-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A6BL8sJMCUlrJZP81u7F3mfsett2zaZU6cDowhMFR2zYdmcP8yet17qihiQ/xZAE vJaCm5UjtphlIcLuABjh7w== 0000737875-00-000006.txt : 20000411 0000737875-00-000006.hdr.sgml : 20000411 ACCESSION NUMBER: 0000737875-00-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST KEYSTONE CORP CENTRAL INDEX KEY: 0000737875 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232249083 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21344 FILM NUMBER: 582130 BUSINESS ADDRESS: STREET 1: 111 W FRONT ST CITY: BERWICK STATE: PA ZIP: 18603 BUSINESS PHONE: 717-752-36 MAIL ADDRESS: STREET 1: 111 WEST FRONT STREET CITY: BERWICK 10-K 1 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, 1999 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 (Exact name of registrant as specified in its Charter) PENNSYLVANIA 23-2249083 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification 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: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $2.00 per share 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 17, 2000, was approximately $44,636,280. The number of shares outstanding of the issuer's Common Stock, as of March 17, 2000, was 2,833,727 shares of Common Stock, par value $2.00 per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1999 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, 1999, are incorporated by reference in Part II of this Annual Report. FIRST KEYSTONE CORPORATION FORM 10-K Table of Contents Part I Page Item 1. Business 1 Item 2. Properties 8 Item 3. Legal Proceedings 10 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 10 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 7A. Quantitative and Qualitative Disclosure about Market Risk 12 Item 8. Financial Statements and Supplementary Data 12 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 12 Item 11. Executive Compensation 12 Item 12. Security Ownership of Certain Beneficial Owners and Management 13 Item 13. Certain Relationships and Related Transactions 13 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 13 Signatures 15 Exhibit 11 18 Exhibit 13 19 Exhibit 21 20 Exhibit 23 21 Exhibit 27 22 Exhibit 99 23 i FIRST KEYSTONE CORPORATION FORM 10-K PART I ITEM 1. BUSINESS Forward Looking Statements __________________________ The management of First Keystone Corporation (the "Corporation") has made forward-looking statements in this annual report on Form 10-K. These forward-looking statements may be subject to risks and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of the Corporation and its subsidiary, The First National Bank of Berwick (the "Bank"). When words such as "believes," "expects," "anticipates" or similar expressions occur in this annual report, management is making forward-looking statements. Shareholders should note that many factors, some of which are discussed elsewhere in this annual report, could affect the future financial results of the Corporation and its subsidiary, both individually and collectively, and could cause those results to differ materially from those expressed in the forward-looking statements contained in this annual report on Form 10-K. These factors include the following: (Bullet) operating, legal and regulatory risks; (Bullet) economic, political and competitive forces affecting our banking, securities, asset management and credit services businesses; and (Bullet) the risk that our analyses of these risks and forces could be incorrect and or that the strategies developed to address them could be unsuccessful. The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review the risk factors described in other documents that are filed periodically with the Securities and Exchange Commission. First Keystone Corporation is a Pennsylvania business corporation, and 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. 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, which has a commercial banking operation and trust department as its major lines of business. Greater than 90% of the company's revenue and profit came from the commercial banking department for the years ended December 31, 1999, 1998, and 1997. and was the only reportable segment. At December 31, 1999, the Corporation had total consolidated assets, deposits and stockholders' equity of approximately $333.5 million, $244.7 million and $29.4 million, respectively. The Bank was organized in 1864. The Bank is a national banking association that is a member of the Federal Reserve System. Its deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent of the law. The Bank, has nine branch locations 1 (five branches within Columbia County, three branches within Luzerne County, and one in Montour County, Pennsylvania), and is a full service commercial bank providing a wide range of services to individuals and small to medium sized businesses in its Northeastern and Central Pennsylvania market area. The Bank's commercial banking activities include 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. Supervision and Regulation __________________________ 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 company's whose shares are registered under Section 12 of the Securities Exchange Act of 1934, as amended. 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 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. The Bank is 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 Office of the Comptroller of the Currency (the "OCC"), the Federal Reserve Board and the FDIC. The primary supervisory authority of the Bank is the OCC, which regulates and examines the Bank. The OCC has the authority under the Financial Institutions Supervisory Act to prevent a national bank from engaging in an unsafe or unsound practice in conducting its business. Federal and state banking laws and regulations govern, among other things, the scope of a bank's business, the investments a bank may make, the reserves against deposits a bank must maintain, loans a bank makes and collateral it takes, and the activities of a bank with respect to mergers and consolidations and the establishment of branches. As a subsidiary of a bank holding company, the Bank is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries and on taking such stock or securities as collateral for loans. The Federal Reserve Act 2 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. 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. 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, 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. 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. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Corporation and its subsidiary bank. Certain changes of potential significance to the Corporation which have been enacted recently and others which are currently under consideration by Congress or various regulatory agencies are discussed below. Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") _____________________________________________________________ The Federal Deposit Insurance Corporation Improvement Act ("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: (Bullet) well capitalized (Bullet) adequately capitalized (Bullet) undercapitalized (Bullet) significantly undercapitalized, and (Bullet) 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 3 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, 1999, 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. 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: (Bullet) asset quality and earnings (Bullet) operational and managerial, and (Bullet) 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: (Bullet) internal controls, information systems and internal audit systems (Bullet) loan documentation (Bullet) credit underwriting (Bullet) interest rate exposure (Bullet) asset growth, and (Bullet) compensation, fees and benefits FDICIA also sets forth Truth in Savings disclosure and advertising requirements applicable to all depository institutions. 4 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. Regulatory Capital Requirements _______________________________ The federal banking regulators have adopted certain risk-based capital guidelines to assist in the assessment of the capital adequacy of a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit, and recourse agreements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans. The following table presents the Corporation's capital ratios at December 31, 1999:
(In Thousands) Tier I Capital $ 31,604 Tier II Capital 2,326 Total Capital 33,930 Adjusted Total Average Assets 325,407 Total Adjusted Risk-Weighted Assets 185,813 Tier I Risk-Based Capital Ratio 17.01% Required Tier I Risk-Based Capital Ratio 4.00% Excess Tier I Risk-Based Capital Ratio 13.01% Total Risk-Based Capital Ratio 18.25% Required Total Risk-Based Capital Ratio 8.00% Excess Total Risk-Based Capital Ratio 10.25% Tier I Leverage Ratio 9.71% Required Tier I Leverage Ratio 4.00% Excess Tier I Leverage Ratio 5.71% ______________________________ Includes off-balance sheet items at credit-equivalent values less intangible assets. Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I Capital to Total Adjusted Risk-Weighted Assets. Total Risk-Based Capital Ratio is defined as the ratio of Tier I and Tier II Capital to Total Adjusted Risk-Weighted Assets. Tier I Leverage Ratio is defined as the ratio of Tier I Capital to Adjusted Total Average Assets.
5 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. See also, the information under the caption "Capital Strength" appearing on page 37 of Registrant's 1999 Annual Report, included in Exhibit 13. 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. Effects of Inflation ____________________ Inflation has some impact on the Bank's operating costs. Unlike industrial companies, however, substantially all of the Bank's assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Bank's performance than the general levels of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services. 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. Interest Rate Risk __________________ Federal banking agency regulations specify that the bank's capital adequacy include an assessment of the bank's interest rate risk ("IRR") exposure. The standards for measuring the adequacy and effectiveness of a banking organization's IRR management includes a measurement of Board of Directors and senior management oversight, and a determination of whether a banking organization's procedures for comprehensive risk management are appropriate to the circumstances of the specific banking organization. The First National Bank of Berwick has internal IRR models that are used to measure and monitor IRR. Additionally, the regulatory agencies have been assessing IRR 6 on an informal basis for several years. For these reasons, the Corporation does not expect the addition of IRR evaluation to the agencies' capital guidelines to result in significant changes in capital requirements for The First National Bank of Berwick. Gramm-Leach-Bliley __________________ On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999, which is also known as the Financial Services Modernization Act. The act repeals some Depression-era banking laws and will permit banks, insurance companies and securities firms to engage in each others' businesses after complying with certain conditions and regulations which are yet to be finalized. The act grants to community banks the power to enter new financial markets as a matter of right that larger institutions have managed to do on an ad hoc basis. At this time, our company has no plans to pursue these additional possibilities. Our company does not believe that the Financial Services Modernization Act will have an immediate positive or negative material effect on our operations. However, the act may have the result of increasing the amount of competition that our company faces from larger financial service companies, many of whom have substantially more financial resources than our company, which may now offer banking services in addition to insurance and brokerage services. History and Business - Bank ___________________________ The Bank's legal headquarters are located at 111 West Front Street, Berwick, Pennsylvania. As of December 31, 1999, the Bank had total assets of $333,515,787, total shareholders' equity of $29,357,519 and total deposits and other liabilities of $304,158,268. 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. The First National Bank of Berwick has no foreign loans or highly leveraged transaction loans, as defined by the Federal Reserve Board. Substantially all of the loans in The First National Bank of Berwick's portfolio have been originated by The First National Bank of Berwick. Policies adopted by the Board of Directors are the basis by which The First National Bank of Berwick conducts its lending activities. At December 31, 1999, the Bank had 110 full-time employees and 24 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 Columbia and Luzerne counties are: (Bullet) First Columbia Bank & Trust Co. of Bloomsburg (Bullet) PNC Bank, N.A. (Bullet) Columbia County Farmers National Bank of Bloomsburg (Bullet) M & T Bank (Bullet) FNB Bank of Danville, and (Bullet) First National Trust Bank of Sunbury 7 In the county of Montour, credit unions are our major competitors along with Northern Central Bank, FNB Bank of Danville and Omega Bank. 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. 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. ITEM 2. DESCRIPTION OF PROPERTIES The Corporation owns no property other than through its subsidiary. These are:
Type of Square Location Ownership Footage Use ________ _________ _______ ___ Columbia County, PA 111 W. Front Street, Berwick Owned 12,500 Administrative office, banking and trust services. 105 Market Street Leased 4,000 computer/ (second floor) Annual accounting Rental department. $32,137 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. 50 Briar Creek Plaza Leased 500 Banking services. Annual Rental $30,000 8 Type of Square Location Ownership Footage Use ________ _________ _______ ___ Columbia County, PA 2401 New Berwick Highway, Bloomsburg Leased 2,000 Banking services. Annual Rental $35,325 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 Montour County, PA Giant Market Leased 500 Banking services. 328 Church Street Annual Danville Rental $25,000
It is Management's opinion that the facilities currently utilized are suitable and adequate for the Corporation's current and immediate future purposes. 9 ITEM 3. LEGAL PROCEEDINGS The Corporation and/or the Bank are defendants in various legal proceedings arising in the ordinary 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: (Bullet) the quarterly high and low prices for a share of the Corporation's Common Stock during the periods indicated as reported to the management of the Corporation and (Bullet) quarterly dividends on a share of the Common Stock with respect to each quarter since January 1, 1998. 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.
Stock Prices Dividends High Low Declared 1998: First quarter $30.25 $19.08 $.14 Second quarter $32.50 $29.50 $.14 Third quarter $36.13 $32.00 $.14 Fourth quarter $34.38 $32.50 $.17 1999: First quarter $33.50 $20.00 $.17 Second quarter $30.25 $28.50 $.17 Third quarter $29.00 $26.25 $.17 Fourth quarter $26.25 $20.25 $.19
As of December 31, 1999, the Corporation had approximately 547 shareholders of record. 10 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 rules govern 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. 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. 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, 1999, there was $3,320,652 in unrestricted retained earnings and net income available at the Bank that could be paid as a dividend to the Corporation under the current OCC regulations. Dividend Restrictions on the Corporation ________________________________________ Under the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), the Corporation may not pay a dividend if, after giving effect thereto, either (a) the Corporation would be unable to pay its debts as they become due in the usual course of business or (b) the Corporation's total assets would be less than its total liabilities. The determination of total assets and liabilities may be based upon: (i) financial statements prepared on the basis of generally accepted accounting principles, (ii) financial statements that are prepared on the basis of other accounting practices and principles that are reasonable under the circumstances, or (iii) a fair valuation or other method that is reasonable under the circumstances. ITEM 6. 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, 1999, which page is included in Exhibit 11 hereto, is incorporated in its entirety by reference in response to this Item 6. 11 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 27 through 42 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1999, which pages are included in Exhibit 13 hereto, is incorporated in its entirety by reference in response to this Item 7. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The information under the caption "Quantitative and Qualitative Disclosure about Market Risk" appearing on page 38 through 40 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1999, which pages are included in Exhibit 13 hereto, is incorporated in its entirety by reference in response to this Item 7A. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Corporation's Consolidated Financial Statements and notes thereto appearing on pages 4 through 24 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1999, 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 and Directors," "Section 16(A) Beneficial Ownership Reporting Compliance," "Principal Officers of the Corporation," and "Principal Officers of the Bank" appearing on pages 7, 8, 9, 16, and 17, 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 11 through 14 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. 12 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 3 through 6 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 Relationships and Related Transactions" appearing on page 15 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, 1999. (c) Exhibits required by Item 601 of Regulation S: 13 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 Articles of Incorporation, as amended, and By-Laws, 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). 9 None. Exhibit Number Referred to Item 601 of Regulation S-K Description of Exhibit 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, 1999. 12 Statement of Computation of Ratios (See the information appearing on page 2 of Registrant's Summary of Selected Financial Data, which page is included in Exhibit 11 and pages 27 and 37 of Registrant's 1999 Annual Report, which pages are included in Exhibit 13.) 13 Excerpt from Annual Report to Shareholders for Fiscal Year Ended December 31, 1999. 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, 1999. 23 Consent of Independent Auditors. 27 Financial Data Schedule. 99 Definitive Proxy Statement, Notice of Annual Meeting and Form of Proxy for the Annual Meeting of Shareholders to be held April 18, 2000. 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST KEYSTONE CORPORATION (Registrant) By: /s/ J. Gerald Bazewicz J. Gerald Bazewicz President and Chief Executive Officer Date: March 28, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, 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 28, 2000 By: /s/ J. Gerald Bazewicz J. Gerald Bazewicz President, Chief Executive Officer and Director (Chief Executive Officer and Principal Financial Officer) Date: March 28, 2000 15 By: /s/ John E. Arndt John E. Arndt Director Date: March 28, 2000 By: /s/ Budd L. Beyer Budd L. Beyer Director Date: March 28, 2000 By: /s/ Robert E. Bull Robert E. Bull Chairman of the Board and Director Date: March 28, 2000 By: /s/ Dudley P. Cooley Dudley P. Cooley Director Date: March 28, 2000 By: /s/ Frederick E. Crispin, Jr. Frederick E. Crispin, Jr. Director Date: March 28, 2000 By: /s/ Jerome F. Fabian Jerome F. Fabian Director Date: March 28, 2000 16 By: Stanley E. Oberrender Director Date: By: /s/ David R. Saracino David R. Saracino Treasurer and Assistant Secretary (Principal Accounting Officer) Date: March 28, 2000 By: /s/ Robert J. Wise Robert J. Wise Vice Chairman of the Board and Director Date: March 28, 2000 17 EX-11 2 EXHIBIT 11 FIRST KEYSTONE CORPORATION COMPUTATION OF EARNINGS PER COMMON SHARE Year Ended December 31,
(Dollars in Thousands) 1999 1998 1997 Primary Net Income $ 5,160 $ 4,888 $ 4,660 Shares Weighted average number of common shares outstanding 2,862,890 2,925,695 2,933,727 Adjustments - increases or decreases None None None Weighted average number of common shares outstanding as adjusted 2,862,890 2,925,695 2,933,727 Basic earnings per common share $ 1.80 $ 1.67 $ 1.59 Assuming full dilution Net Income $ 5,160 $ 4,888 $ 4,660 Shares Weighted average number of common shares outstanding 2,862,890 2,925,695 2,933,727 Adjustments - increases or decreases None None None Weighted average number of common shares outstanding as adjusted 2,862,890 2,925,695 2,933,727 Earnings per common share assuming full dilution $ 1.80 $ 1.67 $ 1.59 See Note 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, 1999, which page is included in Exhibit 13 hereto.
18 EXHIBIT 11 SUMMARY OF SELECTED FINANCIAL DATA
(Amounts in thousands, except per share) 1999 1998 1997 1996 1995 ____ ____ ____ ____ ____ SUMMARY OF OPERATIONS Interest income $ 23,172 $ 20,703 $ 19,345 $ 17,786 $ 16,637 Interest expense 11,888 10,329 9,381 8,667 8,271 Net interest income 11,284 10,374 9,964 9,119 8,366 Provision for loan losses 325 275 325 517 372 Investment securities gains (losses) 124 179 68 (38) 5 Net income $ 5,160 $ 4,888 $ 4,660 $ 4,130 $ 3,486 ___________________________________________________________________________ PER COMMON SHARE Net income $ 1.80 $ 1.67 $ 1.59 $ 1.41 $ 1.19 Cash dividends .70 .59 .47 .39 .33 ___________________________________________________________________________ BALANCE SHEET DATA Assets $333,516 $303,028 $267,399 $242,557 $226,033 Investment securities 135,031 130,686 98,459 101,225 88,125 Net loans 182,631 159,112 149,780 130,994 126,046 Deposits 244,680 247,092 217,647 198,546 187,320 Stockholders' equity 29,358 33,753 31,818 27,473 25,399 ___________________________________________________________________________ PERFORMANCE RATIOS Return on average assets 1.58% 1.72% 1.83% 1.75% 1.58% Return on average equity 16.12% 14.68% 15.92% 15.98% 15.24% Dividend payout ratio 38.72% 35.32% 29.76% 27.56% 27.36% Average equity to average assets ratio 9.78% 11.72% 11.49% 11.05% 10.36% Reflects adjustment for stock dividends more fully described in Note 1.
2 First Keystone Corporation EX-13 3 EXHIBIT 13 EXCERPT FROM ANNUAL REPORT TO SHAREHOLDERS FOR FISCAL YEAR ENDED DECEMBER 31, 1999 19 FIRST KEYSTONE CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 and 1998
___________________________________________________________________________ 1999 1998 ___________________________________________________________________________ ASSETS Cash and due from banks $ 6,883,976 $ 7,033,112 Interest-bearing deposits in other banks 80,157 22,489 Investment securities Available- for-Sale 123,467,820 116,700,864 Investment securities Held-to- Maturity (estimated fair value 1999 - $11,335,286; 1998 - $14,015,044) 11,562,998 13,984,681 Loans, net of unearned income 185,230,902 161,532,639 Allowance for loan losses (2,599,550) (2,421,042) ____________ ____________ Net loans $182,631,352 $159,111,597 ____________ ____________ Premises and equipment, net 3,881,011 3,757,565 Other Real Estate Owned 84,900 - Accrued interest receivable 2,238,835 2,133,030 Other assets 2,684,738 285,143 ____________ ____________ TOTAL ASSETS $333,515,787 $303,028,481 LIABILITIES Deposits: Non-interest bearing $ 20,919,398 $ 22,749,074 Interest bearing 223,760,786 224,342,445 ____________ ____________ Total Deposits $244,680,184 $247,091,519 Short-term borrowings 31,594,327 6,633,646 Long-term borrowings 26,000,000 13,000,000 Accrued interest and other expenses 1,831,865 1,521,029 Other liabilities 51,892 1,029,138 ____________ ____________ TOTAL LIABILITIES $304,158,268 $269,275,332 ____________ ____________ STOCKHOLDERS' EQUITY Preferred stock, par value $10.00 per share; authorized and unissued 500,000 shares $ - $ - Common stock, par value $2.00 per share; authorized 10,000,000 shares; issued 2,933,727 shares 5,867,454 5,867,454 Surplus 9,761,066 9,761,066 Retained earnings 20,285,218 17,123,122 Accumulated other comprehensive income (loss) (3,459,538) 2,192,528 Treasury stock at cost 100,000 shares 1999; 35,134 shares 1998 (3,096,681) (1,191,021) ____________ ____________ TOTAL STOCKHOLDERS' EQUITY $ 29,357,519 $ 33,753,149 ____________ ____________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $333,515,787 $303,028,481 The accompanying notes are an integral part of these consolidated financial statements.
4 FIRST KEYSTONE CORPORATION (bullet) Annual Report 1999 FIRST KEYSTONE CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
___________________________________________________________________________ 1999 1998 ___________________________________________________________________________ INTEREST INCOME Interest and fees on loans $14,567,163 $13,412,619 Interest and dividends on investment securities: Taxable 5,098,399 4,301,941 Tax-exempt 3,087,924 2,562,325 Dividends 252,460 179,521 Deposits in banks 166,666 246,822 ___________ ___________ Total interest income $23,172,612 $20,703,228 ___________ ___________ INTEREST EXPENSE Deposits $ 9,496,065 $ 9,208,368 Short-term borrowings 1,383,099 303,467 Long-term borrowings 1,009,031 817,313 ___________ ___________ Total interest expense $11,888,195 $10,329,148 ___________ ___________ Net interest income $11,284,417 $10,374,080 Provision for loan losses 325,000 275,000 ___________ __________ Net interest income after provision for loan losses $10,959,417 $10,099,080 ___________ ___________ NON-INTEREST INCOME Trust Department $ 577,152 $ 524,835 Service charges and fees 940,144 749,705 Gain on sale of loans 34,820 126,409 Investment securities gains (losses) - net 123,738 178,634 Other 38,731 48,555 ___________ ___________ Total non-interest income $ 1,714,585 $ 1,628,138 ___________ ___________ NON-INTEREST EXPENSE Salaries and employee benefits $ 3,453,167 $ 2,887,862 Occupancy, net 401,120 403,242 Furniture and equipment 550,620 516,186 Other 1,905,064 1,727,790 ___________ ___________ Total non-interest expense $ 6,309,971 $ 5,535,080 Income before income taxes $ 6,364,031 $ 6,192,138 Income tax expense 1,203,966 1,304,606 ___________ ___________ NET INCOME $ 5,160,065 $ 4,887,532 PER SHARE DATA Net income $ 1.80 $ 1.67 Cash dividends $ .70 $ .59 Weighted average shares outstanding 2,862,890 2,925,695 ___________________________________________________________________________ 1997 ___________________________________________________________________________ INTEREST INCOME Interest and fees on loans $12,923,557 Interest and dividends on investment securities: Taxable 3,727,915 Tax-exempt 2,288,362 Dividends 140,973 Deposits in banks 264,015 ___________ Total interest income $19,344,822 ___________ INTEREST EXPENSE Deposits $ 8,437,271 Short-term borrowings 230,071 Long-term borrowings 713,710 ___________ Total interest expense $ 9,381,052 ___________ Net interest income $ 9,963,770 Provision for loan losses 325,000 ___________ Net interest income after provision for loan losses $ 9,638,770 ___________ NON-INTEREST INCOME Trust Department $ 456,880 Service charges and fees 669,252 Gain on sale of loans 34,107 Investment securities gains (losses) - net 67,957 Other 33,855 ___________ Total non-interest income $ 1,262,051 NON-INTEREST EXPENSE Salaries and employee benefits $ 2,626,752 Occupancy, net 331,962 Furniture and equipment 487,683 Other 1,486,748 __________ Total non-interest expense $ 4,933,145 Income before income taxes $ 5,967,676 Income tax expense 1,307,436 ___________ NET INCOME $ 4,660,240 PER SHARE DATA Net income $ 1.59 Cash dividends $ .47 Weighted average shares outstanding 2,933,727 The accompanying notes are an integral part of these consolidated financial statements.
5 FIRST KEYSTONE CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
___________________________________________________________________________ Common Comprehensive Stock Surplus Income (Loss) ___________________________________________________________________________ Balance At December 31, 1996 $1,778,294 $6,654,396 Comprehensive Income: Net income $4,660,240 Change in net unrealized gain (loss) on investment securities available-for-sale, net of reclassification adjustment and tax effects 1,077,383 __________ Total comprehensive income $5,737,623 10% stock dividend 177,524 3,106,670 Dividends paid in lieu of fractional shares Cash dividends - $.47 per share Balance At December 31, 1997 $1,955,818 $9,761,066 Comprehensive Income: Net income $4,887,532 Change in net unrealized gain (loss) on investment securities available-for-sale, net of reclassification adjustment and tax effects (35,237) __________ Total comprehensive income $4,852,295 3 for 1 stock split in the form of a 200% stock dividend 3,911,636 Cash dividends - $.59 per share Acquisition of 35,134 shares of treasury stock Balance At December 31, 1998 $5,867,454 $9,761,066 Comprehensive Income: Net income $5,160,065 Change in net unrealized gain (loss) on investment securities available-for-sale, net of reclassification adjustment and tax effects (5,652,066) __________ Total comprehensive income (loss) $ (492,001) Cash dividends - $.70 per share Acquisition of 64,866 shares of treasury stock Balance At December 31, 1999 $5,867,454 $9,761,066 ___________________________________________________________________________ Accumulated Other Retained Comprehensive Treasury Earnings Income (Loss) Stock ___________________________________________________________________________ Balance At December 31, 1996 $17,889,923 $1,150,382 $ - Comprehensive Income: Net income $4,660,240 Change in net unrealized gain (loss) on investment securities available-for-sale, net of reclassification adjustment and tax effects 1,077,383 Total comprehensive income 10% stock dividend (3,284,194) Dividends paid in lieu of fractional shares (5,650) Cash dividends - $.47 per share (1,386,901) ___________ __________ ___________ Balance At December 31, 1997 $17,873,418 $2,227,765 $ - Comprehensive Income: Net income $4,887,532 Change in net unrealized gain (loss) on investment securities available-for-sale, net of reclassification adjustment and tax effects (35,237) Total comprehensive income 3 for 1 stock split in the form of a 200% stock dividend (3,911,636) Cash dividends - $.59 per share (1,726,192) Acquisition of 35,134 shares of treasury stock (1,191,021) ___________ __________ ___________ Balance At December 31, 1998 $17,123,122 $2,192,528 $(1,191,021) Comprehensive Income: Net income $5,160,065 Change in net unrealized gain (loss) on investment securities available-for-sale, net of reclassification adjustment and tax effects (5,652,066) Total comprehensive income (loss) Cash dividends - $.70 per share (1,997,969) Acquisition of 64,866 shares of treasury stock (1,905,660) ___________ __________ ___________ Balance At December 31, 1999 $20,285,218 $(3,459,538) $(3,096,681) ___________________________________________________________________________ Total ___________________________________________________________________________ Balance At December 31, 1996 $27,472,995 Comprehensive Income: Net income $ 4,660,240 Change in net unrealized gain (loss) on investment securities available-for-sale, net of reclassification adjustment and tax effects 1,077,383 Total comprehensive income 10% stock dividend - Dividends paid in lieu of fractional shares (5,650) Cash dividends - $.47 per share (1,386,901) ___________ Balance At December 31, 1997 $31,818,067 Comprehensive Income: Net income $4,887,532 Change in net unrealized gain (loss) on investment securities available-for-sale, net of reclassification adjustment and tax effects (35,237) Total comprehensive income 3 for 1 stock split in the form of a 200% stock dividend - Cash dividends - $.59 per share (1,726,192) Acquisition of 35,134 shares of treasury stock (1,191,021) ___________ Balance At December 31, 1998 $33,753,149 Comprehensive Income: Net income $5,160,065 Change in net unrealized gain (loss) on investment securities available-for-sale, net of reclassification adjustment and tax effects (5,652,066) Total comprehensive income (loss) Cash dividends - $.70 per share (1,997,969) Acquisition of 64,866 shares of treasury stock (1,905,660) ___________ Balance At December 31, 1999 $29,357,519 The accompanying notes are an integral part of these consolidated financial statements.
6 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999 FIRST KEYSTONE CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
___________________________________________________________________________ 1999 1998 ___________________________________________________________________________ OPERATING ACTIVITIES Net income $ 5,160,065 $ 4,887,532 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 325,000 275,000 Depreciation and amortization 389,368 345,566 Premium amortization on investment securities 233,671 260,911 Discount accretion on investment securities (242,116) (143,293) Deferred income taxes (benefit) (13,451) 1,586 Gain on sale of loans (34,820) (126,409) Proceeds from sale of loans 5,686,033 5,751,429 Originations of loans held for resale (8,147,429) (7,506,624) (Gain) loss on sales of investment securities (123,738) (178,634) Gain on sale of premises and equipment - (12,157) (Gain) loss on sale of other real estate owned 20,285 - (Increase) in accrued interest receivable (105,805) (135,094) (Increase) decrease in other assets - net (328,740) (43,090) Increase (decrease) in accrued interest and other expenses 310,836 (803) Increase (decrease) in other liabilities - net (104,477) (272,171) ____________ ____________ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,024,682 $ 3,103,749 INVESTING ACTIVITIES Proceeds from sales of investment securities Available-for-Sale $ 42,527,853 $ 9,799,220 Proceeds from maturities and redemptions of investment securities Available-for-Sale 16,454,598 15,869,144 Purchases of investment securities Available-for-Sale (71,777,779) (60,639,364) Purchases of investment securities Held-to-Maturity - (676,524) Proceeds from maturities and redemption of investment securities Held-to-Maturity - 3,437,452 Net increase in loans (21,696,625) (7,725,344) Proceeds from sale of premises and equipment - 22,042 Purchases of premises and equipment (512,814) (677,327) Proceeds from sale of other real estate owned 242,900 - ____________ ____________ NET CASH USED IN INVESTING ACTIVITIES $(34,761,867) $(40,590,701) FINANCING ACTIVITIES Net increase (decrease) in deposits $ (2,411,335) $ 29,444,335 Net increase in short-term borrowings 24,960,681 531,486 Proceeds from long-term borrowings 20,000,000 7,000,000 Repayment of long-term borrowings (7,000,000) (3,000,000) Acquisition of Treasury Stock (1,905,660) (1,191,021) Cash dividends paid (1,997,969) (1,726,192) Dividends paid in lieu of fractional shares - - ____________ ____________ NET CASH PROVIDED BY FINANCING ACTIVITIES $ 31,645,717 $ 31,058,608 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (91,468) $ (6,428,344) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,055,601 13,483,945 ____________ ____________ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,964,133 $ 7,055,601 ___________________________________________________________________________ 1997 ___________________________________________________________________________ OPERATING ACTIVITIES Net income $ 4,660,240 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 325,000 Depreciation and amortization 304,134 Premium amortization on investment securities 132,361 Discount accretion on investment securities (131,989) Deferred income taxes (benefit) 18,645 Gain on sale of loans (34,107) Proceeds from sale of loans 765,019 Originations of loans held for resale (1,675,406) (Gain) loss on sales of investment securities (67,957) Gain on sale of premises and equipment (67) (Gain) loss on sale of other real estate owned (816) (Increase) in accrued interest receivable (39,054) (Increase) decrease in other assets - net 65,704 Increase (decrease) in accrued interest and other expenses 393,798 Increase (decrease) in other liabilities - net 406,418 ____________ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 5,121,923 INVESTING ACTIVITIES Proceeds from sales of investment securities Available-for-Sale $ 18,369,369 Proceeds from maturities and redemptions of investment securities Available-for-Sale 5,119,885 Purchases of investment securities Available-for-Sale (21,757,280) Purchases of investment securities Held-to-Maturity - Proceeds from maturities and redemption of investment securities Held-to-Maturity 2,774,482 Net increase in loans (18,202,028) Proceeds from sale of premises and equipment 2,001 Purchases of premises and equipment (860,581) Proceeds from sale of other real estate owned 47,000 ____________ NET CASH USED IN INVESTING ACTIVITIES $(14,507,152) FINANCING ACTIVITIES Net increase (decrease) in deposits $ 19,101,401 Net increase in short-term borrowings 980,793 Proceeds from long-term borrowings 12,000,000 Repayment of long-term borrowings (13,000,000) Acquisition of Treasury Stock - Cash dividends paid (1,386,901) Dividends paid in lieu of fractional shares (5,650) ____________ NET CASH PROVIDED BY FINANCING ACTIVITIES $ 17,689,643 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 8,304,414 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,179,531 CASH AND CASH EQUIVALENTS ____________ AT END OF YEAR $ 13,483,945 The accompanying notes are an integral part of these consolidated financial statements
7 FIRST KEYSTONE CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements for Years Ended December 31, 1999, 1998 and 1997 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 (the "Bank"). All significant inter-company balances and transactions have been eliminated in consolidation. Nature of Operations The Corporation, headquartered in Berwick, Pennsylvania, provides a full range of banking, trust and related services through its wholly owned Bank subsidiary and is subject to competition from other financial institutions in connection with these services. The Bank serves a customer base which includes individuals, businesses, public and institutional customers primarily located in the Northeast Region of Pennsylvania. The Bank has nine full service offices and 12 ATMs located in Columbia, Luzerne and Montour Counties. The Corporation and its subsidiary must also adhere to certain federal banking laws and regulations and are subject to periodic examinations made by various federal agencies. The Corporation has a commercial banking operation and trust department as its major lines of business. The commercial banking operation includes a commercial services and retail services area constituted over 90% of the Corporation's revenue and profit for the years ended December 31, 1999, 1998, and 1997, and was the only reportable segment. Commercial services includes lending and related financial services to small and medium sized corporations and other business entities. The retail services includes sales and distribution (direct lending, deposit gathering, and retail mortgage lending) primarily to individuals. The trust department includes investment management, estate planning, employee benefit administration, and personal trust services which produce fee based income. The business units are identified by the products or services offered by the business unit and the channel through which the product or service is delivered. The accounting policies of the individual business units are the same as those of the Corporation. 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, net of the effect of deferred income taxes, is reported as other comprehensive income in the Consolidated Statement of Stockholders' Equity. 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 income from investments. Realized gains and losses are included in net investment securities gains. The cost of investment securities sold, redeemed or matured is based on the specific identification method. 8 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999 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 with 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 on an aggregate basis. These loans are sold without recourse to the Corporation. Non-Accrual Loans - Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan currently is performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. 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. A principal factor in estimating the allowance for loan losses is the measurement of impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Under current accounting standards, the allowance for loan losses related to impaired loans is based on discounted cash flows using the effective interest rate of the loan or the fair value of the collateral for certain collateral dependent 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 The Corporation originates and sells real estate loans to investors in the secondary mortgage market. After the sale, the Corporation retains the right to service certain loans. When originated mortgage loans are sold and servicing is retained, a servicing asset is capitalized based on relative fair value at the date of sale. Servicing assets are amortized as an offset to other fees in proportion to, and over the period of, estimated net servicing income. The unamortized cost is included in other assets in the accompanying consolidated balance sheet. The servicing rights are periodically evaluated for impairment based on their relative fair value. Other Real Estate Owned Real estate properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value on 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. 9 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. Per Share Data Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, requires dual presentation of basic and fully diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding at the end of each period. Fully diluted earnings per share is calculated by increasing the denominator for the assumed conversion of all potentially dilutive securities. The Corporation's dilutive securities are limited to stock options which currently have no effect on earnings per share since the market price per share historically has not been greater than the lowest stock option exercise price. Per share data has been adjusted retroactively for stock splits and stock dividends. Cash Flow Information For purposes of reporting consolidated 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 $11,665,446, $10,355,156 and $9,275,057 in 1999, 1998 and 1997, respectively. Cash payments for income taxes were $1,327,420, $1,314,645 and $1,257,115 for 1999, 1998 and 1997, respectively. The Corporation transferred loans to other real estate owned in the amounts of $348,085 in 1999. 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. New Accounting Standards Statement of Financial Accounting Standards (SFAS) No. 133 (as amended by SFAS No. 137), "Accounting for Derivative Instruments and Hedging Activities", becomes effective for financial reporting periods beginning after June 15, 2000. SFAS 133 requires fair value accounting for all stand-alone derivatives and many derivatives embedded in other instruments and contracts. Since the Corporation does not enter into transactions involving derivatives described in the standard and does not engage in hedging activities, the standard is not expected to have a significant impact on the Corporation's consolidated financial condition or results of operations. Reporting Format Certain amounts in the consolidated financial statements of prior periods have been reclassified to conform with presentation used in the 1999 consolidated 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 $333,000 and $2,471,000 at December 31, 1999, and 1998, 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 $708,567 at December 31, 1999. 10 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999 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, 1999 and 1998:
Available-for-Sale Securities _________________________________________________ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value _________ __________ _________ ________ December 31, 1999: Obligations of U.S. Government Corporations and Agencies: Mortgage-backed $ 42,398,524 $ 10,874 $1,849,700 $ 40,559,698 Other 22,004,537 - 831,100 21,173,437 Obligations of state and political subdivisions 57,763,990 447,062 3,670,341 54,540,711 Equity securities 6,470,328 808,279 84,633 7,193,974 ____________ __________ __________ ____________ Total $128,637,379 $1,266,215 $6,435,774 $123,467,820
Held-to-Maturity Securities _________________________________________________ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value _________ __________ _________ ________ December 31, 1999: Obligations of U.S. Government Corporations and Agencies: Mortgage-backed $ 8,169,734 $ 8,253 $228,506 $ 7,949,481 Obligations of state and political subdivisions 3,393,264 24,414 31,873 3,385,805 ___________ _______ ________ ___________ Total $11,562,998 $32,667 $260,379 $11,335,286
Available-for-Sale Securities ________________________________________________ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ________ __________ _________ ________ December 31, 1998: U.S. Treasury securities $ 7,347,041 $ 139,115 $ - $ 7,486,156 Obligations of U.S. Government Corporations and Agencies: Mortgage-backed 37,317,890 273,585 107,209 37,484,266 Other 15,006,590 143,098 1,563 15,148,125 Obligations of state and political subdivisions 50,312,521 2,390,785 333,998 52,369,308 Equity securities 3,304,003 940,948 31,942 4,213,009 ____________ __________ ________ ____________ Total $113,288,045 $3,887,531 $474,712 $116,700,864
Held-to-Maturity Securities __________________________________________ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ________ __________ _________ ________ December 31, 1998: Obligations of U.S. Government Corporations and Agencies: Mortgage-backed $10,593,592 $ 48,459 $111,820 $10,530,231 Obligations of state and political subdivisions 3,391,089 93,724 - 3,484,813 ___________ ________ ________ ___________ Total $13,984,681 $142,183 $111,820 $14,015,044
11 Securities Available-for-Sale with an aggregate fair value of $48,426,229 in 1999; $42,346,853 in 1998; and securities Held-to-Maturity with an aggregate unamortized cost of $11,121,179 in 1999 and $8,878,530 in 1998, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and other balances of $20,861,741 in 1999 and $21,062,344 in 1998 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, 1999. 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.
December 31, 1999 U.S. Government Obligations Agency & of State Corporation & Political Obligations Subdivisions _____________ ______________ Available-For-Sale: Within 1 Year: Amortized Cost $ - $ 750,000 Estimated Fair Value - 768,975 Weighted average yield - 11.08% 1 - 5 Years: Amortized cost 11,006,513 2,055,335 Estimated fair value 10,792,500 2,157,416 Weighted average yield 6.15% 11.22% 5 - 10 Years: Amortized cost 9,318,725 1,043,900 Estimated Fair value 8,854,890 1,000,950 Weighted average yield 6.57% 11.21% After 10 Years: Amortized cost 44,077,823 53,914,755 Estimated fair value 42,085,745 50,613,370 Weighted average yield 6.75% 8.50% ___________ ___________ Total: Amortized cost $64,403,061 $57,763,990 Estimated fair value 61,733,135 54,540,711 Weighted average yield 6.62% 9.03% December 31, 1999 ____________________________ Marketable Other Equity Securities Securities ____________ ___________ Available-For-Sale: 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 5,477,200 993,128 Estimated fair value 5,477,200 1,716,774 Weighted average yield 6.59% 4.66% __________ __________ Total: Amortized cost $5,477,200 $ 993,128 Estimated fair value 5,477,200 1,716,774 Weighted average yield 6.59% 4.66% _______________________ Mortgage-backed securities are allocated for maturity reporting at their original maturity date. Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate. Other securities and marketable equity securities are not considered to have defined maturities and are included in the after ten year category.
12 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
December 31, 1999 U.S. Government Obligations Agency & of State Corporation & Political Obligations Subdivisions ______________ _______________ 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 - 1,484,668 Estimated Fair value - 1,480,870 Weighted average yield - 8.00% After 10 Years: Amortized cost 8,169,734 1,908,596 Estimated fair value 7,949,481 1,904,935 Weighted average yield 6.04% 8.55% __________ __________ Total: Amortized cost $8,169,734 $3,393,264 Estimated fair value 7,949,481 3,385,805 Weighted average yield 6.04% 8.31% December 31, 1999 ______________________________ Marketable Other Equity Securities Securities ____________ ____________ 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 - - _______________________ Mortgage-backed securities are allocated for maturity reporting at their original maturity date. Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate. Other securities and marketable equity securities are not considered to have defined maturities and are included in the after ten year category.
FHLB stock has no stated maturity; however, it must be owned as long as the Bank remains a member of the FHLB System. The Bank does not anticipate that it will discontinue its membership and therefore, the investment in the amount of $5,000,000 and $1,938,800 in 1999 and 1998, respectively are classified as other securities. There were no aggregate investments with a single issuer (excluding the U.S. Government and its agencies) which exceeded ten percent of consolidated shareholders' equity at December 31, 1999. 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 1999, 1998 and 1997 were $42,527,853, $9,799,220, and $18,369,369, respectively. Gross gains realized on these sales were $645,549, $219,310 and $309,956, respectively. Gross losses on these sales were $521,811, $40,676 and $241,999, respectively. 13 NOTE 4 LOANS Major classifications of loans at December 31, 1999 and 1998 consisted of:
1999 1998 _______ _______ Commercial, Financial, and Agricultural $ 17,863,635 $ 16,579,315 Tax-exempt 4,133,085 2,253,539 Real estate mortgage 138,613,253 121,223,412 Consumer 30,594,972 26,205,802 ____________ ____________ Gross loans $191,204,945 $166,262,068 Less: Unearned discount 5,892,301 4,603,479 Unamortized loan fees, net of costs 81,742 125,950 ____________ ____________ Loans, net of unearned income $185,230,902 $161,532,639
Mortgage loans held for sale included in loans were $6,448,526 and $3,952,310 at December 31, 1999 and 1998, respectively. Changes in the allowance for loan losses for the years ended December 31, 1999, 1998 and 1997, were as follows:
1999 1998 1997 ______ ______ ______ Balance, January 1 $2,421,042 $2,371,194 $2,266,983 Provision charged to operations 325,000 275,000 325,000 Loans charged off (258,743) (269,218) (271,406) Recoveries 112,251 44,066 50,617 __________ __________ __________ Balance, December 31 $2,599,550 $2,421,042 $2,371,194
Non-accrual loans at December 31, 1999, 1998 and 1997 were $617,763, $854,295, and $320,700, 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:
1999 1998 1997 ____ ____ ____ Gross interest due under terms $68,569 $96,425 $30,027 Amount included in income 6,380 5,610 7,006 _______ _______ _______ Interest income not recognized $62,189 $90,815 $23,021
At December 31, 1999 and 1998 the recorded investment in loans that are considered to be impaired as defined by SFAS No. 114 was $55,889 and $75,068, 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 SFAS No. 114 along with any other potential losses. The average recorded investment in impaired loans during the year ended December 31, 1999 and 1998 was approximately $69,283 and $85,015, respectively. At December 31, 1999, there were no significant commitments to lend additional funds with respect to non-accrual and restructured loans. NOTE 5 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 Balance Sheets. The unpaid principal balances of mortgage loans serviced for others was $10,781,607 and $6,276,477 at December 31, 1999 and 1998. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $4,536 and $3,089 at December 31, 1999 and 1998. Changes in the balances of servicing assets for the years ended December 31, 1999, 1998 and 1997 were as follows: 14 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
1999 1998 1997 ____ ____ ____ Balance at January 1 $ 61,612 $ 7,032 $ 0 Servicing asset additions 51,412 56,251 7,048 Amortization (8,025) (1,671) (16) ________ _______ ______ Balance at December 31 $104,999 $61,612 $7,032
There was no valuation allowance on servicing assets as of December 31, 1999 and 1998. Additionally, there were no unrecognized 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, 1999 and 1998. NOTE 6 PREMISES AND EQUIPMENT A summary of premises and equipment at December 31, 1999 and 1998 follows:
1999 1998 ____ ____ Land $ 876,526 $ 876,526 Buildings and improvements 2,811,246 2,798,369 Equipment 4,048,362 3,548,426 __________ __________ $7,736,134 $7,223,321 Less: Accumulated depreciation 3,855,123 3,465,756 __________ __________ Total $3,881,011 $3,757,565
Depreciation amounted to $389,368 for 1999, $345,566 for 1998 and $304,134 for 1997. NOTE 7 DEPOSITS Major classifications of deposits at December 31, 1999 and 1998 consisted of:
1999 1998 ______ ______ Demand - non-interest bearing $ 20,919,398 $ 22,749,074 Demand - interest bearing 47,630,009 61,897,838 Savings 44,099,703 45,217,418 Time, $100,000 and over 29,849,603 27,344,905 Other time 102,181,471 89,882,284 ____________ ____________ Total deposits $244,680,184 $247,091,519
The following is a schedule reflecting classification and remaining maturities of time deposits of $100,000 and over at December 31, 1999:
2000 $24,980,149 2001 2,868,785 2002 100,000 2003 784,278 2004 261,391 ___________ $28,994,603
Interest expense related to time deposits of $100,000 or more was $1,573,586 in 1999, $1,339,212 in 1998 and $1,241,486 in 1997. 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, 1999, and 1998: 15
1999 ________________________________ Maximum Ending Average Month End Average Balance Balance Balance Rate _______ _______ _______ ____ Federal funds purchased and securities sold under agreements to repurchase $ 7,803,238 $22,974,939 $35,369,195 5.36% Federal Home Loan Bank 22,250,000 4,695,648 22,250,000 5.47% U.S. Treasury tax and loan notes 1,541,089 636,757 1,733,122 4.91% ___________ ___________ ___________ ____ Total $31,594,327 $28,307,344 $59,352,317 5.41%
1998 ________________________________ Maximum Ending Average Month End Average Balance Balance Balance Rate Federal funds purchased and securities sold under agreements to repurchase $6,409,222 $6,158,768 $ 7,149,313 4.19% Federal Home Loan Bank 0 196,000 2,300,000 5.10% U.S. Treasury tax and loan notes 224,424 653,372 1,704,698 5.38% __________ __________ ___________ ____ Total $6,633,646 $7,008,140 $11,154,011 5.32%
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, 1999 and 1998 follows:
1999 1998 ____ ____ Due 1999, 6.38% $ - $ 1,000,000 Due 2000, 5.76% to 6.73% 8,250,000 2,000,000 Due 2002, 5.48% to 7.77% 2,000,000 3,000,000 Due 2004, 5.60% 3,000,000 - Due 2005, 5.55% 2,000,000 2,000,000 Due 2008, 5.02% to 5.48% 5,000,000 5,000,000 Due 2009, 5.30% 2,000,000 - Due 2014, 5.41% 3,750,000 - ___________ ___________ $26,000,000 $13,000,000
NOTE 10 INCOME TAXES The current and deferred components of the income tax provision (benefit) consisted of the following:
1999 1998 1997 ______ ______ ______ Federal Current $1,213,194 $1,291,313 $1,278,515 Deferred (benefit) (13,451) 1,586 18,645 __________ __________ __________ $1,199,743 $1,292,899 $1,297,160 State Current $ 4,223 $ 11,707 $ 10,276 Deferred (benefit) - - - __________ __________ __________ $ 4,223 $ 11,707 $ 10,276 __________ __________ __________ Total provision for income taxes $1,203,966 $1,304,606 $1,307,436
16 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999 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%:
1999 Amount Rate ______ ____ Provision at statutory rate $2,163,771 34.0% Tax-exempt income (1,098,282) (17.2) Non-deductible expenses 146,791 2.3 Other, net (12,537) (.2) __________ ____ Applicable federal income tax and rate $1,199,743 18.9 > 1998 Amount Rate ______ ____ Provision at statutory rate $2,105,327 34.0% Tax-exempt income (929,748) (15.0) Non-deductible expenses 125,925 2.0 Other, net (8,605) (.1) __________ ____ Applicable federal income tax and rate $1,292,899 20.9 1997 Amount Rate ______ ____ 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%
Total federal income tax attributable to realized security gains and losses was $42,071 in 1999, $60,736 in 1998, and $23,105 in 1997. The deferred tax assets and liabilities resulting from temporary timing differences have been netted to reflect a net deferred tax asset (liability) included in other assets or other liabilities in these consolidated financial statements. The components of the net deferred tax asset (liability) at December 31, 1999, 1998 and 1997, are as follows:
1999 1998 1997 ____ ____ ____ Deferred Tax Assets: Loan loss reserve $ 736,943 $ 676,251 $ 659,302 Deferred compensation 71,846 44,307 20,432 Contributions 8,710 11,240 - Unrealized investment securities losses 1,709,880 - - __________ ___________ ___________ Total $2,527,379 $ 731,798 $ 679,734 Deferred Tax Liabilities: Loan origination fees and costs $ (205,733) $ (171,850) $ (118,427) Mortgage servicing rights (1,962) (576) - Accretion (23,055) (21,883) (41,836) Unrealized investment securities gains - (1,220,294) (1,229,914) Depreciation (225,773) (189,964) (170,361) __________ ___________ ___________ Total $ (456,523) $(1,604,567) $(1,560,538) __________ ___________ ___________ Net Deferred Tax Asset (Liability) $2,070,856 $ (872,769) $ (880,804)
It is anticipated that all deferred tax assets are to be realized and 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 $75,725, $67,377 and $59,395 in 1999, 1998 and 1997, respectively. Under the profit sharing feature, contributions, at the discretion of the Board of Directors are funded currently and amounted to $193,481, $167,497 and $151,574 in 1999, 1998 and 1997, 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, 1999 and 1998, was $211,311 and $130,315, respectively. The related expense for these plans amounted to $80,996, $70,222 and $60,093 in 1999, 1998 and 1997, respectively. 17 NOTE 12 LEASE COMMITMENTS AND CONTINGENCIES The Corporation's banking subsidiary leases four branch banking facilities, as well as the operations center adjoining the main bank office, under operating leases. Rent expense for the year ended December 31, 1999, 1998 and 1997 was $109,228, $82,804 and $49,905, respectively. The lease commitments, including a new banking facility opened in 1999 with a base annual rental of $30,000 are: 2000 - $126,927, 2001 - $74,526, 2002 - $55,000, 2003 - $50,833 and 2004 - $17,500. 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, 1999, 1998 and 1997. 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 6 directors and 4 executive officers, consists of the following for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ____ ____ ____ Balance at January 1 $2,032,334 $2,080,963 $2,553,945 Additions 456,766 738,176 284,044 Deductions (780,777) (786,805) (757,026) __________ __________ __________ Balance at December 31 $1,708,323 $2,032,334 $2,080,963
NOTE 14 REGULATORY MATTERS Dividends are paid by the Corporation to shareholders 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 2000, without prior regulatory approval, the Bank may declare dividends to the Corporation in the amount of $3,320,652 plus additional amounts equal to the net income earned in 2000 for the period January 1, 2000, through the date of declaration, less any dividends which may have already been paid in 2000. 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. Management believes, as of December 31, 1999 and 1998, that the Corporation and the Bank met all capital adequacy requirements to which they are subject. 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). 18 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999 As of December 31, 1999, 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 the notification that management believes have changed the Bank's category.
(Amounts in thousands) Actual ______ Amount Ratio ______ _____ As of December 31, 1999: Total Capital (to Risk Weighted Assets) $33,920 18.25% Tier I Capital (to Risk Weighted Assets) 31,604 17.01% Tier I Capital (to Average Assets) 31,604 9.71% As of December 31, 1998: Total Capital (to Risk Weighted Assets) $34,080 20.17% Tier I Capital (to Risk Weighted Assets) 31,554 18.92% Tier I Capital (to Average Assets) 31,554 9.95% For Capital (Amounts in thousands) Adequacy Purposes _________________ Amount Ratio ______ _____ As of December 31, 1999: Total Capital (to Risk Weighted Assets) $14,865 8.00% Tier I Capital (to Risk Weighted Assets) 7,433 4.00% Tier I Capital (to Average Assets) 13,016 4.00% As of December 31, 1998: Total Capital (to Risk Weighted Assets) $13,557 8.00% Tier I Capital (to Risk Weighted Assets) 6,779 4.00% Tier I Capital (to Average Assets) 11,371 4.00% To Be Well Capitalized Under Prompt Corrective (Amounts in thousands) Action Provisions _________________ Amount Ratio ______ _____ As of December 31, 1999: Total Capital (to Risk Weighted Assets) $18,581 10.00% Tier I Capital (to Risk Weighted Assets) 11,149 6.00% Tier I Capital (to Average Assets) 16,270 5.00% As of December 31, 1998: Total Capital (to Risk Weighted Assets) $16,947 10.00% Tier I Capital (to Risk Weighted Assets) 10,168 6.00% Tier I Capital (to Average Assets) 14,214 5.00%
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. 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, 1999, and 1998 were as follows:
1999 1998 ____ ____ Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $17,348,615 $17,230,239 Standby letters of credit $ 632,654 $ 937,438
19 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. 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, 1999, to the extent necessary to avoid any significant concentration of credit risk. NOTE 16 COMPREHENSIVE INCOME The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, as of January 1, 1998. Accounting principals generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale investment securities, along with net income comprise comprehensive income that is reported as a component of consolidated stockholders' equity. The adoption of SFAS No. 130 had no effect on the Corporation's consolidated net income or stockholders' equity. The components of other comprehensive income and related tax effects are as follows:
Years Ended December 31, _______________________ 1999 1998 1997 ____ ____ ____ Unrealized holding gains (losses) on available-for- sale investment securities $(8,458,502) $133,777 $1,740,650 Less reclassification adjustment for gains realized in income 123,738 178,634 67,957 ___________ ________ __________ Net unrealized gains (losses) $(8,582,240) $(44,857) $1,672,693 Tax effects 2,930,174 9,620 (595,310) ___________ ________ __________ Net of tax amount $(5,652,066) $(35,237) $1,077,383
NOTE 17 STOCKHOLDERS' EQUITY 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. A total of 1,955,818 shares were issued resulting in a transfer from retained earnings in the amount of $3,911,636 at par value. On February 10, 1998, the Board of Directors adopted a stock incentive plan and reserved 100,000 shares of common stock for issuance under the plan for certain employees of the Bank. Under the Plan, options are granted at fair market value and the time period during which any option granted may be exercised may not commence before six months or continue beyond the expiration of ten years after the option is awarded. A summary of the stock incentive plan awards and activity were are follows:
Number Exercise of Options Options Grant Date Price Employees Awarded Exercised _____ _________ ______ ________ September 22, 1998 $33.50 22 11,000 0 September 28, 1999 $26.25 25 12,000 0
20 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999 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 18 FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards (SFAS) 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. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments: CASH AND DUE FROM BANKS, SHORT-TERM INVESTMENTS, ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE The fair values are equal to the current carrying values. INVESTMENT SECURITIES Fair values have been individually determined based on currently quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. 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 SFAS 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, 1999, and 1998. 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. 21 COMMITMENTS TO EXTEND CREDIT AND STANDBY 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, 1999 and 1998, the carrying values and estimated fair values of financial instruments of the Corporation are presented in the table below:
1999 ________________________ Carrying Estimated Amount Fair Value ______ __________ FINANCIAL ASSETS: Cash and due from banks $ 6,883,976 $ 6,883,976 Short-term investments 80,157 80,157 Investment securities 135,030,818 134,803,106 Net loans 182,631,352 181,374,636 Accrued interest receivable 2,238,835 2,238,835 FINANCIAL LIABILITIES: Deposits 244,680,184 244,140,095 Short-term borrowings 31,594,327 31,593,182 Long-term borrowings 26,000,000 25,404,360 Accrued interest payable 1,203,132 1,203,132 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: Commitments to extend credit 17,348,615 Standby letters of credit 632,654 1998 ________________________ Carrying Estimated Amount Fair Value ______ __________ FINANCIAL ASSETS: Cash and due from banks $ 7,033,112 $ 7,033,112 Short-term investments 22,489 22,489 Investment securities 130,685,545 130,715,908 Net loans 159,111,597 161,783,048 Accrued interest receivable 2,133,030 2,133,030 FINANCIAL LIABILITIES: Deposits 247,091,519 247,738,736 Short-term borrowings 6,633,646 6,635,422 Long-term borrowings 13,000,000 13,240,392 Accrued interest payable 974,367 986,399 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: Commitments to extend credit 17,230,239 Standby letters of credit 937,438
22 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999 NOTE 19 PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for First Keystone Corporation (parent company only) was as follows:
BALANCE SHEETS December 31 __________________ 1999 1998 ____ ____ ASSETS Cash in subsidiary bank $ 228,926 $ 994,725 Investment in subsidiary bank 27,714,846 31,380,695 Investment in other equity securities 1,716,916 1,797,009 Prepayments and other assets 92,983 - ___________ ___________ TOTAL ASSETS $29,753,671 $34,172,429 LIABILITIES Payable to subsidiary bank $99,742 $32,294 Accrued expenses and other liabilities 296,410 386,986 ___________ ___________ TOTAL LIABILITIES $ 396,152 $ 419,280 STOCKHOLDERS' EQUITY Preferred stock $ - $ - Common stock 5,867,454 5,867,454 Surplus 9,761,066 9,761,066 Retained earnings 20,285,218 17,123,122 Accumulated other comprehensive income (loss) (3,459,538) 2,192,528 Treasury stock, at cost (3,096,681) (1,191,021) ___________ ___________ TOTAL STOCKHOLDERS' EQUITY $29,357,519 $33,753,149 ___________ ___________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,753,671 $34,172,429
STATEMENTS OF INCOME Year Ended December 31 ___________________________ 1999 1998 1997 ____ ____ ____ INCOME Dividends from subsidiary bank $3,227,100 $3,344,449 $1,386,901 Dividends - other 45,243 41,423 40,173 Securities gains 51,000 117,203 103,145 Interest 12,772 24,560 16,650 __________ __________ __________ TOTAL INCOME $3,336,115 $3,527,635 $1,546,869 Operating Expenses 35,075 36,999 28,984 __________ __________ __________ Income Before Taxes and Equity in Undistributed Net Income of Subsidiary $3,301,040 $3,490,636 $1,517,885 Income tax expense 17,159 47,572 41,756 __________ __________ __________ Income Before Equity in Undistributed Net Income of Subsidiary $3,283,881 $3,443,064 $1,476,129 Equity in undistributed income of Subsidiary 1,876,184 1,444,468 3,184,111 __________ __________ __________ NET INCOME $5,160,065 $4,887,532 $4,660,240
23
STATEMENTS OF CASH FLOWS Year Ended December 31 ____________________________ 1999 1998 1997 ____ ____ ____ OPERATING ACTIVITIES Net income $ 5,160,065 $ 4,887,532 $ 4,660,240 Adjustments to reconcile net income to net cash provided by operating activities: Securities gains (51,000) (117,202) (103,145) Equity in undistributed net income of Subsidiary (1,876,184) (1,444,468) (3,184,111) Increase (decrease) in prepaid expenses and other assets (92,983) - 11,400 Increase (decrease) in advances payable to Subsidiary 67,448 28,552 (3,003) Increase (decrease) in accrued expenses and other liabilities (15,390) (14,955) 32,149 ___________ ___________ ___________ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,191,956 $ 3,339,459 $ 1,413,530 INVESTING ACTIVITIES Purchase of equity securities $ (142,626) $ (201,023) $ (59,431) Proceeds from sale of equity securities 88,500 179,904 163,196 ___________ ___________ ___________ NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES $ (54,126) $ (21,119) $ 103,765 FINANCING ACTIVITIES Acquisition of treasury stock $(1,905,660) $(1,191,021) $ - Cash dividends paid (1,997,969) (1,726,192) (1,386,901) Dividends paid in lieu of fractional shares - - (5,650) ___________ ___________ ___________ NET CASH (USED) BY FINANCING ACTIVITIES $(3,903,629) $(2,917,213) $(1,392,551) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (765,799) $ 401,127 $ 124,744 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 994,725 593,598 468,854 ___________ ___________ ___________ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 228,926 $ 994,725 $ 593,598
24 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999 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 Year Ended December 31, 1999 Versus Year Ended December 31, 1998 Net income increased to $5,160,065 for the year ended December 31, 1999, as compared to $4,887,532 for the prior year. The net income for 1999 marked the 17th consecutive year that earnings and earnings per share have increased. Earnings per share, both basic and diluted, for 1999 were $1.80 as compared to $1.67 in 1998. The Corporation's return on average assets declined to 1.58% in 1999 from 1.72% in 1998. However, the return on average equity increased to 16.12% in 1999 from 14.68% in 1998. Return on equity increased since net income increased 5.6% and equity capital fell in 1999. The reduction in equity capital was a result of our stock repurchase plan and a loss on accumulated other comprehensive income representing the accumulated after tax loss on our available-for-sale securities. Net interest income, as indicated below in Table 1, increased by $910,000 to $11,284,000 for the year ended December 31, 1999, primarily due to the growth in average earning assets. The Corporation's net interest income on a fully taxable equivalent basis increased $1,175,000, or 10.0% in 1999 to $12,958,000. Year Ended December 31, 1998 Versus Year Ended December 31, 1997 Net income increased to $4,887,532 for the year ended December 31, 1998, as compared to $4,660,240 in 1997. Earnings per share, both basic and diluted, for 1998 was $1.67 as compared to $1.59 in 1997. The Corporation's return on average assets and return on average equity was 1.72% and 14.68%, respectively in 1998, as compared to 1.83% and 15.92%, respectively in 1997. Net interest income increased by $410,000 to $10,374,000 for the year ended 1998. The Corporation's net interest income on a fully taxable equivalent basis increased 5.1% in 1998 or $569,000 as indicated in Table 1 to $11,783,000. 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 2 on the following page provides a summary of average outstanding balances of earning assets and interest bearing liabilities with the associated interest income and expense as well as average rates earned and paid as of year-end 1999, 1998, and 1997. Table 1 - Net Interest Income
(Amounts in thousands) 1999/1998 _____________________________ Increase/(Decrease) __________________ 1999 Amount % 1998 ____ ______ ___ ____ Interest Income $23,172 $2,469 11.9 $20,703 Interest Expense 11,888 1,559 15.1 10,329 _______ ______ _______ Net Interest Income 11,284 910 8.8 10,374 Tax Equivalent Adjustment 1,674 265 18.8 1,409 _______ ______ _______ Net Interest Income (fully tax equivalent) $12,958 $1,175 10.0 $11,783 (Amounts in thousands) 1998/1997 ____________________________ Increase/(Decrease) __________________ 1998 Amount % 1997 ____ ______ ___ ____ Interest Income $20,703 $1,358 7.0 $19,345 Interest Expense 10,329 948 10.1 9,381 _______ ______ _______ Net Interest Income 10,374 410 4.1 9,964 Tax Equivalent Adjustment 1,409 159 12.7 1,250 _______ ______ _______ Net Interest Income (fully tax equivalent) $11,783 $ 569 5.1 $11,214
The yield on earning assets was 7.86% in 1999, 8.07% in 1998, and 8.37% in 1997. The rate paid on interest bearing liabilities decreased to 4.37% after decreasing to 4.50% in 1998 from 4.56% in 1997. A 21 basis point decline in the yield on earning assets, together with just a 13 basis decrease on the rate paid on interest bearing liabilities in 1999 put additional pressure on the net interest margin. The effect was a decrease in our net 27 Management's Discussion and Analysis _____________________________________________________________________ Table 2 - Distribution of Assets, Liabilities and Stockholders' Equity
1999 ___________________________________ Avg. Balance Revenue Yield /Expense /Rate ___________ ________ _____ Interest Earning Assets: Loans: Commercial $ 18,510,931 $ 1,590,855 8.59% Real Estate 131,870,649 10,799,473 8.19% Installment Loans, Net 24,289,440 2,269,305 9.34% Fees on Loans 0 (9,119) 0% ____________ ___________ ____ Total Loans (Including Fees) $174,671,020 $14,650,514 8.39% Investment Securities: Taxable $ 84,228,396 $ 5,357,426 6.36% Tax Exempt 53,607,172 4,672,106 8.72% ____________ ___________ ____ Total Investment Securities $137,835,568 $10,029,532 7.28% Interest Bearing Deposits in Banks 3,452,932 166,666 4.83% ____________ ___________ ____ Total Interest-Earning Assets $315,959,520 $24,846,711 7.86% Non-Interest Earning Assets: Cash and Due From Banks $7,167,881 Allowance for Loan Losses (2,490,397) Premises and Equipment 3,785,614 Other Real Estate Owned 48,151 Other Assets 2,835,955 ___________ Total Non-Interest Earning Assets 11,347,204 ____________ Total Assets $327,306,724 Interest-Bearing Liabilities: Savings, NOW Accounts, and Money Markets $100,597,697 $2,967,250 2.95% Time Deposits 125,229,509 6,528,815 5.21% Short-Term Borrowings 5,337,884 288,553 5.41% Long-Term Borrowings 17,700,701 1,009,032 5.70% Securities Sold U/A to Repurchase 22,969,459 1,094,546 4.77% ____________ ___________ ____ Total Interest-Bearing Liabilities $271,835,250 $11,888,196 4.37% Non-Interest Bearing Liabilities: Demand Deposits $ 21,650,871 Other Liabilities 1,808,797 Stockholders' Equity 32,011,806 ____________ Total Liabilities/ Stockholders' Equity $327,306,724 Net Interest Income Tax Equivalent $12,958,515 Margin Analysis: Interest Income/Earning Assets 7.86% Interest Expense/Earning Assets 3.76% Net Interest Income/ Earning Assets 4.10% 28 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999 Management's Discussion and Analysis ___________________________________________________________________ 1998 ___________________________________ Avg. Balance Revenue Yield /Expense /Rate ___________ _______ _____ Interest Earning Assets: Loans: Commercial $ 18,349,551 $ 1,645,311 8.97% Real Estate 116,452,691 9,986,605 8.58% Installment Loans, Net 18,989,332 1,861,608 9.80% Fees on Loans 0 7,819 0% ____________ ___________ ____ Total Loans (Including Fees) $153,791,574 $13,501,343 8.78% Investment Securities: Taxable $ 70,371,073 $ 4,481,462 6.37% Tax Exempt 45,379,362 3,882,311 8.56% ____________ ___________ ____ Total Investment Securities $115,750,435 $ 8,363,773 7.23% Interest Bearing Deposits in Banks 4,486,588 246,822 5.50% ____________ ___________ ____ Total Interest-Earning Assets $274,028,597 $22,111,938 8.07% Non-Interest Earning Assets: Cash and Due From Banks $ 6,586,890 Allowance for Loan Losses (2,374,338) Premises and Equipment 3,531,253 Other Real Estate Owned 14,533 Other Assets 2,387,914 ____________ Total Non-Interest Earning Assets 10,146,252 Total Assets $284,174,849 Interest-Bearing Liabilities: Savings, NOW Accounts, and Money Markets $100,617,034 $3,248,282 3.23% Time Deposits 108,004,662 5,960,085 5.52% Short-Term Borrowings 849,372 45,149 5.32% Long-Term Borrowings 13,871,969 817,313 5.89% Securities Sold U/A to Repurchase 6,158,768 258,319 4.19% ____________ ___________ ____ Total Interest-Bearing Liabilities $229,501,805 $10,329,148 4.50% Non-Interest Bearing Liabilities: Demand Deposits $18,970,283 Other Liabilities 2,401,369 Stockholders' Equity 33,301,392 ____________ Total Liabilities/ Stockholders' Equity $284,174,849 Net Interest Income Tax Equivalent $11,782,790 Margin Analysis: Interest Income/Earning Assets 8.07% Interest Expense/Earning Assets 3.77% Net Interest Income/ Earning Assets 4.30% 1997 ___________________________________ Avg. Balance Revenue/ Yield/ Expense Rate __________ _______ ____ Interest Earning Assets: Loans: Commercial $ 18,047,317 $ 1,534,446 8.50% Real Estate 109,683,131 9,412,077 8.58% Installment Loans, Net 17,344,819 2,124,094 12.25% Fees on Loans 0 (76,037) 0% ____________ ___________ _____ Total Loans (Including Fees) $145,075,267 $12,994,580 8.96% Investment Securities: Taxable $ 57,852,149 $ 3,868,888 6.69% Tax Exempt 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% ______________________ Tax-exempt income has been adjusted to a tax equivalent basis using an incremental rate of 34%. Installment loans are stated net of unearned interest. Average loan balances include non-accrual loans. Interest income on non-accrual loans is not included.
29 Management's Discussion and Analysis ___________________________________________________________________ interest margin to 4.10% in 1999 as compared to 4.30% in 1998 and 4.56% in 1997. The continued maintenance of an adequate net interest margin is a primary concern being addressed by management on an ongoing basis. The decline in net interest margin was due primarily to the combination of a lower yield on earning assets, an increased reliance on higher cost borrowed funds, and a lower contribution from non-interest bearing demand deposits. The narrowing of our net interest margin is consistent with industry trends. The trend reflects increased competition for both loans and deposits. Table 3 sets forth certain information regarding changes in interest income and interest expense for the periods indicated for each category of interest earning assets and interest bearing liabilities. Information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by prior rate); (ii) changes in rate (changes in average rate multiplied by prior average volume); and, (iii) changes in rate and volume (changes in average volume multiplied by change in average rate). In 1999, the increase in net interest income of $1,175,000 resulted from a change in volume of $1,243,000 and a decrease of $68,000 due to changes in rate. In 1998, there was an increase in net interest income of $569,000 resulted from a change in volume of $1,212,000 and a decrease of $643,000 due to changes in rate. Table 3 - Changes in Income and Expense, 1999 and 1998
(Amounts in thousands) 1999 COMPARED TO 1998 _______________________ VOLUME RATE NET _____ ____ ___ Interest Income: Loans, Net $1,833 $(684) $1,149 Taxable Investment Securities 882 (7) 875 Tax-Exempt Investment Securities 704 86 790 Other Short-Term Investments (57) (23) (80) ______ _____ ______ Total Interest Income $3,362 $(628) $2,734 Interest Expense: Savings, Now, and Money Markets $(1) $(280) $(281) Time Deposits 950 (382) 568 Short-Term Borrowings 239 5 244 Long-Term Borrowings 226 (34) 192 Securities Sold U/A to Repurchase 705 131 836 ______ _____ ______ Total Interest Expense $2,119 $(560) $1,559 ______ _____ ______ Net Interest Income $1,243 $ (68) $1,175 (Amounts in thousands) 1998 COMPARED TO 1997 _____________________ VOLUME RATE NET ______ ____ ___ Interest Income: Loans, Net $ 781 $(274) $ 507 Taxable Investment Securities 837 (225) 612 Tax-Exempt Investment Securities 634 (219) 415 Other Short-Term Investments (16) (1) (17) ______ _____ ______ Total Interest Income $2,236 $(719) $1,517 Interest Expense: Savings, Now, and Money Markets $367 $ 27 $ 394 Time Deposits 446 (69) 377 Short-Term Borrowings (15) (4) (19) Long-Term Borrowings 136 (33) 103 Securities Sold U/A to Repurchase 90 3 93 ______ _____ ______ Total Interest Expense $1,024 $ (76) $ 948 ______ _____ ______ Net Interest Income $1,212 $(643) $ 569 ________________________ 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 $3,249,720 in 1999, $2,735,553 in 1998, and $2,426,231 in 1997. Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 34%.
PROVISION FOR LOAN LOSSES For the year ended December 31, 1999, the provision for loan losses was $325,000 as compared to $275,000 as of December 31, 1998, an increase of 18.2%. The Corporation's provision for loan losses for the year ended December 31, 1997, was $325,000, the same as 1999. The provision was increased in 1999 primarily because of the loan growth experienced by the Corporation. Net charge-offs by the Corporation for the fiscal year end December 31, 1999, 1998, and 1997, were $146,000, $225,000, and $221,000, respectively. The allowance for loan losses as a percentage of loans, net of unearned interest, was 1.40% as of December 31, 1999, 1.50% as of December 31, 1998, and 1.56% as of December 31, 1997. On a quarterly basis, the Corporation's Board of Directors and management performs a detailed analysis of the adequacy of the allowance for loan losses. This analysis includes an evaluation of credit risk concentration, delinquency trends, past loss experience, current economic conditions, composition of the loan portfolio, classified loans and other relevant factors. 30 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999 Management's Discussion and Analysis ___________________________________________________________________ The Corporation will continue to monitor its allowance for loan losses and make future adjustments to the allowance through the provision for loan losses as conditions warrant. Although the Corporation believes that the allowance for loan losses is adequate to provide for losses inherent in the loan portfolio, there can be no assurance that future losses will not exceed the estimated amounts or that additional provisions will not be required in the future. The Bank is subject to periodic regulatory examination by the Office of the Comptroller of the Currency (OCC). As part of the examination, the OCC will assess the adequacy of the bank's allowance for loan losses and may include factors not considered by the Bank. In the event that an OCC examination results in a conclusion that the Bank's allowance for loan losses is not adequate, the Bank may be required to increase its provision for loan losses. NON-INTEREST INCOME Non-interest income is derived primarily from trust department revenue, service charges and fees, other miscellaneous revenue and the gain on the sale of mortgage loans. In addition, investment security gains or losses also impact total non-interest income. For the year ended December 31, 1999, non-interest income increased $86,000, or 5.3% as compared to an increase of $367,000 for the year ended December 31, 1998. Table 4 provides the major categories of non-interest income and each respective change. Excluding investment security gains, non-interest income in 1999 increased $141,000, or 9.7%. This compares to an increase of $256,000, or 21.4% in 1998 before investment security gains. Income from the trust department, which consists of fees generated from individual and corporate accounts, increased in 1999 by $52,000 after increasing by $68,000 in 1998. Increased income from the trust department was due primarily to new business and increasing market value of accounts. Service charges and fees, consisting primarily of service charges on deposit accounts, was the largest source of non-interest income in 1999 and 1998. Service charges and fees increased by $190,000, or 25.3% in 1999 compared to an increase of $81,000, or 12.1% in 1998. A higher volume of debit and other transactions led to the growth in both years. Other income decreased by $10,000, or 20.4% in 1999 compared to an increase of $15,000, or a 44.1% in 1998. The gain on sale of mortgages provided $35,000 in 1999, a decrease of $91,000 over 1998. Because of rising interest rates in 1999, we were not able to recognize significant gains on the sale of mortgage loans we originated for the secondary market. During 1998 when rates were the less volatile, the gain on the sale of mortgage loans was greater. Since the Corporation continues to service the mortgages which are sold, this provides a source for continued non-interest income. Table 4 - Non-Interest Income
(Amounts in thousands) 1999/1998 __________________________ Increase/(Decrease) _________________ 1999 Amount % 1998 ____ ______ ___ ____ Trust Department $ 577 $ 52 9.9 $ 525 Service Charges and Fees 940 190 25.3 750 Other 39 (10) (20.4) 49 Gain on Sale of Mortgages 35 (91) (72.2) 126 ______ ____ ______ Subtotal $1,591 $141 9.7 $1,450 Investment Securities Gains 124 (55) (30.7) 179 ______ ____ ______ Total $1,715 $ 86 5.3 $1,629 (Amounts in thousands) 1998/1997 __________________________ Increase/(Decrease) ___________________ 1998 Amount % 1997 ____ _____ __ ____ Trust Department $ 525 $ 68 14.9 $ 457 Service Charges and Fees 750 81 12.1 669 Other 49 15 44.1 34 Gain on Sale of Mortgages 126 92 270.6 34 ______ ____ ______ Subtotal 1,450 $256 21.4 $1,194 Investment Securities Gains 179 111 163.2 68 ______ ____ ______ Total $1,629 $367 29.1 $1,262
NON-INTEREST EXPENSES Non-interest expense consists of salaries and benefits, occupancy, furniture and equipment, and other miscellaneous expenses. Table 5 provides the yearly non-interest expense by category, along with the change, amount and percentage. Total non-interest expense increased by $775,000, or 14.0% in 1999 compared to an increase of $601,000, or 12.2% in 1998. Expenses associated with employees (salaries and employee benefits) continue to be the largest non-interest expenditure. Salaries and employee benefits amounted to 54.7% of total non-interest expense in 1999 and 52.2% in 1998. Salaries and employee benefits increased $565,000, or 19.6% in 1999 and $261,000, or 9.9% in 1998. The increase in both years were due to an 31 Management's Discussion and Analysis ___________________________________________________________________ increased number of employees, plus normal salary adjustments and increased benefit costs. Full time equivalent employees total 122 as of December 31, 1999, compared to 105 in 1998, and 98 in 1997. Net occupancy expense decreased $2,000, or 0.5% in 1999 as compared to an increase of $71,000, or 21.4% in 1998. Furniture and equipment expense increased $35,000, or 6.8% in 1999 compared to an increase of $28,000, or 5.7% in 1998. The increase in furniture and equipment expense in 1999 and 1998 relate to higher depreciation associated with computer processing and related equipment. Other operating expenses increased $177,000, or 10.2% in 1999 as compared to an increase of $241,000, or 16.2% in 1998. Higher other expenses are associated with increased professional fees, postage, supplies, insurance, marketing, and advertising. The overall level of non-interest expense continues to below, relative to our peers. In fact, our total non-interest expense was less than 2% of average assets in both 1999 and 1998. Non-interest expense as a percentage of average assets under 2% places us among the leaders in our peer financial institution categories in controlling non-interest expense. Table 5 - Non-Interest Expense
(Amounts in thousands) 1999/1998 ________________________________ Increase/(Decrease) __________________ 1999 Amount % 1998 ____ ______ ______ ____ Salaries and Employee Benefits $3,453 $565 19.6 $2,888 Occupancy, Net 401 (2) (.5) 403 Furniture and Equipment 551 35 6.8 516 Other 1,905 177 10.2 1,728 ______ ____ ______ Total $6,310 $775 14.0 $5,535 (Amounts in thousands) 1998/1997 ____________________________ Increase/(Decrease) __________________ 1998 Amount % 1997 ____ ______ ______ ____ Salaries and Employee Benefits $2,888 $261 9.9 $2,627 Occupancy, Net 403 71 21.4 332 Furniture and Equipment 516 28 5.7 488 Other 1,728 241 16.2 1,487 ______ ____ ______ Total $5,535 $601 12.2 $4,934
INCOME TAX EXPENSE Income tax expense for the year ended December 31, 1999, was $1,203,966 as compared to $1,304,606 and $1,307,436 for the years ended December 31, 1998, and December 31, 1997, respectively. In 1999 and 1998, our income tax expense decreased even though income before taxes increased $171,893 in 1999 and $224,462 in 1998. An increase in tax exempt interest, derived from both our tax-free loans and municipal investment securities in 1999 and 1998, resulted in a lower income tax liability. The effective income tax rate was 18.9% in 1999, 20.9% in 1998, and 21.7% in 1997. The limited availability of municipal investments at attractive interest rates may result in a higher effective tax rate in future years. FINANCIAL CONDITION GENERAL Total assets increased to $333,515,787, at year-end 1999, an increase of 10.1% over year-end 1998. As of December 31, 1999, total deposits amounted to $244,680,184, a decrease of 1.0% over 1998. Assets as of December 31, 1998, were $303,028,481, an increase of 13.3% over 1997, while total deposits as of year-end 1998 amounted to $247,091,519, an increase of 13.5% over 1997. The increase in assets primarily reflects the deployment of proceeds from borrowings and deposits into loans and investment securities. The Corporation continues to maintain and manage its asset growth. Our strong equity capital position provides us an opportunity to leverage our asset growth. Borrowings did increase in 1999 by $37,960,681 and in 1998 by $4,531,486. The additional borrowings in 1999 were used to fund our asset growth since deposits declined $2,411,335. Core deposits, which include demand deposits, interest bearing demand deposits, money market accounts, savings accounts, and time deposits of individuals are our most significant source of funds. Despite successful sales campaigns which attracted new customers and generated growth in retail certificates of deposit (time deposits of individuals), the loss of a substantial commercial deposit account and a shifting of our customer preferences led to an overall decline in deposits during 1999. 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 96.0% as of December 31, 1999, compared to 96.4% as of December 31, 1998, and 96.4% at December 1, 1997. 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. 32 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999 Management's Discussion and Analysis ___________________________________________________________________ LOANS Total loans, net of unearned income, increased to $185,230,902 as of December 31, 1999, as compared to $161,532,639 as of December 31, 1998. Table 6 provides data relating to the composition of the Corporation's loan portfolio on the dates indicated. Total loans, net of unearned income increased $23,698,000, or 14.7% in 1999 compared to an increase of $9,382,000, or 6.2% in 1998 and an increase of $18,890,000, or 14.2% in 1997. The loan portfolio is well diversified and increases in the portfolio the last two years have been primarily from real estate loans, commercial loans secured by real estate, and consumer loans. Also, in 1999 tax exempt loans increased to a new record level. In 1999, approximately $6,000,000 of residential mortgage loans were sold in the secondary market and approximately $5,600,000 were sold in 1998. The Corporation will continue to originate and market long-term fixed rate residential mortgage loans which conform to secondary market requirements. The Corporation derives ongoing income from the servicing of mortgages sold in the secondary market. The noted loan growth was achieved without a significant percentage increase in delinquencies or charge-offs. The Corporation internally underwrites each of its loans to comply with prescribed policies and approval levels established by its Board of Directors. Table 6 - Loans Outstanding, Net of Unearned Income
(Amounts in thousands) December 31, _____________________________ 1999 1998 1997 ____ ____ ____ Commercial, financial and agricultural: Commercial secured by real estate $ 55,514 $ 43,366 $ 41,566 Commercial - other 17,864 16,579 17,241 Tax exempt 4,133 2,254 2,566 Real estate (primarily residential mortgage loans) 83,099 77,858 72,901 Consumer loans 30,595 26,205 22,009 ________ ________ ________ Total Gross Loans $191,205 $166,262 $156,283 Less: Unearned income and unamortized loan fees net of costs 5,974 4,729 4,132 ________ ________ ________ Total Loans, net of unearned income $185,231 $161,533 $152,151 (Amounts in thousands) December 31, _________________ 1996 1995 ____ ____ Commercial, financial and agricultural: Commercial secured by real estate $ 33,103 $ 28,846 Commercial - other 13,574 17,563 Tax exempt 2,263 3,602 Real estate (primarily residential mortgage loans) 65,145 58,438 Consumer loans 23,027 23,681 ________ ________ Total Gross Loans $137,112 $132,130 Less: Unearned income and unamortized loan fees net of costs 3,851 4,069 ________ ________ Total Loans, net of unearned income $133,261 $128,061
INVESTMENT SECURITIES The Corporation uses investment securities to not only generate interest and dividend revenue, but also to help manage interest rate risk and to provide liquidity to meet operating cash needs. 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 to $123,468,000 in 1999, a 5.8% increase over 1998. At December 31, 1999, the net unrealized loss, net of the tax effect, on these securities was $3,459,538 and is included in stockholders' equity as accumulated other comprehensive loss. At December 31, 1998, accumulated other comprehensive income amounted to $2,192,528. The increase in interest rates during 1999 reduced the market value of our available-for-sale securities. Held-to-maturity securities declined $2,422,000, or a 17.3% decrease over 1998. Table 7 provides data on the carrying value of our investment portfolio on the dates indicated. 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 primarily of common stock investments in the Federal Reserve Bank and the Federal Home Loan Bank, as well as other bank holding companies and commercial banks. Securities available-for-sale may be sold as part of the overall asset and liability management process. Realized gains and losses are reflected in the results of operations on our statements of income. The investment portfolio does not contain any structured notes, step-up bonds, or any off-balance sheet derivatives. During 1999, interest bearing deposits in other banks increased to $80,157 from $22,489 in 1998. Balances in interest bearing deposits in other banks were kept low as funds were invested in marketable securities to maximize income while still addressing liquidity needs. 33 Management's Discussion and Analysis ___________________________________________________________________ Table 7 - Carrying Value of Investment Securities
(Amounts in thousands) December 31, __________________ 1999 __________________ Available Held to for Sale Maturity ________ ________ U.S. Treasury $ 0 $ 0 U. S. Government Corporations and Agencies 61,733 8,170 State and Municipal 54,541 3,393 Other Securities 0 0 Equity Securities 7,194 0 ________ _______ Total Investment Securities $123,468 $11,563 (Amounts in thousands) December 31, __________________ 1998 __________________ Available Held to for Sale Maturity ________ ________ U.S. Treasury $ 7,486 $ 0 U. S. Government Corporations and Agencies 52,633 10,594 State and Municipal 52,369 3,391 Other Securities 0 0 Equity Securities 4,213 0 ________ _______ Total Investment Securities $116,701 $13,985 (Amounts in thousands) December 31, __________________ 1997 ___________________ Available Held to for Sale Maturity ________ ________ 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
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses constitutes the amount available to absorb losses within the loan portfolio. As of December 31, 1999, the allowance for loan losses was $2,600,000 as compared to the December 31, 1998, amount of $2,421,000 and the December 31, 1997, amount of $2,371,000. The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for possible loan losses when management believes that the collectibility of the principal is unlikely. The risk characteristics of the loan portfolio are managed through the various control processes, including credit evaluations of individual borrowers, periodic reviews, and diversification by industry. Risk is further mitigated through the application of lending procedures such as the holding of adequate collateral and the establishment of contractual guarantees. 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. This assessment results in an allowance consisting of two components, allocated and unallocated. Management maintains its loan review and loan classification standards consistent with those of its regulatory supervisory authority. Management feels, considering the conservative portfolio composition, which is largely composed of small retail loans (mortgages and installments) with minimal classified assets, low delinquencies, and favorable loss history, that the allowance for loan losses is adequate to cover foreseeable future losses. Table 8 contains an analysis of our Allowance for Loan Losses indicating charge-offs and recoveries by the year. In 1999, net charge-offs as a percentage of average loans were .08% compared to .15% in 1998 and .15% in 1997. Net charge-offs amounted to $146,000 in 1999 as compared to $225,000 and $221,000 in 1998 and 1997, respectively. It is the policy of management and the Corporation's Board of Directors to provide for losses on both identified and unidentified losses inherent in its loan portfolio. A provision for loan losses is charged to operations based upon an evaluation of the potential losses in the loan portfolio. This evaluation takes into account such factors as portfolio concentrations, delinquency, trends, trends of non-accrual and classified loans, economic conditions, and other relevant factors. The loan review process which is conducted quarterly, is an integral part of our evaluation of the loan portfolio. A detailed quarterly analysis to determine the adequacy of the Corporation's allowance for loan losses is reviewed by our Board of Directors. 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 1.49% in 1999, 1.57% in 1998, and 1.63% in 1997. 34 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999 Management's Discussion and Analysis ___________________________________________________________________ Table 8 - Analysis of Allowance for Loan Losses
(Amounts in thousands) Years Ended December 31, ______________________ 1999 1998 1997 ____ ____ _____ Balance at beginning of period $2,421 $2,371 $2,267 Charge-offs: Commercial, financial, and agricultural 25 66 107 Real estate - mortgage 20 42 54 Installment loans to individuals 213 161 111 ______ ______ ______ 258 269 272 Recoveries: Commercial, financial, and agricultural 23 0 7 Real estate - mortgage 62 8 17 Installment loans to individuals 27 36 27 ______ ______ ______ 112 44 51 Net charge-offs 146 225 221 Additions charged to operations 325 275 325 ______ ______ ______ Balance at end of period $2,600 $2,421 $2,371 Ratio of net charge-offs during the period to average loans outstanding during the period .08% .15% .15% Allowance for loan losses to average loans outstanding during the period 1.49% 1.57% 1.63% (Amounts in thousands) Years Ended December 31, ______________________ 1996 1995 ____ ____ Balance at beginning of period $2,015 $1,802 Charge-offs: Commercial, financial, and agricultural 214 18 Real estate - mortgage 0 118 Installment loans to individuals 88 50 ______ ______ 302 186 Recoveries: Commercial, financial, and agricultural 12 6 Real estate - mortgage 8 2 Installment loans to individuals 17 19 ______ ______ 37 27 Net charge-offs 265 159 Additions charged to operations 517 372 ______ ______ Balance at end of period $2,267 $2,015 Ratio of net charge-offs during the period to average loans outstanding during the period .21% .13% Allowance for loan losses to average loans outstanding during the period 1.76% 1.65%
Table 9 sets forth the allocation of the Bank's allowance for loan losses by loan category and the percentage of loans in each category to total loans receivable at the dates indicated. The portion of the allowance for loan losses allocated to each loan category does not represent the total available for future losses that may occur within the loan category, since the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio. Table 9 - Allocation of Allowance for Loan Losses
(Amounts in thousands) December 31, _____________________________________ 1999 % 1998 % ____ ____ ____ ____ Commercial, financial, and agricultural $ 308 11.2 $ 253 9.8 Real estate - mortgage 1,431 75.5 1,237 74.3 Installments to individuals 425 13.3 319 15.9 Unallocated 436 N/A 612 N/A ______ _____ ______ _____ $2,600 100.0 $2,421 100.0 (Amounts in thousands) December 31, _____________________________________ 1997 % 1996 % ____ ____ ____ ____ Commercial, financial, and agricultural $ 271 12.1 $ 303 10.7 Real estate - mortgage 1,135 73.9 1,088 72.5 Installments to individuals 241 14.0 203 16.8 Unallocated 724 N/A 673 N/A ______ _____ ______ _____ $2,371 100.0 $2,267 100.0 (Amounts in thousands) December 31, _______________________________________ 1995 % ____ ____ Commercial, financial, and agricultural $ 344 17.4 Real estate - mortgage 663 66.1 Installments to individuals 443 16.5 Unallocated 565 N/A ______ _____ $2,015 100.0 ______________________ Percentage of loans in each category to total loans.
NON-PERFORMING ASSETS The recent growth experienced by the Corporation has not resulted in a corresponding percentage increase in delinquencies and non-performing loans. Table 10 details the Corporation's non-performing assets at the dates indicated. 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. 35 Management's Discussion and Analysis ___________________________________________________________________ The total of non-performing assets did decrease to $750,000 as of December 31, 1999, as compared to $881,000 as of December 31, 1998. Non-accrual and restructured loans declined from $854,000 in 1998 to $618,000 in 1999. Other real estate/foreclosed assets, consisting of two real estate parcels, increased to $85,000 in 1999. The Corporation is in the process of selling the two real estate parcels and any loss should be minimal. Loans past-due 90 days or more and still accruing increased to $47,000 in 1999 from $27,000 in 1998. Our allowance for loan losses to total non-performing assets remains very strong at 346.6% in 1999 and 274.8% in 1998. Loan quality is monitored closely, and we actively work with borrowers to resolve credit problems. Excluding the assets disclosed in Table 10, 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 1999 and 1998 was $6,380 and $5,610, respectively. Interest income, which would have been recorded on these loans under the original terms in 1999 and 1998 was $68,569 and $96,425, respectively. At December 31, 1999, 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, 1999, 1998, and 1997, 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 74.8% of the loan portfolio as of December 31, 1999, down from 75.0% in 1998. 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 10 - Non-Performing Assets
(Amounts in thousands) December 31, ____________________________________ 1999 1998 1997 1996 1995 ____ ____ ____ ____ ____ Non-accrual and restructured loans $ 618 $ 854 $ 321 $ 267 $ 557 Other real estate/foreclosed assets 85 0 29 84 0 Loans past-due 90 days or more and still accruing 47 27 336 263 68 ______ ______ ______ ______ ______ Total non-performing assets $ 750 $ 881 $ 686 $ 614 $ 625 Non-performing assets to period-end loans and foreclosed assets .40% .55% .45% .46% .48% Total non-performing assets to total assets .22% .29% .26% .25% .28% Total allowance for loan losses to total non- performing assets 346.6% 274.8% 345.7% 369.2% 322.4%
DEPOSITS AND OTHER BORROWED FUNDS Consumer and commercial retail deposits are attracted primarily by First Keystone's subsidiary bank's nine full service office locations. The Bank offers a broad selection of deposit products and continually evaluates its interest rates and fees on deposit products. The Bank regularly reviews competing financial institutions and takes in account prevailing market rates, especially when establishing interest rates on certificates of deposit. Deposits decreased by $2,411,335, or a 1.0% decrease when comparing December 31, 1999, to December 31, 1998. This decrease compares to deposit increases of 13.5% in 1998 and 9.6% in 1997. During 1999, the Corporation experienced a deposit reduction in both non-interest bearing and interest bearing deposits. Non-interest bearing deposits decreased to $20,919,398 as of December 31, 1999, a decrease of 36 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999 Management's Discussion and Analysis ___________________________________________________________________ $1,829,676, or 8.0% over 1998. Interest bearing deposits amounted to $223,760,786 as of December 31, 1999, a decrease of $581,659, or 0.3% over 1998. During 1999 and 1998, the Corporation increased its reliance on both short-term borrowings and long-term borrowings to fund primarily loan growth and its stock repurchase program. Total borrowings were $57,594,327 as of December 31, 1999, compared to $19,633,646 on December 31, 1998. Short-term borrowings are comprised of federal funds purchased, securities sold under agreements to repurchase, U.S. Treasury demand notes, and overnight, as well as short-term borrowings from the Federal Home Loan Bank (FHLB). Long-term borrowings are typically FHLB term borrowings with a maturity of one year or more. Some of the additional term borrowings were made to take advantage of special rates offered by the FHLB. In connection with FHLB borrowings and securities sold under agreements to repurchase, the Corporation maintains certain eligible assets as collateral. CAPITAL STRENGTH Normal increases in capital are generated by net income, less cash dividends paid out. Also, the net unrealized gains or losses on investment securities available for sale decreased shareholders' equity or capital in 1999, referred to as accumulated other comprehensive income (loss). The total net decrease in capital was $4,395,630 in 1999 after an increase of $1,935,082 in 1998. The accumulated other comprehensive income amounted to a loss of $3,459,538 in 1999 and a gain of $2,192,528 in 1998. Another factor for the decrease in equity capital in 1999 relates to our stock repurchase plan. The Corporation's Board of Directors approved repurchasing up to 100,000 shares of common stock. As of December 31, 1999, the Corporation had repurchased 100,000 shares at a cost of $3,096,681. Return on equity (ROE) is computed by dividing net income by average stockholders' equity. This ratio was 16.12% for 1999, 14.68% for 1998, and 15.92% for 1997. 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 11 reflects risk-based capital ratios and the leverage ratio for our Corporation and Bank. The Corporation's leverage ratio was 10.02% at December 31, 1999, and 10.50% as of December 31, 1998. The Corporation has consistently maintained regulatory capital ratios at or above the "well capitalized" standards. For additional information on capital ratios, see Note 14 to the Consolidated Financial Statements. The risk-based capital ratios also decreased somewhat in 1999 from 1998 for both the Corporation and the Bank, but remain strong. 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, 1999, and December 31, 1998, for the Corporation and the Bank. Table 11 - Capital Ratios
December 31, 1999 _________________ Corporation Bank ___________ ____ Risk-Based Capital: Tier I risk-based capital ratio 16.43% 17.00% Total risk-based capital ratio (Tier 1 and Tier 2) 17.85% 18.25% Leverage Ratio: Tier I capital to average assets 10.02% 9.71% December 31, 1998 _________________ Corporation Bank ___________ ____ Risk-Based Capital: Tier I risk-based capital ratio 18.62% 18.92% Total risk-based capital ratio (Tier 1 and Tier 2) 20.11% 20.17% Leverage Ratio: Tier I capital to average assets 10.50% 9.95%
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. At year-end 1999, cash and due from banks and interest-bearing deposits in other banks totaled $6,964,133 as compared to $7,055,601 at year-end 1998. Additionally, maturing loans and repayment of loans are another source of asset liquidity. 37 Management's Discussion and Analysis ___________________________________________________________________ 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, the Corporation's subsidiary bank does have access to funds on a short-term basis from the Federal Reserve Bank discount window. Also, 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. Table 12 - Loan Maturities and Interest Sensitivity
(Amounts in thousands) December 31, 1999 _______________________________ One year One thru Over five or less five years years Total Commercial, Financial and Agricultural Fixed interest rate $ 5,895 $ 9,706 $13,220 $28,821 Variable interest rate 28,176 22,908 3,867 54,951 _______ _______ _______ _______ Total $34,071 $32,614 $17,087 $83,772 Real Estate Construction Fixed interest rate $ 99 $ 1,253 $ 0 $ 1,352 Variable interest rate $ 0 $ 0 $ 0 $ 0 __________________________ Excludes residential mortgages and consumer loans.
FORWARD LOOKING STATEMENTS The sections that follow, Market Risk Management, Asset/Liability Management, and Year 2000 Compliance contain certain forward looking statements. These forward looking statements involve significant risks and uncertainties, including changes in economic and financial market conditions. The Corporation's ability to execute its business plans, including its plan to address the Year 2000 issue, and the ability of third parties to effectively address their Year 2000 issues are significant risks. Although First Keystone Corporation believes that the expectations reflected in such forward looking statements are reasonable, actual results may differ materially. 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. The Corporation's interest rate risk results from timing differences in the repricing of assets, liabilities, off-balance sheet instruments, and changes in relationships between ratio indices and the potential exercise of explicit or embedded options. 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, 1999, the Corporation's securities portfolio included $123,467,820 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. 38 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999 Management's Discussion and Analysis ___________________________________________________________________ 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. 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, the Corporation's balance sheet has more liabilities repricing than assets and is liability sensitive or negatively gapped. This position would contribute positively to net interest income in a falling rate environment. Limitations of gap analysis as illustrated in Table 13 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, 1999 in the case of the following schedule) while the Corporation continually adjusts its interest sensitivity throughout the year. Also in Table 13, the Corporation has elected to incorporate some 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 $35,913,000. 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 and 1999, did not have a significant effect on our net interest income. Table 13 - Interest Rate Sensitivity Analysis
(Amounts in thousands) December 31, 1999 _____________________________ 3 Months 3 - 12 1 - 5 or Less Months Years ______ ______ _____ Rate Sensitive Assets: Cash and cash equivalent $ 80 $ 0 $ 0 Loans 32,331 22,732 69,321 Investments 11,428 7,344 30,564 ________ ________ ________ Total Rate Sensitive Assets $ 43,839 $ 30,076 $ 99,885 Rate Sensitive Liabilities: Interest-bearing deposits $ 45,354 $ 62,490 $ 35,287 Short-term borrowings 31,398 196 0 Long-term borrowings 3,000 5,250 5,000 ________ ________ ________ Total Rate Sensitive Liabilities $ 79,752 $ 67,936 $ 40,287 Interest Rate Sensitivity: Current period $(35,913) $(37,860) $ 59,598 Cumulative gap (35,913) (73,773) (14,175) Cumulative gap to total assets (10.77%) (22.12%) (4.25%) (Amounts in thousands) December 31, 1999 _____________________________ Over 5 Years Total Rate Sensitive Assets: Cash and cash equivalent $ 0 $ 80 Loans 58,247 182,631 Investments 85,694 135,030 ________ ________ Total Rate Sensitive Assets $143,941 $317,741 Rate Sensitive Liabilities: Interest-bearing deposits $ 80,629 $223,760 Short-term borrowings 0 31,594 Long-term borrowings 12,750 26,000 ________ ________ Total Rate Sensitive Liabilities $ 93,379 $281,354 Interest Rate Sensitivity: Current period $ 50,562 $ 36,387 Cumulative gap 36,387 Cumulative gap to total assets 10.91%
Interest Rate Risk Measurement 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. One of the primary goals of asset/liability management is to maximize net interest income and the net value of the Corporation's future cash flows within established interest rate risk limits. Another way management reviews its interest sensitivity position in addition to earnings simulation modeling is net present value estimation. While each of these interest rate risk measurements has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Corporation. 39 Management's Discussion and Analysis ___________________________________________________________________ Earnings Simulation Modeling Earnings simulation modeling 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. 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 5.64% if rates fell gradually by two percentage points over one year. The model projects a decrease of approximately 5.14% in net-interest income if rates rise gradually by two percentage points over one year. Both of these forecasts are within the one year policy guidelines of 10%. Net Present Value Estimation The net present value measure is used for helping to determine levels of risk at a point in time present in the balance sheet that might not be taken into account in the earnings simulation model. 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 17.4%. Additionally, net present value is projected to decrease by 39.6% if rates increase immediately by 200 basis points, both within policy limits restricting these amounts to 50%. During 1999, the Corporation's net present value risk position grew more liability sensitive. The change in position was primarily a result of higher interest rates and repurchases of the Corporation's own stock. 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. Table 14 - Effect of Change in Interest Rates
Projected ALCO Change Guidelines ______ _________ Effect on Net Interest Income 1-year Net Income simulation Projection 200 bp Ramp vs Stable Rate 5.64% (10%) +200 bp Ramp vs Stable Rate (5.14%) (10%) Effect on Net Present Value of Balance Sheet Static Net Present Value Change 200 bp Shock vs Stable Rate 17.4% (50%) +200 bp Shock vs Stable Rate (39.6%) (50%)
YEAR 2000 COMPLIANCE During 1999, management completed the process of preparing its computer systems and applications for the Year 2000. The process involves identifying and remediating date recognition problems in computer systems and software and other operating equipment that could be caused by the date change from December 31, 1999, to January 1, 2000. In addition, the process involved working with third parties to address their year 2000 issues and developing contingency plans to address potential risks in the event of Year 2000 failures. To date, First Keystone Corporation has successfully managed the transition into the Year 2000. Unanticipated problems associated with non-compliance by third parties and disruptions to the economy in general resulting from Year 2000 issues could still have a negative impact on First Keystone Corporation. 40 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999 Management's Discussion and Analysis ___________________________________________________________________ Management will continue to monitor all business processes, including interaction with customers, vendors, and other third parties throughout 2000 to address any issues and insure all processes and systems continue to function properly. Through 1999, the Corporation estimates that its total Year 2000 project cost did not exceed $100,000. The expenses for maintenance or modification of software associated with the Year 2000 were expensed as incurred. The costs of new software were capitalized and amortized over the software's useful life. The aforementioned Year 2000 project cost may change as the Corporation progresses through 2000. Some additional project costs are expected to be incurred in 2000 for ongoing monitoring and support activities. These costs will be expensed as incurred and are estimated not to exceed $25,000. Management believes it has an effective plan in place to address the Year 2000 issues in a timely manner and, thus far, activities have tracked in accordance with the original plan. 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 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 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 15 - Market Price/Dividend History
1999 __________________________ Common Stock Dividends High/Low Paid _______ ____ First Quarter $33.50/$30.00 $.17 Second Quarter $30.25/$28.50 .17 Third Quarter $29.00/$26.25 .17 Fourth Quarter $26.25/$20.25 .19 1998 __________________________ Common Stock Dividends High/Low Paid _______ ____ First Quarter $30.25/$19.08 $.14 Second Quarter $32.50/$29.50 .14 Third Quarter $36.13/$32.00 .14 Fourth Quarter $34.38/$32.50 .17 1997 __________________________ Common Stock Dividends High/Low Paid _______ ____ 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 Reflects adjustment for stock dividends more fully described in Note 1.
The following brokerage firms make a market in First Keystone Corporation stock: Janney Montgomery Scott, Inc. 1801 Market Street Philadelphia, PA 19103 (800) 526-6397 Ryan, Beck and Company 150 Monument Road Suite 106 Bala Cynwyd, PA 19004 (800) 223-8969 Tucker Anthony Cleary Gull 2101 Oregon Pike Lancaster, PA 17601 (717) 519-6020 41 Management's Discussion and Analysis ___________________________________________________________________ Table 16 - Quarterly Results of Operations (Unaudited)
(Amounts in thousands, except per share) Three Months Ended _____________________________________ 1999 March June September December 31 30 30 31 _____ ____ ________ _______ Interest income $5,435 $5,765 $5,900 $6,072 Interest expense 2,745 2,994 3,030 3,119 Net interest income $2,690 $2,771 $2,870 $2,953 Provision for loan losses 75 100 50 100 Other non-interest income 364 478 461 412 Non-interest expense 1,491 1,517 1,588 1,714 ______ ______ ______ ______ Income before income taxes $1,488 $1,632 $1,693 $1,551 Income taxes 265 332 338 269 ______ ______ ______ ______ Net income $1,223 $1,300 $1,355 $1,282 Per share $ .42 $ .45 $ .47 $ .45 (Amounts in thousands, except per share) Three Months Ended _____________________________________ 1998 March June September December 31 30 30 31 _____ ____ ________ _______ Interest income $4,952 $5,183 $5,226 $5,342 Interest expense 2,446 2,531 2,613 2,739 ______ ______ ______ ______ Net interest income $2,506 $2,652 $2,613 $2,603 Provision for loan losses 50 75 50 100 Other non-interest income 352 324 427 525 Non-interest expense 1,351 1,308 1,379 1,497 ______ ______ ______ ______ Income before income taxes $1,457 $1,593 $1,611 $1,531 Income taxes 316 345 342 302 ______ ______ ______ ______ Net income $1,141 $1,248 $1,269 $1,229 Per share $ .39 $ .43 $ .43 $ .42 Reflects adjustment for stock dividends more fully described in Note 1.
42 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999 EX-21 4 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. 20 EX-23 5 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 10, 2000, included in the 1999 Annual Report to Stockholders of First Keystone Corporation. /s/ J. H. Williams & Co., LLP March 28, 2000 J. H. Williams & Co., LLP Kingston, Pennsylvania Certified Public Accountants 21 EX-27 6
9 1,000 12-MOS DEC-31-1999 DEC-31-1999 6,884 80 0 0 123,468 11,563 11,335 185,231 2,600 333,516 244,680 31,594 1,884 26,000 0 0 5,867 23,490 333,516 14,567 8,439 167 23,173 9,496 2,392 11,284 325 124 6,310 6,364 0 0 0 5,160 1.80 1.80 4.10 618 47 0 6,161 2,421 258 112 2,600 2,600 0 435
EX-99 7 EXHIBIT 99 DEFINITIVE PROXY STATEMENT, NOTICE OF ANNUAL MEETING AND FORM OF PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 18, 2000 23 First Keystone Corporation 111 West Front Street Berwick, Pennsylvania 18603 March 28, 2000 DEAR SHAREHOLDER: It is my pleasure to invite you to attend the 2000 Annual Meeting of Shareholders of First Keystone Corporation to be held on Tuesday, April 18, 2000, at 10:00 a.m., Eastern Daylight 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: (Bullet) The election of 4 Class A Directors; and (Bullet) The ratification of the selection of the independent auditors for 2000. 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 form 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 of your intentions to the Secretary of the corporation so that any ballot you submit at the meeting will supersede your prior proxy. Thank you for your continued support. I look forward to seeing you at the Annual Meeting if you are able to attend. Sincerely, /s/ J. Gerald Bazewicz J. Gerald Bazewicz President Proxy Statement Table of Contents __________________ Page General Information 2 Introduction, Date, Time and Place of Annual Meeting 2 Voting Procedures 2 Solicitation and Voting of Proxies 2 Revocability of Proxy 2 Voting Securities, Record Date and Quorum 3 Vote Required for Approval 3 Principal Beneficial Owners of the Corporation's Stock 3 Principal Owners 3 Beneficial Ownership by Officers, Directors and Nominees 4 Proposal No. 1: Election of Directors 6 Information as to Nominees and Directors 6 Directors 7 Committees of the Board of Directors 8 Procedures for Nominating Directors 9 Compensation of Directors 9 Section 16(A) Beneficial Ownership Reporting Compliance 9 Board Compensation Committee Report on Executive Compensation 10 Base Salary 10 Cash Bonuses 10 Long-Term Incentives 11 Executive Compensation 11 Aggregated Stock Option Exercises 12 401(k) Plan 13 Supplemental Employee Retirement Plan 13 Other Executive Benefits 13 Certain Relationships and Related Transactions 15 Principal Officers of the Corporation 16 Principal Officers of the Bank 16 Legal Proceedings 17 Proposal No. 2: Ratification of Independent Auditors 17 Shareholder Proposals 18 Other Matters 18 FIRST KEYSTONE CORPORATION NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 18, 2000 TO THE SHAREHOLDERS OF FIRST KEYSTONE CORPORATION: Notice is hereby given that the Annual Meeting of Shareholders of FIRST KEYSTONE CORPORATION will be held at 10:00 a.m., Eastern Daylight Time, on Tuesday, April 18, 2000, 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 4 Class A Directors to serve for a three-year term and until their successors are properly elected and qualified; 2. To ratify the selection of J. H. Williams & Co., LLP as the independent auditors for the corporation for the year ending December 31, 2000; and 3. To transact such other business as may properly come before the Annual Meeting and any adjournment or postponement of the meeting. In accordance with the by-laws of the corporation and action of the Board of Directors, the corporation is giving notice of the Annual Meeting only to those shareholders on the corporation's records as of the close of business on March 14, 2000, and only those shareholders may vote at the Annual Meeting and any adjournment. A copy of the corporation's Annual Report for the fiscal year ended December 31, 1999, is being mailed with this Notice. Copies of the corporation's Annual Report for the 1998 fiscal year may be obtained at no cost by contacting J. Gerald Bazewicz, President, 111 West Front Street, Berwick, Pennsylvania 18603, telephone: (570) 752-3671. Whether or not you expect to attend the Annual Meeting in person, you are requested to complete, sign, date, and promptly return the enclosed proxy form in the accompanying postage-prepaid envelope. By so doing, you will ensure your proper representation at the meeting. The prompt return of your signed proxy will also save the corporation the expense of additional proxy solicitation. The execution and delivery of the enclosed 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 28, 2000 PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS OF FIRST KEYSTONE CORPORATION TO BE HELD ON APRIL 18, 2000 GENERAL INTRODUCTION, DATE, TIME AND PLACE OF ANNUAL MEETING FIRST KEYSTONE CORPORATION, a Pennsylvania business corporation and registered bank holding company, is furnishing this Proxy Statement in connection with the solicitation by its Board of Directors of proxies to be voted at the Annual Meeting of Shareholders of the corporation to be held on Tuesday, April 18, 2000, at 10:00 a.m., Eastern Daylight 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, 111 West Front Street, Berwick, Pennsylvania 18603. The bank is a wholly-owned subsidiary of the corporation and its sole subsidiary. The telephone number for the corporation is (570) 752-3671. All inquiries should be directed to J. Gerald Bazewicz, President of the corporation. SOLICITATION AND VOTING OF PROXIES This Proxy Statement and the enclosed proxy form are first being sent to shareholders of the corporation on or about March 28, 2000. By properly completing and returning the accompanying proxy, a shareholder is appointing the proxy holders to vote his or her shares as the shareholder specifies on the proxy. If a shareholder signs the proxy but does not make any selection, the proxy holders will vote the proxy: (Bullet) FOR the election of the nominees for Class A Director named below, and (Bullet) FOR the ratification of the selection of J. H. Williams & Co. as the independent auditors for the corporation for the year ending December 31, 2000. The 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 of such intent. The corporation will pay 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. In addition to the use of the mail, certain directors, officers and employees of the corporation and the bank may solicit proxies personally, by telephone, telecopier or other electronic means. The corporation will not pay any additional compensation for the solicitation. The corporation will make arrangements 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 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: (Bullet) By giving written notice of revocation to John L. Coates, Secretary of First Keystone Corporation, at 111 West Front Street, Berwick, Pennsylvania, 18603; (Bullet) By executing a later-dated proxy and giving written notice of this fact to the Secretary of the corporation; or Page 2 First Keystone Corporation (Bullet) By voting in person after giving written notice to the Secretary of the corporation, in person or at the above address. VOTING SECURITIES, RECORD DATE AND QUORUM At the close of business on March 14, 2000, the corporation had outstanding 2,833,727 shares of common stock, par value $2.00 per share, the only issued and outstanding class of stock. The corporation also had 100,000 shares held in treasury as issued but not outstanding shares as of that date. The corporation has 500,000 shares of preferred stock, par value $10.00 per share, authorized. As of March 14, 2000, no shares of preferred stock were issued. Only shareholders of record as of the close of business on March 14, 2000, may 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. Pennsylvania law and the by-laws of the corporation require the presence of a quorum for each matter that shareholders will vote on at the Annual Meeting. 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. The corporation will count votes withheld and abstentions in determining the presence of a quorum for a particular matter. The corporation will not count broker non-votes in determining the presence of a quorum for a particular matter as to which the broker withheld authority. Those shareholders present, in person or by proxy, may adjourn the meeting to another time and place if a quorum is lacking. VOTE REQUIRED FOR APPROVAL OF PROPOSALS Assuming the presence of a quorum, the 4 nominees for director receiving the highest number of votes cast by shareholders will be elected. Votes withheld from a nominee and broker non-votes will not be cast for the nominee. Assuming the presence of a quorum, ratification of the selection of independent auditors requires the affirmative vote of a majority of all votes cast by shareholders, in person or by proxy, on the matter. Abstentions and broker non-votes are not votes cast and therefore do not count either for or against 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 14, 2000, 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 5% of the corporation's outstanding common stock, the number of shares beneficially owned by the person and the percentage of the corporation's outstanding common stock so owned. Proxy Statement Page 3
Amount and Percent of Nature of Outstanding Beneficial Common Stock Name and Address Ownership Beneficially Owned ________________ _____________ __________________ Berbank 341,494 12.05% First National Bank of Berwick Trust Department 111 West Front Street Berwick, PA 18603 Robert E. Bull 190,397 6.72% 323 West Fourth Street Nescopeck, PA 18635 Robert J. Wise 167,082 5.90% 115 West Third Street Berwick, PA 18603 Frederick E. Crispin, Jr. 148,617 5.24% 3 Cedarbrook Terrace Princeton, NJ 08540 ____________________ 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 14, 2000. Beneficial ownership may be disclaimed as to certain of the securities. 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 285,886 shares and as fiduciary with shared voting and dispositive power over 55,608 shares. Total does not include 31,027 shares held by the Trust Department of the bank for which the bank does not have sole or shared 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 and FOR the ratification of J. H. Williams & Co., LLP, independent auditors of the corporation. Includes 133,957 shares held individually by Mr. Bull, 1,995 shares held by Bull, Bull & Knecht, LLP, a law firm of which Mr. Bull is a partner, 3,850 held by Bull, Bull & Knecht, LLP Profit Sharing Trust, and 50,595 shares held by the Estate of Sara Bull in which Mr. Bull is executor. Includes 147,321 shares held individually by Mr. Wise and 19,761 shares held jointly with his spouse. Includes 15,972 shares held individually by Mr. Crispin, 7,986 shares held individually by his spouse and 124,659 shares held by the Frederick E. Crispin Sr. Trust in which Mr. Crispin is trustee and has sole voting authority.
BENEFICIAL OWNERSHIP BY OFFICERS, DIRECTORS AND NOMINEES The following table sets forth as of March 14, 2000, 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. Page 4 First Keystone Corporation
Name of Individual Amount and Nature of Percent or Identity of Group Beneficial Ownership of Class ____________________ __________________ _______ Nominees for Class A Directors (to serve until 2003) And Current Class A Director Budd L. Beyer 37,932 1.34% Frederick E. Crispin, Jr. 148,617 5.24% Jerome F. Fabian 15,814 -- Robert J. Wise 167,082 5.90% Class B Directors (to serve until 2001) John E. Arndt 4,992 -- J. Gerald Bazewicz 15,085 -- Robert E. Bull 190,397 6.72% Class C Directors (to serve until 2002) John L. Coates 7,729 -- Dudley P. Cooley 4,293 -- Stanley E. Oberrender 4,791 -- All Officers, Directors and 601,913 21.24% Nominees as a Group (11 Persons in Total) ____________________ 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 14, 2000. Beneficial ownership may be disclaimed as to certain of the securities. Information furnished by the directors and the corporation. Less than 1% unless otherwise indicated. Includes 15,972 shares held individually by Mr. Crispin, 7,986 shares held individually by his spouse and 124,659 shares held by the Frederick E. Crispin Sr. Trust in which Mr. Crispin is trustee and has sole voting authority. Includes 500 shares held individually by Mr. Fabian, 6,440 shares by the Jerome F. Fabian Trust Under Agreement for which Mr. Fabian exercises dispositive power, 7,286 shares held jointly with his spouse, and 1,588 shares held by Tile Distributors of America, Inc. of which Mr. Fabian is 100% owner. Includes 147,321 shares held individually by Mr. Wise and 19,761 shares held jointly with his spouse. Includes 3,815 shares held individually by Mr. Arndt, 447 shares held individually by his spouse, and 730 shares held by Arndt Insurance Profit Sharing. Includes 7,519 shares held individually by Mr. Bazewicz, 2,010 shares held jointly with his spouse, 566 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 and 4,000 shares which may be purchased upon the exercise of stock options. Proxy Statement Page 5 Includes 133,957 shares held individually by Mr. Bull, 1,995 shares held by Bull, Bull & Knecht, LLP, a law firm of which Mr. Bull is a partner, 3,850 held by Bull, Bull & Knecht, LLP Profit Sharing Trust, and 50,595 shares held by the Estate of Sara Bull in which Mr. Bull is executor. Includes 5,433 shares held individually by Mr. Coates and 2,296 shares held jointly with his spouse.
PROPOSAL NO. 1: ELECTION OF CLASS A DIRECTORS The by-laws of the corporation provide that its Board of Directors shall manage the corporation's business. Sections 10.2 and 10.3 of the By-laws provide that the number of directors on the Board shall not be less than 7 nor more than 25 and that the Board of Directors shall be classified into 3 classes, each class to be elected for a term of 3 years. Within the foregoing limits, the Board of Directors may, from time to time, fix the number of directors and their classifications. No person over 70 may serve as director with the exception of Messrs. Beyer, Bull, Crispin, and Wise. Section 11.1 of the by-laws requires that a majority of the remaining members of the Board of Directors, even if less than a quorum, will select and appoint directors to fill vacancies on the Board and each person so appointed shall serve as director until the expiration of the term of office of the class of directors to which he or she was appointed. Section 10.3 of the by-laws provides for a classified Board of Directors with staggered three-year terms of office. Accordingly, at the 2000 Annual Meeting of Shareholders, 4 Class A Directors shall be elected to serve for a three-year term and until their successors are properly elected and qualified. The Board of Directors of the corporation has nominated the current Class A Directors to serve as Class A Directors for the next three-year term of office. The nominees for re-election this year are as follows: (Bullet) Budd L. Beyer, director since 1983 (Bullet) Frederick E. Crispin Jr., director since 1983 (Bullet) Jerome F. Fabian, director since 1998, and (Bullet) Robert J. Wise, director since 1983 Each nominee has consented to serve a three-year term of office and until his successor is elected and qualified. Unless otherwise instructed, the proxy holders will vote the proxies for the election of these 4 nominees. If any nominee should become unavailable for any reason, proxies will be voted in favor of a substitute nominee by the Board of Directors of the corporation. A majority of the directors of the corporation in office may appoint a new director to fill any vacancy occurring on the Board for any reason, and the new director shall serve until the expiration of the term of the class of directors to which he or she was appointed. The Articles of Incorporation of the corporation provide that cumulative voting rights shall not exist with respect to the election of directors. Accordingly, each share of common stock entitles its owner to cast one vote for each nominee. For example, if a shareholder owns 10 shares of common stock, he or she may cast up to 10 votes for each director to be elected. The Board of Directors recommends that shareholders vote FOR the election of the above named nominees. Page 6 First Keystone Corporation INFORMATION AS TO NOMINEES AND DIRECTORS The following table contains certain information about the nominees and directors of the corporation. These individuals also serve as directors of The First National Bank of Berwick.
Principal Occupation Age as for Past 5 Years Director Name and of and Position Held Since Current March 14, with Corporation Corporation Committees 2000 and Bank /Bank __________ _______ ________________ ________ (Numbers refer to committee listing below table) NOMINEES FOR CLASS A DIRECTOR WHOSE TERM EXPIRES IN 2003 AND CURRENT CLASS A DIRECTORS WHOSE TERM EXPIRES IN 2000 Budd L. Beyer 72 Investor 1983/1976 Committees 1,2,4,7 Frederick E. Crispin, Jr. 68 Retired, former 1983/1964 Committees 1,2,3,5 financial consultant Jerome F. Fabian 57 President and sole 1998/1998 Committees 3,5 shareholder, Tile Distributors of America, Inc. Robert J. Wise 70 Retired, former 1983/1967 Committees 1,2,4,7,8 investor; Vice Chairman of the corporation and the bank CLASS B DIRECTORS WHOSE TERM EXPIRES IN 2001 John E. Arndt 38 Insurance Broker, 1995/1995 Committees 2,3,4,8 Owner of Arndt Insurance Agency (general insurance agency) J. Gerald Bazewicz 51 President and Chief 1986/1986 Committees 1,2,3,4, Executive Officer 5,7,8 of the corporation and the bank Robert E. Bull 77 Attorney and Partner, 1983/1956 Committees 1,4,5,6, Bull, Bull & Knecht, 7,8 LLP; Chairman of the corporation and the bank Proxy Statement Page 7 CLASS C DIRECTORS WHOSE TERM EXPIRES IN 2002 John L. Coates 63 President and sole 1987/1987 Committees 1,3,5,6,7 shareholder, Tri- County Hardware Inc.; Secretary of the corporation and the bank Dudley P. Cooley 61 Personal Financial 1987/1987 Committees 3,5,6,7 Consultant; Former Controller, Wise Foods, Borden, Inc. (Snack food processor) Stanley E. Oberrender 58 Owner, Suntex 1987/1987 Committees 3,4,6,7,8 (Dry cleaning) ____________________ 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 1999. 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 12 times in 1999. 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 interest rate sensitivity positions. This committee met 4 times in 1999. Committee 4 - Marketing Committee This committee provides guidance to management in formulating marketing/sales plans and programs to assist in evaluating the performance of the Bank relative to plans. This committee met 4 times in 1999. 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 4 times in 1999. 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 2 times in 1999. 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 non-executive officers and employees. This committee met 1 time in 1999. 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 did not meet in 1999.
The above listed committees are committees of the bank and not of the corporation. The Board of Directors of the corporation has at present no standing committees. Page 8 First Keystone Corporation The members of the Board of Directors of the corporation also serve as members of the Board of Directors of The First National Bank of Berwick. During 1999, the bank's Board of Directors held 25 meetings and the corporation's Board of Directors held 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, except Stanley E. Oberrender who attended 71% of all combined meetings. PROCEDURES FOR NOMINATING DIRECTORS The corporation's Board of Directors nominates individuals for the position of director. Neither the corporation nor the bank has a nominating committee. In addition, 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 45 days prior to the date of any meeting of shareholders called for the election of directors and must provide the specific information listed in Section 10.1 COMPENSATION OF DIRECTORS During 1999, the corporation's Board of Directors received $400.00 for each director's attendance at the Annual Meeting. Other corporate Board meetings met concurrently with the bank's Board, and directors received no additional compensation. The bank's directors received $400.00 for each directors' meeting attended. Non-employee directors received a $4,000.00 retainer and $200.00 for each committee meeting attended. All directors received a bonus of $1,000.00. In addition, Chairman Bull received an annual stipend of $1,000.00 and Vice Chairman Wise and Secretary Coates each received an annual stipend of $750.00. In the aggregate, the Board of Directors received $170,900.00 for all Board of Directors' meetings and committee meetings attended in 1999, including all fees, bonuses, and stipends paid to all directors in 1999. 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 10% of the registered class of the corporation's equity securities, to file reports of ownership of the corporation's common stock and changes in such ownership with the Securities and Exchange Commission ("SEC"). Officers, directors and greater than 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, 1999, through December 31, 1999, its officers and directors were in compliance with all filing requirements applicable to them. Proxy Statement Page 9 BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The basic mission of 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 Board of Directors serves as the Compensation Committee for the bank and develops the bank's and the corporation's executive compensation policy, with guidance from the Human Resources Committee. The four components of the total compensation package are: (Bullet) Base salary (Bullet) Regular employee bonus (Bullet) Senior management bonus (Bullet) Long-term incentives BASE SALARY The Board of Directors determines compensation for executive officers of The First National Bank of Berwick with guidance from the Human Resources Committee. For the base salary 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. For the base salary 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 established Mr. Bazewicz's base salary, not including director fees, at $131,000 in 1999 and increased his salary to $138,500 effective January 1, 2000. This placed Mr. Bazewicz's base compensation at approximately the median base compensation of chief executive officers of comparable bank holding companies, as reflected in the peer group compensation data reviewed by the Board of Directors. CASH BONUSES The cash bonuses serve as short-term incentives which align executive pay with the annual performance of the corporation. The regular employee bonus program is for all employees, including executives. It is based solely on the corporation's return on equity for the year. The bonus has averaged between 5.0% and 8.7% of each employee's salary for the past five years. The senior management bonus provides further short-term incentive for senior executives of the corporation. This bonus is earned through the achievement of overall annual earnings objectives. Both bonus programs help to align management's interests with those of shareholders because, generally, the higher the net income for the year, the larger the bonuses paid to management. Page 10 First Keystone Corporation LONG-TERM INCENTIVES: STOCK OPTIONS The Board of Directors believes that stock option awards under the First Keystone Corporation's 1998 Stock Incentive Plan 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. Under the Stock Incentive Plan, the corporation makes grants of options to purchase shares of the corporation's common stock to employees, including executives, and the corporation has absolute power to determine what, to whom, when and under what facts and circumstances awards are made. The Board of Directors bases decisions relating to such awards on its overall subjective assessment of the value of the services provided by each executive officer with consideration to performance of the corporation and peer group compensation information. The options generally vest 6 months after issue and expire ten years from the date of the grant. On September 28, 1999, the corporation granted 12,000 incentive stock options under the plan, which are not exercisable until March 28, 2000. The average per share exercise price is $26.25, which was not less than the full market value of the shares as of September 28, 1999. The total number of shares which may be issued under the plan is 100,000. 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 Jerome F. Fabian John E. Arndt Stanley E. Oberrender EXECUTIVE COMPENSATION The table below shows information concerning the annual and long-term compensation for services rendered in all capacities to the corporation and the bank for the fiscal years ended December 31, 1999, 1998, and 1997 of those persons who were: (Bullet) the Chief Executive Officer during 1999, and (Bullet) the other 4 most highly compensated executive officers of the corporation and the bank whose total annual salary and bonus exceeded $100,000 at December 31, 1999. SUMMARY COMPENSATION TABLE
Annual Compensation (a) (b) (c) (d) (e) Other Annual Name and Compen- Principal Salary Bonus sation Position Year ($) ($) ($) J. Gerald Bazewicz 1999 141,400 29,290 0 President and CEO 1998 133,500 24,720 0 of the Corporation 1997 126,800 27,972 0 and the Bank David R. Saracino 1999 86,000 20,086 0 Treasurer and 1998 81,500 16,712 0 Assistant Secretary 1997 77,500 19,286 0 Long-Term Compensation Awards Payouts (f) (g) (h) (i) Restricted All Other Name and Stock Options/ LTIP Compen- Principal Award(s) SARs sation Position ($) Payouts ($) (#) ($) J. Gerald Bazewicz 0 2,000 0 44,648 President and CEO 0 2,000 0 42,474 of the Corporation 0 0 0 38,675 and the Bank David R. Saracino 0 1,000 0 42,276 Treasurer and 0 1,000 0 40,010 Assistant Secretary 0 0 0 35,924 ____________________ Proxy Statement Page 11 Amounts shown for Mr. Bazewicz consist of base salary and fees paid for attendance at Board of Directors meetings of $10,400 in 1999, $10,000 in 1998, and $9,800 in 1997. Bonus information is reported by the year in which earned. Stock Appreciation Rights. Options granted in September 1999 pursuant to First Keystone Corporation's 1998 Stock Incentive Plan. Long-Term Incentive Plan Option Awards. Amounts shown for Mr. Bazewicz include contributions to the Bank's 401(k) Plan of $15,933 for 1999, $15,828 for 1998, and $15,872 for 1997, and accrual for the Bank's Supplemental Employee Retirement Plan (SERP) of $28,715 in 1999, $26,646 in 1998 and $22,803 in 1997. Amounts shown for Mr. Saracino include contributions to the Bank's 401(k) Plan of $10,573 for 1999, $10,591 for 1998, and $10,749 for 1997, and accrual for the Bank's Supplemental Employee Retirement Plan (SERP) of $31,703 in 1999, $29,419 in 1998, and $25,175 in 1997.
STOCK OPTION GRANTS IN FISCAL YEAR 1999 Stock options were granted to executive officers and other employees during fiscal year ended December 31, 1999. All options were granted under the First Keystone Corporation 1998 Stock Incentive Plan. The table shows information about such grants to the named officers: INDIVIDUAL GRANTS
(a) (b) (c) Number of % of Total shares Options underlying Granted to Options Employees Granted in in Fiscal Name Fiscal Year Year ____ ______________ ________ J. Gerald Bazewicz 2,000 16.67% President and CEO David R. Saracino 1,000 8.33% Treasurer and Assistant Secretary (d) (e) (f) Potential Realizable Value at Assumed Annual Rates Exercise of Stock or Base Appreciation Price Expiration for Option Name ($/Sh) Date Term 5%($) 10%($) ____ _____ ________ _____ _____ J. Gerald Bazewicz 26.25 9/28/09 33,000 83,660 President and CEO David R. Saracino 26.25 9/28/09 16,500 41,830 Treasurer and Assistant Secretary ____________________ The options were granted under the First Keystone Corporation's 1998 Stock Incentive Plan on September 28, 1999, and are not exercisable until March 28, 2000.
AGGREGATED STOCK OPTION EXERCISES IN FISCAL YEAR 1999 AND FISCAL YEAR-END OPTION VALUES No options were exercised in fiscal year 1999. Mr. Bazewicz had an option for 2,000 shares and Mr. Saracino had an option for 1,000 shares which were exercisable as of the end of Fiscal Year 1999 at a price of $33.50 per share. Page 12 First Keystone Corporation 401(K) 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 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 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 1999 and 1998 were:
1999 1998 ____ ____ Matching contribution to savings plan $ 75,725 $ 67,377 Contribution to profit sharing plan 193,481 167,497 _______ _______ Total Expense $269,206 $234,874
Of the $269,206 total expenses during 1999, $42,740 was credited among the individual accounts of the 4 most highly compensated executive officers of the bank. Of the $42,740, Mr. Bazewicz was credited with $15,933 and Mr. Saracino with $10,573 and each has been a member of the plan for 14 years. SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN The corporation maintains a Supplemental Employee Retirement Plan ("SERP") covering 4 of the bank's executive officers, Mr. Bazewicz, Mr. Saracino, Mr. Bodle, and Mrs. Rishkofski. The SERP, which is a salary continuation agreement, provides that if the executive officer continues to serve as an officer of the bank until a stated retirement age of either 60 years or 62 years, the bank will pay 240 guaranteed consecutive monthly payments commencing on the first day of the month following the officer's 60th or 62nd 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 approximately 75% of projected final salary including projected benefits from the bank 401(k), social security, and salary continuation provided through the agreement. The retirement benefit under the salary continuation plan for Messrs. Bazewicz, Saracino, Bodle, and Mrs. Rishkofski will be $3,750 per month, $2,333 per month, $1,750 per month, and $417 per month, respectively. If the executive officer attains their stated retirement 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 their stated retirement age, 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 employment prior to attaining the stated retirement age. OTHER EXECUTIVE BENEFITS The corporation maintains the First Keystone Corporation 1998 Stock Incentive Plan to advance the development, growth and financial condition of the corporation. Please refer to the description of the 1998 Stock Incentive Plan in the Board Compensation Committee Report above. The corporation also maintains a bonus program for employees and for senior management, which is also described above in the Board Compensation Committee Report. Proxy Statement Page 13 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 1999, the Bank expensed $80,996 for the accrual of the salary continuation plan for the four executive officers. In addition, $6,008 was paid to cover the year's premium on the term insurance policies. PERFORMANCE GRAPH The following graph and table compare the cumulative total shareholder return on the corporation's common stock during the period December 31, 1994, through and including December 31, 1999, with (Bullet) the cumulative total return on the SNL Securities Corporate Performance Index for banks with less than $500 million in total assets in the Middle Atlantic area , and (Bullet) the cumulative total return for all United States stocks traded on the NASDAQ Stock Market. The comparison assumes $100 was invested on December 31, 1994, 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 12/31/94 12/31/95 12/31/96 First Keystone Corporation 100.00 110.02 144.77 NASDAQ - Total US 100.00 141.33 141.33 SNL <$500M Bank Index 100.00 136.80 176.08 Period Ending 12/31/97 12/31/98 12/31/99 First Keystone Corporation 273.07 473.46 302.45 NASDAQ - Total US 213.07 300.25 542.43 SNL <$500M Bank Index 300.16 274.06 253.69 __________________ Page 14 First Keystone Corporation [FN] SNL Securities is a research and publishing firm specializing in the collection and dissemination of data on the banking, thrift and financial services industries. The Middle Atlantic area comprises the states of Delaware, Pennsylvania, Maryland, New Jersey, New York, the District of Columbia and Puerto Rico. CERTAIN RELATIONSHIPS AND RELATED 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 these persons. The law firm Bull, Bull & Knecht, LLP, of which Mr. Bull is a partner, provided routine legal services to the bank according to the firm's normal fee schedule and billing rates, and the bank intends to continue to engage the firm's services in the future. In addition, 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, 1999, 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 $1,708,323 or approximately 5.82% 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 1999 to officers and directors of the corporation and the bank as a group was $2,042,943. The aggregate amount of indebtedness outstanding as of the latest practicable date, February 1, 2000, to the above described group was $1,683,854. Proxy Statement Page 15 PRINCIPAL OFFICERS OF THE CORPORATION The following table shows 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:
Age Number as of Corporation of Shares March Held Employee Beneficially 14, Name and Position Since Since Owned 2000 Robert E. Bull 1983 190,397 77 Chairman of the Board Robert J. Wise 1996 167,082 70 Vice Chairman of the Board J. Gerald Bazewicz 1987 1973 15,085 51 President and Chief Executive Officer John L. Coates 1995 7,729 63 Secretary David R. Saracino 1983 1972 5,181 55 Treasurer ____________________ Messrs. Bull, Wise, and Coates are not employees of the corporation. For information on specific nature of ownership, please refer to "Beneficial Ownership by Officers, Directors and Nominees". Includes 2,383 shares of common stock held individually by Mr. Saracino, 798 shares of common stock held jointly with his spouse, and 2,000 shares which may be purchased upon the exercise of stock options.
Page 16 First Keystone Corporation PRINCIPAL OFFICERS OF THE BANK The following table presents 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:
Office and Position Held Name with the Bank Since Robert E. Bull Chairman of the Board 1981 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 Vice President 1997 Number of Bank Shares Age as of Employee Beneficially March 14, Name Since Owned 2000 Robert E. Bull 190,397 77 Robert J. Wise 167,082 70 J. Gerald Bazewicz 1973 15,085 51 John L. Coates 7,729 63 David R. Saracino 1972 5,181 55 Leslie W. Bodle 1985 4,915 52 Sally A. Rishkofski 1964 2,507 60 ____________________ Messrs. Bull, Wise, and Coates are not employees of the bank. For information on specific nature of ownership, please refer to "Beneficial Ownership by Officers, Directors and Nominees". For information on specific nature of ownership, please refer to "Principal Officers of the Corporation" above. Includes 2,000 shares which may be purchased upon the exercise of stock options.
LEGAL PROCEEDINGS In the opinion of the management of First Keystone Corporation and its banking subsidiary, there are no proceedings pending to which the corporation or its banking subsidiary is a party or to which their property is subject, which, if determined adversely to the corporation or the bank, would have a material effect on their undivided profits or financial condition. There are no proceedings pending other than routine litigation incident to the business of the corporation and its banking subsidiary. In addition, to the Board's knowledge, no government authorities have initiated, threatened to initiate, or contemplated any material proceedings against First Keystone Corporation or its banking subsidiary. PROPOSAL NO. 2: RATIFICATION OF INDEPENDENT AUDITORS The Board of Directors has appointed J. H. Williams & Co., LLP, Certified Public Accountants, located at 270 Pierce Street, Kingston, Pennsylvania 18705, as the corporation's independent auditors for its 2000 fiscal Proxy Statement Page 17 year. The Board proposes that shareholders ratify this selection. J. H. Williams & Co., LLP, has advised the corporation that none of its members has any financial interest in the corporation. Ratification of J. H. Williams & Co., LLP, 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., LLP served as the corporation's independent auditors for the 1999 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. The corporation's and the bank's Board of Directors approved these non-audit services after due consideration of the accountants' objectivity and after finding them to be wholly independent. Representatives of J. H. Williams & Co., LLP, will attend the Annual Meeting of Shareholders, will have the opportunity to make a statement and are expected to be available to respond to any questions. In the event that the shareholders do not ratify the selection of J. H. Williams & Co, LLP, as the corporation's independent auditors for the 2000 fiscal year, another accounting firm may be chosen to provide independent audit services for the 2000 fiscal year. The Board of Directors recommends that the shareholders vote FOR the ratification of the selection of J. H. Williams & Co., LLP, as the independent auditors for the corporation for the year ending December 31, 2000. ANNUAL REPORT A copy of the corporation's Annual Report for its fiscal year ended December 31, 1999, is enclosed with this Proxy Statement. Additional copies of the Annual Report may be obtained by contacting J. Gerald Bazewicz, President, 111 West Front Street, Berwick, Pennsylvania 18603, telephone: (570) 752-3671. We furnish the Annual Report to shareholders for their information, it is not incorporated in this Proxy Statement. 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 2001 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 Tuesday, November 28, 2000. Also, if the corporation does not receive by February 11, 2001, notice of a shareholder proposal that is not to be included in the corporation's Proxy Statement, the proxy holders at the 2001 Annual Meeting may vote on the proposal at their discretion. 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, the persons named in the accompanying proxy intend to vote on such matters as they determine to be in the best interest of the corporation. ADDITIONAL INFORMATION Any shareholder may obtain a copy of the corporation's report on Form 10-K for its fiscal year ended December 31, 1999, including the financial statements and the schedules thereto, required to be filed with the Securities and Exchange Commission, without change, by submitting a written request to David R. Saracino, Treasurer, First Keystone Corporation, 111 West Front Street, Berwick, Pennsylvania 18603, telephone: (570) 752-3671. Page 18 First Keystone Corporation -----END PRIVACY-ENHANCED MESSAGE-----