UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
Quarterly Report Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2000
Commission File Number: 2-88927
FIRST KEYSTONE CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2249083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
111 West Front Street, Berwick, PA 18603
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (570) 752-3671
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical date:
Common Stock, $2 Par Value, 2,833,727 shares as of March 31, 2000.
<PAGE>
PART I. - FINANCIAL INFORMATION
Item. 1 Financial Statements
<TABLE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
(Amounts in thousands, except per share data)
March December
2000 1999
<S> <C> <C>
ASSETS
Cash and due from banks $6,746 $6,884
Interest bearing deposits with banks 28 80
Available-for-sale securities carried
at estimated fair value 125,072 123,468
Investment securities, held-to-maturity
securities, estimated fair value
of $10,469 and $11,335 10,698 11,563
Loans, net of unearned income 188,264 185,231
Allowance for loan losses (2,600) (2,600)
________ ________
Net loans $185,664 $182,631
Bank premises and equipment 3,833 3,881
Other real estate owned 69 85
Accrued interest receivable 2,261 2,239
Other assets 2,501 2,685
________ ________
Total Assets $336,872 $333,516
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 20,842 $ 20,919
Interest bearing 234,425 223,761
Total deposits 255,267 244,680
Short-term borrowings 28,016 31,594
Long-term borrowings 21,000 26,000
Accrued expenses and other liabilities 2,017 1,884
________ ________
Total Liabilities 306,300 304,158
STOCKHOLDERS' EQUITY
Common stock, par value $2 per share 5,867 5,867
Surplus 9,761 9,761
Retained earnings 20,905 20,285
Accumulated other comprehensive
income (loss) (2,865) (3,459)
Less treasury stock at cost 100,000
shares in 2000 and 1999 (3,096) (3,096)
________ ________
Total Stockholders' Equity 30,572 29,358
________ ________
Total Liabilities and
Stockholders' Equity $336,872 $333,516
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
1
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED March 31, 2000 AND 1999
(Unaudited)
<CAPTION>
(Amounts in thousands except per share data)
2000 1999
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 3,834 $ 3,437
Interest and dividend income on
securities 2,209 1,946
Interest on deposits in banks 1 52
_________ _________
Total Interest Income $ 6,044 $ 5,435
INTEREST EXPENSE
Interest on deposits $ 2,549 $ 2,376
Interest on short-term borrowings 325 183
Interest on long-term borrowings 344 186
_________ _________
Total Interest Expense $ 3,218 $ 2,745
Net interest income $ 2,826 $ 2,690
Provision for loan losses 75 75
_________ _________
Net Interest Income After
Provision for Loan Losses $ 2,751 $ 2,615
OTHER INCOME
Service charges on deposit accounts $ 210 $ 196
Other non-interest income 142 144
Investment securities gains
(losses) net 3 24
_________ _________
Total Other Income $ 355 $ 364
OTHER EXPENSES
Salaries and employee benefits $ 967 $ 800
Net occupancy and fixed asset
expense 244 247
Other non-interest expense 535 444
_________ _________
Total Other Expenses $ 1,746 $ 1,491
Income before income taxes $ 1,360 $ 1,488
Applicable income tax (benefit) 202 265
_________ _________
Net Income $ 1,158 $ 1,223
PER SHARE DATA
Net Income $ .41 $ .42
Cash Dividends .19 .17
Weighted Average Shares
Outstanding 2,833,727 2,891,128
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
2
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED March 31, 2000 AND 1999
(Unaudited)
<CAPTION>
(Amounts in thousands)
2000 1999
<S> <C> <C>
OPERATING ACTIVITIES
Net income $1,158 $1,223
Adjustments to reconcile net income
to net cash provided (used)
by operating activities:
Provision for loan losses 75 75
Provision for depreciation and
amortization 100 100
Premium amortization on investment
securities 23 83
Discount accretion on investment
securities (151) (39)
Gain on sale of mortgage loans (1) (1)
Proceeds from sale of mortgage loans 605 31
Originations of mortgage loans for
resale (926) (2,040)
(Gain) loss on sales of investment
securities (3) (24)
(Gain) loss on sale of other real
estate owned (1) 0
Deferred income tax (benefit) (17) (8)
(Increase) decrease in interest
receivable and other assets (100) (389)
Increase (decrease) in interest
payable, accrued expenses
and other liabilities 133 33
_____ _____
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES $895 $(956)
INVESTING ACTIVITIES
Purchases of investment securities
available-for-sale $(14,081) $(25,585)
Proceeds from sales of investment
securities available-for-sale 11,919 14,705
Proceeds from maturities and
redemptions of investment
securities available for sale 821 4,501
Proceeds from maturities and
redemption ofinvestment
securities held-to-maturity 1,607 819
Net (increase) decrease in loans (2,856) (7,153)
Purchase of premises and equipment (52)
(94)
Proceeds from sale of other
real estate owned 86 0
_______ ________
NET CASH (USED) BY INVESTING
ACTIVITIES $(2,556) $(12,807)
FINANCING ACTIVITIES
Net increase (decrease) in
deposits $10,587 $ (3,610)
Net increase (decrease) in
short-term borrowings (3,578) 29,145
Net increase (decrease)in
long-term borrowings (5,000) 0
Acquisition of treasury stock 0 (652)
Cash dividends (538) (489)
_______ _______
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 1,471 $24,394
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (190) $10,631
CASH AND CASH EQUIVALENTS, BEGINNING 6,964 7,055
_______ _______
CASH AND CASH EQUIVALENTS, ENDING $ 6,774 $17,686
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during period for
Interest $ 3,218 $ 2,743
Income Taxes 0 19
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
3
<PAGE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of First Keystone Corporation and
Subsidiary (the "Corporation") are in accordance with generally
accepted accounting principles and conform to common practices within
the banking industry. The more significant policies follow:
Principles of Consolidation
The consolidated financial statements include the accounts of
First Keystone Corporation and its wholly-owned Subsidiary, The First
National Bank of Berwick (the "Bank"). All significant inter-company
balances and transactions have been eliminated in consolidation.
Nature of Operations
The Corporation, headquartered in Berwick, Pennsylvania, provides
a full range of banking, trust and related services through its wholly
owned Bank subsidiary and is subject to competition from other
financial institutions in connection with these services. The Bank
serves a customer base which includes individuals, businesses, public
and institutional customers primarily located in the Northeast Region
of Pennsylvania. The Bank has nine full service offices and 12 ATMs
located in Columbia, Luzerne and Montour Counties. The Corporation and
its subsidiary must also adhere to certain federal banking laws and
regulations and are subject to periodic examinations made by various
federal agencies.
The Corporation has a commercial banking operation and trust
department as its major lines of business. The commercial banking
operation includes a commercial services and retail services area and
has historically constituted over 90% of the Corporation's revenue and
profit and is the only reportable segment. Commercial services
includes lending and related financial services to small and medium
sized corporations and other business entities. The retail services
includes sales and distribution (direct lending, deposit gathering,
and retail mortgage lending) primarily to individuals. The trust
department includes investment management, estate planning, employee
benefit administration, and personal trust services which produce fee
based income. The business units are identified by the products or
services offered by the business unit and the channel through which
the product or service is delivered. The accounting policies of the
individual business units are the same as those of the Corporation.
Use of Estimates
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of these consolidated financial statements
and the reported amounts of income and expenses during the reporting
periods. Actual results could differ from those estimates.
Investment Securities
The Corporation classifies its investment securities as either
"Held-to-Maturity" or "Available-for-Sale" at the time of purchase.
Debt securities are classified as held-to-maturity when the
Corporation has the ability and positive intent to hold the securities
to maturity. Investment securities Held-to-Maturity are carried at
cost adjusted for amortization of premium and accretion of discount to
maturity.
Debt securities not classified as Held-to-Maturity and equity
securities are included in the Available-for-Sale category and are
carried at fair value. The amount of any unrealized gain or loss, net
of the effect of deferred income taxes, is reported as other
comprehensive income as a component of Stockholders' Equity.
Management's 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.
4
<PAGE>
The cost of debt securities classified as Held-to-Maturity or
Available-for-Sale is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and accretion,
as well as interest and dividends is included in interest income from
investments. Realized gains and losses are included in net investment
securities gains. The cost of investment securities sold, redeemed or
matured is based on the specific identification method.
Loans
Loans are stated at their outstanding unpaid principal balances,
net of deferred fees or costs, unearned income and the allowance for
loan losses. Interest on installment loans is recognized as income
over the term of each loan, generally, by the "actuarial method".
Interest on all other loans is primarily recognized based upon the
principal amount outstanding. Loan origination fees and certain direct
loan origination costs have been deferred with the net amount
amortized using the interest method over the contractual life of the
related loans as an interest yield adjustment.
Mortgage loans held for resale are carried at the lower of cost
or market on an aggregate basis. These loans are sold without recourse
to the Corporation.
Non-Accrual Loans - Generally, a loan is classified as non-accrual and
the accrual of interest on such a loan is discontinued when the
contractual payment of principal or interest has become 90 days past
due or management has serious doubts about further collectibility of
principal or interest, even though the loan currently is performing. A
loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well secured. When a loan is
placed on non-accrual status, unpaid interest credited to income in
the current year is reversed and unpaid interest accrued in prior
years is charged against the allowance for loan losses. Certain non-accrual
loans may continue to perform, that is, payments are still
being received. Generally, the payments are applied to principal.
These loans remain under constant scrutiny and if performance
continues, interest income may be recorded on a cash basis based on
management's judgement as to collectibility of principal.
Allowance for Loan Losses - The allowance for loan losses is
established through provisions for loan losses charged against income.
Loans deemed to be uncollectible are charged against the allowance for
loan losses and subsequent recoveries, if any, are credited to the
allowance.
A principal factor in estimating the allowance for loan losses is
the measurement of impaired loans. A loan is considered impaired when,
based on current information and events, it is probable that the
Corporation will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Under current accounting
standards, the allowance for loan losses related to impaired loans is
based on discounted cash flows using the effective interest rate of
the loan or the fair value of the collateral for certain collateral
dependent loans.
The allowance for loan losses is maintained at a level estimated
by management to be adequate to absorb potential loan losses.
Management's periodic evaluation of the adequacy of the allowance for
loan losses is based on the Corporation's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may
affect the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions, and
other relevant factors. This evaluation is inherently subjective as it
requires material estimates including the amounts and timing of future
cash flows expected to be received on impaired loans that may be
susceptible to significant change.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation computed principally on the straight-line method over the
estimated useful lives of the assets. Maintenance and minor repairs
are charged to operations as incurred. The cost and accumulated
depreciation of the premises and equipment retired or sold are
eliminated from the property accounts at the time of retirement or
sale, and the resulting gain or loss is reflected in current
operations.
5
<PAGE>
Mortgage Servicing Rights
The Corporation originates and sells real estate loans to
investors in the secondary mortgage market. After the sale, the
Corporation retains the right to service certain loans. When
originated mortgage loans are sold and servicing is retained, a
servicing asset is capitalized based on relative fair value at the
date of sale. Servicing assets are amortized as an offset to other
fees in proportion to, and over the period of, estimated net servicing
income. The unamortized cost is included in other assets in the
accompanying consolidated balance sheet. The servicing rights are
periodically evaluated for impairment based on their relative fair
value.
Other Real Estate Owned
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. Revenues derived from and costs to maintain
the assets and subsequent gains and losses on sales are included in
other non-interest income and expense.
Income Taxes
The provision for income taxes is based on the results of
operations, adjusted primarily for tax-exempt income. Certain items of
income and expense are reported in different periods for financial
reporting and tax return purposes. Deferred tax assets and liabilities
are determined based on the differences between the consolidated
financial statement and income tax bases of assets and liabilities
measured by using the enacted tax rates and laws expected to be in
effect when the timing differences are expected to reverse. Deferred
tax expense or benefit is based on the difference between deferred tax
asset or liability from period to period.
Per Share Data
Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share, requires dual presentation of basic and fully
diluted earnings per share. Basic earnings per share is calculated by
dividing net income by the weighted average number of shares of common
stock outstanding at the end of each period. Fully diluted earnings
per share is calculated by increasing the denominator for the assumed
conversion of all potentially dilutive securities. The Corporation's
dilutive securities are limited to stock options which currently have
no effect on earnings per share since the market price per share
historically has not been greater than the lowest stock option
exercise price.
Per share data has been adjusted retroactively for stock splits
and stock dividends.
Cash Flow Information
For purposes of reporting consolidated cash flows, cash and cash
equivalents include cash on hand and due from other banks and interest
bearing deposits in other banks. The Corporation considers cash
classified as interest bearing deposits with other banks as a cash
equivalent since they are represented by cash accounts essentially on
a demand basis.
Trust Assets and Income
Property held by the Corporation in a fiduciary or agency
capacity for its customers is not included in the accompanying
consolidated financial statements since such items are not assets of
the Corporation. Trust Department income is recognized on a cash basis
and is not materially different than if it were reported on an accrual
basis.
New Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 133 (as
amended by SFAS No. 137), "Accounting for Derivative Instruments and
Hedging Activities", becomes effective for financial reporting periods
beginning after June 15, 2000. SFAS 133 requires fair value accounting
for all stand-alone derivatives and many derivatives embedded in other
instruments and contracts. Since the Corporation does not enter into
transactions involving derivatives described in the standard and does
not engage in hedging activities, the standard is not expected to have
a significant impact on the Corporation's consolidated financial
condition or results of operations.
6
<PAGE>
NOTE 2. ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Changes in the allowance for loan losses for the periods ended
March 31, 2000, and March 31, 1999, were as follows:
(amounts in thousands)
2000 1999
<S> <C> <C>
Balance, January 1 $2,600 $2,421
Provision charged to operations 75 75
Loans charged off (79) (34)
Recoveries 4 5
______ ______
Balance, March 31 $2,600 $2,467
</TABLE>
At March 31, 2000, the recorded investment in loans that are
considered to be impaired as defined by SFAS No. 114 was $53,051. No
additional charge to operations was required to provide for the
impaired loans since the total allowance for loan losses is estimated
by management to be adequate to provide for the loan loss allowance
required by SFAS No. 114 along with any other potential losses.
At March 31, 2000, there were no significant commitments to lend
additional funds with respect to non-accrual and restructured loans.
NOTE 3. SHORT-TERM BORROWINGS
Federal funds purchased, securities sold under agreements to
repurchase and Federal Home Loan Bank advances generally represent
overnight or less than 30-day borrowings. U.S. Treasury tax and loan
notes for collections made by the Bank are payable on demand.
NOTE 4. LONG-TERM BORROWINGS
Long-term borrowings are comprised of advances from the Federal
Home Loan Bank (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.
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.
7
<PAGE>
The Corporation may require collateral or other security to
support financial instruments with off-balance sheet credit risk. The
contract or notional amounts at March 31, 2000, and December 31, 1999,
were as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
March 31, December 31,
2000 1999
<S> <C> <C>
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $12,746 $17,348
Standby letters of credit $ 629 $ 633
</TABLE>
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses that may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Corporation upon extension of
credit, is based on management's credit evaluation of the counter-party.
Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by
the Corporation to guarantee the performance of a customer to a third
party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The Corporation may hold collateral to support standby
letters of credit for which collateral is deemed necessary.
The Corporation grants commercial, agribusiness and residential
loans to customers within the state. It is management's opinion that
the loan portfolio was balanced and diversified at March 31, 2000, to
the extent necessary to avoid any significant concentration of credit
risk.
NOTE 6. STOCKHOLDERS' EQUITY
Changes in Stockholders' Equity for the period ended March 31,
2000, were are follows:
<TABLE>
<CAPTION>
(Amounts in thousands, except common share data)
Common Common
Shares Stock Surplus
_______ ______ ______
<S> <C> <C> <C>
Balance at January 1, 2000 2,933,727 $5,867 $9,761
Comprehensive Income:
Net Income
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects
Total Comprehensive
income (loss)
Cash dividends -
$.19 per share _________ ______ ______
Balance at March 31, 2000 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, 2000 $20,285 $(3,459)
Comprehensive Income:
Net Income $1,158 1,158
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects 594 594
______
Total Comprehensive
income (loss) $1,752
Cash dividends -
$.19 per share (538)
_______ _______
Balance at March 31, 2000 $20,905 $(2,865)
<CAPTION>
(Amounts in thousands except Common Shares data)
Treasury
Stock Total
______ _____
<S> <C> <C>
Balance at January 1, 2000 $(3,096) $29,358
Comprehensive Income:
Net Income 1,158
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects 594
Total Comprehensive
income (loss)
Cash dividends -
$.19 per share (538)
_______ _______
Balance at March 31, 2000 $(3,096) $30,572
</TABLE>
8
<PAGE>
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
reflect all adjustments, which are in the opinion of management,
necessary to present fairly the consolidated financial condition and
consolidated results of operations and cash flows for the interim
period presented and that all such adjustments to the consolidated
financial statements are of a normal recurring nature.
The results of operations for the three-month period ended March
31, 2000, 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, 1999, filed with
the Securities and Exchange Commission.
NOTE 8. AMENDMENT OF RULE 10-01 OF REGULATION S-X REQUIRING REVIEWED
QUARTERLY FINANCIAL STATEMENTS
In accordance with the new amendment effective for the period
ended March 31, 2000, the accompanying consolidated financial
statements have been reviewed by Independent Certified Public
Accountants whose report is being submitted as an integral part of
this Form 10Q filing.
9
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS
Board of Directors and Stockholders of First Keystone Corporation:
We have reviewed the accompanying consolidated balance sheet of First
Keystone Corporation and Subsidiary as of March 31, 2000, and the
related consolidated statements of income and cash flows for the
three-month period then ended. These consolidated financial
statements are the responsibility of the management of First Keystone
Corporation and Subsidiary.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the March 31, 2000, financial statements for
them to be in conformity with generally accepted accounting
principles.
The accompanying balance sheet of First Keystone Corporation and
Subsidiary for the year ended December 31, 1999, was audited by us as
part of our audit of the financial statements for the year ended
December 31, 1999, taken as a whole and we expressed an unqualified
opinion on them in our report dated January 10, 2000, but we have not
performed any auditing procedures since that date.
The accompanying statements of income and cash flows of First Keystone
Corporation and Subsidiary for the three-month period ended March 31,
2000, were not audited by us and, accordingly, we do not express an
opinion on them.
/s/ J. H. Williams & Co., LLP
J. H. Williams & Co., LLP
Kingston, Pennsylvania
May 2, 2000
10
<PAGE>
Item 2. First Keystone Corporation Management's Discussion and
Analysis of Financial Condition and Results of Operation
as of March 31, 2000
RESULTS OF OPERATIONS
First Keystone Corporation realized earnings for the first
quarter of 2000 of $1,158,000, a decrease of $65,000, or 5.3% over the
first quarter of 1999. The decrease in net income for the first
quarter of 2000 was a result of a tightening in net interest income, a
slight decrease in total other income, and an increase in total other
expense. Other expenses, non-interest expenses, increased 17.1% in
the first quarter of 2000 over 1999 primarily because of expenses
relating to our ninth full service office opening in the fourth
quarter of 1999. On a per share basis, net income per share decreased
to $.41 for the first three months of 2000 compared to $.42 for the
first three months of 1999, while dividends increased to $.19 per
share up from $.17 in 1999, or an increase of 11.8%.
Year-to-date net income annualized amounts to a return on average
common equity of 15.83% and a return on assets of 1.40%. For the
three months ended March 31, 1999, these measures were 14.34% and
1.57%, respectively on an annualized basis.
NET INTEREST INCOME
The major source of operating income for the Corporation is net
interest income, defined as interest income less interest expense. In
the first quarter of 2000, net interest income increased slightly
because of our tightening net interest margin. In the first quarter
of 2000, interest income amounted to $6,044,000, an increase of
$609,000 or 11.2% over the first quarter of 1999, while interest
expense amounted to $3,218,000 in the first quarter of 2000, an
increase of $473,000, or 17.2% over the first quarter of 1999.
Accordingly, net interest income was $2,826,000 in the first quarter
of 2000, an increase of $136,000, or 5.1% over the first quarter of
1999.
Our net interest margin for the quarter ended March 31, 2000, was
3.96% compared to 4.06% for the quarter ended March 31, 1999.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the quarter ended March 31,
2000, was $75,000, equal to the $75,000 provision for the first
quarter of 1999. Net charge-offs totaled $75,000 for the three months
ended March 31, 2000, as compared to $29,000 for the first three
months of 1999. The allowance for loan losses as a percentage of
loans, net of unearned interest, was 1.38% as of March 31, 2000, as
compared to 1.45% as of March 31, 1999.
NON-INTEREST INCOME
Total non-interest income or other income was $355,000 for the
quarter ended March 31, 2000, as compared to $364,000 for the quarter
ended March 31, 1999, a decrease of $9,000, or 2.5%. Excluding
investment security gains and losses, non-interest income was $352,000
for the first quarter of 2000, an increase of $12,000 over the first
quarter of 1999. An increase in service charges on deposit accounts,
was the primary reason for the increase in non-interest income.
11
<PAGE>
NON-INTEREST EXPENSES
Total non-interest expenses, or other expenses, was $1,746,000
for the quarter ended March 31, 2000, as compared to $1,491,000 for
the quarter ended March 31, 1999. The increase of $255,000 is
comprised of salary and benefits increasing $167,000, occupancy
expense decreasing $3,000, and other non-interest expense increasing
$91,000. The increase in non-interest expenses was primarily the
result of increased personnel expenses and overhead expenses
associated with the opening in the fourth quarter of 1999 of our ninth
full service office.
Expenses associated with employees (salaries and employee
benefits) continue to be the largest category of non-interest
expenses. Salaries and benefits amount to 55.4% of total other non-interest
expense for the three months ended March 31, 2000, as
compared to 53.7% for the first three months of 1999. Other non-interest
expenses amounted to $535,000 for the three months ended
March 31, 2000, an increase of $91,000, or 20.5% over the first three
months of 1999. Even though our non-interest expenses increased in
the first quarter somewhat more than historic averages, our overall
non-interest expense of approximately 2% of average assets on an
annualized basis, 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 14.9% for the first quarter of
2000 as compared to 17.8% for the first quarter of 1999. The
decrease in our effective tax rate in the first quarter of 2000 was
due primarily to increased purchases of municipal (tax-free
investments) securities at relatively attractive interest rates.
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased to $336,872,000 as of March 31, 2000, an
increase of $3,356,000, or 1.0% over year-end 1999. Total deposits
increased to $255,267,000 as of March 31, 2000, an increase of
$10,587,000, or 4.3% over year-end 1999.
The Corporation was able to reduce borrowed funds with the
increase in total deposits. Short-term borrowings decreased by
$3,578,000 to $28,016,000 as of March 31, 2000, and long-term
borrowings decreased by $5,000,000 to $21,000,000 as of March 31,
2000.
EARNING ASSETS
Our primary earning asset, loans, net of unearned income
increased to $188,264,000 as of March 31, 2000, up $3,033,000, or 1.6%
since year-end 1999. The loan portfolio continues to be well
diversified and overall asset quality remains strong with past-dues
remaining stable and non-performing assets down from year-end 1999.
Our investment portfolio remained stable in size from December
31, 1999, to March 31, 2000. Held-to-maturity securities amounted to
$10,698,000 as of March 31, 2000, a decrease of $865,000 from December
31, 1999. However, available-for-sale securities amounted to
$125,072,000 as of March 31, 2000, an increase of
12
<PAGE>
$1,604,000 from year-end 1999. Interest bearing deposits with banks
decreased to $28,000,000 as of March 31, 2000, compared to $80,000 as
of December 31, 1999.
ALLOWANCE FOR LOAN LOSSES
Management performs a quarterly analysis to determine the
adequacy of the allowance for loan losses. The methodology in
determining adequacy incorporates specific and general allocations
together with a risk/loss analysis on various segments of the
portfolio according to an internal loan review process. Management
maintains its loan review and loan classification standards consistent
with those of its regulatory supervisory authority. Management feels,
considering the conservative portfolio composition, which is largely
composed of small retail loans (mortgages and installments) with
minimal classified assets, low delinquencies, and favorable loss
history, that the allowance for loan loss is adequate to cover
foreseeable future losses.
Any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed under
Industry Guide 3 do not (i) represent or result from trends or
uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources, or
(ii) represent material credits about which management is aware of any
information which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
The Corporation was required to adopt Financial Accounting
Standards Board Statement No. 114, "Accounting by Creditors for
Impairment of a Loan" - Refer to Note 5 above for details.
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual and restructured
loans, other real estate and foreclosed assets, together with loans
past-due 90 days or more and still accruing. As of March 31, 2000,
total non-performing assets were $693,000 as compared to $750,000 on
December 31, 1999. Non-performing assets to total loans and
foreclosed assets was .37% as of March 31, 2000, and .40% as of
December 31, 1999.
Interest income received on non-performing loans as of March 31,
2000, was $225 compared to $6,380 as of December 31, 1999. Interest
income, which would have been recorded on these loans under the
original terms as of March 31, 2000, and December 31, 1999, were
$14,567 and $68,569, respectively. As of March 31, 2000 and December
31, 1999, 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 $10,587,000 as
non-interest bearing deposits decreased by $77,000 and interest
bearing deposits increased by $10,664,000 as of March 31, 2000, from
year-end 1999. Total short-term and long-term borrowings decreased by
$8,578,000 from year-end 1999.
CAPITAL STRENGTH
Normal increases in capital are generated by net income, less
cash dividends paid out. Also, net unrealized losses on investment
securities available-for-sale decreased shareholders' equity, or
capital, net of taxes by $2,865,000 as of March 31, 2000, and
$3,459,000 as of December 31, 1999. Our stock repurchase plan has
13
<PAGE>
been completed with 100,000 shares being repurchased as of March 31,
2000 and December 31, 1999. This had an effect of our reducing our
total stockholders' equity by $3,096,000 as of both March 31, 2000 and
December 31, 1999.
Leverage ratio and risk based capital ratios remain very strong.
As of March 31, 2000, our leverage ratio was 10.10% as compared to
10.02% as of December 31, 1999. In addition, Tier 1 risk based
capital and total risk based capital ratio as of March 31, 2000, were
16.55% and 17.90%, respectively. The same ratios as of December 31,
1999, were 16.43% and 17.85%, respectively.
LIQUIDITY
The liquidity position of the Corporation remains adequate to
meet customer loan demand and deposit fluctuation. Managing liquidity
remains an important segment of asset liability management. Our
overall liquidity position is maintained by an active asset liability
management committee.
Management feels its current liquidity position is satisfactorily
given a very stable core deposit base which has increased annually.
Secondly, our loan payments and principal paydowns on our mortgage
backed securities provide a steady source of funds. Also, short-term
investments and maturing investment securities represent additional
sources of liquidity. Finally, short-term borrowings are readily
accessible at the Federal Reserve Bank, Atlantic Central Bankers Bank,
or the Federal Home Loan Bank.
YEAR 2000 COMPLIANCE
During 1999, management completed the process of preparing its
computer systems and applications for the Year 2000. The process
involves identifying and remediating date recognition problems in
computer systems and software and other operating equipment that could
be caused by the date change from December 31, 1999, to January 1,
2000. In addition, the process involved working with third parties to
address their year 2000 issues and developing contingency plans to
address potential risks in the event of Year 2000 failures. To date,
First Keystone Corporation has successfully managed the transition
into the Year 2000.
Unanticipated problems associated with non-compliance by third
parties and disruptions to the economy in general resulting from Year
2000 issues could still have a negative impact on First Keystone
Corporation. Management will continue to monitor all business
processes, including interaction with customers, vendors, and other
third parties throughout 2000 to address any issues and insure all
processes and systems continue to function properly.
Through 1999, the Corporation estimates that its total Year 2000
project cost did not exceed $100,000. The expenses for maintenance or
modification of software associated with the Year 2000 were expensed
as incurred. The costs of new software were capitalized and amortized
over the software's useful life. The aforementioned Year 2000 project
cost may change as the Corporation progresses through 2000. Some
additional project costs are expected to be incurred in 2000 for
ongoing monitoring and support activities. These costs will be
expensed as incurred and are estimated not to exceed $25,000.
Management believes it has an effective plan in place to address
the Year 2000 issues in a timely manner and, thus far, activities have
tracked in accordance with the original plan.
14
<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 18, 2000, at 10:00 a.m.
<TABLE>
<CAPTION>
Votes Votes
Directors Elected Votes For Against Withheld
<S> <C> <C> <C>
Budd L. Beyer 2,404,890 4,268 0
Frederick E. Crispin, Jr. 2,404,890 4,268 0
Jerome F. Fabian 2,406,188 2,970 0
Robert J. Wise 2,405,140 4,018 0
<CAPTION>
Broker
Directors Elected Abstentions Non-Votes
<S> <C> <C>
Budd L. Beyer 0 0
Frederick E. Crispin, Jr. 0 0
Jerome F. Fabian 0 0
Robert J. Wise0 0 0
</TABLE>
Directors Continuing:
John E. Arndt, term expires in 2001
J. Gerald Bazewicz, term expires in 2001
Robert E. Bull, term expires in 2001
John L. Coates, term expires in 2002
Dudley P. Cooley, term expires in 2002
Stanley E. Oberrender, term expires in 2002
Matters Voted Upon:
Selection of J. H. Williams & Co. LLP, as auditors for the
Corporation.
Votes For - 2,406,872
Votes Against - 1,204
Votes Withheld - 0
Abstentions - 1,082
Broker Non-Votes - 0
Item 5. Other Information
None.
15
<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 Annual Report of 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.
16
<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
May 11, 2000 /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and
Chief Executive Officer
(Principal Executive Officer)
May 11, 2000 /s/ David R. Saracino
David R. Saracino
Treasurer/Assistant Secretary
(Principal Accounting Officer)
17
<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 Compensation of Earning Per Share
27 Financial Data Schedule
18
<PAGE>
EXHIBIT 11
FIRST KEYSTONE CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
For the Three Month Period Ended March 31,
2000 1999
(Dollars in Thousands)
2000 1999
<S> <C> <C>
Primary
Net Income $ 1,158 $ 1,223
Shares
Weighted average number of
common shares outstanding 2,833,727 2,891,128
Adjustments - increases or
decreases None None
Weighted average number of
common shares outstanding
as adjusted 2,833,727 2,891,128
Primary earnings per common
share $ .41 $ .42
Assuming full dilution
Net Income $ 1,158 $ 1,223
Shares
Weighted average number of
common shares outstanding 2,833,727 2,891,128
Adjustments - increases or
decreases None None
Weighted average number of
common shares outstanding
as adjusted 2,833,727 2,891,128
Earnings per common share
assuming full dilution $ .41 $ .42
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,746
<INT-BEARING-DEPOSITS> 28
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 125,072
<INVESTMENTS-CARRYING> 10,698
<INVESTMENTS-MARKET> 10,469
<LOANS> 188,264
<ALLOWANCE> 2,600
<TOTAL-ASSETS> 336,872
<DEPOSITS> 255,267
<SHORT-TERM> 28,016
<LIABILITIES-OTHER> 2,017
<LONG-TERM> 21,000
0
0
<COMMON> 5,867
<OTHER-SE> 24,705
<TOTAL-LIABILITIES-AND-EQUITY> 336,872
<INTEREST-LOAN> 3,834
<INTEREST-INVEST> 2,209
<INTEREST-OTHER> 1
<INTEREST-TOTAL> 6,044
<INTEREST-DEPOSIT> 2,549
<INTEREST-EXPENSE> 669
<INTEREST-INCOME-NET> 2,826
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 1,746
<INCOME-PRETAX> 1,360
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,158
<EPS-BASIC> .41
<EPS-DILUTED> .41
<YIELD-ACTUAL> 3.95
<LOANS-NON> 596
<LOANS-PAST> 28
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,761
<ALLOWANCE-OPEN> 2,600
<CHARGE-OFFS> 79
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 2,600
<ALLOWANCE-DOMESTIC> 2,600
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 395
</TABLE>
