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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