deferred tax assets and liabilities are
determined based on the differences between the consolidated financial
statement and income tax bases of assets and liabilities measured by using
the enacted tax rates and laws expected to be in effect when the timing
differences are expected to reverse. Deferred tax expense or benefit is
based on the difference between deferred tax asset or liability from period
to period. Further, the Statement requires that a valuation allowance be
provided in an amount sufficient to reduce the deferred tax asset to the
amount that is more likely than not to be realized. Previously, deferred
income taxes were accounted for using the deferred method.
Per Share Data
Net income and cash dividends per share are based upon weighted
average number of shares outstanding during each period. All data with
respect to weighted average number of shares outstanding, net income and
cash dividends was retroactively adjusted to reflect the stock dividends.
Cash Flow Information
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and due from other banks, interest bearing deposits in
other banks, and federal funds sold. The Corporation considers cash
classified as interest bearing deposits with other banks as a cash
equivalent since they are represented by cash accounts essentially on a
demand basis. Federal funds are also included as a cash equivalent since
they are generally purchased and sold for one-day periods.
Interest paid on deposits and other borrowings was $7,994,087,
$6,287,219, and $6,547,994 in 1995, 1994, and 1993, respectively. Cash
payments for income taxes were $902,567, $760,056, and $889,939 for 1995,
1994, and 1993, respectively. During 1994, the Corporation transferred
$256,530 from loans to other real estate owned.
Derivative Financial Instruments
The Corporation has no derivative financial instruments requiring
disclosure under Statement of Financial Accounting Standards No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments."
Trust Assets and Income
Property held by the Corporation in a fiduciary or agency capacity for
its customers is not included in the accompanying consolidated financial
statements since such items are not assets of the Corporation. Fiduciary
activities income is recognized on a cash basis and is not materially
different than if it were reported on an accrual basis.
Note 2. CHANGES IN ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." The Statement requires that
long-lived assets and certain identifiable intangibles are classified into
two categories for the purpose of accounting for an impairment of assets:
those to be held and used and those to be disposed of. Assets to be held
and used must be reviewed whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. An impairment
loss is indicated if the sum of the expected future cash flows,
undiscounted and without interest charges, is less than the carrying amount
of the assets. An impairment loss must be recognized as the amount by
which the carrying amount of the asset exceeds the fair value of the asset
so determined. The Corporation intends to adopt Statement No. 121, as
required, in its fiscal year beginning January 1, 1996. Implementation of
this Statement is not expected to have a material effect on the
consolidated financial condition or results of operations of the
Corporation.
10 First Keystone Corporation
<PAGE>
Note 3. RESTRICTED CASH BALANCES
Regulations of the Board of Governors of the Federal Reserve System
impose uniform reserve requirements on all member depository institutions.
The Bank subsidiary was required to have a reserve of $1,508,000 at
December 31, 1995, which requirement was satisfied by vault cash on that
date.
The Bank subsidiary also, from time to time, maintains deposits with
the Federal Reserve Bank and other banks for various services such as check
clearing and charge card processing. Balances maintained for this purpose
were $373,721 at December 31, 1995.
Note 4. INVESTMENT SECURITIES
The amortized cost, related estimated fair value, and unrealized gains
and losses for investment securities classified as "Available For Sale" or
"Held to Maturity" were as follows at December 31, 1995, and 1994:
<TABLE>
<CAPTION>
Available For Sale Securities
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1995:
U.S. Treasury
Securities $ 4,947,272 $ 228,353 $ - $ 5,175,625
Obligations of U.S.
Government
Corporations and
Agencies:
Mortgage-backed 16,266,958 121,160 136,491 16,251,627
Other 5,999,434 106,816 - 6,106,250
Obligations of state
and political
subdivisions 29,477,870 2,641,955 14,516 32,105,309
Corporate debt
securities:
Mortgage-backed 2,849,219 - 41,281 2,807,938
Other 92,033 93 - 92,126
Equity securities 1,918,523 246,408 - 2,164,931
Total $61,551,309 $3,344,785 $ 192,288 $64,703,806
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity Securities
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1995:
Obligations of U.S.
Government
Corporations and
Agencies,
Mortgage-backed $20,130,568 $ 60,767 $ 124,139 $20,067,196
Obligations of state
and political
subdivisions 3,290,916 84,205 3,021 3,372,100
Total $23,421,484 $ 144,972 $ 127,160 $23,439,296
</TABLE>
<TABLE>
<CAPTION>
Available For Sale Securities
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1994:
U.S. Treasury
securities $ 3,883,692 $ 37,390 $ 39,137 $ 3,881,945
Obligations of U.S.
Government
Corporations and
Agencies,
Mortgage-backed 28,136,404 11,482 957,773 27,190,113
Obligations of state
and political
subdivisions 14,088,634 882,642 - 14,971,276
Corporate debt
securities:
Mortgage-backed 4,084,961 11,644 67,788 4,028,817
Other 247,068 - 2,930 244,138
Equity securities 1,721,998 139,873 25,124 1,836,747
Total $52,162,757 $ 1,083,031 $1,092,752 $52,153,036
</TABLE>
1995 Annual Report 11
<PAGE>
<TABLE>
<CAPTION>
Held to Maturity Securities
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1994:
U.S. Treasury
securities $ 1,700,877 $ - $ 13,627 $ 1,687,250
Obligations of U.S.
Government
Corporations and
Agencies,
Mortgage-backed 23,893,903 3,238 809,468 23,087,673
Obligations of state
and political
subdivisions 2,198,111 27,640 91,696 2,134,055
Total $27,792,891 $ 30,878 $ 914,791 $26,908,978
</TABLE>
Securities available for sale with an aggregate fair value of
$9,269,723 in 1995; $8,064,139 in 1994 and securities held to maturity with
an aggregate unamortized cost of $20,129,586 in 1995; $19,439,083 in 1994
respectively, were pledged to secure public funds, trust funds, securities
sold under agreements to repurchase and other balances of $17,378,996 in
1995 and $13,536,022 in 1994 as required by law.
The amortized cost, estimated fair value and weighted average yield of
debt securities, by contractual maturity, are shown below at December 31,
1995. 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.
<TABLE>
<CAPTION>
December 31, 1995
U.S. Government Obligations
U.S. Agency & of State
Treasury Corporation & Political
Securities Obligations Subdivisions <F1>
<S> <C> <C> <C>
Available For Sale:
Within 1 Year $ - $ - $ -
1 - 5 Years:
Amortized cost 3,915,520 965,466 -
Estimated fair value 4,111,250 970,064 -
Weighted average yield 7.0013 6.3271 -
5 - 10 Years:
Amortized cost 1,031,752 5,658,383 486,160
Estimated Fair value 1,064,375 5,742,821 551,910
Weighted average yield 6.0487 7.5576 11.2412
After 10 Years:
Amortized cost - 15,642,543 28,991,710
Estimated fair value - 15,644,992 31,553,399
Weighted average yield - 7.4013 9.2529
Total:
Amortized cost $4,947,272 $22,266,392 $29,477,870
Estimated fair value $5,175,625 $22,357,877 $32,105,309
Weighted average yield 6.8026% 7.3944% 9.2857%
<CAPTION>
December 31, 1995
Other Marketable
Debt Other Equity
Securities Securities <F2> Securities <F2>
<S> <C> <C> <C>
Available For Sale:
Within 1 Year $ - $ - $ -
1 - 5 Years:
Amortized cost 92,034 - -
Estimated fair value 92,127 - -
Weighted average yield 5.8085 - -
5 - 10 Years:
Amortized cost - - -
Estimated Fair value - - -
Weighted average yield - - -
After 10 Years:
Amortized cost 2,849,218 1,209,851 708,672
Estimated fair value 2,807,937 1,209,850 955,081
Weighted average yield 7.1461 6.7751 3.3124
Total:
Amortized cost $2,941,252 $1,209,851 $708,672
Estimated fair value $2,900,064 $1,209,850 $955,081
Weighted average yield 7.1042% 6.7751% 3.3124%
_______________________
<FN>
<F1>
Average yields on tax-exempt obligations of state and political subdivisions
have been computed on a tax-equivalent basis using a 34% tax rate.
<F2>
Other securities and marketable equity securities are not considered to have
defined maturities and are included in the after ten year category.
</FN>
</TABLE>
12 First Keystone Corporation
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
U.S. Government Obligations
U.S. Agency & of State
Treasury Corporation & Political
Securities Obligations Subdivisions <F1>
<S> <C> <C> <C>
Held To Maturity:
Within 1 Year $ - $ - $ -
1 - 5 Years:
Amortized cost - - 97,405
Estimated fair value - - 102,961
Weighted average yield - - 9.8638
5 - 10 Years:
Amortized cost - - 702,076
Estimated Fair value - - 701,785
Weighted average yield - - 6.9019
After 10 Years:
Amortized cost - 20,130,568 2,491,435
Estimated fair value - 20,067,196 2,567,354
Weighted average yield - 7.7913 8.3667
Total:
Amortized cost $ - $20,130,568 $3,290,916
Estimated fair value $ - $20,067,196 $3,372,100
Weighted average yield - 7.7913% 8.0985%
<CAPTION>
December 31, 1995
Other Marketable
Debt Other Equity
Securities Securities <F2> Securities <F2>
<S> <C> <C> <C>
Held To Maturity:
Within 1 Year $ - $ - $ -
1 - 5 Years:
Amortized cost - - -
Estimated fair value - - -
Weighted average yield - - -
5 - 10 Years:
Amortized cost - - -
Estimated Fair value - - -
Weighted average yield - - -
After 10 Years:
Amortized cost - - -
Estimated fair value - - -
Weighted average yield - - -
Total:
Amortized cost $ - $ - $ -
Estimated fair value $ - $ - $ -
Weighted average yield $ - $ - $ -
_______________________
<FN>
<F1>
Average yields on tax-exempt obligations of state and political subdivisions
have been computed on a tax-equivalent basis using a 34% tax rate.
<F2>
Other securities and marketable equity securities are not considered to have
defined maturities and are included in the after ten year category.
</FN>
</TABLE>
There were no aggregate investments with a single issuer which
exceeded ten percent of consolidated shareholders' equity at December 31,
1995. The quality rating of all obligations of state and political
subdivisions are "A" or higher, as rated by Moody's or Standard and Poors.
The only exceptions are local issues which are not rated, but are secured
by the full faith and credit obligations of the communities that issued
these securities. All of the state and political subdivision investments
are actively traded in a liquid market.
Proceeds from sale of investments in debt and equity securities during
1995, 1994 and 1993 were $22,461,737, $19,505,870 and $6,793,500,
respectively. Gross gains realized on these sales were $350,410, $332,506,
and $97,864, respectively. Gross losses on these sales were $345,569,
$152,222, and $27,958, respectively. Net unrealized gains (losses) on
securities available for sale included as a separate component of
consolidated stockholders' equity net of tax was $2,064,403 and ($14,740)
in 1995 and 1994 respectively.
Note 5. LOANS
Major classifications of loans at December 31, 1995 and 1994 consisted
of:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Commercial, Financial, and Agricultural $ 19,437,137 $ 16,284,630
Tax exempt 3,602,088 3,754,344
Real estate mortgage 87,180,772 82,515,832
Consumer 21,806,779 19,370,010
Gross loans $132,026,776 $121,924,816
Less: Unearned discount 3,752,652 3,368,307
Unamortized loan fees net of costs 316,589 372,389
Loans, net of unearned income $127,957,535 $118,184,120
</TABLE>
1995 Annual Report 13
<PAGE>
Changes in the allowance for loan losses for the years ended December
31, 1995, 1994, and 1993, were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance, January 1 $1,801,517 $1,844,196 $1,365,697
Provision charged to
operations 372,448 31,233 518,242
Loans charged off (185,643) (181,666) (148,878)
Recoveries 26,914 107,754 109,135
Balance, December 31 $2,015,236 $1,801,517 $1,844,196
</TABLE>
At December 31, 1995, the recorded investment in loans that are
considered to be impaired under Statement No. 114 was $556,533, which were
all non-accrual loans. The related allowance for loan losses for the
impaired loans utilizing standards provided in Statement No. 114 is
$242,319. No additional charge to operations is required since the total
allowance for loan losses is estimated by management to be adequate to
provide for the loan loss allowance under Statement No. 114 as well as any
other potential loan losses. The average recorded investment in impaired
loans during the year ended December 31, 1995, was approximately $601,061.
For the year ended December 31, 1995, the Corporation recognized interest
income on those impaired loans of $2,700 using the cash basis method of
income recognition.
At December 31, 1994, the Corporation had non-accrual loans of
$619,732 that would be considered impaired under Statement No. 114. The
Corporation recorded $3,555 of interest income on these loans in 1994.
Interest income in the amount of $53,224 in 1995 and $61,108 in 1994
would have been recorded on non-accrual loans had they performed according
to their contractual terms.
At December 31, 1995, there were no significant commitments to lend
additional funds with respect to non-accrual and restructured loans.
Note 6. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1995 and 1994
follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Land $ 840,288 $ 835,421
Buildings and improvements 2,386,788 2,351,528
Equipment 2,850,527 2,616,528
$6,077,603 $5,803,477
Less: Accumulated depreciation 3,011,602 2,774,148
Total $3,066,001 $3,029,329
</TABLE>
Depreciation amounted to $311,636 for 1995, $295,327 for 1994, and
$274,409 for 1993.
Note 7. DEPOSITS
Major classifications of deposits at December 31, 1995 and 1994
consisted of:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Demand - non-interest bearing $ 17,621,563 $ 16,682,464
Demand - interest bearing 37,617,465 32,867,640
Savings 42,333,211 46,727,932
Time, $100,000 and over 17,683,648 14,863,170
Other time 72,064,200 61,138,569
Total deposits $187,320,087 $172,279,775
</TABLE>
14 First Keystone Corporation
<PAGE>
The following is a schedule reflecting classification and remaining
maturities of time deposits of $100,000 and over at December 31, 1995:
<TABLE>
<CAPTION>
CERTIFICATES OTHER TIME
OF DEPOSIT DEPOSITS
<S> <C> <C>
Three months or less $ 6,110,785 $855,000
Over three to six months 4,776,630 0
Over six to twelve months 2,906,737 0
Over twelve months 3,034,496 0
Total $16,828,648 $855,000
</TABLE>
Interest expense related to time deposits of $100,000 or more was
$1,156,943 in 1995, $589,750 in 1994, and $782,364 in 1993.
Note 8. SHORT-TERM BORROWINGS
Federal funds purchased, securities sold under agreements to
repurchase and Federal Home Loan Bank advances generally represent
overnight or less than 30-day borrowings. Federal discount window
borrowings generally cannot extend beyond 14 days and are normally
overnight borrowings. U.S. Treasury tax and loan notes for collections
made by the Bank are payable on demand. Short-term borrowings consisted of
the following at December 31, 1995, and 1994:
<TABLE>
<CAPTION>
1995
Maximum
Ending Average Month End Average
Balance Balance Balance Rate
<S> <C> <C> <C> <C>
Federal funds purchased and
securities sold under
agreements to repurchase $3,199,824 $3,994,116 $4,311,556 4.49%
Federal Reserve Bank
discount window - - - -
Federal Home Loan Bank 1,000,000 286,466 1,000,000 6.19%
U.S. Treasury tax and
loan notes 158,777 722,108 2,171,398 5.51%
Total $4,358,601 $5,002,690 $7,482,954 5.71%
<CAPTION>
1994
Maximum
Ending Average Month End Average
Balance Balance Balance Rate
<S> <C> <C> <C> <C>
Federal funds purchased and
securities sold under
agreements to repurchase $4,825,928 $4,288,450 $ 9,315,073 3.32%
Federal Reserve Bank
discount window - 1,233 - 4.66%
Federal Home Loan Bank - 1,344,000 7,530,000 3.74%
U.S. Treasury tax and
loan notes 658,686 596,389 1,215,773 3.81%
Total $5,484,614 $6,230,072 $18,060,846 3.75%
</TABLE>
Note 9. LONG-TERM BORROWINGS
Long-term borrowings are comprised of advances from the Federal Home
Loan Bank (FHLB). Under terms of a blanket agreement, collateral for the
loans are secured by certain qualifying assets of the Bank subsidiary which
consist principally of first mortgage loans.
A schedule of long-term borrowings by maturity as of December 31,
1995, and 1994 follows:
<TABLE>
<CAPTION>
Maturity Interest Rate 1995 1994
<S> <C> <C> <C>
02/14/1995 5.60% - 500,000
07/11/1995 5.94% - 1,000,000
08/08/1996 7.40% 1,000,000 -
10/27/1996 7.36% 1,000,000 1,000,000
05/18/1997 6.90% 2,000,000 2,000,000
10/27/1997 7.65% 1,000,000 1,000,000
11/01/1998 5.56% 1,000,000 1,000,000
05/18/2002 7.77% 1,000,000 1,000,000
$7,000,000 $7,500,000
</TABLE>
1995 Annual Report 15
<PAGE>
Note 10. INCOME TAXES
The current and deferred components of the income tax provision
(benefit) consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Federal
Current $947,026 $815,005 $880,197
Deferred (benefit) (28,711) 88,584 (183,506)
$918,315 $903,589 $696,691
State
Current (benefit) $ 2,153 $ 12,516 $ 1,021
Deferred (benefit) (710) (42) 38
$ 1,443 $ 12,474 $ 1,059
Total provision for income taxes $919,758 $916,063 $697,750
</TABLE>
The following is a reconciliation between the actual provision for
federal income taxes and the amount of federal income taxes which would
have been provided at the statutory rate of 34%:
<TABLE>
<CAPTION>
1995 1994
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Provision at statutory rate $1,498,023 34.0% $1,370,423 34.0%
Tax exempt income (653,505) (14.8) (510,700) (12.7)
Dividend received exclusion (6,433) (.2) (6,085) (.2)
Non-deductible expenses 83,110 1.9 54,552 1.4
Other, net (2,880) (.1) (4,601) (.1)
Applicable federal income
tax and rate $ 918,315 20.8% $ 903,589 22.4%
<CAPTION>
1993
Amount Rate
<S> <C> <C>
Provision at statutory rate $1,183,708 34.0%
Tax exempt income (546,344) (15.7)
Dividend received exclusion (4,104) (.1)
Non-deductible expenses 61,222 1.8
Other, net 2,209 -
Applicable federal income
tax and rate $ 696,691 20.0%
</TABLE>
Income taxes attributable to realized security gains were $1,646 in
1995, $61,297 in 1994, and $23,768 in 1993.
Effective January 1, 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 109 as more fully explained in Note 1 to
Consolidated Financial Statements, which required the Corporation to change
its method of accounting for income taxes. Statement No. 109 was adopted
on a prospective basis and amounts presented for prior years were not
required to be reflected or restated. Application of Statement No. 109
resulted in a cumulative tax benefit of $317,433 recorded as of January 1,
1993.
The deferred tax assets and liabilities resulting from temporary
timing differences have been netted to reflect a net deferred tax asset
included in other assets in these consolidated financial statements. The
components of the net deferred tax assets at December 31, 1995, 1994, and
1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Deferred Tax Assets:
Loan loss Reserve $ 538,276 $ 465,612 $ 480,123
Loan origination fees and
costs - 9,059 147,690
Non-accrual loan interest - - 14,645
Contributions 4,454 - -
Total $ 542,730 $ 474,671 $ 642,458
Deferred Tax Liabilities:
Loan origination fees and
costs $ (30,176) $ - $ -
Accretion (11,622) (3,358) (2,020)
Unrealized investment
securities gains (loss
in 1994) <F1> (1,088,095) (5,018) -
Depreciation (165,418) (165,220) (163,943)
Total $(1,295,311) $(173,596) $(165,963)
Net Deferred Tax Asset
(Liability) $ (752,581) $ 301,075 $ 476,495
____________________________
<FN>
<F1>
The net deferred tax liability on unrealized investment securities losses for
1994 results from deferred federal and state tax on parent company unrealized
securities gains being greater than deferred federal tax on Bank unrealized
losses.
</FN>
</TABLE>
It is anticipated that all tax assets are to be realized, accordingly
no valuation allowance has been provided.
16 First Keystone Corporation
<PAGE>
Note 11. EMPLOYEE BENEFIT PLANS
The Corporation maintains a 401K Profit Sharing Plan. The Plan
agreement provides that the Corporation will match employee deferrals to
the Plan not to exceed 3% of their respective eligible compensations.
Additionally, the Corporation may make a discretionary contribution
annually to the Plan, which when combined with the employee's deferral and
Corporation's matching contributions, cannot exceed 15% of total eligible
compensation.
Contributions reflected as expense in the accompanying consolidated
financial statements under the current plan are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Matching Contribution $ 46,306 $ 41,564 $ 38,050
Discretionary Contribution 195,291 169,347 158,156
Total Expense $241,597 $210,911 $196,206
</TABLE>
Note 12. LEASE COMMITMENTS
At December 31, 1995, the Corporation was leasing two branch bank
buildings. The lease agreement on the Nescopeck branch bank office was
renewed June 1, 1995, for a five-year period and provides, among other
items, renewal options and the payment of other expenses in addition to a
base annual rental of $9,600. The lease agreement on the Scott Township
branch bank office, dated May 31, 1988, is an eight-year lease requiring an
annual rental of $21,800 for each of the first three years and an annual
rental of $25,800 for each of the remaining five years increased annually
for inflation. The lease provides for a renewal option and the payment of
other normal operating expenses.
On November 15, 1995, the Corporation renewed their Scott Township
lease for an additional five-year period. Total rent expense on the two
branch bank buildings for the years ended December 31, 1995, 1994 and 1993
was $45,997, $34,347 and $31,793, respectively.
<TABLE>
<CAPTION>
Minimum future non-cancelable rental payments for the branch buildings
as of December 31, 1995, for each of the next five years are:
<S> <C>
1996 $ 41,745
1997 43,378
1998 44,837
1999 45,824
2000 40,540
Thereafter 15,195
Total $231,519
</TABLE>
Note 13. LEGAL MATTERS
In the normal course of business, there are various pending legal
actions and proceedings that are not reflected in the consolidated
financial statements. Management does not believe the outcome of these
actions and proceedings will have a material adverse effect on the
consolidated financial position of the Corporation.
Note 14. RELATED PARTY TRANSACTIONS
Certain directors and executive officers of First Keystone Corporation
and its subsidiaries and companies in which they are principal owners
(i.e., at least 10%) were indebted to the Corporation at December 31, 1995
and 1994. These loans were made on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at
the time for comparable transactions with unrelated parties. The loans do
not involve more than the normal risk of collectibility nor present other
unfavorable features.
A summary of the activity on the related party loans, comprised of 7
directors and 3 executive officers, consists of the following for the years
ended December 31, 1995, 1994, and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at January 1 $3,410,457 $2,813,715 $2,266,352
New loan advances 1,513,122 1,593,607 1,942,870
Repayments (1,833,549) (996,865) (1,395,507)
Balance at December 31 $3,090,030 $3,410,457 $2,813,715
</TABLE>
1995 Annual Report 17
<PAGE>
Note 15. REGULATORY MATTERS
Dividends are paid by the Corporation to stockholders from its assets
which are mainly provided by the Bank.
National banking laws place certain restrictions on the amount of
dividends allowed to be paid by the Bank to the Corporation. Generally,
the limitation provides that dividend payments may not exceed the Bank's
current year's retained income plus retained net income for the preceding
two years. Accordingly, in 1996, without prior regulatory approval, the
Bank may declare dividends to the Corporation in the amount of $4,646,920
plus additional amounts equal to the net income earned in 1996 for the
period January 1, 1996, through the date of declaration, less any dividends
which may have already been paid in 1996.
Federal regulations provide standards which require that U.S. banking
organizations meet certain minimum capital ratios as a measure of capital
adequacy. In general, the standards require banks and bank holding
companies to maintain capital based on "risk-adjusted" assets so that
categories of assets with potentially higher credit risk will require more
capital backing than assets with lower risk. In addition, banks and bank
holding companies are required to maintain capital to support, on a "risk-
adjusted" basis, certain off-balance sheet activities such as loan
commitments and letters of credit.
The Federal Standards provide specific guidelines which classify
Capital into two Tiers, referred to as Tier 1 and Tier 2. Under these
guidelines the Bank's Tier 1 Capital consists of common stockholders'
equity and Tier 2 Capital consists of Tier 1 Capital plus the lesser of the
allowance for loan losses, or 1.25% of gross risk-weighted assets. Total
qualifying Capital consist of the total of Tier 1 Capital plus Tier 2
Capital with Tier 2 Capital being limited to 100% of Tier 1 Capital. At
December 31, 1995, the Corporation exceeded all minimum Capital
requirements as reflected in the following table:
<TABLE>
<CAPTION>
Calculated Minimum
Ratios Standard
Ratios
<S> <C> <C>
Risk Based Ratios:
Tier 1 Capital to Risk-Weighted Assets 17.40% 4.00%
Total Qualifying Capital to Risk-Weighted
Assets 18.65% 8.00%
</TABLE>
Note 16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK
The Corporation is a party to financial instruments with off-balance-
sheet risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend
credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The contract or
notional amounts of those instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments. The
Corporation does not engage in trading activities with respect to any of
its financial instruments with off-balance sheet risk.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented
by the contractual notional amount of those instruments.
The Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
The Corporation may require collateral or other security to support
financial instruments with off-balance sheet credit risk. The contract or
notional amounts at December 31, 1995, and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Financial instruments whose contract
amount represent credit risk:
Commitments to extend credit $10,036,866 $ 8,594,652
Standby letters of credit $ 1,824,649 $ 3,176,364
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses that may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Corporation evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Corporation upon extension of credit, is based on management's credit
evaluation of the counter-party. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and income-
producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. The
Corporation may hold collateral to support standby letters of credit for
which collateral is deemed necessary. However, at December 31, 1995, all
standby letters of credit are generally unsecured.
18 First Keystone Corporation
<PAGE>
The Corporation grants commercial, agribusiness and residential loans
to customers within the state. It is management's opinion that the loan
portfolio was balanced and diversified at December 31, 1995, to the extent
necessary to avoid any significant concentration of credit risk.
Note 17. STOCKHOLDERS' EQUITY
On December 14, 1993, the Board of Directors declared a 10% stock
dividend paid December 31, 1993, to stockholders of record December 14,
1993. The stock dividend was valued based on the market price of the
Corporation on December 14, 1993. All data with respect to shares, net
income and cash dividends per share, and weighted average number of shares
outstanding was retroactively adjusted to reflect the stock dividends.
On January 4, 1996, the Board of Directors declared a 10% Stock
Dividend paid February 16, 1996, to Shareholders of Record January 4, 1996.
The stock dividend was valued based on the market price of $37.00 per share
on January 4, 1996. A total of 80,718 shares were issued as a result of
this stock dividend with a total value of $2,991,188, including cash in
lieu of fractional shares.
Note 18. LIQUIDATION OF SUBSIDIARY
On December 29, 1995, FKC Realty, Inc., a wholly owned realty
subsidiary of the Corporation, was liquidated. Transfer of assets in
liquidation were at book value to the Corporation and bank subsidiary. No
gain or loss is recognized in these consolidated financial statements.
Note 19. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards Board Statement No. 107,
"Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about financial instruments, whether
or not required to be recognized in the consolidated balance sheet, for
which it is practicable to estimate such fair value. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. These techniques are
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. Fair value estimates derived through
these techniques cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement
of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
Cash and Other Short-Term Instruments
Cash and due from banks, interest bearing deposits with other banks
and Federal Funds sold have carrying values which are a reasonable estimate
of fair value. Accordingly, fair values regarding these instruments are
provided by reference to carrying values reflected on the Consolidated
Balance Sheet.
Investment Securities
The fair value of investment securities which include mortgage backed
securities, except certain state and municipal securities, is estimated
based on bid prices published in financial newspapers or bid quotations
received from securities dealers. The fair value of certain state and
municipal securities is not readily available through market sources other
than dealer quotations, thus fair value estimates are based on quoted
market prices of similar instruments, adjusted for differences between the
quoted instruments and the instruments being valued.
Loans
Fair values are estimated for categories of loans with similar
financial characteristics. Loans were segregated by type such as
commercial, tax exempt, real estate mortgages and consumer. For estimation
purposes each loan category was further segmented into fixed and adjustable
rate interest terms and also into performing and non-performing
classifications.
The fair value of each category of performing loans is calculated by
discounting future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
1995 Annual Report 19
<PAGE>
Fair value for non-performing loans is based on managements' estimate
of future cash flows discounted using a rate commensurate with the risk
associated with the estimated future cash flows. The assumptions used by
management are judgmentally determined using specific borrower information.
Deposits
Under Statement No. 107, the fair value of deposits with no stated
maturity, such as Demand Deposits, Savings Accounts and Money Market
Accounts is equal to the amount payable on demand at December 31, 1995, and
1994.
Fair values for fixed-rate certificates of deposit are estimated using
a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Short-Term Borrowings
The carrying amounts of federal funds purchased and securities sold
under agreements to repurchase and other short-term borrowings approximate
their fair values.
Long-Term Borrowings
The fair values of long-term borrowings are estimated using discounted
cash flow analyses based on the Corporation's incremental borrowing rate
for similar instruments.
Commitments to Extend Credit and Stand-By Letters of Credit
Management estimates that there are no material differences between
the notional amount and the estimated fair value of those off-balance sheet
items since they are primarily composed of unfunded loan commitments which
are generally priced at market at the time of funding.
At December 31, 1995 and 1994, the carrying values and estimated fair
values of financial instruments of the Corporation are presented in the
table below:
<TABLE>
<CAPTION>
1995
Carrying Estimated
Amount Fair Value
<S> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments $ 6,619,812 $ 6,619,812
Investment securities 88,125,290 88,143,102
Loans:
Commercial, Financial and
Agricultural $ 19,788,350 $ 19,736,649
Tax exempt 3,602,088 3,701,060
Real estate mortgage 87,285,848 89,045,448
Consumer 21,454,389 21,453,257
Gross loans $132,130,675 $133,936,414
Less: Unearned discount 3,752,652 -
Unamortized loan fees
net of costs 316,589 -
Loans net of unearned income $128,061,434 $133,936,414
Less allowance for losses 2,015,235 -
Net Loans $126,046,199 $133,936,414
FINANCIAL LIABILITIES:
Deposits:
Demand - non-interest bearing $ 17,621,563 $ 17,621,563
Demand - interest bearing 37,617,465 37,617,465
Savings 42,333,211 42,333,211
Time - $100,000 and over 17,683,648 17,878,115
Other time 72,064,200 72,855,962
Total Deposits $187,320,087 $188,306,316
Short-term borrowings $ 4,358,601 $ 4,358,601
Long-term borrowings 7,000,000 7,219,928
OFF-BALANCE SHEET ASSETS
(LIABILITIES):
Commitments to extend credit $10,036,866
Standby letters of credit 1,824,649
<CAPTION>
1994
Carrying Estimated
Amount Fair Value
<S> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments $ 5,296,289 $ 5,296,289
Investment securities 79,945,927 79,062,014
Loans:
Commercial, Financial and
Agricultural $ 16,284,630 $ 16,358,696
Tax exempt 3,754,344 3,891,234
Real estate mortgage 82,515,832 82,413,099
Consumer 19,370,010 19,660,198
Gross loans $121,924,816 $122,323,227
Less: Unearned discount 3,368,307 -
Unamortized loan fees
net of costs 372,389 -
Loans net of unearned income $118,184,120 $122,323,227
Less allowance for losses 1,801,517 -
Net Loans $116,382,603 $122,323,227
FINANCIAL LIABILITIES:
Deposits:
Demand - non-interest bearing $ 16,682,464 $ 16,682,464
Demand - interest bearing 32,867,640 32,867,640
Savings 46,727,932 46,727,932
Time - $100,000 and over 14,863,170 14,701,949
Other time 61,138,569 59,754,550
Total Deposits $172,279,775 $170,734,535
Short-term borrowings $ 5,484,614 $ 5,484,614
Long-term borrowings 7,500,000 7,261,496
OFF-BALANCE SHEET ASSETS
(LIABILITIES):
Commitments to extend credit $ 8,594,652
Standby letters of credit 3,176,364
</TABLE>
20 First Keystone Corporation
<PAGE>
Note 20. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for First Keystone Corporation (parent
company only) was as follows:
<TABLE>
<CAPTION>
BALANCE SHEETS December 31
1995 1994
<S> <C> <C>
ASSETS
Cash in subsidiary bank $ 445,312 $ 598,522
Investment in subsidiaries at equity:
Subsidiary bank 24,060,533 19,560,128
Other subsidiary - 10,116
Investment in other equity securities 955,082 691,847
Receivables from subsidiaries 54,681 1,356
Prepayments and other assets 82,394 82,149
TOTAL ASSETS $25,598,002 $20,944,118
LIABILITIES
Payable to subsidiaries $ - $ 56,093
Accrued expenses and other liabilities 198,541 99,954
TOTAL LIABILITIES $ 198,541 $ 156,047
STOCKHOLDERS' EQUITY
Preferred stock $ - $ -
Common stock 1,616,858 1,616,858
Surplus 3,829,266 3,829,266
Retained earnings 17,888,934 15,356,687
Unrealized gain (loss) on investment
securities available for sale 2,064,403
(14,740)
TOTAL STOCKHOLDERS' EQUITY $25,399,461 $20,788,071
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $25,598,002 $20,944,118
</TABLE>
<TABLE>
<CAPTION>
INCOME STATEMENTS Year Ended December 31
1995 1994
<S> <C> <C>
INCOME
Dividends from bank subsidiary $ 953,945 $ 889,272
Dividends - other 26,553 25,370
Securities gains 21,760 99,616
Interest 15,372 15,473
TOTAL INCOME $1,017,630 $1,029,731
Operating Expenses 27,102 22,840
Income Before Taxes and Equity in
Undistributed Net Income of
Subsidiaries $ 990,528 $1,006,891
Income tax expense 7,305 41,855
Income Before Equity in Undistributed
Net Income of Subsidiaries $ 983,223 $ 965,036
Equity in undistributed income of
subsidiaries 2,502,970 2,149,557
NET INCOME $3,486,193 $3,114,593
<CAPTION>
INCOME STATEMENTS Year Ended December 31
1993
<S> <C>
INCOME
Dividends from bank subsidiary $ 791,576
Dividends - other 17,085
Securities gains -
Interest 20,056
TOTAL INCOME $ 828,717
Operating Expenses 21,320
Income Before Taxes and Equity in
Undistributed Net Income of
Subsidiaries $ 807,397
Income tax expense 1,625
Income Before Equity in Undistributed
Net Income of Subsidiaries $ 805,772
Equity in undistributed income of
subsidiaries 2,295,405
NET INCOME $3,101,177
</TABLE>
1995 Annual Report 21
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS Year Ended December 31
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net income $3,486,193 $3,114,593
Adjustments to reconcile net income
to net cash provided by operating
activities:
Securities gains (21,760) (99,616)
Equity in undistributed net income
of subsidiaries (2,502,970) (2,149,557)
(Increase) decrease in receivables
from subsidiaries (53,325) (22)
(Increase) decrease in prepaid
expenses and other assets (245) (65,556)
Increase (decrease) in advances
payable to subsidiaries (56,093) 42,804
Increase (decrease) in accrued
expenses 45,900 52,616
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 897,700 $ 895,262
INVESTING ACTIVITIES
Purchase of equity securities $ (166,253) $ (254,565)
Sale of equity securities 56,438 272,442
Dissolution of non-bank subsidiary 12,851 -
NET CASH PROVIDED (USED) IN
INVESTING ACTIVITIES $ (96,964) $ 17,877
FINANCING ACTIVITIES
Proceeds from sale of treasury stock $ - $ -
Acquisition of treasury stock - -
Cash dividends paid (953,946) (768,657)
Dividends paid in lieu of
fractional shares - -
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES $ (953,946) $ (889,272)
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ (153,210) $ 23,867
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 598,522 574,655
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 445,312 $ 598,522
<CAPTION>
STATEMENTS OF CASH FLOWS Year Ended December 31
1993
<S> <C>
OPERATING ACTIVITIES
Net income $3,101,177
Adjustments to reconcile net income
to net cash provided by operating
activities:
Securities gains -
Equity in undistributed net income
of subsidiaries (2,295,405)
(Increase) decrease in receivables
from subsidiaries (425)
(Increase) decrease in prepaid
expenses and other assets (9,333)
Increase (decrease) in advances
payable to subsidiaries (7,229)
Increase (decrease) in accrued
expenses (1,124)
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 787,661
INVESTING ACTIVITIES
Purchase of equity securities $ (102,000)
Sale of equity securities -
Dissolution of non-bank subsidiary -
NET CASH PROVIDED (USED) IN
INVESTING ACTIVITIES $ (102,000)
FINANCING ACTIVITIES
Proceeds from sale of treasury stock $ 135,319
Acquisition of treasury stock (98,169)
Cash dividends paid (768,657)
Dividends paid in lieu of
fractional shares (2,290)
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES $ (733,797)
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ (48,136)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 622,791
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 574,655
</TABLE>
22 First Keystone Corporation
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders of First Keystone Corporation:
We have audited the accompanying consolidated balance sheets of First
Keystone Corporation and Subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31,
1995. These consolidated financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion
on these consolidated 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 consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated 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 consolidated financial
position of First Keystone Corporation and Subsidiaries as of December 31,
1995 and 1994, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements, the
Corporation changed its method of accounting for impaired loans and
contributions in 1995, investments in debt and equity securities in 1994
and income taxes in 1993.
/s/ J. H. Williams & Co., LLP
J. H. Williams & Co., LLP
Kingston, Pennsylvania
January 9, 1996
1995 Annual Report 23
<PAGE>
Management's Discussion and Analysis
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
To Our Stockholders:
The management of First Keystone Corporation is responsible for the
fairness and integrity of the consolidated financial statements as
presented in this annual report. Therefore, all financial statements were
prepared to conform with generally accepted accounting principles and in
accordance with guidelines established by the accounting profession,
Securities and Exchange Commission, and regulatory authorities of bank
holding companies.
Management has designed internal accounting systems and controls to
provide reasonable assurance that financial data is presented fairly. The
monitoring of these systems is accomplished by an internal auditing program
directed by our outside independent auditors, J. H. Williams & Co., LLP.
Additionally, the Audit Committee of the Board of Directors, which is
composed of outside directors and senior management meets periodically with
the auditors.
In addition, the Corporation and its subsidiaries are examined
periodically by various regulatory authorities. Management reviews all
reports from internal and external sources and takes appropriate action.
/s/ J. Gerald Bazewicz
J. Gerald Bazewicz, President & CEO
/s/ David R. Saracino
David R. Saracino, Treasurer & Assistant Secretary
Berwick, Pennsylvania
March 5, 1996
24 First Keystone Corporation
<PAGE>
Management's Discussion and Analysis
Management's Discussion and Analysis of the
Results of Operations and Financial Condition
PURPOSE
The purpose of the Management Discussion and Analysis of First Keystone
Corporation, a bank holding company (the Corporation), and its wholly owned
subsidiary, The First National Bank of Berwick (the Bank), is to assist the
reader in reviewing the financial information presented and should be read
in conjunction with the consolidated financial statements and other
financial data contained herein.
RESULTS OF OPERATIONS
First Keystone Corporation realized record earnings in 1995 with
reported net income of $3,486,193. The net income for 1995 marked the 13th
consecutive year that earnings and earnings per share have increased.
Earnings per share for 1995 were $4.31 as compared to $3.85 and $3.84 in
1994 and 1993, respectively. Included in 1993 results was a $317,433, or
$.39 per share non-recurring Federal income tax benefit due to the adoption
of Statement of Financial Accounting Standard No. 109, "Accounting for
Income Taxes". The Corporation's return on average assets improved to
1.58% in 1995 from 1.54% in 1994 and 1.42% before the extraordinary item in
1993. Likewise, the Corporation's return on average equity remained strong
at 15.24% in 1995 from 15.34% in 1994 and 15.76% (before the extraordinary
item) in 1993. After recording the extraordinary item in 1993, return on
average assets was 1.58% and return on average equity was 17.56%.
Average earning assets increased $18,141,634, or 9.3% during 1995,
while average interest bearing liabilities grew $13,960,264, or 8.4%. The
average yield on earning assets and interest paying liabilities increased
in 1995 after declining in each of the preceding two years. The
Corporation's net interest income on a fully taxable equivalent basis
increased $1,204,017, or 14.8% in 1995.
NET INTEREST INCOME
The major source of operating income for the Corporation is net
interest income, defined as interest income less interest expense. The
amount of interest income is dependent upon both the volume of earning
assets and the level of interest rates. In addition, the volume of non-
performing loans affects interest income. The amount of interest expense
varies with the amount of funds needed to support earnings assets, interest
rates paid on deposits and borrowed funds, and finally, the level of
interest free deposits. Table 1 indicates the amount of net interest
income in each of the past-three years and the increase or decrease in each
of the components. With a higher interest rate environment prevalent in
1995 over 1994, interest income and interest expense both increased after
declining in 1994. With interest income increasing more than interest
expense, net interest income on a fully tax equivalent basis increased
$1,204,000, or 14.8% in 1995 after increasing $109,000, or 1.4% in 1994.
<TABLE>
Table 1 - Net Interest Income
<CAPTION>
(Amounts in thousands) 1995/1994
Increase/(Decrease)
1995 Amount % 1994
<S> <C> <C> <C> <C>
Interest Income $16,637 $2,906 21.2 $13,731
Interest Expense 8,271 1,918 30.2 6,353
Net Interest Income 8,366 988 13.4 7,378
Tax Equivalent Adjustment 990 216 27.9 774
Net Interest Income (fully
tax equivalent) $ 9,356 $1,204 14.8 $ 8,152
<CAPTION>
(Amounts in thousands) 1994/1993
Increase/(Decrease)
1994 Amount % 1993
<S> <C> <C> <C> <C>
Interest Income $13,731 $ (3) (0.0) $13,734
Interest Expense 6,353 (166) (2.5) 6,519
Net Interest Income 7,378 163 2.3 7,215
Tax Equivalent Adjustment 774 (54) (6.5) 828
Net Interest Income (fully
tax equivalent) $ 8,152 $109 1.4 $ 8,043
</TABLE>
Table 2 on the following page illustrates why the increase in net
interest income during 1995 was substantially higher than 1994. The yield
on earning assets was 8.27% in 1995, 7.44% in 1994, and 7.71% in 1993. The
yield on earning assets increased 83 basis points in 1995 after falling 27
basis points in 1994. At the same time, the rate on interest bearing
liabilities increased to 4.60% after dropping to 3.83% in 1994 from 3.99%
in 1993. Therefore, the rate on interest bearing liabilities increased 77
basis points in 1995 after dropping 16 basis points in 1994. This had the
effect of increasing our net interest margin to 4.39% in 1995 from 4.18% in
1994 and 4.26% in 1993. The continued maintenance of an adequate net
interest margin is a primary concern being addressed by management on an
ongoing basis.
1995 Annual Report 25
<PAGE>
Management's Discussion and Analysis
<TABLE>
Table 2 Distribution of Assets, Liabilities and Stockholders' Equity
<CAPTION>
1995
Avg. Balance Revenue/ Yield/
Expense Rate
<S> <C> <C> <C>
Interest Earning Assets
Loans:
Commercial <F1> $ 20,081,671 $ 1,810,582 9.02%
Real Estate <F1> 84,960,257 7,367,400 8.67%
Installment Loans,
Net<F1><F2> 17,105,408 1,880,933 11.00%
Fees on Loans 0 (48,943) 0%
Total Loans
(Including Fees) <F3> $122,147,336 $11,009,972 9.01%
Investment Securities:
Taxable $ 62,270,253 $ 3,995,116 6.42%
Tax Exempt1 26,120,515 2,471,962 9.46%
Total Investment Securities $ 88,390,768 $ 6,467,078 7.32%
Other Short-Term Investments:
Interest Bearing Deposits
in Banks $ 2,559,912 $ 149,793 5.85%
Federal Funds Sold 0 0 0%
Total Other Short-Term
Investments 2,559,912 149,793 5.85%
Total Interest-Earning
Assets $213,098,016 $17,626,843 8.27%
Non-Interest Earning Assets:
Cash and Due From Banks $ 4,138,600
Allowance for Loan Losses (1,823,528)
Premises and Equipment 3,034,903
Other Real Estate Owned 71,370
Other Assets 2,328,407
Total Non-Interest Earning
Assets 7,749,752
Total Assets $220,847,768
Interest-Bearing Liabilities:
Savings, NOW Accounts, and
Money Markets $ 79,045,538 $ 2,502,194 3.17%
Time Deposits 87,133,168 4,948,259 5.68%
Short-Term Borrowings 1,008,574 57,590 5.71%
Long-Term Borrowings 8,478,003 583,469 6.88%
Securities Sold U/A to
Repurchase 3,994,576 179,338 4.49%
Total Interest-Bearing
Liabilities $179,659,859 $ 8,270,850 4.60%
Non-Interest Bearing
Liabilities:
Demand Deposits $ 16,910,070
Other Liabilities 1,408,712
Stockholders' Equity 22,869,127
Total Liabilities/
Stockholders' Equity $220,847,768
Net Interest Income $ 9,355,993
Margin Analysis:
Interest Income/Earning Assets 8.27%
Interest Expense/Earning
Assets 3.88%
Net Interest Income/Earning
Assets 4.39%
26 First Keystone Corporation
<PAGE>
Management's Discussion and Analysis
<CAPTION>
1994
Avg. Balance Revenue/ Yield/
Expense Rate
<S> <C> <C> <C>
Interest Earning Assets
Loans:
Commercial <F1> $ 16,285,410 $ 1,303,728 8.01%
Real Estate <F1> 81,252,856 6,585,333 8.10%
Installment Loans,
Net<F1><F2> 14,118,826 1,572,414 11.14%
Fees on Loans 0 13,533 0%
Total Loans
(Including Fees) <F3> $111,657,092 $ 9,475,008 8.49%
Investment Securities:
Taxable $ 61,558,049 $ 2,989,833 4.86%
Tax Exempt1 20,539,131 1,980,092 9.64%
Total Investment Securities $ 82,097,180 $ 4,969,925 6.05%
Other Short-Term Investments:
Interest Bearing Deposits
in Banks $ 1,202,110 $ 60,176 5.01%
Federal Funds Sold 0 0 0%
Total Other Short-Term
Investments 1,202,110 60,176 5.01%
Total Interest-Earning
Assets $194,956,382 $14,505,109 7.44%
Non-Interest Earning Assets:
Cash and Due From Banks $ 4,270,589
Allowance for Loan Losses (1,826,250)
Premises and Equipment 2,886,072
Other Real Estate Owned 89,064
Other Assets 1,671,304
Total Non-Interest Earning
Assets 7,090,779
Total Assets $202,047,161
Interest-Bearing Liabilities:
Savings, NOW Accounts, and
Money Markets $ 82,791,038 $ 2,506,883 3.03%
Time Deposits 70,016,841 3,229,622 4.61%
Short-Term Borrowings 1,941,622 77,837 4.01%
Long-Term Borrowings 6,661,644 400,907 6.02%
Securities Sold U/A to
Repurchase 4,288,450 137,884 3.22%
Total Interest-Bearing
Liabilities $165,699,595 $ 6,353,133 3.83%
Non-Interest Bearing
Liabilities:
Demand Deposits $ 15,136,451
Other Liabilities 907,310
Stockholders' Equity 20,303,805
Total Liabilities/
Stockholders' Equity $202,047,161
Net Interest Income $ 8,151,976
Margin Analysis:
Interest Income/Earning Assets 7.44%
Interest Expense/Earning
Assets 3.26%
Net Interest Income/Earning
Assets 4.18%
<CAPTION>
1993
Avg. Balance Revenue/ Yield/
Expense Rate
<S> <C> <C> <C>
Interest Earning Assets
Loans:
Commercial <F1> $ 15,077,530 $ 984,470 6.53%
Real Estate <F1> 76,055,443 6,318,523 8.31%
Installment Loans,
Net <F1><F2> 14,340,159 1,697,218 11.84%
Fees on Loans 0 50,157 0%
Total Loans
(Including Fees) <F3> $105,473,132 $ 9,050,368 8.58%
Investment Securities:
Taxable $ 59,617,782 $ 3,270,390 5.49%
Tax Exempt1 20,732,564 2,150,608 10.37%
Total Investment Securities $ 80,350,346 $ 5,420,998 6.75%
Other Short-Term Investments:
Interest Bearing Deposits
in Banks $ 2,384,787 $ 74,030 3.10%
Federal Funds Sold 561,740 16,358 2.91%
Total Other Short-Term
Investments 2,946,527 90,388 3.07%
Total Interest-Earning
Assets $188,770,005 $14,561,754 7.71%
Non-Interest Earning Assets:
Cash and Due From Banks $ 4,022,936
Allowance for Loan Losses (1,525,186)
Premises and Equipment 2,617,477
Other Real Estate Owned 64,672
Other Assets 1,899,787
Total Non-Interest Earning
Assets 7,079,686
Total Assets $195,849,691
Interest-Bearing Liabilities:
Savings, NOW Accounts, and
Money Markets $ 82,746,295 $ 2,679,583 3.24%
Time Deposits 72,298,169 3,443,631 4.76%
Short-Term Borrowings 942,167 26,971 2.86%
Long-Term Borrowings 3,528,767 238,714 6.76%
Securities Sold U/A to
Repurchase 4,029,255 129,672 3.22%
Total Interest-Bearing
Liabilities $163,544,653 $ 6,518,571 3.99%
Non-Interest Bearing
Liabilities:
Demand Deposits $ 13,697,043
Other Liabilities 942,693
Stockholders' Equity 17,665,302
Total Liabilities/
Stockholders' Equity $195,849,691
Net Interest Income $ 8,043,183
Margin Analysis:
Interest Income/Earning Assets 7.71%
Interest Expense/Earning
Assets 3.45%
Net Interest Income/Earning
Assets 4.26%
______________________
<FN>
<F1>
Tax-exempt income has been adjusted to a tax-equivalent basis using an
incremental rate of 34%.
<F2>
Installment loans are stated net of unearned interest.
<F3>
Average loan balances include non-accrual loans. Interest income on non-
accrual loans is not included.
</FN>
</TABLE>
1995 Annual Report 27
<PAGE>
Management's Discussion and Analysis
Table 3 analyzes the changes attributable to the volume and rate
components of net interest income on a fully tax equivalent basis. In
1995, the increase in net interest income of $1,204,000 resulted from
change in volume of $790,000and an increase of $414,000 due to changes in
rate. In 1994, there was an increase in net interest income of $109,000
due to changes in volume of $422,000 and a decrease of $313,000 due to
changes in rate.
<TABLE>
Table 3 - Changes in Income and Expense, 1995 and 1994
<CAPTION>
(Amounts in thousands) 1995 COMPARED TO 1994
VOLUME RATE NET
<S> <C> <C> <C>
Interest Income:
Loans, Net $ 890 $ 645 $1,535
Taxable Investment Securities 34 971 1,005
Tax-Exempt Investment Securities 538 (46) 492
Other Short-Term Investments 68 22 90
Total Interest Income $1,530 $1,592 $3,122
Interest Expense:
Savings, Now, and Money Markets $ (113) $ 108 $ (5)
Time Deposits 790 929 1,719
Short-Term Borrowings (37) 17 (20)
Long-Term Borrowings 109 73 182
Securities Sold U/A to Repurchase (9) 51 42
Total Interest Expense $ 740 $1,178 $1,918
Net Interest Income $ 790 $ 414 $1,204
<CAPTION>
(Amounts in thousands) 1994 COMPARED TO 1993
VOLUME RATE NET
<S> <C> <C> <C>
Interest Income:
Loans, Net $ 531 $ (106) $ 425
Taxable Investment Securities 106 (387) (281)
Tax-Exempt Investment Securities (20) (150) (170)
Other Short-Term Investments (54) 23 (31)
Total Interest Income $ 563 $ (620) $ (57)
Interest Expense:
Savings, Now, and Money Markets $ 1 $ (174) $ (173)
Time Deposits (109) (105) (214)
Short-Term Borrowings 29 22 51
Long-Term Borrowings 212 (50) 162
Securities Sold U/A to Repurchase 8 0 8
Total Interest Expense $ 141 $ (307) $ (166)
Net Interest Income $ 422 $ (313) $ 109
________________________
The change in interest due to both volume and yield/rate has been allocated to
change due to volume and change due to yield/rate in proportion to the absolute
value of the change in each.
Balance on non-accrual loans are included for computational purposes. Interest
income on non-accrual loans is not included.
Interest income exempt from federal tax was $1,922,073 in 1995; $1,502,060 in
1994; and $1,606,895 in 1993. Tax-exempt income has been adjusted to a tax-
equivalent basis using an incremental rate of 34%.
</TABLE>
NON INTEREST INCOME
Total non-interest income decreased $22,000, or 2.2% in 1995 as
compared to an increase of $94,000, or 10.5% in 1994 as illustrated in
Table 5. The overall increase in 1994 has been effected greatly by gains
in securities which amounted to $180,000 in 1994 as compared to $5,000 in
1995.
Excluding investment securities gains, non-interest income in 1995
increased $153,000, or 18.8% compared to 1994 when non-interest income
decreased $16,000, or 1.9%. Income from fiduciary activities, which
consists of fees generated by our Trust Department, increased in 1995 to
approximately the same level as 1993 following a decline in 1994.
Increased fee income from a larger overall number of accounts in 1995 was
the primary reason for the increase in fees from fiduciary activities of
$55,000, or 18.6%. Assets under management by our Trust Department
continue to increase as illustrated in Table 4.
<TABLE>
Table 4 - Assets Under Management by Trust Department
<CAPTION>
(Amounts in thousands) 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Individual Trusts $83,886 $72,027 $70,300 $71,113 $67,775
Corporate Trusts 7,676 3,569 3,887 4,066 4,325
Total Trust Department $91,562 $75,596 $74,187 $75,179 $72,100
</TABLE>
28 First Keystone Corporation
<PAGE>
Management's Discussion and Analysis
Service charges and fees increased $100,000, or 21.1% in 1995 compared
to an increase of $34,000, or 7.8% in 1994. The increase in 1995 service
charges and fees was due primarily to an increasing customer base and some
pricing changes. Other operating income decreased $2,000, or 4.5% in 1995
compared with an increase of $5,000, or 12.6% in 1994. The pricing
changes, which were effective the first quarter of 1995, should help
continue to increase service charges and other operating income at least
marginally in 1996. Finally, we keep abreast of regulations which may
enable our bank or holding company to provide other products or services
which may increase our non-interest income.
<TABLE>
Table 5 - Non-Interest Income
<CAPTION>
(Amounts in thousands) 1995/1994
Increase/(Decrease)
1995 Amount % 1994
<S> <C> <C> <C> <C>
Fiduciary Activities $350 $ 55 18.6 $295
Service Charges and Fees 573 100 21.1 473
Other Operating Income 42 (2) (4.5) 44
Subtotal $965 $ 153 18.8 $812
Investment Securities Gains 5 (175) (97.2) 180
Total $970 $ (22) (2.2) $992
<CAPTION>
(Amounts in thousands) 1994/1993
Increase/(Decrease)
1994 Amount % 1993
<S> <C> <C> <C> <C>
Fiduciary Activities $295 $ (55) (15.7) $350
Service Charges and Fees 473 34 7.8 439
Other Operating Income 44 5 12.6 39
Subtotal $812 $ (16) (1.9) $828
Investment Securities Gains 180 110 157.9 70
Total $992 $ 94 10.5 $898
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year-ended December 31, 1995, was
$372,448 compared to $31,233 and $518,242 for the years ended December 31,
1994, and 1993, respectively. The provision for possible loan losses was
increased in 1995 to cushion us against possible increased charge-offs.
Net charge-offs totaled $158,000 in 1995 as compared to $73,000 for 1994
and $40,000 in 1993. Despite increased net charge-offs, our ratios in the
loan loss area indicate stable asset quality. Non-performing assets,
consisting of non-performing loans and other real estate owned, were
$557,000, $855,000, and $1,436,000 at December 31, 1995, 1994, and 1993,
respectively, representing .44%, .73%, and 1.35%, respectively, of
outstanding loans and other real estate owned.
The allowance for loan losses as a percentage of loans, net of unearned
interest, was 1.57% at December 31, 1995, 1.52% at December 31, 1994, and
1.70% at December 31, 1993. The allowance for loan losses as a percentage
of non-performing assets remains strong at 361.8% and 210.7% at year-end
1995 and 1994, respectively.
NON-INTEREST EXPENSES
Total non-interest expense increased by $248,000, or 5.8% in 1995
compared to an increase of $195,000, or 4.7% in 1994 as illustrated in
Table 6. Expenses associated with employees (salaries and employee
benefits) continue to be the largest category of non-interest expense.
Salaries and employee benefits amounted to 49.7% of total non-interest
expense in 1995 (49.3% in 1994 and 48.5% in 1993). Salaries and employee
benefits increased $141,000, or 6.6% in 1995 and $127,000, or 6.4% in
1994. The increases in
1995 and 1994 were due to an increased number of employees plus normal
salary adjustments and increased benefit costs. Full-time equivalent
employees were 89 at December 31, 1995, compared to 87 in 1994 and 84 at
end year 1993. Based upon our total deposits and total assets, our number
of employees compares favorably against peer financial institutions.
Net occupancy expense increased $18,000, or 6.6% in 1995 as compared to
an increase of $20,000, or 7.9% in 1994. The increases in 1995 and 1994
relate primarily to increases in building maintenance and repair, higher
real estate taxes and rent expense. Furniture and equipment expense
increased $55,000, or 13.7% in 1995 compared to an increase of $30,000, or
8.1% in 1994 from 1993. The increase in 1995 relates directly to higher
depreciation associated with computer processing equipment and related
equipment put into service in the third quarter of 1994.
With the substantial reduction in FDIC insurance premiums in the past
year, the actual deposit insurance expense decreased $177,000, or 46.9% in
1995 after an increase of $3,000, or 0.8% in 1994. The FDIC Board reduced
Bank Insurance Fund premiums in 1995 after the fund became adequately
capitalized.
Other operating expenses increased $211,000, or 18.6% in 1995 after
just a $15,000 increase, or 1.3% in 1994. The increase in 1995 is from
increases in professional fees, postage, printing supplies, insurance,
marketing, and advertising.
Our overall non-interest expense at slightly over 2% of average assets
places us among the leaders of our peer financial institutions in
controlling non-interest expense.
1995 Annual Report 29
<PAGE>
Management's Discussion and Analysis
<TABLE>
Table 6 - Non-Interest Expense
<CAPTION>
(Amounts in thousands) 1995/1994
Increase/(Decrease)
1995 Amount % 1994
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $2,263 $141 6.6 $2,122
Net Occupancy Expense 292 18 6.6 274
Furniture and Equipment Expense 456 55 13.7 401
FDIC Insurance 200 (177) (46.9) 377
Other Operating Expenses 1,345 211 18.6 1,134
Total $4,556 $248 5.8 $4,308
<CAPTION>
(Amounts in thousands) 1994/1993
Increase/(Decrease)
1994 Amount % 1993
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $2,122 $127 6.4 $1,995
Net Occupancy Expense 274 20 7.9 254
Furniture and Equipment Expense 401 30 8.1 371
FDIC Insurance 377 3 0.8 374
Other Operating Expenses 1,134 15 1.3 1,119
Total $4,308 $195 4.7 $4,113
</TABLE>
NCOME TAXES
Effective tax planning has helped produce favorable net income in each
of the past three years. In 1995, net income before taxes increased
$375,295. In 1994, income before income taxes and cumulative effect of a
change in accounting principle increased $549,162 over 1993, while our
income tax liability increased $3,695 and $218,313 in 1995 and 1994,
respectively. The effective total income tax rate was 20.8% in 1995, 22.4%
in 1994, and 20.0% in 1993. The increase in our tax liability rate in 1994
was due primarily to the limited availability of both tax-free loans and
tax-free investments at attractive interest rates.
Effective January 1, 1993, First Keystone Corporation adopted the
provisions of SFAS 109 (See Note 1 of the Notes to Consolidated Financial
Statements for Years Ended December 31, 1994, 1993, and 1992). In
connection with this adoption, the Bank changed its method of accounting
for income taxes from the deferred method to the liability method.
Finally, with the Tax Reform Act of 1986, as tax-free loans continue to
mature and future opportunities for tax-free loans and investments become
less attractive, an increasing effective tax rate is anticipated.
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased to $226,033,263, an increase of 9.3% over year-
end 1994. Total deposits increased to $187,320,087, or 8.7%. Assets at
December 31, 1994, were up 2.8% to $206,864,006, while total deposits were
up 4.0% to $172,279,775 compared to 1993. Annual growth rate in assets
increased in 1995 after slowing in 1994 and 1993. The increase in assets
in 1995 came primarily from our increased growth in deposits. The low
interest rate environment and competition from not only other commercial
banks, thrifts and credit unions, but also mutual funds and brokerage
houses, limited deposit growth in 1994 and 1993. This trend eased somewhat
in 1995 with higher interest rates spurring deposit growth, especially in
certificates of deposit.
The Corporation used borrowed funds to support asset growth not
provided by deposit growth. Deposit growth in 1995 was $15,040,312 as
compared to 1994 with $6,549,062 in deposit growth and $2,883,335 in 1993.
With conventional deposit growth increasing in 1995 and 1994 over 1993, the
Corporation reduced its short-term borrowings and long-term borrowings to
$11,358,601 in 1995 as compared to $12,984,614 in 1994 and $16,044,485 in
1993.
The Corporation continues to maintain and manage its asset growth. Our
strong equity capital position has put us in a position where we can
leverage our asset growth. Depending upon interest rates in 1996, the
Corporation may borrow additional funds to leverage its balance sheet if
net income can be incrementally increased without increasing interest rate
risk. The capital ratios, as illustrated in Table 12 - Capital Ratios for
the Corporation and the Bank, continue to exceed all minimum capital ratio
requirements.
EARNING ASSETS
Earning assets are defined as those assets that produce interest
income. By maintaining a healthy asset utilization rate, i.e., the volume
of earning assets as a percentage of total assets, the Corporation
maximizes income.
The earning asset ratio equaled 96.5% as of December 31, 1995, compared to
96.0% at December 31, 1994, as of December 31, 1993, earnings asset ratio
was 96.6%. This indicates that the management of earning assets is a
priority and non-earning assets, primarily cash and due from banks, fixed
assets and other assets, are maintained at minimal levels.
The primary earning assets are loans and investment securities. Loans,
as illustrated in Table 7 - Loans Outstanding, have steadily increased.
Total loans, net of unearned income, increased $9,773,000, or 8.3% in 1995
as compared to $9,840,000, or 9.1% in 1994 and $5,114,000, or 5.0% in 1993.
The loan portfolio is well diversified, and increases in the portfolio have
primarily been from real estate loans and commercial loans. In addition,
consumer loans increased in both 1995 and 1994 after declining the
previous two years.
30 First Keystone Corporation
<PAGE>
Management's Discussion and Analysis
<TABLE>
Table 7 - Loans Outstanding, Net of Unearned Income
<CAPTION>
(Amounts in thousands) December 31,
1995 1994 1993
<S> <C> <C> <C>
Commercial, financial and
agricultural:
Commercial secured by real estate $ 28,744 $ 30,127 $ 30,097
Commercial - other 19,437 16,285 14,005
Tax exempt 3,602 3,754 2,717
Real estate (primarily residential
mortgage loans) 58,438 52,389 47,867
Consumer loans 21,807 19,370 17,156
Total Gross Loans $132,028 $121,925 $111,842
Less: Unearned income and
unamortized loan fees net
of costs 4,070 3,741 3,498
Total Loans, net of unearned income $127,958 $118,184 $108,344
<CAPTION>
(Amounts in thousands) December 31,
1992 1991
<S> <C> <C>
Commercial, financial and
agricultural:
Commercial secured by real estate $ 26,296 $ 21,292
Commercial - other 14,340 13,627
Tax exempt 3,063 2,849
Real estate (primarily residential
mortgage loans) 44,293 39,503
Consumer loans 19,247 21,577
Total Gross Loans $107,239 $ 98,848
Less: Unearned income and
unamortized loan fees net
of costs 4,009 4,393
Total Loans, net of unearned income $103,230 $ 94,455
</TABLE>
The investment portfolio has been allocated between securities
available for sale and securities held to maturity. No investment
securities were established in a trading account. Total investment
securities as illustrated in Table 8, increased $8.2 million in 1995 after
decreasing $6.1 million in 1994. Deposit growth not used to fund loans in
1995 provided a source of funds for an increase in investment
securities available for sale. The investment portfolio includes short-
term investments, U.S. Treasury Securities, U.S. Government Agencies,
corporate obligations, mortgage backed securities, state and municipal
securities, and other debt securities. In addition, the investment
portfolio includes equity securities consisting of common stock investments
in other bank holding companies and commercial
banks.
<TABLE>
Table 8 - Carrying Value of Investment Securities
<CAPTION>
(Amounts in thousands) December 31,
1995
Available Held to
for Sale Maturity
<S> <C> <C>
U.S. Treasury $ 5,176 $ 0
U. S. Government Corporations
and Agencies 22,358 20,130
State and Municipal 32,105 3,291
Other Securities 2,900 0
Equity Securities 2,165 0
Total Investment Securities $64,704 $23,421
<CAPTION>
(Amounts in thousands) December 31,
1994 1993
Available Held to
for Sale Maturity
<S> <C> <C> <C>
U.S. Treasury $ 3,882 $ 1,701 $ 1,704
U. S. Government Corporations
and Agencies 21,190 23,894 54,613
State and Municipal 14,971 2,198 22,708
Other Securities 4,273 0 6,534
Equity Securities 1,837 0 495
Total Investment Securities $52,153 $27,793 $86,054
</TABLE>
ALLOWANCE FOR LOAN LOSSES
Management performs a quarterly analysis to determine the adequacy of
the allowance for loan losses. The methodology in determining adequacy
incorporates specific and general allocations together with a risk/loss
analysis on various segments of the portfolio according to an internal loan
review process. Management maintains its loan review and loan
classification standards consistent with those of its regulatory
supervisory authority. Management feels, considering the conservative
portfolio composition, which
is largely composed of small retail loans (mortgages and installments) with
minimal classified assets, low delinquencies, and favorable loss history,
that the allowance for loan losses is adequate to cover foreseeable future
losses. Table 9 contains an analysis of our Allowance for Loan Losses
indicating charge-offs and recoveries by the year. In 1995, net charge-
offs as a percentage of average loans were .13% compared to .07% in 1994
and .04% in 1993. Recoveries on charge-offs of $27,000 in 1995 after
$108,000 in 1994 and $109,000 in 1993 was the primary reason for the
increase in net charge-offs as a percentage of loans in 1995. With our
manageable level of net charge-offs and the additions to the reserve from
our provision out of operations, the allowance for loan losses as a
percentage of average loans amounted to 1.65% in 1995, 1.61% in 1994, and
1.75% in 1993.
1995 Annual Report 31
<PAGE>
Management's Discussion and Analysis
<TABLE>
Table 9 - Analysis of Allowance for Loan Losses
<CAPTION>
(Amounts in thousands) Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of period $1,802 $1,844 $1,366
Charge-offs:
Commercial, financial, and
agricultural 18 80 54
Real estate - mortgage 118 29 9
Installment loans to individuals 50 72 86
$ 186 $ 181 $ 149
Recoveries:
Commercial, financial, and
agricultural $ 6 $ 81 $ 0
Real estate - mortgage 2 6 3
Installment loans to individuals 19 21 106
$ 27 $ 108 $ 109
Net charge-offs $ 159 $ 73 $ 40
Additions charged to operations 372 31 518
Balance at end of period $2,015 $1,802 $1,844
Ratio of net charge-offs during the
period to average loans
outstanding during the period .13% .07% .04%
Allowance for loan losses to average
loans outstanding during the period 1.65% 1.61% 1.75%
<CAPTION>
(Amounts in thousands) Years Ended December 31,
1992 1991
<S> <C> <C>
Balance at beginning of period $ 966 $ 690
Charge-offs:
Commercial, financial, and
agricultural 142 17
Real estate - mortgage 84 0
Installment loans to individuals 110 91
$ 336 $ 108
Recoveries:
Commercial, financial, and
agricultural $ 3 $ 15
Real estate - mortgage 0 0
Installment loans to individuals 22 9
$ 25 $ 24
Net charge-offs $ 311 $ 84
Additions charged to operations 711 360
Balance at end of period $1,366 $ 966
Ratio of net charge-offs during the
period to average loans outstanding
during the period .31% .09%
Allowance for loan losses to average
loans outstanding during the period 1.38% 1.06%
</TABLE>
The Bank's actual provision for loan losses and its allowance for loan
losses are based upon an active loan review procedure. A loan review is
conducted quarterly to assess loan quality, analyze delinquencies, identify
and evaluate potential problem loans (classified loans), and review general
economic conditions. The quarterly review includes a determination of the
adequacy of the Bank's loan loss reserves.
The allowance for loan losses was allocated to specific categories as
illustrated in Table 10.
<TABLE>
Table 10 - Allocation of Allowance for Loan Losses
<CAPTION>
(Amounts in thousands) December 31,
1995 % <F1> 1994 % <F1> 1993 % <F1>
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial,
and agricultural $ 344 17.4 $ 253 15.2 $ 262 13.4
Real estate - mortgage 663 66.1 985 68.9 1,077 71.3
Installments to
individuals 443 16.5 153 15.9 174 15.3
Unallocated 565 N/A 411 N/A 331 N/A
$2,015 100.0 $1,802 100.0 $1,844 100.0
<CAPTION>
(Amounts in thousands) December 31,
1992 % <F1> 1991 % <F1>
<S> <C> <C> <C> <C>
Commercial, financial,
and agricultural $ 386 14.5 $ 214 14.4
Real estate - mortgage 418 67.6 327 67.4
Installments to
individuals 135 17.9 153 18.2
Unallocated 427 N/A 272 N/A
$1,366 100.0 $ 966 100.0
______________________
<FN>
<F1>
Percentage of loans in each category to total loans.
</FN>
</TABLE>
NON-PERFORMING ASSETS
Table 11 reflects non-performing assets for the past five years. Non-
accrual loans are generally delinquent on which principal or interest is
past-due, approximately 90 days or more, depending upon the type of credit
and the collateral. When a loan is placed on non-accrual status, any
unpaid interest is charged against income. Restructured loans are loans
where the borrower has been granted a concession in the interest rate or
payment amount because of financial problems. Other real estate owned
represents property acquired through foreclosure, or considered to be an
in-substance
foreclosure.
The total of non-performing assets has declined after increasing rather
substantially in 1993. The decline in non-performing assets in 1994
relates primarily to one commercial loan which was brought current and put
back on accrual. The
32 First Keystone Corporation
<PAGE>
Management's Discussion and Analysis
further reduction in non-performing assets in 1995 relates primarily to the
sale of other real estate owned. In 1995, this other real estate owned was
sold and the deficiency of $37,000 was charged to expense. The current
level of non-performing assets is considered manageable. In addition,
loans which are past-due 90 days or more as to interest or principal and
still accruing has remained relatively stable.
With a full-time loan review officer, loan quality is monitored
closely, and we actively attempt to work with borrowers to resolve credit
problems. Excluding the assets disclosed in Table 11, management is not
aware of any information about borrowers' possible credit problems, which
cause serious doubt as to their ability to comply with present loan
repayment terms.
Should the economic climate no longer continue to improve or begin to
deteriorate, borrowers may experience difficulty, and the level of non-
performing loans and assets, charge-offs and delinquencies could rise and
possibly require additional increases in our allowance for loan losses. In
addition, regulatory authorities, as an integral part of their
examinations, periodically review the allowance for possible loan and lease
losses. They may require additions to allowances based upon their
judgements about information available to them at the time of examination.
Interest income received on non-performing loans in 1995 and 1994 was
$2,700 and $3,555, respectively. Interest income, which would have been
recorded on these loans under the original terms was $53,224 and $61,108,
respectively. At December 31, 1995, the Corporation had no outstanding
commitments to advance additional funds with respect to these non-
performing loans.
A concentration of credit exists when the total amount of loans to
borrowers, who are engaged in similar activities that are similarly
impacted by economic or other conditions, exceed 10% of total loans. As of
December 31, 1995, 1994, and 1993, management is of the opinion that there
were no loan concentrations exceeding 10% of total loans.
<TABLE>
Table 11 - Non-Performing Assets
<CAPTION>
(Amounts in thousands) December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Non-accrual and restructured loans $557 $620 $1,431 $346 $259
Other real estate held 0 235 5 107 378
Total non-performing assets $557 $855 $1,436 $453 $637
As a percentage of period-end
loans and other real estate held .44% .73% 1.35% .44% .68%
Loans past-due 90 or more days and
still accruing 68 49 27 92 212
</TABLE>
DEPOSITS AND OTHER BORROWED FUNDS
Deposit growth amounted to $15,040,312, or an 8.7% increase when
comparing December 31, 1995, to December 31, 1994. This increase compares
to deposit increases of 4.0% in 1994 and 1.7% in 1993.
First Keystone's subsidiary bank, like many other commercial banks,
experienced increased deposit growth in 1995 after slow deposit growth in
both 1994 and 1993. Low interest rates and intense competition for
depositors' funds can be attributed to the slow deposit growth. Increasing
interest rates resulted in an increased emphasis and demand for
certificates of deposits in the fourth quarter of 1994 into much of 1995.
During 1995, the Corporation experienced an increase in both non-
interest bearing demand deposits and interest bearing demand deposits.
Certificates of deposit under $100,000 increased significantly in 1995.
Also, time deposits of $100,000 or more increased slightly in 1995.
Short-term borrowings and long-term borrowings from the Federal Home Loan
Bank were reduced in 1995 by $1,626,013.
CAPITAL STRENGTH
Normal increases in capital are generated by net income, less cash
dividends paid out. Also, the net unrealized gain or loss on investment
securities available for sale increased or decreased shareholders' equity
or capital beginning in 1994. The net increase in capital was $4,611,390
in 1995, $2,210,501 during 1994 and $2,367,380 in 1993.
Return on equity (ROE) is computed by dividing net income by average
stockholders' equity. This ratio was 15.24% for 1995, 15.34% for 1994, and
17.56% for 1993. Refer to Performance Ratios on Page 2 - Summary of
Selected Financial Data for a more expanded listing of the ROE.
Adequate capitalization of banks and bank holding companies is required
and monitored by regulatory authorities. Table 12 reflects risk-based
capital ratios and the leverage ratio for our Corporation and Bank. The
Corporation's leverage ratio was 10.22% at December 31, 1995, and 10.14%
as of December 31, 1994.
1995 Annual Report 33
<PAGE>
Management's Discussion and Analysis
Effective December 31, 1992, new federal regulatory guidelines
measuring risk-based capital were effective. The risk-based capital
calculation assigns various levels of risk to different categories of bank
assets, requiring higher levels of capital for assets with more risk. Also
measured in the risk-based capital ratio is credit risk exposure associated
with off-balance sheet contracts and commitments. The following table
indicates required and actual ratios as of December 31, 1995, for the
Corporation and the Bank.
<TABLE>
Table 12 - Capital Ratios
<CAPTION>
December 31, 1995
Corporation Bank
<S> <C> <C>
Risk-Based Capital:
Tier I risk-based capital ratio 17.40% 16.64%
Total risk-based capital ratio (Tier 1 and Tier 2) 18.65% 17.89%
Leverage Ratio:
Tier I capital to average assets 10.22% 9.74%
<CAPTION>
December 31, 1994
Corporation Bank
<S> <C> <C>
Risk-Based Capital:
Tier I risk-based capital ratio 16.94% 16.08%
Total risk-based capital ratio (Tier 1 and Tier 2) 18.19% 17.33%
Leverage Ratio:
Tier I capital to average assets 10.14% 9.61%
</TABLE>
ASSET LIABILITY MANAGEMENT
LIQUIDITY
The primary strategies of asset liability management focus on liquidity
and interest rate sensitivity. Liquidity is needed to provide the funding
requirements of depositors withdrawals, loan growth, and other operational
needs. Asset liquidity is provided by investment securities maturing in
one year or less, other short-term investments, federal funds sold, and
cash and due from banks. Additionally, maturing loans and repayment of
loans are another source of asset liquidity.
Liability liquidity is accomplished by maintaining a core deposit base,
acquired by attracting new deposits and retaining maturing deposits. Also,
short-term borrowings provide funds to meet liquidity.
Management feels its current liquidity position is satisfactory given
the factors that the Corporation has a very stable core deposit base which
has increased annually. Secondly, our loan payments and principal paydowns
on our mortgage backed securities provide a steady source of funds. Also,
short-term investments and maturing investments represent additional
sources of liquidity. Finally, short-term borrowings are readily
accessible at the Federal Reserve Bank discount window, Atlantic Central
Bankers Bank, or the Federal Home Loan Bank.
<TABLE>
Table 13 - Loan Maturities and Interest Sensitivity <F1>
<CAPTION>
(Amounts in thousands) December 31, 1995
One year One thru Over five
or less five years years Total
<S> <C> <C> <C> <C>
Commercial, Financial and
Agricultural
Fixed interest rate $ 2,759 $ 5,302 $ 0 $ 8,061
Variable interest rate 38,741 11,403 0 50,144
Total $41,500 $16,705 $ 0 $58,205
Real Estate Construction
Fixed interest rate $ 0 $ 0 $ 0 $ 0
Variable interest rate $ 0 $ 0 $ 0 $ 0
__________________________
<FN>
<F1>
Excludes residential mortgages and consumer loans.
</FN>
</TABLE>
34 First Keystone Corporation
<PAGE>
Management's Discussion and Analysis
INTEREST RATE SENSITIVITY
The principal objective of asset liability management is to manage the
sensitivity of the net interest margin to potential movements in interest
rates and to enhance profitability through returns from managed levels of
interest rate risk. The Corporation actively manages the interest rate
sensitivity of its assets and liabilities. Several techniques are used for
measuring interest rate sensitivity. The traditional maturity "gap"
analysis, which reflects the volume difference between interest rate
sensitive assets and liabilities during a given time period, is reviewed
regularly by management. A positive gap occurs when the amount of interest
sensitive assets exceeds interest sensitive liabilities. This position
would contribute positively to net income in a rising interest rate
environment. Conversely, if the balance sheet has more liabilities
repricing than assets, the balance sheet is liability sensitive or
negatively gaped. In this current changing environment, management
continues to monitor sensitivity so we do not become overexposed in a
rising interest rate environment.
Limitations of gap analysis as illustrated in Table 14 include: a)
assets and liabilities which contractually reprice within the same period
may not, in fact, reprice at the same time or to the same extent; b)
changes in market interest rates do not affect all assets and liabilities
to the same extent or at the same time, and c) interest rate gaps reflect
the Corporation's position on a single day (December 31, 1995 in the case
of the following schedule) while the Corporation continually adjusts its
interest sensitivity throughout the year.
Another way management reviews its interest sensitivity position is
through dynamic income simulation. A dynamic income simulation model is
the primary mechanism used in assessing the impact of changes in interest
rates on net interest income. The model reflects managements assumptions
related to asset yields and rates paid on liabilities, deposit sensitivity,
size and composition of the balance sheet. The assumptions are based on
what management believes at that time to be the most likely interest rate
environment. Management also evaluates the impact of higher and lower
interest rates. Management cannot predict the direction of interest rates
or how the mix of assets and liabilities will change. The use of this
information will help formulate strategies to minimize the unfavorable
effect on net interest income caused by interest rate changes.
In Table 14 the Corporation has elected to incorporate interest bearing
demand deposits and savings deposits as rate sensitive in the three months
or less time frame. The result is a negative gap in that time frame of
$48,783,000. As discussed previously, a negative gap will decrease net
interest income should interest rates increase. Despite the Corporation's
negative gap position, the impact of a rapid rise in interest rates as
occurred in 1994, did not have a significant effect on our net interest
income. Accordingly, even though there are some inherent limitations to
gap analysis and dynamic income simulation, the Corporation believes that
the tools used to manage its interest rate sensitivity provide an
appropriate reflection of interest rate risk exposure.
<TABLE>
Table 14 - Interest Rate Sensitivity Analysis
<CAPTION>
(Amounts in thousands) December 31, 1995
3 Months 3 - 12 1 - 5
or Less Months Years
<S> <C> <C> <C>
Rate Sensitive Assets:
Cash and cash equivalent $ 2,067 $ 0 $ 0
Loans 38,049 28,482 43,066
Investments 14,644 15,733 5,242
Total Rate Sensitive Assets $ 54,760 $ 44,215 $ 48,308
Rate Sensitive Liabilities:
Deposits:
Interest-bearing demand $ 37,617 $ 0 $ 0
Savings 42,333 0 0
Time 19,456 37,935 32,358
Short-term borrowings 4,137 222 0
Long-term borrowings 0 2,000 4,000
Total Rate Sensitive Liabilities $103,543 $ 40,157 $ 36,358
Interest Rate Sensitivity:
Current period $(48,783) $ 4,058 $ 11,950
Cumulative gap (48,783) (44,725) (32,775)
Cumulative gap to total assets (21.58%) (19.79%) (14.50%)
<CAPTION>
(Amounts in thousands) December 31, 1995
Over
5 Years Total
<S> <C> <C>
Rate Sensitive Assets:
Cash and cash equivalent $ 0 $ 2,067
Loans 18,361 127,958
Investments 52,506 88,125
Total Rate Sensitive Assets $ 70,867 $218,150
Rate Sensitive Liabilities:
Deposits:
Interest-bearing demand $ 0 $ 37,617
Savings 0 42,333
Time 0 89,749
Short-term borrowings 0 4,359
Long-term borrowings 1,000 7,000
Total Rate Sensitive Liabilities $ 1,000 $181,058
Interest Rate Sensitivity:
Current period $ 69,867 $ 37,092
Cumulative gap 37,092
Cumulative gap to total assets 16.41%
</TABLE>
1995 Annual Report 35
<PAGE>
Management's Discussion and Analysis
EFFECT OF INFLATION
Although inflation was not significant in 1995, the potential for
increased inflation must be kept in mind.
The impact of inflation on a financial institution can be difficult to
measure. Inflation affects asset growth due to inflated borrowing
requests, which in turn requires a bank to increase its equity capital to
maintain an appropriate capital base. Additionally, overall increases
in inflation tend to increase medium to long-term interest rates and
consequently reduce the market value of investment securities, residential
mortgage loans, and other fixed-rate, long-term assets. Management
believes that it can cope with the impact of inflation by managing the mix
of interest rate sensitive assets and liabilities in order to reduce the
impact of changing interest rates on net interest income. Also, inflation
has a direct impact on non-interest income and expense. Management
attempts to offset the effect of inflation by reviewing the prices of its
products and services regularly, and by controlling overhead expenses.
Management believes inflation is another risk associated with the business
of providing financial services. Continuing effective management practices
will be a key, as with other risks to future success. Planning,
monitoring, and revising our short-range and long-range plans will provide
results needed to attain our goals.
FORWARD OUTLOOK
Management and the Board of Directors of the Corporation continually
evaluate its operating procedures and practices. Additionally, bank
regulators often make observations and recommendations regarding such
procedures and practices as a result of their examinations. Those
observations and recommendations are promptly considered by management and
actions are taken as warranted. Financial indicators indicate a slowing
economic environment in 1996. We are optimistic that the improved loan
growth experienced in 1995 should continue well into 1996. Although it
is anticipated that the majority of the loan growth in 1996 will be in the
residential mortgage area as interest rates decline, any deposit increases
in excess of loan demand will be primarily directed to the investment
securities portfolio. We will continue to give careful attention to the
pricing of loans and deposits, such that our net interest margin is not
adversely affected.
Increasing non-interest income and controlling non-interest expense in
1996 and beyond will continue to be a priority.
Finally, the Corporation, as part of its strategic plan, will continue
to investigate expansion. The Corporation will explore market
possibilities for future branch locations. We will maintain a delivery
system and practices which maximize convenience and offer comprehensive
user-friendly service to the market.
MARKET PRICE/DIVIDEND HISTORY
First Keystone Corporation's common stock is traded in the local over-
the-counter market. This over-the-counter market does not include a
specific "market maker"; however, at various times, a number of brokerage
companies may provide "bid" and "asked" quotations as to the price of the
corporation's stock. The following have indicated that they are market
makers in our stock: Ryan, Beck and Company, 80 Main Street, West Orange,
NJ 07052; and Janney Montgomery Scott, Inc., 1801 Market Street,
Philadelphia, PA 19103. The table below reports the highest and lowest per
share prices known to the Corporation and the dividends paid during the
periods indicated. All amounts are restated to reflect a 10% stock
dividend paid December 31, 1993. These prices do not necessarily reflect
any dealer or retail markup, markdown or commission.
<TABLE>
Table 15 - Market Price/Dividend History
<CAPTION>
1995
Common Stock Dividends
High/Low Paid
<S> <C> <C>
First Quarter $35.00/$35.00 $.290
Second Quarter $35.00/$35.00 .290
Third Quarter $37.00/$35.00 .290
Fourth Quarter $37.00/$37.00 .310
<CAPTION>
1994
Common Stock Dividends
High/Low Paid
<S> <C> <C>
First Quarter $32.25/$32.25 $.270
Second Quarter $35.00/$27.00 .270
Third Quarter $35.00/$35.00 .270
Fourth Quarter $35.00/$35.00 .290
<CAPTION>
1994
Common Stock Dividends
High/Low Paid
<S> <C> <C>
First Quarter $29.32/$29.09 $.227
Second Quarter $29.32/$25.68 .227
Third Quarter $29.32/$29.32 .227
Fourth Quarter $32.25/$32.25 .270
</TABLE>
36 First Keystone Corporation
<PAGE>
Management's Discussion and Analysis
<TABLE>
Table 16 - Quarterly Results of Operations (Unaudited)
<CAPTION>
(Amounts in thousands, except per share)
Three Months Ended
1995 March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Interest income $3,839 $4,084 $4,297 $4,417
Interest expense 1,861 2,041 2,196 2,174
Net interest income $1,978 $2,043 $2,101 $2,243
Provision for loan
losses 12 62 43 255
Other non-interest
income 172 228 229 340
Non-interest expense 1,229 1,182 1,037 1,108
Income before income
taxes and cumulative
effect of accounting
change $909 $1,027 $1,250 $1,220
Income taxes 192 218 271 239
Net income $ 717 $ 809 $ 979 $ 981
Per share $ .89 $ 1.00 $ 1.21 $ 1.21
<CAPTION>
(Amounts in thousands, except per share)
Three Months Ended
1994 March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Interest income $3,346 $3,315 $3,442 $3,628
Interest expense 1,516 1,527 1,592 1,718
Net interest income $1,830 $1,788 $1,850 $1,910
Provision for loan
losses 2 1 3 25
Other non-interest
income 224 202 203 363
Non-interest expense 1,087 1,106 1,058 1,057
Income before income
taxes and cumulative
effect of accounting
change $ 965 $ 883 $ 992 $1,191
Income taxes 202 176 227 311
Net income $ 763 $ 707 $ 765 $ 880
Per share $ .94 $ .87 $ .95 $ 1.09
</TABLE>
1995 Annual Report 37
<PAGE>
FIRST KEYSTONE CORPORATION
DIRECTORS*
John Arndt
Owner, Arndt Insurance Agency
J. Gerald Bazewicz
President and Chief Executive Officer of the
Corporation and the Bank
Budd L. Beyer
Investor; Retired President, Sunshine Textile
Services, Inc.
Robert E. Bull
Chairman; Attorney, Bull, Bull & Knecht
John L. Coates
President, Tri-County Hardware, Inc.
Dudley P. Cooley
Financial Consultant; Former Comptroller,
Wise Foods, Borden, Inc.
Frederick E. Crispin, Jr.
Financial Consultant, F. E. Crispin and Associates
Stanley E. Oberrender
Owner, Suntex
F. Stuart Straub
Retired President of the Corporation and the Bank
Robert J. Wise
Investor
OFFICERS
Robert E. Bull
Chairman
J. Gerald Bazewicz
President and Chief Executive Officer
David R. Saracino
Treasurer and Assistant Secretary
John L. Coates
Secretary
*Also Directors of The First National Bank of Berwick
THE FIRST NATIONAL BANK OF BERWICK
OFFICERS
Robert E. Bull
Chairman of the Board
J. Gerald Bazewicz
President and Chief Executive Officer
since January 1987
with the Bank since February 1973
25 years in banking
David R. Saracino
Vice President, Cashier and
Assistant Secretary
since January 1987
with the Bank since February 1972
23 years in banking
Leslie W. Bodle
Vice President and Trust Officer
since October 1985
with the Bank since October 1985
30 years in banking
Sally A. Rishkofski
Assistant Vice President and Community
Office Manager, Scott Township Office
since January 1989
with the Bank since February 1964
35 years in banking
38 First Keystone Corporation
<PAGE>
THE FIRST NATIONAL BANK OF BERWICK
OFFICERS (continued)
Robert D. McWilliams
Assistant Vice President and Loan
Administration Manager
since March 1989
with the Bank since September 1973
22 years in banking
Barbara J. Robbins
Assistant Vice President and EDP Manager
since April 1990
with the Bank since June 1970
25 years in banking
Timothy K. Kishbach
Assistant Vice President and Senior Loan Officer
since April 1993
with the Bank since September 1989
8 years in banking
Linda K. Yerges
Assistant Vice President and Human
Resources Manager
since April 1993
with the Bank since January 1973
22 years in banking
Gabriel D. Alessi
Assistant Vice President and
Mortgage Officer
since May 1995
with the Bank since May 1995
22 years in banking
Judith A. Gizenski
Trust Officer
since August 1991
with the Bank since June 1976
19 years in banking
Marlene L. Eckrote
Assistant Trust Officer
since July 1979
with the Bank since September 1972
23 years in banking
Evelyn M. Bower
Assistant Cashier and Loan Review Officer
since June 1993
with the Bank since March 1978
19 years in banking
John J. Petruzella
Assistant Cashier and Community Office
Manager, Freas Avenue Office
since December 1988
with the Bank since August 1978
17 years in banking
Carmie A. Cleaver
Assistant Cashier and Community Office
Manager, Main Office
since January 1989
with the Bank since May 1972
23 years in banking
J. Steven Shuman
Assistant Cashier and Security Officer
since April 1990
with the Bank since December 1975
20 years in banking
Kevin L. Miller
Assistant Cashier and Assistant EDP Manager
since April 1991
with the Bank since November 1982
13 years in banking
Diane C. A. Rosler
Assistant Cashier and Accounting Manager
since April 1994
with the Bank since July 1990
5 years in banking
Douglas E. Klinger
Assistant Cashier and Commercial
Loan Officer
since April 1995
with the Bank since August 1993
2 years in banking
Richard L. Holloway
Assistant Cashier and Community Office
Manager, Nescopeck Office
since April 1994
with the Bank since September 1983
12 years in banking
Tina M. Gray
Assistant Cashier and Community Office
Manager, Salem Office
since April 1995
with the Bank since June 1984
21 years in banking
John L. Coates
Secretary
1995 Annual Report 39
<PAGE>
THE FIRST NATIONAL BANK OF BERWICK
*MAIN OFFICE *NESCOPECK OFFICE
111 West Front Street West Third Street
Berwick, Pennsylvania Nescopeck, Pennsylvania
752-3671 759-2767
*SALEM OFFICE *FREAS AVENUE OFFICE
400 Fowler Avenue 701 Freas Avenue
Berwick, Pennsylvania Berwick, Pennsylvania
759-2628 752-1244
*SCOTT TOWNSHIP OFFICE *MIFFLINVILLE OFFICE
Central Road and Route 11 Third and Race Streets
Bloomsburg, Pennsylvania Mifflinville, Pennsylvania
784-0354 752-5750
*MAC Locations
24 Hour Banking
also at:
Berwick Hospital Center
701 East 16th Street, Berwick, Pennsylvania
and
Sheetz Convenience Store
Route 11, Bloomsburg, Pennsylvania
<FIRST KEYSTONE CORPORATION LOGO>
A First Keystone Community Bank
<PICTURE OF EQUAL HOUSING HOUSE>
MEMBER FDIC Equal Housing
Lender
40 First Keystone Corporation
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE ISSUER
23
<PAGE>
LIST OF SUBSIDIARIES OF THE ISSUER
Direct Subsidiary: The First National Bank of Berwick, chartered under
the laws of the United States of America, a national
banking association.
24
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
25
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report
(Form 10-KSB) of First Keystone Corporation of our report dated January 9,
1996, included in the 1995 Annual Report to Stockholders of First Keystone
Corporation.
/s/ J. J. Williams & Co., LLP
March 22, 1996 J. H. Williams & Co., LLP
Kingston, Pennsylvania Certified Public Accountants
26
<PAGE>
FINANCIAL DATA SCHEDULE
27
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 4657
<INT-BEARING-DEPOSITS> 1963
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23421
<INVESTMENTS-CARRYING> 64704
<INVESTMENTS-MARKET> 0
<LOANS> 127952
<ALLOWANCE> (20157)
<TOTAL-ASSETS> 226033
<DEPOSITS> 187320
<SHORT-TERM> 4359
<LIABILITIES-OTHER> 1954
<LONG-TERM> 7000
<COMMON> 1617
0
0
<OTHER-SE> 23783
<TOTAL-LIABILITIES-AND-EQUITY> 226033
<INTEREST-LOAN> 10860
<INTEREST-INVEST> 5627
<INTEREST-OTHER> 150
<INTEREST-TOTAL> 16637
<INTEREST-DEPOSIT> 7450
<INTEREST-EXPENSE> 821
<INTEREST-INCOME-NET> 8366
<LOAN-LOSSES> 372
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 4556
<INCOME-PRETAX> 4406
<INCOME-PRE-EXTRAORDINARY> 4406
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3486
<EPS-PRIMARY> 4.31
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.39
<LOANS-NON> 557
<LOANS-PAST> 68
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1853
<ALLOWANCE-OPEN> 1801
<CHARGE-OFFS> 186
<RECOVERIES> 27
<ALLOWANCE-CLOSE> 2015
<ALLOWANCE-DOMESTIC> 2015
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 565
</TABLE>
EXHIBIT 99
DEFINITIVE PROXY STATEMENT, NOTICE OF ANNUAL MEETING AND
FORM OF PROXY FOR THE ANNUAL MEETING
OF SHAREHOLDERS TO BE HELD APRIL 16, 1996
28
<PAGE>
<LOGO> First Keystone Corporation
111 West Front Street
Berwick, Pennsylvania 18603
March 22, 1996
DEAR SHAREHOLDER:
It is my pleasure to invite you to attend the 1996 Annual Meeting of
Shareholders of First Keystone Corporation to be held on Tuesday, April 16,
1996 at 9:00 a.m., prevailing time. The Annual Meeting this year will be
held at the main office of The First National Bank of Berwick, 111 West
Front Street, Berwick, Pennsylvania 18603.
The Notice of the Annual Meeting and the Proxy Statement on the
following pages address the formal business of the meeting. The formal
business schedule includes: the election of three (3) Class C Directors
and the ratification of the selection of the independent auditors for 1996.
At the meeting, members of the Corporation's management will review the
Corporation's operations during the past year and be available to respond
to questions.
We strongly encourage you to vote your shares, whether or not you plan
to attend the meeting. It is very important that you sign, date and return
the accompanying Proxy as soon as possible, in the postage prepaid
envelope. If you do attend the meeting and wish to vote in person, you
must give written notice thereof to the Secretary of the Corporation so
that your Proxy will be superseded by any ballot that you submit at the
meeting.
Sincerely,
/s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President
<PAGE>
<BLANK PAGE>
<PAGE>
FIRST KEYSTONE CORPORATION
________________________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 16, 1996
________________________________
TO THE SHAREHOLDERS OF FIRST KEYSTONE CORPORATION:
Notice is hereby given that the Annual Meeting of Shareholders of
FIRST KEYSTONE CORPORATION (the "Corporation") will be held at 9:00 a.m.,
prevailing time, on Tuesday, April 16, 1996 at the main office of The First
National Bank of Berwick, 111 West Front Street, Berwick, Pennsylvania
18603, for the following purposes:
1. To elect three (3) Class C Directors to serve for a three-year
term and until their successors are elected and qualified;
2. To ratify the selection of J. H. Williams & Co. as the
independent auditors for the Corporation for the year ending December 31,
1996; and
3. To transact such other business as may properly come before the
Annual Meeting and any adjournment or postponement thereof.
In accordance with the By-laws of the Corporation and action of the
Board of Directors, only those shareholders of record at the close of
business on March 5, 1996 will be entitled to notice of and to vote at the
Annual Meeting and any adjournment or postponement thereof.
A copy of the Corporation's Annual Report for the fiscal year ended
December 31, 1995 is being mailed with this Notice. Copies of the
Corporation's Annual Report for the 1994 fiscal year may be obtained at no
cost by contacting J. Gerald Bazewicz, President, 111 West Front Street,
Berwick, Pennsylvania 18603, telephone: (717) 752-3671.
You are urged to mark, sign, date and promptly return your Proxy in
the enclosed envelope so that your shares may be voted in accordance with
your wishes and in order that the presence of a quorum may be assured. The
prompt return of your signed Proxy, regardless of the number of shares you
hold, will aid the Corporation in reducing the expense of additional proxy
solicitation. The giving of such Proxy does not affect your right to vote
in person if you attend the meeting and give written notice to the
Secretary of the Corporation.
By Order of the Board of Directors,
/s/ J. Gerald Bazewicz
J. Gerald Bazewicz, President
March 22, 1996
<PAGE>
<BLANK PAGE>
<PAGE>
PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS
OF FIRST KEYSTONE CORPORATION TO BE HELD ON APRIL 16, 1996
GENERAL
Introduction, Date, Time and Place of Annual Meeting
This Proxy Statement is being furnished in connection with the
solicitation by the Board of Directors of FIRST KEYSTONE CORPORATION (the
"Corporation"), a Pennsylvania business corporation, of proxies to be voted
at the Annual Meeting of Shareholders of the Corporation to be held on
Tuesday, April 16, 1996, at 9:00 a.m., prevailing time, at the main office
of The First National Bank of Berwick, 111 West Front Street, Berwick,
Pennsylvania 18603, and at any adjournment or postponement of the Annual
Meeting.
The principal executive office of the Corporation is located at The
First National Bank of Berwick (the "Bank"), 111 West Front Street,
Berwick, Pennsylvania 18603. The telephone number for the Corporation is
(717) 752-3671. All inquiries should be directed to J. Gerald Bazewicz,
President of the Corporation. The Bank is a wholly-owned subsidiary of the
Corporation.
Solicitation and Voting of Proxies
This Proxy Statement and the enclosed form of proxy (the "Proxy") are
first being sent to shareholders of the Corporation on or about March 22,
1996.
Shares represented by proxies on the accompanying Proxy, if properly
signed and returned, will be voted in accordance with the specifications
made thereon by the shareholders. Any Proxy not specifying to the contrary
will be voted FOR the election of the nominees for Class C Director named
below and FOR the ratification of the selection of J. H. Williams & Co. as
the independent auditors for the Corporation for the year ending December
31, 1996. Execution and return of the enclosed Proxy will not affect a
shareholder's right to attend the Annual Meeting and vote in person, after
giving written notice to the Secretary of the Corporation. The cost of
preparing, assembling, printing, mailing and soliciting proxies, and any
additional material which the Corporation may furnish shareholders in
connection with the Annual Meeting, will be borne by the Corporation. In
addition to the use of the mails, certain directors, officers and employees
of the Corporation and the Bank may solicit proxies personally, by
telephone, telegraph and telecopier. Arrangements will be made with
brokerage houses and other custodians, nominees and fiduciaries to forward
proxy solicitation material to the beneficial owners of stock held of
record by these persons, and, upon request therefor, the Corporation will
reimburse them for their reasonable forwarding expenses.
Revocability of Proxy
A shareholder who returns a Proxy may revoke the Proxy at any time
before it is voted only: (1) by giving written notice of revocation to
John L. Coates, Secretary of First Keystone Corporation, at 111 West Front
Street, Berwick, Pennsylvania 18603; (2) by executing a later-dated proxy
and giving written notice thereof to the Secretary of the Corporation; or
(3) by voting in person after giving written notice to the Secretary of the
Corporation.
Voting Securities, Record Date and Quorum
At the close of business on March 5, 1996, the Corporation had
outstanding 889,147 shares of common stock, par value $2.00 per share, the
only issued and outstanding class of stock (the "Common Stock"). The
Corporation has 500,000 shares of preferred stock, par value $10.00 per
share, authorized. As of March 5, 1996, none of the shares of preferred
stock were issued.
Proxy Statement
Page 1
<PAGE>
Only holders of Common Stock of record at the close of business on
March 5, 1996 will be entitled to notice of and to vote at the Annual
Meeting. Cumulative voting rights do not exist with respect to the
election of directors. On all matters to come before the Annual Meeting,
each share of Common Stock is entitled to one vote.
Under Pennsylvania law and the By-laws of the Corporation, the
presence of a quorum is required for each matter to be acted upon at the
Annual Meeting. Pursuant to Article 3, Section 3.1, of the By-laws of the
Corporation, the presence, in person or by proxy, of shareholders entitled
to cast at least a majority of the votes which all shareholders are
entitled to cast shall constitute a quorum for the transaction of business
at the Annual Meeting. Votes withheld and abstentions will be counted in
determining the presence of a quorum for the particular matter. Broker
non-votes will not be counted in determining the presence of a quorum for
the particular matter as to which the broker withheld authority.
Assuming the presence of a quorum, the three nominees for director
receiving the highest number of votes cast by shareholders entitled to vote
for the election of directors shall be elected. Votes withheld from a
nominee and broker non-votes will not be cast for such nominee.
Assuming the presence of a quorum, the affirmative vote of a majority
of all votes cast by shareholders on such matter is required for the
ratification of the selection of independent auditors. Abstentions and
broker non-votes are not votes cast and therefore do not count either for
or against such ratification. Abstentions and broker non-votes, however,
have the practical effect of reducing the number of affirmative votes
required to achieve a majority for each matter by reducing the total number
of shares voted from which the majority is calculated.
PRINCIPAL BENEFICIAL OWNERS OF THE CORPORATION'S STOCK
Principal Owners
The following table sets forth, as of March 5, 1996, the name and
address of each person who owns of record or who is known by the Board of
Directors to be the beneficial owner of more than five percent (5%) of the
Corporation's outstanding Common Stock, the number of shares beneficially
owned by such person and the percentage of the Corporation's outstanding
Common Stock so owned.
<TABLE>
<CAPTION>
Percent of
Outstanding
Name and Address Shares Common Stock
Beneficially Beneficially
Owned <F1> Owned
<S> <C> <C>
Robert J. Wise 63,314 <F2> 7.12%
115 West Third Street
Berwick, PA 18603
Berbank 86,019 <F3> 9.67%
First National Bank of
Berwick Trust Department
Robert E. Bull 64,732 <F4> 7.28%
323 West Fourth Street
Nescopeck, PA 18635
<FN>
<F1>
See definition of "Beneficially Owned" under Footnote 2 to the following
table relating to beneficial ownership by officers, directors and nominees.
Page 2 Proxy Statement
<PAGE>
<F2>
See Footnote 13 to the following table as to the shares of Common Stock
held beneficially by Mr. Wise.
<F3>
Nominee registration for the Common Stock held by the Trust Department of
the Bank on behalf of various trusts, estates and other accounts for which
the Bank acts as fiduciary with sole voting and dispositive power over
73,584 shares of Common Stock and as fiduciary with shared voting and
dispositive power over 12,435 shares of Common Stock. The Trust Department
intends to cast all shares under its voting power FOR the election of the
nominees for director named below and FOR the ratification of J. H.
Williams & Co. as the independent auditors of the Corporation.
<F4>
See Footnote 9 to the following table as to the shares of Common Stock held
beneficially by Mr. Bull.
</FN>
</TABLE>
Beneficial Ownership by Officers, Directors and Nominees
The following table sets forth as of March 5, 1996, the amount and
percentage of the Common Stock beneficially owned by each director, each
nominee and all officers, directors and nominees of the Corporation as a
group.
<TABLE>
<CAPTION>
Name of Individual Amount and Nature of Percent
or Identity of Group Beneficial of
Ownership <F1><F2>F3> Class
<7>
<S> <C> <C>
John Arndt <F5> 629 --
J. Gerald Bazewicz <F5> 3,101 <F8> --
Budd L. Beyer <F4> 11,495 1.29%
Robert E. Bull <F5> 64,732 <F>9 7.28%
John L. Coates <F6> 2,129 <F10> --
Dudley P. Cooley <F6> 1,210 --
Frederick E. Crispin, Jr. <F4> 7,260 <F11> --
Stanley E. Oberrender <F6> 1,452 --
F. Stuart Straub <F5> 14,023 <F12> 1.58%
Robert J. Wise <F4> 63,314 <F13> 7.12%
All Officers, Directors and 170,250 19.15%
Nominees as a Group
(10 Directors, 4 Officers -
11 Persons in Total)
<FN>
<F1>
Does not include Common Stock held in fiduciary accounts under the control
of the Bank's Trust Department.
<F2>
The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in the
General Rules and Regulations of the Securities and Exchange Commission and
may include securities owned by or for the individual's spouse and minor
children and any other relative who has the same home, as well as
securities to which the individual has or shares voting or investment power
or has the right to acquire beneficial ownership within 60 days after March
5, 1996. Beneficial ownership may be disclaimed as to certain of the
securities.
<F3>
Information furnished by the directors and the Corporation.
<F4>
A Current Class A Director whose term expires in 1997.
<F5>
A Current Class B Director whose term expires in 1998.
Proxy Statement Page 3
<PAGE>
<F6>
Nominee for Class C Director whose term expires in 1999 and a Current Class
C Director whose term expires in 1996.
<F7>
Less than one percent (1%) unless otherwise indicated.
<F8>
Includes 2,075 shares of Common Stock held individually by Mr. Bazewicz,
590 shares of Common Stock held jointly with his spouse, 116 shares of
Common Stock held individually by his spouse, 220 shares of Common Stock
held jointly with his children and 100 shares of Common Stock held as
Custodian for the benefit of his children.
<F9>
Includes 2,995 shares of Common Stock held individually by Mr. Bull, 43,380
shares held jointly with his spouse, 3,025 shares of Common Stock held by
Bull, Bull & Knecht, a law firm of which Mr. Bull is a partner, and 15,332
shares of Common Stock held individually by his spouse.
<F10>
Includes 1,645 shares of Common Stock held individually by Mr. Coates and
484 shares of Common Stock held jointly with his spouse.
<F11>
Includes 4,840 shares of Common Stock held individually by Mr. Crispin and
2,420 shares of Common Stock held individually by his spouse.
<F12>
Includes 2,420 shares of Common Stock held individually by Mr. Straub,
11,240 shares of Common Stock held jointly with his spouse, and 363 shares
of Common Stock held jointly by his spouse and son.
<F13>
Includes 57,325 shares of Common Stock held individually by Mr. Wise and
5,989 shares of Common Stock held jointly with his spouse.
</FN>
</TABLE>
ELECTION OF DIRECTORS
The By-laws of the Corporation provide that the Corporation's business
shall be managed by its Board of Directors. Section 10.2 of the By-laws
provides that the number of directors that shall constitute the whole Board
of Directors shall not be less than seven nor more than twenty-five and
that the Board of Directors shall be classified into three classes, each
class to be elected for a term of three years. Within the foregoing
limits, the Board of Directors may, from time to time, fix the number of
directors and their respective classifications. No person shall serve as a
director after he or she has attained the age of seventy (70) years, with
the exception of Messrs. Beyer, Bull, Crispin, Straub, and Wise. Pursuant
to Section 11.1 of the By-laws, vacancies on the Board of Directors,
including vacancies resulting from an increase in the number of directors,
shall be filled by a majority of the remaining members of the Board of
Directors, though less than a quorum, and each person so appointed shall be
a director until the expiration of the term of office of the class of
directors to which he or she was appointed.
In accordance with Section 10.3 of the By-laws, at the 1996 Annual
Meeting of Shareholders, three (3) Class C Directors shall be elected to
serve for a three-year term and until their successors are elected and
qualified. Therefore, the By-laws provide for a classified Board of
Directors with staggered three-year terms of office.
Unless otherwise instructed, the Proxyholders will vote the Proxies
received by them for the election of the three nominees named below. If
any nominee should become unavailable for any reason, Proxies will be voted
in favor of a substitute nominee as the Board of Directors of the
Corporation shall determine. The Board of Directors has no reason to
believe that the nominees named will be unable to serve, if elected. Any
vacancy occurring on the Board of Directors of the Corporation for any
reason may be filled by a majority of the directors then in office until
the expiration of the term of the vacancy.
Page 4 Proxy Statement
<PAGE>
There is no cumulative voting for the election of directors. Each
share of Common Stock is entitled to cast only one vote for each nominee.
For example, if a shareholder owns ten shares of Common Stock, he or she
may cast up to ten votes for each of the three directors in the class to be
elected.
INFORMATION AS TO NOMINEES, DIRECTORS AND EXECUTIVE OFFICERS
The following table contains certain information with respect to the
executive officers, nominees for Class C Director whose term expires in
1999 and the Current Class C Directors whose term expires in 1996, and the
Class A Directors and Class B Directors whose terms expire in 1997 and
1998, respectively:
<TABLE>
<CAPTION>
Principal Occupation Director
Name and Age as of for Past Five Years Since
Current March 5, and Position Corporation/
Committees 1996 Held with Corporation Bank
NOMINEES FOR
CLASS C DIRECTOR
WHOSE TERM EXPIRES IN 1999
AND
CURRENT CLASS C DIRECTORS
WHOSE TERM EXPIRES IN 1996
<S> <C> <C> <C>
John L. Coates 59 President, Tri-County 1987/1987
Committees 3,6,7 Hardware, Inc. (Retail
hardware stores);
Secretary of the
Corporation and the Bank
Dudley P. Cooley 57 Personal Financial 1987/1987
Committees 3,4,6 Consultant;
Former Controller, Wise
Foods, Borden, Inc.
(Snack food processor)
Stanley E. Oberrender 54 Owner, Suntex (Dry 1987/1987
Committees 3,4,6,7,8 cleaning);
Former President, Bercon
Packaging, Inc. (Plastic
container manufacturing)
<CAPTION>
CLASS A DIRECTORS
WHOSE TERM EXPIRES IN 1997
<S> <C> <C> <C>
Budd L. Beyer 68 Investor; Former 1983/1976
Committees 1,2,4,7 President Sunshine
Textiles Service, Inc.
(Dry Cleaning, Laundry
and Linen Rental)
Frederick E. 64 Financial Consultant, 1983/1964
Crispin, Jr. F.E. Crispin & Associates
Committees 1,3,4,5,6,7
Robert J. Wise 66 Retired, former investor 1983/1967
Committees 1,2,4,5,8
Proxy Statement Page 5
<PAGE>
<CAPTION>
CLASS B DIRECTORS
WHOSE TERM EXPIRES IN 1998
<S> <C> <C> <C>
John Arndt 34 Owner of Arndt 1995/1995
Committees 1,2,3,5,8 Insurance Agency
(General insurance
and real estate agent)
J. Gerald Bazewicz 47 President of the 1986/1986
Committees 1,2,3,4, Corporation and the Bank
5,7,8
Robert E. Bull 73 Attorney, Bull, Bull 1983/1956
Committees 1,3,4,5, & Knecht;
6,7,8, Chairman of the
Corporation and the Bank
F. Stuart Straub 74 Retired, former President 1983/1968
Committees 2,3,5,8 of Corporation and the
Bank
Committee 1 - Executive Committee This committee exercises the authority
of the Board of Directors in the management of the business of the Bank between
the dates of regular meetings of the Board of Directors. This committee met
one (1) time in 1995.
Committee 2 - Trust Committee This committee ensures that all trust
activities of the Bank are performed in a manner that is consistent with the
legal instrument governing the account, prudent trust administration practices,
and approved trust policy. This committee met twelve (12) times in 1995.
Committee 3 - Asset/Liability Committee This committee reviews
asset/liability committee reports and provides support and discretion in
managing the Bank's net interest income, liquidity, and gap positions. This
committee met six (6) times in 1995.
Committee 4 - Marketing Committee This committee is to provide guidance
to management in formulating marketing and sales plans and programs and to
assist in evaluating the performance of the Bank relative to plans. This
committee met seven (7) times in 1995.
Committee 5 - Loan Administration Committee This committee monitors loan
review and compliance activities. Also, the committee ensures that loans are
made and administered in accordance with the Loan Policy. This committee met
five (5) times in 1995.
Committee 6 - Audit Committee This committee recommends the appointment
of the independent certified public accountant to examine the affairs of the
Bank. Also, the committee reviews findings of the auditor and ensures an
independent, effective audit function. This committee met two (2) times in
1995.
Committee 7 - Human Resources Committee This committee helps ensure that
a sound human resources management system is developed and maintained. This
committee also acts as the Compensation Committee for the Bank and related
Corporation officers. This committee met one (1) time in 1995.
Committee 8 - Building Committee This committee makes recommendations to
the Board relating to the Bank's physical assets, including both current and
proposed physical assets. This committee met one (1) time in 1995.
</TABLE>
The aforementioned committees are committees of the Bank and not the
Corporation.
Page 6 Proxy Statement
<PAGE>
During 1995, the Bank's Board of Directors held twenty-six (26)
meetings and the Corporation's Board of Directors held five (5) meetings.
Each of the Directors attended at least 75% of the combined total number of
meetings of the Corporation's and the Bank's Board of Directors and the
committees of which he is a member.
The Board of Directors of the Corporation has at present no standing
committees. The Corporation does not have a nominating committee. A
shareholder who desires to propose an individual for consideration by the
Board of Directors as a nominee for director should submit a proposal in
writing to the Secretary of the Corporation in accordance with Section 10.1
of the Corporation's By-laws. Any shareholder who intends to nominate any
candidate for election to the Board of Directors must notify the Secretary
of the Corporation in writing not less than forty-five (45) days prior to
the date of any meeting of shareholders called for the election of
directors.
COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Corporation's officers and directors, and persons who own more
than ten percent (10%) of the registered class of the Corporation's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (SEC). Officers, directors and greater
than ten percent (10%) shareholders are required by SEC regulation to
furnish the Corporation with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Forms 5
were required for those persons, the Corporation believes that during the
period January 1, 1995 through December 31, 1995, its officers and
directors were in compliance with all filing requirements applicable to
them.
EXECUTIVE COMPENSATION
Shown below is information concerning the annual compensation for
services in all capacities to the Corporation and the Bank for the fiscal
years ended December 31, 1995, 1994 and 1993 of those persons who were (i)
the Chief Executive Officer during 1995, and (ii) the other four most
highly compensated executive officers of the Corporation and the Bank to
the extent such persons' total annual salary and bonus exceeded $100,000 at
December 31, 1995.
Proxy Statement Page 7
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation
(a) (b) (c) (d) (e)
Other
Annual
Name and Compen-
Principal Salary Bonus sation
Position Year ($) <F1> ($) ($)
<S> <C> <C> <C> <C>
J. Gerald Bazewicz 1995 108,100 15,862 0
President and Chief 1994 101,600 18,369 0
Executive Officer 1993 95,400 18,305 0
of the Corporation
and the Bank
<CAPTION>
Long-Term Compensation
Awards Payouts
(f) (g) (h) (i)
Restricted All Other
Name and Stock Options/ LTIP Compen-
Principal Award(s) SARs Payouts sation
Position ($) (#) ($) ($)
<F2><F3>
<S> <C> <C> <C> <C>
J. Gerald Bazewicz 0 0 0 17,938
President and Chief 0 0 0 16,240
Executive Officer 0 0 0 14,715
of the Corporation
and the Bank
<FN>
<F1>
Amounts shown consist of base salary and fees for attendance at Board of
Directors meetings of $8,100 in 1995, $8,100 in 1994, and $8,400 in 1993.
<F2>
Contributions to the Bank's 401(k) Plan on behalf of Mr. Bazewicz of
$17,274 for 1995, $15,563 for 1994 and $14,081 for 1993.
<F3>
Includes Life Insurance Premiums amounting to $664 for 1995, $677 for 1994
and $634 for 1993. Group term life insurance is provided to all regular
full-time employees after completion of their probationary period.
</FN>
</TABLE>
Retirement Plan
The Corporation does not have a retirement or pension plan. The Bank
maintains a 401(K) Plan which has a combined tax qualified savings feature
and profit sharing feature (the "Plan"). The Plan provides benefits to all
employees who have completed at least one year of service and are at least
21 years of age. Under the Plan, the Bank will match employee
contributions to a savings plan not to exceed 3% of their compensation
comprised of salary and bonus for the year. In addition, the Bank can make
a discretionary contribution to a profit sharing plan not to exceed 15% of
total compensation comprised of salary and bonus for the year in which the
employee attains the age of 21 and has completed one year of service.
Contributions made by the Bank to the Plan are allocated to participants in
the same portions that each participant's compensation bears to the
aggregate compensation of all participants. Each participant in the Plan
is one hundred (100%) vested at all times. Benefits are payable under the
Plan upon termination of employment, disability, death, or retirement.
Contributions reflected as expense under this Plan in 1995 and 1994 were:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Matching contribution to savings plan $ 46,306 $ 41,564
Contribution to profit sharing plan 195,291 169,347
Total Expense $241,597 $210,911
</TABLE>
Of the $241,597 total expenses during 1995, $40,331 was credited among
the individual accounts of the most highly compensated executive officers
of the Bank. Of the $40,331, Mr. Bazewicz was credited with $17,274 and
has been a member of the Plan for ten years.
Page 8 Proxy Statement
<PAGE>
Compensation of Directors
During 1995, the Corporation's Board of Directors received Three
Hundred Dollars ($300.00) for each Director's attendance at the Annual
Meeting. Other Corporation Board meetings met concurrently with the Bank's
Board and there was no additional compensation. The Bank's Directors
received Three Hundred Dollars ($300.00) for each Directors' meeting
attended, non-employee Directors received One Hundred Fifty Dollars
($150.00) for each committee meeting attended, and all Directors received a
bonus of Seven Hundred Dollars ($700.00). In addition, Chairman Bull
received an annual stipend of One Thousand Dollars ($1,000.00) and former
Secretary Arndt received an annual stipend of Seven Hundred Fifty Dollars
($750.00). In the aggregate, the Board of Directors received $111,650.00
for all Board of Directors' meetings and committee meetings attended in
1995, including all fees, bonuses, and stipends paid to all Directors in
1995.
CERTAIN TRANSACTIONS
Other than described below, there have been no material transactions
between the Corporation and the Bank, nor any material transactions
proposed, with any director or executive officer of the Corporation and the
Bank, or any associate of the foregoing persons. The Corporation and the
Bank have had and intend to continue to have banking and financial
transactions in the ordinary course of business with directors and officers
of the Corporation and the Bank and their associates on comparable terms
and with similar interest rates as those prevailing from time to time for
other customers of the Corporation and the Bank.
Total loans outstanding from the Corporation and the Bank at
December 31, 1995, to the Corporation's and the Bank's officers and
directors as a group and members of their immediate families and companies
in which they had an ownership interest of 10% or more was $3,090,030 or
approximately 12.2% of the total equity capital of the Bank. Loans to such
persons were made in the ordinary course of business, were made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other
persons, and did not involve more than the normal risk of collectibility or
present other unfavorable features. The largest aggregate amount of
indebtedness outstanding at any time during fiscal year 1995 to officers
and directors of the Corporation and the Bank as a group was $4,140,050.
The aggregate amount of indebtedness outstanding as of the latest
practicable date, January 26, 1996, to the above described group was
$3,044,041.
<TABLE>
<CAPTION>
Largest
Aggregate
Amount of
Nature of Indebtedness
Name Relationship in 1995
<S> <C> <C>
John L. Coates Nominee and $2,226,968
Current Director
Stanley E. Oberrender Nominee and $1,230,175
Current Director
<CAPTION>
Nature of Amount Amount
Indebtedness Outstanding Outstanding
Name /Collateral at 12/31/95 at 1/26/96
<S> <C> <C> <C>
John L. Coates Secured by $1,952,390 $1,938,298
mortgages,
inventory and
equipment
Stanley E. Oberrender Secured by $ 520,025 $ 517,519
mortgages,
inventory and
equipment
</TABLE>
Proxy Statement Page 9
<PAGE>
The loans to Messrs. Coates and Oberrender are considered material
transactions because of the percentage of the total these loans represent.
Loans to Messrs. Coates and Oberrender were made in the ordinary course of
business, were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and did not involve more that the normal
risk of collectibility or present other unfavorable features. All loans
are current and being paid as agreed.
PRINCIPAL OFFICERS OF THE CORPORATION
The following table sets forth selected information about the
principal officers of the Corporation, each of whom is elected by the Board
of Directors and each of whom holds office at the discretion of the Board
of Directors:
<TABLE>
<CAPTION>
Number Age
Bank of Shares as of
Held Employee Beneficially March 5,
Name and Position Since Since Owned 1996
<S> <C> <C> <C> <C>
Robert E. Bull 1983 <F1> 64,732 73
Chairman of the Board
J. Gerald Bazewicz 1987 1973 3,101 47
President
John L. Coates 1995 <F1> 2,129 59
Secretary
David R. Saracino 1983 1972 905 <F2> 51
Treasurer
<FN>
<F1>
Messrs. Bull and Coates are not employees of the Bank.
<F2>
Includes 663 shares of Common Stock held individually by Mr. Saracino and 242
shares of Common Stock held jointly with his spouse.
</FN>
</TABLE>
PRINCIPAL OFFICERS OF THE BANK
The following table sets forth selected information about the
principal officers of the Bank, each of whom is elected by the Board of
Directors and each of whom holds office at the discretion of the Board of
Directors:
Page 10 Proxy
Statement
<PAGE>
<TABLE>
<CAPTION>
Office and Position Held
Namewith the Bank Since
<S> <C> <C>
Robert E. Bull Chairman of the Board 1983
J. Gerald Bazewicz President and CEO 1987
John L. Coates Secretary 1995
David R. Saracino Vice President, 1983
Cashier and
Assistant Secretary
Leslie W. Bodle Vice President and 1985
Trust Officer
Sally A. Rishkofski Assistant Vice President 1982
<CAPTION>
Bank Number of Age as of
Employee Shares Bene- March 5,
Name Since ficially Owned 1996
<S> <C> <C> <C>
Robert E. Bull <F1> 64,732 73
J. Gerald Bazewicz 1973 3,101 47
John L. Coates <F1> 2,129 59
David R. Saracino 1972 905 51
Leslie W. Bodle 1985 797 48
Sally A. Rishkofski 1964 74 56
<FN>
<F1>
Messrs. Bull and Coates are not employees of the Bank.
</FN>
</TABLE>
RATIFICATION OF INDEPENDENT AUDITORS
Unless instructed to the contrary, it is intended that votes will be
cast pursuant to the proxies for the ratification of the selection of J. H.
Williams & Co. as the Corporation's independent auditors for its 1996
fiscal year. The Corporation has been advised by J. H. Williams & Co. that
none of its members has any financial interest in the Corporation.
Ratification of J. H. Williams & Co. will require the affirmative vote of a
majority of the shares of Common Stock represented in person or by proxy at
the Annual Meeting. J. H. Williams & Co. served as the Corporation's
independent auditors for the 1995 fiscal year, assisted the Corporation and
the Bank with preparation of their federal and state tax returns, and
provided assistance in connection with regulatory matters, charging the
Bank for such services at its customary hourly billing rates. These non-
audit services were approved by the Corporation's and the Bank's Board of
Directors after due consideration of the effect of the performance thereof
on the independence of the auditors and after the conclusion by the
Corporation's and the Bank's Board of Directors that there was no effect on
the independence of the auditors.
In the event that the shareholders do not ratify the selection of J.
H. Williams & Co. as the Corporation's independent auditors for the 1996
fiscal year, another accounting firm may be chosen to provide independent
audit services for the 1996 fiscal year. The Board of Directors recommends
that the shareholders vote FOR the ratification of the selection of J. H.
Williams & Co. as the independent auditors for the Corporation for the year
ending December 31, 1996.
ANNUAL REPORT
A copy of the Corporation's Annual Report for its fiscal year ended
December 31, 1995 is enclosed with this Proxy Statement. A representative
of J. H. Williams & Co., the accounting firm which examined the financial
statements in the Annual Report, will attend the meeting. The
representative will have the opportunity to make a statement, if he desires
to do so, and will be available to respond to any appropriate questions
concerning the Annual Report presented by shareholders at the Annual
Meeting.
Proxy Statement Page 11
<PAGE>
SHAREHOLDER PROPOSALS
Any shareholder who, in accordance with and subject to the provisions
of the proxy rules of the Securities and Exchange Commission, wishes to
submit a proposal for inclusion in the Corporation's Proxy Statement for
its 1997 Annual Meeting of Shareholders must deliver such proposal in
writing to the President of First Keystone Corporation at its principal
executive offices, 111 West Front Street, Berwick, President 18603, not
later than Monday, November 25, 1996.
OTHER MATTERS
The Board of Directors does not know of any matters to be presented
for consideration other than the matters described in the accompanying
Notice of Annual Meeting of Shareholders, but if any matters are properly
presented, it is the intention of the persons named in the accompanying
Proxy to vote on such matters in accordance with their best judgment.
ADDITIONAL INFORMATION
UPON WRITTEN REQUEST OF ANY SHAREHOLDER, A COPY OF THE CORPORATION'S
REPORT ON FORM 10-K FOR ITS FISCAL YEAR ENDED DECEMBER 31, 1995, INCLUDING
THE FINANCIAL STATEMENTS AND THE SCHEDULES THERETO, REQUIRED TO BE FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 13a-1 UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, MAY BE OBTAINED, WITHOUT
CHARGE, FROM DAVID R. SARACINO, TREASURER, FIRST KEYSTONE CORPORATION, 111
WEST FRONT STREET, BERWICK, PENNSYLVANIA 18603.
Page 12 Proxy Statement
<PAGE>
FIRST KEYSTONE CORPORATION
PROXY
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 16, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Paul Klinger and
William Selden, Jr. and each or any of them, proxies of the undersigned,
with full power of substitution, to vote all of the shares of First
Keystone Corporation (the "Corporation") that the undersigned may be
entitled to vote at the Annual Meeting of Shareholders of the Corporation
to be held at the main office of The First National Bank of Berwick, 111
West Front Street, Berwick, Pennsylvania 18603 on Tuesday, April 16, 1996
at 9:00 a.m., prevailing time, and at any adjournment or postponement
thereof as follows:
1. ELECTION OF CLASS C DIRECTORS TO SERVE FOR A THREE-YEAR TERM
John L. Coates Dudley P. Cooley Stanley E. Oberrender
[ ] FOR all nominees listed above [ ] WITHHOLD AUTHORITY to
(except as marked to the vote for all nominees
contrary below) listed above
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
WRITE THAT NOMINEE'S NAME ON THE SPACE PROVIDED BELOW.)
________________________________________________________________________
2. PROPOSAL TO RATIFY THE SELECTION OF J. H. WILLIAMS & CO. AS THE
INDEPENDENT AUDITORS FOR THE CORPORATION FOR THE YEAR ENDING
DECEMBER 31, 1996.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR this proposal.
3. In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the meeting and any
adjournment or postponement thereof.
THIS PROXY, WHEN PROPERLY SIGNED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR ALL NOMINEES LISTED ABOVE AND FOR PROPOSAL 2.
Dated: , 1996
Number of Shares Held of
Record on March 5, 1996:
Signature(s) (Seal)
THIS PROXY MUST BE DATED, SIGNED BY THE SHAREHOLDER AND RETURNED PROMPTLY
TO THE CORPORATION IN THE ENCLOSED ENVELOPE. WHEN SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE. IF
MORE THAN ONE TRUSTEE, ALL SHOULD SIGN. IF STOCK IS HELD JOINTLY, EACH
OWNER SHOULD SIGN.
