First Keystone Corporation ANNUAL Report 2018 FINANCIAL HIGHLIGHTS (Dollars in thousands, except per share data) 2018 2017 2016 2015 2014 SUMMARY OF OPERATIONS Interest income Interest expense Net interest income Provision for loan losses Net income PER COMMON SHARE DATA Net income Dividends BALANCE SHEET DATA Total assets Total investment securities Net loans Total deposits Total stockholders’ equity PERFORMANCE RATIOS Return on average assets Return on average equity Dividend payout Average equity to average assets $ 35,573 8,620 26,953 200 9,211 $ 32,268 6,548 25,720 267 8,648 $ 31,643 $ 31,711 4,966 26,745 2,277 9,172 5,282 26,361 2,083 9,472 $ 31,019 4,452 26,567 433 10,211 $ 1.60 1.08 $ 1.52 1.08 $ 1.68 $ 1.64 1.08 1.08 $ 1.84 1.05 $1,012,000 317,614 599,647 671,553 116,756 $990,121 350,218 551,910 778,146 116,719 $984,283 $983,489 385,267 509,871 720,598 108,438 379,641 515,025 725,982 109,685 $912,353 348,722 481,071 661,562 106,271 0.92% 8.05% 67.26% 11.39% 0.86% 7.54% 71.05% 11.45% 0.96% 8.23% 64.30% 11.68% 0.96% 8.43% 65.79% 11.40% 1.13% 9.90% 56.95% 11.45% LOANS # OF NEW LOANS 2017 987 2018 1,024 PERFORMANCE 2017 2018 RETURN OF ASSESTS 0.86% 0.92% TOTAL NEW LOANS $167,104 $169,133 RETURN ON EQUITY 7.54% 8.05% 2018 LOAN PORTFOLIO BREAKDOWN 73% 24% 2% 1% COMMERCIAL MORTGAGES HOME EQUITY CONSUMER & OTHER Dollars in thousands 2018 INITIATIVES COMMUNITY OUTREACH Opened a Loan Production office at 559 Main St., Bethlehem, PA in May Installed in-branch TVs for consistent marketing messaging and sharing of bank information, and advertisement of community events Employee Education: Provided 2,770 hours of training to our employees in areas of Keystone Banker & Career Pathing for frontline employees, Compliance, Frauds & Scams, Information Security and Leadership Skills Employees volunteered 2,030 hours throughout our communities by supporting non-profit agencies, attending school board and municipal meetings, participating in parades, civic clubs, home shows, etc. Through Denim day fundraisers employees donated $3,853 to community non-profit agencies $4,000 and over 1,800 cans of food, clothing and cleaning supplies were donated to community non- profit agencies through CONNECT For Kindness How we generated $41,135 in income: 63% $25,886 24% $9,687 T N E M T S E V N I E M O C N I 13% $5,562 E M O C N I R E H T O S N A O L N O E M O C N I INCOME STATEMENT IN GRAPHIC FORM COMPONENTS OF OTHER INCOME OTHER NON-INTEREST INCOME ITEMS 2017 2018 SERVICE CHARGES & FEES $1,803 $2,059 TRUST DEPARTMENT INCOME $880 $943 ATM FEES & DEBIT CARD INCOME $1,396 $1,567 Dollars in thousands How we used our $41,135 in income: 29% $11,770 22% $9,211 18% $7,519 S E E Y O L P M E T I F O R P D A E H R E V O R E H T O 13% $5,193 S R O T I S O P E D O T D A P I 8% $3,427 8% $3,356 S T S O C G N W O R R O B I I S G N D L I U B , S R E T U P M O C T N E M P I U Q E & 1% $459 X A T E M O C N I E S N E P X E 1% $200 R O F S N O I S I V O R P S E S S O L N A O L Dollars in thousands TO OUR SHAREHOLDERS Making Connections: Community, Customers, Coworkers, Oneself When I became President and CEO of First Keystone Community Bank in September 2018, the typical discussion about goals centered around loan volume, deposit accounts, compliance requirements, and increasing shareholder value. While these elements are absolutely critical to the bank’s success, there was one other factor on my radar that was important. I’m also focused on how we connect with each other, treat each other, and take care of people, whether coworkers or customers. I promised our employees that over the next year, we are going to focus on how to connect. The center pages of this year’s Annual Report to shareholders outlines our Connect Initiatives in more detail. Financial Highlights: For the fiscal year ended December 31, 2018 First Keystone Corporation reported earnings of $9,211,000, as compared to $8,648,000 for 2017, an increase of $563,000 or 6.5%. Net income per share increased to $1.60 in 2018 as compared to $1.52 in 2017. Dividends per share remained consistent at $1.08. The increase in net income in 2018 was primarily the result of higher interest and fees on loans and a lower federal income tax rate. Interest income for 2018 increased $3,305,000, or 10.2%, to $35,573,000 in 2018 as compared to $32,268,000 in 2017. Interest income rose as a result of an increase in loan balances, primarily in commercial loans, and higher yields on the investment portfolio. At December 31, 2018 total loans were $606,392,000, an increase of $46,995,000 or 8.4%. Loan growth was centered in commercial real estate loans, while residential mortgage loans declined slightly. The investment portfolio declined to $316,054,000 but many lower yielding securities were replaced with higher yielding securities during 2018. We will continue our emphasis on loan growth in 2019 as a primary driver of net interest income. Four increases in federal funds rates by the Federal Reserve throughout 2018 and increased reliance on short-term borrowings resulted in a higher interest expense related to deposits and short-term borrowings for the Corporation in 2018. Total deposits decreased by $106,563,000 or 13.7% in 2018 as compared to 2017. Non-interest bearing deposits grew by $4,946,000 or 4.1%. In order to reduce our dependence on short-term borrowings, which are sensitive to rising interest rates, our primary focus will be on the growth of core deposits in 2019. Non-interest income, excluding net investment securities gains, increased $394,000, or 7.5%, to $5,627,000 in 2018. Trust department income increased by $63,000 and service charges and fees increased by $256,000. ATM and debit card income also increased by $171,000 due to the Keystone Rewards program criteria and other increases in card transactions in 2018. Non- interest expense increased by 5.2% to $22,645,000 in 2018. Higher salaries and employee benefits were primarily the result of the hiring of additional lending sales staff, an increase in employee profit sharing contributions, as well as a 5.8% increase in medical insurance for employees. There was also an increase in professional service fees related to newly adopted accounting pronouncements and additional SEC filings. Income tax expense was $459,000 for 2018 as compared to $1,455,000 for 2017, making the effective tax rate 4.7% in 2018 as compared to 14.4% in 2017. Income tax expense was lower due to the Tax Cuts and Jobs Act of 2017 which reduced the company’s tax rate from 34% to 21% effective January 1, 2018. The Corporation continues to have tax-exempt income from investments in tax-exempt bonds in the securities portfolio, tax-free loans, and tax credits from investments in low-income housing partnerships to reduce our effective tax rate in 2019. Total assets increased to $1,012,000,000 in 2018 from $990,121,000 in 2017. As noted above, total loans increased 8.4% with much of the growth in commercial real estate loans. Stockholders’ Equity at year-end 2018 was $116,756,000. Our financial condition remains strong as evidenced by a total risk-based capital ratio of 13.87% and a tier 1 leverage capital ratio of 9.01% at year-end 2018. These key ratios are well above that which federal regulators require for a financial institution to be “well capitalized”. Additional details and related financial information may be found in the Management’s Discussion and Analysis and Financial Statements and Notes sections of the 2018 Form 10-K. In conclusion, with the solid year we experienced in 2018, I am optimistic that we may continue that trend in 2019. I believe we are well positioned for continued financial performance in future years as an independent, community bank financial services provider. We thank and recognize our employees, officers and Board of Directors for their outstanding efforts. We also thank you, our shareholders and customers, for your continued support and confidence. Elaine A. Woodland President and Chief Executive Officer Making a CONNECTION at First Keystone Community Bank The phrase ‘making a connection’ is not one that easily finds its way into financial services discussions, but at First Keystone Community Bank we’re making sure the idea of ‘connecting’ is a priority beginning in 2018 and continuing throughout 2019 and beyond. Connecting with customers, connecting with colleagues, connecting with our communities, and connecting with oneself - it’s all part of enhancing the community banking experience. daily function going Building on a foundation of the bank’s core values, the first of four planned projects was called “CONNECT For Kindness.” The goal was to build a new culture of kindness and ensure it became part of everyone’s forward. Each week, CONNECT For Kindness started with the simple objective of performing four deliberate acts of kindness. To assist with tracking our progress, everyone at First Keystone was provided with a journal to record their efforts and a wristband to remind them to think about how they could reach out to their coworkers, customers, and communities. From the teller line to the Board room, the response to this first initiative was overwhelmingly positive. Everyone was eager to participate with tons of great ideas that were as varied as they were creative. There was enough cooperation, enthusiasm and encouragement to exceed the goals that were set for many of the projects. By leaving unexpected treats on a coworker’s desk, posting positive messages on the restroom mirrors, collecting clothing and cleaning supplies for the local Beyond Violence chapter, or collecting winter items for local kids in need, the awareness of how we treat each other was front and center at FKCB. Thanks to each and every one of our employees and our Board of Directors, we even raised enough money to donate $1,000 checks to four local food banks throughout our market area: The Salvation Army in Berwick, The Mountain Top Area Food Bank, Christ Episcopal Church Food Pantry in Stroudsburg, and New Bethany Ministries in Bethlehem. One of the more popular initiatives revolved around a canned food drive that quickly turned into a friendly competition between two departments at the Bank. At the end of the two weeks, over 1,800 non-perishable food items were collected and delivered to The Hope Center in Nescopeck. While the winning team received bragging rights and the satisfaction of a job well-done, the second place team (seems unfair to call them losers!) received a whipped cream pie in the face! A $2 donation was collected at the door to watch the pie- toss, with the money being forwarded to the Animal Resource Center. While everyone is already looking forward to the next project, Woodland summed up the CONNECT experience this way: “Whether the acts of kindness were performed in a big way or quietly and confidentially, we all contributed to making someone’s day just a little bit better. We connected to each other and that’s what really counts. Along the way, we learned some valuable lessons regarding the importance of kindness in all aspects of our lives. By completing four deliberate acts of kindness each week, we began to develop a habit of kindness that will have a significant impact on our performance. Along with being a successful business and community partner, this new tradition has led First Keystone Community Bank to embrace a CULTURE of kindness. “OUR GOAL IS TO BE: FIRST KEYSTONE COMMUNITY BANK .... THE BANK FOR YOUR COMMUNITY” FIRST KEYSTONE CORPORATION BOARD OF DIRECTORS ROBERT A. BULL Chairman Attorney - Bull & Bull LLP JOHN E. ARNDT Vice Chairman Owner - Arndt Insurance Agency DAVID R. SARACINO Secretary Retired Vice President & CFO First Keystone Community Bank DON E. BOWER President - Don E. Bower, Inc. ROBERT E. BULL Retired Attorney - Bull & Bull LLP DR. JOSEPH B. CONAHAN, JR. Ophthalmologist MICHAEL L. JEZEWSKI President/Owner - Delta Electrical Systems, Inc. NANCY J. MARR Owner/President - Marr Development Companies WILLIAM E. RINEHART President/Owner - Gray Chrysler Dodge Jeep Ram and Gray Chevrolet ELAINE A. WOODLAND President & Chief Executive Officer of First Keystone Community Bank JEROME F. FABIAN Director Emeritus Retired Owner/President Tile Distributors of America, Inc. JOHN G. GERLACH Director Emeritus Retired President First Keystone Community Bank, Pocono Division ROBERT A. BULL Chairman OFFICERS ELAINE A. WOODLAND President & Chief Executive Officer JOHN E. ARNDT Vice Chairman DIANE C.A. ROSLER Chief Financial Officer/Treasurer DAVID R. SARACINO Secretary CHERYL L. WYNINGS Assistant Secretary FIRST KEYSTONE COMMUNITY BANK OFFICERS* ROBERT A. BULL Chairman of the Board JOHN E. ARNDT Vice Chairman DAVID R. SARACINO Secretary ELAINE A. WOODLAND President Chief Executive Officer EXECUTIVE OFFICERS MATTHEW W. MENSINGER Senior Vice President Director of Lending MARK J. MCDONALD Senior Vice President Chief Credit Officer DIANE C.A. ROSLER Senior Vice President Chief Financial Officer & Cashier JEFFREY T. WOZNIAK Senior Vice President Senior IT Manager & Information Security Officer VICE PRESIDENT JODI L. ALLEY Loan Operations Manager STACIA L. ARNAUD Commercial Services Officer ANTHONY P. CARTIGLIA Commercial Services Officer CARMELITA A. CLEAVER Retail Operations Officer JUNE GEORGE Branch Administrator EDGAR A. GOWER, JR. Commercial Services Officer BRENDA L. GRASLEY Consumer Loan Manager TINA M. GRAY Regional Branch Administrator ASSISTANT VICE PRESIDENT LAUREN DUANE Business Deposit Specialist LAURIE GRADY Community Office Manager JILLIAN GUENTHER Fraud Manager & BSA Officer KATHLEEN M. JARSKI Community Office Manager KRISTI A. MCCLINTOCK Commercial Loan Document Specialist ASSISTANT CASHIER TIFFANY BIENKOWSKI Credit Analyst SANDRA L. COLE Community Office Manager SHANE DAVIS Accountant I & Systems Administrator JOHN DOUGHERTY Community Office Manager STACY GORDNER Accounting Reporting Analyst HERBERT HARMON, JR. Facilities Manager COLUMBIA-MONTOUR Michael E. Boone Adam Bowman Dan W. Hartman Michael H. Kuziak OFFICERS LEE A. HESS Loan Review Officer & Security Officer JASON P. HOLLOWAY Commercial Services Officer REBECCA A. HOOPER Senior Trust Officer DONNA KEEFER Training/Systems Support Manager BRIAN M. KLINEFELTER Credit Department Manager KEVIN KRIEGER Compliance Officer & CRA Officer JONATHAN LITTLEWOOD Commercial Services Officer MARISOL LOPEZ Regional Branch Administrator LINDA M. MESHINSKI Regional Branch Administrator EUGENE W. MORRISON Commercial Services Officer MICHAEL REIS Commercial Services Officer MICHAEL C. SANTIAGO Commercial Services Officer LEIGHTON B. WALSH Mortgage Services Manager LINDA K. YERGES Human Resource Manager CHRISTOPHER ZLOBIK Deposit Operations Officer THOMAS MCGRATH Commercial Services Officer KIM R. MURREN Community Office Manager LAURIE NUDO Community Office Manager MARY E. PASCUCCI Training Director FRANCES I. SEWARD Regional Branch Administrator KIMBERLY S. SHINER Community Office Manager SHERRI A. SITLER Deposit Review Officer NATALIE J. STACKHOUSE Accounting Manager KIMBERLY A. VOLKEL Community Office Manager CHERYL L. WYNINGS Executive Administrative Assistant LILIANA HENRICKSON Community Office Manager AMANDA JARSKI Credit Analyst RACHEL JENNINGS Post-Closing Document Specialist STEVEN M. KOTCH Loan Workout Officer MICHELLE E. KOZAK Marketing Manager MARTIN B. LEANDRI Financial Consultant ADVISORY BOARDS WYOMING VALLEY Timothy Connolly Daniel Fierman Edward H. Poggi, III James V. Reino, Jr. ANGELA MACKERT Community Office Manager ASHLEY MILLOWAY Mortgage Loan Consultant BONNIE NEVEL Trainer TERRI ROMANOWSKI Assistant Community Office Manager CINDY THORNE Assistant Trust Officer DAVID WARHO Technology Systems Manager *Officers as of December 31, 2018 POCONO COMMUNITY Richard Berkowitz Darell Covington, MD Richard L. Price, Jr. Joel D. Rossi Jacob E. Seip, Jr. CORPORATE INFORMATION THE CORPORATION DIRECT DEPOSIT First Keystone Corporation is a bank holding company incorporated under the Pennsylvania Business Corporation Laws. Its assets consist primarily of the assets of its wholly-owned subsidiary, First Keystone Community Bank. First Keystone Community Bank serves Columbia, Montour, Luzerne, Monroe and Northampton Counties. The Bank engages in general banking business and also provides fiduciary services. CORPORATE HEADQUARTERS First Keystone Corporation 111 West Front Street Berwick, PA 18603 Telephone: 570-752-3671 Fax: 570-752-4022 NOTICE OF ANNUAL MEETING The 2019 Annual Meeting of Shareholders will be held at 10:00 a.m., Eastern Daylight Time, on Thursday, May 9, 2019 at: Berwick Golf Club 473 Martzville Road Berwick, PA 18603 ANNUAL REPORT ON FORM 10-K The Annual Report on Form 10-K as filed with the Securities and Exchange Commission may be obtained, without charge, by writing to: Cheryl Wynings Investor Relations P.O. Box 289 Berwick, PA 18603 Telephone: 1-888-759-2266, extension 1175 Locally: 570-752-3671, extension 1175 TRANSFER AGENT AND REGISTRAR To change or transfer registration of your stock, report a lost certificate, or other related inquiries, please contact our transfer agent at: Computershare Regular Mail: P.O. Box 505000 Louisville, KY 40233-5000 Telephone: 1-800-368-5948 Website: computershare.com/investor Overnight Delivery: 462 South 4th Street, Suite 1600 Louisville, KY 40202 Shareholders may have their cash dividends deposited directly into the account of their choice at any banking institution, with no charge. Additional information and enrollment materials for direct deposit can be obtained by calling 1-800-368-5948. DIVIDEND REINVESTMENT The Plan, open to residents of Pennsylvania, provides the opportunity to have dividends automatically reinvested into First Keystone Corporation stock. Participants in the Plan may also elect to make cash contributions to purchase additional shares of common stock. For information regarding the Plan, contact the Plan Administrator at: Computershare P.O. Box 505000 Louisville, KY 40233-5000 Telephone: 1-800-368-5948 INVESTOR INFORMATION Information regarding First Keystone Corporation is available online at www. firstkeystonecorporation.com. The website also includes additional information of interest to shareholders such as: historical stock prices, dividend declarations, press releases and governance documents. Requests for information or assistance regarding the corporation should be directed to Shareholder Relations at 1-888-759-2266, extension 1175 Locally: 570-752-3671, extension 1175 STOCK LISTING First Keystone Corporation common stock is traded on OTC Pink under the symbol “FKYS”. STOCK PURCHASE INQUIRIES The following brokerage firms make a market in First Keystone Corporation common stock: RBC Dain Rauscher, 800-223-4207 Janney Montgomery Scott LLC, 800-526-6397 Stifel Nicholaus & Co. Inc., 800-679-5446 Boenning & Scattergood, Inc., 800-883-1212 INDEPENDENT PUBLIC ACCOUNTANTS Baker Tilly Virchow Krause, LLP 1000 Commerce Park Drive, Suite 430 Williamsport, PA 17701 Telephone: 570-323-6023 OFFICE LOCATIONS FIRST KEYSTONE COMMUNITY BANK HANOVER TOWNSHIP OFFICE 1540 Sans Souci Highway Hanover Township, PA 18706 570-825-7352 BRODHEADSVILLE OFFICE 2022 Route 209 Brodheadsville, PA 18322 570-402-2008 MAIN OFFICE 111 West Front Street Berwick, PA 18603 570-752-3671 NESCOPECK OFFICE 437 West Third Street Nescopeck, PA 18635 570-759-2767 SALEM TOWNSHIP OFFICE 400 Fowler Avenue Berwick, PA 18603 570-759-2628 FREAS AVENUE OFFICE 701 Freas Avenue Berwick, PA 18603 570-752-1244 DANVILLE OFFICE 1049 Bloom Road Danville, PA 17821 570-275-8000 BRIAR CREEK OFFICE 50 Briar Creek Plaza Berwick, PA 18603 570-802-0541 KINGSTON OFFICE 299 Wyoming Avenue Kingston, PA 18704 570-718-1110 SCOTT TOWNSHIP OFFICE 2301 Columbia Boulevard Bloomsburg, PA 17815 570-784-0354 STROUDSBURG OFFICE 559 Main Street Stroudsburg, PA 18360 570-424-9700 MIFFLINVILLE OFFICE 133 West Third Street Mifflinville, PA 18631 570-752-5750 MOUNTAINHOME OFFICE 1154 Route 390 Cresco, PA 18326 570-595-9700 888-759-2266 | www.fkc.bank SWIFTWATER OFFICE 2070 Route 611 Swiftwater, PA 18370 570-839-7880 MOUNTAIN TOP OFFICE 18 North Mountain Boulevard Mountain Top, PA 18707 570-715-0720 PLYMOUTH OFFICE 463 West Main Street Plymouth, PA 18651 570-719-1400 DALLAS OFFICE 2325 Memorial Highway Dallas, PA 18612 570-674-1030 SHICKSHINNY OFFICE 107 South Main Street Shickshinny, PA 18655 570-542-6060 LOAN PROCESSING OFFICE 559 Main Street, Suite 114 Bethlehem, PA 18018 Telephone: 610-419-1412 888-759-2266 | www.fkc.bank