UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
Quarterly Report Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999
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: (717) 752-3671
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical date:
Common Stock, $2 Par Value, 2,833,727 shares as of September 30, 1999.
<PAGE>
PART I. - FINANCIAL INFORMATION
Item. 1 Financial Statements
<TABLE>
FIRST KEYSTONE CORPORATION
BALANCE SHEETS
(Unaudited)
<CAPTION>
(Amounts in thousands, except per share data)
September December
1999 1998
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,518 $ 7,033
Interest bearing deposits with banks 1 22
Available-for-sale securities carried
at estimated fair value 128,523 116,701
Investment securities, held to
maturity securities, estimated
fair value of $11,867 and $14,015 12,078 13,985
Loans, net of unearned income 180,574 161,532
Allowance for loan losses (2,572) (2,421)
________ ________
Net loans $178,002 $159,111
Bank premises and equipment 3,888 3,758
Interest receivable 2,327 2,133
Other assets 1,947 285
________ ________
Total Assets $334,284 $303,028
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 21,926 $ 22,749
Interest bearing 228,050 224,342
________ ________
Total deposits $249,976 $247,091
Short-term borrowings 30,423 6,634
Long-term borrowings 22,000 13,000
Accrued expenses 1,865 1,521
Other liabilities 63 1,029
________ ________
Total Liabilities $304,327 $269,275
STOCKHOLDERS' EQUITY
Common stock, par value $2 per
share; authorized 10,000,000
issued 2,933,727 shares $ 5,867 $ 5,867
Surplus 9,761 9,761
Retained earnings 19,540 17,123
Accumulated other comprehensive
income (loss) (2,114) 2,193
Less treasury stock at cost 100,000
shares in 1999 and 35,134 shares
in 1998 $ (3,097) (1,191)
________ _______
Total Stockholders' Equity $ 29,957 $ 33,753
________ ________
Total Liabilities and Stockholders'
Equity $334,284 $303,028
See Accompanying Notes to Financial Statements
</TABLE>
1
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<CAPTION>
(Amounts in thousands except per share data)
1999 1998
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,706 $3,362
Interest and dividend income
on securities 2,182 1,797
Interest on deposits in banks 12 67
______ ______
Total Interest Income $5,900 $5,226
INTEREST EXPENSE
Interest on deposits $2,356 $2,304
Interest on short-term borrowings 395 74
Interest on long-term borrowings 279 235
______ ______
Total Interest Expense $3,030 $2,613
Net interest income $2,870 $2,613
Provision for loan losses 50 50
______ ______
Net Interest Income After Provision
for Loan Losses $2,820 $2,563
OTHER INCOME
Service charges on deposit accounts $ 227 $ 174
Other non-interest income 157 224
Investment securities gains
(losses) net 77 29
______ ______
Total Other Income $ 461 $ 427
OTHER EXPENSES
Salaries and employee benefits $ 884 $ 710
Net occupancy and fixed asset expense 234 256
Other non-interest expense 470 413
______ ______
Total Other Expenses $1,588 $1,379
Income before income taxes $1,693 $1,611
Applicable income tax (benefit) 338 342
______ ______
Net Income $1,355 $1,269
Net Income Per Weighted Share
Outstanding $ .47 $ .43
See Accompanying Notes to Financial Statements
</TABLE>
2
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<CAPTION>
(Amounts in thousands except per share data)
1999 1998
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $10,728 $10,021
Interest and dividend income
on securities 6,207 5,135
Interest on deposits in banks 165 205
_______ _______
Total Interest Income $17,100 $15,361
INTEREST EXPENSE
Interest on deposits $ 7,082 $ 6,779
Interest on short-term borrowings 989 212
Interest on long-term borrowings 698 599
_______ _______
Total Interest Expense $ 8,769 $ 7,590
Net interest income $ 8,331 $ 7,771
Provision for loan losses 225 175
_______ _______
Net Interest Income After
Provision for Loan Losses $ 8,106 $ 7,596
OTHER INCOME
Service charges on deposit accounts $ 645 $ 508
Other non-interest income 485 506
Investment securities gains
(losses) net 173 89
_______ _______
Total Other Income $ 1,303 $ 1,103
OTHER EXPENSES
Salaries and employee benefits $ 2,501 $ 2,110
Net occupancy and fixed asset expense 717 707
Other non-interest expense 1,378 1,221
_______ _______
Total Other Expenses $ 4,596 $ 4,038
Income before income taxes $ 4,813 $ 4,661
Applicable income tax (benefit) 935 1,003
_______ _______
Net Income $ 3,878 $ 3,658
Net Income Per Weighted Share
Outstanding $ 1.35 $ 1.25
See Accompanying Notes to Financial Statements
</TABLE>
3
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<CAPTION>
(Amounts in thousands)
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,878 $ 3,658
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 225 175
Provision for depreciation and
amortization 301 268
Premium amortization on investment
securities 197 190
Discount accretion on investment
securities (142) (103)
Gain on sale of mortgage loans (9) (91)
Proceeds from sale of mortgage loans 4,016 4,335
Originations of mortgage loans for
resale (6,341) (5,059)
(Gain) loss on sales of investment
securities (77) (89)
Deferred income tax (benefit) (44) 37
(Increase) decrease in interest
receivable and other assets (452) (407)
Increase (decrease) in interest
payable, accrued expenses and
other liabilities 251 (415)
________ ________
Net Cash Provided by Operating
Activities $ 1,803 $ 2,499
INVESTING ACTIVITIES
Purchases of investment securities
available-for-sale $(55,358) $(43,896)
Proceeds from sales of investment
securities available for sale 24,124 8,726
Proceeds from maturities and
redemptions of investment
securities available for sale 12,942 10,645
Purchase of investment securities
held-to-maturity 0 (677)
Proceeds from maturities and
redemption of investment
securities held to maturity 1,858 2,579
Net (increase) decrease in loans (16,781) (570)
Purchase of premises and equipment (431) (403)
________ ________
Net Cash Used by Investing
Activities $(33,646) $(23,596)
FINANCING ACTIVITIES
Net increase (decrease) in
deposits $ 2,885 $ 17,208
Net increase (decrease) in
short-term borrowings 23,789 1,365
Net increase (decrease) in
long-term borrowings 9,000 7,000
Acquisition of treasury stock (1,906) (297)
Cash dividends (1,461) (1,231)
________ ________
Net Cash Provided by Financing
Activities $ 32,307 $ 24,045
Increase (Decrease) in Cash and
Cash Equivalent $ 464 $ 2,948
Cash and Cash Equivalents, Beginning 7,055 13,484
________ ________
Cash and Cash Equivalents, Ending $ 7,519 $ 16,432
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during period for
Interest $ 8,707 $ 7,621
Income Taxes 923 1,019
See Accompanying Notes to Financial Statements
</TABLE>
4
<PAGE>
FIRST KEYSTONE CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
Note 1.
The accounting and reporting policies of First Keystone
Corporation and Subsidiary conform to generally accepted accounting
principles and to general practices within the banking industry.
These consolidated interim financial statements include the accounts
of First Keystone Corporation and its wholly owned subsidiary, The
First National Bank of Berwick. All significant inter-company
balances have been eliminated.
Note 2.
The accompanying consolidated interim financial statements are
unaudited. In management's opinion, the consolidated interim
financial statements reflect a 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 reflect all adjustments, which are in the opinion of
management, necessary to present fairly the consolidated financial
condition and consolidated results of operations and cash flows for
the interim period presented and that all such adjustments to the
consolidated financial statements are of a normal recurring nature.
Note 3.
The results of operations for the nine-month period ended
September 30, 1999, are not necessarily indicative of the results to
be expected for the full year.
Note 4.
Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share, requires dual presentation of basic and 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 which currently have
no effect on earnings per share.
Note 5.
LOANS
Loans are stated at their outstanding principal balances, net of
any 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 other loans is primarily recognized based upon the
principal amount outstanding. Loan origination fees and certain
direct loan origination costs have been deferred and the net amount
amortized using the interest method over the contractual life of the
related loans as an interest yield adjustment.
5
<PAGE>
Non-Accrual Loans - Generally, a loan (including a loan impaired
under Statement of Financial Accounting Standards No. 114) 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 credit losses.
Potential problem loans are identified by management as a part of its
loan review process.
Income recognition is in accordance with Statement of Financial
Accounting Standards No. 118. 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.
The Corporation adheres to the principles provided by Statement
of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan as amended by Statement of Financial
Accounting Standards No. 118, "Accounting by creditors for Impairment
of a Loan - Income Recognition and Disclosure." Under these
standards, the allowance for loan losses related to loans that are
identified for evaluation in accordance with Statement No. 114 is
based on discounted cash flows using the loan's initial effective
interest rate or the fair value of the collateral for certain
collateral dependent loans. Statement No. 118 allows the continued
use of existing methods for income recognition on impaired loans and
amends disclosure requirements to require information about the
recorded investment in certain impaired loans and related income
recognition on those loans. The allowance for loan losses is
maintained at a level by management to be adequate to absorb estimated
potential loan losses. Management's periodic evaluation of the
adequacy of the allowance for loan losses is based on the
Corporation's past loan 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.
<TABLE>
<CAPTION>
The following table presents the changes in the allowance for
credit losses:
(Amounts in thousands)
<S> <C>
Balance at January 1, 1999 $2,421
Provisions charged to operations 225
Loans charged off (154)
Recoveries 80
______
Balance at September 30, 1999 $2,572
</TABLE>
At September 30, 1999, the recorded investment in loans that are
considered to be impaired under Statement No. 114 was $70,482. No
additional charge to operations is required since the total allowance
for loan losses is estimated by management to be adequate to provide
for the loan loss allowance under Statement No. 114 as well as any
other potential loan losses.
6
<PAGE>
Note 6.
<TABLE>
<CAPTION>
(Amounts in thousands except Common Shares data)
Common Common
Shares Stock Surplus
<S> <C> <C> <C>
Balance at January 1, 1999 2,933,727 5,867 9,761
Comprehensive Income:
Net Income
Other comprehensive
income (loss), net of tax
Change in unrealized
gain (loss) on
investment securities
available for sale
Total Comprehensive
income (loss)
Cash dividends -
$.51 per share
Purchase of 64,866 shares
of Treasury Stock
_________ _____ _____
Balance at September 30, 1999 2,933,727 5,867 9,761
<CAPTION>
(Amounts in thousands except Common Shares data)
Compre- Accumulated
hensive Other
Income Retained Comprehensive
(Loss) Earnings Income (Loss)
<S> <C> <C> <C>
Balance at January 1, 1999 17,123 2,193
Comprehensive Income:
Net Income 3,878 3,878
Other comprehensive
income (loss), net of tax
Change in unrealized
gain (loss) on
investment securities
available for sale (4,307) (4,307)
Total Comprehensive ______
income (loss) (429)
Cash dividends -
$.51 per share (1,461)
Purchase of 64,866 shares
of Treasury Stock
______ ______
Balance at September 30, 1999 19,540 (2,114)
<CAPTION>
(Amounts in thousands except Common Shares data)
Treasury
Stock Total
<S> <C> <C>
Balance at January 1, 1999 (1,191) 33,753
Comprehensive Income:
Net Income 3,878
Other comprehensive
income (loss), net of tax
Change in unrealized
gain (loss) on
investment securities
available for sale (4,307)
Total Comprehensive
income (loss)
Cash dividends -
$.51 per share (1,461)
Purchase of 64,866 shares
of Treasury Stock (1,906) (1,906)
______ ______
Balance at September 30, 1999 (3,097) 29,957
</TABLE>
Note 7.
As required on January 1, 1996, the Corporation adopted Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The Statement requires that
long-lived assets and certain identifiable intangibles are classified
into two categories for the purpose of accounting for an impairment of
assets: those to be held and used and those to be disposed of.
Assets to be held and used must be reviewed whenever events or changes
in circumstances indicate that the carrying value may not be
recoverable. An impairment loss is indicated if the sum of the
expected future cash flows, undiscounted and without interest charges,
is less than the carrying amount of the assets. An impairment loss
must be recognized as the amount by which the carrying amount of the
asset exceeds the fair value of the asset so determined.
Implementation of this Statement did not have any effect on the
consolidated financial condition or results of operations of the
Corporation.
Note 8.
The consolidated interim financial statements have been prepared
in accordance with requirements of Form 10-Q and therefore does not
include all the disclosures normally required by generally accepted
accounting principles, or those normally made in the Corporation's
annual 10-K filing. The reader of these consolidated interim
financial statements may wish to refer to the Corporation's annual
report or Form 10-K for the period ended December 31, 1998, filed with
the Securities and Exchange Commission.
7
<PAGE>
Item 2. First Keystone Corporation Management's Discussion and
Analysis of Financial Condition and Results of Operation
as of September 30, 1999
RESULTS OF OPERATIONS
First Keystone Corporation realized earnings for the third
quarter of 1999 of $1,355,000, an increase of $86,000, or 6.8% over
the third quarter of 1998. Nine months net income for the period
ended September 30, 1999, amounted to $3,878,000, an increase of 6.0%
over the $3,658,000 net income reported September 30, 1998. On a per
share basis net income per share increased to $1.35 for the nine
months of 1999 compared to $1.25 for the first nine months of 1998,
while dividends increased to $.51 per share up from $.42 in 1998, an
increase of 21.4%.
Year-to-date net income annualized amounts to a return on average
common equity of 15.79% and a return on assets of 1.59%. For the nine
months ended September 30, 1998, these measures were 14.81% and 1.74%,
respectively on an annualized basis.
NET INTEREST INCOME
The major source of operating income for the Corporation is net
interest income, defined as interest income less interest expense. In
the third quarter of 1999 and year-to-date in 1999, interest income
has increased more than interest expense resulting in improved net
interest income. In the third quarter of 1999, interest income
amounted to $5,900,000, an increase of $674,000 or 12.9% over the
third quarter of 1998. Interest expense amounted to $3,030,000 in the
third quarter of 1999, an increase of $417,000, or 16.0% over the
third quarter of 1998. Accordingly, net interest income amounted to
$2,870,000 in the third quarter of 1999, an increase of $257,000, or
9.8% over the third quarter of 1998. Year-to-date for the nine months
ended September 30, 1999, total interest income increased $1,739,000,
or 11.3% over the first nine months of 1998. Total interest expense
increased $1,179,000, or 15.5% for the first nine months of 1999 over
1998. This resulted in net interest income increasing $560,000, or
7.2% for the nine months ended September 30, 1999, over 1998.
Our net interest margin for the quarter ended September 30, 1999,
was 3.91% compared to 4.17% for the quarter ended September 30, 1998.
For the nine months ended September 30, 1999, our net interest margin
was 3.98% compared to 4.27% for the first nine months of 1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the quarter ended September 30,
1999, was $50,000 compared to $50,000 for the third quarter of 1998.
Year-to-date, the provision for loan losses amounts to $225,000 in
1999 as compared to the $175,000 provision for the period ended
September 30, 1998. The provision for possible loan losses increased
in 1999 as loan demand continued to be strong. Our allowance for loan
losses of $2,572,000 as of September 30, 1999, compared favorably to
our allowance for loan losses of $2,421,000 as of December 31, 1998.
Net charge-offs totaled $74,000 for the nine months ended September
30, 1999, as compared to $176,000 for the first nine months of 1998.
The allowance for loan losses as a percentage of loans, net of
unearned interest was 1.42% as of September 30, 1999, and 1.50% as of
December 30, 1998.
8
<PAGE>
NON-INTEREST INCOME
Total non-interest or other income was $461,000 for the quarter
ended September 30, 1999, as compared to $427,000 for the quarter
ended September 30, 1998. Excluding investment security gains and
losses, non-interest income was $384,000 for the third quarter of
1999, a decrease of $14,000 over the third quarter of 1998. For the
nine months ended September 30, 1999, total non-interest income was
$1,303,000, an increase of $200,000, or 18.1% over the first nine
months of 1998. An increase in security gains, largely from the sale
of equity securities, plus an increase in service charges on deposit
accounts, resulted in the $200,000 increase in non-interest income
year-to-date in 1999.
NON-INTEREST EXPENSES
Total non-interest, or other expenses, was $1,588,000 for the
quarter ended September 30, 1999, as compared to $1,379,000 for the
quarter ended September 30, 1998. The increase of $209,000 is
comprised of salary and benefits increasing $174,000, occupancy
expense decreasing $22,000, and other non-interest expense increasing
$57,000.
For the nine months ended September 30, 1999, total non-interest
expense was $4,596,000, an increase of $558,000, or 13.8% over the
first nine months of 1998. Expenses associated with employee expense
and benefits continues to be the largest category of non-interest
expenses. Salaries and benefits amount to 54.4% of total non-interest
expense for the nine months ended September 30, 1999, as compared to
52.3% for the first nine months of 1998. Salaries and benefits
amounted to $2,501,000 for the nine months ended September 30, 1999,
an increase of $391,000, or 18.5% over the first nine months of 1998.
The increase was a result of normal salary adjustments, higher
employee benefit costs and an increased number of employees. Net
occupancy expense amounted to $717,000 for the nine months ended
September 30, 1999, an increase of $10,000, or 1.4% over 1998. Other
non-interest expenses amounted to $1,378,000 for the nine months ended
September 30, 1999, an increase of $157,000, or 12.9% over the first
nine months of 1998. Even though our non-interest expenses have
increased more than historic averages, our overall non-interest
expense of less than 2% of average assets on an annualized basis for
1999 and 1998, places us among the leaders of our peer financial
institutions at controlling total non-interest expense.
INCOME TAXES
Effective tax planning has helped produce favorable net income.
The effective total income tax rate was 20.0% for the third quarter of
1999 as compared to 21.2% for the third quarter of 1998. For the nine
months ended September 30, 1999, our tax liability amounted to
$935,000, a decrease of $68,000 over 1998. Our effective tax rate of
19.4% as of September 30, 1999, compared to an effective tax rate of
21.5% for the first nine months of 1998.
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased to $334,284,000 as of September 30, 1999,
an increase of $31,256,000, or 10.3% over year-end 1998. Total
deposits increased to $249,976,000 as of September 30, 1999, an
increase of $2,885,000, or 1.2% over year-end 1998.
The Corporation used borrowed funds to support asset growth not
provided by deposit growth. Short-term borrowings increased to
$30,423,000, an increase of $23,789,000 over December 31, 1998. The
increase in short-term borrowings was the result of an increase in
securities sold under an agreement to repurchase for a cash
9
<PAGE>
management account. Long-term borrowings also increased to
$22,000,000 as of September 30, 1999, an increase of $9,000,000 over
year-end 1998.
EARNING ASSETS
Our primary earning asset, loans, net of unearned income
increased to $180,574,000 as of September 30, 1998, up $19,042,000, or
11.8% since year-end 1998. The loan portfolio is well diversified and
increases in the portfolio have been primarily from increased
originations of residential real estate loans and commercial real
estate loans.
In addition to loans, our investment portfolio, another earning
asset, increased in size from December 31, 1998, to September 30,
1999. Held-to-maturity securities amounted to $12,078,000 as of
September 30, 1999, a decrease of $1,907,000 since year-end 1998.
However, available-for-sale securities increased to $128,523,000 as of
September 30, 1999, an increase of $11,822,000, or 10.1% from year-end
1998.
ALLOWANCE FOR LOAN LOSSES
Management performs a quarterly analysis to determine the
adequacy of the allowance for loan losses. The methodology in
determining adequacy incorporates specific and general allocations
together with a risk/loss analysis on various segments of the
portfolio according to an internal loan review process. Management
maintains its loan review and loan classification standards consistent
with those of its regulatory supervisory authority. Management feels,
considering the conservative portfolio composition, which is largely
composed of small retail loans (mortgages and installments) with
minimal classified assets, low delinquencies, and favorable loss
history, that the allowance for loan loss is adequate to cover
foreseeable future losses.
Any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed under
Industry Guide 3 do not (i) represent or result from trends or
uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources, or
(ii) represent material credits about which management is aware of any
information which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
The company was required to adopt Financial Accounting Standards
Board Statement No. 114, "Accounting by Creditors for Impairment of a
Loan" - Refer to Note 5 above for details.
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual and restructured
loans, other real estate and foreclosed assets, together with the
loans past-due 90 days or more and still accruing. As of September
30, 1999, total non-performing assets were $826,101 as compared to
$881,000 on December 31, 1998. Non-performing assets to total loans
and foreclosed assets was .46% as of September 30, 1999, and .55% as
of December 31, 1998.
Interest income received on non-performing loans as of September
30, 1999, was $6,131 compared to $5,610 as of December 31, 1998.
Interest income, which would have been recorded on these loans under
the original terms as of September 30, 1999, and December 31, 1998,
was $62,445 and $96,245, respectively. As of September 30, 1999 and
December 31, 1998, there was no outstanding commitments to advance
additional funds with respect to these non-performing loans.
10
<PAGE>
DEPOSITS AND OTHER BORROWED FUNDS
As indicated previously, deposit growth amounted to $2,885,000 as
total deposits increased to $249,976,000 as of September 30, 1999, up
from $247,091,000 as of year-end 1998. During 1999, the Corporation
has experienced deposit growth in only interest bearing deposits.
CAPITAL STRENGTH
Normal increases in capital are generated by net income, less
cash dividends paid out. Also, net unrealized gains or losses on
investment securities available-for-sale decreased shareholders'
equity, or capital by $2,114,000 as of September 30, 1999, and
increased capital by $2,193,000 as of December 31, 1998. Our stock
repurchase plan has repurchased 100,000 shares and 35,134 shares as of
September 30, 1999 and December 31, 1998, respectively. This had an
effect of our reducing our total stockholders' equity by $3,097,000
and $1,191,000 as of September 30, 1999 and December 31, 1998,
respectively.
Leverage ratio and risk based capital ratios remain very strong.
As of September 30, 1999, our leverage ratio was 9.65% compared to
10.50% as of December 31, 1998. In addition, Tier I risk based
capital and total risk based capital ratio as of September 30, 1999,
were 16.43% and 17.86%, respectively. The same ratios as of December
31, 1998, were 18.62% and 20.11%, 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.
YEAR 2000 COMPLIANCE
Management has completed its assessment of all business processes
that could be affected by the Year 2000 issue. Each business process
assessment included a review of the information systems used in that
process, including related hardware and software, the involvement of
any third parties, and any affected operating equipment. The mission
critical systems determined to be critical for supporting the core
services offered by First Keystone Corporation have been remediated,
unit tested, and returned to production. Management has completed the
remediation and testing of all affected systems within the critical
business processes by the end of the second quarter of 1999.
The Corporation anticipates that its total Year 2000 project cost
will not exceed $100,000. This estimated project cost is based upon
currently available information and includes expenses paid to date.
The expenses for maintenance or modification of software associated
with the Year 2000 will be expensed as incurred. The costs of new
software will be capitalized and amortized over the software's useful
life. The aforementioned Year 2000 project cost estimate also may
change as the Corporation progresses in its Year 2000 program and
obtains additional information associated with and conducts further
testing concerning third parties. At this time, no significant
projects have been delayed as a result of the Corporation's Year 2000
effort.
11
<PAGE>
Management believes it has an effective plan in place to resolve
the Year 2000 issue in a timely manner and, thus far, activities have
tracked in accordance with the original plan. Management has in place
a business continuity plan and has developed contingency plans to
address potential risks in the event of Year 2000 failures, including
non-compliance by third parties. Despite First Keystone Corporation's
efforts to date to remediate affected systems and develop contingency
plans for potential risks, management has not yet completed all
activities associated with resolving its Year 2000 issues. In
addition, non-compliance by third parties (including loan customers)
and disruptions to the economy in general resulting from Year 2000
issues could also have a negative impact of undeterminable magnitude
on First Keystone Corporation.
12
<PAGE>
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 20, 1999, at
10:00 a.m.
<TABLE>
<CAPTION>
Votes Votes
Directors Elected Votes For Against Withheld
<S> <C> <C> <C>
John L. Coates 2,378,426 34,118 0
Dudley P. Cooley 2,385,107 27,437 0
Stanley E. Oberrender 2,385,207 27,337 0
<CAPTION>
Broker
Directors Elected Abstentions Non-Votes
<S> <C> <C>
John L. Coates 0 0
Dudley P. Cooley 0 0
Stanley E. Oberrender 0 0
</TABLE>
Directors Continuing:
John E. Arndt, term expires in 2001
J. Gerald Bazewicz, term expires in 2001
Budd L. Beyer, term expires in 2000
Robert E. Bull, term expires in 2001
Frederick E. Crispin, term expires in 2000
Jerome F. Fabian, term expires in 2000
Robert E. Wise, term expires in 2000
Matters Voted Upon:
Selection of J. H. Williams & Co., as auditors for the Corporation.
Votes For - 2,387,481
Votes Against - 798
Votes Withheld - 0
Abstentions - 24,265
Broker Non-Votes - 0
Item 5. Other Information
None.
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 Regulation S-K
Exhibit Number Description of Exhibit
3(i) Articles of Incorporation, as amended
(Incorporated by reference to Exhibit 3(i) to
Registrant's Form 10Q for the Quarter Ended
June 30, 1998 and Exhibit 3(i) to Registrant's
Annual Report on Form 10-KSB for the year ended
December 31, 1996.)
3(ii) Bylaws, as amended (Incorporated by reference
to Exhibit 3(ii) to Registrant's Annual Report
on Form 10-KSB for the year ended
December 31, 1996.)
10 Material Contracts (Incorporated by reference
to Exhibit 10 to Registrant's Form 10Q for the
quarter ended June 30, 1997)
11 Statement RE: Computation of Earnings Per
Share.
27 Financial Data Schedule.
(b) The Registrant has filed no reports on Form 8-K for
this quarter.
14
<PAGE>
FIRST KEYSTONE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly cause this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST KEYSTONE CORPORATION
Registrant
November 3, 1999 /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and
Chief Executive Officer
(Principal Executive Officer)
November 3, 1999 /s/ David R. Saracino
David R. Saracino
Treasurer/Assistant Secretary
(Principal Accounting Officer)
15
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
10 Material Contracts
Profit Sharing Plan Summary (Incorporated by
reference to Exhibit 10 (Page 16) to
Registrant's Form 10Q for the quarter
ended June 30, 1997) Deferred Compensation
(Incorporated by reference to Exhibit 10
(Page 17) to Registrant's Form 10Q
for the quarter ended June 30, 1997)
Other Executive Benefits (Incorporated by
reference to Exhibit 99 (Page 9) of the
Corporation's Annual Report on Form 10-KSB
for the year ended December 31, 1996)
Management Incentive Compensation Plan
(Incorporated by reference to Exhibit 10
(Page 18) to Registrant's Form 10Q for
the quarter ended June 30, 1997)
11 Computation of Earnings Per Share
27 Financial Data Schedule
16
EXHIBIT 11
FIRST KEYSTONE CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
For the Nine Month Period Ended September 30,
1999 1998
(Dollars in Thousands)
1999 1998
<S> <C> <C>
Primary
Net Income $ 3,878 $ 3,658
Shares
Weighted average number of
common shares outstanding 2,833,727 2,931,648
Adjustments - increases or
decreases None None
Weighted average number of
common shares outstanding
as adjusted 2,833,727 2,931,648
Primary earnings per common
share $ 1.35 $ 1.25
Assuming full dilution
Net Income $ 3,878 $ 3,658
Shares
Weighted average number of
common shares outstanding 2,833,727 2,931,746
Adjustments - increases or
decreases None None
Weighted average number of
common shares outstanding
as adjusted 2,833,727 2,931,746
Earnings per common share
assuming full dilution $ 1.35 $ 1.25
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,518
<INT-BEARING-DEPOSITS> 1
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 128,523
<INVESTMENTS-CARRYING> 12,078
<INVESTMENTS-MARKET> 11,867
<LOANS> 180,574
<ALLOWANCE> 2,572
<TOTAL-ASSETS> 334,284
<DEPOSITS> 249,976
<SHORT-TERM> 30,423
<LIABILITIES-OTHER> 1,928
<LONG-TERM> 22,000
0
0
<COMMON> 5,867
<OTHER-SE> 24,090
<TOTAL-LIABILITIES-AND-EQUITY> 334,284
<INTEREST-LOAN> 10,728
<INTEREST-INVEST> 6,207
<INTEREST-OTHER> 165
<INTEREST-TOTAL> 17,100
<INTEREST-DEPOSIT> 7,082
<INTEREST-EXPENSE> 1,687
<INTEREST-INCOME-NET> 8,331
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 173
<EXPENSE-OTHER> 4,596
<INCOME-PRETAX> 4,813
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,878
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.35
<YIELD-ACTUAL> 3.98
<LOANS-NON> 791
<LOANS-PAST> 35
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,521
<ALLOWANCE-OPEN> 2,421
<CHARGE-OFFS> 154
<RECOVERIES> 80
<ALLOWANCE-CLOSE> 2,572
<ALLOWANCE-DOMESTIC> 2,572
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 611
</TABLE>
