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, 2003
Or
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file Number: 2-88927
FIRST KEYSTONE CORPORATION
(Exact name of registrant as specified in its Charter)
PENNSYLVANIA 23-2249083
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number)
111 West Front Street, 18603
Berwick, Pennsylvania (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (570) 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 9, 2004, was approximately $87,161,579.
The number of shares outstanding of the issuer's Common Stock,
as of March 9, 2004, was 2,924,714 shares of Common Stock, par
value $2.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 2004 definitive Proxy Statement
are incorporated by reference in Part III of this Report. In
addition, portions of the Annual Report to Shareholders of the
Registrant for the year ended December 31, 2003, are incorporated
by reference in Part II of this Report.
FIRST KEYSTONE CORPORATION
FORM 10-K
Table of Contents
Part I Page
______ ____
Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a
Vote of Security Holders 11
Part II
_______
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis
of Financial
Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk 13
Item 8. Financial Statements and Supplementary
Data 13
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 13
Item 9A. Controls and Procedures 13
Part III
________
Item 10. Directors and Executive Officers
of the Registrant 13
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain
Beneficial Owners and Management 14
Item 13. Certain Relationships and Related
Transactions 14
Item 14. Principal Accountant Fees and Services 14
Part IV
_______
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 15
Signatures 17
Exhibit 11 20
Exhibit 13 22
Exhibit 14 23
Exhibit 21 24
Exhibit 23 25
Exhibit 31.1 26
Exhibit 31.2 27
Exhibit 32.1 28
Exhibit 32.2 29
i
FIRST KEYSTONE CORPORATION
FORM 10-K
PART I
Forward Looking Statements
__________________________
The management of First Keystone Corporation (Corporation),
has made forward-looking statements in this annual report on Form
10-K. These forward-looking statements may be subject to risks and
uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of operations of the
Corporation and its subsidiary, The First National Bank of Berwick
(Bank). When words such as "believes," "expects," "anticipates" or
similar expressions occur in this annual report, management is
making forward-looking statements.
Shareholders should note that many factors, some of which are
discussed elsewhere in this annual report, could affect the future
financial results of the Corporation and its subsidiary, both
individually and collectively, and could cause those results to
differ materially from those expressed in the forward-looking
statements contained in this annual report on Form 10-K. These
factors include the following:
* operating, legal and regulatory risks;
* economic, political and competitive forces affecting our
banking, securities, asset management and credit services
businesses; and
* the risk that our analyses of these risks and forces could
be incorrect and or that the strategies developed to
address them could be unsuccessful.
The Corporation undertakes no obligation to publicly revise or
update these forward-looking statements to reflect events or
circumstances that arise after the date of this report. Readers
should carefully review the risk factors described in other
documents that are filed periodically with the Securities and
Exchange Commission (SEC).
ITEM 1. BUSINESS
First Keystone Corporation is a Pennsylvania business
corporation, and a bank holding company, registered with and
supervised by the Board of Governors of the Federal Reserve System.
The Corporation was incorporated on July 6, 1983, and commenced
operations on July 2, 1984, upon consummation of the acquisition of
all of the outstanding stock of The First National Bank of Berwick.
Since commencing operations, the Corporation's business has
consisted primarily of managing and supervising the Bank, and its
principal source of income has been dividends paid by the Bank.
The Corporation has one wholly-owned subsidiary, the Bank, which
has a commercial banking operation and trust department as its
major lines of business. Greater than 95% of the company's revenue
and profit came from the commercial banking department for the
years ended December 31, 2003, 2002, and 2001, and was the only
reportable segment. At December 31, 2003, the Corporation had
total consolidated assets, deposits and stockholders' equity of
approximately $481.8 million, $343.0 million and $51.3 million,
respectively.
1
The Bank was organized in 1864. The Bank is a national
banking association that is a member of the Federal Reserve System.
Its deposits are insured by the Federal Deposit Insurance
Corporation (FDIC) to the maximum extent of the law regulated by
The Office of the Comptroller of the Currency (OCC). The Bank, has
ten branch locations (five branches within Columbia County, four
branches within Luzerne County, and one branch in Montour County,
Pennsylvania), and is a full service commercial bank providing a
wide range of services to individuals and small to medium sized
businesses in its Northeastern and Central Pennsylvania market
area. The Bank's commercial banking activities include accepting
time, demand, and savings deposits and making secured and unsecured
commercial, real estate and consumer loans. Additionally, the Bank
also provides personal and corporate trust and agency services to
individuals, corporations, and others, including trust investment
accounts, investment advisory services, mutual funds, estate
planning, and management of pension and profit sharing plans.
Supervision and Regulation
__________________________
The Corporation is subject to the jurisdiction of the SEC and
of state securities laws for matters relating to the offering and
sale of its securities. The Corporation is currently subject to
the SEC's rules and regulations relating to company's whose shares
are registered under Section 12 of the Securities Exchange Act of
1934, as amended.
The Corporation is also subject to the provisions of the Bank
Holding Company Act of 1956, as amended , and to supervision by the
Federal Reserve Board. The Bank Holding Company Act requires the
Corporation to secure the prior approval of the Federal Reserve
Board before it owns or controls, directly or indirectly, more than
5% of the voting shares of substantially all of the assets of any
institution, including another bank.
The Bank Holding Company Act also prohibits acquisitions of
control of a bank holding company, such as the Corporation, without
prior notice to the Federal Reserve Board. Control is defined for
this purpose as the power, directly or indirectly, to direct the
management or policies of a bank holding company or to vote 25% (or
10%, if no other person or persons acting on concert, holds a
greater percentage of the Common Stock) or more of the
Corporation's Common Stock.
The Corporation is required to file an annual report with the
Federal Reserve Board and any additional information that the
Federal Reserve Board may require pursuant to the Bank Holding
Company Act. The Federal Reserve Board may also make examinations
of the Corporation and any or all of its subsidiaries.
The Bank is subject to federal and state statutes applicable
to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System and to banks whose deposits
are insured by the FDIC. Bank operations are also subject to
regulations of the 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.
2
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.
Under the Federal Deposit Insurance Act , the OCC possesses
the power to prohibit institutions regulated by it (such as the
Bank) from engaging in any activity that would be an unsafe or
unsound banking practice or would otherwise be in violation of the
law.
Permitted Non-Banking Activities
________________________________
The Federal Reserve Board permits bank holding companies to
engage in non-banking activities so closely related to banking,
managing or controlling banks as to be a proper incident thereto.
The Corporation does not at this time engage in any of these
non-banking activities, nor does the Corporation have any current
plans to engage in any other permissible activities in the
foreseeable future.
Legislation and Regulatory Changes
__________________________________
From time to time, various types of federal and state
legislation have been proposed that could result in additional
regulations of, and restrictions on, the business of the Bank. It
cannot be predicted whether any such legislation will be adopted or
how such legislation would affect the business of the Bank. As a
consequence of the extensive regulation of commercial banking
activities in the United States, the Bank's business is
particularly susceptible to being affected by federal legislation
and regulations that may increase the costs of doing business.
From time to time, legislation is enacted which has the effect
of increasing the cost of doing business, limiting or expanding
permissible activities or affecting the competitive balance between
banks and other financial institutions. No prediction can be made
as to the likelihood of any major changes or the impact such
changes might have on the Corporation and its subsidiary bank.
Certain changes of potential significance to the Corporation which
have been enacted recently and others which are currently under
consideration by Congress or various regulatory agencies are
discussed below.
Federal Deposit Insurance Corporation Improvement Act of 1991
_____________________________________________________________
The FDICIA established five different levels of capitalization
of financial institutions, with "prompt corrective actions" and
significant operational restrictions imposed of institutions that
are capital deficient under the categories. The five categories
are:
* well capitalized
* adequately capitalized
* undercapitalized
* significantly undercapitalized, and
* critically undercapitalized.
To be considered well capitalized, an institution must have a
total risk-based capital ratio of at least 10%, a Tier 1 risk-based
capital ratio of at least 6%, a leverage capital ratio of 5%, and
must not be subject to any order or directive requiring the
institution to improve its capital level. An institution falls
3
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, 2003,
the Corporation and the Bank exceeded the minimum capital levels of
the well capitalized category.
Regulatory oversight of an institution becomes more stringent
with each lower capital category, with certain "prompt corrective
actions" imposed depending on the level of capital deficiency.
Other Provisions of FDICIA
__________________________
Each depository institution must submit audited financial
statements to its primary regulator and the FDIC, which reports are
made publicly available. In addition, the audit committee of each
depository institution must consist of outside directors and the
audit committee at "large institutions" (as defined by FDIC
regulation) must include members with banking or financial
management expertise. The audit committee at "large institutions"
must also have access to independent outside counsel. In addition,
an institution must notify the FDIC and the institution's primary
regulator of any change in the institutions independent auditor,
and annual management letters must be provided to the FDIC and the
depository institution's primary regulator. The regulations define
a "large institution" as one with over $500 million in assets,
which does not include the Bank. Also, under the rule, an
institution's independent auditor must examine the institution's
internal controls over financial reporting and perform agreed-upon
procedures to test compliance with laws and regulations concerning
safety and soundness.
Under FDICIA, each federal banking agency must prescribe
certain safety and soundness standards for depository institutions
and their holding companies. Three types of standards must be
prescribed:
* asset quality and earnings
* operational and managerial, and
* compensation
Such standards would include a ratio of classified assets to
capital, minimum earnings, and, to the extent feasible, a minimum
ratio of market value to book value for publicly traded securities
of such institutions and holding companies. Operational and
managerial standards must relate to:
* internal controls, information systems and
internal audit systems
* loan documentation
* credit underwriting
* interest rate exposure
* asset growth, and
* compensation, fees and benefits
FDICIA also sets forth Truth in Savings disclosure and
advertising requirements applicable to all depository institutions.
Real Estate Lending Standards. Pursuant to the FDICIA, the
OCC and other federal banking agencies adopted real estate lending
guidelines which would set loan-to-value ratios for different types
of real estate loans. A LTV ratio is generally defined as the
total loan amount divided by the appraised
4
value of the property at the time the loan is originated. If the
institution does not hold a first lien position, the total loan
amount would be combined with the amount of all senior liens when
calculating the ratio. In addition to establishing the LTV ratios,
the guidelines require all real estate loans to be based upon
proper loan documentation and a recent appraisal of the property.
Regulatory Capital Requirements
________________________________
The federal banking regulators have adopted certain risk-based
capital guidelines to assist in the assessment of the capital
adequacy of a banking organization's operations for both
transactions reported on the balance sheet as assets and
transactions, such as letters of credit, and recourse agreements,
which are recorded as off balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with
low credit risk, such as certain U.S. Treasury securities, to 100%
for assets with relatively high credit risk, such as business
loans.
The following table presents the Corporation's capital ratios
at December 31, 2003:
(In Thousands)
<s> <c>
Tier I Capital $ 45,842
Tier II Capital $ 3,974
Total Capital $ 49,816
Adjusted Total Average Assets $466,391
Total Adjusted Risk-Weighted Assets <F1> $309,297
Tier I Risk-Based Capital Ratio <F2> 14.82%
Required Tier I Risk-Based Capital Ratio 4.00%
Excess Tier I Risk-Based Capital Ratio 10.82%
Total Risk-Based Capital Ratio <F3> 16.11%
Required Total Risk-Based Capital Ratio 8.00%
Excess Total Risk-Based Capital Ratio 8.11%
Tier I Leverage Ratio <F4> 9.83%
Required Tier I Leverage Ratio 4.00%
Excess Tier I Leverage Ratio 5.83%
_________________
<FN>
<F1>
Includes off-balance sheet items at credit-equivalent values less
intangible assets.
<F2>
Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I
Capital to Total Adjusted Risk-Weighted Assets.
<F3>
Total Risk-Based Capital Ratio is defined as the ratio of Tier I
and Tier II Capital to Total Adjusted Risk-Weighted Assets.
<F4>
Tier I Leverage Ratio is defined as the ratio of Tier I Capital to
Adjusted Total Average Assets.
</FN>
The Corporation's ability to maintain the required levels of
capital is substantially dependent upon the success of
Corporation's capital and business plans; the impact of future
economic events on the Corporation's loan customers; and the
Corporation's ability to manage its interest rate risk and
investment portfolio and control its growth and other operating
expenses. See also, the information under the caption "Capital
Strength" appearing on page 46 of Registrant's 2003 Annual Report
to Shareholders, included in Exhibit 13.
5
Effect of Government Monetary Policies
______________________________________
The earnings of the Corporation are and will be affected by
domestic economic conditions and the monetary and fiscal policies
of the United States government and its agencies.
The monetary policies of the Federal Reserve Board have had,
and will likely continue to have, an important impact on the
operating results of commercial banks through its power to
implement national monetary policy in order to, among other things,
curb inflation or combat a recession. The Federal Reserve Board
has a major effect upon the levels of bank loans, investments and
deposits through its open market operations in United States
government securities and through its regulations of, among other
things, the discount rate on borrowings of member banks and the
reserve requirements against member bank deposits. It is not
possible to predict the nature and impact of future changes in
monetary and fiscal policies.
Effects of Inflation
____________________
Inflation has some impact on the Bank's operating costs.
Unlike industrial companies, however, substantially all of the
Bank's assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on the Bank's
performance than the general levels of inflation. Over short
periods of time, interest rates may not necessarily move in the
same direction or in the same magnitude as prices of goods and
services.
Environmental Regulation
________________________
There are several federal and state statutes that regulate the
obligations and liabilities of financial institutions pertaining to
environmental issues. In addition to the potential for attachment
of liability resulting from its own actions, a bank may be held
liable, under certain circumstances, for the actions of its
borrowers, or third parties, when such actions result in
environmental problems on properties that collateralize loans held
by the bank. Further, the liability has the potential to far
exceed the original amount of the loan issued by the Bank.
Currently, neither the Corporation nor the Bank is a party to any
pending legal proceeding pursuant to any environmental statute, nor
are the Corporation and the Bank aware of any circumstances that
may give rise to liability under any such statute.
Interest Rate Risk
__________________
Federal banking agency regulations specify that the bank's
capital adequacy include an assessment of the bank's interest rate
risk exposure. The standards for measuring the adequacy and
effectiveness of a banking organization's Interest Rate Risk (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.
The Gramm-Leach-Bliley Act of 2000
__________________________________
On November 12, 2000, President Clinton signed into law the
Gramm-Leach-Bliley Act of 2000, which is also known as the
Financial Services Modernization Act. The act repeals some
Depression-era banking laws and will permit banks, insurance
companies and securities firms to engage in each others' businesses
after complying with certain conditions and regulations which are
yet to be finalized. The act
6
grants to community banks the power to enter new financial markets
as a matter of right that larger institutions have managed to do on
an ad hoc basis. At this time, our company has no plans to pursue
these additional possibilities.
Our company does not believe that the Financial Services
Modernization Act will have an immediate positive or negative
material effect on our operations. However, the act may have the
result of increasing the amount of competition that our company
faces from larger financial service companies, many of whom have
substantially more financial resources than our company, which may
now offer banking services in addition to insurance and brokerage
services.
The Sarbanes-Oxley Act
______________________
On July 30, 2002, President Bush signed into law the
Sarbanes-Oxley Act of 2002. The Act was in response to public
concerns regarding corporate accountability in connection with
recent high visibility accounting scandals. The stated goals of
the Sarbanes-Oxley Act are:
* to increase corporate responsibility;
* to provide for enhanced penalties for accounting
and auditing improprieties at publicly traded
companies; and
* to protect investors by improving the accuracy
and reliability of corporate disclosures pursuant
to the securities laws.
The Sarbanes-Oxley Act generally applies to all companies,
both U.S. and non-U.S., that file periodic reports with the SEC
under the Securities Exchange Act of 1934. The legislation
includes provisions, among other things:
* governing the services that can be provided
by a public company's independent auditors
and the procedures for approving such services;
* requiring the chief executive officer and
chief financial officer to certify certain
matters relating to the company's periodic
filings under the Exchange Act;
* requiring expedited filings of reports by
insiders of their securities transactions
and containing other provisions relating
to insider conflicts of interest;
* increasing disclosure requirements relating
to critical financial accounting policies
and their application;
* increasing penalties for securities law
violations; and
* creating a new public accounting oversight
board, a regulatory body subject to SEC
jurisdiction with broad powers to set auditing,
quality control and ethics standards for
accounting firms.
History and Business - Bank
___________________________
The Bank's legal headquarters are located at 111 West Front
Street, Berwick, Pennsylvania.
As of December 31, 2003, the Bank had total assets of
$479,188,148, total shareholders' equity of $45,595,222 and total
deposits and other liabilities of $433,592,926.
7
The Bank engages in a full-service commercial banking
business, including accepting time and demand deposits, and making
secured and unsecured commercial and consumer loans. The Bank's
business is not seasonal in nature. Its deposits are insured by
the FDIC to the extent provided by law. The First National Bank of
Berwick has no foreign loans or highly leveraged transaction loans,
as defined by the Federal Reserve Board. Substantially all of the
loans in The First National Bank of Berwick's portfolio have been
originated by The First National Bank of Berwick. Policies adopted
by the Board of Directors are the basis by which The First National
Bank of Berwick conducts its lending activities.
At December 31, 2003, the Bank had 113 full-time employees and
33 part-time employees. In the opinion of management, the Bank
enjoys a satisfactory relationship with its employees. The Bank is
not a party to any collective bargaining agreement.
Competition - Bank
__________________
The Bank competes actively with other area commercial banks
and savings and loan associations, many of which are larger than
the Bank, as well as with major regional banking and financial
institutions. The Bank's major competitors in Columbia and Luzerne
counties are:
* First Columbia Bank & Trust Co. of Bloomsburg
* PNC Bank, N.A.
* Columbia County Farmers National Bank of Bloomsburg
* M & T Bank
* FNB Bank of Danville
* First Susquehanna Bank
In the county of Montour, credit unions are our major competitors
along with M & T Bank, FNB Bank of Danville and First Federal 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.
Available Information
_____________________
A copy of the Corporation's Annual Report on Form 10-K may be
obtained without charge from our website at
www.firstnationalberwick.com or via email at fnb@fnbbwk.com.
Information may also be obtained via written request to Investor
Relations at First Keystone Corporation, Attention: J. Gerald
Bazewicz, 111 West Front Street, Berwick, Pennsylvania 18603.
8
ITEM 2. DESCRIPTION OF PROPERTIES
The Corporation owns no property other than through its
subsidiary. These are:
Type of Square
Location Ownership Footage Use
________ _________ _______ ___
<s> <c> <c> <c>
Columbia County, PA
111 W. Front Street,
Berwick Owned 12,500 Administrative
office, banking
and trust services.
105 Market Street Leased 4,000 Computer/
(second floor) Annual accounting
Rental department.
$35,638
2nd & Market Streets, Owned Land No buildings,
Berwick Area held for possible
1.45 expansion. Present
acres use, parking.
701 Freas Avenue,
Berwick Owned 3,744 Banking services.
Giant Market Leased 500 Banking services.
50 Briar Creek Plaza Annual
Rental
$30,000
2401 Columbia
Boulevard, Bloomsburg Leased 2,000 Banking services.
Annual
Rental
$42,436
2301 Columbia Owned 7,000 Banking services.
Boulevard, Bloomsburg Construction in
Progress.
Third & Race Streets, Owned 2,500 Banking services.
Mifflinville
9
Type of Square
Location Ownership Footage Use
________ _________ _______ ___
<s> <c> <c> <c>
Luzerne County, PA
Salem Township Owned 3,700 Banking services.
400 Fowler Avenue,
Berwick
West Third Street, Leased 2,300 Banking services.
Nescopeck Annual
Rental
$14,400
1540 Sans Souci Owned 4,000 Banking services.
Highway, Wilkes-Barre
179 South Wyoming Leased 3,000 Banking services.
Avenue, Kingston Annual
Rental
$51,000
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 ordinary course of their business.
However, in the opinion of management of the Corporation and the
Bank, there are no proceedings pending to which the Corporation and
the Bank is a party or to which their property is subject, which,
if determined adversely to the Corporation and the Bank, would be
material in relation to the Corporation's and Bank's individual
profits or financial condition, nor are there any proceedings
pending other than ordinary routine litigation incident to the
business of the Corporation and the Bank. In addition, no material
proceedings are pending or are known to be threatened or
contemplated against the Corporation and the Bank by government
authorities or others.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the
fiscal year covered by this report to a vote of securityholders
through the solicitation of proxies or otherwise.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER 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:
* The quarterly high and low prices for a share of the
Corporation's Common Stock during the periods indicated as
reported to the management of the Corporation and
* Quarterly dividends on a share of the Common Stock with respect
to each quarter since January 1, 2002.
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
____ ___ ________
<s> <c> <c> <c>
2003:
First quarter $31.15 $25.75 $.24
Second quarter $32.50 $29.25 $.24
Third quarter $34.00 $32.00 $.24
Fourth quarter $36.50 $33.75 $.26
Stock Prices Dividends
High Low Declared
____ ___ ________
<s> <c> <c> <c>
2002:
First quarter $22.86 $18.57 $.20
Second quarter $22.38 $20.10 $.20
Third quarter $24.00 $19.19 $.21
Fourth quarter $26.25 $23.95 $.24
As of December 31, 2003, the Corporation had approximately 603
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.
11
Dividend Restrictions on the Bank
_________________________________
The OCC rules govern the payment of dividends by national
banks. Consequently, the Bank, which is subject to these rules,
may not pay dividends from capital (unimpaired common and preferred
stock outstanding) but only from retained earnings after deducting
losses and bad debts therefrom. To the extent that (1) the Bank
has capital surplus in an amount in excess of common capital and
(2) the Bank can prove that such surplus resulted from prior period
earnings, the Bank, upon approval of the OCC, may transfer earned
surplus to retained earnings and thereby increase its dividend
capacity.
The Bank may not pay any dividends on its capital stock during
a period in which it may be in default in the payment of its
assessment for a deposit insurance premium due to the FDIC, nor may
it pay dividends on Common Stock until any cumulative dividends on
the Bank's preferred stock (if any) have been paid in full. The
Bank has never been in default in the payments of its assessments
to the FDIC; and the Bank has no outstanding preferred stock. In
addition, under the Federal Deposit Insurance Act (912 U.S.C.
Section 1818), dividends cannot be declared and paid if the OCC
obtains a cease and desist order because, in the opinion of the
OCC, such payment would constitute an unsafe and unsound banking
practice. As of December 31, 2003, there was $3,566,475 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 Corporation may not pay a dividend if, after giving
effect thereto, either:
* The Corporation would be unable to pay its debts as they
become due in the usual course of business or;
* The Corporation's total assets would be less than its total
liabilities.
The determination of total assets and liabilities may be based
upon:
* Financial statements prepared on the basis of generally
accepted accounting principles,
* Financial statements that are prepared on the basis of
other accounting practices and principles that are
reasonable under the circumstances, or;
* 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, 2003, 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 the Results of Operations and Financial Condition"
appearing on pages 35 through 51 of the Corporation's Annual Report
to Shareholders for the year ended December 31, 2003, which pages
are included in Exhibit 13 hereto, is incorporated in its entirety
by reference in response to this Item 7.
12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
The information under the caption "Market Risk" appearing on
pages 47 and 48 of the Corporation's Annual Report to Shareholders
for the year ended December 31, 2003, which pages are included in
Exhibit 13 hereto, is incorporated in its entirety by reference in
response to this Item 7A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Corporation's Consolidated Financial Statements and notes
thereto appearing on pages 7 through 34 of the Corporation's Annual
Report to Shareholders for the year ended December 31, 2003, 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.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Corporation maintains controls and procedures designed to
ensure that information required to be disclosed in the reports
that the Corporation files or submits under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and
Exchange Commission. Based upon their evaluation of those controls
and procedures performed within 90 days of the filing date of this
report, the Chief Executive and Chief Financial Officers of the
Corporation concluded that the Corporation's disclosure controls and
procedures were adequate.
(b) Changes in internal controls.
The Corporation made no significant changes in its internal
controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of the controls
by the Chief Executive and Chief Financial Officers.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the captions "Information As To
Directors and Nominees" and "Principal Officers of the Bank"
appearing on pages 8, 9, 10, 11, 12, 22 and 23, respectively, is
incorporated here by reference of First Keystone Corporation's
proxy statement for its 2004 annual meeting of shareholders
scheduled for April 20, 2004. The information under the caption
"Section 16(A) Beneficial Ownership Reporting Compliance" is as
follows:
13
SECTION 16(A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires the corporation's officers and directors, and
persons who own more than 10% of the registered class of the
corporation's equity securities, to file reports of ownership of
the corporation's common stock and changes in ownership with the
SEC. Officers, directors and greater than 10% shareholders are
required by SEC regulation to furnish the corporation with copies
of all Section 16(a) forms they file.
Based solely on its review of copies of Section 16(a) forms
received by it, or written representations from reporting persons
that no Forms 5 were required for those persons, the corporation
believes that during the period January 1, 2003, through December
31, 2003, its officers, directors and reporting shareholders were
in compliance with all filing requirements applicable to them.
CODE OF ETHICS
The Corporation has adopted a Directors and Senior Management
Code of Ethical Conduct, which applies to all members of the Board
of Directors and to senior officers of the Corporation. It can be
found on the Investor Relations section of our website at
www.firstnationalberwick.com and is included in Exhibit 14 hereto.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation"
appearing on pages 14 through 19 are incorporated here by reference
of First Keystone Corporation's proxy statement for its 2004 annual
meeting of shareholders scheduled for April 20, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information under the caption "Share Ownership" appearing
on pages 10 and 11 are incorporated here by reference of First
Keystone Corporation's proxy statement for its 2004 annual meeting
of shareholders scheduled for April 20, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Transactions With Directors
and Executive Officers" appearing on page 19 is incorporated here
by reference of First Keystone Corporation's proxy statement for
its 2004 annual meeting of shareholders scheduled for April 20,
2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information under the caption "Report of the Audit
Committee" appearing on pages 12, 13, and 14 are incorporated here
by reference of First Keystone Corporation's proxy statement for
its 2004 annual meeting of shareholders scheduled for April 20,
2004.
14
Audit Committee Pre-Approval of Audit and
Permissible Non-Audit Services of Independent Auditor
_____________________________________________________
The Audit Committee pre-approves all audit and permissible
non-audit services provided by the independent auditors. These
services may include audit services, audit related services, tax
services, and other services. The Audit Committee has adopted a
policy for the pre-approval of services provided by the independent
auditors. Under the policy, pre-approval is generally provided for
up to one year and any pre-approval is detailed as to the
particular service or category of services and is subject to a
specific budget. In addition, the Audit Committee may also
pre-approve particular services on a case by case basis. For each
proposed service, the independent auditor is required to provide a
detailed engagement letter.
PART IV
ITEM 15. 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 15(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 15(c) hereto.
(b) The Corporation filed the following report on Form 8-K
during the last quarter of the year ended December 31, 2003
Date of Report Item Description
______________ ____ ___________
October 29, 2003 5 Press release of First
Keystone Corporation dated
October 27, 2003, announcing
the purchase of fixed assets
and the assumption of certain
liabilities of First Federal
Bank's branch office located
at 1519 Bloom Road, Danville,
Pennsylvania.
October 31, 2003 12 Press release of First
Keystone Corporation dated
October 29, 2003, announcing
its financial results for the
quarter ended September 30,
2003.
December 29, 2003 5 Press release of First
Keystone Corporation dated
December 26, 2003, announcing
receipt of regulatory approval
to purchase the fixed assets
and assume certain liabilities
of First Federal Bank's branch
office located at 1519 Bloom
Road, Danville, Pennsylvania.
(c) Exhibits required by Item 601 of Regulation S:
15
Exhibit Number Referred to
Item 601 of Regulation S-K Description of Exhibit
__________________________ ______________________
3i Articles of Incorporation, as
amended (Incorporated by
reference to Exhibit 3(i) to
the Registrant's Report on Form
10-Q for the quarter ended
March 31, 2001).
3ii By-Laws, as amended
(Incorporated by reference to
Exhibit 3(ii) to the
Registrant's Report on Form
10-Q for the quarter ended March
31, 2001).
10.1 Supplemental Employee
Retirement Plan (Incorporated
by reference to Exhibit 10 to
Registrant's Annual Report on
Form 10-K for the year ended
December 31, 2000).
10.2 Management Incentive
Compensation Plan (Incorporated
by reference to Exhibit 10 to
Registrant's Report on Form
10-Q for the quarter ended
September 30, 2001).
10.3 Profit Sharing Plan
(Incorporated by reference to
Exhibit 10 to Registrant's
Report on Form 10-Q for the
quarter ended September 30,
2001).
10.4 First Keystone Corporation 1998
Stock Incentive Plan
(Incorporated by reference to
Exhibit 10 to Registrant's
Report on Form 10-Q for the
quarter ended September 30,
2001).
11 Computation of Earnings Per
Share for the fiscal year-ended
2003, 2002, and 2001.
12 Statement of Computation of
Ratios (See the information
appearing on page 2 of
Registrant's Summary of
Selected Financial Data, which
page is included in Exhibit 11
and pages 35 and 46 of
Registrant's 2003 Annual Report
to shareholders, which pages
are included in Exhibit 13).
13 Excerpts from Annual Report to
Shareholders for Fiscal Year
Ended December 31, 2003.
14 Code of Ethics
21 List of Subsidiaries of the
Corporation.
23 Consent of Independent
Auditors.
31.1 Rule 13a-14(a)/15d-14(a)
Certification of Chief
Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a)
Certification of Chief
Financial Officer.
32.1 Section 1350 Certification of
Chief Executive Officer.
32.2 Section 1350 Certification of
Chief Financial Officer.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST KEYSTONE CORPORATION
(Registrant)
By: /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and Chief Executive Officer
Date: March 12, 2004
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
By: /s/ John L. Coates
John L. Coates
Secretary and Director
Date: March 12, 2004
By: /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President, Chief Executive
Officer and Director
(Chief Executive Officer
and Principal Financial Officer)
Date: March 12, 2004
17
By: /s/ John E. Arndt
John E. Arndt
Director
Date: March 12, 2004
By: /s/ Budd L. Beyer
Budd L. Beyer
Director
Date: March 12, 2004
By: /s/ Don E. Bower
Don E. Bower
Director
Date: March 12, 2004
By: /s/ Robert E. Bull
Robert E. Bull
Chairman of the Board
and Director
Date: March 12, 2004
By: /s/ Dudley P. Cooley
Dudley P. Cooley
Director
Date: March 12, 2004
By: /s/ Frederick E. Crispin, Jr.
Frederick E. Crispin, Jr.
Director
Date: March 12, 2004
18
By:
Jerome F. Fabian
Director
Date: March 12, 2004
By: /s/ David R. Saracino
David R. Saracino
Treasurer and Assistant Secretary
(Chief Financial Officer and
Principal Accounting Officer)
Date: March 12, 2004
By:
Robert J. Wise
Vice Chairman of the Board
and Director
Date: March 12, 2004
19