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, 2005
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, 4,397,520 shares as of July 26, 2005.
PART I. - FINANCIAL INFORMATION
ITEM. 1 Financial Statements
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
June December
2005 2004
(Unaudited)
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ASSETS
Cash and due from banks $ 7,766 $ 6,150
Interest bearing deposits with banks 21 36
Investment securities, available-for-
sale securities carried at
estimated fair value 243,360 235,692
Investment securities, held to
maturity estimated fair value of
$3,279 and $3,364 3,266 3,361
Loans, net of unearned income 232,269 233,800
Allowance for loan losses (3,630) (3,828)
________ ________
Net loans $228,639 $229,972
Bank premises and equipment-net 5,207 5,369
Accrued interest receivable 2,642 2,727
Cash surrender value of bank owned
life insurance 11,247 11,033
Goodwill 1,224 1,224
Other assets 1,882 2,051
________ ________
TOTAL ASSETS $505,254 $497,615
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 39,174 $ 35,803
Interest bearing 320,995 322,153
________ ________
TOTAL DEPOSITS $360,169 $357,956
Short-term borrowings 18,565 15,512
Long-term borrowings 66,910 66,910
Accrued interest and other expenses 2,208 1,877
Other liabilities 2,191 2,048
________ ________
TOTAL LIABILITIES $450,043 $444,303
STOCKHOLDERS' EQUITY
Common stock, par value $2 per share $ 9,079 $ 9,079
Surplus 12,389 12,505
Retained earnings 34,163 32,469
Accumulated other comprehensive
income 3,877 3,767
Less treasury stock at cost 142,053
shares in 2005 and 148,264
in 2004 (4,297) (4,508)
________ ________
TOTAL STOCKHOLDERS' EQUITY $ 55,211 $ 53,312
________ ________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $505,254 $497,615
======== ========
See Accompanying Notes to Consolidated Financial Statements
1
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
(Unaudited)
(Amounts in thousands except per share data)
2005 2004
<s> <c> <c>
INTEREST INCOME
Interest and fees on loans $3,618 $3,621
Interest and dividend income
on securities 2,851 2,618
Deposits in banks 19 7
Interest on federal funds sold 3 0
______ ______
TOTAL INTEREST INCOME $6,491 $6,246
______ ______
INTEREST EXPENSE
Deposits $1,923 $1,697
Short-term borrowings 88 34
Long-term borrowings 771 713
______ ______
TOTAL INTEREST EXPENSE $2,782 $2,444
______ ______
Net interest income $3,709 $3,802
Provision for loan losses 200 125
______ ______
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $3,509 $3,677
______ ______
NON-INTEREST INCOME
Trust department $ 128 $ 130
Service charges and fees 562 582
Bank owned life insurance income 108 111
Gain on sale of loans 21 14
Investment securities gains
(losses) - net 87 104
Other 10 8
______ ______
TOTAL NON-INTEREST INCOME $ 916 $ 949
______ ______
NON-INTEREST EXPENSE
Salaries and employee benefits $1,257 $1,232
Occupancy, net 134 174
Furniture and equipment 176 179
Professional services 85 101
State shares tax 120 111
Other 617 571
______ ______
TOTAL NON-INTEREST EXPENSES $2,389 $2,368
______ ______
Income before income taxes $2,036 $2,258
Income tax expense 339 470
______ ______
Net Income $1,697 $1,788
====== ======
PER SHARE DATA
Net Income Per Share*:
Basic $ .39 $ .41
Diluted .39 .41
Cash dividends per share* .20 .18
*Adjusted for a 3 for 2 stock split in the form of a 50% stock dividend
declared April 13, 2004 to shareholders of record
April 27, 2004, distributed May 11, 2004.
See Accompanying Notes to Consolidated Financial Statements
2
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(Unaudited)
(Amounts in thousands except per share data)
2005 2004
<s> <c> <c>
INTEREST INCOME
Interest and fees on loans $ 7,239 $ 7,205
Interest and dividend income
on securities 5,650 5,287
Deposits in banks 40 15
Interest on federal funds sold 3 0
_______ _______
TOTAL INTEREST INCOME $12,932 $12,507
_______ _______
INTEREST EXPENSE
Deposits $ 3,724 $ 3,382
Short-term borrowings 160 67
Long-term borrowings 1,528 1,422
_______ _______
TOTAL INTEREST EXPENSE $ 5,412 $ 4,871
_______ _______
Net interest income $ 7,520 $ 7,636
Provision for loan losses 350 275
_______ _______
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $ 7,170 $ 7,361
_______ _______
NON-INTEREST INCOME
Trust department $ 252 $ 299
Service charges and fees 1,048 1,056
Bank owned life insurance income 215 224
Gain on sale of loans 40 98
Investment securities gains
(losses) - net 143 165
Other 21 50
_______ _______
TOTAL NON-INTEREST INCOME $ 1,719 $ 1,892
_______ _______
NON-INTEREST EXPENSE
Salaries and employee benefits $ 2,525 $ 2,484
Occupancy, net 279 325
Furniture and equipment 351 360
Professional services 201 173
State shares tax 239 222
Other 1,125 1,059
_______ _______
TOTAL NON-INTEREST EXPENSES $ 4,720 $ 4,623
_______ _______
Income before income taxes $ 4,169 $ 4,630
Income tax expense 717 986
_______ _______
Net Income $ 3,452 $ 3,644
PER SHARE DATA
Net Income Per Share*:
Basic $ .79 $ .83
Diluted .79 .83
Cash dividends per share* .40 .35
*Adjusted for a 3 for 2 stock split in the form of a 50% stock dividend
declared April 13, 2004 to shareholders of record April 27, 2004,
distributed May 11, 2004.
See Accompanying Notes to Consolidated Financial Statements
3
FIRST KEYSTONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(Unaudited)
(Amounts in thousands)
2005 2004
<s> <c> <c>
OPERATING ACTIVITIES
Net income $ 3,452 $ 3,644
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision or loan losses 350 275
Stock option expense 0 48
Provision for depreciation and
amortization 283 299
Premium amortization on investment
securities 212 435
Accretion of core deposit net
discount (41) (48)
Discount accretion on investment
securities (331) (242)
Gain on sale of mortgage loans (40) (98)
Proceeds from sale of mortgage
loans 2,370 8,122
Originations of mortgage loans
for resale (2,572) (3,228)
Gain on sales of investment
securities (143) (165)
Deferred income tax (benefit) 8 (108)
(Increase) decrease in interest
receivable and other assets 305 (243)
Increase in cash surrender value
of bank owned life insurance (214) (224)
Increase in interest payable,
accrued expenses and other
liabilities 957 667
________ ________
Net Cash Provided by Operating
Activities $ 4,596 $ 9,134
INVESTING ACTIVITIES
Purchases of investment
securities available for sale $(72,079) $(37,625)
Purchases of investment
securities held to maturity 0 (1,000)
Proceeds from sales of investment
securities available for sale 43,910 15,183
Proceeds from maturities and
redemptions of investment
securities available for sale 20,322 16,032
Proceeds from maturities and
redemption of investment
securities held to maturity 96 5,478
Net (increase) decrease in loans 1,226 (11,324)
Purchase of premises and equipment (73) (797)
Final settlement on acquisition of
branch 0 (414)
________ ________
Net Cash Used by Investing
Activities $ (6,598) $(14,467)
FINANCING ACTIVITIES
Net increase in deposits $ 2,213 $ 8,186
Net increase (decrease) in
short-term borrowings 3,053 (2,322)
Net increase (decrease) in
long-term borrowings 0 2,500
Proceeds from sale of treasury
stock 95 20
Cash dividends (1,758) (1,550)
Dividends paid in lieu of
fractional shares 0 (3)
________ ________
Net Cash Provided by Financing
Activities $ 3,603 $ 6,831
Increase (Decrease) in Cash and
Cash Equivalent $ 1,601 $ 1,498
Cash and Cash Equivalents,
Beginning 6,186 5,941
________ ________
Cash and Cash Equivalents, Ending $ 7,787 $ 7,439
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during period for
Interest $ 5,323 $ 4,934
Income Taxes 307 1,130
See Accompanying Notes to Consolidated Financial Statements
4
FIRST KEYSTONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(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 10 full service
offices and 13 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.
5
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) (see Note 6). Management's 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 expected maturity. Such amortization and
accretion, as well as interest and dividends is included in interest
and dividend income on securities. Realized gains and losses are
included in net investment securities gains and losses. 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.
6
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.
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 outstanding loan
commitments in this category did not give rise to any losses for the
six month period ended June 30, 2005 and year ended December 31,
2004, 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 may retain 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.
7
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.
INVESTMENTS IN REAL ESTATE VENTURES
The Bank is a limited partner in real estate ventures that own
and operate affordable residential low income housing apartment
buildings for elderly residents. The investments are 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 credits
allocated, net of any amortization of the investment in the limited
partnerships, are recognized in the consolidated statements of
income as a component of income tax expense. The amount of tax
credits allocated to the Bank were $128,000 in 2005 and 2004. The
amortization of the investments in the limited partnerships was
$48,000 and $46,000 for the six months ended June 30, 2005 and 2004,
respectively. The carrying value of the investments as of June 30,
2005 and December 31, 2004 was $742,000 and $790,000, respectively
and is carried in other assets in the accompanying consolidated
balance sheets.
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.
GOODWILL, OTHER INTANGIBLE ASSETS, AND PREMIUM DISCOUNT
Goodwill resulted from the acquisition of certain fixed and
operating assets acquired and deposit liabilities assumed of the
branch of another financial institution in Danville, Pennsylvania,
in January 2004. Such goodwill represents the excess cost of the
acquired assets relative to the assets fair value at the date of
acquisition. The Corporation accounts for goodwill pursuant to the
Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Intangible Assets". SFAS No. 142 includes
requirements to test goodwill for impairments rather than to
amortize goodwill. The Corporation has tested the goodwill included
in its consolidated balance sheet at December 31, 2004, and has
determined there was no impairment as of that date.
Intangible assets are comprised of core deposit intangibles and
premium discount (negative premium) on acquired certificates of
deposit acquired in January 2004 when the Bank assumed deposit
accounts of the branch of another financial institution. The core
deposit intangible is being amortized over the average life of the
deposits acquired as determined by an independent third party.
Premium discount (negative premium) on acquired certificates of
deposit resulted from the valuation of certificate of deposit
accounts by an independent third party which were part of the
deposit accounts assumed of the branch by another financial
institution. The book value of certificates of deposit acquired was
greater than their fair value at the date of acquisition which
resulted in a negative premium due to higher cost of the
certificates of deposit compared to the cost of similar term
financing.
8
STOCK BASED COMPENSATION
The Corporation had 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 - an amendment
of FASB Statement No. 123". The Corporation elected to use the
"prospective method" of accounting for stock options as allowed by
the Standard. Accordingly, compensation expense was recognized for
the year ended December 31, 2004 in the amount of $48,000 being the
vested portion attributable to stock options granted in 2003. No
options were granted in 2004.
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.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2004, the Financial Accounting Standards Board
(FASB) issued Staff Position No. 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003", which allows companies to recognize
or defer recognizing the effects of the Medicare Prescription Drug
Improvement and Modernization Act of 2003, or Medicare Act, for
annual financial statements of fiscal years ending after December 7,
2003. The Medicare Act introduced both a Medicare prescription drug
benefit and a federal subsidy to sponsors of retiree health care
plans that provide a benefit at least "actuarially equivalent" to
the Medicare benefit. These provisions of the Medicare Act affect
accounting measurements. This standard does not have impact on the
Corporation's consolidated financial condition or results of
operations.
9
In September 2004, the FASB issued Staff Position Emerging
Issues Task Force ("EITF") Issue No. 03-01, "Effective Date of
Paragraphs 10-20 of EITF Issue No. 03-01, The Meaning of Other Than
Temporary Impairment and Its Application to Certain Investments",
which delays the effective date for the measurement and recognition
guidance contained in EITF Issue No. 03-01. EITF Issue No. 03-01
provides guidance for evaluating whether an investment is other than
temporarily impaired and was originally effective for other than
temporarily impairment evaluations made in reporting periods
beginning after June 15, 2004. The delay in the effective date for
the measurement and recognition guidance contained in paragraphs 10
through 20 of EITF Issue No. 03-01 does not suspend the requirement
to recognize other than temporary impairment as required by existing
authoritative literature. The disclosure guidance in paragraphs 21
and 22 of EITF Issue No. 03-01 remains effective. The delay will be
superseded concurrent with the final issuance of EITF Issue No.
03-01a, which is expected to provide implementation guidance on matters
such as impairment evaluations for declines in value caused by
increases in interest rates and/or sector spreads.
In December 2004, the FASB issued Statement of Financial
Accounting Standards ("SFAS") No. 153, "Exchanges of Nonmonetary
Assets," which amends APB Opinion No. 29, "Accounting for
Nonmonetary Transactions". SFAS No. 153 eliminates the exception
from fair value measurement for nonmonetary exchanges of similar
productive assets in Opinion No. 29 and replaces it with an
exception for exchanges that do not have commercial substance. SFAS
No. 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is
effective for nonmenetary exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of SFAS No. 153 is not
expected to have a material impact on the Corporation's consolidated
financial condition or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment". This Statement is a revision of SFAS No.
123, "Accounting for Stock-Based Compensation", and supercedes APB
Opinion No. 25, "Accounting for Stock Issued to employees", and its
related guidance. SFAS No. 123 (revised 2004) established standards
for the accounting for transactions in which an entity exchanges its
equity instruments for goods and services. This Statement requires
that the cost resulting from all share-based payment transactions be
recognized in the financial statements. This Statement establishes
fair value as the measurement objective in accounting for share
based payment arrangements and requires all entities to apply a fair
value based measurement method in accounting for share based payment
transactions with employees, except for equity instruments held by
employee share ownership plans. This Statement is effective for
public entities that do not file as small business issuers as of the
beginning of the first interim or annual reporting period that
begins after June 15, 2005. The adoption of SFAS No. 123 (revised
2004) is not expected to have a material impact on the Corporation's
consolidated financial condition or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 150, "Accounting for Certain Financial
Instruments with characteristics of both Liabilities and Equity"
which is generally effective for financial instruments entered into
or modified after May 31, 2003 and for contracts in existence at the
start of the first interim period beginning after June 15, 2003.
This Statement establishes new standards for classification,
measurement and disclosure of certain types of financial instruments
having characteristics of both liabilities and equity, including
instruments that are mandatorily redeemable and that embody
obligations requiring or permitting settlement by transferring
assets or by issuing an entity's own shares. In December 2003, the
FASB deferred for an indefinite period the application of the
guidance in SFAS 150 to noncontrolling interests that are classified
as equity in the financial statements of a subsidiary but would be
classified as a liability in the parent's financial statement's
under SFAS 150. The deferral is limited to mandatorily redeemable
noncontrolling interests associated with finite lived subsidiaries.
This standard does not have any impact on the Corporation's
consolidated financial position or results of operations.
10
In December 2003, the Emerging Issues Task Force (EITF) issued
EITF 03-1, "The Meaning of Other Than Temporary Impairment and its
Application to Certain Investments" which is generally effective for
fiscal years ending after December 15, 2003 and addresses how to
define an "other than temporary impairment" as well as its
application to investments classified as either "Available for Sale"
and "Held to Maturity" under SFAS 115. The EITF requires disclosure
of securities in a continuous unrealized loss position to be
stratified based on length of time those securities were carried in
such a position (less than 12 months and 12 months or more).
Additional information is required to be disclosed to include the
nature of the investment, the cause of the decline in value and the
evidence considered in reaching the conclusions that the investment
is not other than temporarily impaired. The disclosure is required
for fiscal years ending after December 15, 2003. Comparative
information for earlier periods is not required.
ADVERTISING COSTS
It is the Corporation's policy to expense advertising costs in
the period in which they are incurred. Advertising expense for the
six month period ended June 30, 2005 and 2004, was approximately
$109,000 and $145,000, respectively.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements of
prior periods have been reclassified to conform with presentation
used in the 2005 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
June 30, 2005, and June 30, 2004, were as follows:
(amounts in thousands)
2005 2004
____ ____
<s> <c> <c>
Balance, January 1 $3,828 $3,524
Provision charged to
operations 350 275
Loans charged off (567) (132)
Recoveries 19 33
______ ______
Balance, June 30 $3,630 $3,700
====== ======
At June 30, 2005, the total recorded investment in loans that
are considered to be impaired as defined by SFAS No. 114 was
$1,787,000. These impaired loans had a related allowance for loan
losses of $138,000. 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, 2005, there were no significant commitments to lend
additional funds with respect to non accrual and restructured loans.
Non accrual loans at June 30, 2005 and December 31, 2004 were
$1,787,000 and $3,405,000, respectively, all of which were
considered impaired.
Loans past due 90 days or more and still accruing interest
amounted to $47,000 and $69,000 on June 30, 2005 and December 31,
2004, respectively.
11
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 (FHLB). Under terms of a blanket agreement,
collateral for the loans are secured by certain qualifying assets of
the Corporation's banking subsidiary which consist principally of
first mortgage loans and certain investment securities.
Note 5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET
RISK AND CONCENTRATIONS OF CREDIT RISK
The Corporation is a party to financial instruments with off
balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of
those instruments reflect the extent of involvement the Corporation
has in particular classes of financial instruments. The Corporation
does not engage in trading activities with respect to any of its
financial instruments with off balance sheet risk.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those instruments.
The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance
sheet instruments.
The Corporation may require collateral or other security to
support financial instruments with off-balance sheet credit risk.
The contract or notional amounts at June 30, 2005, and December 31,
2004, were as follows:
(amounts in thousands) June 30, December 31,
2005 2004
____ ____
<s> <c> <c>
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $22,070 $22,363
Financial standby letters
of credit $ 1,361 $ 1,760
Performance standby letters
of credit $ 248 $ 265
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.
12
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, 2005, 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.
Note 6. STOCKHOLDERS' EQUITY
Changes in Stockholders' Equity for the period ended June 30,
2005, were are follows:
(Amounts in thousands, except common share data)
Common Common
Shares Stock Surplus
______ ______ _______
<s> <c> <c> <c>
Balance at January 1, 2005 4,539,573 $9,079 $12,505
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)
Sale of 6,211 shares
treasury stock (116)
Cash dividends -
$.40 per share
_________ ______ _______
Balance at June 30, 2005 4,539,573 $9,079 $12,389
(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, 2005 $32,469 $3,767
Comprehensive Income:
Net Income $3,452 3,452
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects 110 110
_______
Total comprehensive
income (loss) $ 3,562
=======
Sale of 6,211 shares
treasury stock
Cash dividends -
$.40 per share (1,758)
_______ ______
Balance at June 30, 2005 $34,163 $3,877
(Amounts in thousands, except common share data)
Treasury
Stock Total
_____ _____
<s> <c> <c>
Balance at January 1, 2005 $(4,508) $53,312
Comprehensive Income:
Net Income 3,452
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects 110
Total comprehensive
income (loss)
Sale of 6,211 shares
treasury stock 211 95
Cash dividends -
$.40 per share (1,758)
_______ _______
Balance at June 30, 2005 $(4,297) $55,211
On April 13, 2004 the Board of Directors declared a 3 for 2
stock split in the form of a 50% stock dividend payable to
shareholders of record April 27, 2004 and distributed May 11, 2004.
Per share data has been adjusted retroactively.
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
13
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, 2005, 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, 2004, filed with the Securities and Exchange
Commission.
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005, and
the related consolidated statements of income for the three and six
month periods ended June 30, 2005 and 2004, and the consolidated
statements of cash flows for the six month periods ended June 30,
2005 and 2004. These consolidated interim financial statements are
the responsibility of the management of First Keystone Corporation
and Subsidiary.
We conducted our reviews in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A review
of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in
scope than an audit conducted in accordance with the standards of
the Public Company Accounting Oversight Board (United States), 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 interim 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 the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of First Keystone Corporation and
Subsidiary as of December 31, 2004, and the related consolidated
statements of income, changes in stockholders' equity, and cash
flows for the year then ended (not presented herein); and in our
report dated January 24, 2005, 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, 2004, 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 13, 2005
15
ITEM 2. First Keystone Corporation Management's
Discussion and Analysis of Financial Condition
and Results of Operation as of June 30, 2005
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 2005 of $1,697,000, a decrease of $91,000, or 5.1% from
the second quarter of 2004. Six months net income for the period
ended June 30, 2005, amounted to $3,452,000, a decrease of $192,000
or 5.3% from the $3,644,000 net income reported June 30, 2004. Net
interest income decreased in both the second quarter of 2005 and for
the six months ending June 30, 2005, when compared to the same
periods in 2004. The continued tightening of our net interest
margin resulted from liability or interest expense increasing faster
than interest income. Also, a decline in non interest income in
both the second quarter and for the six months ended June 30, 2005,
put additional pressure on earnings. On a per share basis, net
income per share decreased to $.79 for the six months of 2005
compared to $.83 for the first six months of 2004, while dividends
increased to $.40 per share up from $.35 per share in 2004, or an
increase of 14.3%. Data has been adjusted to reflect a 3 for 2
stock split in the form of a 50% stock dividend paid May 11, 2004.
Year-to-date net income annualized amounts to a return on
average common equity of 12.94% and a return on assets of 1.40%.
For the six months ended June 30, 2004, these measures were 13.80%
and 1.49%, 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 2005, interest income amounted to
$6,491,000, an increase of $245,000 or 3.9% from the second quarter
of 2004. Interest expense amounted to $2,782,000 in the second
quarter of 2005, an increase of $338,000, or 13.8% from the second
quarter of 2004. As a result, net interest income amounted to
$3,709,000 in the second quarter of 2005, a decrease of $93,000, or
2.4% from the second quarter of 2004. Year to date for the six
months ended June 30, 2005, net interest income decreased $116,000,
or 1.5% to $7,520,000 from $7,636,000 in 2004.
Our net interest margin for the quarter ended June 30, 2005,
was 3.50% compared to 3.58% for the quarter ended June 30, 2004.
For the six months ended June 30, 2005, our net interest margin was
3.59% compared to 3.60% for the first six months of 2004.
16
PROVISION FOR LOAN LOSSES
The provision for loan losses for the quarter ended June 30,
2005, was $200,000 as compared to $125,000 for the second quarter of
2004. Year to date, the provision for loan losses amounts to
$350,000 in 2005 an increase of $75,000 over June 30, 2004. Net
charge offs amounted to $548,000 for the six months ended June 30,
2005, as compared to $99,000 for the first six months of 2004. The
increase in charge offs in 2005 relates primarily to a write down of
commercial real estate acquired through foreclosure.
The allowance for loan losses as a percentage of loans, net of
unearned interest remains strong at 1.56% as of June 30, 2005, as
compared to 1.64% as of December 31, 2004.
NON-INTEREST INCOME
Total non interest or other income was $916,000 for the quarter
ended June 30, 2005, as compared to $949,000 for the quarter ended
June 30, 2004. Excluding investment security gains and losses, non
interest income was $829,000 for the second quarter of 2005, as
compared to $845,000 in the second quarter of 2004, a decrease of
1.9%. For the six months ended June 30, 2005, total non interest
income was $1,719,000, a decrease of $173,000, or 9.1% from the
first six months of 2004. In both the second quarter of 2005 and
for the six months ended June 30, 2005, the decrease in non interest
income was primarily the result of a decline in both trust
department income and service charges and fees. Also, investment
securities gains are reduced in both the second quarter and for the
six months of 2005 when compared to the same periods in 2004.
NON-INTEREST EXPENSES
Total non-interest, or other expenses, was $2,389,000 for the
quarter ended June 30, 2005, as compared to $2,368,000 for the
quarter ended June 30, 2004. The increase of only $21,000, or 0.9%
illustrates our emphasis on expense control in the second quarter of
2005.
For the six months ended June 30, 2005, total non interest
expense was $4,720,000, an increase of $97,000, or 2.1% over the
first six months of 2004. Expenses associated with employees
(salaries and employee benefits) continue to be the largest category
of non interest expenses. Salaries and benefits amount to 53.5% of
total non interest expense for the six months ended June 30, 2005,
as compared to 53.7% for the first six months of 2004. Salaries and
benefits amounted to $2,525,000 for the six months ended June 30,
2005, an increase of $41,000, or 1.7% over the first six months of
2004. Net occupancy expense, including furniture and equipment,
amounted to $630,000 for the six-months ended June 30, 2005, a
decrease of $55,000, or 8.0% from 2004. Professional services
increased $28,000 or 16.2% over the first six months of 2004. State
shares tax likewise increased by $17,000 or 7.7% over the first six
months of 2004. Other non interest expenses amounted to $1,125,000
for the six months ended June 30, 2005, an increase of $66,000, or
6.2% over the first six months of 2004. Even with the increase in
non interest expenses in 2005, 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 16.7% for the second quarter
of 2005 as compared to 20.8% for the second quarter of 2004. For
the six months ended June 30, 2005, our tax liability amounted to
$717,000 for an effective tax rate of 17.2% as compared to an
effective tax rate of 21.3% for the first six months of 2004.
17
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased to $505,254,000 as of June 30, 2005, an
increase of $7,639,000, or 1.5% over year end 2004. Total deposits
increased to $360,169,000 as of June 30, 2005, an increase of
$2,213,000, or 0.6% over year end 2004.
The Corporation increased short term borrowings by $3,053,000,
or 19.7% as of June 30, 2005, when compared to year end 2004.
EARNING ASSETS
Our primary earning asset, loans, net of unearned income
decreased slightly to $232,269,000 as of June 30, 2005, from
$233,800,000, or 0.7% since year end 2004. The loan portfolio
continues to be well diversified. Asset quality has improved with
non-performing assets declining since year end 2004.
In addition to loans, another primary earning asset is our
investment portfolio which increased in size from December 31, 2004,
to June 30, 2005. Available for sale securities amounted to
$243,360,000 as of June 30, 2005, an increase of $7,668,000, or 3.3%
from year end 2004. Held to maturity securities decreased to
$3,266,000 as of June 30, 2005, a decrease of $95,000, or 2.8% from
year end 2004.
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,
2005, total non performing assets were $1,984,000 as compared to
$3,480,000 on December 31, 2004. Non performing assets to total
loans and foreclosed assets was .85% as of June 30, 2005, and 1.49%
as of December 31, 2004.
18
Interest income received on non performing loans as of June 30,
2005, was $1,000 compared to $113,000 as of December 31, 2004.
Interest income, which would have been recorded on these loans under
the original terms as of June 30, 2005, and December 31, 2004, was
$67,000 and $253,000, respectively. As of June 30, 2005 and
December 31, 2004, 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 $2,213,000
as non interest bearing deposits increased by $3,371,000 and
interest bearing deposits decreased by $1,158,000 as of June 30,
2005, from year end 2004. Total short term and long term borrowings
increased to $85,475,000 as of June 30, 2005, as compared to
$82,422,000 as of year end 2004 because short term borrowings
increased $3,053,000.
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 $3,877,000 as of June 30, 2005, and $3,767,000 as of
December 31, 2004. Treasury stock as of June 30, 2005 and December
31, 2004 had an effect of our reducing our total stockholders'
equity by $4,297,000 on June 30, 2005, and $4,508,000 on December
31, 2004.
Total stockholders' equity was $55,211,000 as of June 30, 2005,
and $53,312,000 as of December 31, 2004. Leverage ratio and risk
based capital ratios remain very strong. As of June 30, 2005, our
leverage ratio was 9.97% compared to 9.61% as of December 31, 2004.
In addition, Tier I risk based capital and total risk based capital
ratio as of June 30, 2005, were 17.24% and 18.67%, respectively.
The same ratios as of December 31, 2004, were 16.23% and 17.68%,
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. Quantitative and Qualitative Disclosures About
Market Risk
There have been no material changes in the Company's
quantitative and qualitative market risks since December 31, 2003.
The composition of rate sensitive assets and rate sensitive
liabilities as of June 30, 2004 is very similar to December 31,
2003.
19
ITEM 4. 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.
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.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
Total
Number Maximum
of Shares Number of
Purchased Shares That
as Part of May Yet Be
Total Publicly Purchased
Number Average Announced Under the
of Shares Price Paid Plans or Plans or
Period Purchased per Share Programs Programs
______ _________ _________ ________ ________
<s> <c> <c> <c> <c>
April 1 -
April 30,
2005 -- -- -- 85,332 <F1>
May 1 -
May 31,
2005 -- -- -- 85,332
June 1 -
June 30,
2005 -- -- -- 85,332
Total -- -- -- 85,332
<FN>
<F1>
This chart has not been adjusted to reflect the 50% stock dividend declared
April 13, 2004, to shareholders of record as of April 27, 2004, payable May
11, 2004.
</FN>
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 19, 2005, at 10:00 a.m.
Votes Votes
Directors Elected Votes For Against Withheld
_________________ _________ ______ _______
<s> <c> <c> <c>
Don E. Bower 3,749,367 37,108 0
John L. Coates 3,672,725 113,750 0
Dudley P. Cooley 3,749,535 36,940 0
Broker
Directors Elected Abstentions Non-Votes
_________________ ___________ _________
<s> <c> <c>
Don E. Bower 0 0
John L. Coates 0 0
Dudley P. Cooley 0 0
21
Directors Continuing:
____________________
Budd L. Beyer, term expires in 2006
Frederick E. Crispin, Jr., term expires in 2006
Jerome F. Fabian, term expires in 2006
Robert J. Wise, term expires in 2006
John E. Arndt, term expires in 2007
J. Gerald Bazewicz, term expires in 2007
Robert E. Bull, term expires in 2007
Matters Voted Upon:
__________________
Selection of J. H. Williams & Co. LLP, as auditors for the
Corporation.
Votes For - 3,753,249
Votes Against - 3,064
Votes Withheld - 0
Abstentions - 30,162
Broker Non-Votes - 0
Item 5. Other Information
The Company made no material changes to the
procedures by which shareholders may recommend
nominees to the Company's Board of Directors.
22
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 10Q 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 10Q 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 10K 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 10Q 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 10Q for the quarter
ended September 30, 2001).
14 Code of Ethics (Incorporated by reference to
Exhibit 14 to the Registrant's Annual Report on
10K for the year ended December 31, 2003).
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer.
32.1 Section 1350 Certification of Chief Executive
Officer.
32.2 Section 1350 Certification of Chief Financial
Officer.
(b) During the quarter ended June 30, 2005, the
registrant filed the following reports on Form 8K:
Date of Report Item Description
______________ ____ ___________
April 29, 2005 5 On April 29, 2005, the Registrant
issued a press release announcing its
earnings for the quarter ended March
31, 2005.
23
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, 2005 /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and
Chief Executive Officer
(Principal Executive Officer)
August 5, 2005 /s/ David R. Saracino
David R. Saracino
Treasurer/Assistant Secretary
(Principal Accounting Officer)
24
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 10Q 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 10Q 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 10K 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 10Q 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 10Q for the quarter
ended September 30, 2001)
14 Code of Ethics (Incorporated by reference to
Exhibit 14 to the Registrant's Annual Report on
10K for the year ended December 31, 2003).
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer.
32.1 Section 1350 Certification of Chief Executive
Officer.
32.2 Section 1350 Certification of Chief Financial
Officer.
25