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 September 30, 2001
Commission File Number: 2-88927
FIRST KEYSTONE CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2249083
(I.R.S. Employer
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 September 30, 2001.
PART I. - FINANCIAL INFORMATION
Item. 1 Financial Statements
FIRST KEYSTONE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except per share data)
September December
2001 2000
<s> <c> <c>
ASSETS
Cash and due from banks $ 10,118 $ 6,733
Interest bearing deposits with banks 82 2,428
Available-for-sale securities
carried at estimated fair value 170,744 142,224
Investment securities, held to maturity
securities, estimated fair value of
$7,548 and $8,635 7,562 8,737
Loans, net of unearned income 199,021 190,671
Allowance for loan losses (2,653) (2,702)
________ ________
Net loans $196,368 $187,969
________ ________
Bank premises and equipment 3,340 3,570
Accrued interest receivable 2,826 2,491
Other assets 4,166 6,190
________ ________
Total Assets $395,206 $360,342
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 27,016 $ 24,847
Interest bearing 271,994 246,626
________ ________
Total deposits $299,010 $271,473
Short-term borrowings 9,791 8,603
Long-term borrowings 42,250 41,250
Accrued interest and other expenses 2,096 2,231
Other liabilities 1,177 128
________ ________
Total Liabilities $354,324 $323,685
STOCKHOLDERS' EQUITY
Common stock, par value $2 per share $ 5,867 $ 5,867
Surplus 9,761 9,761
Retained earnings 25,465 23,311
Accumulated other comprehensive
income (loss) 2,886 815
Treasury stock at cost 100,000 shares
in 2001 and 100,000 in 2000 (3,097) (3,097)
________ ________
Total Stockholders' Equity $ 40,882 $ 36,657
________ ________
Total Liabilities and
Stockholders' Equity $395,206 $360,342
See Accompanying Notes to Financial Statements
1
FIRST KEYSTONE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED September 30, 2001 AND 2000
(Unaudited)
(Amounts in thousands except per share data)
2001 2000
<s> <c> <c>
INTEREST INCOME
Interest and fees on loans $ 3,990 $ 4,031
Interest and dividend income on
securities 2,663 2,421
Interest on deposits in banks 36 1
Other Interest Income 47 99
_________ _________
Total Interest Income $ 6,736 $ 6,552
INTEREST EXPENSE
Interest on deposits $ 2,886 $ 2,786
Interest on short-term borrowings 90 384
Interest on long-term borrowings 602 479
_________ _________
Total Interest Expense $ 3,578 $ 3,649
Net interest income $ 3,158 $ 2,903
Provision for loan losses 100 75
_________ _________
Net Interest Income After
Provision for Loan Losses $ 3,058 $ 2,828
OTHER INCOME
Service charges on deposit accounts $ 284 $ 264
Other non-interest income 202 191
Investment securities gains
(losses) net 45 70
_________ _________
Total Other Income $ 531 $ 525
OTHER EXPENSES
Salaries and employee benefits $ 971 $ 938
Net occupancy and fixed asset
expense 246 273
Other non-interest expense 559 451
_________ _________
Total Other Expenses $ 1,776 $ 1,662
Income before income taxes $ 1,813 $ 1,691
Applicable income tax (benefit) 406 328
_________ _________
Net Income $ 1,407 $ 1,363
Per Share Data
Net Income $ .50 $ .48
Cash dividends .20 .19
Weighted average shares
outstanding 2,833,727 2,833,727
See Accompanying Notes to Financial Statements
2
FIRST KEYSTONE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED September 30, 2001 AND 2000
(Unaudited)
(Amounts in thousands except per share data)
2001 2000
<s> <c> <c>
INTEREST INCOME
Interest and fees on loans $ 11,920 $ 11,809
Interest and dividend income on
securities 7,877 6,738
Interest on deposits in banks 205 4
Other interest 207 284
_________ _________
Total Interest Income $ 20,209 $ 18,835
INTEREST EXPENSE
Interest on deposits $ 9,242 $ 8,045
Interest on short-term borrowings 286 1,021
Interest on long-term borrowings 1,779 1,142
_________ _________
Total Interest Expense $ 11,307 $ 10,208
Net interest income $ 8,902 $ 8,627
Provision for loan losses 285 235
_________ _________
Net Interest Income After
Provision for Loan Losses $ 8,617 $ 8,392
OTHER INCOME
Service charges on deposit accounts $ 861 $ 719
Other non-interest income 619 490
Investment securities gains (losses)
net 96 123
_________ _________
Total Other Income $ 1,576 $ 1,332
OTHER EXPENSES
Salaries and employee benefits $ 2,882 $ 2,833
Net occupancy and fixed asset expense 773 758
Other non-interest expense 1,645 1,479
_________ _________
Total Other Expenses $ 5,300 $ 5,070
Income before income taxes $ 4,893 $ 4,654
Applicable income tax (benefit) 1,039 810
_________ _________
Net Income $ 3,854 $ 3,844
Per Share Data
Net Income $ 1.36 $ 1.36
Cash dividends .60 .57
Weighted average shares outstanding 2,833,727 2,833,727
See Accompanying Notes to Financial Statements
3
FIRST KEYSTONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30, 2001 AND 2000
(Unaudited)
(Amounts in thousands)
2001 2000
<s> <c> <c>
OPERATING ACTIVITIES
Net income $ 3,854 $ 3,844
Adjustments to reconcile net income
to net cash provided By operating
activities:
Provision for loan losses 285 235
Provision for depreciation and
amortization 298 302
Premium amortization on investment
securities 206 76
Discount accretion on investment
securities (732) (647)
Gain on sale of mortgage loans (95) (19)
Proceeds from sale of mortgage loans 6,865 1,812
Originations of mortgage loans for
resale (3,820) (2,441)
(Gain) loss on sales of investment
securities (96) (123)
(Gain) loss on sales of other real
estate owned 19 36
Deferred income tax (benefit) (42) (27)
(Increase) decrease in interest
receivable and other assets 1,797 (195)
Increase (decrease) in interest
payable, accrued expenses and
other liabilities (127) 476
________ ________
Net Cash Provided by Operating
Activities $ 8,412 $ 3,329
INVESTING ACTIVITIES
Purchases of investment securities
available-for-sale $(78,918) $(54,755)
Proceeds from sales of investment
securities available for sale 17,372 34,718
Proceeds from maturities and
redemptions of investment
securities available for sale 36,828 3,166
Purchase of investment securities
held-to-maturity 0 0
Proceeds from maturities and
redemption of investment
securities held to maturity 1,150 3,314
Net (increase) decrease in loans (12,149) (1,273)
Purchase of premises and equipment (68) (89)
Proceeds from sale of other real
estate owned 387 118
________ ________
Net Cash Used by Investing Activities $(35,398) $(14,801)
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 27,537 $ 15,123
Net increase (decrease) in short-term
borrowings 1,188 (8,235)
Net increase (decrease) in long-term
borrowings 1,000 5,250
Cash dividends (1,700) (1,615)
________ ________
Net Cash Provided by Financing
Activities $ 28,025 $ 10,523
Increase (Decrease) in Cash and
Cash Equivalent 1,039 (949)
Cash and Cash Equivalents, Beginning 9,161 6,964
________ ________
Cash and Cash Equivalents, Ending $ 10,200 $ 6,015
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during period for
Interest $11,642 $10,029
Income Taxes 1,075 695
See Accompanying Notes to Financial Statements
4
FIRST KEYSTONE CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of First Keystone Corporation and
Subsidiary 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. 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 accounting principles generally accepted in the United
States of America 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
5
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.
6
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.
7
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
September 30, 2001, and September 30, 2000, were as follows:
(amounts in thousands)
2001 2000
<s> <c> <c>
Balance, January 1 $2,702 $2,600
Provision charged to operations 285 235
Loans charged off (393) (274)
Recoveries 59 15
______ ______
Balance, September 30 $2,653 $2,576
At September 30, 2001, the recorded investment in loans that are
considered to be impaired as defined by SFAS No. 114 was $96,252. 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 September 30, 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.
8
Note 4. LONG-TERM BORROWINGS
Long-term borrowings are comprised of advances from the Federal
Home Loan Bank. 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 September 30, 2001, and December 31,
2000, were as follows:
(amounts in thousands) September 30, December 31,
2001 2000
<s> <c> <c>
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $23,598 $15,467
Standby letters of credit $ 1,055 $ 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 September 30, 2001,
to the extent necessary to avoid any significant concentration of
credit risk.
9
Note 6. STOCKHOLDERS' EQUITY
Changes in Stockholders' Equity for the period ended September
30, 2001, were are follows:
(Amounts in thousands, except common share data)
Common Common
Shares Stock Surplus
______ ______ _______
<s> <c> <c> <c>
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 -
$.60 per share
_________ ______ ______
Balance at September 30, 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)
________ ________ _____________
<s> <c> <c> <c>
Balance at January 1, 2001 $23,311 $ 815
Comprehensive Income:
Net Income $3,854 3,854
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects 2,071 2,071
______
Total Comprehensive
income (loss) $5,925
Cash dividends -
$.60 per share (1,700)
_______ ______
Balance at September 30, 2001 $25,465 $2,886
(Amounts in thousands, except common share data)
Treasury
Stock Total
______ _____
<s> <c> <c>
Balance at January 1, 2001 $(3,097) $36,657
Comprehensive Income:
Net Income 3,854
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects 2,071
Total Comprehensive
income (loss)
Cash dividends -
$.60 per share (1,700)
_______ _______
Balance at September 30, 2001 $(3,097) $40,882
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 period presented and that all such adjustments
to the consolidated financial statements are of a normal recurring
nature.
The results of operations for the nine-month period ended
September 30, 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 accounting principles
generally accepted in the United States of America 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.
10
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 September 30, 2001, and the
related consolidated statements of income and cash flows for the three
and nine-month periods ended September 30, 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 review, 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
October 12, 2001
11
Item 2. First Keystone Corporation Management's Discussion
and Analysis of Financial Condition and
Results of Operation as of September 30, 2001
This quarterly report contains certain forward-looking statements
(as defined in the Private Securities Litigation Reform Act of 1995),
which reflect management's beliefs and expectations based on
information currently available. These forward-looking statements are
inherently subject to significant risks and uncertainties, including
changes in general economic and financial market conditions, the
Corporation's ability to effectively carry out its business plans and
changes in regulatory or legislative requirements. Other factors that
could cause or contribute to such differences are changes in
competitive conditions, and pending or threatened litigation. Although
management believes the expectations reflected in such forward-looking
statements are reasonable, actual results may differ materially.
RESULTS OF OPERATIONS
First Keystone Corporation realized earnings for the third
quarter of 2001 of $1,407,000, an increase of $44,000, or 3.2% from
the third quarter of 2000. Nine months net income for the period
ended September 30, 2001, amounted to $3,854,000, an increase of 0.3%
from the $3,844,000 net income reported September 30, 2000. The small
increase in year-to-date net income for 2001 was primarily the result
of continued pressure on our net interest margin and an increase in
our effective tax liability. On a per share basis, net income per
share amounted to $1.36 for the nine months of 2001, the same as the
first nine months of 2000, while dividends increased to $.60 per share
up from $.57 in 2000, or an increase of 5.3%.
Year-to-date net income annualized amounts to a return on average
common equity of 13.39% and a return on assets of 1.35%. For the nine
months ended September 30, 2000, these measures were 16.76% and 1.51%,
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 third quarter of 2001, interest income amounted to $6,736,000, an
increase of $184,000 or 2.8% over the third quarter of 2000. Interest
expense amounted to $3,578,000 in the third quarter of 2001, a
decrease of $71,000, or 1.9% from the third quarter of 2000.
Accordingly, net interest income amounted to $3,158,000 in the third
quarter of 2001, an increase of $255,000, or 8.8% over the third
quarter of 2000. Year-to-date for the nine months ended September 30,
2001, total interest income increased $1,374,000, or 7.3% over the
first nine months of 2000. Total interest expense increased
$1,099,000, or 10.8% for the first nine months of 2001 over 2000.
This resulted in net interest income of $8,902,000, an increase of
$275,000, or 3.2% for the nine months ended September 30, 2001, as
compared to 2000.
Our net interest margin for the quarter ended September 30, 2001,
was 3.62% compared to 3.94% for the quarter ended September 30, 2000.
For the nine months ended September 30, 2001, our net interest margin
was 3.51% compared to 4.10% for the first nine months of 2000.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the quarter ended September 30,
2001, was $100,000 compared to $75,000 for the third quarter of 2000.
Year-to-date, the provision for loan losses amounts to $285,000 in
2001 as compared to the $235,000 provision for the period ended
September 30, 2000. The increased provision in 2001 was
commensurate with an increase in net charge-offs. Net charge-offs
increased to $334,000 for the nine months ended September 30, 2001, as
compared to $259,000 for the first nine months of 2000.
12
The allowance for loan losses as a percentage of loans, net of
unearned interest was 1.33% as of September 30, 2001, and 1.42% as of
December 31, 2000.
NON-INTEREST INCOME
Total non-interest or other income was $531,000 for the quarter
ended September 30, 2001, as compared to $525,000 for the quarter
ended September 30, 2000. Excluding investment security gains and
losses, non-interest income was $486,000 for the third quarter of
2001, as compared to $455,000 in the third quarter of 2000. For the
nine months ended September 30, 2001, total non-interest income was
$1,576,000, an increase of $244,000, or 18.3% from the first nine
months of 2000. An increase in service charges on deposit accounts
and other non-interest income in the first nine months of 2001
accounts for the change in total non-interest or other income.
NON-INTEREST EXPENSES
Total non-interest, or other expenses, was $1,776,000 for the
quarter ended September 30, 2001, as compared to $1,662,000 for the
quarter ended September 30, 2000. The increase of $114,000 is
comprised of salary and benefits increasing $33,000, occupancy expense
decreasing $27,000, and other non-interest expense increasing
$108,000.
For the nine months ended September 30, 2001, total non-interest
expense was $5,300,000, an increase of $230,000, or 4.5% over the
first nine months of 2000. Expenses associated with employees
(salaries and employee benefits) continue to be the largest category
of non-interest expenses. Salaries and benefits amount to 54.4% of
total non-interest expense for the nine months ended September 30,
2001, as compared to 55.9% for the first nine months of 2000.
Salaries and benefits amounted to $2,882,000 for the nine months ended
September 30, 2001, an increase of $49,000, or 1.7% over the first
nine months of 2000. Net occupancy expense amounted to $773,000 for
the nine-months ended September 30, 2001, an increase of $15,000, or
2.0% from 2000. Other non-interest expenses amounted to $1,645,000
for the nine months ended September 30, 2001, an increase of $166,000,
or 11.2% over the first nine months of 2000. With the increase in
non-interest expenses in 2001, our overall non-interest expense
continues at less than 2% of average assets on an annualized basis.
This places us among the leaders of our peer financial institutions at
controlling non-interest expense.
INCOME TAXES
Effective tax planning has helped produce favorable net income.
The effective total income tax rate was 22.4% for the third quarter of
2001 as compared to 19.4% for the third quarter of 2000. For the nine
months ended September 30, 2001, our tax liability amounted to
$1,039,000 for an effective tax rate of 21.2% as compared to an
effective tax rate of 17.4% for the first nine months of 2000. The
increase in our effective tax rate was due primarily to the limited
availability of municipal (tax-free investments) securities at
attractive interest rates.
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased to $395,206,000 as of September 30, 2001,
an increase of $34,864,000, or 9.7% over year-end 2000. Total
deposits increased to $299,010,000 as of September 30, 2001, an
increase of $27,537,000, or 10.1% over year-end 2000.
13
The Corporation used the increase in total deposits to fund
primarily an increase in earnings assets, in particular, total loans
and investment securities. Borrowings increased $2,188,000 from
December 31, 2000. Short-term borrowings increased to $9,791,000 as
of September 30, 2001, up $1,188,000 from year-end 2000. Long-term
borrowings increased to $42,250,000 as of September 30, 2001, up
$1,000,000 from year-end 2000.
EARNING ASSETS
Our primary earning asset, loans, net of unearned income
increased to $199,021,000 as of September 30, 2001, up $8,350,000, or
4.4% since year-end 2000. The loan portfolio is well diversified and
increases in the portfolio have been primarily from increased
originations of real estate loans and commercial loans secured by real
estate. Asset quality remains relatively strong with past-due loans
being stable and non-performing loans increasing due to one large
commercial real estate loan.
In addition to loans, another primary earning asset is our
investment portfolio which also increased in size from December 31,
2000, to September 30, 2001. Held-to-maturity securities amounted to
$7,562,000 as of September 30, 2001, a decrease of $1,175,000, or
13.4% since year-end 2000. However, available-for-sale securities
increased to $170,744,000 as of September 30, 2001, an increase of
$28,520,000, or 20.1% from year-end 2000. Interest bearing deposits
with banks decreased to $82,000 on September 30, 2001, as compared to
$2,428,000 as of December 31, 2000.
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 company 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 the
loans past-due 90 days or more and still accruing. As of September
30, 2000, total non-performing assets were $1,611,000 as compared to
$742,000 on December 31, 2000. Non-performing assets to total loans
and foreclosed assets was .81% as of September 30, 2001, and .39% as
of December 31, 2000.
Interest income received on non-performing loans as of September
30, 2001, was $33,578 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 September 30, 2001, and December 31, 2000,
was $81,352 and $67,584, respectively. As of September 30, 2001 and
December 31, 2000, there was no outstanding commitments to advance
additional funds with respect to these non-performing loans.
14
DEPOSITS AND OTHER BORROWED FUNDS
As indicated previously, total deposits increased by $27,537,000
as non-interest bearing deposits increased by $2,169,000 and interest
bearing deposits increased by $25,368,000 as of September 30, 2001,
from year-end 2000. Total short-term and long-term borrowings
increased by $2,188,000 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 by $2,886,000 as of September 30, 2001, and $815,000 as of
December 31, 2000. Our stock repurchase plan repurchased 100,000
shares as of September 30, 2001 and December 31, 2000. This had an
effect of our reducing our total stockholders' equity by $3,097,000.
Total stockholders' equity was $40,882,000 as of September 30,
2001, and $36,657,000 as of December 31, 2000. Leverage ratio and
risk based capital ratios remain very strong. As of September 30,
2001, our leverage ratio was 9.69% compared to 10.47% as of December
31, 2000. In addition, Tier I risk based capital and total risk based
capital ratio as of September 30, 2001, were 15.09% and 16.24%,
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 discount window, Atlantic
Central Bankers Bank, or the Federal Home Loan Bank.
15
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
_________________ _________ ______ _______
<s> <c> <c> <c>
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
_________________ ___________ _________
<s> <c> <c>
John Arndt 0 0
J. Gerald Bazewicz 0 0
Robert E. Bull 0 0
Directors Continuing:
Don E. Bower, term expires in 2002
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.
16
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
(Incorporated by reference to Exhibit 3(i) to
Registrant's Annual Report of Form 10-Q for the
quarter ended March 31, 2001)
3(ii) Bylaws, as amended (Incorporated by reference
to Exhibit 3(ii) to Registrant's Annual Report
on Form 10-Q for the quarter ended
March 31, 2001)
10.1 Supplemental Employee Retirement Plan
(Incorporated by reference to Exhibit 10 to
Registrant's Form 10-K for the year ended
December 31, 2000)
10.2 Management Incentive Compensation Plan
10.3 Profit Sharing Plan
10.4 First Keystone Corporation 1998 Stock Incentive
Plan
11 Statement RE: Computation of Earnings Per
Share.
(b) The Registrant has filed no reports on Form 8-K for
this quarter.
17
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
November 13, 2001 /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and
Chief Executive Officer
(Principal Executive Officer)
November 13, 2001 /s/ David R. Saracino
David R. Saracino
Treasurer/Assistant Secretary
(Principal Accounting Officer)
18
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
10.3 Profit Sharing Plan Summary
10.4 First Keystone Corporation 1998 Stock Incentive
Plan
11 Computation of Earnings Per Share
19