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
For the fiscal year ended December 31, 1996
Or
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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, 18603
Pennsylvania
(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: Not
Applicable
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, 1996, are
$18,838,239.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price as of March 4, 1997, is
$26,611,473.
The number of shares outstanding of the issuer's Common Stock, as
of March 4, 1997, 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 15,
1997.
Part II - Excerpts from Annual Report to Shareholders
for Fiscal Year Ended December 31, 1996.
<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, 1996, the Corporation had
total consolidated assets, deposits and stockholders' equity of
approximately $242.6 million, $198.5 million and $27.5 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
Corporation 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.
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<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.
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<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 that 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
Corporation's Annual Report to Shareholder's for the year ended
December 31, 1996, which pages are included in Exhibit 13. 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 Office of the
Comptroller of the Currency (the "OCC") have issued certain risk-based
capital guidelines, which supplement existing capital requirements.
The guidelines require all United States banks and bank
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holding companies to maintain a minimum risk-based capital ratio of 8
percent (of which at least 4 percent must be 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 Corporation's consolidated assets, it is not expected that such
risk-based capital rules will have a material effect on the
Corporation's business and capital plans. The Bank has capital ratios
exceeding the regulatory requirements.
Regulatory Capital Requirements
<TABLE>
<CAPTION>
The following table presents the Corporation's capital ratios at
December 31, 1996:
<S> <C>
Tier I Capital $ 26,323,000
Tier II Capital 1,712,000
Total Capital $ 28,035,000
Adjusted Total Average Assets $242,170,000
Total Adjusted Risk-Weighted Assets <F1> 136,425,000
Tier I Risk-Based Capital Ratio <F2> 19.29%
Required Tier I Risk-Based Capital Ratio 4.00%
Excess Tier I Risk-Based Capital Ratio 15.29%
Total Risk-Based Capital Ratio <F3> 20.55%
Required Total Risk-Based Capital Ratio 8.00%
Excess Total Risk-Based Capital Ratio 12.55%
Tier I Leverage Ratio <F4> 10.87%
Required Tier I Leverage Ratio 3.00%
Excess Tier I Leverage Ratio 7.87%
_________________________
<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>
As of January 1, 1996, the Corporation adopted Statement of
Financial Accounting Standards 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 be reviewed for impairment 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
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<PAGE>
recognized as the amount by which the carrying amount of the asset
exceeds the fair value of the asset so determined. Implementation of
this Statement by the Corporation did not result in any impairment
losses.
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 power 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.
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 Corporation'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. See also,
the information under the caption "Regulatory Matters" appearing on
page 18 of Registrant's 1996 Annual Report, which page is included in
Exhibit 13.
Effects of Inflation
Inflation has some impact on the Corporation'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 Corporation'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.
5
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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 to, among other things, 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 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 that 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 are the Corporation and the Bank aware of
any circumstances that 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, 1996, the Bank had total assets of
$241,381,942, total shareholders' equity of $26,000,321 and total
deposits and other liabilities of $215,381,621.
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, 1996, the Bank had seventy-five (75) full-time
employees and twenty-nine (29) 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.
6
<PAGE>
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.
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.
7
<PAGE>
Under the Federal Deposit Insurance Act ("FDIA"), 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 or
unsound banking practice or would otherwise be in violation of the
law. Moreover, the Financial Institutions Regulatory and Interest
Rate Control Act of 1978 ("FIRA") generally expanded the circumstances
under which officers or directors of a bank may be removed by the
institution's federal supervisory agency, restricts lending by a bank
to its executive officers, directors, principal shareholders or
related interests thereof and restricts management personnel of a bank
from serving as directors or in other management positions with
certain depository institutions whose assets exceed a specified amount
or which have an office within a specified geographic area, and
restricts the relationships of management personnel of a bank with
securities companies and securities dealers. Additionally, FIRA
requires that no person may acquire control of a bank unless the
appropriate federal supervisory agency has given sixty (60) days prior
written notice and within that time has not disapproved the
acquisition or otherwise extended the period for disapproval. Control
for purposes of FIRA means the power to direct, either directly or
indirectly, the management or policies or to vote twenty-five percent
(25%) or more of any class of outstanding stock of a financial
institution or its respective holding company. A person or group
holding revocable proxies to vote twenty-five percent (25%) or more of
the outstanding common stock of a financial institution or holding
company would presumably be deemed to control the institution for
purposes of FIRA.
Under the Community Reinvestment Act of 1977, as amended ("CRA"),
the OCC is required to assess the record of all financial institutions
regulated by it to determine is 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 of 1989 amended (see below) the CRA to require, among other
things, that the OCC 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
includes 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 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. A
bank's compliance is determined by 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.
When rating a bank in the area of lending, regulators examine the
number and amount of loan originations, the location of where the
loans were made, and the income levels of the borrowers. Although
banks, under the revised rules, are not required to make loans in
every area, if there are apparent tracts in which there is little
lending, examiners will focus their investigations in that area.
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<PAGE>
The service prong evaluates how a bank delivers its products to
the community through branching. As with lending, banks are not
required to branch in every area, although conspicuous gaps will be
investigated.
The third prong, investment in community, examines how the bank
meets the investment needs in the community within which it operates.
Assessment of investment is accomplished using a "performance context"
pursuant to which regulators meet with civic, community and bank
officials in order to determine the credit needs of the community.
Expanded Home Mortgage Disclosure Act reporting requirements were
also approved for large banks and thrifts which require reporting of
census tract data on mortgagees made outside of the delineated
communities. In addition, effective March 1, 1997, institutions with
assets above $250 million will be required to report their aggregate
small business loans made by geographic region.
Independent banks with total assets of less than $250 million and
bank subsidiaries with total assets of less than $250 million that
have holding companies with total assets of less than $1 billion will
be subjected to less stringent CRA examinations.
Under the new regulation, banks will enjoy a reduction in
compliance burden. Specifically, banks are not required to keep
extensive documentation to prove that directors have participated in
the drafting and review of CRA policies. A formal CRA statement does
not have to be prepared. The efforts banks make to market low- and
moderate-income communities do not have to be documented, nor will
banks have to justify the basis for their community delineation or the
methods utilized to determine the credit needs of the community.
Under the Bank Secrecy Act ("BSA"), banks and other financial
institutions are 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.
An omnibus federal banking bill, known as the Competitive
Equality Banking Act ("CEBA"), was signed into law in August of 1987.
Included in the legislation were measures: (1) imposing certain
restrictions on transactions between banks and their affiliates; (2)
expanding the powers available to Federal bank regulators in assisting
failed or failing banks; (3) limiting the amount of time banks may
hold certain deposits prior to making such funds available for
withdrawal and any interest thereon; and (4) requiring that any
adjustable rate mortgage loan secured by a lien on a one-to-four
family dwelling include a limitation on the maximum rate at which
interest may accrue on the principal balance during the term of such
loan. This legislation has not had a material adverse effect on the
Bank's operations or its competitive position.
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<PAGE>
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") became law. Under 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 or
Ratio Ratio Ratio Directive
<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>
In the event an institution's capital deteriorates to the
undercapitalized category or below, FDICIA prescribes an 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.
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<PAGE>
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 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 premium assessments increase in the
future, Management believes such future increase many have a material
impact on future reported results of operations.
The Financial Institutions Reform Recovery and Enforcement Act of
1989 ("FIRREA") was enacted in August of 1989. This law as enacted
primarily to improve the supervision of savings associations by
strengthening capital, accounting and other supervisory standards. In
addition, FIRREA reorganized the FDIC by creating two deposit
insurance funds to be administered by the FDIC: the Savings
Association Insurance Fund and the Bank Insurance Fund. Customers'
deposits held by the Bank are insured under the Bank Insurance Fund.
FIRREA also regulates real estate appraisal standards and the
supervisory/enforcement powers and penalty provisions in connection
with the regulation of the Bank.
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 whom would have a
materially adverse effect on the financial condition of the
Corporation or the Bank.
ITEM 2. DESCRIPTION OF PROPERTIES
The Corporation owns no property other than through its
subsidiaries. These are:
11
<PAGE>
<TABLE>
<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.
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, held
Central Road, 1.11 Acres for expansion.
Bloomsburg Present use,
rental.
Third & Race Streets, Owned 2,500 Banking services.
Mifflinville
Luzerne County, PA
Salem Township Owned 3,700 Banking services.
Post Office Address -
400 Fowler Avenue,
Berwick
West Third Street, Leased 2,300 Banking services.
Nescopeck Annual
Rental
$8,400
</TABLE>
12
<PAGE>
It is Management's opinion that the facilities currently utilized
are suitable and adequate for the Corporation's current and immediate
future purposes.
ITEM 3. LEGAL PROCEEDINGS
The information under the caption "Legal Matters" appearing on
page 17 of the Corporation's Annual Report to Shareholder's for the
year ended December 31, 1996, which page is included in Exhibit 13
hereto, is incorporated in its entirety by reference in response to
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,
1995. The following quotations represent prices between buyers and
sellers and do not include retail markup, markdown or commission, and
may not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
Stock Prices
Dividends
High Low Declared
<S> <C> <C> <C>
1995:
First quarter $31.82 $31.82 $.27
Second quarter $31.82 $31.82 $.27
Third quarter $33.64 $31.82 $.27
Fourth quarter $33.64 $33.64 $.28
1996:
First quarter $37.00 $33.64 $.31
Second quarter $37.00 $37.00 $.31
Third quarter $37.00 $37.00 $.31
Fourth quarter $37.00 $37.00 $.36
</TABLE>
13
<PAGE>
As of December 31, 1996, the Corporation had approximately 492
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 regulations now prohibit
that practice. However, to the extent that (1) the Bank has capital
surplus in an amount in excess of common capital and (2) 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 dividend 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 the approval of the holders of two-thirds of
the outstanding shares of the Corporation's 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 to a fund for the retirement
of preferred stock.
The Bank may not pay any dividends on its capital stock during a
period in which it may be in default in the payment of its assessment
for a 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
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, in the opinion of the OCC, such payment would
constitute an unsafe and unsound banking practice. As of December 31,
1996, there was $5,457,319 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.
14
<PAGE>
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 information under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing
on pages 25 through 37 of the Corporation's Annual Report to
Shareholder's for the year ended December 31, 1996, which pages are
included in Exhibit 13 hereto, is incorporated in its entirety by
reference in response to this Item 6.
ITEM 7. FINANCIAL STATEMENTS
The Corporation's Consolidated Financial Statements and notes
thereto appearing on pages 4 through 23 of the Corporation's Annual
Report to Shareholder's for the year ended December 31, 1996, which
pages are included in Exhibit 13 hereto, are incorporated in their
entirety by reference in response to this Item 7.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information under the captions "Information As To Nominees,
Directors and Executive Officers," "Compliance with Section 16(a) of
the Securities Act of 1934," "Principal Officers of the Corporation,"
and "Principal Officers of the Bank" appearing on pages 5, 7, 10, and
11, respectively in the Corporation's Definitive Proxy Statement,
filed at Exhibit 99 hereto, are incorporated in their entirety by
reference in response to this Item 9.
15
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation"
appearing on pages 7 through 9 of the Corporation's Definitive Proxy
Statement, filed as Exhibit 99 hereto, is incorporated in its entirety
by reference in response to this Item 10.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information under the caption "Principal Beneficial Owners of
the Corporation's Stock" appearing on pages 2 through 4 of the
Corporation's Definitive Proxy Statement, filed as Exhibit 99 hereto,
is incorporated in its entirety by reference in response to this Item
11.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Transactions"
appearing on page 10 of the Corporation's Definitive Proxy Statement,
filed as Exhibit 99 hereto, is incorporated in its entirety by
reference in response to this Item 12.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-B:
<TABLE>
<CAPTION>
Exhibit Number Referred to
Item 601 of Regulation S-B Description of Exhibit
<S> <C>
3i Articles of Incorporation, as
amended, of First Keystone
Corporation, are incorporated herein
by reference to Exhibit 3i to the
Corporation's Annual Report on Form
10-KSB for the year ended December
31, 1996.
3ii By-Laws, as amended, of First
Keystone Corporation, are
incorporated herein by reference to
Exhibit 3ii to the Corporation's
Annual Report on Form 10-KSB for the
year ended December 31, 1996.
11 Computation of Earnings Per Share
incorporated by reference to Exhibit
11 to the Corporation's Annual
Report on Form 10-KSB for the year
ended December 31, 1996.
13 Excerpt from Annual Report to
Shareholders for Fiscal Year Ended
December 31, 1996.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Referred to
Item 601 of Regulation S-B Description of Exhibit
<S> <C>
21 List of Subsidiaries of the
Corporation (Incorporated by
reference to Exhibit 22 to the
Corporation's Annual Report on Form
10-KSB for the year ended December
31, 1996.
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 15,
1997.
</TABLE>
(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, 1996.
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 18, 1997
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 18, 1997
By: /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President, Chief Executive
Officer and Director
(Chief Executive Officer
and Principal Financial Officer)
Date: March 18, 1997
18
<PAGE>
By: /s/ John E. Arndt
John E. Arndt
Director
Date: March 18, 1997
By: /s/ Budd L. Beyer
Budd L. Beyer
Director
Date: March 18, 1997
By: /s/ Robert E. Bull
Robert E. Bull
Chairman of the Board
and Director
Date: March 18, 1997
By: /s/ Dudley P. Cooley
Dudley P. Cooley
Director
Date: March 18, 1997
By: /s/ Frederick E. Crispin, Jr.
Frederick E. Crispin, Jr.
Director
Date: March 18, 1997
19
<PAGE
By: /s/ Stanley E. Oberrender
Stanley E. Oberrender
Director
Date: March 18, 1997
By: /s/ David R. Saracino
David R. Saracino
Treasurer and Assistant Secretary
(Principal Accounting Officer)
Date: March 18, 1997
By: /s/ F. Stuart Straub
F. Stuart Straub
Director
Date: March 18, 1997
By:
Robert J. Wise
Director
Date: March 18, 1997
20
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit Description Page
<S> <C> <C>
3i Articles of Incorporation, as amended 22
3ii By-Laws, as amended 23
11 Compensation of Earnings Per Share 24
Summary of Selected Financial Data 2
Per Share Data 10
13 Excerpt from Annual Report to Shareholders for
Fiscal Year Ended December 31, 1996 25
Legal Matters 17
Regulatory Matters 18
Consolidated Financial Statements and Notes 4-23
Management's Discussion and Analysis of
Financial Condition and Results of
Operation 25-37
21 List of Subsidiaries of the Issuer 26
23 Consent of Independent Auditors 27
27 Financial Data Schedule 28
99 Definitive Proxy Statement, Notice of
Annual Meeting and Form of Proxy for
the Annual Meeting of Shareholders
to be held April 15, 1997 29
Principal Beneficial Owners of the
Corporation's Stock 2-4
Information as to Nominees, Directors,
and Executive Officers 5
Compliance with Section 16(a) of the
Securities Act of 1934 7
Executive Compensation 7-9
Certain Transactions 10
Principal Officers of the Corporation 10
Principal Officers of the Bank 11
CVR Cover letter to the SEC
</TABLE>
21
<PAGE>
EXHIBIT 3i
ARTICLES OF INCORPORATION
AS AMENDED
OF FIRST KEYSTONE CORPORATION
22
<PAGE>
ARTICLES OF INCORPORATION
DOMESTIC BUSINESS CORPORATION
FIRST KEYSTONE CORPORATION
111 WEST FRONT STREET
BERWICK, PENNSYLVANIA 18603
COLUMBIA COUNTY
Purpose of the Corporation - To have unlimited power to engage in
and do any lawful act concerning any or all lawful business for which
corporations may be incorporated under the provisions of the Business
Corporation Law of the Commonwealth of Pennsylvania.
Number and Class of Shares - 1,000,000 shares, Common Stock
Stated Par Value Per Share if Any - $10.00
Total Authorized Capital - $10,000,000
Term of Existence - Perpetual
<PAGE>
1. The following provisions shall regulate the status of the
corporation as a close corporation:
(a) (Strike out (i) or (ii) below, whichever is not
applicable.)
(i) All of the issued shares of the corporation of all
classes, exclusive of treasury shares, shall be held of record by not
more than ________ (number not to exceed 30) persons.
(ii) All of the issued shares of the corporation of all
classes, exclusive of treasury shares, shall be held of record by not
more than the smaller of twenty-five "shareholder" within the meaning
of Subchapter S of the Internal Revenue Code of 1954, as amended, or
30 persons.
(b) All of the issued shares of all classes of the
corporation shall be subject to one or more of the restrictions on
transfer permitted by section 613.1 of the Business Corporation Law
(15 P.S. Section 1613.1).
(c) The corporation shall make no offering of any of its
shares of any class which would constitute a "public offering" within
the meaning of the Securities Act of 1933, as amended.
2. (Optional: BCL Section 372B) A person (other than an estate)
who is not an "individual" or who is a "non-resident alien," in either
case within the meaning of the Internal Revenue Code of 1954, as
amended ("Code"), shall not be entitled to be a holder of record of
shares of the corporation. Only a person whose consent is currently
in effect to the election of the corporation to be treated as an
electing small business corporation under Subchapter S of the Code and
a shareholder who has not affirmatively refused to consent to the
election within sixty days after he acquires his stock, shall be
entitled to be a holder of record of shares of the corporation.
3. (Optional: BCL Section 382) The business and affairs of the
corporation shall be managed by the shareholders of the corporation
rather than by a board of directors.
4. (Optional: Section 376B) The status of the corporation as a
"close corporation" within the meaning of the Business Corporation Law
shall not be terminated without the affirmative vote or written
consent of (all holders of) (shareholder holding _________________
(fraction at least two-thirds) of the) shares of all classes of the
corporation.
<PAGE>
5. (Optional: BCL Section 384B) (Any shareholder) (shareholders
holding _________ (fraction) of the shares) of the corporation may
apply for the appointment of a provisional director of the corporation
in the manner and upon the circumstances provided by statute.
6. (Optional: BCL Section 386) (Any shareholder) (shareholders
holding ________ (fraction) of the shares) of the corporation shall
have the right at will to cause the corporation to be dissolved by
proceeding in the manner provided by statute.
<PAGE>
FIRST KEYSTONE CORPORATION
ARTICLES OF INCORPORATION
ADDITIONAL ARTICLES
7. No merger, consolidation, liquidation or dissolution of this
corporation nor any action that would result in the sale or other
disposition of all or substantially all of the assets of this
corporation shall be valid unless first approved by the affirmative
vote of the holders of at least sixty-six and two-thirds (66 2/3%)
percent of the outstanding shares of Common Stock of this corporation.
This Article 7 may not be amended unless first approved by the
affirmative vote of the holders of at least sixty-six and two-thirds
(66 2/3%) percent of the outstanding shares of Common Stock of this
corporation.
8. Cumulative voting rights shall not exist with respect to the
election of directors.
9. (a) The Board of Directors may, if it deems it advisable,
oppose a tender or other offer for the corporation's securities,
whether the offer is in cash or in the securities of a corporation or
otherwise. When considering whether to oppose an offer, the Board of
Directors may, but is not legally obligated to, consider any relevant,
germane or pertinent issue; by way of illustration, but not to be
considered any limitation on the power of the Board of Directors to
oppose a tender or other offer for this corporation's securities, the
Board of Directors may, but shall not be legally obligated to,
consider any or all of the following:
(i) Whether the offer price is acceptable based on
historical and present operating results or financial condition of the
corporation;
(ii) Whether a more favorable price could be obtained for
the corporation's securities in the future;
(iii) The impact which an acquisition of the corporation
would have on the employees, depositors and customers of the
corporation and its subsidiaries and the communities which they serve;
(iv) The reputation and business practices of the offeror
and its management and affiliates as they would affect the employees,
depositors and customers of the corporation and its subsidiaries and
the future value of the corporation's stock;
<PAGE>
(v) The value of the securities (if any) which the offeror
is offering in exchange for the corporation's securities, based on an
analysis of the worth of the corporation as compared to the
corporation or other entity who securities are being offered; and
(vi) Any antitrust or other legal and regulatory issues that
are raised by the offer.
(b) If the Board of Directors determines that an offer
should be rejected, it may take any lawful action to accomplish its
purpose, including, but not limited to, any or all of the following:
advising shareholders not to accept the offer; litigation against the
offeror; filing complaints with all governmental and regulatory
authorities; acquiring the corporation's securities; selling or
otherwise issuing authorized but unissued securities or treasury stock
or granting options with respect thereto; acquiring a company to
create an antitrust or other regulatory problem for the offeror; and
obtaining a more favorable offer from another individual or entity.
<PAGE>
FIRST KEYSTONE CORPORATION
ARTICLES OF INCORPORATION
INCORPORATORS AND SIGNATURES
<TABLE>
<CAPTION>
Number and
Address (Street, City, State, Class of
Name Zip Code) Shares
<S> <C> <C>
Arthur E. Arndt, Jr. 910 E. 3rd St., Berwick, PA 1 share
18603 Common Stock
Budd L. Beyer R.R. #2, Berwick, PA 18603 1 share
Common Stock
Robert E. Bull 323 W. 4th St., Nescopeck, PA 1 share
18635 Common Stock
Bernard A. Ciampi 302 Martzville Rd., Berwick, 1 share
PA 18603 Common Stock
Frank C. Elmes 113 W. Front St., Berwick, PA 1 share
18603 Common Stock
Russell M. Henne 521 E. 5th St., Berwick, PA 1 share
18603 Common Stock
Doyle W. Hortman 328 Mulberry St., Berwick, 1 share
PA 18603 Common Stock
John K. Jacoby 312 E. 4th St., Berwick, 1 share
PA 18603 Common Stock
F. Stuart Straub 1001 E. Front St., Berwick, 1 share
PA 18603 Common Stock
Robert J. Wise R.R. #3, Berwick, PA 18603 1 share
Common Stock
</TABLE>
<PAGE>
IN TESTIMONY WHEREOF, The Incorporator(s) Has (Have) Signed
And Sealed The Articles Of Incorporation This 5th Day of July,
1983.
/s/ Arthur E. Arndt, Jr.
Arthur E. Arndt, Jr.
/s/ Budd L. Beyer
Budd L. Beyer
/s/ Robert E. Bull
Robert E. Bull
/s/ Bernard A. Ciampi
Bernard A. Ciampi
/s/ Frank C. Elmes
Frank C. Elmes
/s/ Russell M. Henne
Russell M. Henne
/s/ Doyle W. Hortman
Doyle W. Hortman
/s/ John K. Jacoby
John K. Jacoby
/s/ F. Stuart Straub
F. Stuart Straub
/s/ Robert J. Wise
Robert J. Wise
<PAGE>
FIRST KEYSTONE CORPORATION
DIRECTORS' CONSENT TO CORPORATE ACTION
The undersigned, being all the directors of the above-named
corporation, entitled to vote at a meeting thereof, do hereby
consent to the adoption of the following resolutions and to the
taking of the corporate action hereinafter specified as though
same had been adopted at a meeting the directors duly called and
convened, this consent being given pursuant to Section 402 of the
Business Corporation Law, as amended:
BE IT RESOLVED, that, in accordance with Section 1802 of the
Business Corporation Law, the Board of Directors approves,
adopts, ratifies and consents to an amendment to Article 5 of
this corporation's Articles of Incorporation to read as follows:
5. The aggregate number of shares which the corporation
shall have authority to issue is: Three Million
(3,000,000) shares of Common Stock of the par value of Two
Dollars ($2.00) per share (the "Common Stock") and Five
Hundred Thousand (500,000) shares of Preferred Stock of the
par value of Ten Dollars ($10.00) per share (the "Preferred
Stock") with a total authorized capital of Eleven Million
Dollars ($11,000,000).
The Preferred Stock of the corporation may, from time
to time, be divided into and issued in one or more series
of shares, each of which series shall be so designated as
to distinguish the shares thereof from the shares of all
other series. All shares within any series of Preferred
Stock shall be identical. There may be variations between
different series of Preferred Stock, namely, the rate of
dividend, the right of redemption, and the price at, and
the terms and conditions on, which shares may be redeemed,
the amounts payable upon shares in event of voluntary or
involuntary liquidation, sinking fund provisions for the
redemption or purchase of shares, the right of conversion,
and the terms and conditions on which shares may be
converted in the event the shares of any series of
Preferred Stock are issued with the privilege of
conversion. Different series of Preferred Stock shall not
be construed to constitute different classes of shares for
the purpose of voting by classes under the applicable laws
of the Commonwealth of Pennsylvania.
<PAGE>
The Board of Directors of the corporation is hereby
expressly vested with the authority, by resolution, from
time to time to divide the Preferred Stock of the
corporation into one or more series as aforesaid, to fix
and determine the variable relative rights and preferences
of any series so established, and to change redeemed or
reacquired shares of any one series thereof into shares of
another series.
and,
BE IT FURTHER RESOLVED, that the Board of Directors approves,
adopts, ratifies and consents to a new additional Article 10 of
the corporation's Articles of Incorporation to read as follows:
10. No holder of shares of any class or of any series
of any class shall have any preemptive right to subscribe
for, purchase or receive any shares of the corporation,
whether now or hereafter authorized, or any obligations or
other securities convertible into or carrying options or
warrants to purchase any such shares of the corporation, or
any options or rights to purchase any such shares or
securities, issued or sold by the corporation for cash or
any other form of consideration, and any such shares,
securities, options, warrants or rights may be issued or
disposed of by the Board of Directors to such persons and
on such terms as the Board of Directors, in its discretion,
shall deem advisable.
and,
BE IT FURTHER RESOLVED, that the Board of Directors, directs that
the two aforesaid amendments to the corporation's Articles of
Incorporation be submitted to the shareholders at the 1989 Annual
Meeting of Shareholders to be held on March 21, 1989 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
<PAGE>
NOW, THEREFORE, BE IT RESOLVED, that the proper officers of the
corporation are hereby directed, authorized and empowered to take
such action, for and on behalf of the corporation, as they deem
necessary, to effectuate the intent and purpose of the foregoing
resolutions.
Dated: February 15, 1989
/s/ Arthur E. Arndt, Jr.
Arthur E. Arndt, Jr.
/s/ J. Gerald Bazewicz
J. Gerald Bazewicz
/s/ Budd L. Beyer
Budd L. Beyer
/s/ Robert E. Bull
Robert E. Bull
/s/ John L. Coates
John L. Coates
/s/ Dudley P. Cooley
Dudley P. Cooley
/s/ Frederick E. Crispin, Jr.
Frederick E. Crispin, Jr.
/s/ Stanley E. Oberrender
Stanley E. Oberrender
/s/ F. Stuart Straub
F. Stuart Straub
/s/ Robert J. Wise
Robert J. Wise
<PAGE>
EXHIBIT 3ii
BY-LAWS
AS AMENDED
OF FIRST KEYSTONE CORPORATION
23
<PAGE>
BY-LAWS
of
FIRST KEYSTONE CORPORATION
Article 1
CORPORATION OFFICE
Section 1.1 The Corporation shall have and continuously
maintain in Pennsylvania a registered office which may, but need not,
be the same as its place of business and at an address to be
designated from time to time by the Board of Directors.
Section 1.2 The Corporation may also have offices at such other
places as the Board of Directors may from time to time designate or
the business of the Corporation may require.
Article 2
SHAREHOLDERS MEETINGS
Section 2.1 All meetings of the shareholders shall be held at
such time and place as may be fixed from time to time by the Board of
Directors.
Section 2.2 The annual meeting of the shareholders shall be
held on the third Tuesday in March in each year if not a legal
holiday, and if a legal holiday, then on the next full business day,
when they shall elect a Board of Directors and transact such other
business as may properly be brought before the meeting.
Section 2.3 Special meetings of the shareholders may be called
at any time by the Chairman of the Board, the President, the Executive
Vice President, if any, a majority of the Board of Directors or of its
Executive Committee or by shareholders entitled to cast at least one-fourth
of the votes which all shareholders are entitled to cast at the
particular meeting. If such request is addressed to the Secretary, it
shall be signed by the persons making the same and shall state the
purpose or purposes of the proposed meeting. Upon receipt of any such
request, the person or persons making the request may issue the call.
Section 2.4 Written notice of all meetings other than adjourned
meetings of shareholders, stating the place, data and hour, and, in
case of special meetings of shareholders, the purpose thereof, shall
be served upon, or mailed, postage prepaid, or telegraphed, charges
prepaid, at least ten days before such meeting, unless a greater
period of notice is required by statute or by these By-laws, to each
shareholder entitled to vote thereat at such address as appears on the
transfer books of the Company.
<PAGE>
Article 3
QUORUM OF SHAREHOLDERS
Section 3.1 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 on the particular matter shall
constitute a quorum for purposes of considering such matter, and
unless otherwise provided by statute the acts of such shareholders at
a duly organized meeting shall be the acts of the shareholders. If,
however, any meeting of shareholders cannot be organized because of
lack of a quorum, those present, in person or by proxy, shall have the
power, except as otherwise provided by statute, to adjourn the meeting
to such time and place as they may determine, without notice other
than an announcement at the meeting, until the requisite number of
shareholders for a quorum shall be present, in person or by proxy,
except that in the case of any meeting called for the election of
directors such meeting may be adjourned only for periods not exceeding
15 days as the holders of a majority of the shares present, in person
or by proxy, shall direct, and those who attend the second of such
adjourned meetings, although less than a quorum, shall nevertheless
constitute a quorum for the purpose of electing directors. At any
adjourned meeting at which a quorum shall be present or so
represented, any business may be transacted which might have been
transacted at the original meeting if a quorum had been present. The
shareholders present, in person or by proxy, at a duly organized
meeting can continue to do business until adjournment, notwithstanding
the withdrawal of enough shareholders to leave less than a quorum.
Article 4
VOTING RIGHTS
Section 4.1 Except as may be otherwise provided by statute or
by the Articles of Incorporation, at every shareholders meeting, every
shareholder entitled to vote thereat shall have the right to one vote
for every share having voting power standing in his name on the books
of the Corporation on the record date fixed for the meeting. No share
shall be voted at any meeting if any installment is due and unpaid
thereon.
Section 4.2 When a quorum is present at any meeting the voice
vote of the holders of a majority of the stock having voting power,
present, in person or by proxy, shall decide any question brought
before such meeting except as provided differently by statute or by
the Articles of Incorporation.
Section 4.3 Upon demand made by a shareholder entitled to vote
at any election for directors before the voting begins, the election
shall be by ballot.
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Article 5
PROXIES
Section 5.1 Every shareholder entitled to vote at a meeting of
shareholders or to express consent or dissent to corporate action in
writing without a meeting may authorize another person or persons to
act for him by proxy. Every proxy shall be executed in writing by the
shareholder or his duly authorized attorney in fact an filed with the
Secretary of the Corporation. A proxy, unless coupled with an
interest, shall be revocable at will, notwithstanding any other
agreement or any provision in the proxy to the contrary, but the
revocation of a proxy shall not be effective until notice thereof has
been given to the Secretary of the Corporation. No unrevoked proxy
shall be valid after 11 months from the date of its execution, unless
a longer time is expressly provided therein, but in no event shall a
proxy, unless coupled with an interest, be voted after three years
from the date of its execution. A proxy shall not be revoked by the
death or incapacity of the maker, unless before the vote is counted or
the authority is exercised, written notice of such death or incapacity
is given to the Secretary of the Corporation.
Article 6
RECORD DATE
Section 6.1 The Board of Directors may fix a time, not more
than 45 days prior to the date of any meeting of shareholders, or the
date fixed for the payment of any dividend or distribution, or the
date for the allotment of rights, or the date when any change or
conversion or exchange of shares will be made or go into effect, as a
record date for the determination of the shareholders entitled to
notice of, and to vote at, any such meeting, or entitled to receive
payment of any such dividend or distribution, or to receive any such
allotment of rights, or to exercise the rights in respect to any such
change, conversion or exchange of shares. In such case, only such
shareholders as shall be shareholders of record on the date so fixed
shall be entitled to notice of, or to vote at, such meeting or to
receive payment of such dividend or to receive such allotment of
rights or to exercise such rights, as the case may be, notwithstanding
any transfer of any shares of the books of the Corporation after any
record date fixed as aforesaid. The Board of Directors may close the
books of the Corporation against transfers of shares during the whole
or any part of such period, and in such case written or printed notice
thereof shall be mailed at least ten days before the closing thereof
to each shareholder of record at the address appearing on the records
of the Corporation or supplied by him to the Corporation for the
purpose of notice. While the stock transfer books of the Corporation
are closed, no transfer of shares shall be made thereon. If no record
date is fixed by the Board of Directors for the determination of
shareholders entitled to receive notice of, and vote at, a
shareholders meeting, transferees of shares which are transferred on
the books of the Corporation within ten days
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next preceding the date of such meeting shall not be entitled to
notice of or to vote at such meeting.
Article 7
VOTING LISTS
Section 7.1 The officer or agent having charge of the transfer
books for shares of the Corporation shall make, at least five days
before each meeting of shareholders, a complete alphabetical list of
the shareholders entitled to vote at the meeting, with their addresses
and the number of shares held by each, which list shall be kept on
file at the registered offices or principal place of business of the
Corporation and shall be subject to inspection by any shareholder
during the entire meeting. The original transfer books for shares of
the Corporation, or a duplicate thereof kept in this Commonwealth,
shall be prima facie evidence as to who are the shareholders entitled
to exercise the rights of a shareholder.
Article 8
JUDGES OF ELECTION
Section 8.1 In advance of any meeting of shareholders, the
Board of Directors may appoint judges of election, who need not be
shareholders, to act at such meeting or any adjournment thereof. If
judges of election are not so appointed, the Chairman of any such
meeting may, and on the request of any shareholder or his proxy shall,
make such appointment at the meeting. The number of judges shall be
one or three. If appointed at a meeting on the request of one or more
shareholders or proxies, the majority of shares present and entitled
to vote shall determine whether one or three judges are to be
appointed. No person who is a candidate for office shall act as a
judge. The judges of election shall do all such acts as may be proper
to conduct the election or vote, and such other duties as may be
prescribed by statute, with fairness to all shareholders, and if
requested by the Chairman of the meeting or any shareholder or his
proxy, shall make a written report of any matter determined by them
and execute a certificate of any fact found by them. If there are
three judges of election, the decision, act or certificate of a
majority shall be the decision, act or certificate of all.
Article 9
CONSENT OF SHAREHOLDERS IN LIEU OF MEETING
Section 9.1 Any action required to be taken at a meeting of the
shareholders, or of a class of shareholders, may be taken without a
meeting, if a consent or consents in writing setting forth the action
so taken shall be signed by all of the shareholders who would be
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entitled to vote at a meeting for such purpose and shall be filed with
the Secretary of the Corporation.
Article 10
DIRECTORS
Section 10.1 Any shareholder who intends to nominate or to
cause to have nominated any candidate for election to the Board of
Directors (other than any candidate proposed by the Corporation's then
existing Board of Directors) shall so notify the Secretary of the
Corporation in writing not less than 45 days prior to the date of any
meeting of shareholders called for the election of directors. Such
notification shall contain the following information to the extent
known by the notifying shareholder:
(a) The name and address of each proposed nominee;
(b) the age of each proposed nominee;
(c) the principal occupation of each proposed nominee;
(d) the number of shares of the Corporation owned by each
proposed nominee;
(e) the total number of shares that to the knowledge of the
notifying shareholder will be voted for each proposed
nominee;
(f) the name and residence address of the notifying
shareholder; and
(g) the number of shares of the Corporation owned by the
notifying shareholder.
Any nomination for director not made in accordance with this
Section shall be disregarded by the chairman of the meeting, and votes
cast for each such nominee shall be disregarded by the judges of
election. In the event that the same person is nominated by more than
one shareholder, if at least one nomination for such person complies
with this Section, the nomination shall be honored and all votes cast
for such nominee shall be counted.
Section 10.2 The number of directors that shall constitute the
whole Board of Directors shall be not less than seven nor more than
twenty-five. The Board of Directors shall be classified into three
classes, each class to be elected for a term of three years. The
terms of the respective classes shall expire in successive years as
provided in Section 10.3 hereof. Within the foregoing limits, the
Board of Directors may from time to time fix the number of directors
and their respective classifications. The Directors shall be natural
persons of full age and need not be residents of Pennsylvania or
shareholders of the Corporation.
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No person who is 70 years of age or older (except for the eleven
interim directors of the Corporation) shall be elected a director.
Section 10.3 At the 1984 annual meeting of shareholders of the
Corporation, the shareholders shall elect eleven directors as follows:
four Class A directors to serve until the 1985 annual meeting of
shareholders, four Class B directors to serve until the 1986 annual
meeting of shareholders, and three Class C directors to serve until
the 1987 annual meeting of shareholders. Each class shall be elected
in a separate election. At each annual meeting of shareholders
thereafter, successors to the class of directors whose term shall then
expire shall be elected to hold office for a term of three years, so
that the term of office of one class of directors shall expire in each
year.
Section 10.4 The Board of Directors may declare vacant the
office of a director if he is declared of unsound mind by an order of
court or convicted of felony or for any other proper cause or if,
within thirty days after notice of election, he does not accept such
office either in writing or by attending a meeting of the Board of
Directors.
*Amended February 4, 1986.
Article 11
VACANCIES ON BOARD OF DIRECTORS
Article 11.1 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, each person so appointed shall
be a director until the expiration of the term of office of the class
of directors to which he was appointed.
Article 12
POWERS OF BOARD OF DIRECTORS
Section 12.1 The business and affairs of the Corporation shall
be managed by its Board of Directors, which may exercise all such
powers of the Corporation and do all such lawful acts and things as
are not by statute or by the Articles of Incorporation or by these By-laws
directed or required to be exercised and done by the
shareholders.
Section 12.2 The Board of Directors shall have the power and
authority to appoint an Executive Committee and such other committees
as may be deemed necessary by the Board of Directors for the efficient
operation of the Corporation. The Executive Committee shall consist
of the Chairman of the Board, if any, the President and not less than
two nor more than three other directors (which other directors shall
not be employees of the Corporation or any of its subsidiaries). The
Executive Committee shall meet at such time as may be fixed by the
Board of Directors, or upon call of the Chairman of the Board or the
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President. A majority of members of the Executive Committee shall
constitute a quorum. The Executive Committee shall have and exercise
the authority of the Board of Directors in the intervals between the
meetings of the Board of Directors as far as may be permitted by law.
Article 13
MEETINGS OF THE BOARD OF DIRECTORS
Section 13.1 An organization meeting may be held immediately
following the annual shareholders meeting without the necessity of
notice to the directors to constitute a legally convened meeting, or
the directors may meet at such time and place as may be fixed by
either a notice or waiver of notice or consent signed by all of such
directors.
Section 13.2 Regular meetings of the Board of Directors shall
be held not less often than semi-annually at a time and place
determined by the Board of Directors at the preceding meeting. One or
more directors may participate in any meeting of the Board of
Directors, or of any committee thereof, by means of a conference
telephone or similar communications equipment by means of which all
persons participating in the meeting can hear one another.
Section 13.3 Special meetings of the Board of Directors may be
called by the Chairman of the Board or the President on one day's
notice to each director, either personally or by mail, telegram or
telephone; special meetings shall be called by the Chairman of the
Board or the President in like manner and on like notice upon the
written request of three directors.
Section 13.4 At all meetings of the Board of Directors, a
majority of the directors shall constitute a quorum for the
transaction of business, and the acts of a majority of the directors
present at a meeting in person or by conference telephone or similar
communications equipment at which a quorum is present in person or by
such communications equipment shall be the acts of the Board of
Directors, except as may be otherwise specifically provided by statute
or by the Articles of Incorporation or by these By-laws. If a quorum
shall not be present in person or by communications equipment at any
meeting of the directors, the directors present may adjourn the
meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or as permitted herein.
Article 14
INFORMAL ACTION BY THE BOARD OF DIRECTORS
Section 14.1 If all the directors shall severally or
collectively consent in writing, including but not limited to
telegrams and radiograms, to any action to be taken by the
Corporation, such action
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shall be as valid a corporation action as though it had been
authorized at a meeting of the Board of Directors.
Article 15
COMPENSATION OF DIRECTORS
Section 15.1 Directors, as such, may receive a stated salary
for their services or a fixed sum and expenses for attendance at
regular and special meetings, or any combination of the foregoing as
may be determined from time to time by resolution of the Board of
Directors, and nothing contained herein shall be construed to preclude
any director from serving the Corporation in any other capacity and
receiving compensation therefor.
Article 16
OFFICERS
Section 16.1 The officers of the Corporation shall be elected
by the Board of Directors at its organization meeting and shall be a
President, a Secretary and a Treasurer. At its option, the Board of
Directors may elect a Chairman of the Board. The Board of Directors
may also elect one or more Vice Presidents and such other officers and
appoint such agents as it shall deem necessary, who shall hold their
offices for such terms, have such authority and perform such duties as
may from time to time be prescribed by the Board of Directors. Any
two or more offices may be held by the same person.
Section 16.2 The compensation of all officers of the
Corporation shall be fixed by the Board of Directors.
Section 16.3 The Board of Directors may remove any officer or
agent elected or appointed, at any time and within the period, if any,
for which such person was elected or employed whenever in the Board of
Directors' judgment it is in the best interests of the Corporation,
and all persons shall be elected and employed subject to the
provisions hereof. If the office of any officer becomes vacant for
any reason, the vacancy may be filled by the Board of Directors.
Article 17
THE CHAIRMAN OF THE BOARD
Section 17.1 The Chairman of the Board shall preside at all
meetings of the shareholders and directors. He shall supervise the
carrying out of the policies adopted or approved by the Board of
Directors. He shall have general executive powers, as well as the
specific powers conferred by these By-laws. He shall also have and
may
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exercise such further powers and duties as from time to time may be
conferred upon or assigned to him by the Board of Directors.
Article 18
THE PRESIDENT
Section 18.1 The President shall be the chief executive officer
of the Corporation; shall have general and active management of the
business of the Corporation; shall see that all orders and resolutions
of the Board of Directors are put into effect, subject, however, to
the right of the Board of Directors to delegate any specific powers,
except such as may be by statute exclusively conferred on the
President, to any other officer or officers of the Corporation; shall
execute bonds, mortgages and other contracts requiring a seal under
the seal of the Corporation, except where required or permitted by law
to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the Corporation. In the
absence or incapacity of the Chairman of the Board, the President
shall preside at meetings of the shareholders and the directors. If
there is no Chairman of the Board, the President shall have and
exercise all powers conferred by these By-laws or otherwise on the
Chairman of the Board.
Article 19
THE VICE PRESIDENT
Section 19.1 The Vice President or, if more than one, the Vice
Presidents in the order established by the Board of Directors shall,
in the absence or incapacity of the President, exercise all the powers
and perform the duties of the President. The Vice Presidents,
respectively, shall also have such other authority and perform such
other duties as may be provided in these By-laws or as shall be
determined by the Board of Directors or the President. Any Vice
President may, in the discretion of the Board of Directors, be
designated as "executive", "senior", or by departmental or functional
classification.
Article 20
THE SECRETARY
Section 20.1 The Secretary shall attend all meetings of the
Board of Directors and of the shareholders and keep accurate records
thereof in one or more minute books kept for that purpose and shall
perform the duties customarily performed by the secretary of a
corporation and such other duties as may be assigned to him by the
Board of Directors or the President.
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Article 21
THE TREASURER
Section 21.1 The Treasurer shall have the custody, of the
corporate funds and securities; shall keep full and accurate accounts
of receipts and disbursements in books belonging to the Corporation
and shall perform such other duties as may be assigned to him by the
Board of Directors or the President. He shall give bond in such sum
and with such surety as the Board of Directors may from time to time
direct.
Article 22
ASSISTANT OFFICERS
Section 22.1 Each assistant officer shall assist in the
performance of the duties of the officer to whom he is assistant and
shall perform such duties in the absence of the officer. He shall
perform such additional duties as the Board of Directors, the
President or the officer to whom he is assistant may from time to time
assign him. Such officers may be given such functional titles as the
Board of Directors shall from time to time determine.
Article 23
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 23.1 The Corporation shall indemnify any director,
officer and/or employee, or any former director, officer and/or
employee, who was or is a party to, or is threatened to be made a
party to, or who is called to be a witness in connection with, any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation) by reason of the fact that such
person is or was a director, officer and/or employee of the
Corporation, or is or was serving at the request of the Corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction or upon a plea
of nolo contendere or its equivalent, shall not of itself create a
presumption that the person did not act in good faith and in a manner
which he reasonably believed to be in, or not opposed to, the best
interests of the Corporation, and, with respect to any criminal action
or
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proceeding, had reasonable cause to believe that his conduct was
unlawful.
Section 23.2 The Corporation shall indemnify any director,
officer and/or employee, who was or is a party to, or is threatened to
be made a party to, or who is called as a witness in connection with,
any threatened, pending or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of the
fact that such person is or was a director, officer and/or employee or
agent of another corporation, partnership, joint venture, trust or
other enterprise against amounts paid in settlement and expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of, or serving as a witness
in, such action or suit if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of
the Corporation and except that no indemnification shall be made in
respect of any such claim, issue or matter as to which such person
shall have been adjudged to be liable for misconduct in the
performance of his duty to the Corporation.
Section 23.3 Except as may be otherwise ordered by a court,
there shall be a presumption that any director, officer and/or
employee is entitled to indemnification as provided in Sections 23.1
and 23.2 of this Article unless either a majority of the directors who
are not involved in such proceedings ("disinterested directors") or,
if there are less than three disinterested directors, then the holders
of one-third of the outstanding shares of the Corporation determine
that the person is not entitled to such presumption by certifying such
determination in writing to the Secretary of the Corporation. In such
event the disinterested director(s) or, in the event of certification
by shareholders, the Secretary of the Corporation shall request of
independent counsel, who may be the outside general counsel of the
Corporation, a written opinion as to whether or not the parties
involved are entitled to indemnification under Sections 23.1 and 23.2
of this Article.
Section 23.4 Expenses incurred in defending a civil or criminal
action, suit or proceeding may be paid by the Corporation in advance
of the final disposition of such action, suit or proceeding as
authorized in the manner provided under Section 23.3 of this Article
upon receipt of an undertaking by or on behalf of the director,
officer and/or employee to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
Corporation as authorized in this Article.
Section 23.5 The indemnification provided by this Article shall
not be deemed exclusive of any other rights to which a person seeking
indemnification may be entitled under any agreement, vote of
shareholders or disinterested directors, or otherwise, both as to
action in his official capacity while serving as a director, officer
and/or employee and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a
director, officer and/or employee and shall inure to the benefit of
the heirs and personal representatives of such a person.
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Article 24
SHARE CERTIFICATES
Section 24.1 The share certificates of the Corporation shall be
numbered and registered in a share register as they are issued; shall
bear the name of the registered holder, the number and class of shares
represented thereby, the par value of each share or a statement that
such shares are without par value, as the case may be; shall be signed
by the President or a Vice President and the Secretary or the
Treasurer or any other person properly authorized by the Board of
Directors, and shall bear the corporate seal, which seal may be a
facsimile engraved or printed. Where the certificate is signed by a
transfer agent or a registrar, the signature of any corporate officer
on such certificate may be a facsimile engraved or printed. In case
any officer who has signed, or whose facsimile signature has been
placed upon, any share certificate shall have ceased to be such
officer because of death, resignation or otherwise before the
certificate is issued, it may be issued by the Corporation with the
same effect as if the officer had not ceased to be such at the date of
its issue.
Article 25
TRANSFER OF SHARES
Section 25.1 Upon surrender to the Corporation of a share
certificate duly endorsed by the person named in the certificate or by
attorney duly appointed in writing and accompanied where necessary by
proper evidence of succession, assignment or authority to transfer, a
new certificate shall be issued to the person entitled thereto and the
old certificate cancelled and the transfer recorded upon the share
register of the Corporation. No transfer shall be made if it would be
inconsistent with the provisions of Article 8 of the Pennsylvania
Uniform Commercial Code.
Article 26
LOST CERTIFICATES
26.1 Where a shareholder of the Corporation alleges the loss,
theft or destruction of one or more certificates for shares of the
Corporation and requests the issuance of a substitute certificate
therefor, the Board of Directors may direct a new certificate of the
same tenor and for the same number of shares to be issued to such
person upon such person's making of an affidavit in form satisfactory
to the Board of Directors setting forth the facts in connection
therewith, provided that prior to the receipt of such request the
Corporation shall not have either registered a transfer of such
certificate or received notice that such certificate has been acquired
by a bona fide purchaser. When authorizing such issue of a new
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certificate the Board of Directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate, or his heirs or legal
representatives, as the case may be, to advertise the same in such
manner as it shall require and/or give the Corporation a bond in such
form and with surety or sureties, with fixed or open penalty, as shall
be satisfactory to the Board of Directors, as indemnity for any
liability or expense which it may incur by reason of the original
certificate remaining outstanding.
Article 27
DIVIDENDS
Section 27.1 The Board of Directors may, from time to time, at
any duly convened regular or special meeting or by unanimous consent
in writing, declare and pay dividends upon the outstanding shares of
capital stock of the Corporation in cash, property or shares of the
Corporation, as long as any dividend shall not be in violation of law
or the Articles of Incorporation.
Section 27.2 Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such
sum or sums as the Board of Directors from time to time, in their
absolute discretion, think proper as a reserve fund to meet
contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the Corporation, or for such other
purposes as the Board of Directors shall believe to be for the best
interests of the Corporation, and the Board of Directors may reduce or
abolish any such reserve in the manner in which it was created.
Article 28
FINANCIAL REPORT TO SHAREHOLDERS
Section 28.1 The President and the Board of Directors shall
present at each annual meeting of the shareholders a full and complete
statement of the business and affairs of the corporation for the
preceding year.
Article 29
INSTRUMENTS
Section 29.1 All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other
person or persons as the President or the Board of Directors may from
time to time designate.
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Section 29.2 All agreements, indentures, mortgages, deeds,
conveyances, transfers, certificates, declarations, receipts,
discharges, releases, satisfactions, settlements, petitions,
schedules, accounts, affidavits, bonds, undertakings, proxies and
other instruments and documents may be signed, executed, acknowledged,
verified, delivered or accepted, including those in connection with
the fiduciary powers of the Corporation, on behalf of the Corporation
by the President or other persons as may be designated by him.
Article 30
FISCAL YEAR
Section 30.1 The fiscal year of the Corporation shall be the
calendar year.
Article 31
SEAL
Section 31.1 The corporate seal shall have inscribed thereon
the name of the Corporation, the year of its organization and the
words "Corporate Seal, Pennsylvania". Said seal may be used by
causing it or a facsimile thereof to be impressed or affixed in any
manner reproduced.
Article 32
NOTICES AND WAIVERS THEREOF
Section 32.1 Whenever, under the provisions of applicable law
or of the Articles of Incorporation or of these By-laws, written
notice is required to be given to any person, it may be given to such
person either personally or by sending a copy thereof through the mail
or by telegram, charges prepaid, to his address appearing on the books
of the Corporation or supplied by him to the Corporation for the
purpose of notice. If the notice is sent by mail or telegraph, it
shall be deemed to have been given to the person entitled thereto when
deposited in the United States mail or with a telegraph office for
transmission to such person. Such notice shall specify the place, day
and hour of the meeting and, in the case of a special meeting of
shareholders, the general nature of the business to be transacted.
Section 32.2 Any written notice required to be given to any
person may be waived in writing signed by the person entitled to such
notice whether before or after the time stated therein. Attendance of
any person entitled to notice, whether in person or by proxy, at any
meeting shall constitute a waiver of notice of such meeting, except
where any person attends a meeting for the express purpose of
objecting to the transaction of any business because the meeting was
not lawfully
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called or convened. Where written notice is required of any meeting,
the waiver thereof must specify the purpose only if it is for a
special meeting of shareholders.
Article 33
AMENDMENTS
Section 33.1 These By-laws may be altered, amended or repealed
by the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock at any regular or special meeting
duly convened after notice to the shareholders of that purpose, or by
a majority vote of the members of the Board of Directors at any
regular or special meeting thereof duly convened after notice to the
directors of that purpose, subject always to the power of the
shareholders to change such action of the Board of Directors by the
affirmative vote of the holders of a majority of the outstanding
shares of Common Stock.
Amendment to Section 10.4, approved February 4, 1986:
Section 10.4 The Board of Directors may declare vacant the
office of a director if he is declared of unsound mind by an order of
court or convicted of felony or for any other proper cause or if,
within thirty days after notice of election, he does not accept such
office either in writing or by attending a meeting of the Board of
Directors. In addition, whenever a director of this Corporation who
is also an officer, director, or employee of this Corporation or of
any subsidiary of this Corporation is terminated or resigns,
voluntarily or involuntarily, from such position or positions, then
the office of director that such person holds in this Corporation
shall be deemed to be vacant as of the date of such termination or
resignation; provided, however, that the office of director that such
person holds shall not be deemed vacant in the case of the normal
retirement of such person from one or more of the aforesaid positions
with this Corporation or any subsidiaries of this Corporation.
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FIRST KEYSTONE CORPORATION
Amendment to By-laws re Director Emeritus
Section 10.6 The Board of Directors may appoint a former member
of the Board of Directors of the Corporation as a director emeritus.
A person appointed as a director emeritus shall serve for a three-year
term. A director emeritus may be appointed by the Board of Directors
to serve for successive terms. A director emeritus shall not be a
member of any standing or special committee of the Corporation. A
director emeritus shall not have the right to vote on any matter that
is presented to the Board of Directors. A director emeritus may
attend all regular and special meetings of the Board of Directors and
shall be paid a fee for such attendance equal to one-half the current
fee paid to a director for attendance at such meetings. There is no
age limit as a disqualification to serve as a director emeritus.
Adopted March 17, 1987
<PAGE>
FIRST KEYSTONE CORPORATION
Secretary's Certification
(1) I hereby certify that I am Secretary of First Keystone
Corporation, a Pennsylvania business corporation located in Berwick,
Commonwealth of Pennsylvania, and that I am presently serving in this
position in accordance with By-laws of said corporation.
(2) I hereby further certify that at the Annual Meeting of
Shareholders held on March 17, 1987, the attached Articles #23 and #24
were approved by 76% of the issued and outstanding shares entitled to
vote thereon.
These Articles #23 and #24 are presently in full force and effect
and have not been modified or rescinded as of this date.
IN WITNESS WHEREOF, I have hereunto set my hand and Seal of the
Corporation on this 26th day of March, 1987.
/s/ Arthur E. Arndt, Jr.
Arthur E. Arndt, Jr.
Secretary
Seal of Corporation
<PAGE>
FIRST KEYSTONE CORPORATION
Resolution adopted by the
Board of Directors
on February 3, 1987
RESOLVED, that the Board of Directors of this Corporation takes
notice of and concludes: (1) that it is becoming more difficult and
costly to purchase adequate insurance coverage under a directors' and
officers' liability policy, (2) that lawsuits are proliferating
against Boards of Directors and members thereof by individuals,
groups, associations and other corporations that perceive Boards of
Directors and their members as easy targets to recover monies, and (3)
that, as a result thereof, it is difficult to retain and to have
qualified persons accept seats on the Boards of Directors of
corporations due to this exposure to liability for actions while
members of Boards of Directors; and
BE IT FURTHER RESOLVED, that the Board of Directors takes further
notice of the Directors' Liability Act that was recently enacted by
the General Assembly of the Commonwealth of Pennsylvania to ameliorate
the aforesaid difficulties to corporations and personal liability
exposure to members of Boards of Directors; and
BE IT FURTHER RESOLVED, that, in accordance with the Directors'
Liability Act, the Board of Directors of this corporation hereby
adopts, ratifies and approves amendments to the By-laws of the
corporation to read as follows:
Article 23
INDEMNIFICATION OF OFFICERS AND EMPLOYEES
Section 23.1 The Corporation shall indemnify any officer and/or
employee, or any former officer and/or employee, who was or is a party
to, or is threatened to be made a party to, or who is called to be a
witness in connection with, any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the
Corporation) by reason of the fact that such person is or was an
officer and/or employee of the Corporation, or is or was serving at
the request of Corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments,
fines and acted in good faith and in a manner he reasonably believed
<PAGE>
to be in, or not opposed to, the best interests of the Corporation,
and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall
not of itself create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to
believe that his conduct was unlawful.
Section 23.2 The Corporation shall indemnify any officer and/or
employee, who was or is a party to, or is threatened to be made a
party to, or who is called as a witness in connection with, any
threatened, pending or completed action or Suit by or in the right of
the Corporation to procure a judgment in its favor by reason of the
fact that such person is or was a director, officer, and/or employee
or agent of another Corporation, partnership, joint venture, trust or
other enterprise against amounts paid in settlement and expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of, or serving as a witness
in, such action or suit if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of
the Corporation and except that no indemnification shall be made in
respect of any such claim, issue or matter as to which such person
shall have been adjudged to be liable for misconduct in the
performance of his duty to the Corporation.
Section 23.3 Except as may be otherwise ordered by a court,
there shall be a presumption that any officer and/or employee is
entitled to indemnification as provided in Sections 23.1 and 23.2 of
this Article unless either a majority of the directors who are not
involved in such proceedings ("disinterested directors") or, if there
are less than three disinterested directors, then the holders of one-third of
the outstanding shares of the Corporation determine that the
person is not entitled to such presumption by certifying such
determination in writing to the Secretary of the Corporation. In such
event the disinterested director(s) or, in the event of certification
by shareholders, the Secretary of the Corporation shall request of
independent counsel, who may be the outside general counsel of the
Corporation, a written opinion as to whether or not the parties
involved are entitled to indemnification under Sections 23.1 and 23.2
of this Article.
Section 23.4 Expenses incurred by an officer and/or employee in
defending a civil or criminal action, Suit or proceeding may be paid
by the Corporation in advance of the final disposition of such action,
suit or proceeding as authorized in the manner provided under Section
(2)
<PAGE>
23.3 of this Article upon receipt of an undertaking by or on behalf of
the officer and/or employee to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by
the Corporation.
Section 23.5 The indemnification provided by this Article shall
not be deemed exclusive of any other rights to which a person seeking
indemnification may be entitled under any agreement, vote of
shareholders or disinterested directors, or otherwise, both as to
action in his official capacity while serving as an officer and/or
employee and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be an
officer and/or employee and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 23.6 The Corporation may create a fund of any nature,
which may, but need not be, under the control of a trustee, or
otherwise secure or insure in any manner its indemnification
obligations arising under this Article.
Section 23.7 The Corporation shall have the power to purchase
and maintain insurance on behalf of any person who is or was an
officer and/or employee of the Corporation, or is or was serving at
the request of the Corporation as an officer and/or employee of
another Corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by
him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of this Article.
Section 23.8 Indemnification under this Article shall not be
made in any case where the act or failure to act giving rise to the
claim for indemnification is determined by a court to have constituted
willful misconduct or recklessness.
Section 23.9 No amounts shall be payable by the Corporation (or
any of its subsidiaries that have a provision in their by-laws similar
to this Section 23.9) to any person under this Article 23 (or under
such similar provision) unless prior to any such payment the
Corporation and its applicable subsidiary shall have received a
written opinion from its counsel that the payment of any such amount
will not constitute an unsafe or unsound banking practice. Counsel for
the Corporation and its applicable subsidiary may consult and seek
advise from the appropriate banking supervisory agency before issuing
such opinion.
(3)
<PAGE>
Article 24
INDEMNIFICATION OF DIRECTORS
Section 24.1 A director of this Corporation shall stand in a
fiduciary relation to the Corporation and shall perform his duties as
a director, including his duties as a member of any committee of the
board upon which he may serve, in good faith, in a manner he
reasonably believed to be in the best interests of the Corporation,
and with such care, including reasonable inquiry, skill and diligence,
as a person of ordinary prudence would use under similar
circumstances. In performing his duties, a director shall be entitled
to rely in good faith on information, opinions, reports or statements,
including financial statements and other financial data, in each case
prepared or presented by any of the following:
(a) One or more officers or employees of the Corporation whom
the director reasonably believes to be reliable and competent in the
matters presented.
(b) Counsel, public accountants or other persons as to matters
which the director reasonably believes to be within the professional
or expert competence of such person.
(c) A committee of the board upon which he does not serve, duly
designated in accordance with law, as to matters within its designated
authority, which committee the director reasonably believes to merit
confidence.
A director shall not be considered to be acting in good faith if
he has knowledge concerning the matter in question that would cause
his reliance to be unwarranted.
Section 24.2 In discharging the duties of their respective
positions, the board of directors, committees of the board, and
individual directors may, in considering the best interests of the
Corporation, consider the effects of any action upon employees, upon
suppliers and customers of the Corporation and upon communities in
which offices or other establishments of the Corporation are located,
and all other pertinent factors. The consideration of those factors
shall not constitute a violation of Section 24.1.
Section 24.3 Absent a breach of fiduciary duty, lack of good
faith or self-dealing, actions taken as a director or any failure to
take any action shall be presumed to be in the best interests of the
Corporation.
(4)
<PAGE>
Section 24.4 A director of this Corporation shall not be
personally liable for monetary damages as such for any action taken or
for any failure to take any action, unless:
(a) the director has breached or failed to perform the duties of
his office under the provisions of Sections 24.1 and 24.2, and
(b) the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness.
Section 24.5 The provisions of Section 24.4 shall not apply to:
(a) the responsibility or liability of a director pursuant to a
criminal statute, or
(b) the liability of a director for the payment of taxes
pursuant to local, state or federal law.
Section 24.6 The Corporation shall indemnify any director, or
any former director who was or is a party to, or is threatened to be
made a party to, or who is called to be a witness in connection with,
any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Corporation) by reason of the fact
that such person is or was a director of the Corporation, or is or was
serving at the request of the Corporation as a director, officer,
employee or agent of another Corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys,
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not of itself create a presumption that the person
did not act in good faith and in a manner which he reasonably believed
to be in, or not opposed to, the best interests of the Corporation,
and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful.
Section 24.7 The Corporation shall indemnify any director who
was or is a party to, or is threatened to be made a party to, or who
is called as a witness in connection with, any threatened, pending or
completed action or suit by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that such person
is or was a director, officer and/or employee or agent of another
(5)
<PAGE>
Corporation, partnership, joint venture, trust or other enterprise
against amounts paid in settlement and expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the
defense or settlement of, or serving as a witness in, such action or
suit if he acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the Corporation and
except that no indemnification shall be made in respect of any such
claim, issue or matter as to which such person shall have been
adjudged to be liable for misconduct in the performance of his duty
to the Corporation.
Section 24.8 Except as may be otherwise ordered by a court,
there shall be a presumption that any director is entitled to
indemnification as provided in Sections 24.6 and 24.7 of this Article
unless either a majority of the directors who are not involved in such
proceedings ("disinterested directors") or, if there are less than
three disinterested directors, then the holders of one-third of the
outstanding shares of the Corporation determine that the person is not
entitled to such presumption by certifying such determination in
writing to the Secretary of the Corporation. In such event the
disinterested director(s) or, in the event of certification by
shareholders, the Secretary of the Corporation shall request of
independent counsel, who may be the outside general counsel of the
Corporation, a written opinion as to whether or not the parties
involved are entitled to indemnification under Sections 24.6 and 24.7
of this Article.
Section 24.9 Expenses incurred by a director in defending a
civil or criminal action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit
or proceeding as authorized in the manner provided under Section 24.8
of this Article upon receipt of an undertaking by or on behalf of the
director, officer and/or employee to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by
the Corporation as authorized in this Article.
Section 24.10 The indemnification provided by this Article
shall not be deemed exclusive of any other rights to which a person
seeking indemnification may be entitled under any agreement, vote of
shareholders or disinterested directors, or otherwise, both as to
action in his official capacity while serving as a director and as to
action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director and shall
inure to the benefit of the heirs, executors and administrators of
such a person.
(6)
<PAGE>
Section 24.11 The Corporation may create a fund of any nature,
which may, but need not be, under the control of a trustee, or
otherwise secure or insure in any manner its indemnification
obligations arising under this Article.
Section 24.12 The Corporation shall have the power to purchase
and maintain insurance on behalf of any person who is or was a
director or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another Corporation,
partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such
liability under the provisions of this Article.
Section 24.13 Indemnification under this Article shall not be
made in any case where the act or failure to act giving rise to the
claim for indemnification is determined by a court to have constituted
willful misconduct or recklessness.
Section 24.14 No amounts shall be payable by the Corporation
(or any of its subsidiaries that have a provision in their by-laws
similar to this Section 24.14) to any person under this Article 24 (or
under such similar provision) unless prior to any such payment the
Corporation and its applicable subsidiary shall have received a
written opinion from its counsel that the payment of any such amount
will not constitute an unsafe or unsound banking practice. Counsel for
the Corporation and its applicable subsidiary may consult and seek
advice from the appropriate banking supervisory agency before issuing
such opinion.
and,
BE IT FURTHER RESOLVED that present Articles 24 through 33 be
renumbered Articles 25 through 34 respectively after the approval and
adoption of the aforesaid Articles 23 and 24 by the shareholders; and
NOW, THEREFORE, BE IT RESOLVED, that the aforesaid Articles 23
and 24 are to be submitted to the shareholders of this Corporation for
their approval at the Annual Meeting of Shareholders to be held on
March 17, 1987, and that the appropriate officers of the Corporation
be and are hereby authorized, empowered and directed, in the name and
on behalf of this Corporation, to take such action as may be necessary
or desirable to carry out the intents and purpose of the foregoing
resolutions.
(7)
<PAGE>
IN TESTIMONY WHEREOF, hereunder are set our hands and seals this
3rd day of February, 1987.
FIRST KEYSTONE CORPORATION
By: /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
Attest: President
/s/ Arthur E. Arndt Jr.
Arthur E. Arndt Jr.
Secretary
(8)
<PAGE>
FIRST KEYSTONE CORPORATION
Amendment to By-Laws re: Annual Meeting
Section 2.2 The annual meeting of the shareholders shall be
held on the third Tuesday in April in each year if not a legal
holiday, and if a legal holiday, then on the next full business day,
when they shall elect a Board of Directors and transact such other
business as may properly be brought before the meeting.
Adopted November 21, 1989
<PAGE>
EXHIBIT 11
FIRST KEYSTONE CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE*
Year Ended December 31,
1996 1995 1994
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C> <C> <C>
Primary
Net Income $ 4,130 $ 3,486 $ 3,115
Shares**
Weighted average number of
common shares outstanding 879,002 879,002 879,002
Adjustments - increases or
decreases None None None
Weighted average number of
common shares outstanding
as adjusted 879,002 879,002 879,002
Primary earnings per common
share $ 4.70 $ 3.97 $ 3.54
Assuming full dilution
Net Income $ 4,130 $ 3,486 $ 3,115
Shares**
Weighted average number of
common shares outstanding 879,002 879,002 879,002
Adjustments - increases or
decreases None None None
Weighted average number of
common shares outstanding
as adjusted 879,002 879,002 879,002
Earnings per common share
assuming full dilution $ 4.70 $ 3.97 $ 3.54
<FN>
* See Notes 1 and 16 to the consolidated financial statements.
** Restated to reflect 10% stock dividends paid in 1996.
</FN>
</TABLE>
24
<PAGE>
EXHIBIT 11
<TABLE>
SUMMARY OF SELECTED FINANCIAL DATA
<CAPTION>
(Amounts in thousands,
except per share) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $ 17,786 $ 16,637 $ 13,731 $ 13,734 $ 14,010
Interest expense 8,667 8,271 6,353 6,519 7,438
Net interest
income 9,119 8,366 7,378 7,215 6,572
Provision for loan
losses 517 372 31 518 711
Investment securities
gains (losses) (38) 5 180 70 100
Net income $ 4,130 $ 3,486 $ 3,115 $ 3,101 $ 2,324
PER COMMON SHARE
Net income $ 4.70 $ 3.97 $ 3.54 $ 3.53 $ 2.64
Cash dividends 1.29 1.09 1.01 .87 .78
BALANCE SHEET DATA
Assets $242,557 $226,033 $206,864 $201,270 $187,795
Investment securities 101,225 88,125 79,946 86,054 73,755
Net loans 130,994 126,046 116,383 106,500 101,864
Deposits 198,546 187,320 172,280 165,731 162,897
Stockholders' equity 27,473 25,399 20,788 18,577 16,210
PERFORMANCE RATIOS
Return on average
assets 1.75% 1.58% 1.54% 1.58% 1.31%
Return on average
equity 15.98% 15.24% 15.34% 17.56% 14.68%
Dividend payout ratio 27.56% 27.36% 28.55% 24.79% 29.61%
Average equity to
average assets
ratio 11.05% 10.36% 10.05% 9.02% 8.93%
</TABLE>
2 First Keystone Corporation
<PAGE>
EXHIBIT 11
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially 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 carrying amount or fair
value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in loss on foreclosed
real estate.
Advertising Costs
Advertising costs are expensed as the costs are incurred.
Advertising expenses amounted to $119,579, $107,541, and $114,124 for
1996, 1995, and 1994, respectively.
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.
Income Taxes
The provision for income taxes is based on the results of
operations, adjusted primarily for tax exempt income. Certain items
of income and expense are reported in different periods for financial
reporting and tax return purposes. 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.
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 and interest bearing
deposits in other banks. 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.
Interest paid on deposits and other borrowings was $8,682,349,
$7,994,087 and $6,287,219 in 1996, 1995 and 1994, respectively. Cash
payments for income taxes were $1,125,251, $902,567 and $760,056 for
1996, 1995 and 1994, respectively. The Corporation transferred loans
to other real estate owned in the amounts of $46,184 in 1996 and
$256,530 in 1994.
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.
Reporting Format
Certain amounts in the financial statements of prior periods have
been reclassified to conform with presentation used in the 1996
financial statements. Such reclassifications have no effect on the
Corporation's consolidated financial condition or net income.
10 First Keystone Corporation
<PAGE>
EXHIBIT 13
EXCERPT FROM ANNUAL REPORT TO SHAREHOLDERS
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
25
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 and 1995
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,147,438 $ 4,656,866
Interest-bearing deposits
in other banks 32,093 1,962,946
Investment securities available for
sale carried at estimated fair value 81,145,934 64,703,806
Investment securities held to maturity,
estimated fair value
1996 $19,954,360; 1995 $23,439,296 20,079,559 23,421,484
Loans, net of unearned income 133,260,961 128,061,435
Allowance for loan losses (2,266,983) (2,015,236)
Net loans $130,993,978 $126,046,199
Premises and equipment 2,881,176 3,066,001
Other real estate owned 46,184 -
Accrued interest receivable 1,958,882 1,875,368
Other assets 271,906 300,593
TOTAL ASSETS $242,557,150 $226,033,263
LIABILITIES
Deposits:
Non-interest bearing $ 17,804,634 $ 17,621,563
Interest bearing 180,741,149 169,698,524
Total Deposits $198,545,783 $187,320,087
Short-term borrowings 5,121,367 4,358,601
Long-term borrowings 10,000,000 7,000,000
Accrued interest and other expenses 1,128,034 1,180,110
Other liabilities 288,971 775,004
TOTAL LIABILITIES $215,084,155 $200,633,802
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 889,147 shares 1996 and
808,429 shares 1995 1,778,294 1,616,858
Surplus 6,654,396 3,829,266
Retained earnings 17,889,923 17,888,934
Unrealized gain (loss) on investment
securities available for sale,
net of taxes 1,150,382 2,064,403
TOTAL STOCKHOLDERS' EQUITY $ 27,472,995 $ 25,399,461
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $242,557,150 $226,033,263
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, 1996, 1995, and 1994
<CAPTION>
1996 1995
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable $11,193,303 $10,569,702
Tax exempt 212,206 290,578
Interest and dividends on investment
securities:
Taxable interest 3,856,431 3,887,673
Tax exempt interest 2,317,029 1,631,495
Dividends 115,054 107,443
Interest on deposits in banks 91,782 149,793
TOTAL INTEREST INCOME $17,785,805 $16,636,684
INTEREST EXPENSE
Interest on deposits $ 7,864,665 $ 7,450,453
Interest on short-term borrowings 261,458 236,928
Interest on long-term borrowings 541,243 583,469
TOTAL INTEREST EXPENSE $ 8,667,366 $ 8,270,850
NET INTEREST INCOME $ 9,118,439 $ 8,365,834
PROVISION FOR LOAN LOSSES 516,584 372,448
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $ 8,601,855 $ 7,993,386
NON-INTEREST INCOME
Fiduciary activities income $ 424,740 $ 349,809
Service charges and fees 616,487 572,535
Other operating income 48,936 41,825
Investment securities gains
(losses) - net (37,729) 4,841
TOTAL NON-INTEREST INCOME $ 1,052,434 $ 969,010
NON-INTEREST EXPENSE
Salaries and employee benefits $ 2,448,234 $ 2,262,650
Occupancy expense, net 281,222 292,731
Furniture and equipment expense 467,973 456,013
FDIC insurance 2,000 199,953
Other operating expense 1,341,236 1,345,098
TOTAL NON-INTEREST EXPENSE $ 4,540,665 $ 4,556,445
Income before income taxes $ 5,113,624 $ 4,405,951
Income tax expense 983,339 919,758
NET INCOME $ 4,130,285 $ 3,486,193
PER SHARE DATA
Net income $ 4.70 $ 3.97
Cash dividends $ 1.29 $ 1.09
Weighted average shares outstanding 879,002 879,002
The accompanying notes are an integral part if these consolidated financial
statements.
<CAPTION>
1993
<S> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable $ 9,179,252
Tax exempt 195,199
Interest and dividends on investment
securities:
Taxable interest 2,894,880
Tax exempt interest 1,306,861
Dividends 94,953
Interest on deposits in banks 60,176
TOTAL INTEREST INCOME $13,731,321
INTEREST EXPENSE
Interest on deposits $ 5,736,505
Interest on short-term borrowings 215,721
Interest on long-term borrowings 400,907
TOTAL INTEREST EXPENSE $ 6,353,133
NET INTEREST INCOME $ 7,378,188
PROVISION FOR LOAN LOSSES 31,233
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $ 7,346,955
NON-INTEREST INCOME
Fiduciary activities income $ 294,831
Service charges and fees 472,922
Other operating income 43,755
Investment securities gains
(losses) - net 180,284
TOTAL NON-INTEREST INCOME $ 991,792
NON-INTEREST EXPENSE
Salaries and employee benefits $ 2,121,904
Occupancy expense, net 273,746
Furniture and equipment expense 401,378
FDIC insurance 377,154
Other operating expense 1,133,909
TOTAL NON-INTEREST EXPENSE $ 4,308,091
Income before income taxes $ 4,030,656
Income tax expense 916,063
NET INCOME $ 3,114,593
PER SHARE DATA
Net income $ 3.54
Cash dividends $ 1.01
Weighted average shares outstanding 879,002
The accompanying notes are an integral part if these consolidated financial
statements.
</TABLE>
1996 Annual Report 5
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, and 1994
<CAPTION>
Common Retained
Stock Surplus Earnings
<S> <C> <C> <C>
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 -
$1.01 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
<CAPTION>
Net
Unrealized
Gain (Loss)
On Investment
Securities
Treasury Available
Stock For Sale Total
<S> <C> <C> <C>
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 -
$1.01 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
<CAPTION>
Common Retained
Stock Surplus Earnings
<S> <C> <C> <C>
Net Income $ - $ - $ 3,486,193
Cash Dividends -
$1.09 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
<CAPTION>
Net
Unrealized
Gain (Loss)
On Investment
Securities
Treasury Available
Stock For Sale Total
<S> <C> <C> <C>
Net Income $ - $ - $ 3,486,193
Cash Dividends -
$1.09 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
<CAPTION>
Common Retained
Stock Surplus Earnings
<S> <C> <C> <C>
Net Income $ - $ - $ 4,130,285
10% Stock Dividend 161,436 2,825,130 (2,986,566)
Dividends paid in lieu of
fractional shares - - (4,622)
Cash Dividends -
$1.29 per share - - (1,138,108)
Change in unrealized gain
(loss) on investment
securities available for
sale, net of taxes - - -
BALANCE AT DECEMBER 31, 1996 $1,778,294 $6,654,396 $17,889,923
<CAPTION>
Net
Unrealized
Gain (Loss)
On Investment
Securities
Treasury Available
Stock For Sale Total
<S> <C> <C> <C>
Net Income $ - $ - $ 4,130,285
10% Stock Dividend - - -
Dividends paid in lieu of
fractional shares - - (4,622)
Cash Dividends -
$1.29 per share - - (1,138,108)
Change in unrealized gain
(loss) on investment
securities available for
sale, net of taxes - (914,021) (914,021)
BALANCE AT DECEMBER 31, 1996 $1,778,294 $6,654,396 $17,889,923
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, 1996, 1995 and 1994
<CAPTION>
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,130,285 $ 3,486,193
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 516,584 372,448
Depreciation 299,274 311,636
Premium amortization on investment
securities 158,011 254,510
Discount accretion on investment
securities (86,481) (141,052)
Deferred income taxes (benefit) (32,241) (29,421)
(Gain) loss on sales of investment
securities 37,729 (4,841)
Gain on sale of premises and
equipment (804) (2,342)
(Gain) loss on sale of other real
estate owned - 37,155
(Increase) decrease in accrued
interest receivable (83,514) (602,849)
(Increase) decrease in other
assets - net 28,687 100,671
Increase (decrease) in accrued
interest and other expenses (52,076) 398,383
Decrease in other liabilities - net (301) (7,395)
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 4,915,153 $ 4,173,096
INVESTING ACTIVITIES
Purchases of investment securities
available for sale $(40,909,754) $(36,711,805)
Proceeds from sales of investment
securities available for sale 20,076,003 22,461,737
Proceeds from maturities and
redemptions of investment
securities available for sale 3,998,416 6,424,757
Purchases of investment securities
held to maturity (996,170) (5,608,356)
Proceeds from maturities and
redemption of investment securities
held to maturity 3,254,532 8,307,905
Net increase in loans (5,575,547) (10,218,544)
Proceeds from sales of loans 65,000 182,500
Proceeds from sale of premises
and equipment 1,200 3,000
Purchases of premises and equipment (114,846) (348,965)
Proceeds from sale of other real
estate owned - 197,845
NET CASH USED IN INVESTING
ACTIVITIES $(20,201,166) $(15,309,926)
FINANCING ACTIVITIES
Net increase in deposits $ 11,225,696 $ 15,040,312
Net increase (decrease) in
short-term borrowings 762,766 (1,126,013)
Proceeds from long-term borrowings 12,000,000 1,000,000
Repayment of long-term borrowings (9,000,000) (1,500,000)
Cash dividends paid (1,138,108) (953,946)
Dividends paid in lieu of fractional
shares (4,622) -
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 13,845,732 $ 12,460,353
Increase (decrease) in cash and cash
equivalents $ (1,440,281) $ 1,323,523
Cash and cash equivalents at
beginning of year 6,619,812 5,296,289
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 5,179,531 $ 6,619,812
The accompany notes are an integral part of these consolidated financial
statements.
<CAPTION>
1993
<S> <C>
OPERATING ACTIVITIES
Net income $ 3,114,593
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 31,233
Depreciation 295,327
Premium amortization on
investment securities 315,008
Discount accretion on investment
securities (43,119)
Deferred income taxes (benefit) 88,542
(Gain) loss on sales of
investment securities (180,284)
Gain on sale of premises and
equipment -
(Gain) loss on sale of other real
estate owned (3,730)
(Increase) decrease in accrued
interest receivable 28,256
(Increase) decrease in other
assets - net (70,258)
Increase (decrease) in accrued
interest and other expenses (43,889)
Decrease in other liabilities - net (61,521)
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 3,470,158
INVESTING ACTIVITIES
Purchases of investment securities
available for sale $(19,799,911)
Proceeds from sales of investment
securities available for sale 19,505,870
Proceeds from maturities and
redemptions of investment
securities available for sale 5,757,254
Purchases of investment securities
held to maturity (4,345,463)
Proceeds from maturities and
redemption of investment
securities held to maturity 4,889,106
Net increase in loans (10,148,833)
Proceeds from sales of loans -
Proceeds from sale of premises and
equipment -
Purchases of premises and equipment (591,525)
Proceeds from sale of other real
estate owned 8,730
NET CASH USED IN INVESTING
ACTIVITIES $ (4,724,772)
FINANCING ACTIVITIES
Net increase in deposits $ 6,549,062
Net increase (decrease) in
short-term borrowings (4,559,871)
Proceeds from long-term borrowings 3,500,000
Repayment of long-term borrowings (2,000,000)
Cash dividends paid (889,272)
Dividends paid in lieu of
fractional shares -
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 2,599,919
Increase (decrease) in cash and
cash equivalents $ 1,345,305
Cash and cash equivalents at
beginning of year 3,950,984
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 5,296,289
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
1996 Annual Report 7
<PAGE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements for Years Ended December
31, 1996, 1995, and 1994
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Keystone
Corporation and Subsidiary (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. 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.
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.
In November 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 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.
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.
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.
Mortgage loans held for resale are carried at the lower of cost
or market. These loans are sold without recourse to the Corporation.
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
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.
As of January 1, 1996, the Corporation adopted Statement of
Financial Accounting Standards 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 be reviewed for impairment 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. Implementation of this
Statement by the Corporation did not result in any impairment losses.
1996 Annual Report 9
<PAGE>
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially 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 carrying amount or fair
value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in loss on foreclosed
real estate.
Advertising Costs
Advertising costs are expensed as the costs are incurred.
Advertising expenses amounted to $119,579, $107,541, and $114,124 for
1996, 1995, and 1994, respectively.
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.
Income Taxes
The provision for income taxes is based on the results of
operations, adjusted primarily for tax exempt income. Certain items
of income and expense are reported in different periods for financial
reporting and tax return purposes. 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.
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 and interest bearing
deposits in other banks. 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.
Interest paid on deposits and other borrowings was $8,682,349,
$7,994,087 and $6,287,219 in 1996, 1995 and 1994, respectively. Cash
payments for income taxes were $1,125,251, $902,567 and $760,056 for
1996, 1995 and 1994, respectively. The Corporation transferred loans
to other real estate owned in the amounts of $46,184 in 1996 and
$256,530 in 1994.
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.
Reporting Format
Certain amounts in the financial statements of prior periods have
been reclassified to conform with presentation used in the 1996
financial statements. Such reclassifications have no effect on the
Corporation's consolidated financial condition or net income.
10 First Keystone Corporation
<PAGE>
NOTE 2. 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 aggregate cash
reserves of $1,949,000 and $1,508,000 at December 31, 1996, and 1995,
respectively.
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 $1,032,133 at December 31, 1996.
NOTE 3. 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, 1996,
and 1995:
<TABLE>
<CAPTION>
Available For Sale Securities
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1996:
U.S. Treasury
securities $ 3,294,242 $ 46,430 $ - $ 3,340,672
Obligations of U.S.
Government
Corporations and
Agencies:
Mortgage-backed 18,874,935 - 62,810 18,812,125
Other 17,748,918 - 221,778 17,527,140
Obligations of state
and political
subdivisions 35,971,566 1,630,009 - 37,601,575
Corporate debt
securities:
Mortgage-backed 1,292,934 - 27,116 1,265,818
Other 0 - - 0
Equity securities 2,178,352 420,252 - 2,598,604
Total $79,360,947 $2,096,691 $311,704 $81,145,934
</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, 1996:
Obligations of U.S.
Government
Corporations and
Agencies,
Mortgage-backed $16,786,482 $ - $173,419 $16,613,063
Obligations of state
and political
subdivisions 3,293,077 48,220 - 3,341,297
Total $20,079,559 $48,220 $173,419 $19,954,360
</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, 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 0 92,126
Equity securities 1,918,523 246,408 0 2,164,931
Total $61,551,309 $3,344,785 $192,288 $64,703,806
</TABLE>
1996 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, 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>
December 31, 1996
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 3,294,242 - -
Estimated fair value 3,340,672 - -
Weighted average yield 6.89% - -
5 - 10 Years:
Amortized cost - 11,818,162 485,916
Estimated Fair value - 11,788,996 538,971
Weighted average yield - 7.29% 11.69%
After 10 Years:
Amortized cost - 24,805,692 35,485,650
Estimated fair value - 24,550,269 37,062,605
Weighted average yield - 7.33% 9.30%
Total:
Amortized cost $3,294,242 $36,623,854 $35,971,566
Estimated fair value $3,340,672 $36,339,265 $37,601,575
Weighted average yield 6.89% 7.32% 9.33%
<CAPTION>
December 31, 1996
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 - - -
Estimated fair value - - -
Weighted average yield - - -
5 - 10 Years:
Amortized cost - - -
Estimated Fair value - - -
Weighted average yield - - -
After 10 Years:
Amortized cost 1,292,934 1,428,050 750,302
Estimated fair value 1,265,818 1,428,050 1,170,554
Weighted average yield 6.18% 6.28% 3.31%
Total:
Amortized cost $1,292,934 $1,428,050 $ 750,302
Estimated fair value $1,265,818 $1,428,050 $1,170,554
Weighted average yield 6.18% 6.28% 3.31%
_______________________
<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, 1996
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 - - 303,011
Estimated fair value - - 306,802
Weighted average yield - - 8.34%
5 - 10 Years:
Amortized cost - - 498,125
Estimated Fair value - - 498,190
Weighted average yield - - 7.27%
After 10 Years:
Amortized cost - 16,786,482 2,491,941
Estimated fair value - 16,613,063 2,536,305
Weighted average yield - 6.62% 8.84%
Total:
Amortized cost $ - $16,786,482 $3,293,077
Estimated fair value $ - $16,613,063 $3,341,297
Weighted average yield - 6.62% 8.56%
<CAPTION>
December 31, 1996
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 $1,265,818 $1,428,050 $1,170,554
Weighted average yield 6.18% 6.28% 3.31%
_______________________
<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, 1996. 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 1996, 1995 and 1994 were $20,076,003, $22,461,737, and
$19,505,870, respectively. Gross gains realized on these sales were
$414,239, $350,410 and $332,506, respectively. Gross losses on these
sales were $451,968, $345,569 and $152,222, respectively. Net
unrealized gains (losses) on securities available for sale included as
a separate component of consolidated stockholders' equity net of tax
was $1,150,382 and $2,064,403 in 1996 and 1995, respectively.
NOTE 4. LOANS
Major classifications of loans at December 31, 1996 and 1995
consisted of:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Commercial, Financial, and Agricultural $ 13,573,843 $ 17,563,201
Tax exempt 2,263,116 3,602,088
Real estate mortgage 98,248,599 87,284,672
Consumer 23,026,816 23,680,715
Gross loans $137,112,374 $132,130,676
Less: Unearned discount 3,544,417 3,752,652
Unamortized loan fees net of costs 306,996 316,589
Loans, net of unearned income $133,260,961 $128,061,435
</TABLE>
Mortgage loans held for sale included in loans were $1,126,213
and $103,900 at December 31, 1996, and 1995, respectively.
1996 Annual Report 13
<PAGE>
Changes in the allowance for loan losses for the years ended
December 31, 1996, 1995, and 1994, were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance, January 1 $2,015,236 $1,801,517 $1,844,196
Provision charged to
operations 516,584 372,448 31,233
Loans charged off (302,480) (185,643) (181,666)
Recoveries 37,643 26,914 107,754
Balance, December 31 $2,266,983 $2,015,236 $1,801,517
</TABLE>
Non-accrual loans at December 31, 1996, 1995 and 1994 were
approximately $267,445, $556,533 and $619,732, respectively. The
gross interest that would have been recorded if these loans had been
current in accordance with their original terms and the amounts
actually recorded in income were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Gross interest due under terms $46,924 $53,224 $61,108
Amount included in income 3,048 2,700 3,555
Interest income not recognized $43,876 $50,524 $57,553
</TABLE>
At December 31, 1996 and 1995 the recorded investment in loans
that are considered to be impaired as defined by Statement No. 114 was
$108,749 and $242,319, respectively. No additional charge to
operations was required to provide for the impaired loans since the
total allowance for loan losses is estimated by management to be
adequate to provide for the loan loss allowance required by Statement
No. 114 along with any other potential losses. The average recorded
investment in impaired loans during the year ended December 31, 1996
and 1995 was approximately $126,641 and $237,090, respectively.
At December 31, 1996, there were no significant commitments to
lend additional funds with respect to non-accrual and restructured
loans.
Note 5. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1996 and 1995
follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 840,288 $ 840,288
Buildings and improvements 2,386,788 2,386,788
Equipment 2,953,482 2,850,527
$6,180,558 $6,077,603
Less: Accumulated depreciation 3,299,382 3,011,602
Total $2,881,176 $3,066,001
</TABLE>
Depreciation amounted to $299,274 for 1996, $311,636 for 1995,
and $295,327 for 1994.
Note 6. DEPOSITS
Major classifications of deposits at December 31, 1996 and 1995
consisted of:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Demand - non-interest bearing $ 17,804,634 $ 17,621,563
Demand - interest bearing 42,838,638 37,617,465
Savings 40,405,703 42,333,211
Time, $100,000 and over 21,053,285 17,683,648
Other time 76,443,523 72,064,200
Total deposits $198,545,783 $187,320,087
</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, 1996:
<TABLE>
<CAPTION>
CERTIFICATES OTHER TIME
OF DEPOSIT DEPOSITS
<S> <C> <C>
Three months or less $ 7,348,723 $5,247,000
Over three to six months 2,424,960 -
Over six to twelve months 3,238,845 -
Over twelve months 2,793,757 -
Total $15,806,285 $5,247,000
</TABLE>
Interest expense related to time deposits of $100,000 or more was
$1,066,135 in 1996, $1,156,943 in 1995, and $589,750 in 1994.
Note 7. 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. 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, 1996, and
1995:
<TABLE>
<CAPTION>
1996
Maximum
Month
Ending Average End Average
Balance Balance Balance Rate
<S> <C> <C> <C> <C>
Federal funds purchased and
securities sold under
agreements to repurchase $3,388,466 $3,767,724 $ 4,095,918 4.28%
Federal Home Loan Bank 500,000 1,088,209 5,775,000 6.52%
U.S. Treasury tax and
loan notes 1,232,901 570,705 1,506,241 5.11%
Total $5,121,367 $5,426,638 $11,377,159 6.03%
<CAPTION>
1995
Maximum
Month
Ending Average 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%
</TABLE>
NOTE 8. 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,
1996, and 1995 follows:
<TABLE>
<CAPTION>
Maturity Interest Rate 1996 1995
<S> <C> <C> <C>
08/08/1996 7.40% $ - $1,000,000
10/27/1996 7.36% - 1,000,000
01/28/1997 5.50% 1,000,000 -
04/28/1997 5.80% 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
11/04/1997 5.73% 2,000,000 -
11/01/1998 5.56% 1,000,000 1,000,000
12/27/2001 4.97% 1,000,000 -
05/18/2002 7.77% 1,000,000 1,000,000
$10,000,000 $7,000,000
</TABLE>
1996 Annual Report 15
<PAGE>
NOTE 9. INCOME TAXES
The current and deferred components of the income tax provision
(benefit) consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Federal
Current $1,013,777 $947,026 $815,005
Deferred (benefit) (32,241) (28,711) 88,584
$ 981,536 $918,315 $903,589
State
Current (benefit) $1,803 $2,153 $ 12,516
Deferred (benefit) - (710) (42)
$ 1,803 $ 1,443 $ 12,474
Total provision for
income taxes $ 983,339 $919,758 $916,063
</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>
1996 1995
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Provision at statutory rate $1,738,632 34.0% $1,498,023 34.0%
Tax exempt income (859,940) (16.8) (653,505) (14.8)
Dividend received exclusion (8,565) (.2) (6,433) (.2)
Non-deductible expenses 112,022 2.2 83,110 1.9
Other, net (613) - (2,880) (.1)
Applicable federal income
tax and rate $ 981,536 19.2% $ 918,315 20.8%
<CAPTION>
1994
Amount Rate
<S> <C> <C>
Provision at statutory rate $1,370,423 34.0%
Tax exempt income (510,700) (12.7)
Dividend received exclusion (6,085) (.2)
Non-deductible expenses 54,552 1.4
Other, net (4,601) (.1)
Applicable federal income
tax and rate $ 903,589 22.4%
</TABLE>
Income tax (benefit) attributable to realized security losses was
($12,828) in 1996. Income tax expense attributable to realized
security gains was $1,646 in 1995 and $61,297 in 1994.
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, 1996, 1995, and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Deferred Tax Assets:
Loan loss Reserve $ 623,870 $ 538,276 $ 465,612
Loan origination fees
and costs - - 9,059
Contributions - 4,454 -
Total $ 623,870 $ 542,730 $ 474,671
Deferred Tax Liabilities:
Loan origination fees
and costs $ (64,371) $ (30,176) $ -
Accretion (24,302) (11,622) (3,358)
Unrealized investment
securities gains
(loss in 1994 <F1> (634,604) (1,088,095) (5,018)
Depreciation (167,442) (165,418) (165,220)
Total $(890,719) $(1,295,311) $(173,596)
Net Deferred Tax Asset
(Liability) $(266,849) $ (752,581) $ 301,075
____________________________
<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 10. 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>
1996 1995 1994
<S> <C> <C> <C>
Matching Contribution $ 52,892 $ 46,306 $ 41,564
Discretionary Contribution 138,818 195,291 169,347
Total Expense $191,710 $241,597 $210,911
</TABLE>
Note 11. LEASE COMMITMENTS
At December 31, 1996, 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,
1996, 1995 and 1994 was $48,180, $45,997 and $34,347, respectively.
Minimum future non-cancelable rental payments for the branch
buildings as of December 31, 1996, for each of the next five years
are:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 43,678
1998 44,837
1999 45,824
2000 40,540
2001 15,452
Thereafter -
Total $190,331
</TABLE>
NOTE 12. 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 13. RELATED PARTY TRANSACTIONS
Certain directors and executive officers of First Keystone
Corporation and its Subsidiary and companies in which they are
principal owners (i.e., at least 10%) were indebted to the Corporation
at December 31, 1996, 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 5 directors and 3 executive officers, consists of the following for
the years ended December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at January 1 $3,090,030 $3,410,457 $2,813,715
New loan advances 224,885 1,513,122 1,593,607
Repayments (760,970) (1,833,549) (996,865)
Balance at December 31 $2,553,945 $3,090,030 $3,410,457
</TABLE>
1996 Annual Report 17
<PAGE>
Note 14. 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 1997, without
prior regulatory approval, the Bank may declare dividends to the
Corporation in the amount of $5,457,319 plus additional amounts equal
to the net income earned in 1997 for the period January 1, 1997,
through the date of declaration, less any dividends which may have
already been paid in 1997.
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, 1996, the Corporation exceeded all
minimum Capital requirements as reflected in the following table:
<TABLE>
<CAPTION>
Minimum
Calculated Standard
Ratios Ratios
<S> <C> <C>
Risk Based Ratios:
Tier 1 Capital to Risk-Weighted Asset 19.29% 4.00%
Total Qualifying Capital to Risk-Weighted
Assets 20.55% 8.00%
</TABLE>
Note 15. 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, 1996, and 1995 were as
follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Financial instruments whose contract
amount represent credit risk:
Commitments to extend credit $17,675,879 $10,036,866
Standby letters of credit $ 1,331,233 $ 1,824,649
</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, 1996, 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, 1996,
to the extent necessary to avoid any significant concentration of
credit risk.
Note 16. STOCKHOLDERS' EQUITY
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.
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.
NOTE 17. 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 Due From Banks, Short-Term Investments, Accrued Interest
Receivable and Accrued Interest Payable
The fair values are equal to the current carrying values.
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.
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, 1996, and 1995.
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.
1996 Annual Report 19
<PAGE>
Short-Term and Long-Term Borrowings
The fair values of short-term and 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, 1996 and 1995, the carrying values and
estimated fair values of financial instruments of the Corporation
are presented in the table below:
<TABLE>
<CAPTION>
1996
Carrying Estimated
Amount Fair Value
<S> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 5,147,438 $ 5,147,438
Short-term investments 32,093 32,093
Investment securities 101,225,493 100,100,281
Net loans 130,933,978 132,207,197
Accrued interest receivable 1,958,882 1,958,882
FINANCIAL LIABILITIES:
Deposits 198,545,783 198,681,259
Short-term borrowings 5,121,367 5,122,376
Long-term borrowings 10,000,000 10,041,133
Accrued interest payable 900,396 900,396
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS:
Commitments to extend credit 17,675,879
Standby letters of credit 1,331,233
<CAPTION>
1995
Carrying Estimated
Amount Fair Value
<S> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 4,656,866 $ 4,658,866
Short-term investments 1,962,946 1,962,946
Investment securities 88,125,290 88,143,102
Net loans 126,046,199 133,936,414
Accrued interest receivable 1,875,368 1,875,368
FINANCIAL LIABILITIES:
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
Accrued interest payable 915,379 915,379
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS:
Commitments to extend credit 10,036,866
Standby letters of credit 1,824,649
</TABLE>
20 First Keystone Corporation
<PAGE>
Note 18. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for First Keystone Corporation
(parent company only) was as follows:
<TABLE>
<CAPTION>
BALANCE SHEETS December 31
1996 1995
<S> <C> <C>
ASSETS
Cash in subsidiary bank $ 468,854 $ 445,312
Investment in subsidiary bank 26,000,323 24,060,533
Investment in other equity securities 1,170,554 955,082
Receivables from subsidiary bank - 54,681
Prepayments and other assets 11,400 82,394
TOTAL ASSETS $27,651,131 $25,598,002
LIABILITIES
Payable to subsidiary bank $ 6,745 $ -
Accrued expenses and other liabilities 171,391 198,541
TOTAL LIABILITIES $ 178,136 $ 198,541
STOCKHOLDERS' EQUITY
Preferred stock $ - $ -
Common stock 1,778,294 1,616,858
Surplus 6,654,396 3,829,266
Retained earnings 17,889,923 17,888,934
Unrealized gain (loss) on investment
securities available for sale 1,150,382 2,064,403
TOTAL STOCKHOLDERS' EQUITY $27,472,995 $25,399,461
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $27,651,131 $25,598,002
</TABLE>
<TABLE>
<CAPTION>
INCOME STATEMENTS Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
INCOME
Dividends from subsidiary bank $1,138,110 $ 953,945 $ 889,272
Dividends - other 34,818 26,553 25,370
Securities gains - 21,760 99,616
Interest 28,810 15,372 15,473
TOTAL INCOME $1,201,738 $1,017,630 $1,029,731
Operating Expenses 21,212 27,102 22,840
Income Before Taxes and Equity
in Undistributed Net Income
of Subsidiary $1,180,526 $ 990,528 $1,006,891
Income tax expense 7,325 7,305 41,855
Income Before Equity in
Undistributed Net Income of
Subsidiary $1,173,201 $ 983,223 $ 965,036
Equity in undistributed income
of Subsidiary 2,957,084 2,502,970 2,149,557
NET INCOME $4,130,285 $3,486,193 $3,114,593
</TABLE>
1996 Annual Report 21
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
Net income $ 4,130,285 $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 Subsidiary (2,957,084) (2,502,970) (2,149,557)
(Increase) decrease in
receivables from
Subsidiary 54,681 (53,325) (22)
(Increase) decrease in
prepaid expenses and
other assets 70,994 (245) (65,556)
Increase (decrease) in
advances payable to
Subsidiary 6,745 (56,093) 42,804
Increase (decrease) in
accrued expenses (97,721) 45,900 52,616
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 1,207,900 $ 897,700 $ 895,262
INVESTING ACTIVITIES
Purchase of equity securities $ (41,628) $ (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 $ (41,628) $ (96,964) $ 17,877
FINANCING ACTIVITIES
Cash dividends paid $(1,138,108) $ (953,946) $ (889,272)
Dividends paid in lieu of
fractional shares (4,622) - -
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES $(1,142,730) $ (953,946) $ (889,272)
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ 23,542 $ (153,210) $ 23,867
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 445,312 598,522 574,655
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 468,854 $ 445,312 $ 598,522
</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 Subsidiary as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1996. 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 Subsidiary as of
December 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1996, 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 and investments in debt and equity
securities in 1994.
/s/ J. H. Williams & Co., LLP
J. H. Williams & Co., LLP
Kingston, Pennsylvania
January 9, 1997
1996 Annual Report 23
<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 1996 with
reported net income of $4,130,285. The net income for 1996 marked the
14th consecutive year that earnings and earnings per share have
increased. Earnings per share for 1996 were $4.70 as compared to
$3.97 and $3.54 in 1995 and 1994, respectively. The Corporation's
return on average assets improved to 1.75% in 1996 from 1.58% in 1995
and 1.54% in 1994. Likewise, the Corporation's return on average
equity remained strong at 15.98% in 1996, an increase from 15.24% in
1995 and 15.34% in 1994.
Average earning assets increased $14,621,113, or 6.9% during
1996, while average interest bearing liabilities grew $11,744,524, or
6.5%. The average yield on earning assets increased to 8.38% in 1996
from 8.27% in 1995 while the rate paid on interest bearing liabilities
decreased to 4.53% in 1996 from 4.60% in 1995. As a result, the
Corporation's net interest income on a fully taxable equivalent basis
increased 11.4% in 1996.
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 interest
income increasing more than interest expense, net interest income on a
fully tax equivalent basis increased $1,065,000 in 1996 after
increasing $1,204,000, or 14.8% in 1995.
Table 2 on the following page provides a breakdown of average
balances with corresponding revenues and expense resulting in average
yield or rates paid. The yield on earning assets was 8.38% in 1996,
8.27% in 1995, and 7.44% in
<TABLE>
Table 1 - Net Interest Income
<CAPTION>
(Amounts in thousands) 1996/1995
Increase/(Decrease)
1996 Amount % 1995
<S> <C> <C> <C> <C>
Interest Income $17,786 $1,149 6.9 $16,637
Interest Expense 8,667 396 4.8 8,271
Net Interest Income 9,119 753 9.0 8,366
Tax Equivalent Adjustment 1,302 312 31.5 990
Net Interest Income (fully
tax equivalent) $10,421 $1,065 11.4 $ 9,356
<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
</TABLE>
1994. The yield on earning assets increased 11 basis points in 1996
after increasing 83 basis points in 1995. At the same time, the rate
paid on interest bearing liabilities decreased to 4.53% after
increasing to 4.60% in 1995 from 3.83% in 1994. Therefore, the rate
on interest bearing liabilities decreased 7 basis points in 1996 after
increasing 77 basis points in 1995. This had the effect of increasing
our net interest margin to 4.58% in 1996 from 4.39% in 1995 and 4.18%
in 1994. The continued maintenance of an adequate net interest margin
is a primary concern being addressed by management on an ongoing
basis.
1996 Annual Report 25
<PAGE>
Management's Discussion and Analysis
<TABLE>
Table 2 Distribution of Assets, Liabilities and Stockholders' Equity
<CAPTION>
1996
Avg. Balance Revenue/ Yield/
Expense Rate
<S> <C> <C> <C>
Interest Earning Assets:
Loans:
Commercial <F1> $ 15,770,100 $ 1,542,429 9.78%
Real Estate <F1> 93,136,506 8,008,957 8.60%
Installment Loans,
Net <F1><F2> 19,832,168 1,986,279 10.02%
Fees on Loans 0 (22,838) 0%
Total Loans
(Including Fees) <F3> $128,738,774 $11,514,827 8.94%
Investment Securities:
Taxable $ 58,566,185 $ 3,971,485 6.78%
Tax Exempt <F1> 38,724,074 3,510,650 9.07%
Total Investment Securities $ 97,290,259 $ 7,482,135 7.69%
Other Short-Term Investments:
Interest Bearing Deposits
in Banks $ 1,690,096 $ 91,782 5.43%
Federal Funds Sold 0 0 0%
Total Other Short-Term
Investments 1,690,096 91,782 5.43%
Total Interest-Earning
Assets $227,719,129 $19,088,744 8.38%
Non-Interest Earning Assets:
Cash and Due From Banks $ 4,589,473
Allowance for Loan Losses (1,956,549)
Premises and Equipment 2,957,176
Other Real Estate Owned 51,253
Other Assets 2,245,001
Total Non-Interest Earning
Assets 7,886,354
Total Assets $235,605,483
Interest-Bearing Liabilities:
Savings, NOW Accounts, and
Money Markets $ 84,434,401 $ 2,601,722 3.08%
Time Deposits 93,521,485 5,262,943 5.63%
Short-Term Borrowings 1,658,914 100,183 6.04%
Long-Term Borrowings 8,021,858 541,243 6.75%
Securities Sold U/A to
Repurchase 3,767,725 161,275 4.28%
Total Interest-Bearing
Liabilities $191,404,383 $ 8,667,366 4.53%
Non-Interest Bearing
Liabilities:
Demand Deposits $ 16,664,535
Other Liabilities 1,506,985
Stockholders' Equity 26,029,580
Total Liabilities/
Stockholders' Equity $235,605,483
Net Interest Income $10,421,378
Margin Analysis:
Interest Income/Earning
Assets 8.38%
Interest Expense/Earning
Assets 3.81%
Net Interest Income/
Earning Assets 4.58%
26 First Keystone Corporation
Management's Discussion and Analysis
<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 Exempt <F1> 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%
<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%
______________________
<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>
1996 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
1996, the increase in net interest income of $1,065,000 resulted from
change in volume of $969,000 and an increase of $96,000 due to changes
in rate. In 1995, there was an increase in net interest income of
$1,204,000 due to changes in volume of $790,000 and an increase of
$414,000 due to changes in rate.
<TABLE>
Table 3 - Changes in Income and Expense, 1996 and 1995
<CAPTION>
(Amounts in thousands) 1996 COMPARED TO 1995
VOLUME RATE NET
<S> <C> <C> <C>
Interest Income:
Loans, Net $ 594 $ (89) $ 505
Taxable Investment Securities (238) 214 (24)
Tax-Exempt Investment Securities 1,193 (154) 1,039
Other Short-Term Investments (51) (7) (58)
Total Interest Income $1,498 $ (36) $1,462
Interest Expense:
Savings, Now, and Money Markets $ 170 $ (71) $ 99
Time Deposits 363 (48) 315
Short-Term Borrowings 37 6 43
Long-Term Borrowings (31) (11) (42)
Securities Sold U/A to Repurchase (10) (8) (18)
Total Interest Expense $ 529 $(132) $ 397
Net Interest Income $ 969 $ 96 $1,065
<CAPTION>
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
________________________
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 increased $82,000, or 8.5% in 1996 as
compared to a decrease of $22,000, or 2.2% in 1995 as illustrated in
Table 5.
Excluding investment securities gains, non-interest income in
1996 increased $125,000, or 13.0% compared to 1995 when non-interest
income increased $153,000, or 18.8%.
Income from fiduciary activities, which consists of fees
generated by our Trust Department, increased in 1996 by $75,000 after
increasing $55,000 in 1995. Increased income from fiduciary
activities was due to a larger overall number of accounts in 1996.
Also, in 1996 more accounts were moved to a quarterly fee assessment
as opposed to annual. 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) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Individual Trusts $ 91,256 $83,886 $72,027 $70,300 $71,113
Corporate Trusts 10,004 7,676 3,569 3,887 4,066
Total Trust
Department $101,260 $91,562 $75,596 $74,187 $75,179
</TABLE>
28 First Keystone Corporation
<PAGE>
Management's Discussion and Analysis
Service charges and fees, our largest generator of non-interest
income, increased $43,000, or 7.5% in 1996 compared to an increase of
$100,000, or 21.1% in 1995. Other operating income increased $7,000,
or 16.7% in 1996 compared with a decrease of $2,000, or 4.5% in 1995.
The table below illustrates the change in non-interest income by
category for the years ended December 31, 1996, 1995, and 1994.
<TABLE>
Table 5 - Non-Interest Income
<CAPTION>
(Amounts in thousands) 1996/1995
Increase/(Decrease)
1996 Amount % 1995
<S> <C> <C> <C> <C>
Fiduciary Activities $ 425 $ 75 21.4 $350
Service Charges and Fees 616 43 7.5 573
Other Operating Income 49 7 16.7 42
Subtotal $1,090 $125 13.0 $965
Investment Securities Gains (38) (43) (860.0) 5
Total $1,052 $ 82 8.5 $970
<CAPTION>
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
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year-ended December 31,
1996, was $516,584 compared to $372,448 and $31,233 for the years
ended December 31, 1995, and 1994, respectively. The provision for
possible loan losses was increased in 1996 to cushion us against
possible increased charge-offs. Net charge-offs totaled $265,000 in
1996 as compared to $159,000 for 1995 and $73,000 in 1994. Despite
increased net charge-offs, our manageable losses and reduced non-performing
assets indicate good overall asset quality. Non-performing
assets, consisting of non-performing loans and foreclosed assets, were
$351,000, $557,000, and $855,000 at December 31, 1996, 1995, and 1994,
respectively, representing .26%, .44%, and .73%, respectively, of
loans net of unearned income and foreclosed assets.
The allowance for loan losses as a percentage of loans, net of
unearned interest, was 1.70% at December 31, 1996, 1.57% at December
31, 1995, and 1.52% at December 31, 1994. The allowance for loan
losses as a percentage of non-performing assets remains strong at
645.9%, 361.8%, and 210.8% at year-end 1996, 1995, and 1994,
respectively.
Loans past-due 90 or more days and still accruing did increase to
$263,000 in 1996 from $68,000 and $49,000 in 1995 and 1994,
respectively. With the increase in our allowance for loan losses and
our continued collection efforts, the increase in loans past-due 90 or
more days does not represent a concern.
NON-INTEREST EXPENSES
Total non-interest expense decreased by $15,000, or 0.3% in 1996
compared to an increase of $248,000, or 5.8% in 1995 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 53.9% of total non-interest
expense in 1996 (49.7% in 1995 and 49.3% in 1994). Salaries and
employee benefits increased $185,000, or 8.2% in 1996 and $141,000, or
6.6% in 1995. The increases in 1996 and 1995 were due to an increased
number of employees plus normal salary adjustments and increased
benefit costs. Full-time equivalent employees were 91 at December 31,
1996, compared to 89 in 1995 and 87 at end year 1994. Based upon our
total deposits and total assets, our number of employees compares
favorably against peer financial institutions.
Net occupancy expense decreased $11,000, or 3.8% in 1996 as
compared to an increase of $18,000, or 6.6% in 1995. The decrease in
1996 relates primarily to a reduction in depreciation expense.
Furniture and equipment expense increased $12,000, or 2.6% in 1996
compared to an increase of $35,000, or 13.7% in 1995. The increases
in 1996 and 1995 relate directly to higher depreciation associated
with computer processing equipment and related equipment put into
service in the third quarter of 1994.
Due to the restructuring of the payment of FDIC premiums, the
Corporation paid the minimum annual assessment rate of $2,000 in 1996
as a result of our well capitalized status. This represented a
decrease of $198,000 in FDIC insurance expense from 1995.
Other operating expenses decreased $3,000, or 0.2% in 1996 from a
$211,000 increase, or 18.6% in 1995. A leveling-off of the other
operating expenses took place in 1996 after higher expenses associated
with professional fees, postage, printing supplies, insurance,
marketing, and advertising in 1995.
Our overall non-interest expense of less than 2% of average
assets in 1996, places us among the leaders of our peer financial
institutions in controlling non-interest expense.
1996 Annual Report 29
<PAGE>
Management's Discussion and Analysis
<TABLE>
Table 6 - Non-Interest Expense
<CAPTION>
(Amounts in thousands) 1996/1995
Increase/(Decrease)
1996 Amount % 1995
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $2,448 $ 185 8.2 $2,263
Net Occupancy Expense 281 (11) (3.8) 292
Furniture and Equipment Expense 468 12 2.6 456
FDIC Insurance 2 (198) (99.0) 200
Other Operating Expenses 1,342 (3) (0.2) 1,345
Total $4,541 $ (15) (0.3) $4,556
<CAPTION>
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
</TABLE>
INCOME TAXES
Effective tax planning has helped produce favorable net income in
each of the past three years. In 1996, net income before taxes
increased $707,673. In 1995, income before income taxes increased
$375,295 over 1994, while our income tax liability increased $63,581
and $3,695 in 1996 and 1995, respectively. The effective total income
tax rate was 19.2% in 1996, 20.8% in 1995, and 22.4% in 1994. The
decrease in our tax liability rate in 1996 and 1995 was due primarily
to the increased purchase of municipal (tax-free investments)
securities at attractive interest rates.
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased to $242,557,150, an increase of 7.3% over
year-end 1995. Total deposits increased to $198,545,783, or 6.0%.
Assets at December 31, 1995, were up 9.3% to $226,033,263, while total
deposits were up 8.7% to $187,320,087 compared to 1994.
The Corporation used borrowed funds to support asset growth not
provided by deposit growth. Deposit growth in 1996 was $11,225,696 as
compared to 1995 deposit growth of $15,040,312. With conventional
deposit growth decreasing in 1996, as compared to 1995, the
Corporation increased its short-term borrowings and long-term
borrowings to $15,121,367 in 1996 as compared to $11,358,601 in 1995.
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 1997, 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 96.7%
as of December 31, 1996, compared to 96.5% at December 31, 1995, and
96.5% as of December 31, 1994. 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 $5,200,000,
or 4.1% in 1996 as compared to $9,877,000, or 8.4% in 1995 and
$9,840,000, or 9.1% in 1994. The loan portfolio is well diversified,
and increases in the portfolio have primarily been from real estate
loans and commercial loans secured by real estate. In addition,
consumer loans remained stable in 1996 after a large increase in 1995.
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,
1996 1995 1994
<S> <C> <C> <C>
Commercial, financial and
agricultural:
Commercial secured by real estate $ 33,103 $ 28,846 $ 30,127
Commercial - other 13,574 17,563 16,285
Tax exempt 2,263 3,602 3,754
Real estate (primarily residential
mortgage loans) 65,145 58,438 52,389
Consumer loans 23,027 23,681 19,370
Total Gross Loans $127,112 $132,130 $121,925
Less: Unearned income and
unamortized loan fees net
of costs 3,851 4,069 3,741
Total Loans, net of unearned income $133,261 $128,061 $118,184
<CAPTION>
December 31,
1993 1992
<S> <C> <C>
Commercial, financial and
agricultural:
Commercial secured by real estate $ 30,097 $ 26,296
Commercial - other 14,005 14,340
Tax exempt 2,717 3,063
Real estate (primarily residential
mortgage loans) 47,867 44,293
Consumer loans 17,156 19,247
Total Gross Loans $111,842 $107,239
Less: Unearned income and
unamortized loan fees net
of costs 3,498 4,009
Total Loans, net of unearned income $108,344 $103,230
</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. Available for sale
securities increased $16,442,000 to $81,146,000 in 1996, while held to
maturity securities decreased $3,341,000 to $20,080,000, as
illustrated in Table 8. The vast majority of investment security
purchases in 1996 were allocated as available for sale. This provides
the Corporation with increased flexibility should there be a need or
desire to liquidate an investment security. Deposit growth not used
to fund loans in 1996 provided the primary source of funds for the
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,
1996
Available Held to
for Sale Maturity
<S> <C> <C>
U.S. Treasury $ 3,341 $ 0
U. S. Government Corporations
and Agencies 36,339 16,787
State and Municipal 37,602 3,293
Other Securities 1,266 0
Equity Securities 2,598 0
Total Investment Securities $81,146 $20,080
<CAPTION>
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>
December 31,
1994
Available Held to
for Sale Maturity
<S> <C> <C>
U.S. Treasury $ 3,882 $ 1,701
U. S. Government Corporations
and Agencies 27,190 23,894
State and Municipal 14,971 2,198
Other Securities 4,273 0
Equity Securities 1,837 0
Total Investment Securities $52,153 $27,793
</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 1996, net charge-offs as a percentage of average loans were
.21% compared to .13% in 1995 and .07% in 1994. Net charge-offs
amounted to $265,000 in 1996 after $159,000 and $73,000 in 1995 and
1994, respectively. The increase in net charge-offs in 1996 resulted
largely from the loss associated
1996 Annual Report 31
<PAGE>
Management's Discussion and Analysis
with one commercial loan where the borrower declared bankruptcy.
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 1.76% in 1996,
1.65% in 1995, and 1.61% in 1994.
<TABLE>
Table 9 - Analysis of Allowance for Loan Losses
<CAPTION>
(Amounts in thousands) Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of period $2,015 $1,802 $1,844
Charge-offs:
Commercial, financial, and
agricultural 214 18 80
Real estate - mortgage 0 118 29
Installment loans to individuals 88 50 72
$ 302 $ 186 $ 181
Recoveries:
Commercial, financial, and
agricultural $ 12 $ 6 $ 81
Real estate - mortgage 8 2 6
Installment loans to individuals 17 19 21
$ 37 $ 27 $ 108
Net charge-offs $ 265 $ 159 $ 73
Additions charged to operations 517 372 31
Balance at end of period $2,267 $2,015 $1,802
Ratio of net charge-offs during the
period to average loans
outstanding during the period .21% .13% .07%
Allowance for loan losses to average
loans outstanding during the period 1.76% 1.65% 1.61%
<CAPTION>
Years Ended December 31,
1993 1992
<S> <C> <C>
Balance at beginning of period $1,366 $ 966
Charge-offs:
Commercial, financial, and
agricultural 54 142
Real estate - mortgage 9 84
Installment loans to individuals 86 110
$ 149 $ 336
Recoveries:
Commercial, financial, and
agricultural $ 0 $ 3
Real estate - mortgage 3 0
Installment loans to individuals 106 22
$ 109 $ 25
Net charge-offs $ 40 $ 311
Additions charged to operations 518 711
Balance at end of period $1,844 $1,366
Ratio of net charge-offs during the
period to average loans outstanding
during the period .04% .31%
Allowance for loan losses to average
loans outstanding during the period 1.75% 1.38%
</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,
1996 % <F1> 1995 % <F1>
<S> <C> <C> <C> <C>
Commercial, financial,
and agricultural $ 303 10.7 $ 344 17.4
Real estate - mortgage 1,088 72.5 663 66.1
Installments to
individuals 203 16.8 443 16.5
Unallocated 673 N/A 565 N/A
$2,267 100.0 $2,015 100.0
<CAPTION>
December 31,
1994 % <F1> 1993 % <F1>
<S> <C> <C> <C> <C>
Commercial, financial,
and agricultural $ 253 15.2 $ 262 13.4
Real estate - mortgage 985 68.9 1,077 71.3
Installments to
individuals 153 15.9 174 15.3
Unallocated 411 N/A 331 N/A
$1,802 100.0 $1,844 100.0
<CAPTION>
December 31,
1992 % <F1>
<S> <C> <C>
Commercial, financial,
and agricultural $ 386 14.5
Real estate - mortgage 418 67.6
Installments to
individuals 135 17.9
Unallocated 427 N/A
$1,366 100.0
______________________
<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
32 First Keystone Corporation
<PAGE>
Management's Discussion and Analysis
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 annually 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 further
reduction in non-performing assets in 1995 relates primarily to the
sale of other real estate owned. The current level of non-performing
assets of $351,000 and loans past-due 90 days or more are considered
manageable. Loans which are past-due 90 days or more as to interest
or principal and still accruing did increase to $263,000 in 1996
after being relatively stable in the preceding years.
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 be stable 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 1996 and 1995
was $3,048 and $2,700, respectively. Interest income, which would
have been recorded on these loans under the original terms in 1996 and
1995 was $46,924 and $53,224, respectively. At December 31, 1996, 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, 1996, 1995, and 1994, 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,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Non-accrual and restructured loans $267 $557 $620 $1,431 $346
Foreclosed assets 84 0 235 5 107
Total non-performing assets $351 $557 $855 $1,436 $453
Non-performing assets to period-
end loans and foreclosed
assets .26% .44% .73% 1.35% .44%
Loans past-due 90 or more days and
still accruing $263 $68 $49 $27 $92
</TABLE>
DEPOSITS AND OTHER BORROWED FUNDS
Deposit growth amounted to $11,225,696, or a 6.0% increase when
comparing December 31, 1996, to December 31, 1995. This increase
compares to deposit increases of 8.7% in 1995 and 4.0% in 1994.
First Keystone's subsidiary bank, like many other commercial
banks, experienced reduced deposit growth in 1996 after increased
deposit growth in 1995. Low interest rates and intense competition
for depositors' funds can be attributed to the slower deposit growth.
During 1996, the Corporation experienced the vast majority of its
deposits growth in interest bearing deposits. In particular, interest
bearing demand deposits increased in 1996. Also, certificates of
deposit under $100,000 and time deposits of $100,000 or more
increased in 1996. Short-term borrowings and long-term borrowings were
increased in 1996 by $3,762,766.
CAPITAL STRENGTH
Normal increases in capital are generated by net income, less
cash dividends paid out. Also, the net unrealized gains on investment
securities available for sale increased shareholders' equity or
capital in both 1996 and 1995. The net increase in capital was
$2,073,534 in 1996 and $4,611,390 in 1995. The unrealized gain on
investment securities available-for-sale net of taxes fell to
$1,150,382 in 1996 from $2,064,403 in 1995.
Return on equity (ROE) is computed by dividing net income by
average stockholders' equity. This ratio was 15.98% for 1996, 15.24%
for 1995, and 15.34% for 1994. Refer to Performance Ratios on Page 2 -
Summary of Selected Financial Data for a more expanded listing of the
ROE.
1996 Annual Report 33
<PAGE>
Management's Discussion and Analysis
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 10.87% at December 31,
1996, and 10.22% as of December 31, 1995.
The risk-based capital ratios also increased from 1995 to 1996
for both the Corporation and the Bank. 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 capital ratios as of December 31, 1996,
and December 31, 1995, for the Corporation and the Bank.
<TABLE>
Table 12 - Capital Ratios
<CAPTION>
December 31, 1996
Corporation Bank
<S> <C> <C>
Risk-Based Capital:
Tier I risk-based capital ratio 19.29% 18.83%
Total risk-based capital ratio
(Tier 1 and Tier 2) 20.55% 20.08%
Leverage Ratio:
Tier I capital to average assets 10.87% 10.42%
<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%
</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 $ 4,266 $ 4,336 $1,073 $ 9,675
Variable interest rate 33,476 8,504 0 41,980
Total $37,742 $12,840 $1,073 $51,655
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 our current sensitivity position,
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, 1996 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 $67,646,000. However, much of our interest bearing
demand deposits and savings deposits are considered core deposits and
are not rate sensitive. 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, 1996
3 Months 3 - 12 1 - 5
or Less Months Years
<S> <C> <C> <C>
Rate Sensitive Assets:
Cash and cash equivalent $ 32 $ 0 $ 0
Loans 33,489 28,862 44,918
Investments 16,138 11,488 12,926
Total Rate Sensitive Assets $ 49,659 $40,350 $57,844
Rate Sensitive Liabilities:
Deposits:
Deposits:
Interest-bearing demand/
savings $ 83,607 $ 0 $ 0
Time 27,577 40,204 29,353
Short-term borrowings 5,121 0 0
Long-term borrowings 1,000 7,000 1,000
Total Rate Sensitive
Liabilities $117,305 $47,204 $30,353
Interest Rate Sensitivity:
Current period $(67,646) $(6,854) $27,491
Cumulative gap (67,646) (74,500) (47,009)
Cumulative gap to total assets (27.89%) (30.71%) (19.38%)
<CAPTION>
December 31, 1996
Over
5 Years Total
<S> <C> <C>
Rate Sensitive Assets:
Cash and cash equivalent $ 0 $ 32
Loans 25,992 133,261
Investments 60,674 101,226
Total Rate Sensitive Assets $86,666 $234,519
Rate Sensitive Liabilities:
Deposits:
Deposits:
Interest-bearing demand/
savings $ 0 $ 83,607
Time 0 97,134
Short-term borrowings 0 5,121
Long-term borrowings 1,000 10,000
Total Rate Sensitive
Liabilities $ 1,000 $195,862
Interest Rate Sensitivity:
Current period $85,666 $ 38,657
Cumulative gap 38,657
Cumulative gap to total assets 15.94%
</TABLE>
1996 Annual Report 35
<PAGE>
Management's Discussion and Analysis
EFFECT OF INFLATION
Although inflation was not significant in 1996, 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 are mixed on whether continued economic expansion
will take place in 1997. We are optimistic that loan growth will
continue in 1997. Although it is anticipated that the majority of
the loan growth in 1997 will be in the residential mortgage area and
home equity loans, 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 1997 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 February 16, 1996.
These prices do not necessarily reflect any dealer or retail markup,
markdown or commission.
<TABLE>
Table 15 - Market Price/Dividend History
<CAPTION>
1996
Common Stock Dividends
High/Low Paid
<S> <C> <C>
First Quarter $37.00/$33.64 $.31
Second Quarter $37.00/$37.00 .31
Third Quarter $37.00/$37.00 .31
Fourth Quarter $37.00/$37.00 .36
<CAPTION>
1995
Common Stock Dividends
High/Low Paid
<S> <C> <C>
First Quarter $31.82/$31.82 $.27
Second Quarter $31.82/$31.82 .27
Third Quarter $33.64/$31.82 .27
Fourth Quarter $33.64/$33.64 .28
<CAPTION>
1994
Common Stock Dividends
High/Low Paid
<S> <C> <C>
First Quarter $29.32/$29.32 $.24
Second Quarter $31.82/$24.55 .25
Third Quarter $31.82/$31.82 .25
Fourth Quarter $31.82/$31.82 .27
</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
1996 March June September December
31 30 30 31
<S> <C> <C> <C> <C>
Interest income $4,253 $4,390 $4,542 $4,601
Interest expense 2,129 2,152 2,158 2,228
Net interest income $2,124 $2,238 $2,384 $2,373
Provision for loan
losses 25 65 45 382
Other non-interest
income 240 275 262 275
Non-interest expense 1,155 1,081 1,095 1,210
Income before income
taxes and cumulative
effect of accounting
change $1,184 $1,367 $1,506 $1,056
Income taxes 216 274 314 179
Net income $ 968 $1,093 $1,192 $ 877
Per share <F1> $1.10 $1.24 $1.36 $1.00
<CAPTION>
(Amounts in thousands, except per share)
Three Months Ended
1995 March June September December
31 30 30 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 <F1> $ .82 $ .92 $ 1.11 $ 1.12
<FN>
<F1>
Adjusted for 10% stock dividend paid in 1996.
</FN>
</TABLE>
1996 Annual Report 37
<PAGE>
EXHIBIT 21
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.
26
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual
Report on Form 10-KSB of First Keystone Corporation of our report
dated January 9, 1997, included in the 1996 Annual Report to
Stockholders of First Keystone Corporation.
/s/ J. H. Williams & Co., LLP
March 18, 1997 J. H. Williams & Co., LLP
Kingston, Pennsylvania Certified Public Accountants
27
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,147
<INT-BEARING-DEPOSITS> 32
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 81,146
<INVESTMENTS-CARRYING> 20,080
<INVESTMENTS-MARKET> 19,954
<LOANS> 133,261
<ALLOWANCE> 2,267
<TOTAL-ASSETS> 242,557
<DEPOSITS> 198,546
<SHORT-TERM> 5,121
<LIABILITIES-OTHER> 1,417
<LONG-TERM> 10,000
<COMMON> 1,778
0
0
<OTHER-SE> 25,695
<TOTAL-LIABILITIES-AND-EQUITY> 242,557
<INTEREST-LOAN> 11,406
<INTEREST-INVEST> 6,288
<INTEREST-OTHER> 92
<INTEREST-TOTAL> 17,786
<INTEREST-DEPOSIT> 7,865
<INTEREST-EXPENSE> 802
<INTEREST-INCOME-NET> 9,119
<LOAN-LOSSES> 517
<SECURITIES-GAINS> (38)
<EXPENSE-OTHER> 4,541
<INCOME-PRETAX> 5,113
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,130
<EPS-PRIMARY> 4.70
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.58
<LOANS-NON> 267
<LOANS-PAST> 263
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 936
<ALLOWANCE-OPEN> 2,015
<CHARGE-OFFS> 302
<RECOVERIES> 37
<ALLOWANCE-CLOSE> 2,267
<ALLOWANCE-DOMESTIC> 2,267
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 674
</TABLE>
EXHIBIT 99
DEFINITIVE PROXY STATEMENT, NOTICE OF ANNUAL MEETING AND
FORM OF PROXY FOR THE ANNUAL MEETING
OF SHAREHOLDERS TO BE HELD APRIL 15, 1997
29
<PAGE>
<FIRST KEYSTONE CORPORATION LOGO - 1K> First Keystone Corporation
111 West Front Street
Berwick, Pennsylvania 18603
March 21, 1997
DEAR SHAREHOLDER:
It is my pleasure to invite you to attend the 1997 Annual Meeting
of Shareholders of First Keystone Corporation to be held on Tuesday,
April 15, 1997 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 A
Directors and the ratification of the selection of the independent
auditors for 1997. 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 15, 1997
________________________________
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 15, 1997 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 A 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, 1997; 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 4, 1997 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, 1996 is being mailed with this Notice. Copies of
the Corporation's Annual Report for the 1995 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 21, 1997
<PAGE>
<BLANK PAGE>
<PAGE>
PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS
OF FIRST KEYSTONE CORPORATION TO BE HELD ON APRIL 15, 1997
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 15, 1997, 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 21, 1997.
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 A 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, 1997. 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 4, 1997, 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 4, 1997, 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 4, 1997, 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 shareholder is entitled to one vote for each share of
Common Stock outstanding on the record date.
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 4, 1997, 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. The footnotes to
this table follow the "Beneficial Ownership by Officers, Directors and
Nominees" table, found immediately hereafter.
<TABLE>
<CAPTION>
Shares Percent of Outstanding
Beneficially Common Stock
Name and Address Owned <F1> Beneficially Owned
<S> <C> <C>
Robert J. Wise 63,314 <F4> 7.12%
115 West Third Street
Berwick, PA 18603
Berbank 86,019 <F5> 10.38%
First National Bank of
Berwick Trust Department
Robert E. Bull 63,652 <F6> 7.16%
323 West Fourth Street
Nescopeck, PA 18635
</TABLE>
Page 2 Proxy Statement
<PAGE>
<TABLE>
Beneficial Ownership by Officers, Directors and Nominees
The following table sets forth as of March 4, 1997, 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.
<CAPTION>
Name of Individual Amount and Nature of Percent
or Identity of Group Beneficial Ownership of Class
<F1> <F2> <F3> <F7>
<S> <C> <C>
Nominee for Class A Director
(to serve until 2000)
And a Current Class A Director
Budd L. Beyer 11,495 1.29%
Frederick E. Crispin, Jr. 7,260 <F8> --
Robert J. Wise 63,314 <F4> 7.12%
Class B Director
(to serve until 1998)
John Arndt 1,245 <F9> --
J. Gerald Bazewicz 3,220 <F10> --
Robert E. Bull 63,652 <F6> 7.16%
F. Stuart Straub 14,023 <F11> 1.58%
Class C Director
(to serve until 1999)
John L. Coates 2,130 <F12> --
Dudley P. Cooley 1,210 --
Stanley E. Oberrender 1,452 --
All Officers, Directors and 169,918 19.11%
Nominees as a Group
(10 Directors, 4 Officers -
11 Persons in Total)
<FN>
<F1>
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
4, 1997. Beneficial ownership may be disclaimed as to certain of the
securities.
<F2>
Does not include Common Stock held in fiduciary accounts under the control
of the Bank's Trust Department.
<F3>
Information furnished by the directors and the Corporation.
<F4>
Includes 57,325 shares of Common Stock held individually by Mr. Wise and
5,989 shares of Common Stock held jointly with his spouse.
<F5>
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
79,853 shares of Common Stock and as fiduciary with shared voting and
dispositive power over 12,435 shares of Common Stock. Total does not
include 19,581 shares of Common Stock held by the Trust Department of the
Bank for which the Bank does not have sole voting or dispositive power.
The Trust
Proxy Statement Page 3
<PAGE>
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.
<F6>
Includes 5,858 shares of Common Stock held individually by Mr. Bull, 39,437
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.
<F7>
Less than one percent (1%) unless otherwise indicated.
<F8>
Includes 4,840 shares of Common Stock held individually by Mr. Crispin and
2,420 shares of Common Stock held individually by his spouse.
<F9>
Includes 737 shares of Common Stock held individually by Mr. Arndt, 108
shares of Common Stock held individually by his spouse, and 400 shares of
Common Stock held by Arndt Insurance Profit Sharing.
<F10>
Includes 2,130 shares of Common Stock held individually by Mr. Bazewicz,
600 shares of Common Stock held jointly with his spouse, 140 shares of
Common Stock held individually by his spouse, 250 shares of Common Stock
held jointly with his children and 100 shares of Common Stock held as
Custodian for the benefit of his children.
<F11>
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.
<F12>
Includes 1,646 shares of Common Stock held individually by Mr. Coates and
484 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 the appointment of a replacement 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 1997
Annual Meeting of Shareholders, three (3) Class A 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 the
Page 4 Proxy Statement
<PAGE>
appointment of a replacement by a majority of the directors then in
office until the expiration of the term of the vacancy.
There is no cumulative voting for the election of directors.
Each shareholder is entitled to one vote for each share of Common
Stock outstanding on the record date. 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 A Director whose term
expires in 2000 and the current Class A Directors whose term expires
in 1997, and the Class B Directors and Class C Directors whose terms
expire in 1998 and 1999, respectively:
<TABLE>
<CAPTION>
Principal Occupation
for Past Five Years Director
Name and Age as of and Position Held Since
Current March 5, with Corporation Corporation
Committees 1996 and Bank /Bank
NOMINEES FOR CLASS A DIRECTOR WHOSE TERM EXPIRES IN 2000
AND
CURRENT CLASS A DIRECTORS WHOSE TERM EXPIRES IN 1997
<S> <C> <C> <C>
Budd L. Beyer 69 Investor; Former 1983/1976
Committees 1,4,5,7 President Sunshine
Textiles Service, Inc.
(Dry Cleaning, Laundry
and Linen Rental)
Frederick E. Crispin, Jr. 65 Financial Consultant, 1983/1964
Committees 1,3,4,5,6 F.E. Crispin &
Associates
Robert J. Wise 67 Retired, former 1983/1967
Committees 1,2,4,5,7,8 investor Vice Chairman
of the Corporation
and the Bank
<CAPTION>
CLASS B DIRECTORS WHOSE TERM EXPIRES IN 1998
<S> <C> <C> <C>
John Arndt 35 Owner of Arndt 1995/1995
Committees 2,3,4,7,8 Insurance Agency
(General insurance)
J. Gerald Bazewicz 48 President of the 1986/1986
Committees 1,2,3,4, Corporation and the
5,7,8 Bank
Robert E. Bull 74 Attorney, Bull, Bull 1983/1956
Committees 1,3,4,5, & Knecht; Chairman of
6,7,8 the Corporation
and the Bank
F. Stuart Straub 75 Retired, former 1983/1968
Committees 2,3,5,8 President of
Corporation and the
Bank
Proxy Statement Page 5
<PAGE>
<CAPTION>
CLASS C DIRECTORS WHOSE TERM EXPIRES IN 1999
<S> <C> <C> <C>
John L. Coates 60 Owner, Tri-County 1987/1987
Committees 1,3,5,6 True Value Hardware
and Tri-County
True Value Lumber
Secretary of the
Corporation and the
Bank
Dudley P. Cooley 58 Personal Financial 1987/1987
Committees 3,6,7 Consultant; Former
Controller, Wise Foods,
Borden, Inc. (Snack
food processor)
Stanley E. Oberrender 55 Owner, Suntex 1987/1987
Committees 3,4,6,7,8 (Dry cleaning)
<FN>
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 did not meet in 1996.
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 1996.
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 1996.
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 five (5) times in 1996.
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 four (4) times in 1996.
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 1996.
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 three (3) times in 1996.
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 five (5) times in 1996.
</FN>
</TABLE>
The aforementioned committees are committees of the Bank and not
the Corporation.
Page 6 Proxy Statement
<PAGE>
During 1996, the Bank's Board of Directors held twenty-seven (27)
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, 1996 through December 31, 1996, 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, 1996, 1995 and 1994 of those persons
who were (i) the Chief Executive Officer during 1996, 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 $100,000 at December 31, 1996.
Proxy Statement Page 7
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation
(a) (b) (c) (d) (e)
Other
Annual
Name and Compen-
Principal Salary Bonus sation
Position Year ($) <F1> ($) <F2> ($)
<S> <C> <C> <C> <C>
J. Gerald Bazewicz 1996 116,800 35,397 0
President and Chief 1995 108,100 22,553 0
Executive Officer 1994 101,600 15,672 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 ($) (#) ($) ($)
<F3><F4>
<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 $9,800 in 1996, $8,100 in 1995, and $8,100 in 1994.
<F2>
Bonus information is reported by the year in which earned.
<F3>
Contributions to the Bank's 401(K) Plan on behalf of Mr. Bazewicz of
$13,701 for 1996, $17,274 for 1995, and $15,563 for 1994.
<F4>
Includes premium of $1,328 on term life insurance in 1996 relative to
salary continuation agreement. See Other Executive Benefits on next page.
</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 employees who have completed at least one year of
service and are at least 21 years of age. The Plan agreement provides
that the Bank will match employee deferrals to the Plan not to exceed
3% of their respective eligible compensations. Additionally, the Bank
may make a discretionary contribution annually to the Plan, which when
combined with the employee's deferral and Bank's matching
contributions, cannot exceed 15% of total eligible compensation.
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 percent (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 1996 and 1995 were:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Matching contribution to savings plan $ 52,892 $ 46,306
Contribution to profit sharing plan 138,818 195,291
Total Expense $191,710 $241,597
</TABLE>
Page 8 Proxy Statement
<PAGE>
Of the $191,710 total expenses during 1996, $31,566 was credited
among the individual accounts of the most highly compensated executive
officers of the Bank. Of the $31,566, Mr. Bazewicz was credited with
$13,701 and has been a member of the Plan for eleven years.
Other Executive Benefits
In 1996, a Supplemental Employee Retirement Plan (SERP) was
introduced covering the Bank's executive officers, Mr. Bazewicz, Mr.
Saracino, and Mr. Bodle. The SERP, which is a salary continuation
agreement, became effective January 7, 1997.
The salary continuation agreement provides that if the executive
officer continues to serve as an officer of the Bank until he attains
sixty (60) years of age, the Bank has agreed to pay him 240 guaranteed
consecutive monthly payments commencing on the first day of the month
following the officer's 60th birthday. The salary continuation
agreement allows the executive officers to achieve a retirement income
percentage that is more consistent with their experience and years of
service to the Bank. The plan objective is to provide the executive
officers with a final wage replacement ratio of 75% of projected final
salary including projected benefits from the Bank 401K, social
security, and salary continuation provided through the agreement. The
retirement benefit under the salary continuation plan for Messrs.
Bazewicz, Saracino, and Bodle will be $3,750 per month, $2,333 per
month, and $1,750 per month, respectively. If the executive officer
attains sixty (60) years of age, but dies before receiving all of the
guaranteed monthly payments, then the Bank will make the remaining
payments to the officer's beneficiary. In the event the officer dies
while serving as an officer, prior to age sixty (60), then the Bank
will remit the guaranteed monthly payment to the officer's beneficiary
commencing the month following the Executive's death. In the event of
a change of control and the termination of the officer's employment,
the guaranteed monthly payments will commence the month following the
Executive's termination of service.
The Bank has obtained term life insurance (designating the Bank
as the beneficiary) on the life of each participating executive
officer in an amount which is intended to cover the Bank's obligation
until the expense for the plan is fully accrued, based upon certain
actuarial assumptions. In 1996, the Bank expensed $9,300 for
professional services rendered in connection with the design and
implementation of the salary continuation plan. In addition, $5,474
was paid to cover the first year's premium on the term insurance
policies. No expense was accrued for the salary continuation plan in
1996.
Compensation of Directors
During 1996, the Corporation's Board of Directors received Three
Hundred Fifty Dollars ($350.00) for each Director's attendance at the
Annual Meeting. Other Corporate Board meetings met concurrently with
the Bank's Board and there was no additional compensation paid to
Directors. The Bank's Directors received Three Hundred Fifty Dollars
($350.00) for each Directors' meeting attended, non-employee Directors
received One Hundred Seventy-Five Dollars ($175.00) for each committee
meeting attended, and all Directors received a bonus of One Thousand
Dollars ($1,000.00). In addition, Chairman Bull received an annual
stipend of One Thousand Dollars ($1,000.00) and Secretary Coates
received an annual stipend of Seven Hundred Fifty Dollars ($750.00).
In the aggregate, the Board of Directors received $139,025.00 for all
Board of Directors' meetings and committee meetings attended in 1996,
including all fees, bonuses, and stipends paid to all Directors in
1996.
Proxy Statement Page 9
<PAGE>
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, 1996, 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
$2,553,945 or approximately 9.30% 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. All loans are current and being paid as agreed. The
largest aggregate amount of indebtedness outstanding at any time
during fiscal year 1996 to officers and directors of the Corporation
and the Bank as a group was $3,088,843. The aggregate amount of
indebtedness outstanding as of the latest practicable date, January
31, 1997, to the above described group was $2,536,678.
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>
Age
Number as of
Bank of Shares March
Held Employee Beneficially 4,
Name and Position Since Since Owned 1997
<S> <C> <C> <C> <C>
Robert E. Bull 1983 <F1> 63,652 74
Chairman of the Board
Robert J. Wise 1996 <F1> 63,314 67
Vice Chairman
of the Board
J. Gerald Bazewicz 1987 1973 3,220 48
President
John L. Coates 1995 <F1> 2,130 60
Secretary
David R. Saracino 1983 1972 917 <F2> 52
Treasurer
<FN>
<F1>
Messrs. Bull, Wise, and Coates are not employees of the Bank.
<F2>
Includes 675 shares of Common Stock held individually by Mr. Saracino and
242 shares of Common Stock held jointly with his spouse.
</FN>
</TABLE>
Page 10 Proxy Statement
<PAGE>
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:
<TABLE>
<CAPTION>
Office and Position Held
Name with the Bank Since
<S> <C> <C>
Robert E. Bull Chairman of the Board 1983
Robert J. Wise Vice Chairman 1996
of the Board
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 4,
Name Since ficially Owned 1997
<S> <C> <C> <C>
Robert E. Bull <F1> 63,652 74
Robert J. Wise <F1> 63,314 67
J. Gerald Bazewicz 1973 3,220 48
John L. Coates <F1> 2,130 60
David R. Saracino 1972 917 52
Leslie W. Bodle 1985 1,000 <F2> 49
Sally A. Rishkofski 1964 74 57
<FN>
<F1>
Messrs. Bull, Wise, and Coates are not employees of the Bank.
<F2>
Includes 831 shares of Common Stock held individually by Mr. Bodle and 169
shares of Common Stock held jointly with his daughter.
</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 1997 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 1996 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.
Proxy Statement Page 11
<PAGE>
In the event that the shareholders do not ratify the selection of
J. H. Williams & Co. as the Corporation's independent auditors for the
1997 fiscal year, another accounting firm may be chosen to provide
independent audit services for the 1997 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, 1997.
ANNUAL REPORT
A copy of the Corporation's Annual Report for its fiscal year
ended December 31, 1996 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.
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 1998 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, Pennsylvania, 18603, not later than
Monday, November 24, 1997.
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-KSB FOR ITS FISCAL YEAR ENDED DECEMBER
31, 1996, 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 15, 1997
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 15, 1997 at 9:00 a.m., prevailing
time, and at any adjournment or postponement thereof as follows:
1. ELECTION OF CLASS A DIRECTORS TO SERVE FOR A THREE-YEAR TERM
Budd L. Beyer Frederick E. Crispin, Jr. Robert J. Wise
[ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY to vote
above (except as marked for all nominees listed
to the contrary below) 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, 1997.
[ ] 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: , 1997
Number of Shares Held of
Record on March 4, 1997:
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.
