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, 2001
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, 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
ASSETS
Cash and due from banks $ 5,681 $ 6,733
Interest bearing deposits with banks 11,300 2,428
Available-for-sale securities carried
at estimated fair value 157,014 142,224
Investment securities, held-to-maturity
securities, estimated fair value
of $8,407 and $8,635 8,459 8,737
Loans, net of unearned income 188,994 190,671
Allowance for loan losses (2,648) (2,702)
________ ________
Net loans $186,346 $187,969
Bank premises and equipment 3,478 3,570
Accrued interest receivable 2,714 2,491
Other assets 6,528 6,190
________ ________
Total Assets $381,520 $360,342
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 22,854 $ 24,847
Interest bearing 267,297 246,626
________ ________
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 $342,599 $323,685
STOCKHOLDERS' EQUITY
Common stock, par value $2 per share 5,867 5,867
Surplus 9,761 9,761
Retained earnings 23,947 23,311
Accumulated other comprehensive income 2,443 815
Less treasury stock at cost 100,000
shares in 2000 and 1999 (3,097) (3,097)
_______ _______
Total Stockholders' Equity $ 38,921 $ 36,657
________ ________
Total Liabilities and
Stockholders' Equity $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, 2001 AND 2000
(Unaudited)
(Amounts in thousands except per share data)
2001 2000
INTEREST INCOME
Interest and fees on loans $ 3,949 $ 3,834
Interest and dividend income on
securities 2,558 2,122
Interest on deposits in banks 101 1
Other interest income 89 87
_________ _________
Total Interest Income $ 6,697 $ 6,044
INTEREST EXPENSE
Interest on deposits $ 3,176 $ 2,549
Interest on short-term borrowings 112 325
Interest on long-term borrowings 592 344
_________ _________
Total Interest Expense $ 3,880 $ 3,218
Net interest income $ 2,817 $ 2,826
Provision for loan losses 100 75
_________ _________
Net Interest Income After Provision
for Loan Losses $ 2,717 $ 2,751
OTHER INCOME
Service charges on deposit accounts $ 268 $ 210
Other non-interest income 200 142
Investment securities gains
(losses) net 13 3
_________ _________
Total Other Income $ 481 $ 355
OTHER EXPENSES
Salaries and employee benefits $ 956 $ 967
Net occupancy and fixed asset
expense 262 244
Other non-interest expense 483 535
_________ _________
Total Other Expenses $ 1,701 $ 1,746
Income before income taxes $ 1,497 $ 1,360
Applicable income tax (benefit) 294 202
_________ _________
Net Income $ 1,203 $ 1,158
PER SHARE DATA
Net Income $ .42 $ .41
Cash Dividends .20 .19
Weighted Average Shares
Outstanding 2,833,727 2,833,727
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, 2001 AND 2000
(Unaudited)
(Amounts in thousands) 2001 2000
OPERATING ACTIVITIES
Net income $ 1,203 $ 1,158
Adjustments to reconcile net
income to net cash provided (used)
by operating activities:
Provision for loan losses 100 75
Provision for depreciation and
amortization 107 100
Premium amortization on investment
securities 39 23
Discount accretion on investment
securities (284) (151)
Gain on sale of mortgage loans (47) (1)
Proceeds from sale of mortgage loans 3,949 605
Originations of mortgage loans
for resale (692) (926)
(Gain) loss on sales of investment
securities (13) (3)
(Gain) loss on sale of other real
estate owned 0 (1)
Deferred income tax (benefit) (28) (17)
(Increase) decrease in interest
receivable and other assets (489) (100)
Increase (decrease) in interest
payable, accrued expenses and
other liabilities 95 133
________ ________
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES $ 3,940 $ 895
INVESTING ACTIVITIES
Purchases of investment securities
available-for-sale $(32,782) $(14,081)
Proceeds from sales of investment
securities available-for-sale 14,156 11,919
Proceeds from maturities and
redemptions of investment
securities available for sale 4,569 821
Proceeds from maturities and
redemption of investment
securities held-to-maturity 2,272 1,607
Net (increase) decrease in loans (1,758) (2,856)
Purchase of premises and equipment (15) (52)
Proceeds from sale of other real
estate owned 0 86
________ ________
NET CASH (USED) BY INVESTING
ACTIVITIES $(13,558) $ (2,556)
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 18,678 $ 10,587
Net increase (decrease) in
short-term borrowings 327 (3,578)
Net increase (decrease)in
long-term borrowings (1,000) (5,000)
Cash dividends (567) (538)
________ ________
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 17,438 $1,471
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 7,820 $ (190)
CASH AND CASH EQUIVALENTS, BEGINNING 9,161 6,964
________ ________
CASH AND CASH EQUIVALENTS, ENDING $ 16,981 $ 6,774
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during period for
Interest $ 3,980 $ 3,218
Income Taxes 11 0
See Accompanying Notes to Consolidated Financial Statements
3
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(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 in the United States of America and
conform to common practices within the banking industry. The more
significant policies follow:
PRINCIPLES 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 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's banking subsidiary acts as an independent
community financial services provider, and offers traditional banking
and related financial services to individual, business and government
customers. Through its branch and 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 loans; and the
providing of other financial services. The Bank also performs
personal, corporate, pension and fiduciary services through its Trust
Department.
Management does not separately allocate expenses, including the
cost of funding loan demand, between the commercial, retail, trust and
mortgage banking operations of the Corporation. Currently, management
measures the performance and allocates the resources of First 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 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.
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.
Equity 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.
5
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.
MORTGAGE 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.
FORECLOSED 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 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 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 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 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 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.
6
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133 (as
amended by SFAS No. 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 of all derivative instruments 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.
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, were as follows:
(amounts in thousands)
2001 2000
Balance, January 1 $2,702 $2,600
Provision charged to operations 100 75
Loans charged off (165) (79)
Recoveries 11 4
______ ______
Balance, March 31 $2,648 $2,600
At March 31, 2001, the recorded investment in loans that are
considered to be impaired as defined by SFAS No. 114 was $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, 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 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.
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, 2001, and December 31, 2000,
were as follows:
(amounts in thousands) March 31, December 31,
2001 2000
_______ ______
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $18,118 $15,467
Standby letters of credit $ 1,005 $ 947
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, 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,
2001, were are follows:
(Amounts in thousands, except common share data)
Common Common
Shares Stock Surplus
______ ______ _______
Balance at January 1, 2001 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 -
$.20 per share
_________ ______ ______
Balance at March 31, 2001 2,933,727 $5,867 $9,761
(Amounts in thousands, except common share data)
Accumulated
Compre- Other
hensive Retained Comprehensive
Income Earnings Income (Loss)
______ _______ __________
Balance at January 1, 2001 $23,311 $ 815
Comprehensive Income:
Net Income $1,203 1,203
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects 1,628 1,628
______
Total Comprehensive
income (loss) $2,831
Cash dividends -
$.20 per share (567)
_______ ______
Balance at March 31, 2001 $23,947 $2,443
(Amounts in thousands, except common share data)
Treasury
Stock Total
_____ _____
Balance at January 1, 2001 $(3,097) $36,657
Comprehensive Income:
Net Income 1,203
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects 1,628
Total Comprehensive
income (loss)
Cash dividends -
$.20 per share (567)
_______ _______
Balance at March 31, 2001 $(3,097) $38,921
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 periods 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, 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, 2000, filed with
the Securities and Exchange Commission.
9
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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, 2001, and the
related consolidated statements of income and cash flows for the
three-month 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 reviews 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 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 reviews, we are not aware of any material modifications
that should be made to the consolidated financial statements referred
to above for them to be in conformity with accounting principles
generally accepted in 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 (not
presented herein); and in our report dated January 10, 2001, we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 2000, 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
April 24, 2001
10
Item 2. First Keystone Corporation Management's Discussion
and Analysis of Financial Condition and Results of
Operation as of March 31, 2001
RESULTS OF OPERATIONS
First Keystone Corporation realized earnings for the first
quarter of 2001 of $1,203,000, an increase of $45,000, or 3.9% over
the first quarter of 2000. The increase in net income for the first
quarter of 2001 was primarily 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 remaining relatively
stable at $2,817,000 for the first quarter of 2001 compared to
$2,826,000 for the first quarter of 2000. On a per share basis, net
income per share increased to $.42 for the first three months of 2001
compared to $.41 for the first three months of 2000, while dividends
increased to $.20 per share up from $.19 in 2000, or an increase of
5.3%.
Year-to-date net income annualized amounts to a return on
average common equity of 12.87% and a return on assets of 1.30%. For
the three months ended March 31, 2000, these measures were 15.83% and
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 2001, net interest income decreased slightly
because of our reduced net interest margin. In the first quarter of
2001, interest income amounted to $6,697,000, an increase of $653,000
or 10.8% over the first quarter of 2000, while interest expense
amounted to $3,880,000 in the first quarter of 2001, an increase of
$662,000, or 20.6% over the first quarter of 2000. As a result, net
interest income decreased $9,000, or 0.3% over the first quarter of
2000.
Our net interest margin for the quarter ended March 31, 2001,
was 3.48% compared to 3.96% for the quarter ended March 31, 2000.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the quarter ended March 31,
2001, was $100,000, compared to the $75,000 provision for the first
quarter of 2000. Net charge-offs totaled $154,000 for the three
months ended March 31, 2001, as compared to $75,000 for the first
three months of 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.
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, an increase of $126,000, or 35.5%. Excluding
investment security gains and losses, non-interest income was $468,000
for the first quarter of 2001, an increase of $116,000 over the first
quarter of 2000. An increase in service charges on deposit accounts
and an increase in other non-interest income, were the primary reasons
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. The decrease of $45,000 is
comprised of salary and benefits decreasing $11,000, occupancy expense
increasing $18,000, and other non-interest expense decreasing $52,000.
The overall decrease in non-interest expenses was $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 56.2% of total non-interest
expense for the three months ended March 31, 2001, as compared to
55.4% for the first three months of 2000. Other non-interest expenses
amounted to $483,000 for the three months ended March 31, 2001, a
decrease of $52,000, or 9.7% over the first three months of 2000.
With the decrease in our non-interest expense in the first quarter,
our overall non-interest expense is 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. The
increase in our effective tax rate in the first quarter of 2001 was
due primarily to the limited opportunities to purchase municipal
(tax-free investments) securities at relatively attractive interest rates.
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased to $381,520,000 as of March 31, 2001, an
increase of $21,178,000, or 5.9% over year-end 2000. Total deposits
increased to $290,151,000 as of March 31, 2001, an increase of
$18,678,000, or 6.9% over year-end 2000.
With the increase in total deposits, the Corporation did not
increase borrowed funds. Short-term borrowings remained stable at
$8,887,000 as of March 31, 2001, comparable to $8,560,000 as of March
30, 2000. Long-term borrowings decreased by $1,000,000 to $40,250,000
as of March 31, 2001.
EARNING ASSETS
Our primary earning asset, loans, net of unearned income
decreased to $188,994,000 as of March 31, 2001, down $1,677,000, or
0.9% since year-end 2000. The loan portfolio continues to be well
diversified and overall asset quality remains strong with past-due
loans and non-performing assets remaining relatively stable.
Our investment portfolio increased in size from December 31,
2000, to March 31, 2001. Held-to-maturity securities amounted to
$8,459,000 as of March 31, 2001, a decrease of $278,000 from December
31, 2000. However, available-for-sale securities amounted to
$157,014,000 as of March 31, 2001, an increase of $14,790,000 from
year-end 2000. Interest bearing deposits with banks increased to
$11,300,000 as of March 31, 2001, compared to $2,428,000 as of
December 31, 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, 2001,
total non-performing assets were $1,104,000 as compared to $742,000 on
December 31, 2000. Non-performing assets to total loans and
foreclosed assets was .58% as of March 31, 2001, and .21% as of
December 31, 2000.
Interest income received on non-performing loans as of March 31,
2001, was $5,179 compared to $30,345 as of December 31, 2000.
Interest income, which would have been recorded on these loans under
the original terms as of March 31, 2001, and December 31, 2000, were
$20,831 and $67,584, respectively. As of March 31, 2001 and December
31, 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 $18,678,000 as
non-interest bearing deposits decreased by $1,993,000 and interest
bearing deposits increased by $20,671,000 as of March 31, 2001, from
year-end 2000. Total short-term and long-term borrowings declined
slightly by $673,000 from year-end 2000.
CAPITAL STRENGTH
Normal increases in capital are generated by net income, less
cash dividends paid out. Also, net unrealized gains on investment
securities available-for-sale increased shareholders' equity, or
capital, net of taxes by $2,443,000 as of March 31, 2001, and $815,000
as of December 31, 2000. Our stock repurchase plan indicates 100,000
shares being repurchased as of March 31, 2001 and December 31, 2000.
This had an effect of our reducing our total stockholders' equity by
$3,097,000 as of both March 31, 2001 and December 31, 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, 2001, our leverage ratio was 9.87% as compared to
10.47% as of December 31, 2000. In addition, Tier 1 risk based
capital and total risk based capital ratio as of March 31, 2001, were
15.67% and 16.99%, respectively. The same ratios as of December 31,
2000, were 16.25% and 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.
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 17, 2001, at 10:00
a.m.
Votes Votes
Directors Elected Votes For Against Withheld
_________________ _________ ______ _______
John Arndt 2,431,315 50,404 0
J. Gerald Bazewicz 2,431,315 50,404 0
Robert E. Bull 2,430,767 50,952 0
Broker
Directors Elected Abstentions Non-Votes
_________________ ___________ _________
John Arndt 0 0
J. Gerald Bazewicz 0 0
Robert E. Bull 0 0
Directors Continuing:
____________________
John L. Coates, term expires in 2002
Dudley P. Cooley, term expires in 2002
Budd L. Beyer, term expires in 2003
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 - 2,463,445
Votes Against - 17,731
Votes Withheld - 0
Abstentions - 543
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 10 to
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)
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.
(b) During the quarter ended March 30, 2001, the
registrant filed the following reports on Form 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, 2001
J. Gerald Bazewicz
President and
Chief Executive Officer
(Principal Executive Officer)
May 11, 2001
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 to
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)
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 Compensation of Earning Per Share
18