UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
Quarterly Report Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 20002001
Commission File Number: 2-88927
FIRST KEYSTONE CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2249083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
111 West Front Street, Berwick, PA 18603
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (570) 752-3671
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date:
Common Stock, $2 Par Value, 2,833,727 shares as of March 31, 2000.2001.
PART I. - FINANCIAL INFORMATION
Item. 1 Financial Statements
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except per share data)
March December
2001 2000 1999
ASSETS
Cash and due from banks $6,746 $6,884$ 5,681 $ 6,733
Interest bearing deposits with banks 28 8011,300 2,428
Available-for-sale securities carried
at estimated fair value 125,072 123,468157,014 142,224
Investment securities, held-to-maturity
securities, estimated fair value
of $10,469$8,407 and $11,335 10,698 11,563$8,635 8,459 8,737
Loans, net of unearned income 188,264 185,231188,994 190,671
Allowance for loan losses (2,600) (2,600)(2,648) (2,702)
________ ________
Net loans $185,664 $182,631$186,346 $187,969
Bank premises and equipment 3,833 3,881
Other real estate owned 69 853,478 3,570
Accrued interest receivable 2,261 2,2392,714 2,491
Other assets 2,501 2,6856,528 6,190
________ ________
Total Assets $336,872 $333,516$381,520 $360,342
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 20,84222,854 $ 20,91924,847
Interest bearing 234,425 223,761
Total deposits 255,267 244,680
Short-term borrowings 28,016 31,594
Long-term borrowings 21,000 26,000
Accrued expenses and other liabilities 2,017 1,884267,297 246,626
________ ________
Total deposits $290,151 $271,473
Short-term borrowings 8,887 8,560
Long-term borrowings 40,250 41,250
Accrued interest and other expenses 2,309 2,231
Other liabilities 1,002 171
_______ ________
Total Liabilities 306,300 304,158$342,599 $323,685
STOCKHOLDERS' EQUITY
Common stock, par value $2 per share 5,867 5,867
Surplus 9,761 9,761
Retained earnings 20,905 20,28523,947 23,311
Accumulated other comprehensive income (loss) (2,865) (3,459)2,443 815
Less treasury stock at cost 100,000
shares in 2000 and 1999 (3,096) (3,096)
________ ________(3,097) (3,097)
_______ _______
Total Stockholders' Equity 30,572 29,358$ 38,921 $ 36,657
________ ________
Total Liabilities and
Stockholders' Equity $336,872 $333,516$381,520 $360,342
See Accompanying Notes to Consolidated Financial Statements
1
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED March 31, 20002001 AND 19992000
(Unaudited)
(Amounts in thousands except per share data)
2001 2000 1999
INTEREST INCOME
Interest and fees on loans $ 3,8343,949 $ 3,4373,834
Interest and dividend income on
securities 2,209 1,9462,558 2,122
Interest on deposits in banks 101 1
52Other interest income 89 87
_________ _________
Total Interest Income $ 6,0446,697 $ 5,4356,044
INTEREST EXPENSE
Interest on deposits $ 2,5493,176 $ 2,3762,549
Interest on short-term borrowings 112 325 183
Interest on long-term borrowings 592 344 186
_________ _________
Total Interest Expense $ 3,2183,880 $ 2,7453,218
Net interest income $ 2,8262,817 $ 2,6902,826
Provision for loan losses 75100 75
_________ _________
Net Interest Income After Provision
for Loan Losses $ 2,7512,717 $ 2,6152,751
OTHER INCOME
Service charges on deposit accounts $ 210268 $ 196210
Other non-interest income 200 142 144
Investment securities gains
(losses) net 13 3 24
_________ _________
Total Other Income $ 355481 $ 364355
OTHER EXPENSES
Salaries and employee benefits $ 967956 $ 800967
Net occupancy and fixed asset
expense 262 244 247
Other non-interest expense 483 535 444
_________ _________
Total Other Expenses $ 1,7461,701 $ 1,4911,746
Income before income taxes $ 1,3601,497 $ 1,4881,360
Applicable income tax (benefit) 294 202 265
_________ _________
Net Income $ 1,1581,203 $ 1,2231,158
PER SHARE DATA
Net Income $ .41.42 $ .42.41
Cash Dividends .20 .19 .17
Weighted Average Shares
Outstanding 2,833,727 2,891,1282,833,727
See Accompanying Notes to Consolidated Financial Statements
2
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED March 31, 20002001 AND 19992000
(Unaudited)
(Amounts in thousands) 2001 2000 1999
OPERATING ACTIVITIES
Net income $1,158 $1,223$ 1,203 $ 1,158
Adjustments to reconcile net
income to net cash provided (used)
by operating activities:
Provision for loan losses 75100 75
Provision for depreciation and
amortization 100107 100
Premium amortization on investment
securities 39 23 83
Discount accretion on investment
securities (284) (151) (39)
Gain on sale of mortgage loans (1)(47) (1)
Proceeds from sale of mortgage loans 3,949 605 31
Originations of mortgage loans
for resale (692) (926) (2,040)
(Gain) loss on sales of investment
securities (13) (3) (24)
(Gain) loss on sale of other real
estate owned 0 (1) 0
Deferred income tax (benefit) (28) (17) (8)
(Increase) decrease in interest
receivable and other assets (489) (100) (389)
Increase (decrease) in interest
payable, accrued expenses and
other liabilities 95 133
33
_____ _____________ ________
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES $895 $(956)$ 3,940 $ 895
INVESTING ACTIVITIES
Purchases of investment securities
available-for-sale $(32,782) $(14,081) $(25,585)
Proceeds from sales of investment
securities available-for-sale 14,156 11,919 14,705
Proceeds from maturities and
redemptions of investment
securities available for sale 4,569 821 4,501
Proceeds from maturities and
redemption ofinvestmentof investment
securities held-to-maturity 2,272 1,607 819
Net (increase) decrease in loans (1,758) (2,856) (7,153)
Purchase of premises and equipment (15) (52)
(94)
Proceeds from sale of other real
estate owned 0 86
0
_______________ ________
NET CASH (USED) BY INVESTING
ACTIVITIES $(2,556) $(12,807)$(13,558) $ (2,556)
FINANCING ACTIVITIES
Net increase (decrease) in deposits $10,587 $ (3,610)18,678 $ 10,587
Net increase (decrease) in
short-term borrowings 327 (3,578) 29,145
Net increase (decrease)in
long-term borrowings (1,000) (5,000) 0
Acquisition of treasury stock 0 (652)
Cash dividends (567) (538)
(489)
_______ _______________ ________
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 1,471 $24,39417,438 $1,471
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 7,820 $ (190) $10,631
CASH AND CASH EQUIVALENTS, BEGINNING 9,161 6,964
7,055
_______ _______________ ________
CASH AND CASH EQUIVALENTS, ENDING $ 16,981 $ 6,774 $17,686
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during period for
Interest $ 3,2183,980 $ 2,7433,218
Income Taxes 11 0 19
See Accompanying Notes to Consolidated Financial Statements
3
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20002001
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of First Keystone Corporation and
Subsidiary (the "Corporation") are in accordance with accounting
principles generally accepted accounting principlesin the United States of America and
conform to common practices within the banking industry. The more
significant policies follow:
Principles of ConsolidationPRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
First Keystone Corporation and its wholly-owned Subsidiary, The First
National Bank of Berwick (the "Bank"). All significant inter-company
balances and transactions have been eliminated in consolidation.
Nature of OperationsNATURE OF OPERATIONS
The Corporation, headquartered in Berwick, Pennsylvania,
provides a full range of banking, trust and related services through
its wholly owned Bank subsidiary and is subject to competition from
other financial institutions in connection with these services. The
Bank serves a customer base which includes individuals, businesses,
public and institutional customers primarily located in the Northeast
Region of Pennsylvania. The Bank has nine full service offices and 12
ATMs located in Columbia, Luzerne and Montour Counties. The
Corporation and its subsidiary must also adhere to certain federal
banking laws and regulations and are subject to periodic examinations
made by various federal agencies.
SEGMENT REPORTING
The Corporation has a commercialCorporation's banking operationsubsidiary acts as an independent
community financial services provider, and trust
department as its major lines of business. The commercialoffers traditional banking
operation includes a commercial services and retail services area and
has historically constituted over 90% of the Corporation's revenue and
profit and is the only reportable segment. Commercial services
includes lending
and related financial services to smallindividual, business and medium
sized corporationsgovernment
customers. Through its branch and other business entities. The retail services
includes sales and distribution (direct lending, deposit gathering,automated teller machine network,
the Bank offers a full array of commercial and retail financial
services, including the taking of time, savings and demand deposits;
the making of commercial, consumer and mortgage lending) primarily to individuals. The trust
department includes investment management, estate planning, employee
benefit administration, and personal trust services which produce fee
based income. The business units are identified by the products or
services offered by the business unitloans; and the
channelproviding of other financial services. The Bank also performs
personal, corporate, pension and fiduciary services through whichits Trust
Department.
Management does not separately allocate expenses, including the
product or service is delivered. The accounting policiescost of funding loan demand, between the individual business units are the same as thosecommercial, retail, trust and
mortgage banking operations of the Corporation. UseCurrently, management
measures the performance and allocates the resources of EstimatesFirst Keystone
Corporation as a single segment.
USE OF ESTIMATES
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of these consolidated financial statements
and the reported amounts of income and expenses during the reporting
periods. Actual results could differ from those estimates.
Investment SecuritiesINVESTMENT SECURITIES
The Corporation classifies its investment securities as either
"Held-to-Maturity" or "Available-for-Sale" at the time of purchase.
Debt securities are classified as held-to-maturity when the
Corporation has the ability and positive intent to hold the securities
to maturity. Investment securities Held-to-Maturity are carried at
cost adjusted for amortization of premium and accretion of discount to
maturity.
Debt securities not classified as Held-to-Maturity and equity
securities are included in the Available-for-Sale category and are
carried at fair value. The amount of any unrealized gain or loss, net
of the effect of deferred income taxes, is reported as other
comprehensive income as a component of Stockholders' Equity.
Management's
4
decision to sell available-for-sale securities is based on changes in
economic conditions controlling the sources and applications of funds,
terms, availability of and yield of alternative investments, interest
rate risk and the need for liquidity.
4
The cost of debt securities classified as Held-to-Maturity or
Available-for-Sale is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and accretion,
as well as interest and dividends is included in interest income from
investments. Realized gains and losses are included in net investment
securities gains. The cost of investment securities sold, redeemed or
matured is based on the specific identification method.
LoansEquity securities that do not have readily determinable fair
values such as Federal Reserve Bank Stock, Federal Home Loan Bank
Stock and Bankers' bank stock are carried at cost and are included in
other assets and the income is reflected as other interest income.
LOANS
Loans are stated at their outstanding unpaid principal balances,
net of deferred fees or costs, unearned income and the allowance for
loan losses. Interest on installment loans is recognized as income
over the term of each loan, generally, by the "actuarial method".
Interest on all other loans is primarily recognized based upon the
principal amount outstanding. Loan origination fees and certain direct
loan origination costs have been deferred with the net amount
amortized using the interest method over the contractual life of the
related loans as an interest yield adjustment.
Mortgage loans held for resale are carried at the lower of cost
or market on an aggregate basis. These loans are sold without recourse
to the Corporation.
Non-Accrual Loans - Generally, a loan is classified as non-accrual and
the accrual of interest on such a loan is discontinued when the
contractual payment of principal or interest has become 90 days past
due or management has serious doubts about further collectibility of
principal or interest, even though the loan currently is performing. A
loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well secured. When a loan is
placed on non-accrual status, unpaid interest credited to income in
the current year is reversed and unpaid interest accrued in prior
years is charged against the allowance for loan losses. Certain
non-accrual loans may continue to perform, that is, payments are still
being received. Generally, the payments are applied to principal.
These loans remain under constant scrutiny and if performance
continues, interest income may be recorded on a cash basis based on
management's judgement as to collectibility of principal.
Allowance for Loan Losses - The allowance for loan losses is
established through provisions for loan losses charged against income.
Loans deemed to be uncollectible are charged against the allowance for
loan losses and subsequent recoveries, if any, are credited to the
allowance.
A principal factor in estimating the allowance for loan losses
is the measurement of impaired loans. A loan is considered impaired
when, based on current information and events, it is probable that the
Corporation will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Under current accounting
standards, the allowance for loan losses related to impaired loans is
based on discounted cash flows using the effective interest rate of
the loan or the fair value of the collateral for certain collateral
dependent loans.
The allowance for loan losses is maintained at a level estimated
by management to be adequate to absorb potential loan losses.
Management's periodic evaluation of the adequacy of the allowance for
loan losses is based on the Corporation's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may
affect the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions, and
other relevant factors. This evaluation is inherently subjective as it
requires material estimates including the amounts and timing of future
cash flows expected to be received on impaired loans that may be
susceptible to significant change.
Premises and Equipment5
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation computed principally on the straight-line method over the
estimated useful lives of the assets. Maintenance and minor repairs
are charged to operations as incurred. The cost and accumulated
depreciation of the premises and equipment retired or sold are
eliminated from the property accounts at the time of retirement or
sale, and the resulting gain or loss is reflected in current
operations.
5
Mortgage Servicing RightsMORTGAGE SERVICING RIGHTS
The Corporation originates and sells real estate loans to
investors in the secondary mortgage market. After the sale, the
Corporation retains the right to service certain loans. When
originated mortgage loans are sold and servicing is retained, a
servicing asset is capitalized based on relative fair value at the
date of sale. Servicing assets are amortized as an offset to other
fees in proportion to, and over the period of, estimated net servicing
income. The unamortized cost is included in other assets in the
accompanying consolidated balance sheet. The servicing rights are
periodically evaluated for impairment based on their relative fair
value.
Other Real Estate OwnedFORECLOSED ASSETS HELD FOR SALE
Real estate properties acquired through, or in lieu of, loan
foreclosure are held for sale and are initially recorded at fair value
on the date of foreclosure establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and
the real estate is carried at the lower of carrying amount or fair
value less cost to sell.sell and is included in other assets. Revenues
derived from and costs to maintain the assets and subsequent gains and
losses on sales are included in other non-interest income and expense.
Income TaxesINCOME TAXES
The provision for income taxes is based on the results of
operations, adjusted primarily for tax-exempt income. Certain items of
income and expense are reported in different periods for financial
reporting and tax return purposes. Deferred tax assets and liabilities
are determined based on the differences between the consolidated
financial statement and income tax bases of assets and liabilities
measured by using the enacted tax rates and laws expected to be in
effect when the timing differences are expected to reverse. Deferred
tax expense or benefit is based on the difference between deferred tax
asset or liability from period to period.
Per Share DataPER SHARE DATA
Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share, requires dual presentation of basic and fully
diluted earnings per share. Basic earnings per share is calculated by
dividing net income by the weighted average number of shares of common
stock outstanding at the end of each period. Fully diluted earnings
per share is calculated by increasing the denominator for the assumed
conversion of all potentially dilutive securities. The Corporation's
dilutive securities are limited to stock options which currently have
no effect on earnings per share since the market price per share
historically has not been greater than the lowest stock option
exercise price.
Per share data has been adjusted retroactively for stock splits
and stock dividends.
Cash Flow InformationCASH FLOW INFORMATION
For purposes of reporting consolidated cash flows, cash and cash
equivalents include cash on hand and due from other banks and interest
bearing deposits in other banks. The Corporation considers cash
classified as interest bearing deposits with other banks as a cash
equivalent since they are represented by cash accounts essentially on
a demand basis.
Trust Assets and IncomeTRUST ASSETS AND INCOME
Property held by the Corporation in a fiduciary or agency
capacity for its customers is not included in the accompanying
consolidated financial statements since such items are not assets of
the Corporation. Trust Department income is generally recognized on a
cash basis and is not materially different than if it were reported on
an accrual basis.
New Accounting Standards6
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133 (as
amended by SFAS No. 137)138), "Accounting for Derivative Instruments and
Hedging Activities", becomes effective for financial reporting periods
beginning after June 15, 2000. SFAS 133 requires the recognition of
the fair value accounting
forof all stand-alone derivatives and many derivatives embedded in otherderivative instruments and contracts.on the consolidated
balance sheet. Since the Corporation does not enter into transactions
involving derivatives described in the standard and does not engage in
hedging activities, the standard is not expected to have a significant
impact on the Corporation's consolidated financial condition or
results of operations.
6
Statement of Financial Accounting Standards (SFAS) No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities", is generally effective for
transactions occurring after March 31, 2001. For recognition and
reclassification of collateral and for disclosure related to
securitization transactions and collateral, the effective date is for
fiscal years ending after December 15, 2000. SFAS No. 140 replaces
SFAS No. 125 and provides revisions to the standards for accounting
and requirements for certain disclosures relating to securitzations
and other transfers of financial assets. The standard is not expected
to have a significant impact on the Corporation's consolidated
financial condition or results of operations.
REPORTING FORMAT
Certain amounts in the consolidated financial statements of
prior periods have been reclassified to conform with presentation used
in the 2001 consolidated financial statements. Such reclassifications
have no effect on the Corporation's consolidated financial condition
or net income.
NOTE 2. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the periods ended
March 31, 2001, and March 31, 2000, and March 31, 1999, were as follows:
(amounts in thousands)
2001 2000 1999
Balance, January 1 $2,702 $2,600 $2,421
Provision charged to operations 75100 75
Loans charged off (165) (79)
(34)
Recoveries 11 4 5
______ ______
Balance, March 31 $2,648 $2,600 $2,467
At March 31, 2000,2001, the recorded investment in loans that are
considered to be impaired as defined by SFAS No. 114 was $53,051.$154,195. No
additional charge to operations was required to provide for the
impaired loans since the total allowance for loan losses is estimated
by management to be adequate to provide for the loan loss allowance
required by SFAS No. 114 along with any other potential losses.
At March 31, 2000,2001, there were no significant commitments to lend
additional funds with respect to non-accrual and restructured loans.
NOTE 3. SHORT-TERM BORROWINGS
Federal funds purchased, securities sold under agreements to
repurchase and Federal Home Loan Bank advances generally represent
overnight or less than 30-day borrowings. U.S. Treasury tax and loan
notes for collections made by the Bank are payable on demand.
7
NOTE 4. LONG-TERM BORROWINGS
Long-term borrowings are comprised of advances from the Federal
Home Loan Bank (FHLB). Under terms of a blanket agreement, collateral
for the loans are secured by certain qualifying assets of the
Corporation's banking subsidiary which consist principally of first
mortgage loans.loans and certain investment securities.
NOTE 5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments. The Corporation does not
engage in trading activities with respect to any of its financial
instruments with off-balance sheet risk.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those instruments.
The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance
sheet instruments.
7
The Corporation may require collateral or other security to
support financial instruments with off-balance sheet credit risk. The
contract or notional amounts at March 31, 2000,2001, and December 31, 1999,2000,
were as follows:
(amounts in thousands) March 31, December 31,
2001 2000
1999_______ ______
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $12,746 $17,348$18,118 $15,467
Standby letters of credit $ 6291,005 $ 633947
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or
other termination clauses that may require payment of a fee. Since
many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future
cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Corporation upon extension of
credit, is based on management's credit evaluation of the counter-party.
Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by
the Corporation to guarantee the performance of a customer to a third
party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The Corporation may hold collateral to support standby
letters of credit for which collateral is deemed necessary.
The Corporation grants commercial, agribusiness and residential
loans to customers within the state. It is management's opinion that
the loan portfolio was balanced and diversified at March 31, 2000,2001, to
the extent necessary to avoid any significant concentration of credit
risk.
8
NOTE 6. STOCKHOLDERS' EQUITY
Changes in Stockholders' Equity for the period ended March 31,
2000,2001, were are follows:
(Amounts in thousands, except common share data)
Common Common
Shares Stock Surplus
_______ ______ ______ _______
Balance at January 1, 20002001 2,933,727 $5,867 $9,761
Comprehensive Income:
Net Income
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects
Total Comprehensive
income (loss)
Cash dividends -
$.19$.20 per share
_________ ______ ______
Balance at March 31, 20002001 2,933,727 $5,867 $9,761
(Amounts in thousands, except Common Sharescommon share data)
Accumulated
Compre- AccumulatedOther
hensive Other
Income Retained Comprehensive
(Loss)Income Earnings Income (Loss)
______ _______ _____________________
Balance at January 1, 2000 $20,285 $(3,459)2001 $23,311 $ 815
Comprehensive Income:
Net Income $1,158 1,158$1,203 1,203
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects 594 5941,628 1,628
______
Total Comprehensive
income (loss) $1,752$2,831
Cash dividends -
$.19$.20 per share (538)(567)
_______ _____________
Balance at March 31, 2000 $20,905 $(2,865)2001 $23,947 $2,443
(Amounts in thousands, except Common Sharescommon share data)
Treasury
Stock Total
___________ _____
Balance at January 1, 2000 $(3,096) $29,3582001 $(3,097) $36,657
Comprehensive Income:
Net Income 1,1581,203
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects 5941,628
Total Comprehensive
income (loss)
Cash dividends -
$.19$.20 per share (538)(567)
_______ _______
Balance at March 31, 2000 $(3,096) $30,5722001 $(3,097) $38,921
8
NOTE 7. MANAGEMENT'S ASSERTIONS AND COMMENTS REQUIRED TO BE
PROVIDED WITH FORM 10Q FILING
In management's opinion, the consolidated interim financial
statements reflect fair presentation of the consolidated financial
position of First Keystone Corporation and Subsidiary, and the results
of their operations and their cash flows for the interim periods
presented. Further, the consolidated interim financial statements are
unaudited; however they reflect all adjustments, which are in the
opinion of management, necessary to present fairly the consolidated
financial condition and consolidated results of operations and cash
flows for the interim periodperiods presented and that all such adjustments
to the consolidated financial statements are of a normal recurring
nature. The independent accountants, J. H. Williams & Co., LLP,
reviewed these consolidated financial statements as stated in their
accompanying review report.
The results of operations for the three-month period ended March
31, 2000,2001, are not necessarily indicative of the results to be expected
for the full year.
These consolidated interim financial statements have been
prepared in accordance with requirements of Form 10Q and therefore do
not include all disclosures normally required by generally accepted
accounting principles applicable to financial institutions as included
with consolidated financial statements included in the Corporation's
annual Form 10K filing. The reader of these consolidated interim
financial statements may wish to refer to the Corporation's annual
report or Form 10K for the period ended December 31, 1999,2000, filed with
the Securities and Exchange Commission.
NOTE 8. AMENDMENT OF RULE 10-01 OF REGULATION S-X REQUIRING REVIEWED
QUARTERLY FINANCIAL STATEMENTS
In accordance with the new amendment effective for the period
ended March 31, 2000, the accompanying consolidated financial
statements have been reviewed by Independent Certified Public
Accountants whose report is being submitted as an integral part of
this Form 10Q filing.
9
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTSACCOUNTANTS
Board of Directors and Stockholders of First Keystone Corporation:
We have reviewed the accompanying consolidated balance sheet of First
Keystone Corporation and Subsidiary as of March 31, 2000,2001, and the
related consolidated statements of income and cash flows for the
three-month period then ended.periods ended March 31, 2001, and 2000. These
consolidated financial statements are the responsibility of the
management of First Keystone Corporation and Subsidiary.
We conducted our reviewreviews in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with
auditing standards generally accepted auditing standards,in the United States of America,
the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review,reviews, we are not aware of any material modifications
that should be made to the March 31, 2000,consolidated financial statements referred
to above for them to be in conformity with accounting principles
generally accepted accounting
principles.
The accompanyingin the United States of America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated
balance sheet of First Keystone Corporation and Subsidiary as of
December 31, 2000, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended December 31, 1999, was audited by us as
part of(not
presented herein); and in our audit of the financial statements for the year ended
December 31, 1999, taken as a whole andreport dated January 10, 2001, we
expressed an unqualified opinion on themthose consolidated financial
statements. In our opinion, the information set forth in our report dated January 10, 2000, but we have not
performed any auditing procedures since that date.
Thethe
accompanying statementsconsolidated balance sheet as of income and cash flows of First Keystone
Corporation and Subsidiary for the three-month period ended MarchDecember 31, 2000, were not audited by us and, accordingly, we do not express an
opinion on them.is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ J. H. Williams & Co., LLP
J. H. Williams & Co., LLP
Kingston, Pennsylvania
May 2, 2000April 24, 2001
10
Item 2. First Keystone Corporation Management's Discussion
and Analysis of Financial Condition and Results of
Operation as of March 31, 20002001
RESULTS OF OPERATIONS
First Keystone Corporation realized earnings for the first
quarter of 20002001 of $1,158,000, a decrease$1,203,000, an increase of $65,000,$45,000, or 5.3%3.9% over
the first quarter of 1999.2000. The decreaseincrease in net income for the first
quarter of 20002001 was aprimarily the result of an increase of $126,000,
or 35.5% in non-interest income or other income, and a decrease in
total other expense of $45,000, or 2.6%. The tightening of our net
interest margin resulted in net interest income a
slight decrease in total other income, and an increase in total other
expense. Other expenses, non-interest expenses, increased 17.1% inremaining relatively
stable at $2,817,000 for the first quarter of 2000 over 1999 primarily because of expenses
relating2001 compared to
our ninth full service office opening in$2,826,000 for the fourthfirst quarter of 1999.2000. On a per share basis, net
income per share decreasedincreased to $.42 for the first three months of 2001
compared to $.41 for the first three months of 2000, compared to $.42 for the
first three months of 1999, while dividends
increased to $.19$.20 per share up from $.17$.19 in 1999,2000, or an increase of
11.8%5.3%.
Year-to-date net income annualized amounts to a return on
average common equity of 15.83%12.87% and a return on assets of 1.40%1.30%. For
the three months ended March 31, 1999,2000, these measures were 14.34%15.83% and
1.57%1.40%, respectively on an annualized basis.
NET INTEREST INCOME
The major source of operating income for the Corporation is net
interest income, defined as interest income less interest expense. In
the first quarter of 2000,2001, net interest income increaseddecreased slightly
because of our tighteningreduced net interest margin. In the first quarter of
2000,2001, interest income amounted to $6,044,000,$6,697,000, an increase of $609,000$653,000
or 11.2%10.8% over the first quarter of 1999,2000, while interest expense
amounted to $3,218,000$3,880,000 in the first quarter of 2000,2001, an increase of
$473,000,$662,000, or 17.2%20.6% over the first quarter of 1999.
Accordingly,2000. As a result, net
interest income was $2,826,000 in the first quarter
of 2000, an increase of $136,000,decreased $9,000, or 5.1%0.3% over the first quarter of
1999.2000.
Our net interest margin for the quarter ended March 31, 2000,2001,
was 3.96%3.48% compared to 4.06%3.96% for the quarter ended March 31, 1999.2000.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the quarter ended March 31,
2000,2001, was $75,000, equal$100,000, compared to the $75,000 provision for the first
quarter of 1999.2000. Net charge-offs totaled $75,000$154,000 for the three
months ended March 31, 2000,2001, as compared to $29,000$75,000 for the first
three months of 1999.2000. The allowance for loan losses as a percentage
of loans, net of unearned interest, was 1.40% as of March 31, 2001, as
compared to 1.42% as of December 31, 2000, and 1.38% as of March 31,
2000, as
compared to 1.45% as of March 31, 1999.2000.
NON-INTEREST INCOME
Total non-interest income or other income was $481,000 for the
quarter ended March 31, 2001, as compared to $355,000 for the quarter
ended March 31, 2000, as compared to $364,000 for the quarter
ended March 31, 1999, a decreasean increase of $9,000,$126,000, or 2.5%35.5%. Excluding
investment security gains and losses, non-interest income was $352,000$468,000
for the first quarter of 2000,2001, an increase of $12,000$116,000 over the first
quarter of 1999.2000. An increase in service charges on deposit accounts
wasand an increase in other non-interest income, were the primary reasonreasons
for the increase in non-interest income.
11
NON-INTEREST EXPENSES
Total non-interest expenses, or other expenses, was $1,701,000
for the quarter ended March 31, 2001, as compared to $1,746,000 for
the quarter ended March 31, 2000, as compared to $1,491,000 for
the quarter ended March 31, 1999.2000. The increasedecrease of $255,000$45,000 is
comprised of salary and benefits increasing $167,000,decreasing $11,000, occupancy expense
decreasing $3,000,increasing $18,000, and other non-interest expense increasing
$91,000.decreasing $52,000.
The increaseoverall decrease in non-interest expenses was primarily the
result of increased personnel expenses and overhead expenses
associated with the opening in the fourth quarter of 1999 of our ninth
full service office.$45,000, or 2.6%.
Expenses associated with employees (salaries and employee
benefits) continue to be the largest category of non-interest
expenses. Salaries and benefits amount to 55.4%56.2% of total other non-interest
expense for the three months ended March 31, 2000,2001, as compared to
53.7%55.4% for the first three months of 1999.2000. Other non-interest expenses
amounted to $535,000$483,000 for the three months ended March 31, 2000, an increase2001, a
decrease of $91,000,$52,000, or 20.5%9.7% over the first three months of 1999. Even though2000.
With the decrease in our non-interest expenses increasedexpense in the first quarter,
somewhat more than historic averages, our overall non-interest expense of approximatelyis less than 2% of average assets on
an annualized basis, which places us among the leaders of our peer
financial institutions at controlling total non-interest expense.
INCOME TAXES
Effective tax planning has helped produce favorable net income.
The effective total income tax rate was 19.6% for the first quarter of
2001 as compared to 14.9% for the first quarter of 2000 as compared to 17.8% for the first quarter of 1999.2000. The
decreaseincrease in our effective tax rate in the first quarter of 20002001 was
due primarily to increased purchases ofthe limited opportunities to purchase municipal
(tax-free investments) securities at relatively attractive interest rates.
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased to $336,872,000$381,520,000 as of March 31, 2000,2001, an
increase of $3,356,000,$21,178,000, or 1.0%5.9% over year-end 1999.2000. Total deposits
increased to $255,267,000$290,151,000 as of March 31, 2000,2001, an increase of
$10,587,000,$18,678,000, or 4.3%6.9% over year-end 1999.
The Corporation was able to reduce borrowed funds with2000.
With the increase in total deposits.deposits, the Corporation did not
increase borrowed funds. Short-term borrowings decreased by
$3,578,000 to $28,016,000remained stable at
$8,887,000 as of March 31, 2000, and long-term2001, comparable to $8,560,000 as of March
30, 2000. Long-term borrowings decreased by $5,000,000$1,000,000 to $21,000,000$40,250,000
as of March 31, 2000.2001.
EARNING ASSETS
Our primary earning asset, loans, net of unearned income
increaseddecreased to $188,264,000$188,994,000 as of March 31, 2000, up $3,033,000,2001, down $1,677,000, or
1.6%0.9% since year-end 1999.2000. The loan portfolio continues to be well
diversified and overall asset quality remains strong with past-dues
remaining stablepast-due
loans and non-performing assets down from year-end 1999.remaining relatively stable.
Our investment portfolio remained stableincreased in size from December 31,
1999,2000, to March 31, 2000.2001. Held-to-maturity securities amounted to
$10,698,000$8,459,000 as of March 31, 2000,2001, a decrease of $865,000$278,000 from December
31, 1999.2000. However, available-for-sale securities amounted to
$125,072,000$157,014,000 as of March 31, 2000,2001, an increase of 12
$1,604,000$14,790,000 from
year-end 1999.2000. Interest bearing deposits with banks decreasedincreased to
$28,000,000$11,300,000 as of March 31, 2000,2001, compared to $80,000$2,428,000 as of
December 31, 1999.2000.
12
ALLOWANCE FOR LOAN LOSSES
Management performs a quarterly analysis to determine the
adequacy of the allowance for loan losses. The methodology in
determining adequacy incorporates specific and general allocations
together with a risk/loss analysis on various segments of the
portfolio according to an internal loan review process. Management
maintains its loan review and loan classification standards consistent
with those of its regulatory supervisory authority. Management feels,
considering the conservative portfolio composition, which is largely
composed of small retail loans (mortgages and installments) with
minimal classified assets, low delinquencies, and favorable loss
history, that the allowance for loan loss is adequate to cover
foreseeable future losses.
Any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed under
Industry Guide 3 do not (i) represent or result from trends or
uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources, or
(ii) represent material credits about which management is aware of any
information which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
The Corporation was required to adopt Financial Accounting
Standards Board Statement No. 114, "Accounting by Creditors for
Impairment of a Loan" - Refer to Note 5 above for details.
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual and restructured
loans, other real estate and foreclosed assets, together with loans
past-due 90 days or more and still accruing. As of March 31, 2000,2001,
total non-performing assets were $693,000$1,104,000 as compared to $750,000$742,000 on
December 31, 1999.2000. Non-performing assets to total loans and
foreclosed assets was .37%.58% as of March 31, 2000,2001, and .40%.21% as of
December 31, 1999.2000.
Interest income received on non-performing loans as of March 31,
2000,2001, was $225$5,179 compared to $6,380$30,345 as of December 31, 1999.2000.
Interest income, which would have been recorded on these loans under
the original terms as of March 31, 2000,2001, and December 31, 1999,2000, were
$14,567$20,831 and $68,569,$67,584, respectively. As of March 31, 20002001 and December
31, 1999,2000, there was no outstanding commitments to advance additional
funds with respect to these non-performing loans.
DEPOSITS AND OTHER BORROWED FUNDS
As indicated previously, total deposits increased $10,587,000$18,678,000 as
non-interest bearing deposits decreased by $77,000$1,993,000 and interest
bearing deposits increased by $10,664,000$20,671,000 as of March 31, 2000,2001, from
year-end 1999.2000. Total short-term and long-term borrowings decreaseddeclined
slightly by $8,578,000$673,000 from year-end 1999.2000.
CAPITAL STRENGTH
Normal increases in capital are generated by net income, less
cash dividends paid out. Also, net unrealized lossesgains on investment
securities available-for-sale decreasedincreased shareholders' equity, or
capital, net of taxes by $2,865,000$2,443,000 as of March 31, 2000,2001, and $3,459,000$815,000
as of December 31, 1999.2000. Our stock repurchase plan has
13
been completed withindicates 100,000
shares being repurchased as of March 31, 20002001 and December 31, 1999.2000.
This had an effect of our reducing our total stockholders' equity by
$3,096,000$3,097,000 as of both March 31, 20002001 and December 31, 1999.2000. Total
stockholders' equity was $38,921,000 as of March 31, 2001, compared to
$36,657,000 as of December 31, 2000.
13
Leverage ratio and risk based capital ratios remain very strong.
As of March 31, 2000,2001, our leverage ratio was 10.10%9.87% as compared to
10.02%10.47% as of December 31, 1999.2000. In addition, Tier 1 risk based
capital and total risk based capital ratio as of March 31, 2000,2001, were
16.55%15.67% and 17.90%16.99%, respectively. The same ratios as of December 31,
1999,2000, were 16.43%16.25% and 17.85%17.55%, respectively.
LIQUIDITY
The liquidity position of the Corporation remains adequate to
meet customer loan demand and deposit fluctuation. Managing liquidity
remains an important segment of asset liability management. Our
overall liquidity position is maintained by an active asset liability
management committee.
Management feels its current liquidity position is
satisfactorily given a very stable core deposit base which has
increased annually. Secondly, our loan payments and principal
paydowns on our mortgage backed securities provide a steady source of
funds. Also, short-term investments and maturing investment
securities represent additional sources of liquidity. Finally, short-term
borrowings are readily accessible at the Federal Reserve Bank,
Atlantic Central Bankers Bank, or the Federal Home Loan Bank.
YEAR 2000 COMPLIANCE
During 1999, management completed the process of preparing its
computer systems and applications for the Year 2000. The process
involves identifying and remediating date recognition problems in
computer systems and software and other operating equipment that could
be caused by the date change from December 31, 1999, to January 1,
2000. In addition, the process involved working with third parties to
address their year 2000 issues and developing contingency plans to
address potential risks in the event of Year 2000 failures. To date,
First Keystone Corporation has successfully managed the transition
into the Year 2000.
Unanticipated problems associated with non-compliance by third
parties and disruptions to the economy in general resulting from Year
2000 issues could still have a negative impact on First Keystone
Corporation. Management will continue to monitor all business
processes, including interaction with customers, vendors, and other
third parties throughout 2000 to address any issues and insure all
processes and systems continue to function properly.
Through 1999, the Corporation estimates that its total Year 2000
project cost did not exceed $100,000. The expenses for maintenance or
modification of software associated with the Year 2000 were expensed
as incurred. The costs of new software were capitalized and amortized
over the software's useful life. The aforementioned Year 2000 project
cost may change as the Corporation progresses through 2000. Some
additional project costs are expected to be incurred in 2000 for
ongoing monitoring and support activities. These costs will be
expensed as incurred and are estimated not to exceed $25,000.
Management believes it has an effective plan in place to address
the Year 2000 issues in a timely manner and, thus far, activities have
tracked in accordance with the original plan.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Annual Meeting of Shareholders of First Keystone
Corporation held on Tuesday, April 18, 2000,17, 2001, at 10:00
a.m.
Votes Votes
Directors Elected Votes For Against Withheld
_________________ _________ ______ _______
Budd L. Beyer 2,404,890 4,268John Arndt 2,431,315 50,404 0
Frederick E. Crispin, Jr. 2,404,890 4,268 0
Jerome F. Fabian 2,406,188 2,970J. Gerald Bazewicz 2,431,315 50,404 0
Robert J. Wise 2,405,140 4,018E. Bull 2,430,767 50,952 0
Broker
Directors Elected Abstentions Non-Votes
_________________ ___________ _________
Budd L. BeyerJohn Arndt 0 0
Frederick E. Crispin, Jr. 0 0
Jerome F. FabianJ. Gerald Bazewicz 0 0
Robert J. Wise0E. Bull 0 0
Directors Continuing:
John E. Arndt, term expires in 2001
J. Gerald Bazewicz, term expires in 2001
Robert E. Bull, term expires in 2001____________________
John L. Coates, term expires in 2002
Dudley P. Cooley, term expires in 2002
Stanley E. Oberrender,Budd L. Beyer, term expires in 20022003
Frederick E. Crispin, Jr., term expires in 2003
Jerome F. Fabian, term expires in 2003
Robert J. Wise, term expires in 2003
Matters Voted Upon:
__________________
Selection of J. H. Williams & Co. LLP, as auditors for the
Corporation.
Votes For - 2,406,8722,463,445
Votes Against - 1,20417,731
Votes Withheld - 0
Abstentions - 1,082543
Broker Non-Votes - 0
Item 5. Other Information
None.
15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 Regulation S-K
Exhibit Number Description of Exhibit
3(i) Articles of Incorporation, as amended
3(ii) Bylaws, as amended
10.1 Supplemental Employee Retirement Plan
(Incorporated by reference to Exhibit 3(i)10 to
Registrant's Annual Report of Form 10-KSB10-K for the year ended
December 31, 1996.)
3(ii) Bylaws, as amended2000)
10.2 Management Incentive Compensation Plan
(Incorporated by reference to Exhibit 3(ii) to Registrant's Annual Report
on Form 10-KSB for the year ended
December 31, 1996.)
10 Material Contracts (Incorporated by reference
to Exhibit 10(Page
18) to Registrant's Form 10Q for the quarter
ended June 30, 1997.)1997)
10.3 Profit Sharing Plan Summary (Incorporated by
reference to Exhibit 10 (Page 16) to
Registrant's Form 10Q for the quarter ended
June 30, 1997)
10.4 First Keystone Corporation 1998 Stock Incentive
Plan (Incorporated by reference to Exhibit 99
to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997)
11 Statement RE: Computation of Earnings Per
Share.
27 Financial Data Schedule.
(b) The Registrant hasDuring the quarter ended March 30, 2001, the
registrant filed nothe following reports on Form 8-K for
this quarter.8-K:
Date of Report Item Description
______________ ____ ___________
March 27, 2001 5 Press release announcing share buyback
plan.
16
FIRST KEYSTONE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly cause this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST KEYSTONE CORPORATION
Registrant
May 11, 2000 /s/ J. Gerald Bazewicz2001
J. Gerald Bazewicz
President and
Chief Executive Officer
(Principal Executive Officer)
May 11, 2000 /s/ David R. Saracino2001
David R. Saracino
Treasurer/Assistant Secretary
(Principal Accounting Officer)
17
INDEX TO EXHIBITS
Exhibit Description
_______ ___________
10.1 Supplemental Employee Retirement Plan
(Incorporated by reference to Exhibit 10 Material Contractsto
Registrant's Form 10-K for the year ended December
31, 2000)
10.2 Management Incentive Compensation Plan
(Incorporated by reference to Exhibit 10 (Page 18)
to Registrant's Form 10Q for the quarter ended
June 30, 1997)
10.3 Profit Sharing Plan Summary (Incorporated by
reference to Exhibit 10 (Page 16) to Registrant's
Form 10Q for the quarter ended June 30, 1997)
Deferred Compensation
(Incorporated by reference to Exhibit 10
(Page 17) to Registrant's Form 10Q for the
quarter ended June 30, 1997)
Other Executive Benefits10.4 First Keystone Corporation 1998 Stock Incentive
Plan (Incorporated by reference to Exhibit 99 (Page 9) ofto
the Corporation'sRegistrant's Annual Report on Form 10-KSB10-K for
the year ended December 31, 1996)
Management Incentive Compensation Plan
(Incorporated by reference to Exhibit 10
(Page 18) to Registrant's Form 10Q for
the quarter ended June 30, 1997)
11 Compensation of Earning Per Share
27 Financial Data Schedule
18