UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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, 18603
Berwick, Pennsylvania (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (717) 752-3671
Securities registered pursuant to Section 12(b) of the Act: Common
Stock, par value $2.00 per share
Securities registered pursuant to Section 12(g) of the Act: Not
Applicable
Indicate by check mark whether the Registrant (1) filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 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______
Indicate by check mark if there is no disclosure of delinquent
filers in response to Item 405 of Regulation S-K 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-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-
affiliates on the Registrant based on the closing price as of March
10, 1998, was approximately $60,033,324.
The number of shares outstanding of the issuer's Common Stock, as
of March 10, 1998, was 2,933,727 shares of Common Stock, par value
$2.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1998 definitive Proxy Statement are
incorporated by reference in Part III of this Annual Report. In
addition, portions of the Annual Report to stockholders of the
Registrant for the year ended December 31, 1997, are incorporated by
reference in Part II of this Annual Report.
<PAGE>
FIRST KEYSTONE CORPORATION
FORM 10-K
Table of Contents
Part I Page
Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of
Security Holders Not Applicable
Part II
Item 5. Market for Registrant's Common
Equity and Related Stockholder
Matters 13
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 15
Item 8. Financial Statements and Supplementary
Data 15
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure Not Applicable
Part III
Item 10. Directors and Executive Officers
of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain
Beneficial Owners and Management 16
Item 13. Certain Relationships and Related
Transactions 16
Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 16
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FIRST KEYSTONE CORPORATION
FORM 10-K
PART I
ITEM 1. BUSINESS
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, 1997, the Corporation had
total consolidated assets, deposits and stockholders' equity of
approximately $267.4 million, $217.6 million and $31.8 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 six branch locations
(three branches within Columbia County and three 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.
Additionally, the Bank also provides personal and corporate trust and
agency services to individuals, corporations, and others, including
trust investment accounts, investment advisory services, mutual funds,
estate planning, and management of pension and profit sharing plans.
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 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. The Bank is subject to regulation by
the Pennsylvania Department of Banking and the FDIC, but, as a
national bank, is regulated and examined by the Office of the
Comptroller of the Currency.
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. The Bank
Holding Company
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Act prohibits acquisition by the Corporation of more than 5% of the
voting shares of, or interest in, or substantially all the assets of,
any bank located outside Pennsylvania unless such an acquisition is
specifically authorized by laws of the state in which such bank is
located.
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.
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
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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.
Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA")
On August 9, 1989, major reform and financing legislation, i.e.,
FIRREA, was enacted into law in order to restructure the regulation of
the thrift industry, to address the financial condition of the Federal
Savings and Loan Insurance Corporation and to enhance the supervisory
and enforcement powers of the Federal bank and thrift regulatory
agencies. The Office of the Comptroller of the Currency ("OCC"), as
the primary Federal regulator of the Bank, is primarily responsible
for supervision of the Bank. The OCC and FDIC have far greater
flexibility to impose supervisory agreements on an institution that
fails to comply with its regulatory requirements, particularly with
respect to the capital requirements. Possible enforcement actions
include the imposition of a capital plan, termination of deposit
insurance and removal or temporary suspension of an officer, director
or other institution-affiliated party.
Under FIRREA, civil penalties are classified into three levels,
with amounts increasing with the severity of the violation. The first
tier provides for civil penalties of up to $5,000 per day for any
violation of law or regulation. A civil penalty of up to $25,000 per
day may be assessed if more than a minimal loss or a pattern of
misconduct is involved. Finally, a civil penalty of up to $1.0
million per day may be assessed for knowingly or recklessly causing a
substantial loss to an institution or taking action that results in a
substantial pecuniary gain or other benefit. Criminal penalties are
increased to $1.0 million per violation, up to $5.0 million for
continuing violations or for the actual amount of gain or loss. These
monetary penalties may be combined with prison sentences for up to
five years.
Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA")
In 1991, the Federal Deposit Insurance Corporation Improvement
Act ("FDICIA") was signed into law. FDICIA established five different
levels of capitalization of financial institutions, with "prompt
corrective actions" and significant operational restrictions imposed
of institutions that are capital deficient under the categories. The
five categories are: Well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized.
To be considered well capitalized, an institution must have a
total risk-based capital ratio of at least 10%, a Tier 1 risk-based
capital ratio of at least 6%, a leverage capital ratio of 5%, and must
not be subject to any order or directive requiring the institution to
improve its capital level. An institution falls within the adequately
capitalized category if it has a total risk-based capital ratio of at
least 8%, a Tier 1 risk-based capital ratio of at least 4%, and a
leverage capital ratio of at least 4%. Institutions with lower
capital levels are deemed to be undercapitalized, significantly
undercapitalized or critically undercapitalized, depending on their
actual capital levels. In addition, the appropriate federal
regulatory agency may downgrade an institution to the next lower
capital category upon a determination that the institution is in an
unsafe or unsound condition, or is engaged in an unsafe or unsound
practice. Institutions are required under FDICIA to closely monitor
their capital levels and to notify their appropriate regulatory agency
of any basis for a change in capital category. On December 31, 1997,
the Corporation and the Bank exceeded the minimum capital levels of
the well capitalized category.
Regulatory oversight of an institution becomes more stringent
with each lower capital category, with certain "prompt corrective
actions" imposed depending on the level of capital deficiency.
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Other Provisions of FDICIA
Each depository institution must submit audited financial
statements to its primary regulator and the FDIC, which reports are
made publicly available. In addition, the audit committee of each
depository institution must consist of outside directors and the audit
committee at "large institutions" (as defined by FDIC regulation) must
include members with banking or financial management expertise. The
audit committee at "large institutions" must also have access to
independent outside counsel. In addition, an institution must notify
the FDIC and the institution's primary regulator of any change in the
institutions independent auditor, and annual management letters must
be provided to the FDIC and the depository institution's primary
regulator. The regulations define a "large institution" as one with
over $500 million in assets, which does not include the Bank. Also,
under the rule, an institution's independent auditor must examine the
institution's internal controls over financial reporting and perform
agreed-upon procedures to test compliance with laws and regulations
concerning safety and soundness.
Under FDICIA, each federal banking agency must prescribe certain
safety and soundness standards for depository institutions and their
holding companies. Three types of standards must be prescribed:
Asset quality and earnings, operational and managerial, and
compensation. Such standards would include a ratio of classified
assets to capital, minimum earnings, and, to the extent feasible, a
minimum ratio of market value to book value for publicly traded
securities of such institutions and holding companies. Operational
and managerial standards must relate to: (i) internal controls,
information systems and internal audit systems, (ii) loan
documentation, (iii) credit underwriting, (iv) interest rate exposure,
(v) asset growth, and (vi) compensation, fees and benefits. In
November, 1993, the federal banking agencies released proposed rules
setting forth some of the required safety and soundness standards.
Under such proposed rules, if the primary federal regulator determines
that any standard has not been met, the regulator can require the
institution to submit a compliance plan that describes the steps the
institution will take to eradicate the deficiency. Failure to adopt
or implement a compliance plan could lead to further sanctions by the
responsible regulator. Pursuant to the Riegle Community Development
and Regulatory Improvement Act of 1994, federal banking agencies have
been given the discretion to adopt safety and soundness guidelines
rather than regulations.
Provisions of FDICIA relax certain requirements for mergers and
acquisitions among financial institutions, including authorization of
mergers of insured institutions that are not members of the same
insurance fund, and provide specific authorization for a federally
chartered savings association or national bank to be acquired by an
insured depository institution.
Under FDICIA, all depository institutions must provide 90 days
notice to their primary federal regulator of branch closings, and
penalties are imposed for false reports by financial institutions.
Depository institutions with assets in excess of $250 million must be
examined on-sit annually by their primary federal or state regulator
of the FDIC.
FDICIA also sets forth Truth in Savings disclosure and
advertising requirements applicable to all depository institutions.
Real Estate Lending Standards. Pursuant to the FDICIA, the OCC
and other federal banking agencies adopted real estate lending
guidelines which would set loan-to-value ("LTV") ratios for different
types of real estate loans. A LTV ratio is generally defined as the
total loan amount divided by the appraised value of the property at
the time the loan is originated. If the institution does not hold a
first lien position, the total loan amount would be combined with the
amount of all senior liens when calculating the ratio. In addition to
establishing the LTV ratios, the guidelines require all real estate
loans to be based upon proper loan documentation and a recent
appraisal of the property.
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Bank Enterprise Act of 1991. Within the overall FDICIA is a
separate subtitle called the "Bank Enterprise Act of 1991." The
purpose of this Act is to encourage banking institutions to establish
"basic transaction services for consumers" or so-called "lifeline
accounts." The FDIC assessment rate is reduced for all lifeline
depository accounts. This Act establishes ten (10) factors which are
the minimum requirements to qualify as a lifeline depository account.
Some of these factors relate to minimum opening and balance amounts,
minimum number of monthly withdrawals, the absence of discriminatory
practices against low-income individuals and minimum service charges
and fees. Moreover, the Housing and Community Development Act of 1972
requires that the FDIC's risk-based assessment system include
provisions regarding life-line accounts. Assessment rates applicable
to life-line accounts are to be established by FDIC rule.
Truth in Savings Act. The FDICIA also contains the Truth in
Savings Act ("TSA"). The Federal Reserve Board has adopted
regulations ("Regulation DD") under the TSA. The purpose of TSA is to
require the clear and uniform disclosure of the rates of interest
which are payable on deposit accounts by depository institutions and
the fees that are assessable against deposit accounts, so that
consumers can make a meaningful comparison between the competing
claims of banks with regard to deposit accounts and products. In
addition to disclosures to be provided when a customer establishes a
deposit account, TSA requires the depository institution to include,
in a clear and conspicuous manner, the following information with each
periodic statement of a deposit account: (1) the annual percentage
yield earned, (2) the amount of interest earned, (3) the amount of any
fees and charges imposed and (4) the number of days in the reporting
period. TSA allows for civil lawsuits to be initiated by customers if
the depository institution violates any provision or regulation under
TSA.
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for all
insured depository institutions that results in the assessment of
premiums based on capital and supervisory measures.
Under the risk-related premium schedule, the FDIC, on a
semiannual basis, assigns, each institution to one of three capital
groups (well capitalized, adequately capitalized or under capitalized)
and further assigns such institution to one of three subgroups within
a capital group corresponding to the FDIC's judgment of the
institution's strength based on supervisory evaluations, including
examination reports, statistical analysis and other information
relevant to gauging the risk posed by the institution. Only
institutions with a total capital to risk-adjusted assets ratio of
10.0% or greater, a Tier 1 capital to risk-adjusted assets ratio of
6.0% or greater and a Tier 1 leverage ratio of 5.0% or greater, are
assigned to the well-capitalized group.
Over the last two years, FDIC insurance assessments have seen
several changes for both the Bank Insurance Fund ("BIF") and the
Savings Association Insurance Fund ("SAIF") institutions. The most
recent change occurred on September 30, 1996, when the President
signed into law a bill designed to remedy the disparity between BIF
and SAIF deposit premiums. The first part of the bill called for the
SAIF to be capitalized by a one-time assessment on all SAIF insured
deposits held as of March 31, 1995. This assessment, which was 65.7
cents per $100 in deposits, raised approximately $4.7 billion to bring
the SAIF up to its required 1.25 reserve ratio. This special
assessment, paid in 1996, had no effect on the Bank. The second part
of the bill remedied the future anticipated shortfall with respect to
the payment of Financing Corporation ("FICO") interest. For 1997
through 1999, the banking industry will help pay the FICO interest
payments at an assessment rate that is one-fifth the rate paid by
thrifts. The FICO assessment on BIF insured deposits is 1.29 cents
per $100 in deposits; for SAIF insured deposits it is 6.44 cents per
$100 in deposits. Beginning January 1, 2000, the FICO interest
payments will be paid pro-rata by banks and thrifts based on deposits.
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Regulatory Capital Requirements
<TABLE>
<CAPTION>
The following table presents the Corporation's capital ratios at
December 31, 1997:
(In Thousands)
<S> <C>
Tier I Capital $ 29,589
Tier II Capital 29,589
Total Capital 31,499
Adjusted Total Average Assets 263,525
Total Adjusted Risk-Weighted Assets <F1> 152,323
Tier I Risk-Based Capital Ratio <F2> 19.43%
Required Tier I Risk-Based Capital Ratio 4.00%
Excess Tier I Risk-Based Capital Ratio 15.43%
Total Risk-Based Capital Ratio <F3> 20.68%
Required Total Risk-Based Capital Ratio 8.00%
Excess Total Risk-Based Capital Ratio 12.68%
Tier I Leverage Ratio <F4> 11.23%
Required Tier I Leverage Ratio 3.00%
Excess Tier I Leverage Ratio 8.23%
______________________________
<FN>
<F1>
Includes off-balance sheet items at credit-equivalent values less
intangible assets.
<F2>
Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I
Capital to Total Adjusted Risk-Weighted Assets.
<F3>
Total Risk-Based Capital Ratio is defined as the ratio of Tier I and
Tier II Capital to Total Adjusted Risk-Weighted Assets.
<F4>
Tier I Leverage Ratio is defined as the ratio of Tier I Capital to
Adjusted Total Average Assets.
</FN>
</TABLE>
The Corporation's ability to maintain the required levels of
capital is substantially dependent upon the success of 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.
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.
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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, 1997, the Bank had total assets of
$265,829,051, total shareholders' equity of $30,022,204 and total
deposits and other liabilities of $235,806,847.
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, 1997, the Bank had eighty-three (83) full-time
employees and thirty-one (31) part-time employees. In the opinion of
management, the Bank enjoys a satisfactory relationship with its
employees. The Bank is not a party to any collective bargaining
agreement.
Competition - Bank
The Bank competes actively with other area commercial banks and
savings and loan associations, many of which are larger than the Bank,
as well as with major regional banking and financial institutions.
The Bank's major competitors in the county of Columbia and the county
of Luzerne are: First Columbia Bank & Trust Co. of Bloomsburg, PNC
Bank, N.A., Columbia County Farmers National Bank of Bloomsburg,
Franklin First Savings Bank of Wilkes-Barre, FNB Bank of Danville and
First National Trust Bank of Sunbury. 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
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maintain, loans a bank makes and collateral it takes, and the
activities of a bank with respect to mergers and consolidations and
the establishment of branches.
As a subsidiary of a bank holding company, the Bank is subject to
certain restrictions imposed by the Federal Reserve Act on any
extensions of credit to the bank holding company or its subsidiaries,
on investments in the stock or other securities of the bank holding
company or its subsidiaries and on taking such stock or securities as
collateral for loans. The Federal Reserve Act and Federal Reserve
Board regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to principal
shareholders of its parent holding company, among others, and to
related interests of such principal shareholders. In addition, such
legislation and regulations may affect the terms upon which any person
becoming a principal shareholder of a holding company may obtain
credit from banks with which the subsidiary bank maintains a
correspondent relationship.
From time to time, various types of federal and state legislation
have been proposed that could result in additional regulations of, and
restrictions on, the business of the Bank. It cannot be predicted
whether any such legislation will be adopted or how such legislation
would affect the business of the Bank. As a consequence of the
extensive regulation of commercial banking activities in the United
States, the Bank's business is particularly susceptible to being
affected by federal legislation and regulations that may increase the
costs of doing business.
Under the Federal Deposit Insurance Act ("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 Bank Secrecy Act ("BSA"), the Bank is required to
report to the Internal Revenue Service currency transactions of more
than $10,000 or multiple transactions of which the Bank is aware in
any one day that aggregate in excess of $10,000. Civil and criminal
penalties are provided under the BSA for failure to file a required
report, for failure to supply information required by the BSA or for
filing a false or fraudulent report.
The Garn-St Germain Depository Institutions Act of 1982 ("1982
Act"), removes certain restrictions on the lending powers and
liberalizes the depository abilities of the Bank. The 1982 Act also
amends FIRA (see above) by eliminating certain statutory limits on
lending of a bank to its executive officers, directors, principal
shareholders or related interests thereof and by relaxing certain
reporting requirements. However, the 1982 Act strengthened FIRA
provisions respecting management interlocks and correspondent bank
relationships by management personnel.
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Community Reinvestment Act
The Community Reinvestment Act of 1977, as amended (the "CRA"),
and the regulations promulgated to implement the CRA are designed to
create a system for bank regulatory agencies to evaluate a depository
institution's record in meeting the credit needs of its community.
Until May 1995, a depository institution was evaluated for CRA
compliance based upon 12 assessment factors.
The CRA regulations were completely revised as of May 4, 1995, to
establish new performance-based standard for use in examining a
depository institution's compliance with the CRA (the "revised CRA
regulations"). The revised CRA regulations establish new tests for
evaluating both small and large depository institutions investment in
the community. A "small bank" is defined as a bank which has total
assets of less than $250 million and is independent or is an affiliate
of a holding company with less than $1 billion in assets., Pursuant
to the revised CRA regulations, a depository institution which
qualifies as a "small bank" will be examined under a streamlined
procedure which emphasizes lending activities. The streamlined
examination procedures for a small bank became effective on January 1,
1996.
A large retail institution is one which does not meet the "small
bank" definition above. A large retail institution can be evaluated
under one of two tests: (1) a three-part test evaluating the
institution's lending, service and investment performance: or (2) a
"Strategic Plan"; designed by the institution with community
involvement and approved by the appropriate federal bank regulator. A
large institution must choose one of these options prior to July 1997,
but may opt to be examined under one of these two options prior to
that time. Effective January 1, 1996, a large retail institution that
opts to be examined pursuant to a strategic plan may submit its
strategic plan to the bank regulators for approval.
In addition, the revised CRA regulations include separate rules
regarding the manner in which "wholesale banks" and "limited purpose
banks" will be evaluated for compliance.
The new CRA regulations will be phased in over a two-year period,
beginning July 1, 1995, with a final effective date of July 1, 1997.
Until the applicable test is phased in, institutions may be examined
under the prior CRA regulations.
On December 27, 1995, the federal banking regulators issued a
joint final rule containing technical amendments to the revised CRA
regulations. Specifically, the recent technical amendments clarify
the various effective dates in the revised CRA regulations, correct
certain cross references and state that once an institution becomes
subject to the requirements of the revised CRA regulations, it must
comply with all aspects of the revised CRA regulations, regardless of
the effective date of certain provisions. Similarly, once an
institution is subject to the revised CRA regulations, the prior CRA
regulations do not apply to that institution.
For the purposes of the revised CRA regulations, the Bank is
deemed to be a small depository institution, based upon financial
information as of December 31, 1997. Therefore, the Bank will be
evaluated for CRA compliance using the streamlined procedures for a
small bank. The Bank received a "satisfactory" rating in 1996.
Concentration
The Corporation and the 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.
9
<PAGE>
New Legislation
The Deposit Insurance Funds Act of 1996 was a part of the larger
Economic Growth and Regulatory Paperwork Reduction Act of 1996
"EGRPRA"). EGRPRA is a lengthy Act that amends many different bank
regulatory and consumer protection statutes. While EGRPRA does not
contain any major changes to banking law (except for the FDIC and FICO
assessments discussed above), it does contain a number of smaller
provisions that are beneficial to the banking industry. In
particular, certain routine regulatory application requirements and
procedures have been reduced or eliminated, making it easier and less
expensive for banks to comply with regulatory requirements. While the
changes effected by EGRPRA are welcome, the direct effect on the
Company and the Bank are expected to be minimal.
Proposed legislation is introduced in almost every legislative
session that would dramatically affect the regulation of the banking
industry. Whether or not such legislation will ever be enacted and
what effect if may have on the Company and the Bank cannot be
estimated at this time.
Pennsylvania Banking Law
Under the Pennsylvania Banking Code of 1965, as amended (the
"Code"), the Corporation is permitted to control an unlimited number
of banks. However, the Corporation would be required, under the Bank
Holding Company Act, to obtain the prior approval of the Federal
Reserve Board before it could acquire all or substantially all of the
assets of any bank, or acquire ownership or control of any voting
shares of any bank other than the Bank, if, after such acquisition, it
would own or control more than five percent (5%) of the voting shares
of such bank.
Interstate Banking
Prior to the passage of the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Banking Act"), the
BHCA prohibited a bank holding company located in one state from
acquiring a bank located in another state, unless such an acquisition
by an out-of-state bank holding company was specifically authorized by
the law of the state where the bank to be acquired was located.
Similarly, interstate branching by a single bank was generally
prohibited by the McFadden Act. The Interstate Banking Act permits an
adequately capitalized and adequately managed bank holding company to
acquire a bank in another state whether or not the law of that other
state permits the acquisition, subject to certain deposit
concentration caps and approval by the Federal Reserve Board. In
addition, beginning on June 1, 1997, under the Interstate Banking Act,
a bank can engage in interstate expansion by merging with a bank in
another state, unless the other state affirmatively opts out of the
legislation before that date. A state may also opt into the
legislation earlier than June 1, 1997 if it wishes to do so. The
Interstate Banking Act also permits de novo interstate branching as of
June 1, 1997, but only if a state affirmatively opts in by adopting
appropriate legislation. Pennsylvania, Delaware, Maryland, and New
Jersey, as well as other states, adopted "opt in" legislation which
allows such transactions prior to the June 1, 1997 federal effective
date.
10
<PAGE>
Foreign Operations
The Corporation does not depend on foreign sources for funds, nor
does the Corporation make foreign loans.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable
year. Any of the Corporation's computer programs that have date-
sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, or a temporary
inability to engage in normal business activities.
First Keystone Corporation is in the process of becoming Year
2000 compliant. The expenses for maintenance or modification of
software associated with the Year 2000 will be expensed as incurred.
The costs of new software will be capitalized and amortized over the
software's useful life. The cost of becoming 2000 compliant is not
material. The amount expensed in 1997 was immaterial and the
Corporation does not expect the amounts required to be expensed in
1998 and 1999 to have a material effect on its financial position or
results of operation.
The Corporation has also initiated formal communications with all
of its significant suppliers and large customers to determine the
extent to which the Corporation is vulnerable to those third parties'
failure to remediate their own Year 2000 issue. However, failures of
third parties or other companies, on which the Corporation systems
rely to be 2000 compliant could have an adverse effect on the
Corporation's systems.
The Corporation plans to complete the Year 2000 project by
December 31, 1998. The costs of the project and the date on which the
Corporation plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans.
11
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES
The Corporation owns no property other than through its
subsidiary. These are:
<TABLE>
<CAPTION>
Type of Square
Location Ownership Footage Use
<S> <C> <C> <C>
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,
Berwick 1.45 Acres held for possible
expansion. 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,
Central Road, 1.11 Acres held 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
1540 Sans Souci Highway Owned 4,000 Banking services.
Wilkes-Barre
</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 Corporation and/or the Bank are defendants in various legal
proceedings arising in the course of their business. However, in the
opinion of management of the Corporation and the Bank, there are no
proceedings pending to which the Corporation and the Bank is a party
or to which their property is subject, which, if determined adversely
to the Corporation and the Bank, would be material in relation to the
Corporation's and Bank's individual profits or financial condition,
nor are there any proceedings pending other than ordinary routine
litigation incident to the business of the Corporation and the Bank.
In addition, no material proceedings are pending or are known to be
threatened or contemplated against the Corporation and the Bank by
government authorities or others.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Corporation's Common Stock is traded in the over-the-counter
market on the OTC Bulletin Board under the symbol "FKYS". 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, 1996. 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>
1996:
First quarter $11.21 $10.19 $.094
Second quarter $11.21 $11.21 $.094
Third quarter $11.21 $11.21 $.094
Fourth quarter $11.21 $11.21 $.106
1997:
First quarter $11.21 $10.74 $.106
Second quarter $14.33 $10.92 $.117
Third quarter $14.33 $14.33 $.117
Fourth quarter $19.08 $16.63 $.133
</TABLE>
As of December 31, 1997, the Corporation had approximately 524
shareholders of record.
13
<PAGE>
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.
Dividend Restrictions on the Bank
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,
1997, there was $6,141,195 in unrestricted retained earnings and net
income available at the Bank that could be paid as a dividend to the
Corporation under the current OCC regulations.
Dividend Restrictions on the Corporation
Under the Pennsylvania Business Corporation Law of 1988, as
amended (the "BCL"), the Corporation may not pay a dividend if, after
giving effect thereto, either (a) the Corporation would be unable to
pay its debts as they become due in the usual course of business or
(b) the Corporation's total assets would be less than its total
liabilities. The determination of total assets and liabilities may be
based upon: (i) financial statements prepared on the basis of
generally accepted accounting principles, (ii) financial statements
that are prepared on the basis of other accounting practices and
principles that are reasonable under the circumstances, or (iii) a
fair valuation or other method that is reasonable under the
circumstances.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information under the caption "Summary of Selected Financial
Data" appearing on page 2 of the Corporation's Annual Report to
Shareholders for the year ended December 31, 1997, which page is
included in Exhibit 11 hereto, is incorporated in its entirety by
reference in response to this Item 6.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing
on pages 25 through 39 of the Corporation's Annual Report to
Shareholders for the year ended December 31, 1997, which pages are
included in Exhibit 13 hereto, is incorporated in its entirety by
reference in response to this Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Corporation's Consolidated Financial Statements and notes
thereto appearing on pages 4 through 23 of the Corporation's Annual
Report to Shareholders for the year ended December 31, 1997, which
pages are included in Exhibit 13 hereto, are incorporated in their
entirety by reference in response to this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the captions "Information As To Nominees,
Directors and Executive Officers," "Section 16(A) Beneficial Ownership
Reporting Compliance," "Principal Officers of the Corporation," and
"Principal Officers of the Bank" appearing on pages 5, 6, 7, 12, and
13, 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 10.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation"
appearing on pages 8 through 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 11.
15
<PAGE>
ITEM 12. 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 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Transactions"
appearing on page 12 of the Corporation's Definitive Proxy Statement,
filed as Exhibit 99 hereto, is incorporated in its entirety by
reference in response to this Item 13.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. The Registrant's consolidated financial statements
and notes thereto as well as the applicable reports of the independent
certified public accountants are filed at Exhibit 13 hereto and are
incorporated in their entirety by reference under this Item 14(a)1.
2. All schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
3. The exhibits required by Item 601 of the Regulation
S-K are included under Item 14(c) hereto.
(b) The Corporation filed no reports on Form 8-K during the
last quarter of the year ended December 31, 1997.
(c) Exhibits required by Item 601 of Regulation S-::
Exhibit Number Referred to
Item 601 of Regulation S-K Description of Exhibit
2 None.
3i Articles of Incorporation, as
amended (Incorporated by reference
to Exhibit 3(i) to the
Registrant's Annual Report on Form
10-KSB for the year ended December
31, 1996).
3ii By-Laws, as amended (Incorporated
by reference to Exhibit 3(ii) to
the Registrant's Annual Report on
Form 10-KSB for the year ended
December 31, 1996).
4 None.
9 None.
16
<PAGE>
Exhibit Number Referred to
Item 601 of Regulation S-K Description of Exhibit
10 None.
11 Computation of Earnings Per Share
incorporated by reference to
Exhibit 11 to the Registrant's
Annual Report on Form 10-K for the
year ended December 31, 1997.
12 None.
13 Excerpt from Annual Report to
Shareholders for Fiscal Year Ended
December 31, 1997.
16 None.
18 None.
21 List of Subsidiaries of the
Corporation (Incorporated by
reference to Exhibit 22 to the
Registrant's Annual Report on Form
10-K for the year ended December
31, 1997.
22 None.
23 Consent of Independent Auditors.
24 None.
27 Financial Data Schedule.
99 Definitive Proxy Statement, Notice
of Annual Meeting and Form of
Proxy for the Annual Meeting of
Shareholders to be held April 21,
1998.
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 24, 1998
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 24, 1998
By: /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President, Chief Executive
Officer and Director
(Chief Executive Officer
and Principal Financial Officer)
Date: March 24, 1998
18
<PAGE>
By: /s/ John E. Arndt
John E. Arndt
Director
Date: March 24, 1998
By: /s/ Budd L. Beyer
Budd L. Beyer
Director
Date: March 24, 1998
By: /s/ Robert E. Bull
Robert E. Bull
Chairman of the Board
and Director
Date: March 24, 1998
By: /s/ Dudley P. Cooley
Dudley P. Cooley
Director
Date: March 24, 1998
By: /s/ Frederick E. Crispin, Jr.
Frederick E. Crispin, Jr.
Director
Date: March 24, 1998
By:
Stanley E. Oberrender
Director
Date: March 24, 1998
19
<PAGE>
By: /s/ David R. Saracino
David R. Saracino
Treasurer and Assistant Secretary
(Principal Accounting Officer)
Date: March 24, 1998
By: /s/ Robert J. Wise
Robert J. Wise
Vice Chairman of the Board
and Director
Date: March 24, 1998
20
<PAGE>
EXHIBIT 11
FIRST KEYSTONE CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
Year Ended December 31,
<TABLE>
<CAPTION>
(Dollars in Thousands)
1997 1996 1995
<S> <C> <C> <C>
Primary
Net Income $ 4,660 $ 4,130 $ 3,486
Shares <F1>
Weighted average number of
common shares outstanding 2,933,727 2,933,727 2,933,727
Adjustments - increases or
decreases None None None
Weighted average number of
common shares outstanding
as adjusted 2,933,727 2,933,727 2,933,727
Basic earnings per common
share $ 1.59 $ 1.41 $ 1.19
Assuming full dilution
Net Income $ 4,660 $ 4,130 $ 3,486
Shares <F1>
Weighted average number of
common shares outstanding 2,933,727 2,933,727 2,933,727
Adjustments - increases or
decreases None None None
Weighted average number of
common shares outstanding
as adjusted 2,933,727 2,933,727 2,933,727
Earnings per common share
assuming full dilution $ 1.59 $ 1.41 $ 1.19
<FN>
<F1>
See Notes 1 to the consolidated financial statements appearing on page 8
more fully described in the Corporation's Annual Report to Shareholders for
the year ended December 31, 1997, which page is included in Exhibit 13
hereto.
</FN>
</TABLE>
21
<PAGE>
EXHIBIT 11
<TABLE>
SUMMARY OF SELECTED FINANCIAL DATA
<CAPTION>
(Amounts in thousands,
except per share) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $ 19,345 $ 17,786 $ 16,637 $ 13,731 $ 13,734
Interest expense 9,381 8,667 8,271 6,353 6,519
Net interest
income 9,964 9,119 8,366 7,378 7,215
Provision for loan
losses 325 517 372 31 518
Investment securities
gains (losses) 68 (38) 5 180 70
Net income $ 4,660 $ 4,130 $ 3,486 $ 3,115 $ 3,101
PER COMMON SHARE <F1>
Net income $ 1.59 $ 1.41 $ 1.19 $ 1.07 $ 1.07
Cash dividends .47 .39 .33 .31 .26
BALANCE SHEET DATA
Assets $267,399 $242,557 $226,033 $206,864 $201,270
Investment securities 98,459 101,225 88,125 79,946 86,054
Net loans 149,780 130,994 126,046 116,383 106,500
Deposits 217,647 198,546 187,320 172,280 165,731
Stockholders' equity 31,818 27,473 25,399 20,788 18,577
PERFORMANCE RATIOS
Return on average
assets 1.83% 1.75% 1.58% 1.54% 1.58%
Return on average
equity 15.92% 15.98% 15.24% 15.34% 17.56%
Dividend payout ratio 29.76% 27.56% 27.36% 28.55% 24.79%
Average equity to
average assets
ratio 11.49% 11.05% 10.36% 10.05% 9.02%
<FN>
<F1>
Reflects adjustment for stock dividends more fully described in Note 1.
</FN>
</TABLE>
2 First Keystone Corporation
<PAGE>
EXHIBIT 13
EXCERPT FROM ANNUAL REPORT TO SHAREHOLDERS
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
22
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 and 1996
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,400,261 $ 5,147,438
Interest-bearing deposits
in other banks 7,083,684 32,093
Investment securities available
for sale 81,650,689 81,145,934
Investment securities held to
maturity (estimated fair value
1997 $16,833,038; 1996 $19,954,360) 16,808,625 20,079,559
Loans, net of unearned income 152,150,843 133,260,961
Allowance for loan losses (2,371,194) (2,266,983)
Net loans $149,779,649 $130,993,978
Premises and equipment 3,435,689 2,881,176
Other real estate owned 0 46,184
Accrued interest receivable 1,997,936 1,958,882
Other assets 242,053 271,906
TOTAL ASSETS $267,398,586 $242,557,150
LIABILITIES
Deposits:
Non-interest bearing $ 18,397,819 $ 17,804,634
Interest bearing 199,249,365 180,741,149
Total Deposits $217,647,184 $198,545,783
Short-term borrowings 6,102,160 5,121,367
Long-term borrowings 9,000,000 10,000,000
Accrued interest and other expenses 1,521,832 1,128,034
Other liabilities 1,309,343 288,971
TOTAL LIABILITIES $235,580,519 $215,084,155
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 977,909 shares
1997 and 889,147 shares 1996 1,955,818 1,778,294
Surplus 9,761,066 6,654,396
Retained earnings 17,873,418 17,889,923
Net unrealized securities gains,
net of tax 2,227,765 1,150,382
TOTAL STOCKHOLDERS' EQUITY $ 31,818,067 $ 27,472,995
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $267,398,586 $242,557,150
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, 1997, 1996, and 1995
<CAPTION>
1997 1996
<S> <C> <C>
INTEREST INCOME
Loans, including fees:
Taxable $12,785,688 $11,193,303
Tax exempt 137,869 212,206
Interest and dividends on
investment securities:
Taxable 3,727,915 3,856,431
Tax exempt 2,288,362 2,317,029
Dividends 140,973 115,054
Deposits in banks 264,015 91,782
Total interest income $19,344,822 $17,785,805
INTEREST EXPENSE
Deposits $ 8,437,271 $ 7,864,665
Short-term borrowings 230,071 261,458
Long-term borrowings 713,710 541,243
Total interest expense $ 9,381,052 $ 8,667,366
Net interest income $ 9,963,770 $ 9,118,439
Provision for loan losses 325,000 516,584
Net interest income after
provision for loan losses $ 9,638,770 $ 8,601,855
NON-INTEREST INCOME
Trust Department $456,880 $424,740
Service charges and fees 669,252 616,487
Other 33,855 48,936
Gain on sale of mortgage loans 34,107 -
Investment securities gains
(losses) - net 67,957 (37,729)
Total non-interest income $ 1,262,051 $ 1,052,434
NON-INTEREST EXPENSE
Salaries and employee benefits $ 2,626,752 $ 2,448,234
Occupancy, net 331,962 281,222
Furniture and equipment 487,683 467,973
FDIC insurance 24,795 2,000
Other 1,461,953 1,341,236
Total non-interest expense $ 4,933,145 $ 4,540,665
Income before income taxes $ 5,967,676 $ 5,113,624
Income tax expense 1,307,436 983,339
NET INCOME $ 4,660,240 $ 4,130,285
PER SHARE DATA
Net income $ 1.59 $ 1.41
Cash dividends $ .47 $ .39
Weighted average shares
outstanding <F1> 2,933,727 2,933,727
<CAPTION>
1995
<S> <C>
INTEREST INCOME
Loans, including fees:
Taxable $10,569,702
Tax exempt 290,578
Interest and dividends on
investment securities:
Taxable 3,887,673
Tax exempt 1,631,495
Dividends 107,443
Deposits in banks 149,793
Total interest income $16,636,684
INTEREST EXPENSE
Deposits $ 7,450,453
Short-term borrowings 236,928
Long-term borrowings 583,469
Total interest expense $ 8,270,850
Net interest income $ 8,365,834
Provision for loan losses 372,448
Net interest income after
provision for loan losses $ 7,993,386
NON-INTEREST INCOME
Trust Department $ 349,809
Service charges and fees 572,535
Other 41,825
Gain on sale of mortgage loans -
Investment securities gains
(losses) - net 4,841
Total non-interest income $ 969,010
NON-INTEREST EXPENSE
Salaries and employee benefits $ 2,262,650
Occupancy, net 292,731
Furniture and equipment 456,013
FDIC insurance 199,953
Other 1,345,098
Total non-interest expense $ 4,556,445
Income before income taxes $ 4,405,951
Income tax expense 919,758
NET INCOME $ 3,486,193
PER SHARE DATA
Net income $ 1.19
Cash dividends $ .33
Weighted average shares
outstanding <F1> 2,933,727
<FN>
<F1>
Reflects adjustment for stock dividends more fully described in Note 1.
</FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
1997 Annual Report 5
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, and 1995
<CAPTION>
Common Retained
Stock Surplus Earnings
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $1,616,858 $3,829,266 $15,356,687
Net Income $ - $ - $ 3,486,193
Cash Dividends -
$.33 per share <F1> - - (953,946)
Change in unrealized gain
on securities, net of tax - - -
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>
BALANCE AT DECEMBER 31, 1994 $ - $ (14,740) $20,788,071
Net Income $ - $ - $ 3,486,193
Cash Dividends -
$.33 per share <F1> - - (953,946)
Change in unrealized gain
on securities, net of tax - 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 -
$.39 per share <F1> - - (1,138,108)
Change in unrealized gain
on securities, net of tax - - -
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 -
$.39 per share <F1> - - (1,138,108)
Change in unrealized gain
on securities, net of tax - (914,021) (914,021)
BALANCE AT DECEMBER 31, 1996 $ - $1,150,382 $27,472,995
<CAPTION>
Common Retained
Stock Surplus Earnings
<S> <C> <C> <C>
Net Income $ - $ - $ 4,660,240
10% Stock Dividend 177,524 3,106,670 (3,284,194)
Dividends paid in lieu
of fractional shares - - (5,650)
Cash Dividends -
$.47 per share <F1> - - (1,386,901)
Change in unrealized gain
on securities, net of tax - - -
BALANCE AT DECEMBER 31, 1997 $1,955,818 $9,761,066 $17,873,418
<CAPTION>
Net
Unrealized
Gain (Loss)
On Investment
Securities
Treasury Available
Stock For Sale Total
<S> <C> <C> <C>
Net Income $ - $ - $ 4,660,240
10% Stock Dividend - - -
Dividends paid in lieu
of fractional shares - - (5,650)
Cash Dividends -
$.47 per share <F1> - - (1,386,901)
Change in unrealized gain
on securities, net of tax - 1,077,383 1,077,383
BALANCE AT DECEMBER 31, 1997 $ - $2,227,765 $31,818,067
<FN>
<F1>
Reflects adjustment for stock dividends more fully described in Note 1.
</FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
6 First Keystone Corporation
<PAGE
<TABLE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
<CAPTION>
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,660,240 $ 4,130,285
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 325,000 516,584
Depreciation 304,134 299,274
Premium amortization on investment
securities 132,361 158,011
Discount accretion on investment
securities (131,988) (86,481)
Deferred income taxes (benefit) 18,645 (32,241)
Gain on sale of mortgage loans (34,107) -
Proceeds from sale of mortgage loans 765,019 65,000
Originations of mortgage loans held
for resale (1,675,406) (1,087,313)
(Gain) loss on sales of investment
securities (67,958) 37,729
Gain on sale of premises and
equipment (67) (804)
(Gain) loss on sale of other real
estate owned (816) -
(Increase) decrease in accrued
interest receivable (39,054) (83,514)
(Increase) decrease in other
assets - net 65,704 28,687
Increase (decrease) in accrued
interest and other expenses 393,798 (52,076)
Increase (decrease) in other
liabilities - net 406,418 (301)
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 5,121,923 $ 3,892,840
INVESTING ACTIVITIES
Proceeds from sales of investment
securities available for sale $ 18,369,369 $ 20,076,003
Proceeds from maturities and
redemptions of investment
securities available for sale 5,119,885 3,998,416
Purchases of investment securities
available for sale (21,757,280) (40,909,754)
Purchases of investment securities
held to maturity - (996,170)
Proceeds from maturities and
redemption of investment securities
held to maturity 2,774,482 3,254,532
Net increase in loans (18,202,028) (4,488,234)
Proceeds from sale of premises
and equipment 2,001 1,200
Purchases of premises and equipment (860,581) (114,846)
Proceeds from sale of other real
estate owned 47,000 -
NET CASH USED IN INVESTING
ACTIVITIES $(14,507,152) $(19,178,853)
FINANCING ACTIVITIES
Net increase in deposits $ 19,101,401 $ 11,225,696
Net increase (decrease) in
short-term borrowings 980,793 762,766
Proceeds from long-term borrowings 12,000,000 12,000,000
Repayment of long-term borrowings (13,000,000) (9,000,000)
Cash dividends paid (1,386,901) (1,138,108)
Dividends paid in lieu of
fractional shares (5,650) (4,622)
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 17,689,643 $ 13,845,732
Increase (decrease) in cash and
cash equivalents $ 8,304,414 $ (1,440,281)
Cash and cash equivalents at
beginning of year 5,179,531 6,619,812
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 13,483,945 $ 5,179,531
The accompanying notes are an integral part of these consolidated financial
statements.
<CAPTION>
1995
<S> <C>
OPERATING ACTIVITIES
Net income $ 3,486,193
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 372,448
Depreciation 311,636
Premium amortization on investment
securities 254,510
Discount accretion on investment
securities (141,052)
Deferred income taxes (benefit) (29,421)
Gain on sale of mortgage loans -
Proceeds from sale of mortgage loans 182,500
Originations of mortgage loans held
for resale (286,400)
(Gain) loss on sales of investment
securities (4,841)
Gain on sale of premises and equipment (2,342)
(Gain) loss on sale of other real
estate owned 37,155
(Increase) decrease in accrued
interest receivable (602,849)
(Increase) decrease in other
assets - net 100,671
Increase (decrease) in accrued
interest and other expenses 398,383
Increase (decrease) in other
liabilities - net (7,395)
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 4,069,196
INVESTING ACTIVITIES
Proceeds from sales of investment
securities available for sale $ 22,461,737
Proceeds from maturities and
redemptions of investment
securities available for sale 6,424,757
Purchases of investment securities
available for sale (36,711,805)
Purchases of investment securities
held to maturity (5,608,356)
Proceeds from maturities and
redemption of investment securities
held to maturity 8,307,905
Net increase in loans (9,932,144)
Proceeds from sale of premises
and equipment 3,000
Purchases of premises and equipment (348,965)
Proceeds from sale of other real
estate owned 197,845
NET CASH USED IN INVESTING
ACTIVITIES $(15,206,026)
FINANCING ACTIVITIES
Net increase in deposits $15,040,312
Net increase (decrease) in
short-term borrowings (1,126,013)
Proceeds from long-term borrowings 1,000,000
Repayment of long-term borrowings (1,500,000)
Cash dividends paid (953,946)
Dividends paid in lieu of
fractional shares -
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 12,460,353
Increase (decrease) in cash and
cash equivalents $ 1,323,523
Cash and cash equivalents at
beginning of year 5,296,289
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 6,619,812
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
1997 Annual Report 7
<PAGE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements for Years Ended December
31, 1997, 1996, and 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of First Keystone Corporation and
Subsidiary (the "Corporation") are in accordance with generally
accepted accounting principles and conform to common 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 Subsidiary, The First
National Bank of Berwick. 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 seven full
service offices and nine ATMs 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 classifies its investment securities as either
"Held to Maturity" or "Available for Sale" at the time of purchase.
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. 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.
Loans
Loans are stated at their outstanding unpaid principal balances,
net of 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 all 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.
8 First Keystone Corporation
<PAGE>
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.
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 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.
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.
Mortgage Servicing Rights
In accordance with Statement of Financial Accounting Standards
No. 125, the Corporation records a separate asset or liability
representing the right of obligation, respectively, to service
mortgage loans for others. A servicing asset is determined by
allocating the loans' previous carrying amount between the servicing
asset and the loans that were sold, based on their relative fair
values at the date of sale. Servicing liabilities are recorded at
their fair value as a reduction of the sale proceeds. Servicing
assets and liabilities are amortized in proportion to, and over the
period of, estimated net servicing income. In addition, the mortgage
servicing rights must be periodically evaluated for impairment based
on their fair value.
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. Revenues derived from and costs to maintain
the assets and subsequent gains and losses on sales are included in
other non-interest income and expense.
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.
1997 Annual Report 9
<PAGE>
Per Share Data
Net income and cash dividends per share is calculated by dividing
net income and dividends by the weighted average number of shares
outstanding during each year presented adjusted retroactively for
stock splits and dividends. Adjustments resulted from the following:
a 10% stock dividend distributed on February 6, 1996, to shareholder
of record January 4, 1996, a 10% stock dividend distributed May 16,
1997, to shareholders of record May 2, 1997, and an event subsequent
to December 31, 1997, in that on January 27, 1998, the Board of
Directors approved a 3 for 1 stock split issued in the form of a 200%
stock dividend to be distributed March 2, 1998, to shareholders of
record on February 10, 1998.
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 $9,275,057,
$8,682,349, and $7,994,087 in 1997, 1996 and 1995, respectively. Cash
payments for income taxes were $1,257,115, $1,125,251, and $902,567
for 1997, 1996, and 1995, respectively. The Corporation transferred
loans to other real estate owned in the amounts of $46,184 in 1996.
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. Trust Department income is recognized on a cash
basis and is not materially different than if it were reported on an
accrual basis.
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities
In June 1996, The Financial Accounting Standards Board (FASB)
issued Statement 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinquishments of Liabilities." This Statement
provides new accounting and reporting standards for sales,
securitizations and servicing of receivables and other financial
assets, for certain secured borrowing and collateral transactions and
extinquishments of liabilities.
Implementation of certain transfer provisions of FASB 125 was
delayed by FASB 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement 125." For repurchase agreements, dollar
roll, securities lending and similar transactions, the FASB 125
transfer provisions and related disclosures are effective for those
transactions occurring after December 31, 1997, and adoption f this
segment of the standard is not expected to have a material impact on
the consolidated financial statements.
For securitizations, servicing of assets and extinquishments of
liabilities the FASB 125 provisions are effective for transactions
occurring after December 31, 1996, and were implemented by the
Corporation where applicable with no material impact on these
consolidated financial statements.
Reporting Comprehensive Income
In June 1997, The Financial Accounting Standards Board (FASB)
issued Statement 130 "Reporting Comprehensive Income." FASB 130
establishes standards for reporting and display of comprehensive
income and its components (income, expenses, gains and losses) in a
full set of general-purpose financial statements. FASB 130 is
effective for fiscal years beginning after December 15, 1997. The
Corporation has determined that the impact of adopting the standard
will not be material to the financial position or results of
operations.
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.
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 Corporation's banking subsidiary was required to
have aggregate cash reserves of $3,105,000 and $1,949,000 at December
31, 1997, and 1996, respectively.
The Corporation's banking 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 $1,284,001 at December 31,
1997.
10 First Keystone Corporation
<PAGE>
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, 1997,
and 1996:
<TABLE>
<CAPTION>
Available For Sale Securities
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Treasury
securities $10,321,983 $ 119,830 $ - $10,441,813
Obligations of U.S.
Government
Corporations
and Agencies:
Mortgage-backed 17,196,705 237,966 32,030 17,402,641
Other 16,754,705 120,138 25,000 16,849,843
Obligations of state
and political
subdivisions 31,782,785 2,213,179 - 33,995,964
Equity securities 2,136,832 823,596 - 2,960,428
Total $78,193,010 $3,514,709 $57,030 $81,650,689
</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, 1997:
Obligations of U.S.
Government
Corporations
and Agencies,
Mortgage-backed $13,611,707 $ - $66,466 $13,545,241
Obligations of state
and political
subdivisions 3,196,918 90,879 - 3,287,797
Total $16,808,625 $90,879 $66,466 $16,833,038
</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, 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
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>
1997 Annual Report 11
<PAGE>
Securities available for sale with an aggregate fair value of
$29,864,796 in 1997; $23,005,146 in 1996 and securities held to
maturity with an aggregate unamortized cost of $13,611,707 in 1997;
$16,786,482 in 1996, respectively, were pledged to secure public
funds, trust funds, securities sold under agreements to repurchase and
other balances of $35,175,394 in 1997 and $25,362,784 in 1996 as
required by law.
The amortized cost, estimated fair value and weighted average
yield of debt securities, by contractual maturity, are shown below at
December 31, 1997. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1997
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:
Amortized Cost $ 1,992,647 $ - $ -
Estimated Fair Value 1,997,813 - -
Weighted average yield 6.54% - -
1 - 5 Years:
Amortized cost 8,329,336 3,010,728 2,340,163
Estimated fair value 8,444,000 3,024,688 2,581,550
Weighted average yield 6.45% 6.49% 10.95%
5 - 10 Years:
Amortized cost - 7,792,321 485,672
Estimated Fair value - 7,868,682 536,065
Weighted average yield - 7.31% 11.70%
After 10 Years:
Amortized cost - 23,148,361 28,956,950
Estimated fair value - 23,359,114 30,878,349
Weighted average yield - 7.28% 9.01%
Total:
Amortized cost $10,321,983 $33,951,410 $31,782,785
Estimated fair value 10,441,813 34,252,484 33,995,964
Weighted average yield 6.47% 7.28% 9.20%
<CAPTION>
December 31, 1997
Marketable
Other Equity
Securties <F2> Securities
<F2>
<S> <C> <C>
Available For Sale:
Amortized Cost $ - $ -
Estimated Fair Value - -
Weighted average yield - -
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 1,387,150 749,682
Estimated fair value 1,387,150 1,573,278
Weighted average yield 6.29% 5.33%
Total:
Amortized cost $1,387,150 $ 749,682
Estimated fair value 1,387,150 1,573,278
Weighted average yield 6.29% 5.33%
_______________________
<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, 1997
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:
Amortized Cost $ - $ - $ -
Estimated fair value - - -
Weighted average yield - - -
1 - 5 Years:
Amortized cost - - 205,000
Estimated fair value - - 205,267
Weighted average yield - - 7.42%
5 - 10 Years:
Amortized cost - - 779,173
Estimated Fair value - - 782,188
Weighted average yield - - 7.74%
After 10 Years:
Amortized cost - 13,611,707 2,212,745
Estimated fair value - 13,545,241 2,300,342
Weighted average yield - 6.76% 8.87%
Total:
Amortized cost $ - $13,611,707 $3,196,918
Estimated fair value - 13,545,241 3,287,797
Weighted average yield - 6.76% 8.50%
<CAPTION>
December 31, 1997
Marketable
Other Equity
Securties <F2> Securities
<F2>
<S> <C> <C>
Held To Maturity:
Within 1 Year:
Amortized Cost $ - $ -
Estimated fair value - -
Weighted average yield - -
1 - 5 Years:
Amortized cost - -
Estimated fair value - -
Weighted average yield - -
5 - 10 Years:
Amortized cost - -
Estimated Fair value - -
Weighted average yield - -
After 10 Years:
Amortized cost - -
Estimated fair value - -
Weighted average yield - -
Total:
Amortized cost $ - $ -
Estimated fair value - -
Weighted average yield - -
_______________________
<FN>
<F1>
Average yields on tax-exempt obligations of state and political
subdivisions have been computed on a tax-equivalent basis using a 34% tax
rate.
<F2>
Other securities and marketable equity securities are not considered to
have defined maturities and are included in the after ten year category.
</FN>
</TABLE>
There were no aggregate investments with a single issuer
(excluding U.S. Government and its agencies) which exceeded ten
percent of consolidated shareholders' equity at December 31, 1997.
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 1997, 1996 and 1995 were $18,369,369, $20,076,003, and
$22,461,737, respectively. Gross gains realized on these sales were
$309,956, $414,239, and $350,410, respectively. Gross losses on these
sales were $241,999, $451,968, and $345,569, respectively. Net
unrealized gains on securities available for sale included as a
separate component of consolidated stockholders' equity net of tax was
$2,227,765, $1,150,382, and $2,064,403 in 1997, 1996, and 1995,
respectively.
NOTE 4. LOANS
Major classifications of loans at December 31, 1997 and 1996
consisted of:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Commercial, Financial, and Agricultural $ 17,240,808 $ 13,573,843
Tax exempt 2,565,607 2,263,116
Real estate mortgage 114,467,096 98,248,599
Consumer 22,009,000 23,026,816
Gross loans $156,282,511 $137,112,374
Less: Unearned discount 3,864,710 3,544,417
Unamortized loan fees net of costs 266,958 306,996
Loans, net of unearned income $152,150,843 $133,260,961
</TABLE>
1997 Annual Report 13
<PAGE>
Mortgage loans held for sale included in loans were $2,070,707
and $1,126,213 at December 31, 1997, and 1996, respectively.
Changes in the allowance for loan losses for the years ended
December 31, 1997, 1996, and 1995, were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance, January 1 $2,266,983 $2,015,236 $1,801,517
Provision charged to
operations 325,000 516,584 372,448
Loans charged off (271,406) (302,480) (185,643)
Recoveries 50,617 37,643 26,914
Balance, December 31 $2,371,194 $2,266,983 $2,015,236
</TABLE>
Non-accrual loans at December 31, 1997, 1996 and 1995 were
approximately $320,700, $267,445, and $556,533, 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>
1997 1996 1995
<S> <C> <C> <C>
Gross interest due under terms $30,027 $46,924 $53,224
Amount included in income 7,006 3,048 2,700
Interest income not recognized $23,021 $43,876 $50,524
</TABLE>
At December 31, 1997 and 1996 the recorded investment in loans
that are considered to be impaired as defined by Statement No. 114 was
$45,531 and $108,749, 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, 1997
and 1996 was approximately $84,901 and $126,641, respectively.
At December 31, 1997, 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, 1997 and 1996
follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 876,526 $ 840,288
Buildings and improvements 2,773,148 2,386,788
Equipment 3,389,465 2,953,482
$7,039,139 $6,180,558
Less: Accumulated depreciation 3,603,450 3,299,382
Total $3,435,689 $2,881,176
</TABLE>
Depreciation amounted to $304,134 for 1997, $299,274 for 1996,
and $311,636 for 1995.
NOTE 6. MORTGAGE SERVICING RIGHTS
The Corporation's banking subsidiary entered into mortgage
servicing in 1997. Mortgage loans serviced for others are not
included in the accompanying Consolidated Statements of Financial
Condition. The unpaid principal balances of mortgage loans serviced
for others was $704,673 at December 31, 1997.
Custodial escrow balances maintained in connection with the
foregoing loan servicing, and included in demand deposits, was
approximately $777 at December 31, 1997.
Mortgage servicing rights of $7,048 were capitalized in 1997.
Amortization of mortgage servicing rights was $16 in 1997.
14 First Keystone Corporation
<PAGE>
Changes in the balances of servicing assets for the year ended
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Servicing Assets
<S> <C>
Balance at January 1, 1997 $ 0
Servicing asset additions 7,048
Amortization 16
Balance at December 31, 1997 $7,032
</TABLE>
There was no valuation allowance on servicing assets as of
December 31, 1997. Additionally, there were no unrecognized servicing
assets or liabilities, or, servicing assets or liabilities for which
it is not practicable to estimate fair value. Mortgage servicing
rights in the Consolidated Balance Sheet are included in other assets
at December 31, 1997.
NOTE 7. DEPOSITS
Major classifications of deposits at December 31, 1997 and 1996
consisted of:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Demand - non-interest bearing $ 18,397,819 $ 17,804,634
Demand - interest bearing 51,654,338 42,838,638
Savings 41,651,109 40,405,703
Time, $100,000 and over 25,245,346 21,053,285
Other time 80,698,572 76,443,523
Total deposits $217,647,184 $198,545,783
</TABLE>
The following is a schedule reflecting classification and
remaining maturities of time deposits of $100,000 and over at December
31, 1997:
<TABLE>
<CAPTION>
<S> <C>
1998 $21,489,432
1999 2,586,625
2000 1,005,293
2001 163,996
$25,245,346
</TABLE>
Interest expense related to time deposits of $100,000 or more was
$1,241,486 in 1997, $1,066,135 in 1996, and $1,156,943 in 1995.
NOTE 8. SHORT-TERM BORROWINGS
Federal funds purchased, securities sold under agreements to
repurchase and Federal Home Loan Bank advances generally represent
overnight or less than 30-day borrowings. 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, 1997, and
1996:
<TABLE>
<CAPTION>
1997
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 $4,602,160 $3,992,063 $4,728,459 4.15%
Federal Home Loan Bank 0 456,411 2,275,000 6.50%
U.S. Treasury tax and
loan notes 1,500,000 663,378 1,888,686 5.19%
Total $6,102,160 $5,111,852 $8,892,145 5.75%
<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%
</TABLE>
1997 Annual Report 15
<PAGE>
NOTE 9. LONG-TERM BORROWINGS
Long-term borrowings are comprised of advances from the Federal
Home Loan Bank (FHLB). Under terms of a blanket agreement, collateral
for the loans are secured by certain qualifying assets of the
Corporation's banking subsidiary which consist principally of first
mortgage loans.
A schedule of long-term borrowings by maturity as of December 31,
1997, and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Due 1997, 5.50% to 5.73% $ - $ 7,000,000
Due 1998, 5.56% 1,000,000 1,000,000
Due 1999, 6.38% 1,000,000 -
Due 2000, 6.73% 2,000,000 -
Due 2001, 4.97% to 5.80% 1,000,000 1,000,000
Due 2002, 5.48% to 7.77% 4,000,000 1,000,000
$9,000,000 $10,000,000
</TABLE>
NOTE 10. INCOME TAXES
The current and deferred components of the income tax provision
(benefit) consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal
Current $1,278,515 $1,013,777 $947,026
Deferred (benefit) 18,645 (32,241) (28,711)
$1,297,160 $ 981,536 $918,315
State
Current (benefit) $ 10,276 $ 1,803 $ 2,153
Deferred (benefit) - - (710)
$ 10,276 $ 1,803 $ 1,443
Total provision for
income taxes $1,307,436 $ 983,339 $919,758
</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>
1997
Amount Rate
<S> <C> <C>
Provision at statutory rate $2,029,010 34.0%
Tax exempt income (824,918) (13.8)
Non-deductible expenses 106,425 1.8
Other, net (13,357) (.3)
Applicable federal income tax and rate $1,297,160 21.7%
<CAPTION>
1996
Amount Rate
<S> <C> <C>
Provision at statutory rate $1,738,632 34.0%
Tax exempt income (859,940) (16.8)
Non-deductible expenses 112,022 2.2
Other, net (9,178) (.2)
Applicable federal income tax and rate $ 981,536 19.2%
<CAPTION>
1995
Amount Rate
<S> <C> <C>
Provision at statutory rate $1,498,023 34.0%
Tax exempt income (653,505) (14.8)
Non-deductible expenses 83,110 1.9
Other, net (9,313) (.3)
Applicable federal income tax and rate $ 918,315 20.8%
</TABLE>
Total federal income tax (benefit) attributable to realized
security gains and losses was $29,888 in 1997, ($12,828) in 1996, and
$2,833 in 1995.
The deferred tax assets and liabilities resulting from temporary
timing differences have been netted to reflect a net deferred tax
liability included in other liabilities in these consolidated
financial statements. The components of the net deferred tax
liability at December 31, 1997, 1996, and 1995, are as follows:
16 First Keystone Corporation
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Deferred Tax Assets:
Loan loss Reserve $ 659,302 $ 623,870 $ 538,276
Deferred Compensation 20,432 - -
Contributions - - 4,454
Total $ 679,734 $ 623,870 $ 542,730
Deferred Tax Liabilities:
Loan origination fees
and costs $ (118,427) $ (64,371) $ (30,176)
Accretion (41,836) (24,302) (11,622)
Unrealized investment
securities gains (1,229,914) (634,604) (1,088,095)
Depreciation (170,361) (167,442) (165,418)
Total $(1,560,538) $(890,719) $(1,295,311)
Net Deferred Tax
Asset (Liability) $ (880,804) $(266,849) $ (752,581)
</TABLE>
It is anticipated that all deferred tax assets are to be
realized, accordingly no valuation allowance has been provided.
NOTE 11. EMPLOYEE BENEFIT PLANS AND DEFERRED COMPENSATION AGREEMENTS
The Corporation maintains a 401K Plan which has a combined tax
qualified savings feature and profit sharing feature for the benefit
of its employees. Under the savings feature, the Corporation
contributes 100% of the employee contribution up to 3% of compensation
which amounted to $59,395, $52,892, and $46,306 in 1997, 1996, and
1995, respectively. Under the profit sharing feature, contributions
at the discretion of the Board of Directors, funded currently,
amounted to $151,574, $138,818, and $195,291 in 1997, 1996, and 1995,
respectively.
The Bank also has non-qualified deferred compensation agreements
with three of its officers. These agreements are essentially
unsecured promises by the Bank to make monthly payments to the
officers over a twenty year period. Payments begin based upon
specific criteria generally, when the officer retires. To account
for the cost of payments yet to be made in the future, the Bank
recognizes an accrued liability in years prior to when payments begin
based on the present value of those future payments. The Bank's
accrued liability for these deferred compensation agreements as of
December 31, 1997 and 1996, was $60,093 and $0, respectively.
NOTE 12. LEASE COMMITMENTS AND CONTINGENCIES
The Corporation's banking subsidiary leases two branch bank
buildings under operating leases. Rent expense for the year ended
December 31, 1997, 1996, and 1995 was $49,905, $48,180, and $45,997,
respectively. The lease commitments, including a new lease entered
into in January 1998 for additional office space adjoining the main
bank building with a base annual rental by $30,000 adjusted annually
for inflation, is: 1998 - $74,725, 1999 - $77,087, 2000 - $72,577,
and 2001 - $18,130.
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 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, 1997, 1996 and 1995. 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 4 executive officers, consists of the following for
the years ended December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at January 1 $2,553,945 $3,090,030 $3,410,457
Additions 284,044 224,885 1,513,122
Deductions (757,026) (760,970) (1,833,549)
Balance at December 31 $2,080,963 $2,553,945 $3,090,030
</TABLE>
1997 Annual Report 17
<PAGE>
NOTE 14. REGULATORY MATTERS
Dividends are paid by the Corporation to shareholders from its
assets which are mainly provided by dividends from the Bank. However,
national banking laws place certain restrictions on the amount of cash
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 1998, without
prior regulatory approval, the Bank may declare dividends to the
Corporation in the amount of $6,141,195 plus additional amounts equal
to the net income earned in 1998 for the period January 1, 1998,
through the date of declaration, less any dividends which may have
already been paid in 1998. Regulations also limit the amount of loans
and advances from the Bank to the Corporation to 10% of consolidated
net assets.
The Corporation is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory
and possibly additional discretionary actions by regulators that,
if undertaken, could have a direct material effect on the
Corporation's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the
Corporation must meet specific capital guidelines that involve
quantitative measures of the Corporation's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The Corporation's capital amounts and
classification are also subject to qualitative judgements by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
fourth in the table below) of Total and Tier I Capital (as defined in
the regulations) to Risk-Weighted Assets (as defined), and of Tier I
Capital (as defined) to Average Assets (as defined).
As of December 31, 1997, the most recent notification from the
Office of the Comptroller of the Currency categorized the Bank as Well
Capitalized under the regulatory framework for prompt corrective
action. To be categorized as Well Capitalized, the Bank must maintain
minimum Total Risk-Based, Tier I Risked-Based, and Tier I Leverage
Ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the
institution's category.
<TABLE>
<CAPTION>
(Amounts in thousands) Actual
Amount Ratio
<S> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $30,073 21.01%
Tier I Capital
(to Risk Weighted Assets) 28,277 19.75%
Tier I Capital
(to Average Assets) 28,277 10.79%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $26,741 20.45%
Tier I Capital
(to Risk Weighted Assets) 25,099 19.29%
Tier I Capital
(to Average Assets) 25,099 10.42%
<CAPTION>
For Capital
(Amounts in thousands) Adequacy Purposes
Amount Ratio
<S> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $11,450 8.00%
Tier I Capital
(to Risk Weighted Assets) 5,727 4.00%
Tier I Capital
(to Average Assets) 10,483 4.00%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $10,461 8.00%
Tier I Capital
(to Risk Weighted Assets) 5,204 4.00%
Tier I Capital
(to Average Assets) 9,635 4.00%
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
(Amounts in thousands) Action Provisions
Amount Ratio
<S> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $14,314 10.00%
Tier I Capital
(to Risk Weighted Assets) 8,590 6.00%
Tier I Capital
(to Average Assets) 13,103 5.00%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $31,076 10.00%
Tier I Capital
(to Risk Weighted Assets) 7,807 6.00%
Tier I Capital
(to Average Assets) 12,044 5.00%
</TABLE>
The Corporation's capital ratios are not materially different
from those of the Bank.
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.
18 First Keystone Corporation
<PAGE>
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, 1997, and 1996 were as
follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $15,524,491 $17,675,879
Standby letters of credit $ 522,080 $ 1,331,233
</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, 1997, all standby letters of credit are generally
unsecured.
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, 1997,
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. A total of 80,718 shares were issued as a result of this stock
dividend with a total value transferred from retained earnings of
$2,991,188, including cash in lieu of fractional shares.
On April 15, 1997, the Board of Directors declared a 10% stock
dividend paid May 16, 1997, to shareholders of record May 2, 1997. A
total of 88,762 shares were issued as a result of this stock dividend
with a total value transferred from retained earnings of $3,289,844,
including cash in lieu of fractional shares.
On January 27, 1998, the Board of Directors approved a 3 for 1
stock split issued in the form of a 200% stock dividend to be paid
March 2, 1998, to shareholders of record February 10, 1998. It is
expected that 1,955,818 shares will be issued as a result of this
transaction.
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 additional shares issued.
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.
1997 Annual Report 19
<PAGE>
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, 1997, and 1996.
Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
Short-Term 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, 1997 and 1996, the carrying values and estimated
fair values of financial instruments of the Corporation are presented
in the table below:
<TABLE>
<CAPTION>
1997
Carrying Estimated
Amount Fair Value
<S> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 6,400,261 $ 6,400,261
Short-term investments 7,083,684 7,083,684
Investment securities 98,459,314 98,483,727
Net loans 149,779,649 151,403,927
Accrued interest receivable 1,997,936 1,997,936
FINANCIAL LIABILITIES:
Deposits 217,647,184 218,366,085
Short-term borrowings 6,102,160 6,104,781
Long-term borrowings 9,000,000 9,042,986
Accrued interest payable 991,403 991,403
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS:
Commitments to extend credit 15,524,491
Standby letters of credit 522,080
<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 101,225,493 100,100,294
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
</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
1997 1996
<S> <C> <C>
ASSETS
Cash in subsidiary bank $ 593,598 $ 468,854
Investment in subsidiary bank 30,022,204 26,000,323
Investment in other equity securities 1,573,278 1,170,554
Prepayments and other assets - 11,400
TOTAL ASSETS $32,189,080 $27,651,131
LIABILITIES
Payable to subsidiary bank $ 3,742 $ 6,745
Accrued expenses and other liabilities 367,271 171,391
TOTAL LIABILITIES $ 371,013 $ 178,136
STOCKHOLDERS' EQUITY
Preferred stock $ - $ -
Common stock 1,955,818 1,778,294
Surplus 9,761,066 6,654,396
Retained earnings 17,873,418 17,889,923
Net unrealized securities gains 2,227,765 1,150,382
TOTAL STOCKHOLDERS' EQUITY $31,818,067 $27,472,995
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $32,189,080 $27,651,131
</TABLE>
<TABLE>
<CAPTION>
INCOME STATEMENTS
Year Ended December 31
1997 1996 1995
<S> <C> <C> <C>
INCOME
Dividends from subsidiary bank $1,386,901 $1,138,110 $ 953,945
Dividends - other 40,173 34,818 26,553
Securities gains 103,145 - 21,760
Interest 16,650 28,810 15,372
TOTAL INCOME $1,546,869 $1,201,738 $1,017,630
Operating Expenses 28,984 21,212 27,102
Income Before Taxes and
Equity in Undistributed
Net Income of Subsidiary $1,517,885 $1,180,526 $ 990,528
Income tax expense 41,756 7,325 7,305
Income Before Equity in
Undistributed Net Income
of Subsidiary $1,476,129 $1,173,201 $ 983,223
Equity in undistributed
income of Subsidiary 3,184,111 2,957,084 2,502,970
NET INCOME $4,660,240 $4,130,285 $3,486,193
</TABLE>
1997 Annual Report 21
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year Ended December 31
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,660,240 $ 4,130,285 $3,486,193
Adjustments to reconcile net
income to net cash provided
by operating activities:
Securities gains (103,145) - (21,760)
Equity in undistributed
net income of
Subsidiary (3,184,111) (2,957,084) (2,502,970)
(Increase) decrease in
receivables from
Subsidiary - 54,681 (53,325)
(Increase) decrease in
prepaid expenses and
other assets 11,400 70,994 (245)
Increase (decrease) in
advances payable to
Subsidiary (3,003) 6,745 (56,093)
Increase (decrease) in
accrued expenses and
other liabilities 32,149 (97,721) 45,900
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 1,413,530 $ 1,207,900 $ 897,700
INVESTING ACTIVITIES
Purchase of equity securities $ (59,431) $ (41,628) $ (166,253)
Sale of equity securities 163,196 - 56,438
Dissolution of non-bank
subsidiary - - 12,851
NET CASH PROVIDED (USED)
IN INVESTING ACTIVITIES $ 103,765 $ (41,628) $ (96,964)
FINANCING ACTIVITIES
Cash dividends paid $(1,386,901) $(1,138,108) $ (953,946)
Dividends paid in lieu of
fractional shares (5,650) (4,622) -
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES $(1,392,551) $(1,142,730) $ (953,946)
Increase (Decrease) in
Cash and Cash
Equivalents $ 124,744 $ 23,542 $ (153,210)
Cash and Cash Equivalents
at Beginning of Year 468,854 445,312 598,522
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 593,598 $ 468,854 $ 445,312
</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, 1997 and
1996, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1997. 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, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ J. H. Williams & Co., LLP
J. H. Williams & Co., LLP
Kingston, Pennsylvania
January 9, 1998
1997 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 1997 with
reported net income of $4,660,240. The net income for 1997 marked the
15th consecutive year that earnings and earnings per share have
increased. Earnings per share for 1997 were $1.59 as compared to
$1.41 and $1.19 in 1996 and 1995, respectively (adjusted for a 10%
stock dividend paid in May 1997 and a 3 for 1 stock split in the form
of a 200% stock dividend paid in March 1998). The Corporation's
return on average assets improved to 1.83% in 1997 from 1.75% in 1996
and 1.58% in 1995. Likewise, the Corporation's return on average
equity remained strong at 15.92% in 1997, compared to 15.98% in 1996
and 15.24% in 1995.
Average earning assets increased $18,347,624, or 8.1% during
1997, while average interest bearing liabilities grew $14,504,523, or
7.6%. The average yield on earning assets decreased to 8.37% in 1997
from 8.38% in 1996 while the rate paid on interest bearing liabilities
increased to 4.56% in 1997 from 4.53% in 1996. As a result, the
Corporation's net interest income on a fully taxable equivalent basis
increased 7.6% in 1997 after increasing 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 $793,000 in 1997 as compared to
an increase of $1,065,000 in 1996.
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 8.37% in 1997,
8.38% in 1996, and 8.27% in 1995. The rate paid on interest bearing
liabilities increased to 4.56% after decreasing to 4.53% in 1996 from
4.60% in 1995. A 1 basis point decline in the yield on earning
assets, together with a 3 basis increase on the rate paid on interest
bearing liabilities in 1997 put slight pressure on the net interest
margin. The effect was a decrease in our net interest margin to 4.56%
in 1997 as compared to 4.58% in 1996 and 4.39% in 1995. The continued
maintenance of an adequate net interest margin is a primary concern
being addressed by management on an ongoing basis.
<TABLE>
Table 1 - Net Interest Income
<CAPTION>
(Amounts in thousands) 1997/1996
Increase/(Decrease)
1997 Amount % 1996
<S> <C> <C> <C> <C>
Interest Income $19,345 $1,559 8.8 $17,786
Interest Expense 9,381 714 8.2 8,667
Net Interest Income 9,964 845 9.3 9,119
Tax Equivalent Adjustment 1,250 (52) (4.0) 1,302
Net Interest Income (fully
tax equivalent) $11,214 $ 793 7.6 $10,421
<CAPTION>
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
</TABLE>
1997 Annual Report 25
<PAGE>
Management's Discussion and Analysis
<TABLE>
Table 2 Distribution of Assets, Liabilities and Stockholders' Equity
<CAPTION>
1997
Avg. Balance Revenue/ Yield/
Expense Rate
<S> <C> <C> <C>
Interest Earning Assets:
Loans:
Commercial<F1> $ 18,047,317 $ 1,534,446 8.50%
Real Estate<F1> 109,683,131 9,412,077 8.58%
Installment Loans,
Net<F1><F2> 17,344,819 2,124,094 12.25%
Fees on Loans 0 (76,037) 0%
Total Loans
(Including Fees)<F3> $145,075,267 $12,994,580 8.96%
Investment Securities:
Taxable $ 57,852,149 $ 3,868,888 6.69%
Tax Exempt<F1> 38,362,932 3,467,215 9.04%
Total Investment Securities $ 96,215,081 $ 7,336,103 7.62%
Interest Bearing Deposits
in Banks 4,776,405 264,015 5.53%
Total Interest-Earning
Assets $246,066,753 $20,594,698 8.37%
Non-Interest Earning Assets:
Cash and Due From Banks $ 5,378,688
Allowance for Loan Losses (2,295,089)
Premises and Equipment 3,161,431
Other Real Estate Owned 47,946
Other Assets 2,240,113
Total Non-Interest Earning
Assets 8,533,089
Total Assets $254,599,842
Interest-Bearing Liabilities:
Savings, NOW Accounts, and
Money Markets $ 89,137,426 $ 2,853,898 3.20%
Time Deposits 100,012,779 5,583,373 5.58%
Short-Term Borrowings 1,119,789 64,408 5.75%
Long-Term Borrowings 11,646,849 713,710 6.13%
Securities Sold U/A to
Repurchase 3,992,063 165,663 4.15%
Total Interest-Bearing
Liabilities $205,908,906 $ 9,381,052 4.56%
Non-Interest Bearing
Liabilities:
Demand Deposits $ 17,712,235
Other Liabilities 1,712,920
Stockholders' Equity 29,265,781
Total Liabilities/
Stockholders' Equity $254,599,842
Net Interest Income
Tax Equivalent $11,213,646
Margin Analysis:
Interest Income/Earning
Assets 8.37%
Interest Expense/Earning
Assets 3.81%
Net Interest Income/
Earning Assets 4.56%
26 First Keystone Corporation
<PAGE>
Management's Discussion and Analysis
<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%
Interest Bearing Deposits
in Banks 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%
<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%
Interest Bearing Deposits
in Banks 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%
______________________
<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>
1997 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
1997, the increase in net interest income of $793,000 resulted from a
change in volume of $816,000 and a decrease of $23,000 due to changes
in rate. In 1996, there was an increase in net interest income of
$1,065,000 due to changes in volume of $969,000 and an increase of
$96,000 due to changes in rate.
<TABLE>
Table 3 - Changes in Income and Expense, 1997 and 1996
<CAPTION>
(Amounts in thousands) 1997 COMPARED TO 1996
VOLUME RATE NET
<S> <C> <C> <C>
Interest Income:
Loans, Net $1,461 $ 19 $1,480
Taxable Investment Securities (49) (54) (103)
Tax-Exempt Investment Securities (33) (11) (44)
Other Short-Term Investments 168 5 173
Total Interest Income $1,547 $ (41) $1,506
Interest Expense:
Savings, Now, and Money Markets $ 145 $ 107 $ 252
Time Deposits 365 (45) 320
Short-Term Borrowings (33) (3) (36)
Long-Term Borrowings 245 (72) 173
Securities Sold U/A to Repurchase 9 (5) 4
Total Interest Expense $ 731 (18) $ 713
Net Interest Income $ 816 $ (23) $ 793
<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
________________________
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 $2,426,231 in 1997, $2,529,235
in 1996 and $1,922,073 in 1995. 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 $210,000, or 20.0% in 1997 as
compared to an increase of $82,000, or 8.5% in 1996 as illustrated in
Table 5.
Excluding investment securities gains, non-interest income in
1997 increased $104,000, or 9.5% as compared to 1996 when non-interest
income increased by $125,000, or 13.0%. Income from the trust
department which consists of <PAGE>
fees generated from individual and corporate accounts, increased in
1997 by $32,000 after increasing by $75,000 in 1996. Increased income
from the trust department was due to a larger overall number of
accounts in 1997. Also, in 1997 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) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Individual Trusts $109,788 $ 91,256 $83,886 $72,027 $70,300
Corporate Trusts 9,535 10,004 7,676 3,569 3,887
Total Trust
Department $119,323 $101,260 $91,562 $75,596 $74,187
</TABLE>
28 First Keystone Corporation
<PAGE>
Management's Discussion and Analysis
Service charges and fees, consisting primarily of service charges
on deposit accounts, was the largest source of non-interest income in
1997. Service charges increased by $53,000, or 8.6% in 1997 compared
to an increase of $43,000, or 7.5% in 1996. Other income decreased by
$15,000, or 30.6% in 1997 compared with an increase of $7,000, or
16.7% in 1996. In 1997 for the first time, a gain on the sale of
mortgage loans of $34,000 was recognized. It is anticipated that some
mortgages will continue to be originated for sale in the secondary
market. The servicing of those mortgages will provide additional fee
income.
The table below illustrates the change in non-interest income by
category for the years ended December 31, 1997, 1996, and 1995.
<TABLE>
Table 5 - Non-Interest Income
<CAPTION>
(Amounts in thousands) 1997/1996
Increase/(Decrease)
1997 Amount % 1996
<S> <C> <C> <C> <C>
Trust Department $ 457 $ 32 7.5 $ 425
Service Charges and Fees 669 53 8.6 616
Other 34 (15) (30.6) 49
Gain on Sale of Mortgages 34 34 0 0
Subtotal $1,194 104 9.5 $1,090
Investment Securities Gains 68 106 278.9 (38)
Total $1,262 $210 20.0 $1,052
1996/1995
Increase/(Decrease)
1996 Amount % 1995
<S> <C> <C> <C> <C>
Trust Department $ 425 $ 75 21.4 $350
Service Charges and Fees 616 43 7.5 573
Other 49 7 16.7 42
Gain on Sale of Mortgages 0 0 0 0
Subtotal $1,090 $125 13.0 $965
Investment Securities Gains (38) (43) (860.0) 5
Total $1,052 $ 82 8.5 $970
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year-ended December 31,
1997, was $325,000 compared to $516,584 and $372,448 for the years
ended December 31, 1996, and 1995, respectively. The provision for
possible loan losses declined in 1997 primarily because net charge-
offs fell in 1997 as compared to 1996. Net charge-offs totaled
$221,000 in 1997, $265,000 in 1996, and $159,000 in 1995,
respectfully. Our manageable net charge-offs and reduced non-
performing assets indicate good overall asset quality. Non-performing
assets, consisting of non-performing loans and foreclosed assets, were
$350,000, $351,000, and $557,000 at December 31, 1997, 1996, and 1995,
respectively, representing .23%, .26%, and .44%, 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 1.56% at December 31, 1997, 1.70% at December
31, 1996, and 1.57% at December 31, 1995. The allowance for loan
losses as a percentage of non-performing assets and loans past-due 90
or more days remain strong at 345.7%, 369.2%, and 322.4% at year-end
1997, 1996, and 1995, respectively.
Loans past-due 90 or more days and still accruing interest
increased to $336,000 in 1997 from $263,000 and $68,000 in 1996 and
1995, 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 increased by $392,000, or 8.6% in 1997
compared to a decrease of $15,000, or 0.3% in 1996 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 53.3% of total non-
interest expense in 1997 and 53.9% in 1996. Salaries and employee
benefits increased $179,000, or 7.3% in 1997 and $185,000, or 8.2% in
1996. The increases in 1997 and 1996 were due to an increased number
of employees plus normal salary adjustments and increased benefit
costs. Full-time equivalent employees totaled 98 at December 31, 1997,
compared to 91 in 1996 and 89 at year-end 1995. Based upon our total
deposits and total assets, our number of employees compares favorably
against peer financial institutions.
Net occupancy expense increased $51,000, or 18.1% in 1997 as
compared to a decrease of $11,000, or 3.8% in 1996. The increase in
1997 relates primarily to the opening of a new branch office.
Furniture and equipment expense increased $20,000, or 4.3% in 1997
compared to an increase of $12,000, or 2.6% in 1996. The increases in
1997 and 1996 relate directly to higher depreciation associated with
computer processing and related equipment.
1997 Annual Report 29
<PAGE>
Management's Discussion and Analysis
Due to the reestablishment of the payment of FDIC premiums, the
Corporation paid $25,000 in 1997 after paying the minimum annual
assessment rate of $2,000 in 1996. This represented an increase of
$23,000 in FDIC insurance expense from 1996.
Other operating expenses increased by $119,000, or 8.9% in 1997
after a $3,000 decrease, or 0.2% in 1996. The increase in other
operating expenses in 1997 was because of higher expenses associated
with professional fees, postage, printing supplies, insurance,
marketing, and advertising over 1996.
Our overall non-interest expense of less than 2% of average
assets in 1997 and 1996, places us among the leaders of our peer
financial institutions in controlling non-interest expense.
<TABLE>
Table 6 - Non-Interest Expense
<CAPTION>
(Amounts in thousands) 1997/1996
Increase/(Decrease)
1997 Amount % 1996
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $2,627 $179 7.3 $2,448
Occupancy, Net 332 51 18.1 281
Furniture and Equipment 488 20 4.3 468
FDIC Insurance 25 23 1150.0 2
Other 1,461 119 8.9 1,342
Total $4,933 $392 8.6 $4,541
<CAPTION>
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
</TABLE>
INCOME TAXES
Effective tax planning has helped produce favorable net income in
each of the past three years. In 1997, net income before taxes
increased $854,052. In 1996, income before income taxes increased
$707,673 over 1995, while our income tax liability increased $324,097
and $63,581 in 1997 and 1996, respectively. The effective total
income tax rate was 21.9% in 1997, 19.2% in 1996, and 20.8% in 1995.
The increase in our tax liability rate in 1997 was due primarily to
the limited purchases of municipal (tax-free investments) securities
at attractive interest rates.
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased to $267,398,586, an increase of 10.2% over
year-end 1996. Total deposits increased to $217,647,184, or 9.6%.
Assets at December 31, 1996, were up 7.3% to $242,557,150, while total
deposits were up 6.0% to $198,545,783 compared to 1995.
The Corporation has used borrowed funds in previous years to
support asset growth not provided by deposit growth. Deposit growth
in 1997 was $19,101,401 as compared to 1996 deposit growth of
$11,225,696. With conventional deposit growth increasing in 1997, as
compared to 1996, the Corporation's short-term borrowings and long-
term borrowings remained stable at $15,102,160 in 1997 as compared to
$15,121,367 in 1996. Borrowings were not reduced in 1997 because of
strong loan demand which is discussed under Earning Assets and
illustrated in Table 7 - Loans Outstanding, Net of Unearned Income.
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 1998, the Corporation may borrow additional funds to leverage its
balance sheet if net income can be incrementally increased without
incurring an excessive amount of 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 96.4%
as of December 31, 1997, compared to 96.7% at December 31, 1996, and
96.5% as of December 31, 1995. 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
$18,890,000, or 14.2% in 1997 to a level of $152,151,000. This
compares to an increase in loans of $5,200,000, or 4.1% in 1996 and
$9,877,000, or 8.4% in 1995. 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. A pool of
30 First Keystone Corporation
<PAGE>
Management's Discussion and Analysis
residential mortgage loans was sold in the secondary market during
1997. The Corporation will continue to originate and market
residential mortgage loans which conform to secondary market
requirements. The Corporation derives ongoing income from the
servicing of mortgages.
<TABLE>
Table 7 - Loans Outstanding, Net of Unearned Income
<CAPTION>
(Amounts in thousands) December 31,
1997 1996 1995
<S> <C> <C> <C>
Commercial, financial and
agricultural:
Commercial secured by real estate $ 41,566 $ 33,103 $ 28,846
Commercial - other 17,241 13,574 17,563
Tax exempt 2,566 2,263 3,602
Real estate (primarily residential
mortgage loans) 72,901 65,145 58,438
Consumer loans 22,009 23,027 23,681
Total Gross Loans $156,283 $137,112 $132,130
Less: Unearned income and
unamortized loan fees
net of costs 4,132 3,851 4,069
Total Loans, net of unearned income $152,151 $133,261 $128,061
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
Commercial, financial and
agricultural:
Commercial secured by real estate $ 30,127 $ 30,097
Commercial - other 16,285 14,005
Tax exempt 3,754 2,717
Real estate (primarily residential
mortgage loans) 52,389 47,867
Consumer loans 19,370 17,156
Total Gross Loans $121,925 $111,842
Less: Unearned income and
unamortized loan fees
net of costs 3,741 3,498
Total Loans, net of unearned income $118,184 $108,344
</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 $505,000 to $81,651,000 in 1997, while held to
maturity securities decreased $3,271,000 to $16,809,000, as
illustrated in Table 8. The vast majority of investment security
purchases are allocated as available for sale. This provides the
Corporation with increased flexibility should there be a need or
desire to liquidate an investment security. 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.
During 1997, interest bearing deposits in other banks increased
to $7,083,684 from $32,093 in 1996, as funds were kept short-term for
liquidity purposes and to fund additional loan commitments.
<TABLE>
Table 8 - Carrying Value of Investment Securities
<CAPTION>
(Amounts in thousands) December 31,
1997
Available Held to
for Sale Maturity
<S> <C> <C>
U.S. Treasury $10,442 $ 0
U. S. Government Corporations
and Agencies 34,253 13,612
State and Municipal 33,996 3,197
Other Securities 0 0
Equity Securities 2,960 0
Total Investment Securities $81,651 $16,809
<CAPTION>
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
</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
1997 Annual Report 31
<PAGE>
Management's Discussion and Analysis
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 1997, net charge-offs as a percentage of
average loans were .15% compared to .21% in 1996 and .13% in 1995.
Net charge-offs amounted to $221,000 in 1997 as compared to $265,000
and $159,000 in 1996 and 1995, respectively. The increased number of
bankruptcy filings in 1997 and 1996 largely account for the increased
net charge-offs. 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 1.63% in 1997, 1.76% in 1996, and 1.65% in 1995.
<TABLE>
Table 9 - Analysis of Allowance for Loan Losses
<CAPTION>
(Amounts in thousands) Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of period $2,267 $2,015 $1,802
Charge-offs:
Commercial, financial, and
agricultural 107 214 18
Real estate - mortgage 54 0 118
Installment loans to individuals 111 88 50
272 302 186
Recoveries:
Commercial, financial, and
agricultural 7 12 6
Real estate - mortgage 17 8 2
Installment loans to individuals 27 17 19
51 37 27
Net charge-offs 221 265 159
Additions charged to operations 325 517 372
Balance at end of period $2,371 $2,267 $2,015
Ratio of net charge-offs during the
period to average loans
outstanding during the period .15% .21% .13%
Allowance for loan losses to average
loans outstanding during the period 1.63% 1.76% 1.65%
<CAPTION>
(Amounts in thousands) Years Ended December 31,
1994 1993
<S> <C> <C>
Balance at beginning of period $1,844 $1,366
Charge-offs:
Commercial, financial, and
agricultural 80 54
Real estate - mortgage 29 9
Installment loans to individuals 72 86
181 149
Recoveries:
Commercial, financial, and
agricultural 81 0
Real estate - mortgage 6 3
Installment loans to individuals 21 106
108 109
Net charge-offs 73 40
Additions charged to operations 31 518
Balance at end of period $1,802 $1,844
Ratio of net charge-offs during the
period to average loans
outstanding during the period .07% .04%
Allowance for loan losses to average
loans outstanding during the period 1.61% 1.75%
</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>
December 31,
1997 % <F1>
<S> <C> <C>
Commercial, financial,
and agricultural $ 271 12.1
Real estate - mortgage 1,135 73.9
Installments to
individuals 241 14.0
Unallocated 724 N/A
$2,371 100.0
<CAPTION>
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
______________________
<FN>
<F1>
Percentage of loans in each category to total loans.
</FN>
</TABLE>
32 First Keystone Corporation
<PAGE>
Management's Discussion and Analysis
NON-PERFORMING ASSETS
Table 11 reflects non-performing assets for the past five years.
Non-accrual loans are generally delinquent on which principal or
interest is past-due approximately 90 days or more, depending
upon the type of credit and the collateral. When a loan is placed on
non-accrual status, any unpaid interest is charged against income.
Restructured loans are loans where the borrower has been granted a
concession in the
interest rate or payment amount because of financial problems. Other
real estate owned/foreclosed assets represents property acquired
through foreclosure, or considered to be an in-substance foreclosure.
The total of non-performing assets has declined annually after
peaking in 1993. The current level of non-performing assets of
$350,000 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 $336,000 in 1997 from $263,000 in
1996.
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 1997 and 1996
was $7,006 and $3,048, respectively. Interest income, which would have
been recorded on these loans under the original terms in 1997 and 1996
was $30,027 and $46,924, respectively. At December 31, 1997, 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, 1997, 1996, and 1995, management is of the opinion
that there were no loan concentrations exceeding 10% of total loans.
There is a concentration of real estate mortgage loans in the loan
portfolio. Real estate mortgages comprise 73.2% of the loan portfolio
as of December 31, 1997, up from 71.7% in 1996. Real estate mortgages
consist of both residential and commercial real estate loans. The
real estate loan portfolio is well diversified in terms of borrowers
and collateral. Also, the real estate loan portfolio has a mix of
both fixed rate and adjustable rate mortgages. The real estate loans
are concentrated primarily in our marketing area and are subject to
risks associated with the local economy.
<TABLE>
Table 11 - Non-Performing Assets
<CAPTION>
(Amounts in thousands) December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Non-accrual and restructured loans $321 $267 $557 $620 $1,431
Other real estate/
foreclosed assets 29 84 0 235 5
Total non-performing assets $350 $351 $557 $855 $1,436
Non-performing assets to
period-end loans and
foreclosed assets .23% .26% .44% .73% 1.35%
Loans past-due 90 or more
days and still accruing $336 $263 $68 $49 $27
</TABLE>
DEPOSITS AND OTHER BORROWED FUNDS
Deposit growth amounted to $19,101,401, or a 9.6% increase when
comparing December 31, 1997, to December 31, 1996. This increase
compares to deposit increases of 6.0% in 1996 and 8.7% in 1995.
First Keystone's subsidiary bank, opened its seventh full service
office in Hanover Township, Wilkes-Barre, Pennsylvania, in the fourth
quarter of 1997. This office helped account for some of the deposit
growth in 1997. We expect the office to not only provide a basis for
deposits, but also be an active lender in the area.
During 1997, the Corporation experienced a vast majority of its
deposit growth in interest bearing deposits. In particular, interest
bearing demand deposits increased in 1997. Also, certificates of
deposit under $100,000 and time deposits of $100,000 or more both
increased in 1997. Short-term borrowings and long-term borrowings
remained relatively stable in 1997, while declining only $19,207 after
increasing $3,762,766 in 1996.
1997 Annual Report 33
<PAGE>
Management's Discussion and Analysis
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 1997 and 1996. The net increase in capital was
$4,345,072 in 1997 and $2,073,534 in 1996. The unrealized gain on
investment securities available-for-sale net of taxes which increased
to $2,227,765 in 1997, accounts for part of the net increase in
capital in 1997.
Return on equity (ROE) is computed by dividing net income by
average stockholders' equity. This ratio was 15.92% for 1997, 15.98%
for 1996, and 15.24% for 1995. Refer to Performance Ratios on Page 2 -
Summary of Selected Financial Data for a more expanded listing of the
ROE.
Adequate capitalization of banks and bank holding companies is
required and monitored by regulatory authorities. Table 12 reflects
risk-based capital ratios and the leverage ratio for our Corporation
and Bank. The Corporation's leverage ratio was 11.23% at December 31,
1997, and 10.87% as of December 31, 1996.
The risk-based capital ratios also increased in 1997 from 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, 1997,
and December 31, 1996, for the Corporation and the Bank.
<TABLE>
Table 12 - Capital Ratios
<CAPTION>
December 31, 1997
Corporation Bank
<S> <C> <C>
Risk-Based Capital:
Tier I risk-based capital ratio 19.43% 19.75%
Total risk-based capital ratio
(Tier 1 and Tier 2) 20.68% 21.01%
Leverage Ratio:
Tier I capital to average assets 11.23% 10.79%
<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%
</TABLE>
LIQUIDITY MANAGEMENT
Effective liquidity management ensures that the cash flow
requirements of depositors and borrowers, as well as the operating
cash needs of the Corporation, are met.
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.
Finally, the Corporation does have access to funds on a short-
term basis from the Federal Reserve Bank discount window. Fed funds
can be purchased by means of a borrowing line at the Atlantic Central
Bankers Bank. The Corporation has indirect access to the capital
markets through its membership in the Federal Home Loan Bank.
Advances, both short-term and long-term, are available to help address
any liquidity needs.
34 First Keystone Corporation
<PAGE>
Management's Discussion and Analysis
<TABLE>
Table 13 - Loan Maturities and Interest Sensitivity <F1>
<CAPTION>
(Amounts in thousands) December 31, 1997
One year One thru Over five
or less five years years Total
<S> <C> <C> <C> <C>
Commercial, Financial and
Agricultural
Fixed interest rate $ 2,707 $ 7,025 $6,598 $16,330
Variable interest rate 30,379 14,107 1,632 46,118
Total $33,086 $21,132 $8,230 $62,448
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>
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in
the fair value of financial instruments due to changes in interest
rates, exchange rates and equity prices. First Keystone Corporation's
market risk is composed primarily of interest rate risk.
Increases in the level of interest rates also may adversely
affect the fair value of the Corporation's securities and other
earning assets. Generally, the fair value of fixed-rate instruments
fluctuates inversely with changes in interest rates. As a result,
increases in interest rates could result in decreases in the fair
value of the Corporation's interest-earning assets, which could
adversely affect the Corporation's results of operations if sold, or,
in the case of interest earning assets classified as available for
sale, the Corporation's stockholders' equity, if retained. Under The
Financial Accounting Standards Board (FASB) Statement 115, changes in
the unrealized gains and losses, net of taxes, on securities
classified as available for sale will be reflected in the
Corporation's stockholders' equity. As of December 31, 1997, the
Corporation's securities portfolio included $81,650,689 in securities
classified as available for sale. Accordingly, with the magnitude of
the Corporation's holdings of securities available for sale, changes
in interest rates could produce significant changes in the value of
such securities and could produce significant fluctuations in the
stockholders' equity of the Corporation. The Corporation does not own
any trading assets.
The Bank's Asset/Liability Committee (ALCO) is responsible for
reviewing the interest rate sensitivity position and establishing
policies to monitor and limit exposure to interest rate risk. The
guidelines established by ALCO are reviewed by the Corporation's Board
of Directors.
Table 14 presents an analysis of the changes in net-interest
income and net present value of the balance sheet resulting from an
increase or decrease of two percentage points (200 basis points) in
the level of interest rates. The calculated estimates of change in
net interest income and net present value of the balance sheet are
compared to current limits approved by ALCO and the Board of
Directors. The earnings simulation model projects net-interest income
would increase by approximately 7.6% if rates fell gradually by two
percentage points over one year. It projects a decrease of
approximately 7.8% in net-interest income if rates rise gradually by
two percentage points over one year. While this does indicate a
liability sensitive risk position, both of these forecasts are within
the one year policy guidelines of 10%.
The net present value of the balance sheet is defined as the
discounted present value of asset cash flows minus the discounted
present value of liability cash flows. At year-end, a 200 basis point
immediate decrease in rates is estimated to increase net present value
by 39.4%. Additionally, net present value is projected to decrease by
36.1% if rates increase immediately by 200 basis points, both within
policy limits restricting these amounts to 50%.
The computation of the effects of hypothetical interest rate
changes are based on many assumptions. They should not be relied upon
solely as being indicative of actual results, since the computations
do not contemplate actions management could undertake in response to
changes in interest rates.
1997 Annual Report 35
<PAGE>
Management's Discussion and Analysis
<TABLE>
Table 14 - Effect of Change in Interest Rates
<CAPTION>
Projected ALCO
Change Guidelines
<S> <C> <C>
Effect on Net Interest
Income
1-year Net Income
simulation Projection
-200 bp Ramp vs Stable Rate 7.6% (10%)
+200 bp Ramp vs Stable Rate (7.8%) (10%)
Effect on Net Present Value
of Balance Sheet
Static Net Present Value Change
-200 bp Shock vs Stable Rate 39.4% (50%)
+200 bp Shock vs Stable Rate (36.1%) (50%)
</TABLE>
ASSET/LIABILITY MANAGEMENT
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-interest 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 gapped. 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 15 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, 1997 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
management's 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 15, 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 $61,964,000. However, much of our interest bearing
demand deposits and savings deposits are considered core deposits and
are not rate sensitive, especially in the three months or less time
frame. Accordingly, the Corporation feels it is only slightly
negatively gapped with exposure to an increase in interest rates
limited within policy guidelines. As discussed previously, a negative
gap will decrease net interest income should interest rates rise.
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.
36 First Keystone Corporation
<PAGE>
Management's Discussion and Analysis
<TABLE>
Table 15 - Interest Rate Sensitivity Analysis
<CAPTION>
(Amounts in thousands) December 31, 1997
3 Months 3 - 12 1 - 5
or Less Months Years
<S> <C> <C> <C>
Rate Sensitive Assets:
Cash and cash equivalent $ 7,084 $ 0 $ 0
Loans 38,122 25,694 51,955
Investments 21,062 10,405 26,121
Total Rate Sensitive Assets $ 66,268 $ 36,099 $78,076
Rate Sensitive Liabilities:
Deposits:
Interest-bearing demand
/savings $ 93,317 $ 0 $ 0
Time 29,215 46,429 29,943
Short-term borrowings 5,700 402 0
Long-term borrowings 0 1,000 8,000
Total Rate Sensitive
Liabilities $128,232 $ 47,831 $37,943
Interest Rate Sensitivity:
Current period $(61,964) $(11,732) $40,133
Cumulative gap (61,964) (73,696) (33,563)
Cumulative gap to total assets (23.17%) (27.56%) (12.55%)
<CAPTION>
December 31, 1997
Over
5 Years Total
<S> <C> <C>
Rate Sensitive Assets:
Cash and cash equivalent $ 0 $ 7,084
Loans 36,380 152,151
Investments 39,298 96,886
Total Rate Sensitive Assets $75,678 $256,121
Rate Sensitive Liabilities:
Deposits:
Interest-bearing demand
/savings $ 0 $ 93,317
Time 0 105,587
Short-term borrowings 0 6,102
Long-term borrowings 0 9,000
Total Rate Sensitive
Liabilities $ 0 $214,006
Interest Rate Sensitivity:
Current period $75,678 $ 42,115
Cumulative gap 42,115
Cumulative gap to total assets 15.75%
</TABLE>
EFFECT OF INFLATION
Although inflation was not significant in 1997, 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 AND YEAR 2000
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 1998. We are optimistic that loan growth will
continue in 1998. Although it is anticipated that the majority of the
loan growth in 1998 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 1998 and beyond will continue to be a priority. 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.
1997 Annual Report 37
<PAGE>
Management's Discussion and Analysis
First Keystone Corporation is in the process of becoming Year
2000 compliant. The expenses for maintenance or modification of
software associated with the Year 2000 will be expensed as incurred.
The costs of new software will be capitalized and amortized over the
software's useful life. The cost of becoming 2000 compliant is not
material. The amount expensed in 1997 was immaterial and the
Corporation does not expect the amounts required to be expensed in
1998 and 1999 to have a material effect on its financial position or
results of operation. However, failures of third parties or other
companies, on which the Corporation systems rely to be 2000 compliant
could have an adverse effect on the Corporation's systems.
MARKET PRICE/DIVIDEND HISTORY
First Keystone Corporation's common stock is quoted on the Over
The Counter (OTC) Bulletin Board under the symbol "FKYS." The
following have indicated that they are market makers in our stock:
Ryan, Beck and Company, 150 Monument Road, Suite 106, Bala Cynwyd, PA
19004 (800-223-8969); Janney Montgomery Scott, Inc., 1801 Market
Street, Philadelphia, PA 19103 (800-526-6397); and Hopper Soliday &
Co., 1703 Oregon Pike, Lancaster, PA 17601 (800-646-8647). 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 in February
1996, May 1997, and a 3 for 1 split in the form of a 200% dividend
paid in March 1998. These prices do not necessarily reflect any dealer
or retail markup, markdown or commission.
<TABLE>
Table 16 - Market Price/Dividend History <F1>
<CAPTION>
1997
Common Stock Dividends
High/Low Paid
<S> <C> <C>
First Quarter $11.21/$10.74 $.106
Second Quarter $14.33/$10.92 .117
Third Quarter $14.33/$14.33 .117
Fourth Quarter $19.08/$16.63 .133
<CAPTION>
1996
Common Stock Dividends
High/Low Paid
<S> <C> <C>
First Quarter $11.21/$10.19 $.094
Second Quarter $11.21/$11.21 .094
Third Quarter $11.21/$11.21 .094
Fourth Quarter $11.21/$11.21 .106
<CAPTION>
1995
Common Stock Dividends
High/Low Paid
<S> <C> <C>
First Quarter $ 9.64/$ 9.64 $.081
Second Quarter $ 9.64/$ 9.64 .081
Third Quarter $10.19/$ 9.64 .081
Fourth Quarter $10.19/$10.19 .085
<FN>
<F1>
Reflects adjustment for stock dividends more fully described in Note 1.
</FN>
</TABLE>
38 First Keystone Corporation
<PAGE>
Management's Discussion and Analysis
<TABLE>
Table 17 - Quarterly Results of Operations (Unaudited)
<CAPTION>
(Amounts in thousands, except per share)
Three Months Ended
1997 March June September December
31 30 30 31
<S> <C> <C> <C> <C>
Interest income $4,608 $4,745 $4,948 $5,044
Interest expense 2,237 2,276 2,417 2,451
Net interest income $2,371 $2,469 $2,531 $2,593
Provision for loan
losses 50 100 50 125
Other non-interest
income 291 273 286 412
Non-interest expense 1,215 1,186 1,223 1,309
Income before income
taxes $1,397 $1,456 $1,544 $1,570
Income taxes 274 309 359 365
Net income $1,123 $1,147 $1,185 $1,205
Per share <F1> $ .38 $ .39 $ .40 $ .41
<CAPTION>
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 $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> $ .33 $ .37 $ .41 $ .30
<FN>
<F1>
Reflects adjustment for stock dividends more fully described in Note 1.
1997 Annual Report 39
<PAGE>
</TABLE>
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.
23
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual
Report on Form 10-K of First Keystone Corporation of our report dated
January 9, 1998, included in the 1997 Annual Report to Stockholders of
First Keystone Corporation.
/s/ J. H. Williams & Co., LLP
March 24, 1998 J. H. Williams & Co., LLP
Kingston, Pennsylvania Certified Public Accountants
24
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,400
<INT-BEARING-DEPOSITS> 7,084
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 81,651
<INVESTMENTS-CARRYING> 16,809
<INVESTMENTS-MARKET> 16,833
<LOANS> 152,151
<ALLOWANCE> 2,371
<TOTAL-ASSETS> 267,399
<DEPOSITS> 217,647
<SHORT-TERM> 6,102
<LIABILITIES-OTHER> 2,831
<LONG-TERM> 9,000
0
0
<COMMON> 1,956
<OTHER-SE> 29,862
<TOTAL-LIABILITIES-AND-EQUITY> 267,399
<INTEREST-LOAN> 12,924
<INTEREST-INVEST> 6,157
<INTEREST-OTHER> 264
<INTEREST-TOTAL> 19,345
<INTEREST-DEPOSIT> 8,437
<INTEREST-EXPENSE> 944
<INTEREST-INCOME-NET> 9,964
<LOAN-LOSSES> 325
<SECURITIES-GAINS> 68
<EXPENSE-OTHER> 4,933
<INCOME-PRETAX> 5,968
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,660
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.49
<LOANS-NON> 320
<LOANS-PAST> 336
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,775
<ALLOWANCE-OPEN> 2,267
<CHARGE-OFFS> 271
<RECOVERIES> 50
<ALLOWANCE-CLOSE> 2,371
<ALLOWANCE-DOMESTIC> 2,371
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 724
</TABLE>
EXHIBIT 99
DEFINITIVE PROXY STATEMENT, NOTICE OF ANNUAL MEETING AND
FORM OF PROXY FOR THE ANNUAL MEETING
OF SHAREHOLDERS TO BE HELD APRIL 21, 1998
26
<PAGE>
<FIRST KEYSTONE CORPORATION LOGO - 1K> First Keystone Corporation
111 West Front Street
Berwick, Pennsylvania 18603
March 27, 1998
DEAR SHAREHOLDER:
It is my pleasure to invite you to attend the 1998 Annual Meeting
of Shareholders of First Keystone Corporation to be held on Tuesday,
April 21, 1998, 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 B
Directors, the proposal to amend Article 5 of the Articles of
Incorporation to increase the number of authorized shares of common
stock, the proposal to adopt the First Keystone Corporation 1998 Stock
Incentive Plan and the ratification of the selection of the
independent auditors for 1998. 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>
<BLANK PAGE>
<PAGE>
FIRST KEYSTONE CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 21, 1998
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 21, 1998, 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 B Directors to serve for a
three-year term and until their successors are elected and qualified;
2. To consider and act upon a proposal to amend Article 5 of the
Articles of Incorporation to increase the number of authorized shares
of common stock from three million to ten million shares;
3. To consider and act upon a proposal to approve the First
Keystone Corporation 1998 Stock Incentive Plan, as described in the
accompanying Proxy Statement;
4. To ratify the selection of J. H. Williams & Co. as the
independent auditors for the Corporation for the year ending December
31, 1998; and
5. 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 10, 1998 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, 1997 is being mailed with this Notice. Copies of
the Corporation's Annual Report for the 1996 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 27, 1998
<PAGE>
PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS
OF FIRST KEYSTONE CORPORATION TO BE HELD ON APRIL 21, 1998
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 21, 1998, 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 27, 1998.
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 B Director named below, FOR the proposal to amend
Article 5 of the Articles of Incorporation to increase the number of
authorized shares of common stock, FOR the proposal to adopt the First
Keystone Corporation 1998 Stock Incentive Plan (the Plan ) 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, 1998. 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.
Proxy Statement Page 1
<PAGE>
Voting Securities, Record Date and Quorum
At the close of business on March 10, 1998, the Corporation had
outstanding 2,933,727 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 10, 1998, none of the
shares of preferred stock were issued.
Only holders of Common Stock of record at the close of business
on March 10, 1998, 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 approval and adoption of the amendment to Article 5 of the
Articles of Incorporation, for the approval and adoption of the Plan
and 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 the approval and adoption or
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 10, 1998, 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.
Page 2 Proxy Statement
<PAGE>
<TABLE>
<CAPTION>
Shares Percent of Outstanding
Beneficially Common Stock
Name and Address Owned <F1> Beneficially Owned
<S> <C> <C>
Robert J. Wise 197,082 <F4> 6.72%
115 West Third Street
Berwick, PA 18603
Berbank 295,929 <F5> 10.09%
First National Bank of
Berwick Trust Department
Robert E. Bull 206,433 <F6> 7.04%
323 West Fourth Street
Nescopeck, PA 18635
Frederick E. Crispin, Jr. 148,617 <F8> 5.07%
3
Cedarbrook
Terrace
Princeton, NJ 08540
</TABLE>
Beneficial Ownership by Officers, Directors and Nominees
The following table sets forth as of March 10, 1998, 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. All shares are individually owned by the
reporting person unless otherwise indicated.
<TABLE>
<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 B Directors
(to serve until 2001)
And a Current Class B Director
John Arndt 4,836 <F9> --
J. Gerald Bazewicz 10,848 <F10> --
Robert E. Bull 206,433 <F6> 7.04%
Class C Directors
(to serve until 1999)
John L. Coates 7,029 <F11> --
Dudley P. Cooley 3,993 --
Stanley E. Oberrender 4,791 --
Class A Directors
(to serve until 2000)
Budd
L. Beyer 37,932 1.29%
Frederick E. Crispin, Jr. 148,617 <F8> 5.07%
Robert J. Wise 197,082 <F4> 6.72%
All Officers, Directors and 624,753 21.29%
Nominees as a Group
(10 Persons in Total)
Proxy Statement Page 3
<PAGE>
<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
10, 1998. 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 177,321 shares held individually by Mr. Wise and 19,761 shares
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
248,421 shares and as fiduciary with shared voting and
dispositive
power
over 47,508 shares. Total does not include 29,886 shares held by the Trust
Department of the Bank for which the Bank does not have sole voting or
dispositive power. The Trust Department intends to cast all shares under
its voting power FOR the election of the nominees for director named below
FOR the proposal to amend Article 5 of the Articles of Incorporation to
increase the number of authorized shares of common stock, FOR the proposal
to adopt the First Keystone Corporation 1998 Stock Incentive Plan ( the
Plan ) and FOR the ratification of J. H. Williams & Co. as the independent
auditors of the Corporation.
<F6>
Includes 145,857 shares held individually by Mr. Bull, 9,981 shares held by
Bull, Bull & Knecht, a law firm of which Mr. Bull is a partner, and 50,595
shares held by the Sara Bull Trust.
<F7>
Less than one percent (1%) unless otherwise indicated.
<F8>
Includes 15,972 shares held individually by Mr. Crispin, 7,986 shares held
individually by his spouse and 124,659 shares held by Frederick E. Crispin
Trust in which Mr. Crispin is trustee.
<F9>
Includes 3,159 shares held individually by Mr. Arndt, 357 shares held
individually by his spouse, and 1,320 shares held by Arndt Insurance Profit
Sharing.
<F10>
Includes 7,329 shares held individually by Mr. Bazewicz, 2,055 shares held
jointly with his spouse, 474 shares held individually by his spouse, 660
shares held jointly with his children and 330 shares held as Custodian for
the benefit of his children.
<F11>
Includes 5,433 shares held individually by Mr. Coates and 1,596 shares 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, 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
Page 4 Proxy Statement
<PAGE>
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 1998
Annual Meeting of Shareholders, three (3) Class B 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 appointment of a
replacement by a majority of the directors then in office and the
replacement shall serve 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 B Director whose term
expires in 2001 and the current Class B Directors whose term expires
in 1998, and the Class C Directors and Class A Directors whose terms
expire in 1999 and 2000, respectively:
<TABLE>
<CAPTION>
Principal Occupation
for Past Five Years Director
Name and Age as of and Position Held Since
Current March 10, with Corporation Corporation
Committees 1998 and Bank /Bank
NOMINEES FOR CLASS B DIRECTOR WHOSE TERM EXPIRES IN 2001
AND
CURRENT CLASS B DIRECTORS WHOSE TERM EXPIRES IN 1998
<S> <C> <C> <C>
John Arndt 36 Owner of Arndt 1995/1995
Committees 2,3,4,7,8 Insurance Agency
(General insurance)
J. Gerald Bazewicz 49 President of the
Committees 1,2,3,4, Corporation 1986/1986
5,7,8 and the Bank
Robert E. Bull 75 Attorney, Bull, 1983/1956
Committees 1,3,4,5, Bull & Knecht;
6,7,8 Chairman of the
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 61 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 59 Personal Financial 1987/1987
Committees 3,6,7 Consultant; Former
Controller, Wise Foods,
Borden, Inc. (Snack
food processor)
Stanley E. Oberrender 56 Owner,
Suntex
1987/1987
Committees 3,4,6,7,8 (Dry cleaning)
<CAPTION>
CLASS A DIRECTORS WHOSE TERM EXPIRES IN 2000
<S> <C> <C> <C>
Budd
L. Beyer 70 Investor; Former 1983/1976
Committees 1,2,4,5,7 President, Sunshine
Textiles Service, Inc.
(Dry Cleaning, Laundry
and Linen Rental)
Frederick E. Crispin, Jr. 66 Financial Consultant, 1983/1964
Committees 1,3,4,5,6
F.E.
Crispin &
Associates
Robert J. Wise 68 Retired, former investor 1983/1967
Committees 1,2,4,5,7,8 investor Vice Chairman
of the Corporation and
the Bank
<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 1997.
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 1997.
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 four (4) times in 1997.
Committee 4 - Marketing Committee This committee provides 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 four (4) times in 1997.
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 1997.
Page 6 Proxy Statement
<PAGE>
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 1997.
Committee 7 - Human Resources Committee This committee helps ensure
that a sound human resources management system is developed and maintained.
This committee also acts as the Compensation Committee for the Bank and
related Corporation officers. This committee met one (1) time in 1997.
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 two (2) times in 1997.
</FN>
</TABLE>
The aforementioned committees are committees of the Bank and not
of the Corporation.
During 1997, 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.
SECTION 16(A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
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, 1997, through December 31, 1997, its
officers and directors were in compliance with all filing requirements
applicable to them.
COMPENSATION COMMITTEE REPORT
OF EXECUTIVE COMPENSATION
The Corporation s Executive Compensation Policy is to provide
executives of First Keystone Corporation's subsidiary, The First
National Bank of Berwick, with a competitive compensation package that
attracts and retains qualified executives while placing a portion of
total pay at risk. The at risk portion is paid as a cash bonus and is
earned through the achievement of overall annual earnings objectives.
This helps align executive management's interest with those of
shareholders since generally, the higher the net income for the year,
the larger the bonuses paid to executive management.
Proxy Statement Page 7
<PAGE>
Compensation for executive officers of The First National Bank of
Berwick is determined by the Board of Directors. With regard to the
compensation paid to executive officers other than the Chief Executive
Officer, the Board of Directors considers information provided by the
Chief Executive Officer as to each executive officer's level of
individual performance, contribution to the organization, and salary
history. With regard to the compensation paid to the Chief Executive
Officer, the Board of Directors, with Mr. Bazewicz not being present,
considers his performance level, the results of management decisions
made by him, and the earnings of the organization. No particular
weight is assigned to any of the foregoing individual performance
factors. The executive compensation established by the Board of
Directors is based on its overall subjective assessment of the value
of the services provided by each executive officer with consideration
to the performance factors discussed in this paragraph and peer group
compensation information.
The peer group of banks chosen by the Board of Directors for
purposes of making a comparative analysis of executive compensation
does not include all of the same banks incorporated in the peer group
established to compare shareholder returns as indicated in the
Performance Graph included in this proxy statement. The Board of
Directors uses data from compensation surveys of the banking industry
to assist in determining executive pay. This group of Pennsylvania
banking organizations bears no direct relationship to those banking
organizations represented in the Performance Graph.
The Board of Directors believes Plan to be voted on by
shareholders will provide a long-term incentive program to further
link compensation and performance of First Keystone Corporation
employees. The Board of Directors believes that stock option awards
provide a vehicle for long-term incentive compensation through
financial rewards dependent on future increases in the market value of
the Corporation's stock. Thus, executive officers are encouraged to
manage the Corporation with a view toward maximizing long-term
shareholder value.
BOARD OF DIRECTORS
Robert E. Bull, Chairman
Budd
L. Beyer
Robert J. Wise, Vice Chairman Dudley P. Cooley
J. Gerald Bazewicz, President Frederick E. Crispin, Jr.
John L. Coates, Secretary Stanley E. Oberrender
John E. Arndt
EXECUTIVE COMPENSATION
Shown below is information concerning the annual compensation for
services rendered in all capacities to the Corporation and the Bank
for the fiscal years ended December 31, 1997, 1996 and 1995 of those
persons who were (
i
) the Chief Executive Officer during 1997, 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 $100,000 at December 31, 1997.
Page 8 Proxy Statement
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation
(a) (b) (c) (d) (e)
Other
Annual
Name and Compen-
Principal Salary Bonus sation
Position Year ($) <F1> ($) <F2> ($)
<S> <C> <C> <C> <C>
J. Gerald Bazewicz 1997 126,800 27,972 0
President and Chief 1996 116,800 35,397 0
Executive Officer 1995 108,100 22,553 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>
<S> <C> <C> <C> <C>
J. Gerald Bazewicz 0 0 0 40,003
President and Chief 0 0 0 13,701
Executive Officer 0 0 0 17,274
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 1997, $9,800 in 1996, and $8,100 in 1995.
<F2>
Bonus information is reported by the year in which earned.
<F3>
Amounts shown include contributions to the Bank's 401(K) Plan of $15,872
for 1997, $13,701 for 1996, and $17,274 for 1995. The amount for 1997
includes the first year accrual to the Bank's Supplemental Employee
Retirement Plan (
SERP
) of $22,803 and the premiums on term life insurance
relative to the
SERP
of $1,328 in 1997. 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 1997 and 1996 were:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Matching contribution to savings plan $ 59,395 $ 52,892
Contribution to profit sharing plan 151,575 138,818
Total Expense $210,970 $191,710
</TABLE>
Proxy Statement Page 9
<PAGE>
Of the $210,970 total expenses during 1997, $41,633 was credited
among the individual accounts of the most highly compensated executive
officers of the Bank. Of the $41,633, Mr. Bazewicz was credited with
$15,872 and has been a member of the Plan for twelve years.
Other Executive Benefits
A Supplemental Employee Retirement Plan ( SERP ) was approved and
became effective January 7, 1997, covering three of the Bank's
executive officers, Mr. Bazewicz, Mr. Saracino, and Mr. Bodle. The
SERP, which is a 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 will pay him 240
guaranteed consecutive monthly payments commencing on the first day of
the month following the officer's 60th birthday in the amounts
indicated below.
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. No benefit shall be paid if the
executive officer voluntarily terminates his employment prior to the
age of sixty (60).
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 1997, the Bank
expensed
$60,093 for the
first year accrual of the salary continuation plan for the three
executive officers. In addition, $5,474 was paid to cover the first
year's premium on the term insurance policies.
Compensation of Directors
During 1997, 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 a Four Thousand Dollar ($4,000.00) retainer and One
Hundred Seventy-Five Dollars ($175.00) for each committee meeting
attended. 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 Vice Chairman Wise and Secretary
Coates each received an annual stipend of Seven Hundred Fifty Dollars
($750.00). In the aggregate, the Board of Directors received
$158,375.00 for all Board of Directors' meetings and committee
meetings attended in 1997, including all fees, bonuses, and stipends
paid to all Directors in 1997.
Page 10 Proxy Statement
<PAGE>
PERFORMANCE GRAPH
The following graph and table compare the cumulative total
shareholder return on the Corporation's Common Stock during the period
December 31, 1992, through and including December 31, 1997, with (i)
the cumulative total return on the SNL Securities Corporate
Performance Index <F1> for banks with less than $500 million in total
assets in the Middle Atlantic area <F2>, and (ii) the cumulative total
return for all United States stocks traded on the NASDAQ Stock Market.
The comparison assumes $100 was invested on December 31, 1992, in the
Corporation's Common Stock and in each of the indices below and
assumes further the reinvestment of dividends into the applicable
securities. The shareholder return shown on the graph and table below
is not necessarily indicative of future performance.
(Performance Graph omitted)
(The following is a description of the performance graph in tabular
format)
FIRST KEYSTONE CORPORATION
Total Return Performance
Period Ending
12/31/92 12/31/93 12/31/94
First Keystone Corporation 100.00 102.54 116.56
NASDAQ - Total US 100.00 114.80 112.21
SNL <$500M Bank Index 100.00 130.56 140.42
Period Ending
12/31/95 12/31/96 12/31/97
First Keystone Corporation 128.24 168.76 318.33
NASDAQ - Total US 158.70 195.19 239.53
SNL <$500M Bank Index 192.09 247.24 421.47
[FN]
<F1>
SNL Securities is a research and publishing firm specializing in the
collection and dissemination of data on the banking, thrift and
financial services industries.
<F2>
The Middle Atlantic area comprises the states of Delaware,
Pennsylvania, Maryland, New Jersey, New York, the District of Columbia
and Puerto Rico.
</FN>
Proxy Statement Page 11
<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 engaged in and intend to continue to
engage in 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, 1997, 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
$2,080,963 or approximately 6.54% 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 1997 to officers and directors of the Corporation
and the Bank as a group was $2,244,288. The aggregate amount of
indebtedness outstanding as of the latest practicable date, February
2, 1998, to the above described group was $2,025,362.
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
Corporation of Shares March
Held Employee Beneficially 10,
Name and Position Since Since Owned 1998
<S> <C> <C> <C> <C>
Robert E. Bull 1983 <F1> 206,433 75
Chairman of the Board
Robert J. Wise 1996 <F1> 197,082 68
Vice Chairman
of the Board
J. Gerald Bazewicz 1987 1973 10,848 49
President
John L. Coates 1995 <F1> 7,029 61
Secretary
David R. Saracino 1983 1972 3,192 <F2> 53
Treasurer
<FN>
<F1>
Messrs. Bull, Wise, and Coates are not employees of the Corporation.
<F2>
Includes 2,394 shares of Common Stock held individually by Mr. Saracino and
798 shares of Common Stock held jointly with his spouse.
</FN>
</TABLE>
Page 12 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 1997
<CAPTION>
Bank Number of Age as of
Employee Shares Bene- March 10,
Name Since ficially Owned 1998
<S> <C> <C> <C>
Robert E. Bull <F1> 206,433 75
Robert J. Wise <F1> 197,082 68
J. Gerald Bazewicz 1973 10,848 49
John L. Coates <F1> 7,029 61
David R. Saracino 1972 3,192 53
Leslie W. Bodle 1985 3,495 <F2> 50
Sally A. Rishkofski 1964 435 58
<FN>
<F1>
Messrs. Bull, Wise, and Coates are not employees of the Bank.
<2>
Includes 1,242 shares of Common Stock held individually by Mr. Bodle, 1,113
shares of Common Stock held jointly with his spouse, and 1,140 shares of
Common Stock held jointly with his daughter.
</FN>
</TABLE>
PROPOSAL TO APPROVE AND ADOPT
AN AMENDMENT TO
ARTICLE 5 OF THE ARTICLES OF INCORPORATION
OF THE CORPORATION, AS AMENDED
TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF THE CORPORATION
The Articles of Incorporation of the Corporation, as amended,
currently authorize three million (3,000,000) shares of Common Stock,
par value $2.00 per share. As of March 10, 1998, there were 2,933,727
shares of Common Stock issued and outstanding. The Corporation thus
has only a limited number of authorized but unissued shares of Common
Stock available for issuance from time to time as may be necessary in
connection with future
financings
, investment opportunities,
acquisitions of other companies, the declaration of stock dividends,
stock splits or other distributions, or for other corporate purposes.
Accordingly, on January 27, 1998, the Board of Directors of the
Corporation approved and adopted resolutions to amend Article 5 of the
Corporation's amended Articles of Incorporation to increase the number
of authorized shares of Common Stock from 3,000,000 shares to
10,000,000 shares. The increase in the number of authorized shares of
Common Stock requires that the shareholders approve and adopt the
proposed
Proxy Statement Page 13
<PAGE>
amendment to the Corporation s amended Articles of Incorporation. A
true and correct copy of the proposed amendment to Article 5 of the
Corporation's amended Articles of Incorporation and the resolutions
approved and adopted by the Board of Directors and as proposed to the
shareholders are set forth below:
RESOLUTION OF BOARD OF DIRECTORS
FIRST KEYSTONE CORPORATION
WHEREAS, the Board of Directors desires and finds that it is in
the best interests of the Corporation and its shareholders to increase
the number of authorized shares of the Corporation's Common Stock, par
value $2.00 per share, from 3,000,000 shares to 10,000,000, in order
to provide the Corporation with as much flexibility as possible to
issue additional shares of Common Stock for proper corporate purposes,
including financing, acquisitions, stock splits, stock dividends,
employee incentive plans, and other similar purposes; and
NOW, THEREFORE, BE IT RESOLVED, that in accordance with Sections
1911, 1912, 1914, 1915 and 1916 of the Business Corporation Law of
1988, as amended, the Board of Directors hereby approves and adopts
the following proposed amendment to the Corporation's Articles of
Incorporation, as amended, and hereby directs that the following
proposed amendment to the Articles of Incorporation, as amended, of
this Corporation be submitted to the shareholders of the Corporation
for their approval and adoption at the 1998 Annual Meeting of
Shareholders of the Corporation to be held on April 21, 1998, at 9:00
a.m., prevailing time, at 111 West Front Street, Berwick, Pennsylvania
18603 to wit:
Article 5 of the Articles of Incorporation, as amended, of First
Keystone Corporation is amended and restated to read in full and in
its entirety as follows:
The aggregate number of shares which the Corporation shall have
authority to issue is 10,000,000 shares of Common Stock of the par
value $2.00 per share (the "Common Stock").
BE IT FURTHER RESOLVED, that the Board of Directors establishes
and fixes Tuesday, March 10, 1998, at the close of business as the
record date and time to determine those shareholders entitled to
notice of and to vote at the 1998 Annual Meeting of Shareholders to be
held on Tuesday, April 21, 1998;
RESOLVED, that the Board of Directors directs and orders that the
President and Secretary, or a Vice President and an Assistant
Secretary, of the Corporation shall cause to be prepared proxy
solicitation materials for the 1998 Annual Meeting of Shareholders to
solicit proxies for approval and adoption of the aforesaid amendment
by the shareholders of the Corporation and further directs and orders
that said proxy solicitation materials be mailed to the shareholders
of record, on March 30, 1998, or as soon as practicable thereafter;
and
BE IT FURTHER RESOLVED, that after approval and adoption of the
aforesaid amendment of the Articles of Incorporation of the
Corporation by the shareholders of the Corporation at the 1998 Annual
Meeting of Shareholders, the President and Secretary, or a Vice
President and an Assistant Secretary, of the Corporation are hereby
authorized, empowered and directed to execute and file Articles of
Amendment containing and amendment with the Commonwealth of
Pennsylvania, Department of State, Corporation Bureau, and upon such
filing said amendment shall be effective.
Except as described in this section of the Proxy Statement, the
Corporation has no present plans, understandings or arrangements for
issuing the additional shares of Common Stock to be authorized by the
proposed amendment. The Board of Directors believes that it is
advisable to have authorization for such additional shares of Common
Stock in order to enable the Corporation, as the need may arise, to
take prompt advantage of market conditions and the availability of
favorable opportunities for the acquisition of other companies without
the delay and expense incident to the holding of a special meeting of
stockholders of the Corporation. The future issuance by the
Corporation of shares of Common Stock may dilute the present equity
ownership position of current holders of the Common Stock. The
proposed amendment is not intended to have
Page 14 Proxy Statement
<PAGE>
an anti-takeover effect. The issuance, however, of any of the shares
proposed to be authorized as well as currently authorized but unissued
shares, may potentially have an anti-takeover effect by making it more
difficult to obtain shareholder approval of actions such as certain
business combinations or removal of management.
The proposed amendment, if adopted by the shareholders, would
increase the number of authorized but unissued shares of Common Stock
of the Corporation from 3,000,000 shares, par value $2.00 per share,
to 10,000,000 shares, par value $2.00 per share. The unissued shares
of Common Stock will he available for issuance at the discretion of
the Board of Directors from time to time for any proper corporate
purposes generally without further action of the shareholders upon the
affirmative vote of a majority of the members of the Board of
Directors. If the proposed amendment is adopted by the shareholders,
the Board of Directors is not likely to solicit shareholder approval
to issue the additional authorized shares, except to the extent that
such approval may be required by law, regulation or any agreement
governing the trading of the Corporation's stock.
As a result, the Board of Directors proposes that Article 5 of
the Corporation's amended Articles of Incorporation be amended and
restated to read in full and in its entirety as set forth above and
that the shareholders approve and adopt the following resolution:
RESOLVED, that the proposed amendment to Article S of the amended
Articles of Incorporation of the Corporation, as set forth in its
entirely above, be and hereby is, approved, adopted, ratified and
confirmed.
The affirmative vote of at least a majority of the issued and
outstanding shares of Common Stock of the Corporation entitled to vote
at the Annual Meeting is required to approve and adopt this amendment
to Article 5 of the Articles of Incorporation of the Corporation, as
amended.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSAL
TO AMEND THE CORPORATION'S ARTICLES OF INCORPORATION TO INCREASE THE
NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM THREE MILLION SHARES,
PAR VALUE $2.00 PER SHARE, TO TEN MILLION SHARES, PAR VALUE $2.00 PER
SHARE.
PROPOSAL TO APPROVE AND ADOPT
THE FIRST KEYSTONE CORPORATION
1998 STOCK INCENTIVE PLAN
On February 10, 1998, the Board of Directors adopted the First
Keystone 1998 Stock Incentive Plan (the "Plan") and reserved 100,000
shares of Common Stock for issuance under the Plan. The purpose of the
Plan is to advance the development, growth and financial condition of
the Corporation and its subsidiaries by providing incentives through
participation in the appreciation of capital stock of the Corporation
in order to secure, retain and motivate personnel responsible for the
operation and management of the Corporation and its subsidiaries. The
Plan is designed to attract and retain individuals of outstanding
ability as employees of the Corporation and its subsidiaries, to
encourage employees to acquire a proprietary interest in the
Corporation, to continue their employment with the Corporation and its
subsidiaries and to render superior performance during such
employment.
The Plan became effective as of the date it was adopted by the
Corporation's Board of Directors, subject to the approval of the
shareholders of the Corporation. Any and all options and rights
awarded under the Plan before its approval by the shareholders are
conditioned upon and may not be exercised before receipt of
shareholder approval. If the shareholders approve the Plan, the Plan
will continue in effect until all awards under the Plan either have
lapsed, been exercised, satisfied or canceled according to the terms
under the Plan. The shares of stock that may be issued under the Plan
shall not exceed, in the aggregate, 100,000 shares of Common Stock as
may be adjusted from time to time due to stock splits, payments of
stock dividends, or other changes in the structure of the
Corporation's capital.
Proxy Statement Page 15
<PAGE>
The Plan will be administered by a committee consisting of two or
more directors (the Committee"). Persons eligible to receive awards
under the Plan are those key officers and other management employees
of the Corporation and its subsidiaries as determined by the
Committee.
Awards
Awards made under the Plan may be in the form of: (i) options to
purchase stock intended to qualify as incentive stock options under
Sections 421 and 422 of the Code (referred to herein as "Qualified
Options") and (ii) options which do not so qualify (referred to herein
as "Non-Qualified Options").
Generally, awards may be exercised in whole or in part. Funds
received by the Corporation from the exercise of any award shall be
used for its general corporate purposes. The Committee may permit an
acceleration of previously established exercise terms of any award as,
when, under such facts and circumstances, and subject to such other or
further requirements and conditions as the Committee may deem
necessary or appropriate, including, but not limited to upon a change
of control of the Corporation (as defined in the Plan).
Qualified Options
Qualified Options may not be awarded under the Plan more than ten
(10) years after the earlier of the date the Plan is adopted by the
Board of Directors or the date on which the Plan is approved by the
shareholders are only exercisable upon the expiration of six months
after the date of the award and may not continue beyond the expiration
often (10) years beyond the date of the award. The purchase price of
the stock subject to any Qualified Option, as determined by the
Committee, may not be less than the stock's fair market value (as
defined in the Plan) at the time the option is awarded or less than
its par value. If the recipient of a Qualified Option ceases to be
employed by the Corporation, or subsidiary thereof, the Committee may
permit the recipient to exercise such option during its remaining term
for a period of not more than three (3) months. This period may be
extended to a 12 month period if such employment cessation was due to
the recipient's disability, as defined in the Plan. If the recipient
ceases to be employed by the Corporation, or subsidiary thereof, due
to his or her death, the committee may permit the recipient's
qualified personal representatives, or any persons who acquire the
options pursuant to his or her will or the laws of descent and
distribution, to exercise such option during its remaining term for a
period not to exceed 12 months after the recipient's death to the
extent that the option was then and remains exercisable. Qualified
Options are not transferrable except by will or by the laws of descent
and distribution.
Non-Qualified Options
Similar to Qualified Options, Non-Qualified Options are only
exercisable upon the expiration of six (6) months after the date of
the award and shall not continue beyond the expiration of ten (10)
years beyond the date of the award. If a recipient of a Non-Qualified
Option ceases to be eligible under the Plan before the option lapses
or before it is fully exercised, the Committee may permit the
recipient to exercise the option during its remaining term, to the
extent that the option was then and remains exercisable, for such time
period and under such terms and conditions as may be prescribed by the
Committee. The purchase price of a share of stock pursuant to a Non-
Qualified Option, as determined by the Committee, shall not be less
than the stock's par value (as defined in the Plan) at the time such
option is awarded. Except as otherwise provided by the Committee, Non-
Qualified Stock Options are not transferable except as designated by
the participant by will and the laws of descent and distribution.
Federal Tax Consequences
An employee who receives Qualified Options will not recognize
taxable income on the grant or the exercise of the option. If the
stock acquired by the exercise of a Qualified Option is held until the
later of: (i) two (2) years from the date of the grant; and (ii) one
(1) year from the date of exercise, any gain (or loss) recognized on
the sale or exchange of the stock will he treated as long-term capital
gain (or loss), and the
Page 16 Proxy Statement
<PAGE>
Corporation will not be entitled to any income tax deduction. If stock
acquired on exercise of a Qualified Option is sold or exchanged before
the expiration of the required holding period, the employee will
recognize ordinary income in the year of disposition in an amount
equal to the difference between the option price and the lesser of the
fair market value of the stock on the date of exercise, or the setting
price. In the event of a disqualifying disposition, the Corporation
will be entitled to an income tax deduction in the year of such
disposition in an amount equal to the amount of ordinary income
recognized by the employee.
An employee who receives a Non-Qualified Option will not
recognize taxable income on the grant of the option, however, upon
exercise, he or she will recognize ordinary income in an amount equal
to the excess of the fair market value of the stock on the date that
the option is exercised over the purchase price paid for the stock.
The Corporation will be entitled to an income tax deduction in the
year of exercise in an amount equal the amount of income recognized by
the employee.
The foregoing tax discussion is intended as a summary only, and
the federal income tax consequences to any person who participates in
the Plan and to the Corporation may vary from those described above
depending upon individual actions and circumstances.
As of February 10, 1998, four (4) executive officers were
eligible to participate in the Plan. The size and type of awards are
generally to be determined by the Committee in its discretion. Such
future grants are not presently determinable, and it is not possible
to predict the benefits or amounts that will be received by or
allocated to particular individuals or groups for 1998.
The following table sets forth the benefits that would have been
granted under the Plan had it been in effect during 1997. The table
assumes that the grants would have been made on December 31, 1997. On
that date, the approximate fair market value of the Corporation's
Common Stock was $55,985,290. Currently, the Corporation has
definitive plans to issue any benefits under the Plan.
<TABLE>
<CAPTION>
New Plan Benefits
Name and Position Dollar Value ($) Number of Units
<S> <C> <C>
J. Gerald Bazewicz, CEO 114,500 2,000
Executive Group 171,750 3,000
Non-Executive Director
Group 0 0
Non-Executive Officer 114,500 2,000
Employee Group 11,450 200
</TABLE>
The foregoing discussion of the Plan consists of only a summary
and is qualified in its entirety by reference to the full text of the
Plan attached as Exhibit "A" to this Proxy Statement. Exhibit "A" is
deemed to be an integral part of this Proxy Statement and incorporated
in its entirety by reference.
The Board of Directors recommends a vote FOR the following
resolution which will be presented at the Annual Meeting:
RESOLVED, that the First Keystone Corporation 1998 Stock
Incentive Plan, the text of which is set forth in full and in its
entirety in the Proxy Statement for the 1998 Annual Meeting of
Shareholders as Exhibit "A" is hereby approved, adopted, ratified and
confirmed by the shareholders of the Corporation.
The approval and adoption of the Plan requires the affirmative
vote of a majority of all votes cast by all shareholders entitled to
vote thereon. Proxies solicited by the Board of Directors will be
voted for the foregoing resolution unless shareholders specify to the
contrary on their proxies.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RESOLUTION
APPROVING AND ADOPTING THE FIRST KEYSTONE CORPORATION 1998 STOCK
INCENTIVE PLAN.
Proxy Statement Page 17
<PAGE>
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 1998 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 1997 fiscal year, assisted the Corporation and the Bank with
preparation of their federal and state tax returns, and provided
assistance in connection with regulatory matters, charging the Bank
for such services at its customary hourly billing rates. These non-
audit services were approved by the Corporation's and the Bank's Board
of Directors after due consideration of the effect of the performance
thereof on the independence of the auditors and after the conclusion
by the Corporation's and the Bank's Board of Directors that there was
no effect on the independence of the auditors.
In the event that the shareholders do not ratify the selection of
J. H. Williams & Co. as the Corporation's independent auditors for the
1998 fiscal year, another accounting firm may be chosen to provide
independent audit services for the 1998 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, 1998.
ANNUAL REPORT
A copy of the Corporation's Annual Report for its fiscal year
ended December 31, 1997 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 1999 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 23, 1998.
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.
Page 18 Proxy Statement
<PAGE>
ADDITIONAL INFORMATION
UPON WRITTEN REQUEST OF ANY SHAREHOLDER, A COPY OF THE
CORPORATION'S REPORT ON FORM 10-K FOR ITS FISCAL YEAR ENDED DECEMBER
31, 1997, 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.
Proxy Statement Page 19
<PAGE>
EXHIBIT A
FIRST KEYSTONE CORPORATION
1998 STOCK INCENTIVE PLAN
1. Purpose. The purpose of this Stock Incentive Plan (the "Plan")
is to advance the development, growth and financial condition of
First Keystone Corporation (the "Corporation") and each
subsidiary thereof, as defined in Section 424 of the Internal
Revenue Code of 1986, as amended (the "Code"), by providing
incentives through participation in the appreciation of the
common stock of the Corporation to secure, retain and motivate
personnel who may be responsible for the operation and for
management of the affairs of the Corporation and any subsidiary
now or hereafter existing ("Subsidiary").
2. Term. The Plan shall become effective as of the date it is
adopted by the Corporation's Board of Directors (the "Board"),
and shall be presented for approval at the next meeting of the
Corporation's shareholders. Any and all options and rights
awarded under the Plan (the "Awards") before it is approved by
the Corporation's shareholders shall be conditioned upon and may
not be exercised before receipt of shareholder approval, and
shall lapse upon failure to receive such approval. If the Plan
is approved, it shall continue in effect until all Awards either
have lapsed or been exercised, satisfied or canceled according
to their terms under the Plan.
3. Stock. Shares of the Corporation s common stock, par value $2.00
per share (the "Stock"), that may be issued under the Plan shall
not exceed, in the aggregate, 100,000 shares, as may be adjusted
pursuant to paragraph 16 hereof. Shares may be either
authorized and unissued shares, or authorized shares, issued by
and subsequently reacquired by the Corporation as treasury
stock. Under no circumstances shall any fractional shares be
awarded under the Plan. Except as may be otherwise provided in
the Plan, any Stock subject to an Award that, for any reason,
lapses or terminates prior to exercise, shall again become
available for grant under the Plan. While the Plan is in
effect, the Corporation shall reserve and keep available the
number of shares of Stock needed to satisfy the requirements of
the Plan. The Corporation shall apply for any requisite
governmental authority to issue shares under the Plan. The
Corporation's failure to obtain any such governmental authority,
deemed necessary by the Corporation's legal counsel for the
lawful issuance and sale of Stock under the Plan, shall relieve
the Corporation of any duty, or liability for the failure to
issue or sell the Stock.
4. Administration. The ability to control and manage the operation
and administration of the Plan shall be vested in the Board or
in a committee of two or more members of the Board, selected by
the Board (the Committee ). The Committee shall have the
authority and discretion to interpret the Plan, to establish,
amend and rescind any rules and regulations relating to the
Plan, to determine the terms and provisions of any agreements
made pursuant to the Plan, and to make any and all
determinations that may be necessary or advisable for the
administration of the Plan. Any interpretation of the Plan by
the Committee and any decision made by the Committee under the
Plan is final and binding.
The Committee shall be responsible and shall have full,
absolute and final power of authority to determine what, to
whom, when and under what facts and circumstances Awards shall
be made, and the form, number, terms, conditions and duration
thereof, including but not limited to when exercisable, the
number of shares of Stock subject thereto, and the stock option
exercise prices. The Committee shall make all other
determinations and decisions, take all actions and do all things
necessary or appropriate in and for the administration of the
Plan. No member of the Committee or of the Board shall be
liable for any decision, determination or action made or taken
in good faith by such person under or with respect to the Plan
or its administration.
Page 20 Proxy Statement
<PAGE>
5. Awards. Awards may be made under the Plan in the form of: (a)
"Qualified Options" to purchase Stock, which are intended to
qualify for certain tax treatment as incentive stock options
under Sections 421 and 422 of the Code, or (b) "Non-Qualified
Options" to purchase Stock, which are not intended to qualify
under Sections 421 through 424 of the Code. More than one Award
may be granted to an eligible person, and the grant of any Award
shall not prohibit the grant another Award, either to the same
person or otherwise, or impose any obligation to exercise on the
participant. All Awards and the terms and conditions thereof
shall be set forth in written agreements, in such form and
content as approved by the Committee from time to time, and
shall be subject to the provisions of the Plan whether or not
contained in such agreements. Multiple Awards for a particular
person may be set forth in a single written agreement or in
multiple agreements, as determined by the Committee, but in all
cases each agreement for one or more Awards shall identify each
of the Awards thereby represented as a Qualified Option or Non-
Qualified Option, as the case may be.
6. Eligibility. Persons eligible to receive Awards shall be those
key officers and other employees of the Corporation and each
Subsidiary, as determined by the Committee. A person's
eligibility to receive an Award shall not confer upon him or her
any right to receive an Award. Except as otherwise provided, a
person's eligibility to receive, or actual receipt of an Award
under the Plan shall not limit or affect his or her benefits
under or eligibility to participate in any other incentive or
benefit plan or program of the Corporation or of its affiliates.
7. Qualified Options. In addition to other applicable provisions
of the Plan, all Qualified Options and Awards thereof shall be
under and subject to the following terms and conditions:
(a) No Qualified Option shall be awarded more than ten (10)
years after the date the Plan is adopted by the Board or
the date the Plan is approved by the Corporation's
shareholders, whichever is earlier;
(b) The time period during which any Qualified Option is
exercisable, as determined by the Committee, shall not
commence before the expiration of six (6) months or
continue beyond the expiration of ten (10) years after the
date the Qualified Option is awarded;
(c) If a participant, who was awarded a Qualified Option,
ceases to be employed by the Corporation or any Subsidiary
for any reason other than his or her death, the Committee
may permit the participant thereafter to exercise the
option during its remaining term for a period of not more
than three (3) months after cessation of employment to the
extent that the Qualified Option was then and remains
exercisable, unless such employment cessation was due to
the participant's disability, as defined in Section
22(e)(3) of the Code, in which case the three (3) month
period shall be twelve (12) months; if the participant dies
while employed by the Corporation or a Subsidiary, the
Committee may permit the participant's qualified personal
representatives, or any persons who acquire the Qualified
Option pursuant to his or her Will or laws of descent and
distribution, to exercise the Qualified Option during its
remaining term for a period of not more than twelve (12)
months after the participant's death to the extent that the
Qualified Option was then and remains exercisable; the
Committee may impose terms and conditions upon and for the
exercise of a Qualified Option after the cessation of the
participant's employment or his or her death;
(d) The purchase price of Stock subject to any Qualified Option
shall not be less than the Stock's fair market value at the
time the Qualified Option is awarded or less than the
Stock's par value; and
(e) Qualified Options may not be sold, transferred or assigned
by the participant except by will or the laws of descent
and distribution.
Proxy Statement Page 21
<PAGE>
8. Non-Qualified Options. In addition to other applicable
provisions of the Plan, all Non-Qualified Options and Awards
thereof shall be under and subject to the following terms and
conditions:
(a) The time period during which any Non-Qualified Option is
exercisable shall not commence before the expiration of six
(6) months or continue beyond the expiration of ten (10)
years after the date the Non-Qualified Option is awarded;
(b) If a participant, who was awarded a Non-Qualified Option,
ceases to be eligible under the Plan, before lapse or full
exercise of the option, the Committee may permit the
participant to exercise the option during its remaining
term, to the extent that the option was then and remains
exercisable, or for such time period and under such terms
and conditions as may be prescribed by the Committee;
(c) The purchase price of a share of Stock subject to any Non-
Qualified Option shall not be less than the Stock's par
value; and
(d) Except as otherwise provided by the Committee, Non-
Qualified Stock Options granted under the Plan are not
transferable except as designated by the participant by
Will and the laws of descent and distribution.
9. Exercise. Except as otherwise provided in the Plan, Awards may
be exercised in whole or in part by giving written notice
thereof to the Secretary of the Corporation, or his or her
designee, identifying the Award to be exercised, the number of
shares of Stock with respect thereto, and other information
pertinent to exercise of the Award. The purchase price of the
shares of Stock with respect to which an Award is exercised
shall be paid with the written notice of exercise, either in
cash or in Stock at its then current fair market value, or it
any combination thereof, as the Committee shall determine.
Funds received by the Corporation from the exercise of any Award
shall be used for its general corporate purposes.
The Committee may permit an acceleration of previously
established exercise terms of any Awards as, when, under such
facts and circumstances, and subject to such other or further
requirements and conditions as the Committee may deem necessary
or appropriate. In addition:
(a) if the Corporation or its shareholders execute an agreement
to dispose of all or substantially all of the Corporation's
assets or stock by means of sale, merger, consolidation,
reorganization, liquidation or otherwise, as a result of
which the Corporation's shareholders, immediately before
the transaction, will not own at least fifty percent (50%)
of the total combined voting power of all classes of voting
stock of the surviving entity (be it the Corporation or
otherwise) immediately after the consummation of the
transaction, then any and all outstanding Awards shall
immediately become and remain exercisable or, if the
transaction is not consummated, until the agreement
relating to the transaction expires or is terminated, in
which case, all Awards shall be treated as if the agreement
was never executed;
(b) if there is an actual, attempted or threatened change in
the ownership of at least twenty-five percent (25%) of all
classes of voting stock of the Corporation through the
acquisition of, or an offer to acquire such percentage of
the Corporation's voting stock by any person or entity, or
persons or entities acting in concert or as a group, and
the acquisition or offer has not been duly approved by the
Board; or
Page 22 Proxy Statement
<PAGE>
(c) if during any period of two (2) consecutive years, the
individuals who at the beginning of such period constituted
the Board cease, for any reason, to constitute at least a
majority of the Board, (unless the election of each
director of the Board, who was not a director of the Board
at the beginning of such period, was approved by a vote of
at least two-thirds of the directors then still in office
who were directors at the beginning of such period)
thereupon any and all Awards immediately shall become and
remain exercisable.
10. Withholding. When a participant exercises a stock option
awarded under the Plan, the Corporation, in its discretion and
as required by law, may require the participant to remit to the
Corporation an amount sufficient to satisfy fully any federal,
state and other jurisdictions' income and other tax withholding
requirements prior to the delivery of any certificates for
shares of Stock.
11. Value. Where used in the Plan, the "fair market value" of Stock
or any options or rights with respect thereto, including Awards,
shall mean and be determined by (a) the average of the highest
and lowest reported sales prices thereof on the principal
established domestic securities exchange on which listed, and if
not listed, then (b) the average of the dealer "bid" and "ask"
prices thereof on the New York over-the-counter market, as
reported by the National Association of Securities Dealers,
Inc., in either case as of the specified or otherwise required
or relevant time, or if not traded as of such specified,
required or relevant time, then based upon such reported sales
or "bid" and "ask" prices before and/or after such time in
accordance with pertinent provisions of and principles under the
Code and the regulations promulgated thereunder.
12. Amendment. To the extent permitted by applicable law, the Board
may amend, suspend, or terminate the Plan at any time. The
amendment or termination of this Plan shall not, without the
consent of the participants, alter or impair any rights or
obligations under any Award previously granted hereunder.
From time to time, the Committee may rescind, revise and
add to any of the terms, conditions and provisions of the Plan
or of an Award as necessary or appropriate to have the Plan and
any Awards be or remain qualified and in compliance with all
applicable laws, rules and regulations, and the Committee may
delete, omit or waive any of the terms conditions or provisions
that are no longer required by reason of changes of applicable
laws, rules or regulations, but not limited to, the provisions
of Sections 421 and 422 of the Code, Section 16 of the
Securities Exchange Act of 1934, as amended, (the 1934 Act ) and
Rule 16b-3 promulgated by the Securities and Exchange
Commission. Without limiting the generality of the preceding
sentence, each Qualified Option shall be subject to such other
and additional terms, conditions and provisions as the Committee
may deem necessary or appropriate in order to qualify as a
Qualified Option under Section 422 of the Code, including, but
not limited to, the following provisions:
(a) At the time a Qualified Option is awarded, the aggregate
fair market value of the Stock subject thereto and of any
Stock or other capital stock with respect to which
incentive stock options qualifying under Sections 421 and
422 of the Code are exercisable for the first time by the
participant during any calendar year under the Plan and any
other plans of the Corporation or its affiliates, shall not
exceed $100,000.00; and
(b) No Qualified Option, shall be awarded to any person if, at
the time of the Award, the person owns shares of the stock
of the Corporation possessing more than ten percent (10%)
of the total combined voting power of all classes of stock
of the Corporation or its affiliates, unless, at the time
the Qualified Option is awarded, the exercise price of the
Qualified Option is at least one hundred and ten percent
(110%) of the fair market value of the Stock on the date of
grant and the option, by its terms, is not exercisable
after the expiration of five (5) years from the date it is
awarded.
Proxy Statement Page 23
<PAGE>
13. Continued Employment. Nothing in the Plan or any Award shall
confer upon any participant or other persons any right to
continue in the employ of, or maintain any particular
relationship with, the Corporation or its affiliates, or limit
or affect any rights, powers or privileges that the Corporation
or its affiliates may have to supervise, discipline and
terminate the participant. However, the Committee may require,
as a condition of making and/or exercising any Award, that a
participant agree to, and in fact provide services, either as an
employee or in another capacity, to or for the Corporation or
any Subsidiary for such time period as the Committee may
prescribe. The immediately preceding sentence shall not apply
to any Qualified Option, to the extent such application would
result in disqualification of the option under Sections 421 and
422 of the Code.
14. General Restrictions. If the Committee or Board determines that
it is necessary or desirable to: (a) list, register or qualify
the Stock subject to the Award, or the Award itself, upon any
securities exchange or under any federal or state securities or
other laws, (b) obtain the approval of any governmental
authority, or (c) enter into an agreement with the participant
with respect to disposition of any Stock (including, without
limitation, an agreement that, at the time of the participant's
exercise of the Award, any Stock thereby acquired is and will be
acquired solely for investment purposes and without any
intention to sell or distribute the Stock), then such Award
shall not be consummated in whole or in part unless the listing,
registration, qualification, approval or agreement, as the case
may be, shall have been appropriately effected or obtained to
the satisfaction of the Committee and legal counsel for the
Corporation.
15. Rights. Except as otherwise provided in the Plan, participants
shall have no rights as a holder of the Stock unless and until
one or more certificates for the shares of Stock are issued and
delivered to the participant.
16. Adjustments. In the event that the shares of common stock of the
Corporation, as presently constituted, shall be changed into or
exchanged for a different number or kind of shares of common
stock or other securities of the Corporation or of other
securities of the Corporation or of another corporation (whether
by reason of merger, consolidation, recapitalization,
reclassification, split-up, combination of shares or otherwise)
or if the number of such shares of common stock shall be
increased through the payment of a stock dividend, stock split
or similar transaction, then, there shall be substituted for or
added to each share of common stock of the Corporation that was
theretofore appropriated, or which thereafter may become subject
to an option under the Plan, the number and kind of shares of
common stock or other securities into which each outstanding
share of the common stock of the Corporation shall be so changed
or for which each such share shall be exchanged or to which each
such shares shall be entitled, as the case may be. Each
outstanding Award shall be appropriately amended as to price and
other terms, as may be necessary to reflect the foregoing
events.
If there shall be any other change in the number or kind of
the outstanding shares of the common stock of the Corporation,
or of any common stock or other securities in which such common
stock shall have been changed, or for which it shall have been
exchanged, and if a majority of the disinterested members of the
Committee shall, in its sole discretion, determine that such
change equitably requires an adjustment in any Award that was
theretofore granted or that may thereafter be granted under the
Plan, then such adjustment shall be made in accordance with such
determination.
The grant of an Award under the Plan shall not affect in
any way the right or power of the Corporation to make
adjustments, reclassifications, reorganizations or changes of
its capital or business structure, to merge, to consolidate, to
dissolve, to liquidate or to sell or transfer all or any part of
its business or assets.
Fractional shares resulting from any adjustment in Awards
pursuant to this paragraph 16 may be settled as a majority of
the disinterested members of the Board of Directors or of the
Committee, as the case may be, shall determine.
Page 24 Proxy Statement
<PAGE>
To the extent that the foregoing adjustments relate to
common stock or securities of the Corporation, such adjustments
shall be made by a majority of the members of the Board, whose
determination in that respect shall be final, binding and
conclusive. Notice of any adjustment shall be given by the
Corporation to each holder of an Award that is so adjusted.
17. Forfeiture. Notwithstanding anything to the contrary in this
Plan, if the Committee finds, after full consideration of the
facts presented on behalf of the Corporation and the involved
participant, that he or she has been engaged in fraud,
embezzlement, theft, commission of a felony, or dishonesty in
the course of his or her employment by the Corporation or by any
Subsidiary and such action has damaged the Corporation or the
Subsidiary, as the case may be, or that the participant has
disclosed trade secrets of the Corporation or its affiliates,
the participant shall forfeit all rights under and to all
unexercised Awards, and under and to all exercised Awards under
which the Corporation has not yet delivered payment or
certificates for shares of Stock (as the case may be), all of
which Awards and rights shall be automatically canceled. The
decision of the Committee as to the cause of the participant's
discharge from employment with the Corporation or any Subsidiary
and the damage thereby suffered shall be final for purposes of
the Plan, but shall not affect the finality of the participant's
discharge by the Corporation or Subsidiary for any other
purposes. The preceding provisions of this paragraph shall not
apply to any Qualified Option to the extent such application
would result in disqualification of the option as an incentive
stock option under Sections 421 and 422 of the Code.
18. Indemnification. In and with respect to the administration of
the Plan, the Corporation shall indemnify each member of the
Committee and/or of the Board, each of whom shall be entitled,
without further action on his or her part, to indemnification
from the Corporation for all damages, losses, judgments,
settlement amounts, punitive damages, excise taxes, fines,
penalties, costs and expenses (including without limitation
attorneys' fees and disbursements) incurred by the member in
connection with any threatened, pending or completed action,
suit or other proceedings of any nature, whether civil,
administrative, investigative or criminal, whether formal or
informal, and whether by or in the right or name of the
Corporation, any class of its security holders, or otherwise, in
which the member may be or may have been involved, as a party or
otherwise, by reason of his or her being or having been a member
of the Committee and/or of the Board, whether or not he or she
continues to be a member of the Committee or of the Board. The
provisions, protection and benefits of this paragraph shall
apply and exist to the fullest extent permitted by applicable
law to and for the benefit of all present and future members of
the Committee and/or of the Board and their respective heirs,
personal and legal representatives, successors and assigns, in
addition to all other rights that they may have as a matter of
law, by contract, or otherwise, except (a) to the extent there
is entitlement to insurance proceeds under insurance coverages
provided by the Corporation on account of the same matter or
proceeding for which indemnification hereunder is claimed, or
(b) to the extent there is entitlement to indemnification from
the Corporation, other than under this paragraph, on account of
the same matter or proceeding for which indemnification
hereunder is claimed.
19. Miscellaneous. (a) Any reference contained in this Plan to
particular section or provision of law, rule or regulation,
including but not limited to the Code and the 1934 Act, shall
include any subsequently enacted or promulgated section or
provision of law, rule or regulation, as the case may be. With
respect to persons subject to Section 16 of the 1934 Act,
transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3 or any successor rule that
may be promulgated by the Securities and Exchange Commission,
and to the extent any provision of this Plan or action by the
Committee fails to so comply, it shall be deemed null and void,
to the extent permitted by applicable law and deemed advisable
by the Committee.
Proxy Statement Page 25
<PAGE>
(b) Where used in this Plan: the plural shall include the
singular, and unless the context otherwise clearly
requires, the singular shall include the plural; and the
term "affiliates" shall mean each and every Subsidiary and
any parent of the Corporation.
(c) The captions of the numbered paragraphs contained in this
Plan are for convenience only, and shall not limit or
affect the meaning, interpretation or construction of any
of the provisions of the Plan.
Page 26 Proxy Statement
<PAGE>
FIRST KEYSTONE CORPORATION
PROXY
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 21, 1998
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 21, 1998, at 9:00 a.m.,
prevailing time, and at any adjournment or postponement thereof as
follows:
1. ELECTION OF CLASS B DIRECTORS TO SERVE FOR A THREE-YEAR TERM
John Arndt J. Gerald Bazewicz Robert E. Bull
[ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY
above (except as marked to vote for all
to the contrary below) nominees listed above
(INSTRUCTION: TO WITHHOLD AUTHORITY FROM THE PROXYHOLDERS TO
VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE THAT NOMINEE'S NAME FOR
WHOM YOU DO NOT WISH THE PROXYHOLDERS TO VOTE FOR ON THE SPACE
PROVIDED BELOW.)
__________________________________________________________________
2. PROPOSAL #1: PROPOSAL TO AMEND ARTICLE 5 OF THE ARTICLES OF
INCORPORATION TO INCREASE THE NUMBER AUTHORIZED SHARES OF COMMON
STOCK FROM THREE MILLION TO TEN MILLION SHARES.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR this proposal.
3. PROPOSAL #2: PROPOSAL TO APPROVE THE FIRST KEYSTONE CORPORATION
1998 STOCK INCENTIVE PLAN.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR this proposal.
4. PROPOSAL #3: PROPOSAL TO RATIFY THE SELECTION OF J. H. WILLIAMS
& CO. AS THE INDEPENDENT AUDITORS FOR THE CORPORATION FOR THE
YEAR ENDING DECEMBER 31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR this proposal.
5. 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.
<PAGE>
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 1, PROPOSAL 2, AND PROPOSAL 3.
__________________________, 1998
Number of Shares Held of ________________________________
Record on March 10, 1998:
________________________________
________________________________
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.
