UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
Quarterly Report Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1997
Commission File Number: 2-88927
FIRST KEYSTONE CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2249083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
111 West Front Street, Berwick, PA 18603
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 752-3671
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 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
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical date:
Common Stock, $2 Par Value, 889,147 shares as of March 31, 1997.
<PAGE>
PART I. - FINANCIAL INFORMATION
Item. 1 Financial Statements
<TABLE>
FIRST KEYSTONE CORPORATION
BALANCE SHEETS
(Unaudited)
<CAPTION>
(Amounts in thousands, except per share data)
March December
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,703 $ 5,147
Interest bearing deposits with banks 4,870 32
Available-for-sale securities carried
at estimated fair value 79,842 81,146
Investment securities, held to
maturity securities, estimated
fair value of $19,180 and $19,955 19,421 20,080
Loans, net of unearned income 137,229 133,261
Allowance for loan losses (2,295) (2,267)
Net loans $134,934 $130,994
Bank premises and equipment 2,923 2,881
Other real estate 46 46
Interest receivable 1,953 1,959
Other assets 659 272
Total Assets $250,351 $242,557
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 17,852 $ 17,805
Interest bearing 185,417 180,741
Total deposits $203,269 $198,546
Short-term borrowings 5,099 5,121
Long-term borrowings 13,000 10,000
Accrued expenses 1,475 1,128
Other liabilities 89 289
Total Liabilities $222,932 $215,084
STOCKHOLDERS' EQUITY
Common stock, par value $2 per share $ 1,778 $ 1,778
Surplus 6,655 6,655
Retained earnings 18,702 17,890
Unrealized gain (loss) on investment
securities available
for sale, net of taxes 284 1,150
Total Stockholders' Equity $ 27,419 $ 27,473
Total Liabilities and
Stockholders' Equity $250,351 $242,557
<FN>
See Accompanying Notes to Financial Statements
</FN>
</TABLE>
1
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
<CAPTION>
(Amounts in thousands except per share data)
1997 1996
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,986 $2,801
Interest and dividend income
on securities 1,611 1,405
Interest on deposits in banks 11 47
Total Interest Income $4,608 $4,253
INTEREST EXPENSE
Interest on deposits $1,997 $1,955
Interest on short-term borrowings 78 49
Interest on long-term borrowings 162 125
Total Interest Expense $2,237 $2,129
Net interest income $2,371 $2,124
Provision for loan losses 50 25
Net Interest Income After
Provision for Loan Losses $2,321 $2,099
OTHER INCOME
Service charges on deposit accounts $ 146 $ 130
Other non-interest income 139 109
Investment securities gains
(losses) net 6 1
Total Other Income $ 291 $ 240
OTHER EXPENSES
Salaries and employee benefits $ 659 $ 617
Net occupancy and fixed asset expense 192 207
Other non-interest expense 364 331
Total Other Expenses $1,215 $1,155
Income before income taxes $1,397 $1,184
Applicable income tax (benefit) 274 216
Net Income $1,123 $ 968
Net Income Per Weighted Share
Outstanding $ 1.26 $ 1.09
<FN>
See Accompanying Notes to Financial Statements
</FN>
</TABLE>
2
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
<CAPTION>
(Amounts in thousands)
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,123 $ 968
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision or loan losses 50 25
Provision for depreciation and
amortization 77 79
Premium amortization on investment
securities 33 47
Discount accretion on investment
securities (31) (21)
(Gain) loss on sales of investment
securities (6) (1)
Deferred income tax (benefit) (7) 18
(Increase) decrease in interest
receivable and other assets (201) (181)
Increase (decrease) in interest
payable, accrued expenses and
other liabilities 415 165
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 1,453 $ 1,099
INVESTING ACTIVITIES
Purchases of investment securities
available for sale $(5,778) $(18,561)
Proceeds from sales of investment
securities available for sale 4,217 5,299
Proceeds from maturities and
redemptions of investment
securities available for sale 1,584 1,441
Purchase of investment securities
held to maturity 0 (996)
Proceeds from maturities and
redemption of investment
securities held to maturity 638 1,029
Proceeds from sales of loans 0 65
Net (increase) decrease in loans (3,990) 690
Purchase of premises and equipment (120) (33)
NET CASH USED BY INVESTING ACTIVITIES $(3,449) $(11,066)
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 4,723 $ 4,737
Net increase (decrease) in
short-term borrowings (22) 2,696
Net increase (decrease)in long-term
borrowings 3,000 1,000
Cash dividends (311) (280)
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 7,390 $ 8,153
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENT $ 5,394 $ (1,814)
CASH AND CASH EQUIVALENTS, BEGINNING 5,179 6,620
CASH AND CASH EQUIVALENTS, ENDING $10,573 $ 4,806
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during period for
Interest $ 2,183 $ 2,079
Income Taxes 0 102
<FN>
See Accompanying Notes to Financial Statements
</FN>
</TABLE>
3
<PAGE>
FIRST KEYSTONE CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
March 31, 1997
(Unaudited)
Note 1.
The accounting and reporting policies of First Keystone
Corporation and Subsidiaries conform to generally accepted accounting
principles and to general practices within the banking industry.
These consolidated interim financial statements include the accounts
of First Keystone Corporation and its wholly owned subsidiary, The
First National Bank of Berwick. All significant inter-company
balances have been eliminated.
Note 2.
The accompanying consolidated interim financial statements are
unaudited. In management's opinion, the consolidated interim
financial statements reflect a fair presentation of the consolidated
financial position of First Keystone Corporation and Subsidiary, and
the results of their operations and their cash flows for the interim
periods presented. Further, the consolidated interim financial
statements reflect all adjustments, which are in the opinion of
management, necessary to present fairly the consolidated financial
condition and consolidated results of operations and cash flows for
the interim period presented and that all such adjustments to the
consolidated financial statements are of a normal recurring nature.
Note 3.
The results of operations for the three-month period ended March
31, 1997, are not necessarily indicative of the results to be expected
for the full year.
Note 4.
Net income per share of common stock for the interim periods is
based on the weighted average number of shares outstanding for each
period; 1997 and 1996 - 889,147 shares.
Note 5.
LOANS
Loans are stated at their outstanding principal balances, net of
any deferred fees or costs, unearned income, and the allowance for
loan losses. Interest on installment loans is recognized as income
over the term of each loan, generally, by the "actuarial method".
Interest on other loans is primarily recognized based upon the
principal amount outstanding. Loan origination fees and certain
direct loan origination costs have been deferred and the net amount
amortized using the interest method over the contractual life of the
related loans as an interest yield adjustment.
Non-Accrual Loans - Generally, a loan (including a loan impaired
under Statement of Financial Accounting Standards No. 114) is
classified as non-accrual, and the accrual of interest on such a 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.
4
<PAGE>
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 credit 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.
The Corporation adheres to the principles provided by 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 these
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. 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 by management to be adequate to absorb estimated
potential loan losses. Management's periodic evaluation of the
adequacy of the allowance for loan losses is based on the
Corporation's past loan 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.
<TABLE>
<CAPTION>
The following table presents the changes in the allowance for
credit losses:
<S> <C>
Balance at January 1, 1997 $2,267
Provisions charged off 50
Loans charged off (30)
Recoveries 8
Balance at March 31, 1997 $2,295
</TABLE>
At March 31, 1997, the recorded investment in loans that are
considered to be impaired under Statement No. 114 was $117,087. No
additional charge to operations is required since the total allowance
for loan losses is estimated by management to be adequate to provide
for the loan loss allowance under Statement No. 114 as well as any
other potential loan losses.
Note 6.
On April 15, 1997, the Board of Directors declared a 10% stock
dividend payable May 16, 1997, to shareholders of record May 2, 1997.
The stock dividend was valued based on the market price of $37.00 per
share on May 2, 1997. A total of 88,762 shares were issued as a
result of the stock dividend with a total value of $3,289,844,
including cash in lieu of fractional shares.
5
<PAGE>
<TABLE>
<CAPTION>
Common Common
Shares Stock Surplus
<S> <C> <C> <C>
Balance at January 1, 1997 889,147 $1,778,294 $6,654,396
Net Income - - -
Cash dividends - $.35
per share - - -
Change in unrealized gain
(loss) on investment
securities available
for sale - - -
Balance at March 31, 1997 889,147 $1,778,294 $6,654,396
<CAPTION>
Net Unrealized
Gain (Loss)
on Investment
Securities
Retained Available
Earnings For Sale Total
<S> <C> <C> <C>
Balance at January 1, 1997 $17,889,923 $1,150,382 $27,472,995
Net Income 1,123,083
Cash dividends - $.35
per share (311,201)
Change in unrealized gain
(loss) on investment
securities available
for sale (866,311)
Balance at March 31, 1997 $18,701,805 $ 284,072 $27,418,567
</TABLE>
Note 7.
As required on January 1, 1996, the Corporation adopted Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The Statement requires that
long-lived assets and certain identifiable intangibles are classified
into two categories for the purpose of accounting for an impairment of
assets: those to be held and used and those to be disposed of.
Assets to be held and used must be reviewed whenever events or changes
in circumstances indicate that the carrying value may not be
recoverable. An impairment loss is indicated if the sum of the
expected future cash flows, undiscounted and without interest charges,
is less than the carrying amount of the assets. An impairment loss
must be recognized as the amount by which the carrying amount of the
asset exceeds the fair value of the asset so determined.
Implementation of this Statement did not have any effect on the
consolidated financial condition or results of operations of the
Corporation.
Note 8.
The consolidated interim financial statements have been prepared
in accordance with requirements of From 10-Q and therefore does not
include all the disclosures normally required by generally accepted
accounting principles, or those normally made in the Corporation's
annual 10-KSB filing. The reader of these consolidated interim
financial statements may wish to refer to the Corporation's annual
report or Form 10-KSB for the period ended December 31, 1996, filed
with the Securities and Exchange Commission.
6
<PAGE>
Item 2. First Keystone Corporation Management's Discussion and
Analysis of Financial Condition and Results of Operation
as of March 31, 1997
FINANCIAL CONDITION
Total assets of the Corporation increased by $7,794,000 from
December 31, 1996, to March 31, 1997, to a level of $250,351,000.
The increase in total assets was largely a result of total deposits
increasing to $203,269,000, up $4,723,000 from December 31, 1996, and
long-term borrowings increasing by $3,000,000.
The increase in deposits and borrowings were used principally to
fund an increase in loans and an increase in interest-bearing deposits
with banks. Loans, net of unearned income increased $3,968,000 from
year-end 1996 to March 31, 1997. Interest bearing deposits with banks
increased by $4,838,000 as additional funds were kept short-term in
anticipation of possible interest rate increases.
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 loss is adequate to cover
foreseeable future losses.
Any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed under
Industry Guide 3 do not (i) represent or result from trends or
uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources, or
(ii) represent material credits about which management is aware of any
information which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
The company was required to adopt Financial Accounting Standards
Board Statement No. 114, "Accounting by Creditors for Impairment of a
Loan" - Refer to Note 5 above for details.
LIQUIDITY
The liquidity position of the Corporation remains adequate to
meet customer loan demand and deposit fluctuation. Managing liquidity
remains an important segment of asset liability management. Our
overall liquidity position is maintained by an active asset liability
management committee. Liquidity is achieved through steady increases
in core deposits, our investment portfolio, our loan portfolio through
loan payments and payoffs, and our access to borrowed funds.
7
<PAGE>
RESULTS OF OPERATIONS
Net income for the first quarter or the three months ended March
31, 1997, was $1,123,000, an increase of 16.0% over the first quarter
of 1996. The increase is largely a result of net interest income
increasing $247,000, or 11.6% over 1996 and total other income
increasing $51,000, or 21.3% over 1996.
As indicated, the increase in net income resulted from
improvements in several areas. The net interest income increase was
due to our relatively stable net interest margin which increased in
1996 over prior years. Total other income increased $51,000 largely
from the additional fiduciary activities income generated by our trust
department. Operating expenses were controlled during the first
quarter of 1997, with our provision for loan losses increasing $25,000
and total other expenses increasing $60,000. Our income before income
taxes increased to $1,397,000 in 1997, an increase of 18% over 1996.
Finally, continued effective tax planning helps to enhance
profitability. Our effective tax rate for the first quarter of 1997
was 19.6% as compared to 18.2% in 1996.
Net income per weighted share outstanding was $1.26 for the three
months ended March 31, 1997, as compared to $1.09 in 1996. Cash
dividends per share increased to $.35 as of March 31, 1997, as
compared to $.31 in March 1996. We remain committed to increase net
interest income through the generation of quality loans. Continued
loan growth, together with manageable loan losses and cost control
over other expenses, will provide the foundation for strong net income
results throughout 1997.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Annual Meeting of Shareholders of First Keystone
Corporation held on Tuesday, April 15, 1997, at 9:00
a.m.
<TABLE>
<CAPTION>
Votes Votes
Directors Elected Votes For Against Withheld
<S> <C> <C> <C>
Budd L. Beyer 754,543 6,453 0
Frederick E. Crispin, Jr. 754,543 6,453 0
Robert J. Wise 754,514 6,482 0
<CAPTION>
Broker
Directors Elected Abstentions Non-Votes
<S> <C> <C>
Budd L. Beyer 0 0
Frederick E. Crispin, Jr. 0 0
Robert J. Wise 0 0
</TABLE>
Directors Continuing:
John Arndt, term expires in 1998
J. Gerald Bazewicz, term expires in 1998
Robert E. Bull, term expires in 1998
John L. Coates, term expires in 1999
Dudley P. Cooley, term expires in 1999
Stanley E. Oberrender, term expires in 1999
F. Stuart Straub, term expires in 1998
Matters Voted Upon:
Selection of J. H. Williams & Co., as auditors for the
Corporation.
Votes For - 760,537
Votes Against - 48
Votes Withheld - 0
Abstentions - 411
Broker Non-Votes - 0
Item 5. Other Information
10% Stock Dividend - refer to Consolidated Notes to
Financial Statements Note 6 appearing on page 5 of
this Form 10-Q.
9
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 Regulation S-K
Exhibit Number Description of Exhibit
3(i) Articles of Incorporation, as amended
(Incorporated by reference to Exhibit 3(i) to
Registrant's Annual Report of Form 10-KSB for
the year ended December 31, 1996.
3(ii) Bylaws, as amended (Incorporated by reference
to Exhibit 3(ii) to Registrant's Annual Report
on Form 10-KSB for the year ended
December 31, 1996.
10 Material Contracts
11 Statement RE: Computation of Earnings Per
Share.
27 Financial Data Schedule.
(b) The Registrant has filed no reports on Form 8-K
for this quarter.
10
<PAGE>
FIRST KEYSTONE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly cause this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST KEYSTONE CORPORATION
Registrant
May 12, 1997 /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and
Chief Executive Officer
(Principal Executive Officer)
May 12, 1997 /s/ David R. Saracino
David R. Saracino
Treasurer/Assistant Secretary
(Principal Accounting Officer)
11
<PAGE>
INDEX TO EXHIBITS
Exhibit Description Page
10 Material Contracts
Profit Sharing Plan Summary 13
Deferred Compensation 14
Other Executive Benefits
(Incorporated by reference to
Exhibit 99 (Page 9) of the
Corporation's Annual Report on
Form 10-KSB for the year ended
December 31, 1996)
Management Incentive Compensation Plan 15
11 Compensation of Earning Per Share 16
27 Financial Data Schedule
12
EXHIBIT 10
PROFIT SHARING PLAN
SUMMARY OF PLAN PROVISIONS
ACCOUNTING, EFFECTIVE DATE AND OTHER DATA
EMPLOYER'S NAME First National Bank of Berwick
ADDRESS 111 West Front Street, Berwick, PA 18603
BUSINESS
ORGANIZATION Corporation
EFFECTIVE DATE November 1, 1985
RESTATED DATE January 1, 1987
EMPLOYER
TAX YEAR END December 31
PLAN YEAR END December 31
EMPLOYER
IDENTIFICATION
NUMBER 24-0525403
PLAN NUMBER 002
DESCRIPTION OF
TRADE OR BUSINESS Banking
LIMITATION
YEAR END December 31
ELIGIBILITY
SERVICE
REQUIREMENT 1 year(s) of service.
MINIMUM AGE
REQUIREMENT The minimum age requirement is 21.
ELIGIBILITY FOR
EMPLOYER
CONTRIBUTIONS A participant shall be eligible to receive an
allocation of the employer contributions for a
plan year if the following conditions are met:
The participant must be employed on the last
day of the plan year.
The participant must complete 1,000 hours of
service during the plan year unless the plan
is top-heavy for such plan year.
13
<PAGE>
These requirements shall not apply if the
participant terminates employment due to
death, disability or retirement.
These requirements shall not apply to employer
contributions made pursuant to a salary
reduction agreement.
ENTRY DATES January 1, April 1, July 1, and October 1.
PLAN ENTRY An employee shall enter the plan on the plan
entry date following the date on which the
employee meets the eligibility requirements
of the plan.
DEFINITION OF COMPENSATION
Compensation shall mean W-2 earnings.
Compensation shall mean the amount which is
actually paid to the participant during the
plan year.
Compensation shall include employer
contributions made pursuant to a salary
reduction agreement which is not includible
in the gross income of the employee under
Sections 125, 402(a)(8), 402(h) or 403(b)
of the Code.
This definition of compensation shall be
effective as of January 1, 1987.
Compensation shall be taken into account for
the entire period in which the employee
becomes a participant.
ELECTIVE DEFERRALS
ELECTIVE
DEFERRALS A participant may elect to have his or her
compensation reduced up to 6 percent per year.
ELECTIONS Each year a participant may elect to commence
deferrals as of 1/1, 4/1, 7/1 and 10/1.
A participant may elect to terminate or modify
the amount of deferrals as of 1/1, 4/1, 7/1
and 10/1 of each year.
MATCHING
CONTRIBUTIONS The employer will make matching contributions
to the plan on behalf of all participants.
Matching contributions will be made on behalf
of each participant in the amount of 100
percent of the elective deferral made for
each plan year.
The maximum elective deferral the employer
shall match will not exceed 3% of the
participant's compensation.
Forfeitures of excess aggregate contributions
and forfeitures of any Nonqualified Matching
Contributions shall be used to reduce employer
contributions.
<PAGE>
Qualified matching contributions shall mean
matching contributions which are subject to
the distribution and nonforfeitability
requirements of Section 401(k) of the Code
when made.
QUALIFIED
NONELECTIVE
CONTRIBUTIONS The employer will make qualified nonelective
contributions to the plan.
The amount of such contributions for each plan
year shall be an amount determined by the
employer.
The allocation of qualified nonelective
contributions shall be made to the account of
all participants.
VOLUNTARY
NONDEDUCTIBLE
CONTRIBUTIONS A participant will not be allowed to make
nondeductible voluntary employee contributions.
HARDSHIP
WITHDRAWALS Hardship withdrawals of elective deferrals
shall be permitted.
EXCESS ELECTIVE
DEFERRALS A participant who claims excess elective
deferrals for the preceding taxable year must
submit his/her claim in writing to the plan
administrator by March 1.
VESTING
NONTOP-HEAVY
SCHEDULE Participant will be 100% vested upon entry into
the plan.
TOP-HEAVY
VESTING SCHEDULE The 100% immediate schedule will apply as of
the first day of the plan year for which the
plan is top-heavy.
NORMAL RETIREMENT AGE
The normal retirement age is 65.
SERVICE WITH PREVIOUS EMPLOYER
Service with a previous employer will not be
taken into account except to the extent
service is required to be given pursuant to
Code Section 414(a) and the regulations
thereunder.
ALLOCATION OF EMPLOYER CONTRIBUTIONS AND FORFEITURES
BASIC
NONINTEGRATED
FORMULA Contributions will be allocated under a
nonintegrated formula.
<PAGE>
ADMINISTRATIVE ELECTIONS
PAYOUTS OF
SMALL ACCOUNT
BALANCES The employer will automatically make a total
distribution of the participant's vested
interest if it is $3,500 or less upon
retirement, termination of employment or
disability.
DISTRIBUTIONS AT
TERMINATION OF
EMPLOYMENT A participant may take a total distribution
of his/her vested account balance if he/she
terminates employment for reasons other than
death, disability or retirement.
HARDSHIP
WITHDRAWALS Hardship withdrawals shall be allowed under
this plan.
PARTICIPANT
LOANS Plan loans to a participant shall be allowed.
A minimum loan amount of $1,000 shall apply.
PARTICIPANT-
DIRECTED
INVESTMENTS Participant-directed investments shall not be
allowed under this plan.
ROLLOVERS Rollovers of funds by a participant from other
plans to this plan shall be allowed.
TRANSFERS Transfers of funds by a participant from other
plans to this plan shall be allowed.
CUSTODIAN
TRUSTEE First National Bank of Berwick
111 West Front Street
Berwick, PA 18603
<PAGE>
SUMMARY OF PLAN PROVISION ATTACHMENT
EMPLOYER NAME First National Bank of Berwick
PLAN NAME First National Bank of Berwick 401(k) Profit
Sharing Plan
EMPLOYER'S PHONE
NUMBER (717) 752-3671
TYPE OF PLAN
ADMINISTRATION Employer Provided
AGENT FOR SERVICE
OF LEGAL PROCESS Robert A. Bull Esquire
106 Market Street
Berwick, PA 18603
Legal process may also be served upon a plan trustee or the plan
administrator.
<PAGE>
PROPOSED MINUTES OF ACTION OF THE
BOARD OF DIRECTORS OF
THE FIRST NATIONAL BANK OF BERWICK
THE UNDERSIGNED, being the Secretary of THE FIRST NATIONAL BANK
OF BERWICK, a national banking association located in Berwick,
Pennsylvania (the "Company"), does hereby record the following minutes
and resolutions by the Board of Directors (the "Board") on this 7th
day of January, 1997 in accordance with its charter.
SALARY CONTINUATION AGREEMENT
RECITALS:
1. The Board deems it to be in the best interest of the Company
to retain the services of J. Gerald Bazewicz, David Saracino
and Leslie Bodle (the "Executives"), key employees of the
Company. To encourage the Executives to continue their
employment with the Company, the Board believes it to be in
the best interests of the Company to enter into certain
salary continuation agreements with the Executives
(hereinafter to be referred to as the "Agreements").
2. The Agreements will not be subject to the qualification
requirements of Section 401(a) of the Internal Revenue Code,
therefore, the Agreements may discriminate to only provide
benefits for the Executives in their role as a select group
of top management and highly compensated employees of the
Company. The Agreements shall be subject to the disclosure
and claims procedures of Title I of the Employee Income
Security Act of 1974.
3. The Board has reviewed the Agreements and the insurance to be
purchased for financing of the Agreements to assess the
effect of the promised benefits on the Company's finances.
The Agreement provides the Executive with retirement income
as follows:
<TABLE>
<CAPTION>
Normal Monthly Duration of
Retirement Retirement Retirement
Name Age Benefit Benefit
<S> <C> <C> <C>
J. Gerald Bazewicz 60 $3,750.00 20 years
David Saracino 60 $2,333.33 20 years
Leslie Bodle 60 $1,750.00 20 years
</TABLE>
14
<PAGE>
4. The Agreements are being established to reward the Executives
for past and future services to the Company. The projected
benefit amounts are calculated to give the Executives
supplemental retirement income provided that the Executives
meet the requirements of the Agreements. The Board believes
the income benefit amounts are reasonable and consistent with
the compensation standards of Section 39 of the Federal
Deposit Insurance Company Improvement Act of 1991 and the
related implementing regulations. This determination was
made by estimating future salary increases and targeting a
supplemental benefit to bring each Executive's total
retirement income to 75% of final salary.
5. The Board has determined that it is in the best interests of
the Company to finance the supplemental retirement benefits
by purchasing life insurance. The Board selected Bank
Compensation Strategies Group ("BCS"), a benefits consulting
firm endorsed by the American Banking Association and many
other state bank associations to calculate cost projections
and choose life insurance appropriate to finance the
obligations.
6. The Board deems it to be in the best interests of the Company
to purchase term life insurance from among the following
insurers:
Insurer
West Coast Life Insurance Co.
The Mutual Group Life Insurance Company
Alexander Hamilton Life Insurance Co.
Transamerica Assurance Company
Chubb LifeAmerica
7. After consulting with BCS, the Board deems it to be in the
best interests of the Company to purchase term life insurance
policies from the following life insurance companies:
<TABLE>
<CAPTION>
First Year Face
Insured Insurer Premium Amount
<S> <C> <C> <C>
J. Gerald Bazewicz West Coast Life Insurance Co. $1,327.50 $500,000
David Saracino West Coast Life Insurance Co. $1,078.20 $300,000
Leslie Bodle Chubb LifeAmerica $3,068.00 $200,000
</TABLE>
The life insurance policies will be owned by and payable to
the Company. The purpose of the insurance is to cover the
contingent liability associated with the possible death of
the Executives prior to retirement.
<PAGE>
8. The insurers of the policies which were selected by the
Board, with the recommendation of BCS, have credit ratings
of:
<TABLE>
<CAPTION>
A.M. Best Standard & Poor's
Insurer Rating Rating
<S> <C> <C>
West Coast Life Insurance Co. A+ AA+<F1>
Chubb LifeAmerica A+ AA-
<FN>
<F1>
The Standard & Poor's rating for West Coast Life Insurance Co. is the
rating of its parent company, Nationwide Life Insurance Co. which is
based in Columbus, Ohio, and has total assets of $57 billion.
</FN>
</TABLE>
9. Generally Accepted Accounting Principles ("GAAP") shall be
used in carrying the obligations and the assets on the books
of the Company.
10. The Board has reviewed the requirements of OCC Bulletin 96-51, Bank
Purchases of Life Insurance with the projections and
analysis prepared by BCS. BCS and the Company's CPA have
been consulted. Thus the Board deems it in the best
interests of the Company to execute the Agreements and
purchase term life insurance.
NOW, THEREFORE, BE IT RESOLVED, that the Chief Executive Officer
or Secretary or any other appropriate officer of the Company is
authorized and directed to execute The First National Bank of Berwick
Salary Continuation Agreement, by and between the Company and J.
Gerald Bazewicz, The First National Bank of Berwick Salary
Continuation Agreement, by and between the Company and David Saracino,
and The First National Bank of Berwick Salary Continuation Agreement,
by and between the Company and Leslie Bodle.
FURTHER RESOLVED, that the Chief Executive Officer or the
Secretary, or any other appropriate officer of the Company, is hereby
authorized and directed to execute any and all documents necessary to
implement the Agreements.
FURTHER RESOLVED, that the Chief Executive Officer or the
Secretary, or any other appropriate officer of the Company, is hereby
authorized and directed to purchase term life insurance contemplated
by this Agreement, and which is discussed in these minutes, or any
such other life insurance that has been subject to the same due
diligence as discussed above.
/s/ John L. Coates
Secretary
<PAGE>
THE FIRST NATIONAL BANK
OF BERWICK
MANAGEMENT INCENTIVE COMPENSATION PLAN
CONTENTS
I. PURPOSE 1
II. GENERAL DESCRIPTION 2
III. PLAN ADMINISTRATION 3
IV. PLAN PARTICIPANTS 5
V. OPERATING RULES 6
VI. SUMMARY OF SUPPLEMENTARY PLAN DOCUMENTS 9
15
<PAGE>
I. PURPOSE
The purpose of the Management Incentive Compensation Plan is to
provide incentives and awards to top management employees who, through
high levels of performance, contribute to the success and
profitability of The First National Bank of Berwick. The Plan is
designed to support organizational objectives and financial goals, as
defined by the Bank's Strategic and Financial Plans, by making
available additional, variable, and contingent incentive compensation.
II. GENERAL DESCRIPTION
The Management Incentive Compensation Plan is based upon the
achievement of a required budget net income figure before any
incentive award "pool" is formed. The Plan specifies annual goals
that are consistent with those contained in the Strategic Business
Plan and the annual Profit Plan.
The calculation of share of profits to be distributed to the Plan
participants, and the incentive formulas, are constructed to provide
awards that are consistent with achieved profitability levels. The
incentive formulas insure a level of incentive award that will enable
The First National Bank to attract, retain, and motivate high-quality
management personnel and support continued growth and profitability.
The Management Incentive Compensation Plan is established to
augment regular salary and benefits programs already in existence.
The Plan is not meant to be a substitute for salary increases, but as
a supplement to salary, and, as stated earlier, as an incentive for
performance that contributes to outstanding levels of achievement.
III. PLAN ADMINISTRATION
Throughout this Plan document, reference to the actions and
authority of the Human Resource Committee of the Board of Directors
also presumes that the Committee will recommend, and the Board of
Directors will approve or disapprove, final disposition of all matters
pertaining to the administration of the Plan. The Committee, with
Board approval, has the responsibility to interpret, administer,
amend, or recommend suspension or termination of the Plan as
necessary. The recommendations of the Committee, as approved by
<PAGE>
the Board, affecting the construction, interpretation, and
administration of the Plan shall be final and binding on all parties,
including the Bank and its employees.
Matters before the Committee shall be decided upon a majority
vote of the Committee and recommended to the Board for final action.
Plan participants who are members of the Committee shall not be
entitled to vote on matters relating to the eligibility for and/or
determination of their own incentive compensation awards.
During the first quarter of each Plan Year, the Committee may
review and revise the operating rules. Performance measures and
awards based upon those measures, may be changed in order to emphasize
specific goals and objectives of the Plan. However, it is expected
that the Plan will require modification only when significant changes
in organization, goals, personnel, or performance occur. The Chief
Executive Officer shall inform the Committee of any proposed changes
to the operating rules.
Computation of incentive awards will be made by the Chief
Executive Officer in consultation with the Chairman of the Board.
Maintenance of participant payments and other related records shall be
the responsibility of the Bank's Human Resource Manager. Such
computations and records may be audited annually by the independent
auditors of the Bank prior to submission to the Committee and the
Board for review and approval.
Finally, the Committee, in the exercise of its discretion with
respect to the determination of the amount of the incentive plan pool
for any given Plan Year, may take into account the presence or absence
of nonrecurring or extraordinary items of income, gain, expense, or
loss, and any and all factors that, in its sole discretion, may deem
relevant.
Extraordinary occurrences may be excluded when calculating
performance results to insure that the best interests of the Bank are
protected and are not brought into conflict with the best interest of
plan participants.
<PAGE>
IV. PLAN PARTICIPANTS
Participation in the Management Incentive Plan at The First
National Bank of Berwick is limited to the executive management team.
This management team includes the following functional job titles:
A. Chief Executive Officer
B. Finance/Control Division Manager
C. Sales/Marketing Division Manager
D. Trust Services Division Manager
Plan participation by these four (4) individuals recognizes the
importance of this group to the Bank and the potential these officers
have to influence the achievement of financial and strategic
objectives.
The only additional eligibility requirement is that the manager
named to one of the four (4) positions noted above must have served in
the position the full twelve (12) months of the plan year in order to
be eligible.
V. OPERATING RULES
I. The Plan shall be effective as of April 1, 1988.
A. The Board of Directors of The First National Bank of
Berwick may amend, suspend, or terminate the Plan at any
time.
B. The Plan shall be administered by the Human Resource
Committee with assistance from Executive Management.
C. The Human Resource Committee shall adopt such rules and
regulations and shall make determinations and
interpretations of the Plan thereunder as it shall deem
appropriate. All such rules, regulations, and
determinations, as approved by the Board of Directors,
shall be conclusive and binding upon all parties.
D. Eligibility for participation in the Plan is based upon the
eligibility requirements as stated herein.
E. Supplementary Plan Documents relating to participants, the
targeted incentive plan pool, and other pertinent matters
will be prepared by the Committee, and approved by the
Board of Directors,
<PAGE>
during the first quarter of each Plan Year.
F. The incentive plan pool may be funded, within the
discretion of the Board of Directors, with the following to
be used as a general guideline:
Fund as a % of Budget
% of Budget Beyond Goal
Greater than 90% of budget 5%
up to 95% of budget
Greater than 95% of budget 10%
up to 100% of budget
In excess of budget 15%
G. Allocation of the plan pool will be made in accordance with
the guidelines shown in Section VI of this Plan document.
As noted in these guidelines, individual performance
standards must be met before an eligible participant will
receive all or part of his/her eligible portion of the
pool.
H. Within thirty (30) days following the end of the Plan Year,
or as soon as financial and operating results are known,
eligible participants will receive their appropriate
incentive plan payment. Unless otherwise determined and
approved by the Board of Directors, this payment will be
made in cash.
I. Basic Incentive Plan guidelines for any Plan Year shall be
reviewed with the participants at the beginning of each
Plan Year.
J. Partial payments under the Plan shall be administered as
follows:
1. Retirement: In the event of termination of employment
through retirement, the employee may, at the discretion
of the Committee, be considered to have earned one-twelfth
(1/12) of the annual incentive compensation
award of a particular year for each month of employment
in the Plan Year of his/her retirement.
2. Death: If a participant dies, the amount of the award
may be prorated for each month of employment during the
Plan Year at the discretion of the Committee, and paid
to the estate or designated beneficiary.
3. Termination for Reasons Other Than Death or Retirement:
In the event of termination of employment for reasons
other than death or retirement, the participant, at the
discretion of
<PAGE>
the Committee, will forfeit all unpaid incentive
awards.
K. No right or interest of any participant in the plan shall
be assignable or transferable, or subject to any lien,
directly, by operation of law, or otherwise, including
levy, garnishment, attachment, pledge, or bankruptcy,
except to a beneficiary upon the death of a participant as
herein provided.
L. An award under the Plan shall not confer any right on the
participant to continue in the employ of the bank, or limit
in any way the right of the bank to terminate the
participant's employment at any time. The receipt of an
award for any one year shall not guarantee an employee the
right to receive an award for any subsequent year.
M. The Bank shall have the right to deduct from all payments
under this Plan any federal or state taxes required by law
to be withheld with respect to such payments.
N. The Committee, with concurrence of the Board of Directors,
may terminate, amend, or modify this Plan at any time.
VI. SUMMARY OF SUPPLEMENTARY PLAN DOCUMENTS
A. Allocation of Incentive Plan Pool
Maximum %
Job Title of Pool
1. Chief Executive Officer 40%
2. Finance/Control Division Manager 30%
3. Trust Services Division Manager 15%
4. Sales/Marketing Division Manager 15%
EXHIBIT 11
FIRST KEYSTONE CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Quarter Ended March 31,
1997 1996
(Dollars in Thousands)
<S> <C> <C>
Primary
Net Income $ 1,123 $ 968
Shares<F1>
Weighted average number of
common shares outstanding 889,147 889,147
Adjustments - increases or
decreases None None
Weighted average number of
common shares outstanding
as adjusted 889,147 889,147
Primary earnings per common share $ 1.26 $ 1.09
Assuming full dilution
Net Income $ 1,123 $ 968
Shares<F1>
Weighted average number of
common shares outstanding 889,147 889,147
Adjustments - increases or
decreases None None
Weighted average number of
common shares outstanding
as adjusted 889,147 889,147
Earnings per common share
assuming full dilution $ 1.26 $ 1.09
<FN>
<F1>
Restated to reflect 10% stock dividends paid in 1996.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,703
<INT-BEARING-DEPOSITS> 4,870
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 79,842
<INVESTMENTS-CARRYING> 19,421
<INVESTMENTS-MARKET> 19,180
<LOANS> 137,229
<ALLOWANCE> 2,295
<TOTAL-ASSETS> 250,351
<DEPOSITS> 203,269
<SHORT-TERM> 5,099
<LIABILITIES-OTHER> 1,564
<LONG-TERM> 13,000
<COMMON> 1,778
0
0
<OTHER-SE> 25,641
<TOTAL-LIABILITIES-AND-EQUITY> 250,351
<INTEREST-LOAN> 2,986
<INTEREST-INVEST> 1,611
<INTEREST-OTHER> 11
<INTEREST-TOTAL> 4,608
<INTEREST-DEPOSIT> 1,997
<INTEREST-EXPENSE> 240
<INTEREST-INCOME-NET> 2,371
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 1,215
<INCOME-PRETAX> 1,397
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,123
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.51
<LOANS-NON> 361
<LOANS-PAST> 57
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,292
<ALLOWANCE-OPEN> 2,267
<CHARGE-OFFS> 20
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 2,295
<ALLOWANCE-DOMESTIC> 2,295
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 485
</TABLE>
