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 June 30, 2003
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, 2,948,083 shares as of June 30, 2003.
PART I. - FINANCIAL INFORMATION
ITEM. 1 Financial Statements
FIRST KEYSTONE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
June December
2003 2002
(Unaudited)
<s> <c> <c>
ASSETS
Cash and due from banks $ 6,945 $ 7,396
Interest bearing deposits with banks 67 60
Available-for-sale securities carried
at estimated fair value 225,823 209,823
Investment securities, held to
maturity securities, estimated
fair value of $4,775 and $5,925 4,769 5,932
Loans, net of unearned income 211,933 201,517
Allowance for loan losses (3,346) (3,174)
________ ________
Net loans $208,587 $198,343
Bank premises and equipment 3,659 3,430
Accrued interest receivable 2,955 3,069
Cash surrender value of bank
owned life insurance 10,346 10,102
Other assets 1,199 1,371
________ ________
Total Assets $464,350 $439,526
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 31,586 $ 30,057
Interest bearing 320,552 300,689
________ ________
Total deposits $352,138 $330,746
Short-term borrowings 8,836 9,067
Long-term borrowings 44,250 45,750
Accrued interest and other expenses 1,865 1,648
Other liabilities 4,029 3,219
________ ________
Total Liabilities $411,118 $390,430
STOCKHOLDERS' EQUITY
Common stock, par value $2 per share $ 6,154 $ 6,150
Surplus 12,558 12,584
Retained earnings 29,610 27,395
Accumulated other comprehensive
income (loss) 8,796 6,544
Treasury stock at cost 129,124 shares
in 2003 and 119,181 in 2002 (3,886) (3,577)
________ ________
Total Stockholders' Equity $ 53,232 $ 49,096
________ ________
Total Liabilities and
Stockholders' Equity $464,350 $439,526
======== ========
See Accompanying Notes to Financial Statements
1
FIRST KEYSTONE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
(Amounts in thousands except per share data)
2003 2002
<s> <c> <c>
INTEREST INCOME
Interest and fees on loans $ 3,511 $ 3,771
Interest and dividend income
on securities 2,664 2,686
Interest on deposits in banks 10 8
_______ _______
Total Interest Income $ 6,185 $ 6,465
INTEREST EXPENSE
Interest on deposits $ 1,956 $ 1,961
Interest on short-term borrowings 24 36
Interest on long-term borrowings 595 646
_______ _______
Total Interest Expense $ 2,575 $ 2,643
Net interest income $ 3,610 $ 3,822
Provision for loan losses 125 125
_______ _______
Net Interest Income After
Provision for Loan Losses $ 3,485 $ 3,697
OTHER INCOME
Service charges on deposit
accounts $ 421 $ 322
Other non-interest income 347 240
Investment securities gains
(losses) net 141 (97)
_______ _______
Total Other Income $ 909 $ 465
OTHER EXPENSES
Salaries and employee benefits $ 1,099 $ 997
Net occupancy and fixed asset expense 300 262
Other non-interest expense 631 646
_______ _______
Total Other Expenses $ 2,030 $ 1,905
Income before income taxes $ 2,364 $ 2,257
Applicable income tax (benefit) 507 538
_______ _______
Net Income $ 1,857 $ 1,719
======= =======
NET INCOME PER SHARE
Basic $ .63 $ .58
Diluted .63 .58
Cash Dividends .24 .20
See Accompanying Notes to Financial Statements
2
FIRST KEYSTONE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
(Amounts in thousands except per share data)
2003 2002
<s> <c> <c>
INTEREST INCOME
Interest and fees on loans $ 7,081 $ 7,486
Interest and dividend income
on securities 5,334 5,362
Interest on deposits in banks 27 9
________ ________
Total Interest Income $ 12,442 $ 12,857
INTEREST EXPENSE
Interest on deposits $ 3,930 $ 4,011
Interest on short-term borrowings 51 84
Interest on long-term borrowings 1,186 1,260
________ ________
Total Interest Expense $ 5,167 $ 5,355
Net interest income $ 7,275 $ 7,502
Provision for loan losses 275 300
________ ________
Net Interest Income After
Provision for Loan Losses $ 7,000 $ 7,202
OTHER INCOME
Service charges on deposit accounts $ 778 $ 583
Other non-interest income 700 389
Investment securities gains
(losses) net 176 8
________ ________
Total Other Income $ 1,654 $ 980
OTHER EXPENSES
Salaries and employee benefits $ 2,182 $ 2,024
Net occupancy and fixed
asset expense 593 510
Other non-interest expense 1,274 1,187
________ ________
Total Other Expenses $ 4,049 $ 3,721
Income before income taxes $ 4,605 $ 4,461
Applicable income tax (benefit) 970 1,070
________ ________
Net Income $ 3,635 $ 3,391
======== ========
NET INCOME PER SHARE
Basic $ 1.23 $ 1.14
Diluted 1.23 1.14
Cash Dividends .48 .40
See Accompanying Notes to Financial Statements
3
FIRST KEYSTONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
(Amounts in thousands)
2003 2002
<s> <c> <c>
OPERATING ACTIVITIES
Net income $ 3,635 $ 3,391
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision or loan losses 275 300
Provision for depreciation
and amortization 249 187
Premium amortization on investment
securities 530 240
Discount accretion on investment
securities (225) (382)
Gain on sale of mortgage loans (198) (110)
Proceeds from sale of mortgage loans 5,284 4,917
Originations of mortgage loans
for resale (9,063) (5,049)
(Gain) loss on sales of investment
securities (176) (8)
(Gain) loss on sales of other real
estate owned 18 0
Deferred income tax (benefit) (90) (86)
(Increase) decrease in interest
receivable and other assets 257 (192)
Increase in cash surrender value
of bank owned life insurance (244) 0
Increase (decrease) in interest
payable, accrued expenses and
other liabilities (64) (499)
________ ________
Net Cash Provided by Operating
Activities $ 188 $ 2,709
INVESTING ACTIVITIES
Purchases of investment securities
available for sale $(46,973) $(44,825)
Purchases of investment securities
held to maturity 0 (983)
Proceeds from sales of investment
securities available for sale 12,325 31,502
Proceeds from maturities and
redemptions of investment
securities available for sale 22,639 9,605
Proceeds from maturities and
redemption of investment
securities held to maturity 477 502
Net (increase) decrease in loans (6,633) (4,538)
Purchase of premises and equipment (449) (207)
Proceeds from sale of other real
estate owned 72 75
________ ________
Net Cash Used by Investing
Activities $(18,542) $ (8,869)
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 21,392 $ 13,799
Net increase (decrease) in
short-term borrowings (231) (4,870)
Net increase (decrease)in long-term
borrowings (1,500) 5,000
Acquisition of treasury stock (454) (24)
Proceeds from sale of treasury
stock 71 18
Proceeds from issuance of common
stock 52 0
Cash dividends (1,420) (1,190)
________ ________
Net Cash Provided by Financing
Activities $ 17,910 $ 12,733
Increase (Decrease) in Cash and
Cash Equivalent $ (444) $ 6,573
Cash and Cash Equivalents,
Beginning 7,456 6,550
________ ________
Cash and Cash Equivalents, Ending $ 7,012 $ 13,123
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during period for
Interest $ 5,220 $ 5,537
Income Taxes 794 1,582
See Accompanying Notes to Financial Statements
4
FIRST KEYSTONE CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
June 30, 2003
(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 ten full service
offices and 14 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 (loss) in the Consolidated Statement of
Stockholders' Equity. Management's decision to sell Available for
Sale securities is based on changes in economic conditions
controlling the
5
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 expected 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.
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 on an actual
day basis. 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.
Past Due Loans - Generally, a loan is considered to be past due when
scheduled loan payments are in arrears 15 days or more. Delinquent
notices are generated automatically when a loan is 15 days past-due,
depending on the type of loan. Collection efforts continue on loans
past due beyond 60 days that have not been satisfied, when it is
believed that some chance exists for improvement in the status of
the loan. Past due loans are continually evaluated with the
determination for charge off being made when no reasonable chance
remains that the status of the loan can be improved.
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
DERIVATIVES
The Bank has outstanding loan commitments that relate to the
origination of mortgage loans that will be held for resale.
Pursuant to Statement of Financial Accounting Standards (SFAS) No.
133 "Accounting for Derivative Instruments and Hedging Activities"
as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" and the guidance
contained within the Derivatives Implementation Group Statement 133
Implementation Issue No. C 13, the Bank has accounted for such loan
commitments as derivative instruments. The effective date of the
implementation guidance is the first day of the first fiscal quarter
beginning after April 10, 2002. The outstanding loan commitments in
this category did not give rise to any losses for the period ending
after the implementation date, as the fair market value of each
outstanding loan commitment exceeded the Bank's cost basis in each
outstanding loan commitment.
PREMISES AND EQUIPMENT
Premises, improvements and equipment are stated at cost less
accumulated depreciation computed principally on the straight line
method over the estimated useful lives of the assets. Long lived
assets are reviewed for impairment whenever events or changes in
business circumstances indicate that the carrying value may not be
recovered. 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 these 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 REAL ESTATE
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.
BANK OWNED LIFE INSURANCE
The Corporation invests in Bank Owned Life Insurance (BOLI)
with split dollar life provisions. Purchase of BOLI provides life
insurance coverage on certain employees with the Corporation being
owner and beneficiary of the policies.
INVESTMENT IN REAL ESTATE VENTURE
In October of 2000, the Bank became a limited partner in a real
estate venture that owns and operates an affordable residential low
income housing apartment building for elderly residents. The
investment is accounted for under the effective yield method under
the Emerging Issues Task Force (EITF) 94-1 "Accounting for Tax
Benefits Resulting from Investments in Affordable Housing Projects".
Under the effective yield method, the Bank recognizes tax credits as
they are allocated and amortizes the initial cost of the investment
to provide a constant effective yield over the period that the tax
credits are allocated to the Bank. Under this method, the tax
credit allocated, net of any amortization of the investment in the
limited partnership, is recognized in the consolidated statements of
income as a component of income tax expense. The annual amount of
tax credits allocated to the Bank were $80,866 for each of the years
2003 and 2002, and the annual amortization of the limited
partnership investment was $57,820 and $55,263 in 2003 and 2002,
respectively. The annual amounts are prorated for interim periods.
The carrying value of the investment as of June 30, 2003 and
December 31, 2002, was $533,111 and $562,021, respectively, and is
carried in Other Assets in the accompanying consolidated balance
sheet.
7
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.
STOCK BASED COMPENSATION
The Corporation accounted for stock options and shares issued
under the Stock Option Incentive Plan through December 31, 2002 in
accordance with Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees". Under this method no
compensation expense is recognized for stock options when the
exercise price equals the fair value of the options at the grant
date. Under provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock Based Compensation",
the fair value of a stock option is required to be recognized as
compensation expense over the service period (generally the vesting
period). As permitted under SFAS No. 123 the Corporation had elected
to continue to account for its stock option plan in accordance with
APB No. 25.
As of the first quarter 2003, the Corporation adopted Statement
of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock Based Compensation - Transition and Disclosures" (See recent
accounting pronouncements). The Corporation elected to use the
"prospective method" of accounting for stock options as allowed by
the Standard. Since no stock options were granted during 2003,
application of the newly required standard had no impact on the
Corporation's Consolidated Financial Condition or Results of
Operations for the period ended June 30, 2003.
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. 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.
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.
The Corporation transferred loans to foreclosed assets held for
sale in the amounts of $91,527 and $0 for the periods ended March
31, 2003 and 2002, respectively.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets" is generally effective for
fiscal years beginning after December 31, 2001, and addresses the
financial accounting and reporting for acquired goodwill and other
intangible assets and replaces APB Opinion No. 17, "Intangible
Assets". The statement addresses how intangible assets that are
acquired individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for in
financial statements upon their acquisition. Goodwill and other
intangible assets with an indefinite useful life should not be
amortized but should be tested for impairment at least annually.
Intangibles that are separable from goodwill and that have a
determinable useful life should be amortized over the determinable
useful life. The standard does not have any impact on the
Corporation's consolidated financial condition or results of
operations.
8
Statement of Financial Accounting Standards (SFAS) No. 143,
"Accounting for Asset Retirement Obligations" is generally effective
for financial statements for fiscal years beginning after June 15,
2002. The statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long lived
assets and the associated asset retirement costs. It applies to
legal obligations associated with the retirement of long lived
assets that result from the acquisition, construction development
and (or) the normal operation of a long lived asset. The Statement
requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of
the long lived asset. This standard does not have any impact on the
Corporation's consolidated financial condition or results of
operations.
Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for Impairment or Disposal of Long Lived Assets" is
generally effective for financial statements issued for fiscal years
beginning after December 15, 2001, and for interim periods within
those fiscal years. The statement addresses financial accounting and
reporting for the impairment or disposal of long lived assets. The
statement replaces FASB Statement No. 121, "Accounting for the
Impairment of Long Lived Assets and for Long Lived Assets to be
Disposed Of", and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", for the
disposal of a "segment of a business" (as previously defined in that
Opinion). The statement also amends ARB No. 51, "Consolidated
Financial Statements", to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. This
standard does not have any impact on the Corporation's consolidated
financial conditions or results of operations.
Statement of Financial Accounting Standards (SFAS) No. 145,
"Recession of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections" is generally effective
for financial statements issued on or after May 15, 2002. The
statement rescinds FASB Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt", and an amendment of that statement,
FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking Fund Requirements". The statement amends FASB Statement No.
13, "Accounting for Leases", to eliminate an inconsistency between
the required accounting for sale leaseback transactions and the
required accounting for certain lease modifications that have
economic effects that are similar to sale leaseback transactions.
The statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions.
This standard does not have any impact on the Corporation's
consolidated financial condition or results of operations.
Statement of Financial Accounting Standards (SFAS) No. 148,
"Accounting for Stock-Based Compensation - Transition and
Disclosure" is generally effective for financial statements for
fiscal years and interim periods beginning after December 31, 2002.
The statement amends SFAS No. 123, "Accounting for Stock Based
Compensation", to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock based employee compensation. The statement also amends the
disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about
the method of accounting for stock based compensation and the effect
of the method used on reported results. The Corporation has elected
to adopt SFAS 148 for the first quarter 2003 using the "prospective
method" of accounting for stock options as allowed for in the
Standard.
ADVERTISING COSTS
It is the Corporation's policy to expense advertising costs in
the period in which they are incurred. Advertising expense for the
periods ended June 30, 2003 and 2002, was approximately $105,390 and
$87,973, respectively.
REPORTING FORMAT
Certain amounts in the consolidated financial statements of
prior periods have been reclassified to conform with presentation
used in the 2002 consolidated financial statements. Such
reclassifications have no effect on the Corporation's consolidated
financial condition or net income.
9
Note 2. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the periods ended
June 30, 2003, and June 30, 2002, were as follows:
(amounts in thousands)
2003 2002
____ ____
<s> <c> <c>
Balance, January 1 $3,174 $2,922
Provision charged to operations 275 300
Loans charged off (131) (169)
Recoveries 28 80
______ ______
Balance, June 30 $3,346 $3,133
====== ======
At June 30, 2003, the recorded investment in loans that are
considered to be impaired as defined by SFAS No. 114 was $45,794. 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 June 30, 2003, 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.
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.
10
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 June 30, 2003, and December 31,
2002, were as follows:
(amounts in thousands)
June 30, December 31,
2003 2002
____ ____
<s> <c> <c>
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $23,230 $24,742
Standby letters of credit $ 3,807 $ 3,630
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, agricultural, real estate
mortgage and consumer loans to customers primarily in the counties
of Columbia, Luzerne, and Montour, Pennsylvania. It is management's
opinion that the loan portfolio was well balanced and diversified at
June 30, 2003, to the extent necessary to avoid any significant
concentration of credit risk. However, its debtors ability to honor
their contracts may be influenced by the region's economy.
11
Note 6. STOCKHOLDERS' EQUITY
Changes in Stockholders' Equity for the period ended June 30,
2003, were are follows:
(Amounts in thousands, except common share data)
Common Common
Shares Stock Surplus
______ ______ _______
<s> <c> <c> <c>
Balance at January 1, 2003 3,075,180 6,150 12,584
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)
Purchase of 14,300 shares
treasury stock
Sale of 4,357 shares
treasury stock (74)
Sale of 2,027 shares
of common stock 2,027 4 48
Cash dividends -
$.48 per share
_________ _____ ______
Balance at June 30, 2003 3,077,207 6,154 12,558
(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, 2003 27,395 6,544
Comprehensive Income:
Net Income 3,635 3,635
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects 2,252 2,252
_____
Total Comprehensive
income (loss) 5,887
=====
Purchase of 14,300 shares
treasury stock
Sale of 4,357 shares
treasury stock
Sale of 2,027 shares
of common stock
Cash dividends -
$.48 per share (1,420)
______ _____
Balance at June 30, 2003 29,610 8,796
(Amounts in thousands, except common share data)
Treasury
Stock Total
_____ _____
<s> <c> <c>
Balance at January 1, 2003 (3,577) 49,096
Comprehensive Income:
Net Income 3,635
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects 2,252
Total Comprehensive
income (loss)
Purchase of 14,300 shares
treasury stock (454) (454)
Sale of 4,357 shares
treasury stock 145 71
Sale of 2,027 shares
of common stock 52
Cash dividends -
$.48 per share (1,420)
______ ______
Balance at June 30, 2003 (3,886) 53,232
On June 23, 2003 the Board of Directors authorized a plan to
purchase, in the open market and privately negotiated transactions,
up to 100,000 shares of its outstanding common stock. Any
repurchased shares will be added to existing treasury stock acquired
and 15,344 shares of treasury stock remaining to be acquired under
the repurchase plan previously authorized in March 2001. The
treasury stock acquired will be used for general corporate purposes.
NOTE 7. COMMITMENTS
The Corporation has entered into agreements to build a new
branch office building on Corporation owned land and will replace
its existing leased facility in Bloomsburg, Pennsylvania. The
estimated costs of the project are expected to total $1,325,000 and
is expected to be completed in the second quarter of 2004.
The Corporation has entered into an agreement to acquire a
49.99% limited partnership interest in The Benton Elderly Housing
Limited Partnership, a real estate venture, that will operate an
affordable residential low income housing facility for elderly
residents in Benton, Pennsylvania. The required investment by the
Corporation will be approximately $385,000 and the project is
expected to be completed by the end of 2003.
12
NOTE 8. 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 six month period ended June
30, 2003, 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, 2002, filed with the Securities and Exchange
Commission.
13
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 June 30, 2003, and
the related consolidated statements of income and cash flows for the
three and six-month periods ended June 30, 2003 and 2002. 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, 2002, 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 13, 2003, 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, 2002, 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
July 14, 2003
14
ITEM 2. First Keystone Corporation Management's
Discussion and Analysis of Financial Condition
and Results of Operation as of June 30, 2003
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 second
quarter of 2003 of $1,857,000, an increase of $138,000, or 8.0% from
the second quarter of 2002. Six months net income for the period
ended June 30, 2003, amounted to $3,635,000, an increase of 7.2%
over the $3,391,000 net income reported June 30, 2002. Net interest
income declined in both the second quarter of 2003 and for the six
months ending June 30, 2003, because of the tightening of our net
interest margin due to lower asset yields. A substantial increase
in other income including security gains, largely accounts for the
increase in net income in both the second quarter and for the six
months ending June 30, 2003. On a per share basis, net income per
share increased to $1.23 for the six months of 2003 compared to
$1.14 for the first six months of 2002, while dividends increased to
$.48 per share up from $.40 in 2002, or an increase of 20.0% per
share. Data has been adjusted to reflect a 5% stock dividend
declared June 25, 2002.
Year to date net income annualized amounts to a return on
average common equity of 14.10% and a return on assets of 1.62%.
For the six months ended June 30, 2002, these measures were 16.34%
and 1.70%, 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 second quarter of 2003, interest income amounted to
$6,185,000, a decrease of $280,000 or 4.3% from the second quarter
of 2002. Interest expense amounted to $2,575,000 in the second
quarter of 2003, a decrease of $68,000, or 2.6% from the second
quarter of 2002. As a result, net interest income amounted to
$3,610,000 in the second quarter of 2003, a decrease of $212,000, or
5.5% over the second quarter of 2002. Year to date for the six
months ended June 30, 2003, net interest income decreased $227,000,
or 3.0% to $7,275,000 from $7,502,000 in 2002.
Our net interest margin for the quarter ended June 30, 2003,
was 3.64% compared to 4.24% for the quarter ended June 30, 2002.
For the six months ended June 30, 2003, our net interest margin was
3.72% compared to 4.21% for the first six months of 2002.
15
PROVISION FOR LOAN LOSSES
The provision for loan losses for the quarter ended June 30,
2003, was $125,000 the same as the provision for the second quarter
of 2002. Year to date, the provision for loan losses amounts to
$275,000 in 2003 as compared to the $300,000 provision for the
period ended June 30, 2002. Net charge offs amounted to $103,000
for the six months ended June 30, 2003, as compared to $89,000 for
the first six months of 2002.
The allowance for loan losses as a percentage of loans, net of
unearned interest remains strong at 1.58% as of June 30, 2003, the
same as December 31, 2002.
NON-INTEREST INCOME
Total non interest or other income was $909,000 for the quarter
ended June 30, 2003, as compared to $465,000 for the quarter ended
June 30, 2002. Excluding investment security gains and losses, non
interest income was $768,000 for the second quarter of 2003, as
compared to $562,000 in the second quarter of 2002, an increase of
36.7%. For the six months ended June 30, 2003, total non interest
income was $1,654,000, an increase of $674,000, or 68.8% from the
first six months of 2002. In both the second quarter of 2003 and
for the six months ended June 30, 2003, the increase in non interest
income was the result of an increase in service charges on deposit
accounts, an increase in other non interest income, and an increase
in investment security gains. The increase in cash surrender value
of bank owned life insurance purchased in the fourth quarter of 2002
was the principal reason for the increase in other non interest
income.
NON-INTEREST EXPENSES
Total non interest, or other expenses, was $2,030,000 for the
quarter ended June 30, 2003, as compared to $1,905,000 for the
quarter ended June 30, 2002. The increase of $125,000, or 6.6% is
comprised of salary and benefits increasing $102,000, occupancy
expense increasing $38,000, and other non-interest expense
decreasing $15,000.
For the six months ended June 30, 2003, total non interest
expense was $4,049,000, an increase of $328,000, or 8.8% over the
first six months of 2002. Expenses associated with employees
(salaries and employee benefits) continue to be the largest category
of non interest expenses. Salaries and benefits amount to 53.9% of
total non interest expense for the six months ended June 30, 2003,
as compared to 54.4% for the first six months of 2002. Salaries and
benefits amounted to $2,182,000 for the six months ended June 30,
2003, an increase of $158,000, or 7.8% over the first six months of
2002. Net occupancy expense amounted to $593,000 for the six months
ended June 30, 2003, an increase of $83,000, or 16.3% from 2002.
Other non interest expenses amounted to $1,274,000 for the six
months ended June 30, 2003, an increase of $87,000, or 7.3% over the
first six months of 2002. Even with the increase in non interest
expenses in 2003, our overall non interest expense continues at less
than 2.0% 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 21.4% for the second quarter
of 2003 as compared to 23.8% for the second quarter of 2002. For
the six months ended June 30, 2003, our tax liability amounted to
$970,000 for an effective tax rate of 21.1% as compared to an
effective tax rate of 24.0% for the first six months of 2002. The
decrease in our effective tax rate was due primarily to tax savings
derived from our investment in bank owned life insurance in the
fourth quarter of 2002.
16
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased to $464,350,000 as of June 30, 2003, an
increase of $24,824,000, or 5.6% over year end 2002. Total deposits
increased to $352,138,000 as of June 30, 2003, an increase of
$21,392,000, or 6.5% over year end 2002.
The Corporation used the increase in total deposits to fund
primarily an increase in earnings assets, in particular, total loans
and investment securities.
EARNING ASSETS
Our primary earning asset, loans, net of unearned income
increased to $211,933,000 as of June 30, 2003, from $201,517,000, or
5.2% since year end 2002. 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 strong with past due loans and
non performing loans being relatively stable.
In addition to loans, another primary earning asset is our
investment portfolio which also increased in size from December 31,
2002, to June 30, 2003. Held to maturity securities amounted to
$4,769,000 as of June 30, 2003, a decrease of $1,163,000, or 19.6%
since year end 2002. However, available for sale securities
increased to $225,823,000 as of June 30, 2003, an increase of
$16,000,000, or 7.6% from year end 2002.
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 2 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 June 30,
2003, total non performing assets were $593,597 as compared to
$458,000 on December 31, 2002. Non performing assets to total loans
and foreclosed assets was .28% as of June 30, 2003, and .23% as of
December 31, 2002.
17
Interest income received on non performing loans as of June 30,
2003, was $7,192 compared to $19,179 as of December 31, 2002.
Interest income, which would have been recorded on these loans under
the original terms as of June 30, 2003, and December 31, 2002, was
$24,858 and $38,956, respectively. As of June 30, 2003 and December
31, 2002, 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 by
$21,392,000 as non interest bearing deposits increased by $1,529,000
and interest bearing deposits increased by $19,863,000 as of June
30, 2003, from year end 2002. Total short term and long term
borrowings remained stable at $53,086,000 as of June 30, 2003, as
compared to $54,817,000 as of year end 2002.
CAPITAL STRENGTH
Normal increases in capital are generated by net income, less
cash dividends paid out. Also, accumulated other comprehensive
income derived from unrealized gains on investment securities
available for sale increased shareholders' equity, or capital, net
of taxes, by $8,796,000 as of June 30, 2003, and $6,544,000 as of
December 31, 2002. Our stock repurchase plan repurchased 129,124
shares as treasury stock as of June 30, 2003 and 119,181 shares as
treasury stock as of December 31, 2002. This had an effect of our
reducing our total stockholders' equity by $3,886,000 on June 30,
2003, and $3,577,000 on December 31, 2002.
Total stockholders' equity was $53,232,000 as of June 30, 2003,
and $49,096,000 as of December 31, 2002. Leverage ratio and risk
based capital ratios remain very strong. As of June 30, 2003, our
leverage ratio was 9.69% compared to 9.78% as of December 31, 2002.
In addition, Tier I risk based capital and total risk based capital
ratio as of June 30, 2003, were 15.20% and 16.45%, respectively.
The same ratios as of December 31, 2002, were 15.80% and 17.11%,
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.
ITEM 3. Controls and Procedures
a) Evaluation of disclosure controls and procedures. The
company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the company
files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and
procedures performed within 90 days of the filing date of this
report, the chief executive and chief financial officers of the
company concluded that the company's disclosure controls and
procedures were adequate.
18
b) Changes in internal controls. The Company made no
significant changes in its internal controls or in other factors
that could significantly affect these controls subsequent to the
date of the evaluation of the controls by the Chief Executive and
Chief Financial officers.
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 15, 2003 at 10:00
a.m.
Votes Votes
Directors Elected Votes For Against Withheld
_________________ _________ ______ _______
<s> <c> <c> <c>
Budd L. Beyer 2,239,286 29,476 0
Frederick E. Crispin, Jr. 2,240,680 28,082 0
Jerome F. Fabian 2,241,104 27,658 0
Robert J. Wise 2,240,042 28,720 0
Broker
Directors Elected Abstentions Non-Votes
_________________ _________ ______
<s> <c> <c>
Budd L. Beyer 0 0
Frederick E. Crispin, Jr. 0 0
Jerome F. Fabian 0 0
Robert J. Wise 0 0
Directors Continuing:
____________________
John Arndt, term expires in 2004
J. Gerald Bazewicz, term expires in 2004
Robert E. Bull, term expires in 2004
Don E. Bower, term expires in 2005
John L. Coates, term expires in 2005
Dudley P. Cooley, term expires in 2005
Matters Voted Upon:
__________________
Selection of J. H. Williams & Co. LLP, as auditors for the
Corporation.
Votes For - 2,251,664
Votes Against - 469
Votes Withheld - 0
Abstentions - 16,629
Broker Non-Votes - 0
19
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 Regulation S-K
Exhibit Number Description of Exhibit
3i Articles of Incorporation, as amended
(Incorporated by reference to Exhibit 3(i) to
the Registrant's Report on Form 10-Q for the
quarter ended March 31, 2001)
3ii By-Laws, as amended (Incorporated by
reference to Exhibit 3(ii) to the
Registrant's 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 Annual Report on Form 10-K for
the year ended December 31, 2000)
10.2 Management Incentive Compensation Plan
(Incorporated by reference to Exhibit 10 to
Registrant's Report on Form 10-Q for the
quarter ended September 30, 2001)
10.3 Profit Sharing Plan (Incorporated by
reference to Exhibit 10 to Registrant's
Report on Form 10-Q for the quarter ended
September 30, 2001)
10.4 First Keystone Corporation 1998 Stock
Incentive Plan (Incorporated by reference to
Exhibit 10 to Registrant's Report on Form 10Q
for the quarter ended September 30, 2001)
11 Statement RE: Computation of Earnings Per
Share.
99.1 Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350
99.2 Certification of Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350
(b) During the quarter ended June 31, 2003, the
registrant filed the following reports on Form 8-K:
Date of Report Item Description
______________ ____ ___________
April 30, 2003 5 Press release announcing increased
earnings for first quarter of 2003
May 29, 2003 5 Press release announcing the promotions
of Brenda L. Grasley, Charlotte M.
Bishop and Kevin Miller
June 2, 2003 5 Press release announcing second quarter
dividend
June 24, 2003 5 Press release announcing newly approved
Stock Repurchase Plan
20
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
August 5, 2003 /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and
Chief Executive Officer
(Principal Executive Officer)
August 5, 2003 /s/ David R. Saracino
David R. Saracino
Treasurer/Assistant Secretary
(Principal Accounting Officer)
21
CERTIFICATION
I, J. Gerald Bazewicz, President and Chief Executive Officer,
certify, that:
1. I have reviewed this quarterly report on Form 10-Q for
the period ended June 30, 2003, of First Keystone Corporation.
2. Based on my knowledge, the quarterly report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report.
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or
operation of the internal controls which could adversely
affect the registrant's ability to record, process, summarize
and report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls.
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect the internal controls subsequent to the
date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
/s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and Chief Executive Officer
Date: August 5, 2003
22
CERTIFICATION
I, David R. Saracino, Treasurer and Chief Financial Officer,
certify, that:
1. I have reviewed this quarterly report on Form 10-Q for
the period ended June 30, 2003, of First Keystone Corporation.
2. Based on my knowledge, the quarterly report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report.
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or
operation of the internal controls which could adversely
affect the registrant's ability to record, process, summarize
and report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls.
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect the internal controls subsequent to the
date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
/s/ David R. Saracino
David R. Saracino
Treasurer and Chief Financial Officer
Date: August 5, 2003
23
INDEX TO EXHIBITS
Exhibit Description
_______ ___________
3i Articles of Incorporation, as amended
(Incorporated by reference to Exhibit 3(i) to
the Registrant's Report on Form 10-Q for the
quarter ended March 31, 2001)
3ii By-Laws, as amended (Incorporated by reference
to Exhibit 3(ii) to the Registrant's Report on
Form 10-Q for the quarter ended March 31, 2001)
9 None.
10.1 Supplemental Employee Retirement Plan
(Incorporated by reference to Exhibit 10 to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 2000)
10.2 Management Incentive Compensation Plan
(Incorporated by reference to Exhibit 10 to
Registrant's Report on Form 10-Q for the quarter
ended September 30, 2001)
10.3 Profit Sharing Plan (Incorporated by reference
to Exhibit 10 to Registrant's Report on Form 10Q
for the quarter ended September 30, 2001)
10.4 First Keystone Corporation 1998 Stock Incentive
Plan (Incorporated by reference to Exhibit 10 to
Registrant's Report on Form 10-Q for the quarter
ended September 30, 2001)
11 Compensation of Earning Per Share
99.1 Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350
99.2 Certification of Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350
24