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Item 1. Business

2021-03-15 compared with 2020-03-13 · 219 added, 475 removed, 68 unchanged (91% of the section changed)

First Keystone Corporation (the “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 First National Bank of Berwick (the predecessor to First

Keystone Community Bank).

The Corporation has one wholly-owned subsidiary, First Keystone Community Bank (the “Bank”),

which has a commercial banking operation and trust department as its major lines of business.

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.

Greater than 97% of the Corporation’s revenue and profit came from the commercial bank

subsidiary for the years ended December 31, 2019 and 2018, and was the only reportable segment.

At December 31, 2019, the

Corporation had total consolidated assets, deposits and stockholders’ equity of approximately $1 billion, $762 million and

$129 million, respectively.

The Bank was originally organized in 1864

as a national banking association.

On October 1, 2010, the Bank converted from a national banking association to a Pennsylvania

chartered commercial bank under the supervision of the Pennsylvania Department of Banking and Securities and the FDIC.

The Bank’s deposits are insured by

the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum extent of the law regulated by the FDIC and

the Pennsylvania Department of Banking and Securities.

The Bank is subject to regulation by the Federal Reserve Board governing

reserves required to be maintained against certain deposits and other matters.

The Bank is also a member of the Federal Home Loan

Bank of Pittsburgh, which is one of the twelve regional cooperative banks comprising the system of Federal Home Loan Banks that

lending institutions use to finance housing and economic development in local communities.

The Bank’s legal headquarters are

located at 111 West Front Street, Berwick, Pennsylvania, from which it oversees the operations of its nineteen branch locations.

These locations consist of five branches within Columbia County, eight branches within Luzerne County, one branch in Montour County,

four branches within Monroe County, and one loan production office within Northampton County, Pennsylvania.

For further information,

please refer to Item 2 – Properties, and Note 11 ― Commitments and Contingencies in the notes to the consolidated

financial statements.

The Bank is a full service commercial bank

providing a wide range of services to individuals and small to medium sized businesses in its Northeastern Pennsylvania market

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 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.

First Keystone Corporation (the “Corporation”) is a Pennsylvania business corporation, and a bank holding company, registered with and supervised by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

The Corporation was incorporated on July 6, 1983, and commenced operations on July 2, 1984, upon consummation of the acquisition of all of the outstanding stock of First National Bank of Berwick (the predecessor to First Keystone Community Bank).

The Corporation has one wholly-owned subsidiary, First Keystone Community Bank (the “Bank”), which has a commercial banking operation and trust department as its major lines of business.

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.

Greater than 97% of the Corporation’s revenue and profit came from the commercial bank subsidiary for the years ended December 31, 2020 and 2019, and was the only reportable segment.

At December 31, 2020, the Corporation had total consolidated assets, deposits and stockholders’ equity of approximately $1.2 billion, $937 million and $144 million, respectively.

The Bank was originally organized in 1864 as a national banking association.

On October 1, 2010, the Bank converted from a national banking association to a Pennsylvania chartered commercial bank under the supervision of the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation (the “FDIC”).

The Bank’s deposits are insured by the FDIC to the maximum extent of the law regulated by the FDIC and the Pennsylvania Department of Banking and Securities.

The Bank is subject to regulation by the Federal Reserve Board governing reserves required to be maintained against certain deposits and other matters.

The Bank is also a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”), which is one of the twelve regional cooperative banks comprising the system of Federal Home Loan Banks that lending institutions use to finance housing and economic development in local communities.

The Bank’s legal headquarters are located at 111 West Front Street, Berwick, Pennsylvania, from which it oversees the operations of its nineteen branch locations.

These locations consist of five branches within Columbia County, eight branches within Luzerne County, one branch in Montour County, four branches within Monroe County, and one loan production office within Northampton County, Pennsylvania.

For further information, please refer to Item 2 – Properties, and Note 12 — Commitments and Contingencies in the notes to the consolidated financial statements.

The Bank is a full service commercial bank providing a wide range of services to individuals and small to medium sized businesses in its Northeastern Pennsylvania market area.

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 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.

The Bank’s business is not seasonal in nature.

Bank has no foreign loans or highly leveraged transaction loans, as defined by the Federal Reserve Board.

Substantially all of

the loans in the Bank’s portfolio have been originated by the Bank.

Policies adopted by the Board of Directors are the basis

by which the Bank conducts its lending activities.

At December 31, 2019, the Bank had 193

full-time employees and 13 part-time employees.

In the opinion of management, the Bank enjoys a satisfactory relationship with

its employees.

The Bank has no foreign loans or highly leveraged transaction loans, as defined by the Federal Reserve Board.

Substantially all of the loans in the Bank’s portfolio have been originated by the Bank.

Policies adopted by the Board of Directors are the basis by which the Bank conducts its lending activities.

At December 31, 2020, the Bank had 193 full-time employees and 9 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.

The Corporation’s internet website

is www.firstkeystonecorporation.com and the Bank’s internet website is www.fkc.bank .

None of the information

or contents of our website is incorporated into this Annual Report on Form 10-K.

When we say “we”, “us”,

“our” or the “Corporation”, we mean the Corporation on a consolidated basis with the Bank.

The Corporation’s internet website is www.firstkeystonecorp.fkc.bank and the Bank’s internet website is www.fkc.bank .

None of the information or contents of our website is incorporated into this Annual Report on Form 10-K.

When we say “we”, “us”, “our” or the “Corporation”, we mean the Corporation on a consolidated basis with the Bank.

Primary Market Areas

Bank’s primary market area reaches west from Montour county spanning east into Monroe and Northampton counties, encompassing

Columbia and Luzerne counties.

The Bank’s primary market area reaches west from Montour county spanning east into Monroe and Northampton counties, encompassing Columbia and Luzerne counties.

The bank’s market extends north through Luzerne county and south to Northampton county.

other adjourning counties are served, such as Pike and Lehigh.

The area served by the Bank includes a mix of rural communities,

small to mid-sized towns and cities.

The current population of the Bank’s primary five-county footprint has increased 0.8%

since 2016 to 877,000 and is estimated to increase 0.6% to 883,000 by 2025.

As of June 30, 2019, the FDIC deposit market share

data ranked the Bank 6 th in the deposit market share out of the top 20 financial institutions in the four-county market,

with 6.1% of deposits.

The Bank’s headquarters, main office,

and three of its branch offices are located in Berwick, Pennsylvania.

Therefore, the Bank has a very strong presence in the Borough

of Berwick, a community with a current population of approximately 10,000.

The Bank ranks a commanding first in deposit market

share in the Berwick market with 70.5% of deposits as of June 30, 2019, based on data compiled annually by the FDIC.

In the course of attracting and retaining

deposits and originating loans, the Bank faces considerable competition.

The Bank competes with 58 commercial banks, 5 savings

banks and savings and loans associations, and 44 credit unions for traditional banking products, such as deposits and loans in

its primary five-county market area.

Additionally, the Bank competes with consumer finance companies for loans, mutual funds and

other investment alternatives for deposits.

The Bank competes for deposits based on the ability to provide a range of competitively

priced products, quality service, competitive rates, online services and convenient locations and hours.

The competition among

its peers for loan origination generally relates to interest rates offered, products available, ease of process, quality of service,

and loan origination fees charged.

The economic base of the Bank’s market region is developed around small business, health

care, educational facilities (colleges and public schools), light manufacturing industries, travel and leisure, and agriculture.

The Bank continues to assess the market

area to determine the best way to meet the financial needs of the communities it serves.

Management continues to pursue new market

opportunities based on a strategic plan to efficiently grow the Bank, improve earnings performance, and bring the Bank’s

products and services to new customers.

Management strategically addresses growth opportunities versus competitive issues by determining

the new products and services to be offered, evaluating expansion opportunities of its existing footprint with new locations,

as well as investing in the expertise of skilled staffing.

The Bank continues to succeed in serving its customers by living up

to its motto, “Yesterday’s Traditions.

Ten other adjourning counties are served, such as Pike and Lehigh.

The area served by the Bank includes a mix of rural communities, small to mid-sized towns and cities.

The current population of the Bank’s primary five-county footprint has increased 0.8% since 2016 to 877,000 and is estimated to increase 0.3% to 880,000 by 2026.

As of June 30, 2020, the FDIC deposit market share data ranked the Bank 5 th in the deposit market share out of the top 20 financial institutions in the four-county market, with 6.4% of deposits.

The Bank’s headquarters, main office, and three of its branch offices are located in Berwick, Pennsylvania.

Therefore, the Bank has a very strong presence in the Borough of Berwick, a community with a current population of approximately 9,800.

The Bank ranks a commanding first in deposit market share in the Berwick market with 68.8% of deposits as of June 30, 2020, based on data compiled annually by the FDIC.

In the course of attracting and retaining deposits and originating loans, the Bank faces considerable competition.

The Bank competes with 59 commercial banks, 4 savings banks and 1 savings and loan association, and 41 credit unions for traditional banking products, such as deposits and loans in its primary five-county market area.

Additionally, the Bank competes with consumer finance companies for loans, mutual funds and other investment alternatives for deposits.

The Bank competes for deposits based on the ability to provide a range of competitively priced products, quality service, competitive rates, online services and convenient locations and hours.

The competition among its peers for loan origination generally relates to interest rates offered, products available, ease of process, quality of service, and loan origination fees charged.

The economic base of the Bank’s market region is developed around small business, health care, educational facilities (colleges and public schools), light manufacturing industries, travel and leisure, and agriculture.

The Bank continues to assess the market area to determine the best way to meet the financial needs of the communities it serves.

Management continues to pursue new market opportunities based on a strategic plan to efficiently grow the Bank, improve earnings performance, and bring the Bank’s products and services to new customers.

Management strategically addresses growth opportunities versus competitive issues by determining the new products and services to be offered, evaluating expansion opportunities of its existing footprint with new locations, as well as investing in the expertise of skilled staffing.

The Bank continues to succeed in serving its customers by living up to its motto, “Yesterday’s Traditions.

Tomorrow’s Vision.”

Competition - Bank

The Bank’s competition is comprised

of national, regional, community banking financial institutions and credit unions.

The Bank’s major competitors in Columbia,

Luzerne, Montour, Monroe, Northampton and Lehigh counties are:

National Bank

Shore State Bank

Ambassador Bank

Community Bank

Deposit and Discount Bank

Columbia Bank & Trust Co.

National Bank

National Bank of PA (FNB of PA)

Security Bank

Commonwealth 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.

The Bank’s competition is comprised of national, regional, community banking financial institutions and credit unions.

The Bank’s major competitors in Columbia, Luzerne, Montour, Monroe, Northampton and Lehigh counties are:

· Citizens Bank

· Fulton Bank

· Community Bank, N.A.

· Honesdale National Bank

· Jersey Shore State Bank

· Embassy Bank

· Landmark Community Bank

· ESSA Bank & Trust

· Luzerne Bank

· Fidelity Deposit and Discount Bank

· First Columbia Bank & Trust Co.

· NBT Bank, N.A

· First National Bank of PA (FNB of PA)

· Peoples Security Bank

· First Northern Bank & Trust

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

on deposits nor exposed by loan concentrations to a single customer or to a small group of customers, such that the loss of any

one or more would not have a materially adverse effect on the financial condition of the Corporation or the Bank.

The Corporation

has been successful in attracting municipal deposits, which make up 17.5% of total deposits at December 31, 2019.

municipal deposit customer consisted of a school district with deposit balances amounting to 6.8% of total deposits.

The Corporation

currently has the ability to utilize liquidity tools, such as wholesale borrowings or brokered deposits, to replace reductions

in municipal deposits.

The customers’ ability to repay their loans is generally dependent on the real estate market and

general economic conditions prevailing in Pennsylvania, among other factors.

The Corporation and the Bank are not dependent on deposits nor exposed by loan concentrations to a single customer or to a small group of customers, such that the loss of any one or more would not have a materially adverse effect on the financial condition of the Corporation or the Bank.

The Corporation has been successful in attracting municipal deposits, which make up 23.1% of total deposits at December 31, 2020.

The largest municipal deposit customer consisted of a school district with deposit balances amounting to 13.1% of total deposits.

The Corporation currently has the ability to utilize liquidity tools, such as wholesale borrowings or brokered deposits, to replace reductions in municipal deposits.

The customers’ ability to repay their loans is generally dependent on the real estate market and general economic conditions prevailing in Pennsylvania, among other factors.

Supervision and Regulation

Corporation is subject to the jurisdiction of the Securities and Exchange Commission (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 companies whose shares are registered under Section 12 of the Securities Exchange Act of 1934

(the “Exchange Act”), 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

acquisition 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 Pennsylvania and to banks whose deposits are insured by the FDIC.

The Bank is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and Securities, the FDIC

and the Consumer Financial Protection Bureau.

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.

The Corporation is subject to the jurisdiction of the Securities and Exchange Commission (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 companies whose shares are registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”), 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 acquisition 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 Pennsylvania and to banks whose deposits are insured by the FDIC.

The Bank is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and Securities, the FDIC and the Consumer Financial Protection Bureau.

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.

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.

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

It cannot be predicted whether any such legislation will be adopted or how such legislation would affect the business

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

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 the Bank.

Certain changes of potential significance to the Corporation

which have been enacted recently and others which are currently under consideration by Congress or various regulatory agencies

are discussed below.

Federal Deposit Insurance Corporation Improvement Act of

1991 (“FDICIA” )

The FDICIA established five different levels

of capitalization of financial institutions, with “prompt corrective actions” and significant operational restrictions

imposed on institutions that are capital deficient under the categories.

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 the Bank.

Certain changes of potential significance to the Corporation which have been enacted recently and others which are currently under consideration by Congress or various regulatory agencies are discussed below.

Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA” )

The FDICIA established five different levels of capitalization of financial institutions, with “prompt corrective actions” and significant operational restrictions imposed on institutions that are capital deficient under the categories.

The five categories are:

2 unchanged sentences

● undercapitalized

• significantly 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 8%, a common equity

tier 1 risk-based capital ratio of at least 6.5%, a leverage capital ratio of at least 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 6%, a common equity tier

1 risk-based capital ratio of at least 4.5%, 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

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 the 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, 2019, the Corporation and the Bank exceeded the minimum

capital levels of the well capitalized category.

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 8%, a common equity tier 1 risk-based capital ratio of at least 6.5%, a leverage capital ratio of at least 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 6%, a common equity tier 1 risk-based capital ratio of at least 4.5%, 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 the 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, 2020, the Corporation and the Bank exceeded the minimum capital levels of the well capitalized category.

See Note 14 — Regulatory Matters.

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.

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 the FDICIA

Each depository institution must submit

audited financial statements to its primary regulator and the FDIC, whose 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 institution’s 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 include the Bank.

Also, under the rule, an institution's

independent public accountant 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 the FDICIA, each federal banking

agency must prescribe certain safety and soundness standards for depository institutions and their holding companies.

of standards must be prescribed:

• asset quality and earnings

Each depository institution must submit audited financial statements to its primary regulator and the FDIC, whose 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 institution’s 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 include the Bank.

Also, under the rule, an institution's independent public accountant 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 the 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, earnings, and stock valuation

● 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.

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

● internal controls, information systems and internal audit systems

● loan documentation

3 unchanged sentences

● compensation, fees and benefits.

The FDICIA also sets forth Truth in Savings

disclosure and advertising requirements applicable to all depository institutions.

The FDICIA also sets forth Truth in Savings disclosure and advertising requirements applicable to all depository institutions.

Real Estate Lending Standards .

to the FDICIA, federal banking agencies adopted real estate lending guidelines which would set loan-to-value (“LTV”)

ratios for different types of real estate loans.

The 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 junior 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 or certificate

of inspection of the property.

Pursuant to the FDICIA, federal banking agencies adopted real estate lending guidelines which would set loan-to-value (“LTV”) ratios for different types of real estate loans.

The 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 superior 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 or certificate of inspection of the property.

Regulatory Capital Requirements

In July 2013, the federal banking agencies

issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.

period for community banking organizations began January 1, 2015, while larger institutions (generally those with assets of $250

billion or more) were required to comply by January 1, 2014.

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.

The phase-in period for community banking organizations began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) were required to comply by January 1, 2014.

The final rules call for the following capital requirements:

• A minimum ratio of common equity

tier 1 capital to risk-weighted assets of 4.5%.

• A minimum ratio of tier 1 capital to risk-weighted

assets of 6%.

• A minimum ratio of total capital to risk-weighted

assets of 8%.

● A minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5%.

● A minimum ratio of tier 1 capital to risk-weighted assets of 6%.

● A minimum ratio of total capital to risk-weighted assets of 8%.

● A minimum leverage ratio of 4%.

In addition, the final rules establish

a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations.

a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be

subject to certain restrictions on capital distributions and discretionary bonus payments.

The phase-in period for the capital

conservation and countercyclical capital buffers for all banking organizations began on January 1, 2016.

The capital level required

to avoid restrictions on elective distributions applicable to the Bank were as follows:

In addition, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations.

If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments.

The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations began on January 1, 2016.

The capital level required to avoid restrictions on elective distributions applicable to the Bank were as follows:

● A common equity tier 1 capital ratio of 7%.

1 unchanged sentence

● A total risk-based capital ratio of 10.5%.

As of December 31, 2019, the Bank maintained capital

ratios above the required capital conservation buffer.

Under the initially proposed rules, accumulated

other comprehensive income (“AOCI”) would have been included in a banking organization’s common equity tier

The final rules allow community banks to make a one-time election not to include these additional components of AOCI

in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI

components from regulatory capital.

As of December 31, 2020, the Bank maintained capital ratios above the required capital conservation buffer.

Under the initially proposed rules, accumulated other comprehensive income (“AOCI”) would have been included in a banking organization’s common equity tier 1 capital.

The final rules allow community banks to make a one-time election not to include these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital.

The Bank elected to opt-out of this item with the filing of the March 31, 2015 Call Report.

The Corporation has assessed the impact

of these changes on the regulatory ratios of the Corporation and the Bank on the capital, operations, liquidity and earnings of

the Corporation and Bank, and concluded that the new rules did not have a material negative effect.

The Corporation has assessed the impact of these changes on the regulatory ratios of the Corporation and the Bank on the capital, operations, liquidity and earnings of the Corporation and Bank, and concluded that the new rules did not have a material negative effect.

Federal Reserve Bank Small Bank Holding Company Policy

Effective in August 2018, the Federal Reserve

Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy statement.

The interim final rule raised the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated

assets for a bank holding company or savings and loan holding company that:

Effective in August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy statement.

The interim final rule raised the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company that:

(1) is not engaged in significant nonbanking activities;

(2) does not conduct significant off-balance sheet activities;

and (3) does not have a material amount of debt or equity securities,

other than trust-preferred securities, outstanding.

The interim final rule provides that, if warranted for supervisory purposes,

the Federal Reserve may exclude a company from the threshold increase.

Management believes the Corporation meets the conditions

of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated capital

requirements at December 31, 2019;

however, the Bank remains subject to regulatory capital requirements administered by the federal

banking agencies.

and (3) does not have a material amount of debt or equity securities, other than trust-preferred securities, outstanding.

The interim final rule provides that, if warranted for supervisory purposes, the Federal Reserve may exclude a company from the threshold increase.

Management believes the Corporation meets the conditions of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated capital requirements at December 31, 2020;

however, the Bank remains subject to regulatory capital requirements administered by the federal banking agencies.

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

The Federal Reserve Board has 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.

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 Federal Reserve Board has 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

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.

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.

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.

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.

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 Bank.

In 2012, the Jumpstart Our Business Startups

Act (the “JOBS Act”) became law.

The JOBS Act is aimed at facilitating capital raising by smaller companies, banks

and bank holding companies by implementing the following changes:

• Raising the threshold requiring registration under the

Exchange Act for banks and bank holdings companies from 500 to 2,000 holders of record;

• Raising the threshold for triggering deregistration under

the Exchange Act for banks and bank holding companies from 300 to 1,200 holders of record;

• Raising the limit for Regulation A offerings from $5 million

to $50 million per year and exempting some Regulation A offerings from state blue sky

• Permitting advertising and general solicitation in Rule

506 and Rule 144A offerings;

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 Bank 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 Bank.

In 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) became law.

The JOBS Act is aimed at facilitating capital raising by smaller companies, banks and bank holding companies by implementing the following changes:

● Raising the threshold requiring registration under the Exchange Act for banks and bank holding companies from 500 to 2,000 holders of record;

● Raising the threshold for triggering deregistration under the Exchange Act for banks and bank holding companies from 300 to 1,200 holders of record;

● Raising the limit for Regulation A offerings from $5 million to $50 million per year and exempting some Regulation A offerings from state blue sky laws;

● Permitting advertising and general solicitation in Rule 506 and Rule 144A offerings;

● Allowing private companies to use "crowdfunding"

to raise up to $1 million in any 12-month period, subject to certain conditions;

• Creating a new category of issuer, called an "Emerging

Growth Company,"

for companies with less than $1 billion in annual gross revenue,

which will benefit from certain changes that reduce the cost and burden of carrying out

an equity initial public offering and complying with public company reporting obligations

for up to five years.

The JOBS Act has not had any application

to the Corporation, and management will continue to monitor the implementation rules for potential effects that might benefit

the Corporation.

● Creating a new category of issuer, called an "Emerging Growth Company,"

for companies with less than $1 billion in annual gross revenue, which will benefit from certain changes that reduce the cost and burden of carrying out an equity initial public offering and complying with public company reporting obligations for up to five years.

The JOBS Act has not had any application to the Corporation, and management will continue to monitor the implementation rules for potential effects that might benefit the Corporation.

The Gramm-Leach-Bliley Act of 1999

In 1999, the Gramm-Leach-Bliley Act became

law, which is also known as the Financial Services Modernization Act.

The act repealed 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.

The act grants to community banks the power to enter new financial markets as a matter of right that

larger institutions have managed to do on an ad hoc basis.

At this time, the Corporation has no plans to pursue these additional

possibilities.

In 1999, the Gramm-Leach-Bliley Act became law, which is also known as the Financial Services Modernization Act.

The act repealed 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.

The act grants to community banks the power to enter new financial markets as a matter of right that larger institutions have managed to do on an ad hoc basis.

At this time, the Corporation has no plans to pursue these additional possibilities.

The Sarbanes-Oxley Act

In 2002, the Sarbanes-Oxley Act became

The Act was in response to public concerns regarding corporate accountability in connection with recent high visibility accounting

In 2002, the Sarbanes-Oxley Act became law.

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;

• 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.

● To provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies;

● 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 Exchange Act.

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

• Increasing disclosure requirements relating to critical

financial accounting policies and their application;

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;

• Creating a 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.

● Creating a 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.

Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer

Protection Act (“Dodd-Frank”) became law in July 2010.

Dodd-Frank is intended to affect a fundamental restructuring

of federal banking regulation.

Among other things, Dodd-Frank created a new Financial Stability Oversight Council to identify

systemic risks in the financial system and gave federal regulators new authority to take control of and liquidate financial firms.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) became law in July 2010.

Dodd-Frank is intended to affect a fundamental restructuring of federal banking regulation.

Among other things, Dodd-Frank created a new Financial Stability Oversight Council to identify systemic risks in the financial system and gave federal regulators new authority to take control of and liquidate financial firms.

Dodd-Frank additionally created a new independent federal regulator to administer federal consumer protection laws.

continues to have a significant impact on our business operations as its provisions are amended and requirements are clarified.

Dodd-Frank continues to have a significant impact on our business operations as its provisions are amended and requirements are clarified.

Community banks have seen an increase in operating and compliance costs and interest expense.

Among the provisions that have affected

us are the following:

Among the provisions that have affected us are the following:

Holding Company Capital Requirements.

Dodd-Frank requires the Federal Reserve to apply consolidated capital requirements to bank holding companies that are

no less stringent than those currently applied to depository institutions.

Under these standards, trust preferred securities will

be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than

$15 billion in assets.

Dodd-Frank additionally requires that bank regulators issue countercyclical capital requirements so that

the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent

with safety and soundness.

Dodd-Frank requires the Federal Reserve to apply consolidated capital requirements to bank holding companies that are no less stringent than those currently applied to depository institutions.

Under these standards, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets.

Dodd-Frank additionally requires that bank regulators issue countercyclical capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness.

Deposit Insurance.

permanently increases the maximum deposit insurance amount for banks, savings institutions and credit unions to $250,000 per depositor,

and extended unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012.

Dodd-Frank also

broadens the base for FDIC insurance assessments.

Assessments will now be based on the average consolidated total assets less

tangible equity capital of a financial institution.

Dodd-Frank requires the FDIC to increase the reserve ratio of the Deposit

Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured

depository institutions when the reserve ratio exceeds certain thresholds.

Effective one year from the date of enactment, Dodd-Frank

eliminated the federal statutory prohibition against the payment of interest on business checking accounts.

Dodd-Frank permanently increases the maximum deposit insurance amount for banks, savings institutions and credit unions to $250,000 per depositor, and extended unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012.

Dodd-Frank also broadens the base for FDIC insurance assessments.

Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution.

Dodd-Frank required the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds.

Effective one year from the date of enactment, Dodd-Frank eliminated the federal statutory prohibition against the payment of interest on business checking accounts.

Corporate Governance.

requires publicly traded companies to give stockholders a non-binding vote on executive compensation at least every three years,

a non-binding vote regarding the frequency of the vote on executive compensation at least every six years, and a non-binding vote

on “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on

by shareholders.

Dodd-Frank requires publicly traded companies to give stockholders a non-binding vote on executive compensation at least every three years, a non-binding vote regarding the frequency of the vote on executive compensation at least every six years, and a non-binding vote on “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders.

The SEC has finalized the rules implementing these requirements which took effect on January 21, 2011.

Additionally,

Dodd-Frank directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of

depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is

publicly traded.

Dodd-Frank also gives the SEC authority to prohibit broker discretionary voting on elections of directors and

executive compensation matters.

Prohibition Against Charter Conversions

of Troubled Institutions.

Effective one year after enactment, Dodd-Frank prohibits a depository institution from converting

from a state to federal charter or vice versa while it is the subject of a cease and desist order or other formal enforcement

action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking

agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does

not object within 30 days.

Additionally, Dodd-Frank directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1 billion, regardless of whether the company is publicly traded.

Dodd-Frank also gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

Prohibition Against Charter Conversions of Troubled Institutions.

Effective one year after enactment, Dodd-Frank prohibits a depository institution from converting from a state to federal charter or vice versa while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days.

The notice must include a plan to address the significant supervisory matter.

The converting institution

must also file a copy of the conversion application with its current federal regulator which must notify the resulting federal

regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide

access to all supervisory and investigative information relating thereto.

The converting institution must also file a copy of the conversion application with its current federal regulator which must notify the resulting federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide access to all supervisory and investigative information relating thereto.

Interstate Branching.

authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state

would be permitted.

Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state

banks to establish branches in that state.

Dodd-Frank authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted.

Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state.

Accordingly, banks will be able to enter new markets more freely.

Limits on Interstate Acquisitions

Dodd-Frank precludes a bank holding company from engaging in an interstate acquisition — the acquisition

of a bank outside its home state — unless the bank holding company is both well capitalized and well managed.

a bank may not engage in an interstate merger with another bank headquartered in another state unless the surviving institution

will be well capitalized and well managed.

Limits on Interstate Acquisitions and Mergers.

Dodd-Frank precludes a bank holding company from engaging in an interstate acquisition — the acquisition of a bank outside its home state — unless the bank holding company is both well capitalized and well managed.

Furthermore, a bank may not engage in an interstate merger with another bank headquartered in another state unless the surviving institution will be well capitalized and well managed.

The previous standard in both cases was adequately capitalized and adequately managed.

Limits on Interchange Fees.

Dodd-Frank amends the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish

rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion

and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to

Dodd-Frank amends the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

On June 29, 2011, the Federal Reserve Board set the interchange rate cap at $0.21 per transaction.

While the restrictions

on interchange fees do not affect banks with assets less than $10 billion, the rule could affect the competitiveness of debit

cards issued by smaller banks.

While the restrictions on interchange fees do not affect banks with assets less than $10 billion, the rule could affect the competitiveness of debit cards issued by smaller banks.

Consumer Financial Protection Bureau.

Dodd-Frank created the independent federal agency called the Consumer Financial Protection Bureau (“CFPB”),

which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws,

including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting

Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes.

The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in

Smaller institutions are subject to rules promulgated by the CFPB but continue to be examined and supervised by federal

banking regulators for consumer compliance purposes.

The CFPB has authority to prevent unfair, deceptive or abusive practices

in connection with the offering of consumer financial products.

Dodd-Frank authorizes the CFPB to establish certain minimum standards

for the origination of residential mortgages including a determination of the borrower’s ability to repay.

Dodd-Frank will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified

mortgage” as defined by the CFPB.

Dodd-Frank permits states to adopt consumer protection laws and standards that are more

stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance

with both the state and federal laws and regulations.

Dodd-Frank created the independent federal agency called the Consumer Financial Protection Bureau (“CFPB”), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes.

The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets.

Smaller institutions are subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking regulators for consumer compliance purposes.

The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products.

Dodd-Frank authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay.

In addition, Dodd-Frank will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB.

Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

Department of Defense Military Lending Rule

In 2015, the U.S.

Department of Defense

issued a final rule which restricts pricing and terms of certain credit extended to active duty military personnel and their families.

This rule, which was implemented effective October 3, 2016, caps the interest rate on certain credit extensions to an annual percentage

rate of 36% and restricts other fees.

The rule requires financial institutions to verify whether customers are military

personnel subject to the rule.

The impact of this final rule, and any subsequent amendments thereto, on the Corporation’s

lending activities and the Corporation’s statements of income or condition has had little or no impact;

however, management

will continue to monitor the implementation of the rule for any potential side effects on the Corporation’s business.

Department of Defense issued a final rule which restricts pricing and terms of certain credit extended to active duty military personnel and their families.

This rule, which was implemented effective October 3, 2016, caps the interest rate on certain credit extensions to an annual percentage rate of 36% and restricts other fees.

The rule requires financial institutions to verify whether customers are military personnel subject to the rule.

The impact of this final rule, and any subsequent amendments thereto, on the Corporation’s lending activities and the Corporation’s statements of income or condition has had little or no impact;

however, management will continue to monitor the implementation of the rule for any potential side effects on the Corporation’s business.

Available Information

The Corporation’s common stock is

registered under Section 12(g) of the Exchange Act.

The Corporation is subject to the informational requirements of the Exchange

Act, and, accordingly, files reports, proxy statements and other information with the SEC.

The Corporation is an electronic filer

with the SEC.

The SEC maintains an internet site that contains reports, proxy and information statements, and other information

regarding issuers that file electronically with the SEC.

The Corporation’s common stock is registered under Section 12(g) of the Exchange Act.

The Corporation is subject to the informational requirements of the Exchange Act, and, accordingly, files reports, proxy statements and other information with the SEC.

The Corporation is an electronic filer with the SEC.

The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

The SEC’s internet site address is www.sec.gov .

A copy of the Corporation’s Annual

Report on Form 10-K may be obtained without charge at www.fkyscorp.com or via email at info@fkcbank.com .

reports on Form 10-Q, current event reports on Form 8-K, and amendments to these reports, may be obtained without charge via email

at info@fkcbank.com .

Information may also be obtained via written request to Investor Relations at First Keystone Corporation,

A copy of the Corporation’s Annual Report on Form 10-K may be obtained without charge at www.fkyscorp.com or via email at info@fkcbank.com .

Quarterly reports on Form 10-Q, current event reports on Form 8-K, and amendments to these reports, may be obtained without charge via email at info@fkcbank.com .

Information may also be obtained via written request to Investor Relations at First Keystone Corporation, Attention:

Cheryl Wynings, 111 West Front Street, P.O.

Box 289, Berwick, Pennsylvania 18603, or by telephone at 570-752-3671,

extension 1175.

Box 289, Berwick, Pennsylvania 18603, or by telephone at 570-752-3671, extension 1175.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business