-----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, VYCwG37LgET1A0ty+g47aD2Fe513MGArXnAzEIsTx3rGG0h11TvZgzAouK/a/X45 2PIs2TpuQpEHYPCwd6Qc1w== 0000737875-99-000007.txt : 19990412 0000737875-99-000007.hdr.sgml : 19990412 ACCESSION NUMBER: 0000737875-99-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990409 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST KEYSTONE CORP CENTRAL INDEX KEY: 0000737875 STANDARD INDUSTRIAL CLASSIFICATION: 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: 99584678 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, 1998 Or [ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ________________ Commission file Number: 2-88927 FIRST KEYSTONE CORPORATION (Name of small business issuer in its charter) PENNSYLVANIA 23-2249083 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 111 West Front Street, Berwick, Pennsylvania 18603 (Address of principal executive offices) (Zip Code) 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 16, 1999, was approximately $71,256,969. The number of shares outstanding of the issuer's Common Stock, as of March 16, 1999, was 2,877,993 shares of Common Stock, par value $2.00 per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1998 definitive Proxy Statement are incorporated by reference in Part III of this Annual Report. In addition, portions of the Annual Report to stockholders of the Registrant for the year ended December 31, 1998, 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 10 Item 3. Legal Proceedings 11 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 12 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 8. Financial Statements and Supplementary Data 14 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 14 Item 11. Executive Compensation 14 Item 12. Security Ownership of Certain Beneficial Owners and Management 15 Item 13. Certain Relationships and Related Transactions 15 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 15 i FIRST KEYSTONE CORPORATION FORM 10-K PART I ITEM 1. BUSINESS First Keystone Corporation (the "Corporation"), a Pennsylvania business corporation, is a bank holding company, registered with and supervised by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Corporation was incorporated on July 6, 1983, and commenced operations on July 2, 1984, upon consummation of the acquisition of all of the outstanding stock of The First National Bank of Berwick (the "Bank"). Since commencing operations, the Corporation's business has consisted primarily of managing and supervising the Bank, and its principal source of income has been dividends paid by the Bank. The Corporation has one wholly- owned subsidiary, the Bank. At December 31, 1998, the Corporation had total consolidated assets, deposits and stockholders' equity of approximately $303.0 million, $247.1 million and $33.8 million, respectively. The Bank was organized in 1864. The Bank is a national banking association that is a member of the Federal Reserve System and the deposits of which are insured by the Federal Deposit Insurance Corporation (the "FDIC"). The Bank, having seven branch locations (three branches within Columbia County, three branches within Luzerne County, and one in Montour County, Pennsylvania), is a full service commercial bank providing a wide range of services to individuals and small to medium sized businesses in its Northeastern and Central Pennsylvania market area, including accepting time, demand, and savings deposits and making secured and unsecured commercial, real estate and consumer loans. Additionally, the Bank also provides personal and corporate trust and agency services to individuals, corporations, and others, including trust investment accounts, investment advisory services, mutual funds, estate planning, and management of pension and profit sharing plans. 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 periodic reporting in accordance with Section 13 of the Securities Exchange Act of 1934. The Bank is subject to regulation by the Pennsylvania Department of Banking and the FDIC, but, as a national bank, is regulated and examined by the Office of the Comptroller of the Currency. The Corporation is also subject to the provisions of the Bank Holding Company Act of 1956, as amended ("Bank Holding Company Act"), and to supervision by the Federal Reserve Board. The Bank Holding Company Act requires the Corporation to secure the prior approval of the Federal Reserve Board before it owns or controls, directly or indirectly, more than 5% of the voting shares of substantially all of the assets of any institution, including another bank. The Bank Holding Company Act prohibits acquisition by the Corporation of more than 5% of the voting shares of, or interest in, or substantially all the assets of, any bank located outside Pennsylvania unless such an acquisition is specifically authorized by laws of the state in which such bank is located. 1 A bank holding company is prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in non-banking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the Federal Reserve Board considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects. The Bank Holding Company Act also prohibits acquisitions of control of a bank holding company, such as the Corporation, without prior notice to the Federal Reserve Board. Control is defined for this purpose as the power, directly or indirectly, to direct the management or policies of a bank holding company or to vote twenty- five percent (25%) (or ten percent (10%), if no other person or persons acting on concert, holds a greater percentage of the Common Stock) or more of the Corporation's Common Stock. The Corporation is required to file an annual report with the Federal Reserve Board and any additional information that the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may also make examinations of the Corporation and any or all of its subsidiaries. Further, under Section 106 of the 1970 amendments to the Bank Holding Company Act and the Federal Reserve Board's regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of credit or provision of any property or services. The so-called "Anti-tie-in" provisions state generally that a bank may not extend credit, lease, sell property or furnish any service to a customer on the condition that the customer provide additional credit or service to the bank, to its bank holding company or to any other subsidiary of its bank holding company or on the condition that the customer not obtain other credit or service from a competitor of the bank, its bank holding company or any subsidiary of its bank holding company. The operations of the Bank are subject to federal and state statutes applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System and to banks whose deposits are insured by the FDIC. Bank operations are also subject to regulations of the OCC, the Federal Reserve Board and the FDIC. The primary supervisory authority of the Bank is the OCC, which regulates and examines the Bank. The OCC has the authority under the Financial Institutions Supervisory Act to prevent a national bank from engaging in an unsafe or unsound practice in conducting its business. Federal and state banking laws and regulations govern, among other things, the scope of a bank's business, the investments a bank may make, the reserves against deposits a bank must maintain, loans a bank makes and collateral it takes, and the activities of a bank with respect to mergers and consolidations and the establishment of branches. As a subsidiary of a bank holding company, the Bank is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries and on taking such stock or securities as collateral for loans. The Federal Reserve Act and Federal Reserve Board regulations also place certain limitations and reporting requirements on extensions of credit by a bank to principal shareholders of its parent holding company, among others, and to related interests of such principal shareholders. In addition, such legislation and regulations may affect the terms upon which any person becoming a principal shareholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship. 2 From time to time, various types of federal and state legislation have been proposed that could result in additional regulations of, and restrictions on, the business of the Bank. It cannot be predicted whether any such legislation will be adopted or how such legislation would affect the business of the Bank. As a consequence of the extensive regulation of commercial banking activities in the United States, the Bank's business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business. Under the Federal Deposit Insurance Act ("FDIA"), the OCC possesses the power to prohibit institutions regulated by it (such as the Bank) from engaging in any activity that would be an unsafe or unsound banking practice or would otherwise be in violation of the law. Moreover, the Financial Institutions Regulatory and Interest Rate Control Act of 1978 ("FIRA") generally expanded the circumstances under which officers or directors of a bank may be removed by the institution's federal supervisory agency, restricts lending by a bank to its executive officers, directors, principal shareholders or related interests thereof and restricts management personnel of a bank from serving as directors or in other management positions with certain depository institutions whose assets exceed a specified amount or which have an office within a specified geographic area, and restricts the relationships of management personnel of a bank with securities companies and securities dealers. Additionally, FIRA requires that no person may acquire control of a bank unless the appropriate federal supervisory agency has given sixty (60) days prior written notice and within that time has not disapproved the acquisition or otherwise extended the period for disapproval. Control for purposes of FIRA means the power to direct, either directly or indirectly, the management or policies or to vote twenty-five percent (25%) or more of any class of outstanding stock of a financial institution or its respective holding company. A person or group holding revocable proxies to vote twenty-five percent (25%) or more of the outstanding common stock of a financial institution or holding company would presumably be deemed to control the institution for purposes of FIRA. Permitted Non-Banking Activities The Federal Reserve Board permits bank holding companies to engage in non-banking activities so closely related to banking, managing or controlling banks as to be a proper incident thereto. The Corporation does not at this time engage in any of these non-banking activities, nor does the Corporation have any current plans to engage in any other permissible activities in the foreseeable future. Legislation and Regulatory Changes From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, and before various bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Corporation and its subsidiary bank. Certain changes of potential significance to the Corporation which have been enacted recently and others which are currently under consideration by Congress or various regulatory agencies are discussed below. Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") On August 9, 1989, major reform and financing legislation, i.e., FIRREA, was enacted into law in order to restructure the regulation of the thrift industry, to address the financial condition of the Federal Savings and Loan Insurance Corporation and to enhance the supervisory and enforcement powers of the Federal bank and thrift regulatory agencies. The Office of the Comptroller of the 3 Currency ("OCC"), as the primary Federal regulator of the Bank, is primarily responsible for supervision of the Bank. The OCC and FDIC have far greater flexibility to impose supervisory agreements on an institution that fails to comply with its regulatory requirements, particularly with respect to the capital requirements. Possible enforcement actions include the imposition of a capital plan, termination of deposit insurance and removal or temporary suspension of an officer, director or other institution-affiliated party. Under FIRREA, civil penalties are classified into three levels, with amounts increasing with the severity of the violation. The first tier provides for civil penalties of up to $5,000 per day for any violation of law or regulation. A civil penalty of up to $25,000 per day may be assessed if more than a minimal loss or a pattern of misconduct is involved. Finally, a civil penalty of up to $1.0 million per day may be assessed for knowingly or recklessly causing a substantial loss to an institution or taking action that results in a substantial pecuniary gain or other benefit. Criminal penalties are increased to $1.0 million per violation, up to $5.0 million for continuing violations or for the actual amount of gain or loss. These monetary penalties may be combined with prison sentences for up to five years. Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") In 1991, the Federal Deposit Insurance Corporation Improvement Act ("FDICIA") was signed into law. FDICIA established five different levels of capitalization of financial institutions, with "prompt corrective actions" and significant operational restrictions imposed of institutions that are capital deficient under the categories. The five categories are: (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 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, 1998, 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 4 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 In November, 1993, the federal banking agencies released proposed rules setting forth some of the required safety and soundness standards. Under such proposed rules, if the primary federal regulator determines that any standard has not been met, the regulator can require the institution to submit a compliance plan that describes the steps the institution will take to eradicate the deficiency. Failure to adopt or implement a compliance plan could lead to further sanctions by the responsible regulator. Pursuant to the Riegle Community Development and Regulatory Improvement Act of 1994, federal banking agencies have been given the discretion to adopt safety and soundness guidelines rather than regulations. Provisions of FDICIA relax certain requirements for mergers and acquisitions among financial institutions, including authorization of mergers of insured institutions that are not members of the same insurance fund, and provide specific authorization for a federally chartered savings association or national bank to be acquired by an insured depository institution. Under FDICIA, all depository institutions must provide 90 days notice to their primary federal regulator of branch closings, and penalties are imposed for false reports by financial institutions. Depository institutions with assets in excess of $250 million must be examined on-sit annually by their primary federal or state regulator of the FDIC. FDICIA also sets forth Truth in Savings disclosure and advertising requirements applicable to all depository institutions. 5 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. BANK ENTERPRISE ACT OF 1991. Within the overall FDICIA is a separate subtitle called the "Bank Enterprise Act of 1991." The purpose of this Act is to encourage banking institutions to establish "basic transaction services for consumers" or so-called "lifeline accounts." The FDIC assessment rate is reduced for all lifeline depository accounts. This Act establishes ten (10) factors which are the minimum requirements to qualify as a lifeline depository account. Some of these factors relate to minimum opening and balance amounts, minimum number of monthly withdrawals, the absence of discriminatory practices against low-income individuals and minimum service charges and fees. Moreover, the Housing and Community Development Act of 1972 requires that the FDIC's risk-based assessment system include provisions regarding life-line accounts. Assessment rates applicable to life-line accounts are to be established by FDIC rule. TRUTH IN SAVINGS ACT. The FDICIA also contains the Truth in Savings Act ("TSA"). The Federal Reserve Board has adopted regulations ("Regulation DD") under the TSA. The purpose of TSA is to require the clear and uniform disclosure of the rates of interest which are payable on deposit accounts by depository institutions and the fees that are assessable against deposit accounts, so that consumers can make a meaningful comparison between the competing claims of banks with regard to deposit accounts and products. In addition to disclosures to be provided when a customer establishes a deposit account, TSA requires the depository institution to include, in a clear and conspicuous manner, the following information with each periodic statement of a deposit account: (1) the annual percentage yield earned, (2) the amount of interest earned, (3) the amount of any fees and charges imposed and (4) the number of days in the reporting period. TSA allows for civil lawsuits to be initiated by customers if the depository institution violates any provision or regulation under TSA. FDIC Insurance Assessments The FDIC has implemented a risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on capital and supervisory measures. Under the risk-related premium schedule, the FDIC, on a semiannual basis, assigns, each institution to one of three capital groups (well capitalized, adequately capitalized or under capitalized) and further assigns such institution to one of three subgroups within a capital group corresponding to the FDIC's judgment of the institution's strength based on supervisory evaluations, including examination reports, statistical analysis and other information relevant to gauging the risk posed by the institution. Only institutions with a total capital to risk-adjusted assets ratio of 10.0% or greater, a Tier 1 capital to risk-adjusted assets ratio of 6.0% or greater and a Tier 1 leverage ratio of 5.0% or greater, are assigned to the well-capitalized group. Over the last two years, FDIC insurance assessments have seen several changes for both the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF") institutions. The most recent change occurred on September 30, 1996, when the President signed into law a bill designed to remedy the disparity between BIF and SAIF deposit premiums. The first part of the bill called for the SAIF to be capitalized by a one-time assessment on all SAIF insured deposits held as of March 31, 1995. This assessment, which was 65.7 cents per $100 in deposits, raised approximately $4.7 billion to bring the SAIF up to its required 1.25 reserve ratio. This special assessment, paid in 6 1996, had no effect on the Bank. The second part of the bill remedied the future anticipated shortfall with respect to the payment of Financing Corporation ("FICO") interest. For 1997 through 1999, the banking industry will help pay the FICO interest payments at an assessment rate that is one-fifth the rate paid by thrifts. The FICO assessment on BIF insured deposits is 1.29 cents per $100 in deposits; for SAIF insured deposits it is 6.44 cents per $100 in deposits. Beginning January 1, 2000, BIF deposits and SAIF deposits will be subject to the same assessment for FICO bonds. 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, 1998:
(In Thousands) Tier I Capital $ 31,554 Tier II Capital 34,080 Total Capital 34,080 Adjusted Total Average Assets 300,526 Total Adjusted Risk-Weighted Assets 169,471 Tier I Risk-Based Capital Ratio 18.62% Required Tier I Risk-Based Capital Ratio 4.00% Excess Tier I Risk-Based Capital Ratio 14.62% Total Risk-Based Capital Ratio 20.11% Required Total Risk-Based Capital Ratio 8.00% Excess Total Risk-Based Capital Ratio 12.11% Tier I Leverage Ratio 10.50% Required Tier I Leverage Ratio 4.00% Excess Tier I Leverage Ratio 6.50% ______________________________ 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.
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. 7 Effect of Government Monetary Policies The earnings of the Corporation are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The monetary policies of the Federal Reserve Board have had, and will likely continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order to, among other things, curb inflation or combat a recession. The Federal Reserve Board has a major effect upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulations of, among other things, the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies. Environmental Regulation There are several federal and state statutes that regulate the obligations and liabilities of financial institutions pertaining to environmental issues. In addition to the potential for attachment of liability resulting from its own actions, a bank may be held liable, under certain circumstances, for the actions of its borrowers, or third parties, when such actions result in environmental problems on properties that collateralize loans held by the bank. Further, the liability has the potential to far exceed the original amount of the loan issued by the Bank. Currently, neither the Corporation nor the Bank is a party to any pending legal proceeding pursuant to any environmental statute, nor are the Corporation and the Bank aware of any circumstances that may give rise to liability under any such statute. Interest Rate Risk In August 1995 and May 1996, the federal banking agencies adopted final regulations specifying that the agencies will include, in their evaluations of a bank's capital adequacy, 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 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. History and Business - Bank The Bank's legal headquarters are located at 111 West Front Street, Berwick, Pennsylvania. As of December 31, 1998, the Bank had total assets of $301,263,766, total shareholders' equity of $31,380,695 and total deposits and other liabilities of $269,883,071. 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 8 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, 1998, the Bank had ninety-five (95) full-time employees and thirty-one (31) part-time employees. In the opinion of management, the Bank enjoys a satisfactory relationship with its employees. The Bank is not a party to any collective bargaining agreement. Competition - Bank The Bank competes actively with other area commercial banks and savings and loan associations, many of which are larger than the Bank, as well as with major regional banking and financial institutions. The Bank's major competitors in the county of Columbia and the county of Luzerne are: (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. 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. Pennsylvania Banking Law Under the Pennsylvania Banking Code of 1965, as amended (the "Code"), the Corporation is permitted to control an unlimited number of banks. However, the Corporation would be required, under the Bank Holding Company Act, to obtain the prior approval of the Federal Reserve Board before it could acquire all or substantially all of the assets of any bank, or acquire ownership or control of any voting shares of any bank other than the Bank, if, after such acquisition, it would own or control more than five percent (5%) of the voting shares of such bank. Interstate Banking Prior to the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act"), the BHCA prohibited a bank holding company located in one state from acquiring a bank located in another state, unless such an acquisition by an out-of-state bank holding company was specifically authorized by the law of the state where the bank to be acquired was located. Similarly, interstate branching by a single bank was generally prohibited by the McFadden Act. The Interstate Banking Act permits an adequately capitalized and adequately managed bank holding company to acquire a bank in another state whether or not the law of that 9 other state permits the acquisition, subject to certain deposit concentration caps and approval by the Federal Reserve Board. In addition, beginning on June 1, 1997, under the Interstate Banking Act, a bank can engage in interstate expansion by merging with a bank in another state, unless the other state affirmatively opts out of the legislation before that date. A state may also opt into the legislation earlier than June 1, 1997 if it wishes to do so. The Interstate Banking Act also permits de novo interstate branching as of June 1, 1997, but only if a state affirmatively opts in by adopting appropriate legislation. Pennsylvania, Delaware, Maryland, and New Jersey, as well as other states, adopted "opt in" legislation which allows such transactions prior to the June 1, 1997 federal effective date. 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 and computer department. 2nd & Market Streets, Owned Land Area No buildings, Berwick 1.45 Acres held for possible expansion. Present use, parking. 701 Freas Avenue, Berwick Owned 3,744 Banking services. 2401 New Berwick Highway, Bloomsburg Leased 2,000 Banking services. Annual Rental $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 10 Type of Square Location Ownership Footage Use ________ _________ _______ ___ 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. ITEM 3. LEGAL PROCEEDINGS The Corporation and/or the Bank are defendants in various legal proceedings arising in the course of their business. However, in the opinion of management of the Corporation and the Bank, there are no proceedings pending to which the Corporation and the Bank is a party or to which their property is subject, which, if determined adversely to the Corporation and the Bank, would be material in relation to the Corporation's and Bank's individual profits or financial condition, nor are there any proceedings pending other than ordinary routine litigation incident to the business of the Corporation and the Bank. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation and the Bank by government authorities or others. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 11 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 by the management of the Corporation and (bullet) quarterly dividends on a share of the Common Stock with respect to each quarter since January 1, 1997. 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 1997: First quarter $11.21 $10.74 $.106 Second quarter $14.33 $10.92 $.117 Third quarter $14.33 $14.33 $.117 Fourth quarter $19.08 $16.63 $.133 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
As of December 31, 1998, the Corporation had approximately 529 shareholders of record. The Corporation has paid dividends since commencement of business in 1984. It is the present intention of the Corporation's Board of Directors to continue the dividend payment policy; however, further dividends must necessarily depend upon earnings, financial condition, appropriate legal restrictions and other factors relevant at the time the Board of Directors of the Corporation considers dividend policy. Cash available for dividend distributions to shareholders of the Corporation must initially come from dividends paid by the Bank to the Corporation. Therefore, the restrictions on the Bank's dividend payments are directly applicable to the Corporation. Dividend Restrictions on the Bank The OCC has issued rules governing the payment of dividends by national banks. Consequently, the Bank, which is subject to these rules, may not pay dividends from capital (unimpaired common and preferred stock outstanding) but only from retained earnings after deducting losses and bad debts therefrom. "Bad debts" are defined as matured obligations in which interest is past due and unpaid for ninety (90) days, but do not include well-secured obligations that are in the process of collection. Previously, the Bank was permitted to add the balances in its allowance for loan and lease losses in determining retained earnings, but the OCC's regulations now prohibit that practice. However, to the extent that (1) the Bank has capital surplus in an amount in excess of common capital 12 and (2) the Bank can prove that such surplus resulted from prior period earnings, the Bank, upon approval of the OCC, may transfer earned surplus to retained earnings and thereby increase its dividend capacity. If, however, the Bank has insufficient retained earnings to pay a dividend, the OCC's regulations allow the Bank to reduce its capital to a specified level and to pay dividends upon receipt of the approval of the OCC, as well as the approval of the holders of two-thirds of the outstanding shares of the Corporation's Common Stock. The Bank is allowed to pay dividends no more frequently than quarterly. Moreover, the Bank must obtain the OCC's approval before paying a dividend, if the total of all dividends declared by the Bank in any calendar year would exceed the total of (1) the Bank's net profits for that year plus (2) its retained net profits for the preceding two years less (3) any required transfers to surplus or to a fund for the retirement of preferred stock. The Bank may not pay any dividends on its capital stock during a period in which it may be in default in the payment of its assessment for a deposit insurance premium due to the FDIC, nor may it pay dividends on Common Stock until any cumulative dividends on the Bank's preferred stock (if any) have been paid in full. The Bank has never been in default in the payments of its assessments to the FDIC; and the Bank has no outstanding preferred stock. In addition, under the Federal Deposit Insurance Act (912 U.S.C. Section 1818), dividends cannot be declared and paid if the OCC obtains a cease and desist order because, in the opinion of the OCC, such payment would constitute an unsafe and unsound banking practice. As of December 31, 1998, there was $4,628,579 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, 1997, which page is included in Exhibit 11 hereto, is incorporated in its entirety by reference in response to this Item 6. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages 25 through 41 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1998, which pages are included in Exhibit 13 hereto, is incorporated in its entirety by reference in response to this Item 7. 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Corporation's Consolidated Financial Statements and notes thereto appearing on pages 4 through 23 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1998, 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 6, 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. 14 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 5 of the Corporation's Definitive Proxy Statement, filed as Exhibit 99 hereto, is incorporated in its entirety by reference in response to this Item 12. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Certain Transactions" appearing on page 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, 1998. (c) Exhibits required by Item 601 of Regulation S-K: Exhibit Number Referred to Item 601 of Regulation S-K Description of Exhibit 2 None. 3i Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3(i) to the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1996). 3ii By-Laws, as amended (Incorporated by reference to Exhibit 3(ii) to the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1996). 4 None. 9 None. 15 Exhibit Number Referred to Item 601 of Regulation S-K Description of Exhibit 10 None. 11 Computation of Earnings Per Share incorporated by reference to Exhibit 11 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. 12 None. 13 Excerpt from Annual Report to Shareholders for Fiscal Year Ended December 31, 1998. 16 None. 18 None. 21 List of Subsidiaries of the Corporation (Incorporated by reference to Exhibit 22 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. 22 None. 23 Consent of Independent Auditors. 24 None. 27 Financial Data Schedule. 99 Definitive Proxy Statement, Notice of Annual Meeting and Form of Proxy for the Annual Meeting of Shareholders to be held April 20, 1999. 16 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST KEYSTONE CORPORATION (Issuer) By: /s/ J. Gerald Bazewicz J. Gerald Bazewicz President and Chief Executive Officer Date: March 23, 1999 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ John L. Coates John L. Coates Secretary and Director Date: March 23, 1999 By: /s/ J. Gerald Bazewicz J. Gerald Bazewicz President, Chief Executive Officer and Director (Chief Executive Officer and Principal Financial Officer) Date: March 23, 1999 17 By: /s/ John E. Arndt John E. Arndt Director Date: March 23, 1999 By: /s/ Budd L. Beyer Budd L. Beyer Director Date: March 23, 1999 By: /s/ Robert E. Bull Robert E. Bull Chairman of the Board and Director Date: March 23, 1999 By: /s/ Dudley P. Cooley Dudley P. Cooley Director Date: March 23, 1999 By: /s/ Frederick E. Crispin, Jr. Frederick E. Crispin, Jr. Director Date: March 23, 1999 By: /s/ Stanley E. Oberrender Stanley E. Oberrender Director Date: March 23, 1999 18 By: /s/ David R. Saracino David R. Saracino Treasurer and Assistant Secretary (Principal Accounting Officer) Date: March 23, 1999 By: /s/ Robert J. Wise Robert J. Wise Vice Chairman of the Board and Director Date: March 23, 1999 19 EX-11 2 EXHIBIT 11 FIRST KEYSTONE CORPORATION COMPUTATION OF EARNINGS PER COMMON SHARE Year Ended December 31,
(Dollars in Thousands) 1998 1997 1996 Primary Net Income $ 4,888 $ 4,660 $ 4,130 Shares Weighted average number of common shares outstanding 2,925,695 2,933,727 2,933,727 Adjustments - increases or decreases None None None Weighted average number of common shares outstanding as adjusted 2,925,695 2,933,727 2,933,727 Basic earnings per common share $ 1.67 $ 1.59 $ 1.41 Assuming full dilution Net Income $ 4,888 $ 4,660 $ 4,130 Shares Weighted average number of common shares outstanding 2,925,695 2,933,727 2,933,727 Adjustments - increases or decreases None None None Weighted average number of common shares outstanding as adjusted 2,925,695 2,933,727 2,933,727 Earnings per common share assuming full dilution $ 1.67 $ 1.59 $ 1.41 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, 1998, which page is included in Exhibit 13 hereto.
20 EXHIBIT 11 SUMMARY OF SELECTED FINANCIAL DATA
(Amounts in thousands, except per share) 1998 1997 1996 1995 1994 ____ ____ ____ ____ ____ SUMMARY OF OPERATIONS Interest income $ 20,703 $ 19,345 $ 17,786 $ 16,637 $ 13,731 Interest expense 10,329 9,381 8,667 8,271 6,353 Net interest income 10,374 9,964 9,119 8,366 7,378 Provision for loan losses 275 325 517 372 31 Investment securities gains (losses) 179 68 (38) 5 180 Net income $ 4,888 $ 4,660 $ 4,130 $ 3,486 $ 3,115 ___________________________________________________________________________ PER COMMON SHARE Net income $ 1.67 $ 1.59 $ 1.41 $ 1.19 $ 1.07 Cash dividends .59 .47 .39 .33 .31 ___________________________________________________________________________ BALANCE SHEET DATA Assets $303,028 $267,399 $242,557 $226,033 $206,864 Investment securities 130,686 98,459 101,225 88,125 79,946 Net loans 159,112 149,780 130,994 126,046 116,383 Deposits 247,092 217,647 198,546 187,320 172,280 Stockholders' equity 33,753 31,818 27,473 25,399 20,788 ___________________________________________________________________________ PERFORMANCE RATIOS Return on average assets 1.72% 1.83% 1.75% 1.58% 1.54% Return on average equity 14.68% 15.92% 15.98% 15.24% 15.34% Dividend payout ratio 35.32% 29.76% 27.56% 27.36% 28.55% Average equity to average assets ratio 11.72% 11.49% 11.05% 10.36% 10.05% 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, 1998 21 FIRST KEYSTONE CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 and 1997
___________________________________________________________________________ 1998 1997 ___________________________________________________________________________ ASSETS Cash and due from banks $ 7,033,112 $ 6,400,261 Interest-bearing deposits in other banks 22,489 7,083,684 Investment securities Available- for-Sale 116,700,864 81,650,689 Investment securities Held-to- Maturity (estimated fair value 1998 $14,015,044; 1997 $16,833,038) 13,984,681 16,808,625 Loans, net of unearned income 161,532,639 152,150,843 Allowance for loan losses (2,421,042) (2,371,194) ____________ ____________ Net loans $159,111,597 $149,779,649 Premises and equipment 3,757,565 3,435,689 Accrued interest receivable 2,133,030 1,997,936 Other assets 285,143 242,053 ____________ ____________ TOTAL ASSETS $303,028,481 $267,398,586 LIABILITIES Deposits: Non-interest bearing $ 22,749,074 $ 18,397,819 Interest bearing 224,342,445 199,249,365 ____________ ____________ Total Deposits $247,091,519 $217,647,184 Short-term borrowings 6,633,646 6,102,160 Long-term borrowings 13,000,000 9,000,000 Accrued interest and other expenses 1,521,029 1,521,832 Other liabilities 1,029,138 1,309,343 ____________ ____________ TOTAL LIABILITIES $269,275,332 $235,580,519 STOCKHOLDERS' EQUITY Preferred stock, par value $10.00 per share; authorized 500,000 shares; no shares issued $ - $ - Common stock, par value $2.00 per share; authorized 10,000,000 shares 1998 and 3,000,000 shares 1997; issued 2,933,727 shares 1998 and 977,909 shares 1997 5,867,454 1,955,818 Surplus 9,761,066 9,761,066 Retained earnings 17,123,122 17,873,418 Accumulated other comprehensive income 2,192,528 2,227,765 Treasury stock at cost (35,134 shares) (1,191,021) - ____________ ____________ TOTAL STOCKHOLDERS' EQUITY $ 33,753,149 $ 31,818,067 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $303,028,481 $267,398,586 The accompanying notes are an integral part of these consolidated financial statements.
4 First Keystone Corporation FIRST KEYSTONE CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
___________________________________________________________________________ 1998 1997 ___________________________________________________________________________ INTEREST INCOME Interest and fees on loans $13,412,619 $12,923,557 Interest and dividends on investment securities: Taxable 4,301,941 3,727,915 Tax-exempt 2,562,325 2,288,362 Dividends 179,521 140,973 Deposits in banks 246,822 264,015 ___________ ___________ Total interest income $20,703,228 $19,344,822 INTEREST EXPENSE Deposits $ 9,208,368 $ 8,437,271 Short-term borrowings 303,467 230,071 Long-term borrowings 817,313 713,710 ___________ ___________ Total interest expense $10,329,148 $ 9,381,052 Net interest income 10,374,080 9,963,770 Provision for loan losses 275,000 325,000 Net interest income after provision for loan losses $10,099,080 $ 9,638,770 NON-INTEREST INCOME Trust Department $ 524,835 $ 456,880 Service charges and fees 749,705 669,252 Gain on sale of loans 126,409 34,107 Investment securities gains (losses) - net 178,634 67,957 Other 48,555 33,855 ___________ ___________ Total non-interest income $ 1,628,138 $ 1,262,051 NON-INTEREST EXPENSE Salaries and employee benefits $ 2,887,862 $ 2,626,752 Occupancy, net 403,242 331,962 Furniture and equipment 516,186 487,683 Other 1,727,790 1,486,748 ___________ ___________ Total non-interest expense $ 5,535,080 $ 4,933,145 Income before income taxes $ 6,192,138 $ 5,967,676 Income tax expense 1,304,606 1,307,436 ___________ ___________ NET INCOME $ 4,887,532 $ 4,660,240 PER SHARE DATA Net income $ 1.67 $ 1.59 Cash dividends $ .59 $ .47 Weighted average shares outstanding 2,925,695 2,933,727 ___________________________________________________________________________ 1996 ___________________________________________________________________________ INTEREST INCOME Interest and fees on loans $11,405,509 Interest and dividends on investment securities: Taxable 3,856,431 Tax-exempt 2,317,029 Dividends 115,054 Deposits in banks 91,782 ___________ Total interest income $17,785,805 INTEREST EXPENSE Deposits $ 7,864,665 Short-term borrowings 261,458 Long-term borrowings 541,243 ___________ Total interest expense $ 8,667,366 Net interest income 9,118,439 Provision for loan losses 516,584 Net interest income after provision for loan losses $ 8,601,855 NON-INTEREST INCOME Trust Department $ 424,740 Service charges and fees 616,487 Gain on sale of loans $ - Investment securities gains (losses) - net (37,729) Other 48,936 Total non-interest income $ 1,052,434 NON-INTEREST EXPENSE Salaries and employee benefits $ 2,448,234 Occupancy, net 281,222 Furniture and equipment 467,973 Other 1,343,236 ___________ Total non-interest expense $ 4,540,665 Income before income taxes $ 5,113,624 Income tax expense 983,339 ___________ NET INCOME $ 4,130,285 PER SHARE DATA Net income $ 1.41 Cash dividends $ .39 Weighted average shares outstanding 2,933,727 The accompanying notes are an integral part of these consolidated financial statements.
1998 Annual Report 5 FIRST KEYSTONE CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
___________________________________________________________________________ Common Comprehensive Stock Surplus Income ___________________________________________________________________________ Balance At December 31, 1995 $1,616,858 $3,829,266 Comprehensive Income: Net income $4,130,285 Other comprehensive income, net of tax: Unrealized gains (losses) on investment securities of $(938,922), net of reclassification adjustment for (losses) included in net income of $(24,901) (914,021) __________ Comprehensive income $3,216,264 10% stock dividend 161,436 2,825,130 Dividends paid in lieu of fractional shares Cash dividends - $.39 per share Balance At December 31, 1996 $1,778,294 $6,654,396 Comprehensive Income: Net income $4,660,240 Other comprehensive income, net of tax: Unrealized gains on investment securities of $1,115,453, net of reclassification adjustment for gains included in net income of $38,070 1,077,383 __________ 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 Other comprehensive income, net of tax: Unrealized gains (losses) on investment securities of $74,935, net of reclassification adjustment for gains included in net income of $110,172 (35,237) __________ 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 ___________________________________________________________________________ Accumulated Other Retained Comprehensive Treasury Earnings Income Stock ___________________________________________________________________________ Balance At December 31, 1995 $17,888,934 $2,064,403 $ - Comprehensive Income: Net income $ 4,130,285 Other comprehensive income net of tax: Unrealized gains (losses) on investment securities of $(938,922), net of reclassification adjustment for (losses) included in net income of $(24,901) (914,021) Comprehensive income 3,216,264 10% stock dividend (2,986,566) Dividends paid in lieu of fractional shares (4,622) Cash dividends - $.39 per share (1,138,108) Balance At December 31, 1996 $17,889,923 $1,150,382 $ - Comprehensive Income: Net income $ 4,660,240 Other comprehensive income, net of tax: Unrealized gains on investment securities of $1,115,453, net of reclassification adjustment for gains included in net income of $38,070 1,077,383 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 Other comprehensive income, net of tax: Unrealized gains (losses) on investment securities of $74,935, net of reclassification adjustment for gains included in net income of $110,172 (35,237) 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) ___________________________________________________________________________ Total ___________________________________________________________________________ Balance At December 31, 1995 $25,399,461 Comprehensive Income: Net income $ 4,130,285 Other comprehensive income, net of tax: Unrealized gains (losses) on investment securities of $(938,922), net of reclassification adjustment for (losses) included in net income of $(24,901) (914,021) Comprehensive income 10% stock dividend - Dividends paid in lieu of fractional shares (4,622) Cash dividends - $.39 per share (1,138,108) Balance At December 31, 1996 $27,472,995 Comprehensive Income: Net income $ 4,660,240 Other comprehensive income, net of tax: Unrealized gains on investment securities of $1,115,453, net of reclassification adjustment for gains included in net income of $38,070 1,077,383 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 Other comprehensive income, net of tax: Unrealized gains (losses) on investment securities of $74,935, net of reclassification adjustment for gains included in net income of $110,172 (35,237) 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 The accompanying notes are an integral part of these consolidated financial statements.
6 First Keystone Corporation FIRST KEYSTONE CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
___________________________________________________________________________ 1998 1997 ___________________________________________________________________________ OPERATING ACTIVITIES Net income $ 4,887,532 $ 4,660,240 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 275,000 325,000 Depreciation 345,566 304,134 Premium amortization on investment securities 260,911 132,361 Discount accretion on investment securities (143,293) (131,988) Deferred income taxes (benefit) 1,586 18,645 Gain on sale of loans (126,409) (34,107) Proceeds from sale of loans 5,751,429 765,019 Originations of loans held for resale (7,506,624) (1,675,406) (Gain) loss on sales of investment securities (178,634) (67,958) Gain on sale of premises and equipment (12,157) (67) (Gain) on sale of other real estate owned - (816) (Increase) in accrued interest receivable (135,094) (39,054) (Increase) decrease in other assets - net (43,090) 65,704 Increase (decrease) in accrued interest and other expenses (803) 393,798 Increase (decrease) in other liabilities - net (272,171) 406,418 ____________ ____________ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,103,749 $ 5,121,923 ____________ ____________ INVESTING ACTIVITIES Proceeds from sales of investment securities Available-for-Sale $ 9,799,220 $ 18,369,369 Proceeds from maturities and redemptions of investment securities Available-for-Sale 15,869,144 5,119,885 Purchases of investment securities Available-for-Sale (60,639,364) (21,757,280) Purchases of investment securities Held-to-Maturity (676,524) - Proceeds from maturities and redemption of investment securities Held-to-Maturity 3,437,452 2,774,482 Net increase in loans (7,725,344) (18,202,028) Proceeds from sale of premises and equipment 22,042 2,001 Purchases of premises and equipment (677,327) (860,581) Proceeds from sale of other real estate owned - 47,000 ____________ ____________ NET CASH USED IN INVESTING ACTIVITIES $(40,590,701) $(14,507,152) ____________ ____________ FINANCING ACTIVITIES Net increase in deposits $ 29,444,335 $ 19,101,401 Net increase in short-term borrowings 531,486 980,793 Proceeds from long-term borrowings 7,000,000 12,000,000 Repayment of long-term borrowings (3,000,000) (13,000,000) Acquisition of Treasury Stock (1,191,021) - Cash dividends paid (1,726,192) (1,386,901) Dividends paid in lieu of fractional shares - (5,650) ____________ ____________ NET CASH PROVIDED BY FINANCING ACTIVITIES $ 31,058,608 $ 17,689,643 ____________ ____________ Increase (decrease) in cash and cash equivalents $ (6,428,344) $ 8,304,414 Cash and cash equivalents at beginning of year 13,483,945 5,179,531 ____________ ____________ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,055,601 $ 13,483,945 ___________________________________________________________________________ 1996 ___________________________________________________________________________ OPERATING ACTIVITIES Net income $4,130,285 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 516,584 Depreciation 299,274 Premium amortization on investment securities 158,011 Discount accretion on investment securities (86,481) Deferred income taxes (benefit) (32,241) Gain on sale of loans - Proceeds from sale of loans 65,000 Originations of loans held for resale (1,087,313) (Gain) loss on sales of investment securities 37,729 Gain on sale of premises and equipment (804) (Gain) on sale of other real estate owned - (Increase) in accrued interest receivable (83,514) (Increase) decrease in other assets - net 28,687 Increase (decrease) in accrued interest and other expenses (52,076) Increase (decrease) in other liabilities - net (301) ____________ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,892,840 ____________ INVESTING ACTIVITIES Proceeds from sales of investment securities Available-for-Sale $ 20,076,003 Proceeds from maturities and redemptions of investment securities Available-for-Sale 3,998,416 Purchases of investment securities Available-for-Sale (40,909,754) Purchases of investment securities Held-to-Maturity (996,170) Proceeds from maturities and redemption of investment securities Held-to-Maturity 3,254,532 Net increase in loans (4,488,234) Proceeds from sale of premises and equipment 1,200 Purchases of premises and equipment (114,846) Proceeds from sale of other real estate owned - ____________ NET CASH USED IN INVESTING ACTIVITIES $(19,178,853) ____________ FINANCING ACTIVITIES Net increase in deposits $ 11,225,696 Net increase in short-term borrowings 762,766 Proceeds from long-term borrowings 12,000,000 Repayment of long-term borrowings (9,000,000) Acquisition of Treasury Stock - Cash dividends paid (1,138,108) Dividends paid in lieu of fractional shares (4,622) ____________ NET CASH PROVIDED BY FINANCING ACTIVITIES $ 13,845,732 ____________ Increase (decrease) in cash and cash equivalents $ (1,440,281) Cash and cash equivalents at beginning of year 6,619,812 ____________ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,179,531 The accompanying notes are an integral part of these consolidated financial statements
1998 Annual Report 7 FIRST KEYSTONE CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements for Years Ended December 31, 1998, 1997 and 1996 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of First Keystone Corporation and Subsidiary (the "Corporation") are in accordance with generally accepted accounting principles and conform to common practices within the banking industry. The more significant policies follow: Principles of Consolidation The consolidated financial statements include the accounts of First Keystone Corporation and its wholly-owned Subsidiary, The First National Bank of Berwick. All significant inter-company balances and transactions have been eliminated in consolidation. 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 eight full service offices and 11 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. First Keystone 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. 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 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. Loans Loans are stated at their outstanding unpaid principal balances, net of deferred fees or costs, unearned income and the allowance for loan losses. Interest on installment loans is recognized as income over the term of each loan, generally, by the "actuarial method". Interest on all other loans is primarily recognized based upon the principal amount outstanding. Loan origination fees and certain direct loan origination costs have been deferred and the net amount amortized using the interest method over the contractual life of the related loans as an interest yield adjustment. Mortgage loans held for resale are carried at the lower of cost or market. These loans are sold without recourse to the Corporation. 8 First Keystone Corporation Non-Accrual Loans - Generally, a loan is classified as non-accrual and the accrual of interest on such loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan currently is performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Certain non- accrual loans may continue to perform, that is, payments are still being received. Generally, the payments are applied to principal. These loans remain under constant scrutiny and if performance continues, interest income may be recorded on a cash basis based on management's judgement as to collectibility of principal. Allowance for Loan Losses - The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. 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 loans effective interest rate 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 to 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 balance sheet. In addition, 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 to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenues derived from and costs to maintain the assets and subsequent gains and losses on sales are included in other non-interest income and expense. Income Taxes The provision for income taxes is based on the results of operations, adjusted primarily for tax-exempt income. Certain items of income and expense are reported in different periods for financial reporting and tax return purposes. Deferred tax assets and liabilities are determined based on the differences between the consolidated financial statement and income tax bases of assets and liabilities measured by using the enacted tax rates and laws expected to be in effect when the timing differences are expected to reverse. Deferred tax expense or benefit is based on the difference between deferred tax asset or liability from period to period. Per Share Data Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, requires dual presentation of basic and 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. 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. 1998 Annual Report 9 Historical shares outstanding and per share data have been adjusted retroactively for stock splits and dividends. Cash Flow Information For purposes of reporting cash flows, cash and cash equivalents include cash on hand and due from other banks and interest bearing deposits in other banks. The Corporation considers cash classified as interest bearing deposits with other banks as a cash equivalent since they are represented by cash accounts essentially on a demand basis. Interest paid on deposits and other borrowings was $10,355,156, $9,275,057 and $8,682,349 in 1998, 1997 and 1996, respectively. Cash payments for income taxes were $1,314,645, $1,257,115 and $1,125,251 for 1998, 1997 and 1996, respectively. The Corporation transferred loans to other real estate owned in the amounts of $46,184 in 1996. Derivative Financial Instruments The Corporation has no derivative financial instruments requiring disclosure under Statement of Financial Accounting Standards (SFAS) No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." Trust Assets and Income Property held by the Corporation in a fiduciary or agency capacity for its customers is not included in the accompanying consolidated financial statements since such items are not assets of the Corporation. Trust Department income is recognized on a cash basis and is not materially different than if it were reported on an accrual basis. New Accounting Standards Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", is effective and has been implemented for the year ended December 31, 1998. SFAS 130 establishes standards for reporting and display of comprehensive income and its components. The adoption of SFAS 130 did not have a material effect on the Corporation's financial condition or results of operations. Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", provides accounting and reporting standards for sales, securitizations, and servicing of receivables and other financial assets, for certain serviced borrowings and collateral transactions, and for extinguishment of liabilities. As a result of SFAS 127, provisions of SFAS 125 became fully effective in 1998 and has not had a significant impact on the Corporation's financial condition or results of operations. Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information", became effective for 1998 and establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Corporation adopted the provision of this Statement for 1998. The disclosure requirements had no impact on the financial position or results of operations. Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", becomes effective for years beginning after June 15, 1999. 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 financial condition or results of operations. Reporting Format Certain amounts in the financial statements of prior periods have been reclassified to conform with presentation used in the 1998 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 $2,471,000 and $3,105,000 at December 31, 1998, and 1997, 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 $2,330,554 at December 31, 1998. 10 First Keystone Corporation 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, 1998 and 1997:
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
Available-for-Sale Securities ________________________________________________ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value December 31, 1997: U.S. Treasury securities $10,321,983 $ 119,830 $ - $10,441,813 Obligations of U.S. Government Corporations and Agencies: Mortgage-backed 17,196,705 237,966 32,030 17,402,641 Other 16,754,705 120,138 25,000 16,849,843 Obligations of state and political subdivisions 31,782,785 2,213,179 - 33,995,964 Equity securities 2,136,832 823,596 - 2,960,428 ___________ __________ _______ ___________ Total $78,193,010 $3,514,709 $57,030 $81,650,689
Held-to-Maturity Securities ________________________________________________ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value _________ _________ ________ ________ December 31, 1997: Obligations of U.S. Government Corporations and Agencies, Mortgage-backed $13,611,707 $ - $66,466 $13,545,241 Obligations of state and political subdivisions 3,196,918 90,879 - 3,287,797 ___________ _______ _______ ___________ Total $16,808,625 $90,879 $66,466 $16,833,038
1998 Annual Report 11 Securities Available-for-Sale with an aggregate fair value of $42,346,853 in 1998; $29,864,796 in 1997 and securities Held-to- Maturity with an aggregate unamortized cost of $8,878,530 in 1998 and $13,611,707 in 1997, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and other balances of $21,062,344 in 1998 and $35,175,394 in 1997 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, 1998. 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, 1998 ________________________________________ U.S. Government Obligations U.S. Agency & of State Treasury Corporation & Political Securities Obligations Subdivisions _______ __________ __________ Available-For-Sale: Within 1 Year: Amortized Cost $3,013,365 $ - $ - Estimated Fair Value 3,040,625 - - Weighted average yield 6.18% - - 1 - 5 Years: Amortized cost 4,333,676 4,314,838 3,903,316 Estimated fair value 4,445,531 4,346,956 4,269,332 Weighted average yield 6.40% 6.48% 10.72% 5 - 10 Years: Amortized cost - 12,561,299 1,929,351 Estimated Fair value - 12,652,514 2,101,141 Weighted average yield - 6.78% 10.50% After 10 Years: Amortized cost - 35,448,343 44,479,854 Estimated fair value - 35,632,921 45,998,835 Weighted average yield - 6.97% 9.81% Total: Amortized cost $7,347,041 $52,324,480 $50,312,521 Estimated fair value 7,486,156 52,632,391 52,369,308 Weighted average yield 6.31% 6.88% 9.91% December 31, 1998 ________________________________ 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 2,416,000 888,003 Estimated fair value 2,416,000 1,797,009 Weighted average yield 6.42% 4.90% Total: Amortized cost $2,416,000 $ 888,003 Estimated fair value 2,416,000 1,797,009 Weighted average yield 6.42% 4.90% _______________________ Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate. Mortgage-backed securities are allocated for maturity reporting at their original maturity date. 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
December 31, 1998 U.S. Government Obligations U.S. Agency & of State Treasury Corporation & Political Securities 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 - - 750,000 Estimated Fair value - - 759,545 Weighted average yield - - 7.39% After 10 Years: Amortized cost - 10,593,592 2,641,089 Estimated fair value - 10,530,231 2,725,268 Weighted average yield - 6.50% 8.02% __________ ___________ __________ Total: Amortized cost $ - $10,593,592 $3,391,089 Estimated fair value - 10,530,231 3,484,813 Weighted average yield - 6.50% 7.88% December 31, 1998 _______________________________ 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 - - _______________________ Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate. Mortgage-backed securities are allocated for maturity reporting at their original maturity date. 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 $1,938,800 and $1,027,300 in 1998 and 1997, respectively are classified as other securities. There were no aggregate investments with a single issuer (excluding U.S. Government and its agencies) which exceeded ten percent of consolidated shareholders' equity at December 31, 1998. 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 1998, 1997 and 1996 were $9,799,220, $18,369,369 and $20,076,003, respectively. Gross gains realized on these sales were $219,310, $309,956 and $414,239, respectively. Gross losses on these sales were $40,676, $241,999 and $451,968, respectively. Net unrealized gains on securities Available-for-Sale net of tax, reported as Other Comprehensive Income in the Consolidated Statement of Stockholders' Equity, was $2,192,528, $2,227,765 and $1,150,382, in 1998, 1997 and 1996, respectively. 1998 Annual Report 13 NOTE 4 LOANS Major classifications of loans at December 31, 1998 and 1997 consisted of:
1998 1997 ________ _______ Commercial, Financial, and Agricultural $ 16,579,315 $ 17,240,808 Tax-exempt 2,253,539 2,565,607 Real estate mortgage 121,223,412 114,467,096 Consumer 26,205,802 22,009,000 ____________ ____________ Gross loans $166,262,068 $156,282,511 Less: Unearned discount 4,603,479 3,864,710 Unamortized loan fees, net of costs 125,950 266,958 ____________ ____________ Loans, net of unearned income $161,532,639 $152,150,843
Mortgage loans held for sale included in loans were $3,952,310 and $2,070,707 at December 31, 1998, and 1997, respectively. Changes in the allowance for loan losses for the years ended December 31, 1998, 1997 and 1996, were as follows:
1998 1997 1996 _______ ______ ______ Balance, January 1 $2,371,194 $2,266,983 $2,015,236 Provision charged to operations 275,000 325,000 516,584 Loans charged off (269,218) (271,406) (302,480) Recoveries 44,066 50,617 37,643 __________ __________ __________ Balance, December 31 $2,421,042 $2,371,194 $2,266,983
Non-accrual loans at December 31, 1998, 1997 and 1996 were $854,295, $320,700 and $267,445, 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:
1998 1997 1996 ______ ______ ______ Gross interest due under terms $96,425 $30,027 $46,924 Amount included in income 5,610 7,006 3,048 _______ _______ _______ Interest income not recognized $90,815 $23,021 $43,876
At December 31, 1998 and 1997 the recorded investment in loans that are considered to be impaired as defined by SFAS No. 114 was $75,068 and $45,531, 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, 1998 and 1997 was approximately $85,015 and $84,901, respectively. At December 31, 1998, there were no significant commitments to lend additional funds with respect to non-accrual and restructured loans. NOTE 5 PREMISES AND EQUIPMENT A summary of premises and equipment at December 31, 1998 and 1997 follows:
1998 1997 ______ ______ Land $ 876,526 $ 876,526 Buildings and improvements 2,798,369 2,773,148 Equipment 3,548,426 3,389,465 __________ __________ $7,223,321 $7,039,139 Less: Accumulated depreciation 3,465,756 3,603,450 __________ __________ Total $3,757,565 $3,435,689
Depreciation amounted to $345,566 for 1998, $304,134 for 1997 and $299,274 for 1996. 14 First Keystone Corporation NOTE 6 MORTGAGE SERVICING RIGHTS The Corporation's banking subsidiary entered into mortgage servicing in 1997. Mortgage loans serviced for others are not included in the accompanying Consolidated Statements of Financial Condition. The unpaid principal balances of mortgage loans serviced for others was $6,276,477 and $704,673 at December 31, 1998 and 1997. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, was approximately $3,089 and $777 at December 31, 1998 and 1997. Mortgage servicing rights of $56,251 and $7,048 were capitalized in 1998 and 1997. Amortization of mortgage servicing rights was $1,671 in 1998 and $16 in 1997. Changes in the balances of servicing assets for the year ended December 31, 1998, are as follows:
1998 1997 ______ ______ Balance at January 1 $ 7,032 $ 0 Servicing asset additions 56,251 7,048 Amortization (1,671) (16) _______ ______ Balance at December 31 $61,612 $7,032
There was no valuation allowance on servicing assets as of December 31, 1998 and 1997. 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, 1998 and 1997. NOTE 7 DEPOSITS Major classifications of deposits at December 31, 1998 and 1997 consisted of:
1998 1997 ______ ______ Demand - non-interest bearing $ 22,749,074 $ 18,397,819 Demand - interest bearing 61,897,838 51,654,338 Savings 45,217,418 41,651,109 Time, $100,000 and over 27,344,905 25,245,346 Other time 89,882,284 80,698,572 ____________ ____________ Total deposits $247,091,519 $217,647,184
The following is a schedule reflecting classification and remaining maturities of time deposits of $100,000 and over at December 31, 1998:
1999 $23,906,518 2000 2,376,370 2001 272,878 2002 - 2003 789,139 ___________ $27,344,905
Interest expense related to time deposits of $100,000 or more was $1,339,212 in 1998, $1,241,486 in 1997 and $1,066,135 in 1996. 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, 1998, and 1997: 1998 Annual Report 15
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% 1997 _____________________________________ Maximum Ending Average Month End Average Balance Balance Balance Rate ______ ______ ______ ______ Federal funds purchased and securities sold under agreements to repurchase $4,602,160 $3,992,063 $4,728,459 4.15% Federal Home Loan Bank 0 456,411 2,275,000 6.50% U.S. Treasury tax and loan notes 1,500,000 663,378 1,888,686 5.19% __________ __________ __________ ____ Total $6,102,160 $5,111,852 $8,892,145 5.75%
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, 1998 and 1997 follows:
1998 1997 ______ ______ Due 1998, 5.56% $ - $1,000,000 Due 1999, 6.38% 1,000,000 1,000,000 Due 2000, 5.76% to 6.73% 2,000,000 2,000,000 Due 2001, 4.97% to 5.80% - 1,000,000 Due 2002, 5.48% to 7.77% 3,000,000 4,000,000 Due 2005, 5.55% 2,000,000 - Due 2008, 5.02% to 5.48% 5,000,000 - ___________ __________ $13,000,000 $9,000,000
NOTE 10 INCOME TAXES The current and deferred components of the income tax provision (benefit) consisted of the following:
1998 1997 1996 ______ ______ ______ Federal Current $1,291,313 $1,278,515 $1,013,777 Deferred (benefit) 1,586 18,645 (32,241) __________ __________ __________ $1,292,899 $1,297,160 $ 981,536 __________ __________ __________ State Current $ 11,707 $ 10,276 $ 1,803 Deferred (benefit) - - - $ 11,707 $ 10,276 $ 1,803 __________ __________ __________ Total provision for income taxes $1,304,606 $1,307,436 $ 983,339
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%:
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% 1996 ____________ Amount Rate _____ ____ Provision at statutory rate $1,738,632 34.0% Tax-exempt income (859,940) (16.8) Non-deductible expenses 112,022 2.2 Other, net (9,178) (.2) __________ _____ Applicable federal income tax and rate $ 981,536 19.2%
16 First Keystone Corporation Total federal income tax (benefit) attributable to realized security gains and losses was $60,746 in 1998, $23,105 in 1997 and ($12,828) in 1996. The deferred tax assets and liabilities resulting from temporary timing differences have been netted to reflect a net deferred tax liability included in other liabilities in these consolidated financial statements. The components of the net deferred tax liability at December 31, 1998, 1997 and 1996, are as follows:
1998 1997 1996 ______ ______ ______ Deferred Tax Assets: Loan loss Reserve $ 676,251 $ 659,302 $ 623,870 Deferred Compensation 44,307 20,432 - Contributions 11,240 - - ___________ ___________ _________ Total $ 731,798 $ 679,734 $ 623,870 Deferred Tax Liabilities: Loan origination fees and costs $ (171,850) $ (118,427) $ (64,371) Mortgage servicing rights (576) - - Accretion (21,883) (41,836) (24,302) Unrealized investment securities gains (1,220,294) (1,229,914) (634,604) Depreciation (189,964) (170,361) (167,442) ___________ ___________ _________ Total $(1,604,567) $(1,560,538) $(890,719) Net Deferred Tax Asset (Liability) $ (872,769) $ (880,804) $(266,849)
It is anticipated that all deferred tax assets are to be realized, accordingly no valuation allowance has been provided. NOTE 11 EMPLOYEE BENEFIT PLANS AND DEFERRED COMPENSATION AGREEMENTS The Corporation maintains a 401K Plan which has a combined tax qualified savings feature and profit sharing feature for the benefit of its employees. Under the savings feature, the Corporation contributes 100% of the employee contribution up to 3% of compensation which amounted to $67,377, $59,395, and $52,892 in 1998, 1997 and 1996, respectively. Under the profit sharing feature, contributions at the discretion of the Board of Directors, funded currently, amounted to $167,497, $151,574, and $138,818 in 1998, 1997 and 1996, 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, 1998 and 1997, was $70,222 and $60,093, respectively. NOTE 12 LEASE COMMITMENTS AND CONTINGENCIES The Corporation's banking subsidiary leases three 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, 1998, 1997 and 1996 was $82,804, $49,905 and $48,180, respectively. The lease commitments, including a new banking facility opened in 1998 with a base annual rental of $25,000 are: 1999 - $105,148, 2000 - $97,526, 2001 - $41,190, 2002 - $25,000 and 2003 - $20,833. 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, 1998, 1997 and 1996. 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. 1998 Annual Report 17 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, 1998, 1997 and 1996:
1998 1997 1996 ______ ______ ______ Balance at January 1 $2,080,963 $2,553,945 $3,090,030 Additions 738,176 284,044 224,885 Deductions (786,805) (757,026) (760,970) __________ __________ __________ Balance at December 31 $2,032,334 $2,080,963 $2,553,945
NOTE 14 REGULATORY MATTERS Dividends are paid by the Corporation to shareholders from its assets which are mainly provided by dividends from the Bank. However, national banking laws place certain restrictions on the amount of cash dividends allowed to be paid by the Bank to the Corporation. Generally, the limitation provides that dividend payments may not exceed the Bank's current year's retained income plus retained net income for the preceding two years. Accordingly, in 1999, without prior regulatory approval, the Bank may declare dividends to the Corporation in the amount of $4,628,579 plus additional amounts equal to the net income earned in 1999 for the period January 1, 1999, through the date of declaration, less any dividends which may have already been paid in 1999. Regulations also limit the amount of loans and advances from the Bank to the Corporation to 10% of consolidated net assets. The Corporation is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off- balance sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set fourth in the table below) of Total and Tier I Capital (as defined in the regulations) to Risk-Weighted Assets (as defined), and of Tier I Capital (as defined) to Average Assets (as defined). As of December 31, 1998, 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 institution's category.
(Amounts in thousands) Actual _______ Amount Ratio ______ _____ 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% As of December 31, 1997: Total Capital (to Risk Weighted Assets) $30,073 21.01% Tier I Capital (to Risk Weighted Assets) 28,277 19.75% Tier I Capital (to Average Assets) 28,277 10.79% For Capital (Amounts in thousands) Adequacy Purposes _________________ Amount Ratio _______ _____ 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% As of December 31, 1997: Total Capital (to Risk Weighted Assets) $11,450 8.00% Tier I Capital (to Risk Weighted Assets) 5,727 4.00% Tier I Capital (to Average Assets) 10,483 4.00% To Be Well Capitalized Under Prompt Corrective (Amounts in thousands) Action Provisions __________________ Amount Ratio ______ _____ 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% As of December 31, 1997: Total Capital (to Risk Weighted Assets) $14,314 10.00% Tier I Capital (to Risk Weighted Assets) 8,590 6.00% Tier I Capital (to Average Assets) 13,103 5.00%
The Corporation's capital ratios are not materially different from those of the Bank. 18 First Keystone Corporation 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, 1998, and 1997 were as follows:
1998 1997 ____ ____ Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $17,230,239 $15,524,491 Standby letters of credit $ 937,438 $ 522,080
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses that may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the counter- party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation may hold collateral to support standby letters of credit for which collateral is deemed necessary. However, at December 31, 1998, all standby letters of credit are generally unsecured. The Corporation grants commercial, agribusiness and residential loans to customers within the state. It is management's opinion that the loan portfolio was balanced and diversified at December 31, 1998, to the extent necessary to avoid any significant concentration of credit risk. NOTE 16 STOCKHOLDERS' EQUITY On January 4, 1996, the Board of Directors declared a 10% stock dividend paid February 16, 1996, to shareholders of record January 4, 1996. A total of 80,718 shares were issued as a result of this stock dividend with a total value transferred from retained earnings of $2,991,188, including cash in lieu of fractional shares. On April 15, 1997, the Board of Directors declared a 10% stock dividend paid May 16, 1997, to shareholders of record May 2, 1997. A total of 88,762 shares were issued as a result of this stock dividend with a total value transferred from retained earnings of $3,289,844, including cash in lieu of fractional shares. On January 27, 1998, the Board of Directors approved a 3 for 1 stock split issued in the form of a 200% stock dividend to be paid March 2, 1998, to shareholders of record February 10, 1998. 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. On September 28, 1998, 11,000 options were granted to 22 employees of the Bank. The fair market value per share at the grant date was $33.50 per share. 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. 1998 Annual Report 19 NOTE 17 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 The fair value of investment securities which include mortgage-backed securities is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. 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, 1998, and 1997. 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. 20 First Keystone Corporation 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, 1998 and 1997, the carrying values and estimated fair values of financial instruments of the Corporation are presented in the table below:
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 130,685,545 130,715,919 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 1997 _______________________ Carrying Estimated Amount Fair Value _____ __________ FINANCIAL ASSETS: Cash and due from banks $ 6,400,261 $ 6,400,261 Short-term investments 7,083,684 7,083,684 Investment securities 98,459,314 98,483,727 Net loans 149,779,649 151,403,927 Accrued interest receivable 1,997,936 1,997,936 FINANCIAL LIABILITIES: Deposits 217,647,184 218,366,085 Short-term borrowings 6,102,160 6,104,781 Long-term borrowings 9,000,000 9,042,986 Accrued interest payable 991,403 991,403 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: Commitments to extend credit 15,524,491 Standby letters of credit 522,080
1998 Annual Report 21 NOTE 18 PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for First Keystone Corporation (parent company only) was as follows:
BALANCE SHEETS December 31 __________________ 1998 1997 ____ ____ ASSETS Cash in subsidiary bank $994,725 $593,598 Investment in subsidiary bank 31,380,695 30,022,204 Investment in other equity securities 1,797,009 1,573,278 ___________ ___________ TOTAL ASSETS $34,172,429 $32,189,080 LIABILITIES Payable to subsidiary bank $32,294 $3,742 Accrued expenses and other liabilities 386,986 367,271 ___________ __________ TOTAL LIABILITIES $419,280 $371,013 ___________ __________ STOCKHOLDERS' EQUITY Preferred stock $ - $ - Common stock 5,867,454 1,955,818 Surplus 9,761,066 9,761,066 Retained earnings 17,123,122 17,873,418 Accumulated other comprehensive income 2,192,528 2,227,765 Treasury stock, at cost (1,191,021) - ___________ ___________ TOTAL STOCKHOLDERS' EQUITY $33,753,149 $31,818,067 ___________ ___________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $34,172,429 $32,189,080
INCOME STATEMENTS Year Ended December 31 ______________________________ 1998 1997 1996 ____ ____ ____ INCOME Dividends from subsidiary bank $3,344,449 $1,386,901 $1,138,110 Dividends - other 41,423 40,173 34,818 Securities gains 117,203 103,145 - Interest 24,560 16,650 28,810 __________ __________ __________ TOTAL INCOME $3,527,635 $1,546,869 $1,201,738 Operating Expenses 36,999 28,984 21,212 __________ __________ __________ Income Before Taxes and Equity in Undistributed Net Income of Subsidiary $3,490,636 $1,517,885 $1,180,526 Income tax expense 47,572 41,756 7,325 __________ __________ __________ Income Before Equity in Undistributed Net Income of Subsidiary $3,443,064 $1,476,129 $1,173,201 Equity in undistributed income of Subsidiary 1,444,468 3,184,111 2,957,084 __________ __________ __________ NET INCOME $4,887,532 $4,660,240 $4,130,285
22 First Keystone Corporation
STATEMENTS OF CASH FLOWS Year Ended December 31 _____________________________ 1998 1997 1996 ____ ____ ____ OPERATING ACTIVITIES Net income $ 4,887,532 $ 4,660,240 $ 4,130,285 Adjustments to reconcile net income to net cash provided by operating activities: Securities gains (117,202) (103,145) - Equity in undistributed net income of Subsidiary (1,444,468) (3,184,111) (2,957,084) Decrease in receivables from Subsidiary - - 54,681 Decrease in prepaid expenses and other assets - 11,400 70,994 Increase (decrease) in advances payable to Subsidiary 28,552 (3,003) 6,745 Increase (decrease) in accrued expenses and other liabilities (14,955) 32,149 (97,721) ___________ ___________ ___________ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,339,459 $ 1,413,530 $ 1,207,900 ___________ ___________ ___________ INVESTING ACTIVITIES Purchase of equity securities $ (201,023) $ (59,431) $ (41,628) Sale of equity securities 179,904 163,196 - NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES $ (21,119) $ 103,765 $ (41,628) FINANCING ACTIVITIES Acquisition of treasury stock $(1,191,021) $ - $ - Cash dividends paid (1,726,192) (1,386,901) (1,138,108) Dividends paid in lieu of fractional shares - (5,650) (4,622) ___________ ___________ ___________ NET CASH (USED) BY FINANCING ACTIVITIES $(2,917,213) $(1,392,551) $(1,142,730) ___________ ___________ ___________ Increase in Cash and Cash Equivalents $ 401,127 $ 124,744 $ 23,542 Cash and Cash Equivalents at Beginning of Year 593,598 468,854 445,312 ___________ ___________ ___________ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 994,725 $ 593,598 $ 468,854
1998 Annual Report 23 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, 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 for the prior year. The net income for 1998 marked the 16th consecutive year that earnings and earnings per share have increased. Earnings per share, both basic and diluted, for 1998 were $1.67 as compared to $1.59 in 1997 (adjusted for a 10% stock dividend paid in May 1997 and a 3 for 1 stock split in the form of a 200% stock dividend paid in March 1998). The Corporation's return on average assets declined to 1.72% in 1998 from 1.83% in 1997. Likewise, the return on average equity declined to 14.68% in 1998 from 15.92% in 1997. The increase in net income in 1998 did not keep pace with the increase in average assets and average equity. Net interest income, as indicated below in Table 1, increased by $410,000 to $10,374,000 for the year ended December 31, 1998, primarily due to the growth in average earning assets. The Corporation's net interest income on a fully taxable equivalent basis increased 5.1% in 1998 to $569,000. Year Ended December 31, 1997 Versus Year Ended December 31, 1996 Net income increased to $4,660,240 for the year ended December 31, 1997, as compared to $4,130,285 in 1996. Earnings per share, both basic and diluted, for 1997 was $1.59 as compared to $1.41 in 1996. The Corporation's return on average assets and return on average equity was 1.83% and 15.92%, respectively in 1997, as compared to 1.75% and 15.98%, respectively in 1996. Net interest income increased by $845,000 to $9,964,000 for the year ended 1997. The Corporation's net interest income on a fully taxable equivalent basis increased 7.6% in 1997 to $793,000 as indicated in Table 1. 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 balances with corresponding interest income and interest expense, as well as average yield and rate information for the periods presented. Table 1 - Net Interest Income
(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 (Amounts in thousands) 1997/1996 Increase/(Decrease) 1997 Amount % 1996 Interest Income $19,345 $1,559 8.8 $17,786 Interest Expense 9,381 714 8.2 8,667 Net Interest Income 9,964 845 9.3 9,119 Tax Equivalent Adjustment 1,250 (52) (4.0) 1,302 Net Interest Income (fully tax equivalent) $11,214 $ 793 7.6 $10,421
The yield on earning assets was 8.07% in 1998, 8.37% in 1997, and 8.38% in 1996. The rate paid on interest bearing liabilities decreased to 4.50% after increasing to 4.56% in 1997 from 4.53% in 1996. A 30 basis point decline in the yield on earning assets, together with just a 6 basis decrease on the rate paid on interest bearing liabilities in 1998 put additional pressure on the net interest margin. The effect was a decrease in our net interest margin to 4.30% in 1998 as compared to 4.56% in 1997 and 4.58% in 1996. The continued maintenance of an adequate net interest margin is a primary concern being addressed by management on an ongoing basis. 1998 Annual Report 25 Management's Discussion and Analysis _____________________________________________________________________ Table 2 - Distribution of Assets, Liabilities and Stockholders' Equity
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% 26 First Keystone Corporation Management's Discussion and Analysis ___________________________________________________________________ 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% 1996 ___________________________________ Avg. Balance Revenue/ Yield/ Expense Rate ____________ _______ ____ Interest Earning Assets: Loans: Commercial $ 15,770,100 $ 1,542,429 9.78% Real Estate 93,136,506 8,008,957 8.60% Installment Loans, Net 19,832,168 1,986,279 10.02% Fees on Loans 0 (22,838) 0% ____________ ___________ _____ Total Loans (Including Fees) $128,738,774 $11,514,827 8.94% Investment Securities: Taxable $ 58,566,185 $ 3,971,485 6.78% Tax Exempt 38,724,074 3,510,650 9.07% Total Investment Securities $ 97,290,259 $ 7,482,135 7.69% Interest Bearing Deposits in Banks 1,690,096 91,782 5.43% Total Interest - Earning Assets $227,719,129 $19,088,744 8.38% ____________ ___________ Non-Interest Earning Assets: Cash and Due From Banks $ 4,589,473 Allowance for Loan Losses (1,956,549) Premises and Equipment 2,957,176 Other Real Estate Owned 51,253 Other Assets 2,245,001 ____________ Total Non-Interest Earning Assets 7,886,354 ____________ Total Assets $235,605,483 Interest-Bearing Liabilities: Savings, NOW Accounts, and Money Markets $ 84,434,401 $ 2,601,722 3.08% Time Deposits 93,521,485 5,262,943 5.63% Short-Term Borrowings 1,658,914 100,183 6.04% Long-Term Borrowings 8,021,858 541,243 6.75% Securities Sold U/A to Repurchase 3,767,725 161,275 4.28% ____________ ___________ Total Interest-Bearing Liabilities $191,404,383 $ 8,667,366 4.53% Non-Interest Bearing Liabilities: Demand Deposits $ 16,664,535 Other Liabilities 1,506,985 Stockholders' Equity 26,029,580 ____________ Total Liabilities/ Stockholders' Equity $235,605,483 Net Interest Income Tax Equivalent $10,421,378 Margin Analysis: Interest Income/Earning Assets 8.38% Interest Expense/Earning Assets 3.81% Net Interest Income/ Earning Assets 4.58% ______________________ 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.
1998 Annual Report 27 Management's Discussion and Analysis ___________________________________________________________________ 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 1998, the 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. In 1997, there was an increase in net interest income of $793,000 due to changes in volume of $816,000 and a decrease of $23,000 due to changes in rate. Table 3 - Changes in Income and Expense, 1998 and 1997
(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 (Amounts in thousands) 1997 COMPARED TO 1996 ________________________________ VOLUME RATE NET ______ ____ ___ Interest Income: Loans, Net $1,461 $ 19 $1,480 Taxable Investment Securities (49) (54) (103) Tax-Exempt Investment Securities (33) (11) (44) Other Short-Term Investments 168 5 173 ______ _____ ______ Total Interest Income $1,547 $ (41) $1,506 Interest Expense: Savings, Now, and Money Markets $ 145 $ 107 $ 252 Time Deposits 365 (45) 320 Short-Term Borrowings (33) (3) (36) Long-Term Borrowings 245 (72) 173 Securities Sold U/A to Repurchase 9 (5) 4 ______ ____ ______ Total Interest Expense $ 731 (18) $ 713 ______ _____ ______ Net Interest Income $ 816 $ (23) $ 793 ________________________ The change in interest due to both volume and yield/rate has been allocated to change due to volume and change due to yield/rate in proportion to the absolute value of the change in each. Balance on non-accrual loans are included for computational purposes. Interest income on non-accrual loans is not included. Interest income exempt from federal tax was $2,735,553 in 1998, $2,426,231 in 1997, and $2,529,235 in 1996. 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, 1998, the provision for loan losses was $275,000 as compared to $325,000 as of December 31, 1997, a decrease of 15.4%. The Corporation's provision for loan losses for the year ended December 31, 1997, was down $191,584 over 1996. The provision was decreased the past two years since the loan growth experienced by the Corporation has not resulted in significant increase in delinquencies or charge-offs. Net charge-offs by the Corporation for the fiscal year end December 31, 1998, 1997, and 1996, were $225,000, $221,000, and $265,000, respectively. The allowance for loan losses as a percentage of loans, net of unearned interest, was 1.50% as of December 31, 1998, 1.56% as of December 31, 1997, and 1.70% as of December 31, 1996. 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. 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. 28 First Keystone Corporation Management's Discussion and Analysis ___________________________________________________________________ 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 further increase non-interest income, while investment security losses reduce non-interest income. For the year ended December 31, 1998, non-interest income increased $367,000, or 29.1% as compared to an increase of $210,000 for the year ended December 31, 1997. Table 4 provides the major categories of non-interest income and each respective change. Excluding investment security gains, non-interest income in 1998 increased $256,000, or 21.4%. This compares to an increase of $104,000, or 9.5% in 1997 before investment security gains. Income from the trust department, which consists of fees generated from individual and corporate accounts, increased in 1998 by $68,000 after increasing by $32,000 in 1997. Increased income from the trust department was due primarily to 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 1998 and 1997. Service charges and fees increased by $81,000, or 12.1% in 1998 compared to an increase of $53,000, or 8.6% in 1997. Other income increased by $15,000, or 44.41% in 1998 compared to a decrease of $15,000, or a 30.6% reduction in 1997. The gain on sale of mortgages provided $126,000 in 1998, an increase of $92,000 over 1997. In 1997, we recognized our first gain on the sale of mortgage loans as we originated mortgages for sale in the secondary market. 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) 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 (Amounts in thousands) 1997/1996 ________________________________ Increase/(Decrease) __________________ 1997 Amount % 1996 ____ _____ __ ____ Trust Department $ 457 $ 32 7.5 $ 425 Service Charges and Fees 669 53 8.6 616 Other 34 (15) (30.6) 49 Gain on Sale of Mortgages 34 34 0 0 ______ ____ _____ ______ Subtotal $1,194 104 9.5 $1,090 Investment Securities Gains 68 106 278.9 (38) ______ ____ _____ ______ Total $1,262 $210 20.0 $1,052
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 $601,000, or 12.2% in 1998 compared to an increase of $393,000, or 8.6% in 1997. Expenses associated with employees (salaries and employee benefits) continue to be the largest non-interest expenditure. Salaries and employee benefits amounted to 52.2% of total non-interest expense in 1998 and 53.3% in 1997. Salaries and employee benefits increased $261,000, or 9.9% in 1998 and $179,000, or 7.3% in 1997. The increase in both years were due to an increased number of employees, plus normal salary adjustments and increased benefit costs. Full time equivalent employees total 105 as of December 31, 1998, compared to 98 in 1997, and 91 in 1996. Net occupancy expense increased $71,000, or 21.4% in 1998 as compared to $51,000, or 18.1% in 1997. The increases in occupancy in both 1998 and 1997 relate primarily to the opening of one new full service branch office in each year. Furniture and equipment expense increased $28,000, or 5.7% in 1998 compared to an increase of $20,000, or 4.3% in 1997. Other operating expenses increased $241,000, or 16.2% in 1998 as compared to an increase of $143,000, or 10.6% in 1997. The overall level of non-interest expense continues to be low, relative to our peers. In fact, our total non-interest expense was less than 2% of average assets in both 1998 and 1997. 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. 1998 Annual Report 29 Management's Discussion and Analysis ___________________________________________________________________ Table 5 - Non-Interest Expense
(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 (Amounts in thousands) 1997/1996 ________________________________ Increase/(Decrease) 1997 Amount % 1996 ____ _____ __ ____ Salaries and Employee Benefits $2,627 $179 7.3 $2,448 Occupancy, Net 332 51 18.1 281 Furniture and Equipment 488 20 4.3 468 Other 1,487 143 10.6 1,344 Total $4,934 $393 8.6 $4,541
INCOME TAX EXPENSE Income tax expense for the year ended December 31, 1998, was $1,304,606 as compared to $1,307,436 and $983,339 for the years ended December 31, 1997, and December 31, 1996, respectively. In 1998, our income tax expense decreased even though income before taxes increased $224,462. An increase in tax exempt interest, derived from both our tax-free loans and municipal investment securities in 1998, resulted in a lower income tax liability. The effective income tax rate was 20.9% in 1998, 21.7% in 1997, and 19.2% in 1996. 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 $303,028,481, at year-end 1998, an increase of 13.3% over year-end 1997. As of December 31, 1998, total deposits amounted to $247,091,519, up 13.5%over 1997. Assets as of December 31, 1997, were $267,398,586, an increase of 10.2% over 1996, while total deposits as of year-end 1997 amounted to $217,647,184, an increase of 9.6% over 1996. The increase in assets primarily reflects the deployment of proceeds from 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 1998 by $4,531,486. The Corporation may borrow additional funds to leverage its balance sheet in 1999 if net income can be incrementally increased without incurring an excessive amount of interest rate risk. EARNING ASSETS Earning assets are defined as those assets that produce interest income. By maintaining a healthy asset utilization rate, i.e., the volume of earning assets as a percentage of total assets, the Corporation maximizes income. The earning asset ratio equaled 96.4% as of December 31, 1998, compared to 96.4% as of December 31, 1997, and 96.7% at December 1, 1996. This indicates that the management of earning assets is a priority and non-earning assets, primarily cash and due from banks, fixed assets and other assets, are maintained at minimal levels. The primary earning assets are loans and investment securities. LOANS Total loans, net of unearned income, increased to $161,533,000 as of December 31, 1998, as compared to $152,151,000 as of December 31, 1997. 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 $9,382,000, or 6.2% in 1998 compared to an increase of $18,890,000, or 14.2% in 1997 and $5,200,000, or 4.1% in 1996. The loan portfolio is well diversified and increases in the portfolio the last two years have been primarily from real estate loans and commercial loans secured by real estate. Also, in 1998 consumer loans increased to a new record level. In 1998, approximately $5,600,000 of residential mortgage loans were sold in the secondary market. 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. 30 First Keystone Corporation Management's Discussion and Analysis ___________________________________________________________________ Table 6 - Loans Outstanding, Net of Unearned Income
(Amounts in thousands) December 31, ___________________________ 1998 1997 1996 ____ ____ ____ Commercial, financial and agricultural: Commercial secured by real estate $ 43,366 $ 41,566 $ 33,103 Commercial - other 16,579 17,241 13,574 Tax exempt 2,254 2,566 2,263 Real estate (primarily residential mortgage loans) 77,858 72,901 65,145 Consumer loans 26,205 22,009 23,027 ________ ________ ________ Total Gross Loans $166,262 $156,283 $137,112 Less: Unearned income and unamortized loan fees net of costs 4,729 4,132 3,851 ________ ________ ________ Total Loans, net of unearned income $161,533 $152,151 $133,261 (Amounts in thousands) December 31, _________________ 1995 1994 ____ ____ Commercial, financial and agricultural: Commercial secured by real estate $ 28,846 $ 30,127 Commercial - other 17,563 16,285 Tax exempt 3,602 3,754 Real estate (primarily residential mortgage loans) 58,438 52,389 Consumer loans 23,681 19,370 ________ ________ Total Gross Loans $132,130 $121,925 Less: Unearned income and unamortized loan fees net of costs 4,069 3,741 ________ ________ Total Loans, net of unearned income $128,061 $118,184
INVESTMENT SECURITIES 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 $116,701,000 in 1998, a 42.9% increase over 1997. Held-to-maturity securities declined $2,824,000, or a 16.8% decrease over 1997. 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 other bank holding companies and commercial banks. During 1998, interest bearing deposits in other banks decreased to $22,489 from $7,083,684 in 1997, as more funds were invested in marketable securities to maximize income while still addressing liquidity needs. Table 7 - Carrying Value of Investment Securities
(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 December 31, ___________________ 1996 ___________________ Available Held to for Sale Maturity _______ ________ U.S. Treasury $ 3,341 $ 0 U. S. Government Corporations and Agencies 36,339 16,787 State and Municipal 37,602 3,293 Other Securities 1,266 0 Equity Securities 2,598 0 Total Investment Securities $81,146 $20,080
1998 Annual Report 31 Management's Discussion and Analysis ___________________________________________________________________ ALLOWANCE FOR LOAN LOSSES Management performs a quarterly analysis to determine the adequacy of the allowance for loan losses. The methodology in determining adequacy incorporates specific and general allocations together with a risk/loss analysis on various segments of the portfolio according to an internal loan review process. Management maintains its loan review and loan classification standards consistent with those of its regulatory supervisory authority. Management feels, considering the conservative portfolio composition, which is largely composed of small retail loans (mortgages and installments) with minimal classified assets, low delinquencies, and favorable loss history, that the allowance for loan losses is adequate to cover foreseeable future losses. Table 8 contains an analysis of our Allowance for Loan Losses indicating charge-offs and recoveries by the year. In 1998, net charge-offs as a percentage of average loans were .15% compared to .15% in 1997 and .21% in 1996. Net charge-offs amounted to $225,000 in 1998 as compared to $221,000 and $265,000 in 1997 and 1996, 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 1.57% in 1998, 1.63% in 1997, and 1.76% in 1996. Table 8 - Analysis of Allowance for Loan Losses
(Amounts in thousands) Years Ended December 31, ______________________ 1998 1997 1996 ____ ____ ____ Balance at beginning of period $2,371 $2,267 $2,015 Charge-offs: Commercial, financial, and agricultural 66 107 214 Real estate - mortgage 42 54 0 Installment loans to individuals 161 111 88 _____ _____ _____ 269 272 302 Recoveries: Commercial, financial, and agricultural 0 7 12 Real estate - mortgage 8 17 8 Installment loans to individuals 36 27 17 44 51 37 Net charge-offs 225 221 265 Additions charged to operations 275 325 517 ______ ______ ______ Balance at end of period $2,421 $2,371 $2,267 Ratio of net charge-offs during the period to average loans outstanding during the period .15% .15% .21% Allowance for loan losses to average loans outstanding during the period 1.57% 1.63% 1.76% (Amounts in thousands) Years Ended December 31, ______________________ 1995 1994 ____ ____ Balance at beginning of period $1,802 $1,844 Charge-offs: Commercial, financial, and agricultural 18 80 Real estate - mortgage 118 29 Installment loans to individuals 50 72 ______ ______ 186 181 Recoveries: Commercial, financial, and agricultural 6 81 Real estate - mortgage 2 6 Installment loans to individuals 19 21 ______ ______ 27 108 Net charge-offs 159 73 Additions charged to operations 372 31 ______ ______ Balance at end of period $2,015 $1,802 Ratio of net charge-offs during the period to average loans outstanding during the period .13% .07% Allowance for loan losses to average loans outstanding during the period 1.65% 1.61%
32 First Keystone Corporation Management's Discussion and Analysis ___________________________________________________________________ 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, _______________________________________ 1998 % 1997 % ____ ____ ____ ____ Commercial, financial, and agricultural $ 253 9.8 $ 271 12.1 Real estate - mortgage 1,237 74.3 1,135 73.9 Installments to individuals 319 15.9 241 14.0 Unallocated 612 N/A 724 N/A ______ ______ ______ _____ $2,421 100.00 $2,371 100.0 December 31, _____________________________________ 1996 % 1995 % ____ ____ ____ ____ Commercial, financial, and agricultural $ 303 10.7 $ 344 17.4 Real estate - mortgage 1,088 72.5 663 66.1 Installments to individuals 203 16.8 443 16.5 Unallocated 673 N/A 565 N/A ______ _____ ______ _____ $2,267 100.0 $2,015 100.0 December 31, _______________________________________ 1994 % ____ ____ Commercial, financial, and agricultural $ 253 15.2 Real estate - mortgage 985 68.9 Installments to individuals 153 15.9 Unallocated 411 N/A ______ _____ $1,802 100.0 ______________________ 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. The total of non-performing assets did increase to $881,000 as of December 31, 1998, as compared to $686,000 as of December 31, 1997. Some of the loans at year-end 1997, which were past-due 90 days or more and still accruing, were put on non-accrual in 1998. Even though our total non-performing assets did increase in 1998, our allowance for loan losses to total non-performing assets remains very strong at 274.8%. With a full-time loan review officer, loan quality is monitored closely, and we actively attempt to work with borrowers to resolve credit problems. Excluding the assets disclosed in Table 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 1998 and 1997 was $5,610 and $7,006, respectively. Interest income, which would have been recorded on these loans under the original terms in 1998 and 1997 was $96,425 and $30,027, respectively. At December 31, 1998, 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, 1998, 1997, and 1996, 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 72.9% of the loan portfolio as of December 31, 1998, down slightly from 73.2% in 1997. 1998 Annual Report 33 Management's Discussion and Analysis ___________________________________________________________________ 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, ____________________________________ 1998 1997 1996 1995 1994 ____ ____ ____ ____ ____ Non-accrual and restructured loans $854 $321 $267 $557 $620 Other real estate/ foreclosed assets 0 29 84 0 235 Loans past-due 90 days or more and still accruing 27 336 263 68 49 ____ ____ ____ ____ ____ Total non-performing assets $881 $686 $614 $625 $904 Non-performing assets to period-end loans and foreclosed assets .55% .45% .46% .48% .76% Total non-performing assets to total assets .29% .26% .25% .28% .44% Total allowance for loan losses to total non-performing assets 274.8% 345.7% 369.2% 322.4% 199.3%
DEPOSITS AND OTHER BORROWED FUNDS Consumer and commercial retail deposits are attracted primarily by First Keystone's subsidiary bank's eight 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 interest rates and other economic factors. Deposit growth amounted to $29,444,335, or a 13.5% increase when comparing December 31, 1998, to December 31, 1997. This increase compares to deposit increases of 9.6% in 1997 and 6.0% in 1996. During 1998, the Corporation experienced deposit growth in both non-interest bearing and interest bearing deposits. Non-interest bearing deposits amounted to $22,749,074 as of December 31, 1998, an increase of $4,351,255, or 23.7% over 1997. Interest bearing deposits amounted to $224,342,445 as of December 31, 1998, an increase of $25,093,080, or 12.6% over 1997. In the area of interest bearing deposits, transaction type of core deposit (interest checking, savings, and money market) accounts increased as well as certificates of deposit. The Corporation utilizes borrowing from the Federal Home Loan Bank (FHLB) and collateralized repurchase agreements as a tool to augment deposits in funding asset growth. Total borrowings were $19,633,646 as of December 31, 1998, compared to $15,102,160 on December 31, 1997. The increase in borrowings in 1998 were utilized to fund loan growth and increase in our investment portfolio. In connection with FHLB borrowings and repurchase agreements, 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 on investment securities available for sale increased shareholders' equity or capital in both 1998 and 1997. The net increase in capital was $1,935,082 in 1998 and $4,345,072 in 1997. The accumulated other comprehensive income decreased slightly to $2,192,528 in 1998. Another factor for the smaller increase in equity capital in 1998 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, 1998, the Corporation had repurchased 35,134 shares at a cost of $1,191,021. Return on equity (ROE) is computed by dividing net income by average stockholders' equity. This ratio was 14.68% for 1998, 15.92% for 1997, and 15.98% for 1996. 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 10.50% at December 31, 1998, and 11.23% as of December 31, 1997. The risk-based capital ratios also decreased in 1998 from 1997 for both the Corporation and the Bank. The risk-based capital calculation assigns various levels of risk to different categories of bank assets, requiring higher levels of capital for assets with more risk. Also measured in the risk-based capital ratio is credit risk exposure associated with off-balance sheet contracts and commitments. The following table indicates capital ratios as of December 31, 1998, and December 31, 1997, for the Corporation and the Bank. 34 First Keystone Corporation Management's Discussion and Analysis ___________________________________________________________________ Table 11 - Capital Ratios
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% December 31, 1997 _________________ Corporation Bank __________ ____ Risk-Based Capital: Tier I risk-based capital ratio 19.43% 19.75% Total risk-based capital ratio (Tier 1 and Tier 2) 20.68% 21.01% Leverage Ratio: Tier I capital to average assets 11.23% 10.79%
LIQUIDITY MANAGEMENT Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, are met. Liquidity is needed to provide the funding requirements of depositors withdrawals, loan growth, and other operational needs. Asset liquidity is provided by investment securities maturing in one year or less, other short-term investments, federal funds sold, and cash and due from banks. Additionally, maturing loans and repayment of loans are another source of asset liquidity. Liability liquidity is accomplished by maintaining a core deposit base, acquired by attracting new deposits and retaining maturing deposits. Also, short-term borrowings provide funds to meet liquidity. Management feels its current liquidity position is satisfactory given the factors that the Corporation has a very stable core deposit base which has increased annually. Secondly, our loan payments and principal paydowns on our mortgage backed securities provide a steady source of funds. Also, short-term investments and maturing investments represent additional sources of liquidity. Finally, short-term borrowings are readily accessible at the Federal Reserve Bank discount window, Atlantic Central Bankers Bank, or the Federal Home Loan Bank. Finally, while the Corporation does not have access to funds on a short-term basis from the Federal Reserve Bank discount window, the Bank can utilize the 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, 1998 _______________________________ One year One thru Over five or less five years years Total Commercial, Financial and Agricultural Fixed interest rate $ 5,573 $ 7,088 $6,955 $19,616 Variable interest rate 32,270 15,150 689 48,109 _______ _______ ______ _______ Total $37,843 $22,238 $7,644 $67,725 Real Estate Construction Fixed interest rate $ 100 $ 961 $ 0 $ 1,061 Variable interest rate $ 125 $ 0 $ 0 $ 125 __________________________ 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. 1998 Annual Report 35 Management's Discussion and Analysis ___________________________________________________________________ MARKET RISK MANAGEMENT Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. First Keystone Corporation's market risk is composed primarily of interest rate risk. Increases in the level of interest rates also may adversely affect the fair value of the Corporation's securities and other earning assets. Generally, the fair value of fixed-rate instruments fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the Corporation's interest-earning assets, which could adversely affect the Corporation's results of operations if sold, or, in the case of interest earning assets classified as available for sale, the Corporation's stockholders' equity, if retained. Under The Financial Accounting Standards Board (FASB) Statement 115, changes in the unrealized gains and losses, net of taxes, on securities classified as available for sale will be reflected in the Corporation's stockholders' equity. As of December 31, 1998, the Corporation's securities portfolio included $116,700,864 in securities classified as available for sale. Accordingly, with the magnitude of the Corporation's holdings of securities available for sale, changes in interest rates could produce significant changes in the value of such securities and could produce significant fluctuations in the stockholders' equity of the Corporation. The Corporation does not own any trading assets. The Bank's Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. The guidelines established by ALCO are reviewed by the Corporation's Board of Directors. Table 13 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 2.4% if rates fell gradually by two percentage points over one year. The model projects a decrease of approximately 2.4% in net-interest income if rates rise gradually by two percentage points over one year. While this does indicate a liability sensitive risk position, both of these forecasts are within the one year policy guidelines. 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 42.2%. Additionally, net present value is projected to decrease by 38.7% if rates increase immediately by 200 basis points, both within policy limits restricting these amounts to 50%. The computation of the effects of hypothetical interest rate changes are based on many assumptions. They should not be relied upon solely as being indicative of actual results, since the computations do not contemplate actions management could undertake in response to changes in interest rates. Table 13 - 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 2.4% (10%) +200 bp Ramp vs Stable Rate (2.4%) (10%) Effect on Net Present Value of Balance Sheet Static Net Present Value Change 200 bp Shock vs Stable Rate 42.2% (50%) +200 bp Shock vs Stable Rate (38.7%) (50%)
ASSET/LIABILITY MANAGEMENT The principal objective of asset liability management is to manage the sensitivity of the net interest margin to potential movements in interest rates and to enhance profitability through returns from managed levels of interest rate risk. The Corporation actively manages the interest rate sensitivity of its assets and liabilities. Several techniques are used for measuring interest rate sensitivity. The traditional maturity "gap" analysis, which reflects the volume difference between interest rate sensitive assets and liabilities during a given time period, is reviewed regularly by management. A positive gap occurs when the amount of interest sensitive assets exceeds interest sensitive liabilities. This position would 36 First Keystone Corporation Management's Discussion and Analysis ___________________________________________________________________ contribute positively to net-interest income in a rising interest rate environment. Conversely, if the balance sheet has more liabilities repricing than assets, the balance sheet is liability sensitive or negatively gapped. In our current sensitivity position, management continues to monitor sensitivity so we do not become overexposed in a rising interest rate environment. Limitations of gap analysis as illustrated in Table 14 include: a) assets and liabilities which contractually reprice within the same period may not, in fact, reprice at the same time or to the same extent; b) changes in market interest rates do not affect all assets and liabilities to the same extent or at the same time, and c) interest rate gaps reflect the Corporation's position on a single day (December 31, 1998 in the case of the following schedule) while the Corporation continually adjusts its interest sensitivity throughout the year. Another way management reviews its interest sensitivity position is through dynamic income simulation. A dynamic income simulation model is the primary mechanism used in assessing the impact of changes in interest rates on net interest income. The model reflects management's assumptions related to asset yields and rates paid on liabilities, deposit sensitivity, size and composition of the balance sheet. The assumptions are based on what management believes at that time to be the most likely interest rate environment. Management also evaluates the impact of higher and lower interest rates. Management cannot predict the direction of interest rates or how the mix of assets and liabilities will change. The use of this information will help formulate strategies to minimize the unfavorable effect on net interest income caused by interest rate changes. Also in Table 14, 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 $33,862,000. However, much of our interest bearing demand deposits and savings deposits are considered core deposits and are not rate sensitive, especially in the three months or less time frame. Accordingly, the Corporation feels it is only slightly negatively gapped with exposure to an increase in interest rates limited within policy guidelines. As discussed previously, a negative gap will decrease net interest income should interest rates rise. Despite the Corporation's negative gap position, the impact of a rapid rise in interest rates as occurred in 1994, did not have a significant effect on our net interest income. Accordingly, even though there are some inherent limitations to gap analysis and dynamic income simulation, the Corporation believes that the tools used to manage its interest rate sensitivity provide an appropriate reflection of interest rate risk exposure. Table 14 - Interest Rate Sensitivity Analysis
(Amounts in thousands) December 31, 1998 _____________________________ 3 Months 3 - 12 1 - 5 or Less Months Years ______ ______ _____ Rate Sensitive Assets: Cash and cash equivalent $ 22 $ 0 $ 0 Loans 32,975 26,342 57,710 Investments 19,599 9,460 60,559 ________ _______ ________ Total Rate Sensitive Assets $ 52,596 $ 35,802 $118,269 Rate Sensitive Liabilities: Deposits: Interest-bearing demand/ savings $ 52,035 $ 327 $ 0 Time 28,282 59,472 29,100 Short-term borrowings 6,141 492 0 Long-term borrowings 0 1,000 5,000 ________ ________ ________ Total Rate Sensitive Liabilities $ 86,458 $ 61,291 $ 34,100 Interest Rate Sensitivity: Current period $(33,862) $(25,489) $ 84,169 Cumulative gap (33,862) (59,351) 24,818 Cumulative gap to total assets (11.17%) (19.59%) 8.19% (Amounts in thousands) December 31, 1998 _____________________________ Over 5 Years Total ______ _____ Rate Sensitive Assets: Cash and cash equivalent $ 0 $ 22 Loans 44,506 161,533 Investments 41,068 130,686 _______ ________ Total Rate Sensitive Assets $85,574 $292,241 Rate Sensitive Liabilities: Deposits: Interest-bearing demand/ savings $55,119 $107,481 Time 8 116,862 Short-term borrowings 0 6,633 Long-term borrowings 7,000 13,000 _______ ________ Total Rate Sensitive Liabilities $62,127 $243,976 Interest Rate Sensitivity: Current period $23,447 $ 48,265 Cumulative gap 48,265 Cumulative gap to total assets 15.93%
1998 Annual Report 37 Management's Discussion and Analysis ___________________________________________________________________ YEAR 2000 COMPLIANCE Management initiated the process of preparing its computer systems and applications for the Year 2000 in 1997. 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. Management has completed its assessment of all business processes that could be affected by the Year 2000 issue. Each business process assessment included a review of the information systems used in that process, including related hardware and software, the involvement of any third parties, and any affected operating equipment. To date, approximately 75% of the mission critical systems determined to be critical for supporting the core services offered by First Keystone Corporation have been remediated, unit tested, and returned to production. Management expects to complete the remediation and testing of all affected systems within the critical business processes by the end of the second quarter of 1999. The Corporation anticipates that its total Year 2000 project cost will not exceed $100,000. This estimated project cost is based upon currently available information and includes expenses paid to date. The expenses for maintenance or modification of software associated with the Year 2000 will be expensed as incurred. The costs of new software will be capitalized and amortized over the software's useful life. The aforementioned Year 2000 project cost estimate also may change as the Corporation progresses in its Year 2000 program and obtains additional information associated with and conducts further testing concerning third parties. At this time, no significant projects have been delayed as a result of the Corporation's Year 2000 effort. Financial institution regulators have intensively focused upon Year 2000 exposures, issuing guidance concerning the responsibilities of senior management and directors. Year 2000 testing and certification is being addressed as a key safety and soundness issue in conjunction with regulatory examinations. In May 1997, the Federal Financial Institutions Examination Council ("FFIEC") issued an interagency statement to the chief executive officers of all federally supervised financial institutions regarding Year 2000 project management awareness. The FFIEC has highly prioritized Year 2000 compliance in order to avoid major disruptions to the operations of financial institutions and the country's financial systems when the new century begins. The FFIEC statement provides guidance to financial institutions, providers of data services, and all examining personnel of the federal banking agencies regarding the Year 2000 issue. Management believes it has an effective plan in place to resolve the Year 2000 issue in a timely manner and, thus far, activities have tracked in accordance with the original plan. Management is in the process of modifying its existing business continuity plans and is also developing contingency plans to address potential risks in the event of Year 2000 failures, including non-compliance by third parties. Despite First Keystone Corporation's efforts to date to remediate affected systems and develop contingency plans for potential risks, management has not yet completed all activities associated with resolving its Year 2000 issues. In addition, non-compliance by third parties (including loan customers) and disruptions to the economy in general resulting from Year 2000 issues could also have a negative impact of undeterminable magnitude on First Keystone Corporation. 38 First Keystone Corporation Management's Discussion and Analysis ___________________________________________________________________ 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 February 1996, May 1997, and a 3 for 1 split in the form of a 200% dividend paid in March 1998. These prices do not necessarily reflect any dealer or retail markup, markdown or commission. Table 15 - Market Price/Dividend History
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 1996 __________________________ Common Stock Dividends High/Low Paid _______ ____ First Quarter $11.21/$10.19 $.094 Second Quarter $11.21/$11.21 .094 Third Quarter $11.21/$11.21 .094 Fourth Quarter $11.21/$11.21 .106 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 Hopper Soliday and Co. 1703 Oregon Pike Lancaster, PA 17601 (800) 646-8647 Ryan, Beck and Company 150 Monument Road Suite 106 Bala Cynwyd, PA 19004 (800) 223-8969 1998 Annual Report 39 Management's Discussion and Analysis ___________________________________________________________________ Table 16 - Quarterly Results of Operations (Unaudited)
(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 (Amounts in thousands, except per share) Three Months Ended _______________________________________ 1997 March June September December 31 30 30 31 ____ ____ ________ _______ Interest income $4,608 $4,745 $4,948 $5,044 Interest expense 2,237 2,276 2,417 2,451 ______ ______ ______ ______ Net interest income $2,371 $2,469 $2,531 $2,593 Provision for loan losses 50 100 50 125 Other non-interest income 291 273 286 412 Non-interest expense 1,215 1,186 1,223 1,309 ______ ______ ______ ______ Income before income taxes $1,397 $1,456 $1,544 $1,570 Income taxes 274 309 359 365 ______ ______ ______ ______ Net income $1,123 $1,147 $1,185 $1,205 Per share $ .38 $ .39 $ .40 $ .41 Reflects adjustment for stock dividends more fully described in Note 1.
40 First Keystone Corporation 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. 22 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 11, 1999, included in the 1998 Annual Report to Stockholders of First Keystone Corporation. /s/ J. H. Williams & Co., LLP March 23, 1999 J. H. Williams & Co., LLP Kingston, Pennsylvania Certified Public Accountants 23 EX-27 6
9 1,000 12-MOS DEC-31-1998 DEC-31-1998 7,033 22 0 0 13,985 116,701 116,701 161,533 2,421 303,028 247,092 6,634 2,549 13,000 0 0 5,867 27,886 303,028 13,413 7,044 246 20,703 9,208 1,121 10,374 275 179 5,535 6,192 0 0 0 4,888 1.67 1.67 4.30 854 27 0 4,682 2,371 269 44 2,421 2,421 0 568
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 20, 1999 25 First Keystone Corporation 111 West Front Street Berwick, Pennsylvania 18603 March 26, 1999 DEAR SHAREHOLDER: It is my pleasure to invite you to attend the 1999 Annual Meeting of Shareholders of First Keystone Corporation to be held on Tuesday, April 20, 1999, at 10:00 a.m., Eastern Standard 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 three (3) Class C Directors; and (bullet) The ratification of the selection of the independent auditors for 1999 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. Sincerely, /s/ J. Gerald Bazewicz J. Gerald Bazewicz President FIRST KEYSTONE CORPORATION NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 20, 1999 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 Standard Time, on Tuesday, April 20, 1999, at the main office of The First National Bank of Berwick, 111 West Front Street, Berwick, Pennsylvania 18603, for the following purposes: 1. To elect three (3) Class C Directors to serve for a three-year term and until their successors are 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, 1999; 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 16, 1999, and only those shareholders may vote at the Annual Meeting and any adjournment or postponement. A copy of the corporation's Annual Report for the fiscal year ended December 31, 1998, is being mailed with this Notice. Copies of the corporation's Annual Report for the 1997 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. You are urged to mark, sign, date and promptly return your proxy in the enclosed postage-prepaid envelope to assure that your shares are voted in accordance with your wishes, whether or not you personally attend the meeting, and that a quorum is present. The prompt return of your signed proxy, regardless of the number of shares you hold, will aid the corporation in reducing the expense of additional proxy solicitation. The 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 26, 1999 PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS OF FIRST KEYSTONE CORPORATION TO BE HELD ON APRIL 20, 1999 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 20, 1999, at 10:00 a.m., Eastern Standard 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 26, 1999. By properly filling out, signing and returning the accompanying proxy in the enclosed, postage-prepaid envelope, a shareholder is appointing the proxy holders to vote his or her shares in accordance with the shareholder s directions as marked on the proxy. Unless a proxy specifies to the contrary, the proxy holders will vote the proxy: (bullet) FOR the election of the nominees for Class C 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, 1999 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 mails, certain directors, officers and employees of the corporation and the bank may solicit proxies personally, by telephone, telegraph and telecopier. 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, upon request, the corporation will reimburse them for their reasonable forwarding expenses. REVOCABILITY OF PROXY A shareholder who returns a proxy may revoke the proxy at any time before it is voted only: (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, of such intent. VOTING SECURITIES, RECORD DATE AND QUORUM At the close of business on March 16, 1999, the Corporation had outstanding 2,877,993 shares of common stock, par value $2.00 per share, the only issued and outstanding class of stock. The corporation has 500,000 shares of preferred stock, par value $10.00 per share, authorized. As of March 16, 1999, no shares of preferred stock were issued. Only holders of common stock on the corporation s records as of close of business on March 16, 1999 (the record date), 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. Pursuant to Article 3, Section 3.1, of the By-laws of the Corporation, the presence, in person or by proxy, of shareholders entitled to cast at least a majority of the votes which all shareholders are entitled to cast shall constitute a quorum for the transaction of business at the Annual Meeting. Votes withheld and abstentions will be counted in determining the presence of a quorum for a particular matter. Broker non-votes will not be counted 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 three nominees for director receiving the highest number of votes cast by shareholders entitled to vote for the election of directors shall be elected. Votes withheld from a nominee and broker non-votes will not be cast for such nominee. Assuming the presence of a quorum, the affirmative vote of a majority of all votes cast by shareholders, in person or by proxy, on such matter is required for the ratification of the selection of independent auditors. Abstentions and broker non-votes are not votes cast and therefore do not count either for or against the approval and adoption or ratification. Abstentions and broker non-votes, however, have the practical effect of reducing the number of affirmative votes required to achieve a majority for each matter by reducing the total number of shares voted from which the majority is calculated. PRINCIPAL BENEFICIAL OWNERS OF THE CORPORATION'S STOCK PRINCIPAL OWNERS The following table sets forth, as of March 16, 1999, the name and address of each person who owns of record or who is known by the Board of Directors to be the beneficial owner of more than five percent (5%) of the corporation's outstanding common stock, the number of shares beneficially owned by such person and the percentage of the corporation's outstanding common stock so owned. The footnotes to this table follow the "Beneficial Ownership by Officers, Directors and Nominees" table, found immediately after the "Principal Owners" table. Proxy Statement Page 3
Amount and Nature of Percent of Outstanding Beneficial Common Stock Name and Address Ownership Beneficially Owned Berbank 295,160 10.26% First National Bank of Berwick Trust Department 111 West Front Street Berwick, PA 18603 Robert E. Bull 201,733 7.01% 323 West Fourth Street Nescopeck, PA 18635 Robert J. Wise 174,382 6.06% 115 West Third Street Berwick, PA 18603 Frederick E. Crispin, Jr. 148,617 5.16% 3 Cedarbrook Terrace Princeton, NJ 08540
BENEFICIAL OWNERSHIP BY OFFICERS, DIRECTORS AND NOMINEES The following table sets forth as of March 16, 1999, 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.
Name of Individual Amount and Nature of Percent or Identity of Group Beneficial Ownership of Class Nominees for Class C Directors (to serve until 2002) And Current Class C Director John L. Coates 7,229 -- Dudley P. Cooley 4,293 -- Stanley E. Oberrender 4,791 -- Class A Directors (to serve until 2000) Budd L. Beyer 37,932 1.32% Frederick E. Crispin, Jr. 148,617 5.16% Jerome F. Fabian 17,176 -- Robert J. Wise 174,382 6.06% Class B Directors (to serve until 2001) John Arndt 5,658 -- J. Gerald Bazewicz 10,903 -- Robert E. Bull 201,733 7.01% All Officers, Directors and 615,867 21.40% Nominees as a Group (11 Persons in Total) ______________________ Page 4 First Keystone Corporation 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 16, 1999. Beneficial ownership may be disclaimed as to certain of the securities. Does not include common stock held in fiduciary accounts under the control of the bank's Trust Department. Information furnished by the directors and the corporation. Includes 154,621 shares held individually by Mr. Wise and 19,761 shares held jointly with his spouse. 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 244,352 shares and as fiduciary with shared voting and dispositive power over 50,808 shares. Total does not include 42,677 shares held by the Trust Department of the bank for which the bank does not have sole voting or dispositive power. The Trust Department intends to cast all shares under its voting power FOR the election of the nominees for director named below and FOR the ratification of J. H. Williams & Co., LLP, independent auditors of the corporation. Includes 141,157 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, 7,986 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. Less than one percent (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 3,697 shares held individually by Mr. Arndt, 441 shares held individually by his spouse, and 1,520 shares held by Arndt Insurance Profit Sharing. Includes 7,373 shares held individually by Mr. Bazewicz, 1,980 shares held jointly with his spouse, 560 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. Mr. Bazewicz has the right to acquire an additional 2,000 shares pursuant to the exercise of stock options. Includes 5,433 shares held individually by Mr. Coates and 1,796 shares held jointly with his spouse. 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, 6,936 shares held jointly with his spouse, and 3,300 shares held by Tile Distributors of America, Inc. of which Mr. Fabian is 100% owner.
Proxy Statement Page 5 PROPOSAL NUMBER 1: RE-ELECTION OF CLASS C 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 seven nor more than twenty-five and that the Board of Directors shall be classified into three classes, each class to be elected for a term of three years. Within the foregoing limits, the Board of Directors may, from time to time, fix the number of directors and their 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 1999 Annual Meeting of Shareholders, three (3) Class C 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 C Directors to serve as Class C Directors for the next three-year term of office. The nominees for re-election this year are as follows: (Bullet) John L. Coates (director since 1987) (Bullet) Dudley P. Cooley (director since 1987) (Bullet) Stanley E. Oberrender (director since 1987) 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 received by them for the election of these three nominees. If any nominee should become unavailable for any reason, proxies will be voted in favor of a substitute nominee as the Board of Directors of the corporation shall determine. The Board of Directors has no reason to believe that the nominees named will be unable to serve, if elected. A majority of the directors of the corporation may fill any vacancy occurring on the Board of Directors of the corporation for any reason by appointing a replacement, and the replacement shall serve until the expiration of the term of the vacancy. 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 case one vote for each nominee. For example, if a shareholder owns ten shares of common stock, he or she may cast up to ten votes for each director to be elected. INFORMATION AS TO NOMINEES AND DIRECTORS The following table contains certain information with respect to the nominees for Class C Director whose term expires in 2002 and who are also the current Class C Directors whose term expires in 1999 and the Class A Directors and Class B Directors whose terms expire in 2000 and 2001, respectively: Page 6 First Keystone Corporation
Principal Occupation for Past Five Years Director Name and Age as of and Position Held Since Current March 16, with Corporation Corporation Committees 1999 and Bank /Bank (Numbers refer to committee listing below table) NOMINEES FOR CLASS C DIRECTOR WHOSE TERM EXPIRES IN 2002 AND CURRENT CLASS C DIRECTORS WHOSE TERM EXPIRES IN 1999 John L. Coates 62 President and sole Committees 1,3,5,6,7 shareholder, 1987/1987 Tri-County Hardware Inc.; Secretary of the Corporation and the Bank Dudley P. Cooley 60 Personal Financial Committees 3,5,6,7 Consultant; 1987/1987 Former Controller, Wise Foods, Borden, Inc. (Snack food processor) Stanley E. Oberrender 57 Owner, Suntex 1987/1987 Committees 3,4,6,7,8 (Dry cleaning) CLASS A DIRECTORS WHOSE TERM EXPIRES IN 2000 Budd L. Beyer 71 Investor 1983/1976 Committees 1,2,4,7 Frederick E. Crispin, Jr. 67 Financial Consultant, Committees 1,2,3,5 d.b.a., F.E. Crispin 1983/1964 & Associates Jerome F. Fabian 56 President and sole Committees 3,5 shareholder, Tile 1998/1998 Distributors of America, Inc. Robert J. Wise 69 Retired, former 1983/1967 Committees 1,2,4,7,8 investor; Vice Chairman of the Corporation and the Bank Proxy Statement Page 7 CLASS B DIRECTORS WHOSE TERM EXPIRES IN 2001 John Arndt 37 Insurance Broker, 1995/1995 Committees 2,3,4,8 Owner of Arndt Insurance Agency (general insurance agency) J. Gerald Bazewicz 50 President and Chief 1986/1986 Committees 1,2,3,4,5, Executive Officer of 7,8 the Corporation and the Bank Robert E. Bull 76 Attorney and Partner, 1983/1956 Committees 1,4,5,6, Bull, Bull & Knecht, 7,8 LLP,; Chairman of the Corporation and the Bank ____________________ Committee 1 - Executive Committee This committee exercises the authority of the Board of Directors in the management of the business of the bank between the dates of regular meetings of the Board of Directors. This committee did not meet in 1998. Committee 2 - Trust Committee This committee ensures that all trust activities of the Bank are performed in a manner that is consistent with the legal instrument governing the account, prudent trust administration practices, and approved trust policy. This committee met twelve (12) times in 1998. 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 four (4) times in 1998. Committee 4 - Marketing Committee This committee provides guidance to management in formulating marketing and sales plans and programs and to assist in evaluating the performance of the Bank relative to plans. This committee met four (4) times in 1998. Committee 5 - Loan Administration Committee This committee monitors loan review and compliance activities. Also, the committee ensures that loans are made and administered in accordance with the loan policy. This committee met four (4) times in 1998. Committee 6 - Audit Committee This committee recommends the appointment of the independent certified public accountant to examine the affairs of the Bank. Also, the committee reviews findings of the auditor and ensures an independent, effective audit function. This committee met two (2) times in 1998. 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 one (1) time in 1998. 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 1998.
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 1998, the bank's Board of Directors held twenty- five (25) meetings and the corporation's Board of Directors held eight (8) 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 Robert J. Wise who attended 68% 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 forty-five (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 1998, the corporation's Board of Directors received Four Hundred Dollars ($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 Four Hundred Dollars ($400.00) for each Directors' meeting attended. Non-employee Directors received a Four Thousand Dollar ($4,000.00) retainer and Two Hundred Dollars ($200.00) for each committee meeting attended. All Directors received a bonus of One Thousand Dollars ($1,000.00). In addition, Chairman Bull received an annual stipend of One Thousand Dollars ($1,000.00) and Vice Chairman Wise and Secretary Coates each received an annual stipend of Seven Hundred Fifty Dollars ($750.00). In the aggregate, the Board of Directors received $163,250.00 for all Board of Directors' meetings and committee meetings attended in 1998, including all fees, bonuses, and stipends paid to all Directors in 1998. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the corporation's officers and directors, and persons who own more than ten percent (10%) of the registered class of the corporation's equity securities, to file reports of ownership of the corporation s common stock and changes in such ownership with the Securities and Exchange Commission ("SEC"). Officers, directors and greater than ten percent (10%) shareholders are required by SEC regulation to furnish the corporation with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for those persons, the corporation believes that during the period January 1, 1998, through December 31, 1998, 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 at $133,500, a 5.28% increase over his 1997 salary level. 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 8.6% 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 six (6) months after issue and expire ten years from the date of the grant. On September 22, 1998, the corporation granted 11,000 incentive stock options under the plan, which are not exercisable until March 22, 1999. The average per share exercise price is $33.50, which was not less than the full market value of the shares as of September 22, 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, 1998, 1997, and 1996 of those persons who were ( i ) the Chief Executive Officer during 1998, and (ii) the other four most highly compensated executive officers of the corporation and the bank whose total annual salary and bonus exceeded $100,000 at December 31, 1998. SUMMARY COMPENSATION TABLE
Annual Compensation (a) (b) (c) (d) (e) Other Annual Name and Compen- Principal Salary Bonus sation Position Year ($) ($) ($) J. Gerald Bazewicz 1998 133,500 24,720 0 President and CEO 1997 126,800 27,972 0 of the Corporation 1996 116,800 35,397 0 and the Bank 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 43,949 President and CEO 0 0 0 40,003 of the Corporation 0 0 0 13,701 and the Bank _________________ Proxy Statement Page 11 Amounts shown consist of base salary and fees for attendance at Board of Directors meetings of $10,000 in 1998, $9,800 in 1997, and $9,800 in 1996. Bonus information is reported by the year in which earned. Stock Appreciation Rights. Options granted in September 1998 pursuant to First Keystone Corporation's 1998 Stock Incentive Plan. Long-Term Incentive Plan Option Awards. Amounts shown include contributions to the Bank's 401(k) Plan of $15,828 for 1998, $15,872 for 1997, and $13,701 for 1996. The amounts for 1998 and 1997 include each year s accrual for the Bank's Supplemental Employee Retirement Plan (SERP) of $26,646 in 1998 and $22,803 in 1997, and the premiums on term life insurance relative to the SERP of $1,475 in 1998 and $1,328 in 1997. See Other Executive Benefits on Page 13.
STOCK OPTION GRANTS IN FISCAL YEAR 1998 Stock options were granted to executive officers and other employees during fiscal year ended December 31, 1998. All options were granted under the First Keystone Corporation 1998 Stock Incentive Plan. The table shows information about such grants to the named officers: INDIVIDUAL GRANTS
(a) (b) (c) Number of % of Total shares Options underlying Granted to Options Employees Granted in in Fiscal Name Fiscal Year Year J. Gerald Bazewicz 2,000 18.18% President and CEO David R. Saracino 1,000 9.09% Treasurer and Assistant Secretary (d) (e) (f) Exercise Grant or Base Date Price Expiration Present Name ($/Sh) Date Value ($) J. Gerald Bazewicz 33.50 9/22/08 67,000 President and CEO David R. Saracino 33.50 9/22/08 33,500 Treasurer and Assistant Secretary The options were granted under the First Keystone Corporation's 1998 Stock Incentive Plan on September 22, 1998, and are not exercisable until March 22, 1999. Based on closing market price per share on September 22, 1998, the grant date.
AGGREGATED STOCK OPTION EXERCISES IN FISCAL YEAR 1998 AND FISCAL YEAR- END OPTION VALUES No options were exercisable in fiscal year 1998. 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 one hundred percent (100%) vested at all times. Benefits are payable under the Plan upon termination of employment, disability, death, or retirement. Contributions reflected as expense under this Plan in 1998 and 1997 were:
1998 1997 Matching contribution to savings plan $ 67,377 $ 59,395 Contribution to profit sharing plan 167,497 151,574 Total Expense $234,874 $210,969
Of the $234,874 total expenses during 1998, $42,548 was credited among the individual accounts of the four (4) most highly compensated executive officers of the Bank. Of the $42,548, Mr. Bazewicz was credited with $15,828 and has been a member of the Plan for thirteen years. SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN The corporation maintains a Supplemental Employee Retirement Plan ("SERP") covering three of the bank's executive officers, Mr. Bazewicz, Mr. Saracino, and Mr. Bodle. The SERP, which is a salary continuation agreement, provides that if the executive officer continues to serve as an officer of the bank until he attains sixty (60) years of age, the bank will pay him 240 guaranteed consecutive monthly payments commencing on the first day of the month following the officer's 60th birthday in the amounts indicated below. The salary continuation agreement allows the executive officers to achieve a retirement income percentage that is more consistent with their experience and years of service to the bank. The plan objective is to provide the executive officers with a final wage replacement ratio of 75% of projected final salary including projected benefits from the Bank 401(k), social security, and salary continuation provided through the agreement. The retirement benefit under the salary continuation plan for Messrs. Bazewicz, Saracino, and Bodle will be $3,750 per month, $2,333 per month, and $1,750 per month, respectively. If the executive officer attains sixty (60) years of age, but dies before receiving all of the guaranteed monthly payments, then the bank will make the remaining payments to the officer's beneficiary. In the event the officer dies while serving as an officer, prior to age sixty (60), then the bank will remit the guaranteed monthly payment to the officer's beneficiary commencing the month following the executive's death. In the event of a change of control and the termination of the officer's employment, the guaranteed monthly payments will commence the month following the executive's termination of service. No benefit shall be paid if the executive officer voluntarily terminates his employment prior to the age of sixty (60). 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 1998, the Bank expensed $70,222 for the accrual of the salary continuation plan for the three executive officers. In addition, $5,741 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, 1993, through and including December 31, 1998, with ( i ) 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 (ii) the cumulative total return for all United States stocks traded on the NASDAQ Stock Market. The comparison assumes $100 was invested on December 31, 1993, 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 12/31/93 12/31/94 12/31/95 First Keystone Corporation 100.00 112.52 123.79 NASDAQ - Total US 100.00 97.75 138.26 SNL <$500M Bank Index 100.00 107.55 147.13 Period Ending 12/31/96 12/31/97 12/31/98 First Keystone Corporation 162.89 307.25 532.72 NASDAQ - Total US 170.01 208.58 293.21 SNL <$500M Bank Index 189.37 322.82 294.76 ____________________ 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 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, 1998, to the corporation's and the bank's officers and directors as a group and members of their immediate families and companies in which they had an ownership interest of 10% or more was $2,032,334 or approximately 6.48% 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 1998 to officers and directors of the corporation and the bank as a group was $2,374,602. The aggregate amount of indebtedness outstanding as of the latest practicable date, February 1, 1999, to the above described group was $1,808,886. 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 16, Name and Position Since Since Owned 1999 Robert E. Bull 1983 201,733 76 Chairman of the Board Robert J. Wise 1996 174,382 69 Vice Chairman of the Board J. Gerald Bazewicz 1987 1973 10,903 50 President and Chief Executive Officer John L. Coates 1995 7,229 62 Secretary David R. Saracino 1983 1972 3,153 54 Treasurer _________________ Messrs. Bull, Wise, and Coates are not employees of the corporation. Includes 2,355 shares of common stock held individually by Mr. Saracino and 798 shares of common stock held jointly with his spouse. Mr. Saracino has the right to acquire an additional 1,000 shares pursuant to the exercise of stock options.
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: Page 16 First Keystone Corporation
Office and Position Held Name with the Bank Since Robert E. Bull Chairman of the Board 1983 Robert J. Wise Vice Chairman 1996 of the Board J. Gerald Bazewicz President and CEO 1987 John L. Coates Secretary 1995 David R. Saracino Vice President, 1983 Cashier and Assistant Secretary Leslie W. Bodle Vice President and 1985 Trust Officer Sally A. Rishkofski Vice President 1997 Bank Number of Age as of Employee Shares Bene- March 16, Name Since ficially Owned 1999 Robert E. Bull 201,733 76 Robert J. Wise 174,382 69 J. Gerald Bazewicz 1973 10,903 50 John L. Coates 7,229 62 David R. Saracino 1972 3,153 54 Leslie W. Bodle 1985 3,315 51 Sally A. Rishkofski 1964 435 59 _________________ Messrs. Bull, Wise, and Coates are not employees of the bank. Includes 1,250 shares of common stock held individually by Mr. Bodle, 920 shares of common stock held jointly with his spouse, and 1,145 shares of common stock held jointly with his daughter. Mr. Bodle has the right to acquire an additional 1,000 shares pursuant to the exercise of stock options. Ms. Rishkofski has the right to acquire an additional 1,000 shares pursuant to 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 NUMBER 2: RATIFICATION OF INDEPENDENT AUDITORS Unless instructed to the contrary, the proxy holders will cast all votes represented by proxies for the ratification of the selection of J. H. Williams & Co., LLP, Certified Public Accountants, located at 270 Pierce Street, Kingston, Pennsylvania 18705, as the corporation's independent auditors for its 1999 fiscal year. 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 1998 fiscal year, assisted the corporation and the bank Proxy Statement Page 17 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 effect of the performance on such services on the independence of the auditors and after the conclusion by the corporation's and the bank's Board of Directors that there was no effect on the independence of the auditors. The corporation s Board of Directors has appointed J. H. Williams & Co., LLP, Certified Public Accountants as the corporation s auditors for the fiscal year-ending December 31, 1999. 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 1999 fiscal year, another accounting firm may be chosen to provide independent audit services for the 1999 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, 1999. ANNUAL REPORT A copy of the corporation's Annual Report for its fiscal year ended December 31, 1998, 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 2000 Annual Meeting of Shareholders must deliver such proposal in writing to the President of First Keystone Corporation at its principal executive offices, 111 West Front Street, Berwick, Pennsylvania 18603, not later than Monday, November 29, 1999. 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 in accordance with their best judgment. ADDITIONAL INFORMATION Any shareholder may obtain a copy of the corporation s report on Form 10-K for its fiscal year ended December 31, 1998, 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-----