EXHIBIT 13
EXCERPT FROM ANNUAL REPORT TO SHAREHOLDERS
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
4
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 and 1998
<CAPTION>
___________________________________________________________________________
1999 1998
___________________________________________________________________________
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,883,976 $ 7,033,112
Interest-bearing deposits
in other banks 80,157 22,489
Investment securities Available-
for-Sale 123,467,820 116,700,864
Investment securities Held-to-
Maturity (estimated fair value 1999
- $11,335,286; 1998 - $14,015,044) 11,562,998 13,984,681
Loans, net of unearned income 185,230,902 161,532,639
Allowance for loan losses (2,599,550) (2,421,042)
____________ ____________
Net loans $182,631,352 $159,111,597
____________ ____________
Premises and equipment, net 3,881,011 3,757,565
Other Real Estate Owned 84,900 -
Accrued interest receivable 2,238,835 2,133,030
Other assets 2,684,738 285,143
____________ ____________
TOTAL ASSETS $333,515,787 $303,028,481
LIABILITIES
Deposits:
Non-interest bearing $ 20,919,398 $ 22,749,074
Interest bearing 223,760,786 224,342,445
____________ ____________
Total Deposits $244,680,184 $247,091,519
Short-term borrowings 31,594,327 6,633,646
Long-term borrowings 26,000,000 13,000,000
Accrued interest and other expenses 1,831,865 1,521,029
Other liabilities 51,892 1,029,138
____________ ____________
TOTAL LIABILITIES $304,158,268 $269,275,332
____________ ____________
STOCKHOLDERS' EQUITY
Preferred stock, par value $10.00
per share; authorized and
unissued 500,000 shares $ - $ -
Common stock, par value $2.00 per
share; authorized 10,000,000
shares; issued 2,933,727 shares 5,867,454 5,867,454
Surplus 9,761,066 9,761,066
Retained earnings 20,285,218 17,123,122
Accumulated other comprehensive
income (loss) (3,459,538) 2,192,528
Treasury stock at cost 100,000
shares 1999; 35,134 shares 1998 (3,096,681) (1,191,021)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY $ 29,357,519 $ 33,753,149
____________ ____________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $333,515,787 $303,028,481
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4 FIRST KEYSTONE CORPORATION (bullet) Annual Report 1999
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
<CAPTION>
___________________________________________________________________________
1999 1998
___________________________________________________________________________
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $14,567,163 $13,412,619
Interest and dividends on
investment securities:
Taxable 5,098,399 4,301,941
Tax-exempt 3,087,924 2,562,325
Dividends 252,460 179,521
Deposits in banks 166,666 246,822
___________ ___________
Total interest income $23,172,612 $20,703,228
___________ ___________
INTEREST EXPENSE
Deposits $ 9,496,065 $ 9,208,368
Short-term borrowings 1,383,099 303,467
Long-term borrowings 1,009,031 817,313
___________ ___________
Total interest expense $11,888,195 $10,329,148
___________ ___________
Net interest income $11,284,417 $10,374,080
Provision for loan losses 325,000 275,000
___________ __________
Net interest income after
provision for loan losses $10,959,417 $10,099,080
___________ ___________
NON-INTEREST INCOME
Trust Department $ 577,152 $ 524,835
Service charges and fees 940,144 749,705
Gain on sale of loans 34,820 126,409
Investment securities gains
(losses) - net 123,738 178,634
Other 38,731 48,555
___________ ___________
Total non-interest income $ 1,714,585 $ 1,628,138
___________ ___________
NON-INTEREST EXPENSE
Salaries and employee benefits $ 3,453,167 $ 2,887,862
Occupancy, net 401,120 403,242
Furniture and equipment 550,620 516,186
Other 1,905,064 1,727,790
___________ ___________
Total non-interest expense $ 6,309,971 $ 5,535,080
Income before income taxes $ 6,364,031 $ 6,192,138
Income tax expense 1,203,966 1,304,606
___________ ___________
NET INCOME $ 5,160,065 $ 4,887,532
PER SHARE DATA
Net income $ 1.80 $ 1.67
Cash dividends $ .70 $ .59
Weighted average shares
outstanding 2,862,890 2,925,695
<CAPTION>
___________________________________________________________________________
1997
___________________________________________________________________________
<S> <C>
INTEREST INCOME
Interest and fees on loans $12,923,557
Interest and dividends on
investment securities:
Taxable 3,727,915
Tax-exempt 2,288,362
Dividends 140,973
Deposits in banks 264,015
___________
Total interest income $19,344,822
___________
INTEREST EXPENSE
Deposits $ 8,437,271
Short-term borrowings 230,071
Long-term borrowings 713,710
___________
Total interest expense $ 9,381,052
___________
Net interest income $ 9,963,770
Provision for loan losses 325,000
___________
Net interest income after
provision for loan losses $ 9,638,770
___________
NON-INTEREST INCOME
Trust Department $ 456,880
Service charges and fees 669,252
Gain on sale of loans 34,107
Investment securities gains
(losses) - net 67,957
Other 33,855
___________
Total non-interest income $ 1,262,051
NON-INTEREST EXPENSE
Salaries and employee benefits $ 2,626,752
Occupancy, net 331,962
Furniture and equipment 487,683
Other 1,486,748
__________
Total non-interest expense $ 4,933,145
Income before income taxes $ 5,967,676
Income tax expense 1,307,436
___________
NET INCOME $ 4,660,240
PER SHARE DATA
Net income $ 1.59
Cash dividends $ .47
Weighted average shares
outstanding 2,933,727
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
5
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
<CAPTION>
___________________________________________________________________________
Common Comprehensive
Stock Surplus Income (Loss)
___________________________________________________________________________
<S> <C> <C> <C>
Balance At December 31, 1996 $1,778,294 $6,654,396
Comprehensive Income:
Net income $4,660,240
Change in net unrealized
gain (loss) on
investment securities
available-for-sale, net
of reclassification
adjustment and tax
effects 1,077,383
__________
Total comprehensive income $5,737,623
10% stock dividend 177,524 3,106,670
Dividends paid in lieu of
fractional shares
Cash dividends - $.47
per share
Balance At December 31, 1997 $1,955,818 $9,761,066
Comprehensive Income:
Net income $4,887,532
Change in net unrealized
gain (loss) on
investment securities
available-for-sale, net
of reclassification
adjustment and tax
effects (35,237)
__________
Total comprehensive income $4,852,295
3 for 1 stock split in the
form of a 200% stock
dividend 3,911,636
Cash dividends - $.59
per share
Acquisition of 35,134
shares of treasury stock
Balance At December 31, 1998 $5,867,454 $9,761,066
Comprehensive Income:
Net income $5,160,065
Change in net unrealized
gain (loss) on
investment securities
available-for-sale, net
of reclassification
adjustment and tax
effects (5,652,066)
__________
Total comprehensive
income (loss) $ (492,001)
Cash dividends - $.70
per share
Acquisition of 64,866
shares of treasury stock
Balance At December 31, 1999 $5,867,454 $9,761,066
<CAPTION>
___________________________________________________________________________
Accumulated
Other
Retained Comprehensive Treasury
Earnings Income (Loss) Stock
___________________________________________________________________________
<S> <C> <C> <C>
Balance At December 31, 1996 $17,889,923 $1,150,382 $ -
Comprehensive Income:
Net income $4,660,240
Change in net unrealized
gain (loss) on
investment securities
available-for-sale, net
of reclassification
adjustment and tax
effects 1,077,383
Total comprehensive income
10% stock dividend (3,284,194)
Dividends paid in lieu of
fractional shares (5,650)
Cash dividends - $.47
per share (1,386,901)
___________ __________ ___________
Balance At December 31, 1997 $17,873,418 $2,227,765 $ -
Comprehensive Income:
Net income $4,887,532
Change in net unrealized
gain (loss) on
investment securities
available-for-sale, net
of reclassification
adjustment and tax
effects (35,237)
Total comprehensive income
3 for 1 stock split in the
form of a 200% stock
dividend (3,911,636)
Cash dividends - $.59
per share (1,726,192)
Acquisition of 35,134
shares of treasury stock (1,191,021)
___________ __________ ___________
Balance At December 31, 1998 $17,123,122 $2,192,528 $(1,191,021)
Comprehensive Income:
Net income $5,160,065
Change in net unrealized
gain (loss) on
investment securities
available-for-sale, net
of reclassification
adjustment and tax
effects (5,652,066)
Total comprehensive
income (loss)
Cash dividends - $.70
per share (1,997,969)
Acquisition of 64,866
shares of treasury stock (1,905,660)
___________ __________ ___________
Balance At December 31, 1999 $20,285,218 $(3,459,538) $(3,096,681)
<CAPTION>
___________________________________________________________________________
Total
___________________________________________________________________________
<S> <C>
Balance At December 31, 1996 $27,472,995
Comprehensive Income:
Net income $ 4,660,240
Change in net unrealized
gain (loss) on
investment securities
available-for-sale, net
of reclassification
adjustment and tax
effects 1,077,383
Total comprehensive income
10% stock dividend -
Dividends paid in lieu of
fractional shares (5,650)
Cash dividends - $.47
per share (1,386,901)
___________
Balance At December 31, 1997 $31,818,067
Comprehensive Income:
Net income $4,887,532
Change in net unrealized
gain (loss) on
investment securities
available-for-sale, net
of reclassification
adjustment and tax
effects (35,237)
Total comprehensive income
3 for 1 stock split in the
form of a 200% stock
dividend -
Cash dividends - $.59
per share (1,726,192)
Acquisition of 35,134
shares of treasury stock (1,191,021)
___________
Balance At December 31, 1998 $33,753,149
Comprehensive Income:
Net income $5,160,065
Change in net unrealized
gain (loss) on
investment securities
available-for-sale, net
of reclassification
adjustment and tax
effects (5,652,066)
Total comprehensive
income (loss)
Cash dividends - $.70
per share (1,997,969)
Acquisition of 64,866
shares of treasury stock (1,905,660)
___________
Balance At December 31, 1999 $29,357,519
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
6 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
<CAPTION>
___________________________________________________________________________
1999 1998
___________________________________________________________________________
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,160,065 $ 4,887,532
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 325,000 275,000
Depreciation and amortization 389,368 345,566
Premium amortization on investment
securities 233,671 260,911
Discount accretion on investment
securities (242,116) (143,293)
Deferred income taxes (benefit) (13,451) 1,586
Gain on sale of loans (34,820) (126,409)
Proceeds from sale of loans 5,686,033 5,751,429
Originations of loans held for resale (8,147,429) (7,506,624)
(Gain) loss on sales of investment
securities (123,738) (178,634)
Gain on sale of premises and
equipment - (12,157)
(Gain) loss on sale of other real
estate owned 20,285 -
(Increase) in accrued interest
receivable (105,805) (135,094)
(Increase) decrease in other
assets - net (328,740) (43,090)
Increase (decrease) in accrued
interest and other expenses 310,836 (803)
Increase (decrease) in other
liabilities - net (104,477) (272,171)
____________ ____________
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 3,024,682 $ 3,103,749
INVESTING ACTIVITIES
Proceeds from sales of investment
securities Available-for-Sale $ 42,527,853 $ 9,799,220
Proceeds from maturities and
redemptions of investment
securities Available-for-Sale 16,454,598 15,869,144
Purchases of investment securities
Available-for-Sale (71,777,779) (60,639,364)
Purchases of investment securities
Held-to-Maturity - (676,524)
Proceeds from maturities and
redemption of investment
securities Held-to-Maturity - 3,437,452
Net increase in loans (21,696,625) (7,725,344)
Proceeds from sale of premises
and equipment - 22,042
Purchases of premises and equipment (512,814) (677,327)
Proceeds from sale of other real
estate owned 242,900 -
____________ ____________
NET CASH USED IN INVESTING
ACTIVITIES $(34,761,867) $(40,590,701)
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ (2,411,335) $ 29,444,335
Net increase in short-term
borrowings 24,960,681 531,486
Proceeds from long-term borrowings 20,000,000 7,000,000
Repayment of long-term borrowings (7,000,000) (3,000,000)
Acquisition of Treasury Stock (1,905,660) (1,191,021)
Cash dividends paid (1,997,969) (1,726,192)
Dividends paid in lieu of fractional
shares - -
____________ ____________
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 31,645,717 $ 31,058,608
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ (91,468) $ (6,428,344)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 7,055,601 13,483,945
____________ ____________
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 6,964,133 $ 7,055,601
<CAPTION>
___________________________________________________________________________
1997
___________________________________________________________________________
<S> <C>
OPERATING ACTIVITIES
Net income $ 4,660,240
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 325,000
Depreciation and amortization 304,134
Premium amortization on
investment securities 132,361
Discount accretion on investment
securities (131,989)
Deferred income taxes (benefit) 18,645
Gain on sale of loans (34,107)
Proceeds from sale of loans 765,019
Originations of loans held for
resale (1,675,406)
(Gain) loss on sales of investment
securities (67,957)
Gain on sale of premises and
equipment (67)
(Gain) loss on sale of other real
estate owned (816)
(Increase) in accrued interest
receivable (39,054)
(Increase) decrease in other
assets - net 65,704
Increase (decrease) in accrued
interest and other expenses 393,798
Increase (decrease) in other
liabilities - net 406,418
____________
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 5,121,923
INVESTING ACTIVITIES
Proceeds from sales of investment
securities Available-for-Sale $ 18,369,369
Proceeds from maturities and
redemptions of investment
securities Available-for-Sale 5,119,885
Purchases of investment securities
Available-for-Sale (21,757,280)
Purchases of investment securities
Held-to-Maturity -
Proceeds from maturities and
redemption of investment
securities Held-to-Maturity 2,774,482
Net increase in loans (18,202,028)
Proceeds from sale of premises
and equipment 2,001
Purchases of premises and equipment (860,581)
Proceeds from sale of other real
estate owned 47,000
____________
NET CASH USED IN INVESTING
ACTIVITIES $(14,507,152)
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 19,101,401
Net increase in short-term borrowings 980,793
Proceeds from long-term borrowings 12,000,000
Repayment of long-term borrowings (13,000,000)
Acquisition of Treasury Stock -
Cash dividends paid (1,386,901)
Dividends paid in lieu of
fractional shares (5,650)
____________
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 17,689,643
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 8,304,414
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 5,179,531
CASH AND CASH EQUIVALENTS
____________
AT END OF YEAR $ 13,483,945
The accompanying notes are an integral part of these consolidated financial
statements
</TABLE>
7
<PAGE>
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements for Years Ended December
31, 1999, 1998 and 1997
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
constituted over 90% of the Corporation's revenue and profit for the
years ended December 31, 1999, 1998, and 1997, and was 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 in the Consolidated Statement of Stockholders'
Equity. Management's decision to sell available-for-sale securities is
based on changes in economic conditions controlling the sources and
applications of funds, terms, availability of and yield of alternative
investments, interest rate risk and the need for liquidity.
The cost of debt securities classified as Held-to-Maturity or
Available-for-Sale is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and accretion,
as well as interest and dividends is included in interest income from
investments. Realized gains and losses are included in net investment
securities gains. The cost of investment securities sold, redeemed or
matured is based on the specific identification method.
8 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
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.
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.
9
<PAGE>
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.
Interest paid on deposits and other borrowings was $11,665,446,
$10,355,156 and $9,275,057 in 1999, 1998 and 1997, respectively. Cash
payments for income taxes were $1,327,420, $1,314,645 and $1,257,115
for 1999, 1998 and 1997, respectively. The Corporation transferred
loans to other real estate owned in the amounts of $348,085 in 1999.
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.
Reporting Format
Certain amounts in the consolidated financial statements of prior
periods have been reclassified to conform with presentation used in
the 1999 consolidated financial statements. Such reclassifications
have no effect on the Corporation's consolidated financial condition
or net income.
NOTE 2 RESTRICTED CASH BALANCES
Regulations of the Board of Governors of the Federal Reserve
System impose uniform reserve requirements on all member depository
institutions. The Corporation's banking subsidiary was required to
have aggregate cash reserves of $333,000 and $2,471,000 at December
31, 1999, and 1998, respectively.
The Corporation's banking subsidiary also, from time to time,
maintains deposits with the Federal Reserve Bank and other banks for
various services such as check clearing and charge card processing.
Balances maintained for this purpose were $708,567 at December 31,
1999.
10 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
NOTE 3 INVESTMENT SECURITIES
The amortized cost, related estimated fair value, and unrealized
gains and losses for investment securities classified as "Available-For-Sale" or
"Held-to-Maturity" were as follows at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Available-for-Sale Securities
_________________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_________ __________ _________ ________
<S> <C> <C> <C> <C>
December 31, 1999:
Obligations of U.S.
Government
Corporations
and Agencies:
Mortgage-backed $ 42,398,524 $ 10,874 $1,849,700 $ 40,559,698
Other 22,004,537 - 831,100 21,173,437
Obligations of
state and
political
subdivisions 57,763,990 447,062 3,670,341 54,540,711
Equity securities 6,470,328 808,279 84,633 7,193,974
____________ __________ __________ ____________
Total $128,637,379 $1,266,215 $6,435,774 $123,467,820
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity Securities
_________________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_________ __________ _________ ________
<S> <C> <C> <C> <C>
December 31, 1999:
Obligations of U.S.
Government
Corporations
and Agencies:
Mortgage-backed $ 8,169,734 $ 8,253 $228,506 $ 7,949,481
Obligations of
state and
political
subdivisions 3,393,264 24,414 31,873 3,385,805
___________ _______ ________ ___________
Total $11,562,998 $32,667 $260,379 $11,335,286
</TABLE>
<TABLE>
<CAPTION>
Available-for-Sale Securities
________________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
________ __________ _________ ________
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Treasury
securities $ 7,347,041 $ 139,115 $ - $ 7,486,156
Obligations of
U.S. Government
Corporations
and Agencies:
Mortgage-backed 37,317,890 273,585 107,209 37,484,266
Other 15,006,590 143,098 1,563 15,148,125
Obligations of
state and
political
subdivisions 50,312,521 2,390,785 333,998 52,369,308
Equity securities 3,304,003 940,948 31,942 4,213,009
____________ __________ ________ ____________
Total $113,288,045 $3,887,531 $474,712 $116,700,864
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity Securities
__________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
________ __________ _________ ________
<S> <C> <C> <C> <C>
December 31, 1998:
Obligations of
U.S. Government
Corporations
and Agencies:
Mortgage-backed $10,593,592 $ 48,459 $111,820 $10,530,231
Obligations of
state and
political
subdivisions 3,391,089 93,724 - 3,484,813
___________ ________ ________ ___________
Total $13,984,681 $142,183 $111,820 $14,015,044
</TABLE>
11
<PAGE>
Securities Available-for-Sale with an aggregate fair value of
$48,426,229 in 1999; $42,346,853 in 1998; and securities Held-to-Maturity with
an aggregate unamortized cost of $11,121,179 in 1999 and
$8,878,530 in 1998, were pledged to secure public funds, trust funds,
securities sold under agreements to repurchase and other balances of
$20,861,741 in 1999 and $21,062,344 in 1998 as required by law.
The amortized cost, estimated fair value and weighted average
yield of debt securities, by contractual maturity, are shown below at
December 31, 1999. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1999
U.S. Government Obligations
Agency & of State
Corporation & Political
Obligations <F1> Subdivisions <F2>
_____________ ______________
<S> <C> <C>
Available-For-Sale:
Within 1 Year:
Amortized Cost $ - $ 750,000
Estimated Fair Value - 768,975
Weighted average yield - 11.08%
1 - 5 Years:
Amortized cost 11,006,513 2,055,335
Estimated fair value 10,792,500 2,157,416
Weighted average yield 6.15% 11.22%
5 - 10 Years:
Amortized cost 9,318,725 1,043,900
Estimated Fair value 8,854,890 1,000,950
Weighted average yield 6.57% 11.21%
After 10 Years:
Amortized cost 44,077,823 53,914,755
Estimated fair value 42,085,745 50,613,370
Weighted average yield 6.75% 8.50%
___________ ___________
Total:
Amortized cost $64,403,061 $57,763,990
Estimated fair value 61,733,135 54,540,711
Weighted average yield 6.62% 9.03%
<CAPTION>
December 31, 1999
____________________________
Marketable
Other Equity
Securities <F3> Securities <F3>
____________ ___________
<S> <C> <C>
Available-For-Sale:
Within 1 Year:
Amortized Cost $ - $ -
Estimated Fair Value - -
Weighted average yield - -
1 - 5 Years:
Amortized cost - -
Estimated fair value - -
Weighted average yield - -
5 - 10 Years:
Amortized cost - -
Estimated Fair value - -
Weighted average yield - -
After 10 Years:
Amortized cost 5,477,200 993,128
Estimated fair value 5,477,200 1,716,774
Weighted average yield 6.59% 4.66%
__________ __________
Total:
Amortized cost $5,477,200 $ 993,128
Estimated fair value 5,477,200 1,716,774
Weighted average yield 6.59% 4.66%
_______________________
<FN>
<F1>Mortgage-backed securities are allocated for maturity reporting at
their original maturity date.
<F2>Average yields on tax-exempt obligations of state and political
subdivisions have been computed on a tax-equivalent basis using a 34% tax
rate.
<F3>Other securities and marketable equity securities are not considered to
have defined maturities and are included in the after ten year category.
</FN>
</TABLE>
12 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
U.S. Government Obligations
Agency & of State
Corporation & Political
Obligations <F1> Subdivisions <F2>
______________ _______________
<S> <C> <C>
Held-To-Maturity:
Within 1 Year:
Amortized Cost $ - $ -
Estimated fair value - -
Weighted average yield - -
1 - 5 Years:
Amortized cost - -
Estimated fair value - -
Weighted average yield - -
5 - 10 Years:
Amortized cost - 1,484,668
Estimated Fair value - 1,480,870
Weighted average yield - 8.00%
After 10 Years:
Amortized cost 8,169,734 1,908,596
Estimated fair value 7,949,481 1,904,935
Weighted average yield 6.04% 8.55%
__________ __________
Total:
Amortized cost $8,169,734 $3,393,264
Estimated fair value 7,949,481 3,385,805
Weighted average yield 6.04% 8.31%
<CAPTION>
December 31, 1999
______________________________
Marketable
Other Equity
Securities <F3> Securities <F3>
____________ ____________
<S> <C> <C>
Held-To-Maturity:
Within 1 Year:
Amortized Cost $ - $ -
Estimated fair value - -
Weighted average yield - -
1 - 5 Years:
Amortized cost - -
Estimated fair value - -
Weighted average yield - -
5 - 10 Years:
Amortized cost - -
Estimated Fair value - -
Weighted average yield - -
After 10 Years:
Amortized cost - -
Estimated fair value - -
Weighted average yield - -
________ ________
Total:
Amortized cost $ - $ -
Estimated fair value - -
Weighted average yield - -
_______________________
<FN>
<F1>Mortgage-backed securities are allocated for maturity reporting at
their original maturity date.
<F2>Average yields on tax-exempt obligations of state and political
subdivisions have been computed on a tax-equivalent basis using a 34% tax
rate.
<F3>Other securities and marketable equity securities are not considered to
have defined maturities and are included in the after ten year category.
</FN>
</TABLE>
FHLB stock has no stated maturity; however, it must be owned as
long as the Bank remains a member of the FHLB System. The Bank does
not anticipate that it will discontinue its membership and therefore,
the investment in the amount of $5,000,000 and $1,938,800 in 1999 and
1998, respectively are classified as other securities.
There were no aggregate investments with a single issuer
(excluding the U.S. Government and its agencies) which exceeded ten
percent of consolidated shareholders' equity at December 31, 1999. The
quality rating of all obligations of state and political subdivisions
are "A" or higher, as rated by Moody's or Standard and Poors. The only
exceptions are local issues which are not rated, but are secured by
the full faith and credit obligations of the communities that issued
these securities. All of the state and political subdivision
investments are actively traded in a liquid market.
Proceeds from sale of investments in debt and equity securities
during 1999, 1998 and 1997 were $42,527,853, $9,799,220, and
$18,369,369, respectively. Gross gains realized on these sales were
$645,549, $219,310 and $309,956, respectively. Gross losses on these
sales were $521,811, $40,676 and $241,999, respectively.
13
<PAGE>
NOTE 4 LOANS
Major classifications of loans at December 31, 1999 and 1998
consisted of:
<TABLE>
<CAPTION>
1999 1998
_______ _______
<S> <C> <C>
Commercial, Financial, and Agricultural $ 17,863,635 $ 16,579,315
Tax-exempt 4,133,085 2,253,539
Real estate mortgage 138,613,253 121,223,412
Consumer 30,594,972 26,205,802
____________ ____________
Gross loans $191,204,945 $166,262,068
Less: Unearned discount 5,892,301 4,603,479
Unamortized loan fees, net of costs 81,742 125,950
____________ ____________
Loans, net of unearned income $185,230,902 $161,532,639
</TABLE>
Mortgage loans held for sale included in loans were $6,448,526
and $3,952,310 at December 31, 1999 and 1998, respectively.
Changes in the allowance for loan losses for the years ended
December 31, 1999, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
______ ______ ______
<S> <C> <C> <C>
Balance, January 1 $2,421,042 $2,371,194 $2,266,983
Provision charged to
operations 325,000 275,000 325,000
Loans charged off (258,743) (269,218) (271,406)
Recoveries 112,251 44,066 50,617
__________ __________ __________
Balance, December 31 $2,599,550 $2,421,042 $2,371,194
</TABLE>
Non-accrual loans at December 31, 1999, 1998 and 1997 were
$617,763, $854,295, and $320,700, respectively. The gross interest
that would have been recorded if these loans had been current in
accordance with their original terms and the amounts actually recorded
in income were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
____ ____ ____
<S> <C> <C> <C>
Gross interest due under terms $68,569 $96,425 $30,027
Amount included in income 6,380 5,610 7,006
_______ _______ _______
Interest income not recognized $62,189 $90,815 $23,021
</TABLE>
At December 31, 1999 and 1998 the recorded investment in loans
that are considered to be impaired as defined by SFAS No. 114 was
$55,889 and $75,068, respectively. 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. The average recorded investment in
impaired loans during the year ended December 31, 1999 and 1998 was
approximately $69,283 and $85,015, respectively.
At December 31, 1999, there were no significant commitments to
lend additional funds with respect to non-accrual and restructured
loans.
NOTE 5 MORTGAGE SERVICING RIGHTS
The Corporation's banking subsidiary entered into mortgage
servicing in 1997. Mortgage loans serviced for others are not included
in the accompanying Consolidated Balance Sheets. The unpaid principal
balances of mortgage loans serviced for others was $10,781,607 and
$6,276,477 at December 31, 1999 and 1998.
Custodial escrow balances maintained in connection with the
foregoing loan servicing, and included in demand deposits, were
approximately $4,536 and $3,089 at December 31, 1999 and 1998.
Changes in the balances of servicing assets for the years ended
December 31, 1999, 1998 and 1997 were as follows:
14 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
____ ____ ____
<S> <C> <C> <C>
Balance at January 1 $ 61,612 $ 7,032 $ 0
Servicing asset additions 51,412 56,251 7,048
Amortization (8,025) (1,671) (16)
________ _______ ______
Balance at December 31 $104,999 $61,612 $7,032
</TABLE>
There was no valuation allowance on servicing assets as of
December 31, 1999 and 1998. Additionally, there were no unrecognized
servicing assets or liabilities for which it is not practicable to
estimate fair value. Mortgage servicing rights in the Consolidated
Balance Sheet are included in other assets at December 31, 1999 and
1998.
NOTE 6 PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1999 and 1998
follows:
<TABLE>
<CAPTION>
1999 1998
____ ____
<S> <C> <C>
Land $ 876,526 $ 876,526
Buildings and improvements 2,811,246 2,798,369
Equipment 4,048,362 3,548,426
__________ __________
$7,736,134 $7,223,321
Less: Accumulated depreciation 3,855,123 3,465,756
__________ __________
Total $3,881,011 $3,757,565
</TABLE>
Depreciation amounted to $389,368 for 1999, $345,566 for 1998 and
$304,134 for 1997.
NOTE 7 DEPOSITS
Major classifications of deposits at December 31, 1999 and 1998
consisted of:
<TABLE>
<CAPTION>
1999 1998
______ ______
<S> <C> <C>
Demand - non-interest bearing $ 20,919,398 $ 22,749,074
Demand - interest bearing 47,630,009 61,897,838
Savings 44,099,703 45,217,418
Time, $100,000 and over 29,849,603 27,344,905
Other time 102,181,471 89,882,284
____________ ____________
Total deposits $244,680,184 $247,091,519
</TABLE>
The following is a schedule reflecting classification and
remaining maturities of time deposits of $100,000 and over at December
31, 1999:
<TABLE>
<CAPTION>
<S> <C>
2000 $24,980,149
2001 2,868,785
2002 100,000
2003 784,278
2004 261,391
___________
$28,994,603
</TABLE>
Interest expense related to time deposits of $100,000 or more was
$1,573,586 in 1999, $1,339,212 in 1998 and $1,241,486 in 1997.
NOTE 8 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. Short-term
borrowings consisted of the following at December 31, 1999, and
1998:
15
<PAGE>
<TABLE>
<CAPTION>
1999
________________________________
Maximum
Ending Average Month End Average
Balance Balance Balance Rate
_______ _______ _______ ____
<S> <C> <C> <C> <C>
Federal funds purchased
and securities sold
under agreements
to repurchase $ 7,803,238 $22,974,939 $35,369,195 5.36%
Federal Home Loan Bank 22,250,000 4,695,648 22,250,000 5.47%
U.S. Treasury tax and
loan notes 1,541,089 636,757 1,733,122 4.91%
___________ ___________ ___________ ____
Total $31,594,327 $28,307,344 $59,352,317 5.41%
</TABLE>
<TABLE>
<CAPTION>
1998
________________________________
Maximum
Ending Average Month End Average
Balance Balance Balance Rate
<S> <C> <C> <C> <C>
Federal funds purchased
and securities sold
under agreements to
repurchase $6,409,222 $6,158,768 $ 7,149,313 4.19%
Federal Home Loan Bank 0 196,000 2,300,000 5.10%
U.S. Treasury tax and
loan notes 224,424 653,372 1,704,698 5.38%
__________ __________ ___________ ____
Total $6,633,646 $7,008,140 $11,154,011 5.32%
</TABLE>
NOTE 9 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.
A schedule of long-term borrowings by maturity as of December 31,
1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
____ ____
<S> <C> <C>
Due 1999, 6.38% $ - $ 1,000,000
Due 2000, 5.76% to 6.73% 8,250,000 2,000,000
Due 2002, 5.48% to 7.77% 2,000,000 3,000,000
Due 2004, 5.60% 3,000,000 -
Due 2005, 5.55% 2,000,000 2,000,000
Due 2008, 5.02% to 5.48% 5,000,000 5,000,000
Due 2009, 5.30% 2,000,000 -
Due 2014, 5.41% 3,750,000 -
___________ ___________
$26,000,000 $13,000,000
</TABLE>
NOTE 10 INCOME TAXES
The current and deferred components of the income tax provision
(benefit) consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
______ ______ ______
<S> <C> <C> <C>
Federal
Current $1,213,194 $1,291,313 $1,278,515
Deferred (benefit) (13,451) 1,586 18,645
__________ __________ __________
$1,199,743 $1,292,899 $1,297,160
State
Current $ 4,223 $ 11,707 $ 10,276
Deferred (benefit) - - -
__________ __________ __________
$ 4,223 $ 11,707 $ 10,276
__________ __________ __________
Total provision for
income taxes $1,203,966 $1,304,606 $1,307,436
</TABLE>
16 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
The following is a reconciliation between the actual provision
for federal income taxes and the amount of federal income taxes which
would have been provided at the statutory rate of 34%:
<TABLE>
<CAPTION>
1999
Amount Rate
______ ____
<S> <C> <C>
Provision at statutory rate $2,163,771 34.0%
Tax-exempt income (1,098,282) (17.2)
Non-deductible expenses 146,791 2.3
Other, net (12,537) (.2)
__________ ____
Applicable federal income tax and rate $1,199,743 18.9
<CAPTION>>
1998
Amount Rate
______ ____
<S> <C> <C>
Provision at statutory rate $2,105,327 34.0%
Tax-exempt income (929,748) (15.0)
Non-deductible expenses 125,925 2.0
Other, net (8,605) (.1)
__________ ____
Applicable federal income tax and rate $1,292,899 20.9
<CAPTION>
1997
Amount Rate
______ ____
<S> <C> <C>
Provision at statutory rate $2,029,010 34.0%
Tax-exempt income (824,918) (13.8)
Non-deductible expenses 106,425 1.8
Other, net (13,357) (.3)
__________ ____
Applicable federal income tax and rate $1,297,160 21.7%
</TABLE>
Total federal income tax attributable to realized security gains
and losses was $42,071 in 1999, $60,736 in 1998, and $23,105 in 1997.
The deferred tax assets and liabilities resulting from temporary
timing differences have been netted to reflect a net deferred tax
asset (liability) included in other assets or other liabilities in
these consolidated financial statements. The components of the net
deferred tax asset (liability) at December 31, 1999, 1998 and 1997,
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
____ ____ ____
<S> <C> <C> <C>
Deferred Tax Assets:
Loan loss reserve $ 736,943 $ 676,251 $ 659,302
Deferred compensation 71,846 44,307 20,432
Contributions 8,710 11,240 -
Unrealized investment
securities losses 1,709,880 - -
__________ ___________ ___________
Total $2,527,379 $ 731,798 $ 679,734
Deferred Tax Liabilities:
Loan origination fees
and costs $ (205,733) $ (171,850) $ (118,427)
Mortgage servicing rights (1,962) (576) -
Accretion (23,055) (21,883) (41,836)
Unrealized investment
securities gains - (1,220,294) (1,229,914)
Depreciation (225,773) (189,964) (170,361)
__________ ___________ ___________
Total $ (456,523) $(1,604,567) $(1,560,538)
__________ ___________ ___________
Net Deferred Tax Asset
(Liability) $2,070,856 $ (872,769) $ (880,804)
</TABLE>
It is anticipated that all deferred tax assets are to be realized
and accordingly, no valuation allowance has been provided.
NOTE 11 EMPLOYEE BENEFIT PLANS AND DEFERRED COMPENSATION AGREEMENTS
The Corporation maintains a 401K Plan which has a combined tax
qualified savings feature and profit sharing feature for the benefit
of its employees. Under the savings feature, the Corporation
contributes 100% of the employee contribution up to 3% of compensation
which amounted to $75,725, $67,377 and $59,395 in 1999, 1998 and 1997,
respectively. Under the profit sharing feature, contributions, at the
discretion of the Board of Directors are funded currently and amounted
to $193,481, $167,497 and $151,574 in 1999, 1998 and 1997,
respectively.
The Bank also has non-qualified deferred compensation agreements
with three of its officers. These agreements are essentially unsecured
promises by the Bank to make monthly payments to the officers over a
twenty year period. Payments begin based upon specific criteria -
generally, when the officer retires. To account for the cost of
payments yet to be made in the future, the Bank recognizes an accrued
liability in years prior to when payments begin based on the present
value of those future payments. The Bank's accrued liability for these
deferred compensation agreements as of December 31, 1999 and 1998, was
$211,311 and $130,315, respectively. The related expense for these
plans amounted to $80,996, $70,222 and $60,093 in 1999, 1998 and 1997,
respectively.
17
<PAGE>
NOTE 12 LEASE COMMITMENTS AND CONTINGENCIES
The Corporation's banking subsidiary leases four branch banking
facilities, as well as the operations center adjoining the main bank
office, under operating leases. Rent expense for the year ended
December 31, 1999, 1998 and 1997 was $109,228, $82,804 and $49,905,
respectively. The lease commitments, including a new banking facility
opened in 1999 with a base annual rental of $30,000 are: 2000 -
$126,927, 2001 - $74,526, 2002 - $55,000, 2003 - $50,833 and 2004 -
$17,500.
In the normal course of business, there are various pending legal
actions and proceedings that are not reflected in the Consolidated
Financial Statements. Management does not believe the outcome of these
actions and proceedings will have a material effect on the
consolidated financial position of the Corporation.
NOTE 13 RELATED PARTY TRANSACTIONS
Certain directors and executive officers of First Keystone
Corporation and its Subsidiary and companies in which they are
principal owners (i.e., at least 10%) were indebted to the Corporation
at December 31, 1999, 1998 and 1997. These loans were made on
substantially the same terms and conditions, including interest rates
and collateral, as those prevailing at the time for comparable
transactions with unrelated parties. The loans do not involve more
than the normal risk of collectibility nor present other unfavorable
features.
A summary of the activity on the related party loans, comprised
of 6 directors and 4 executive officers, consists of the following for
the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
____ ____ ____
<S> <C> <C> <C>
Balance at January 1 $2,032,334 $2,080,963 $2,553,945
Additions 456,766 738,176 284,044
Deductions (780,777) (786,805) (757,026)
__________ __________ __________
Balance at December 31 $1,708,323 $2,032,334 $2,080,963
</TABLE>
NOTE 14 REGULATORY MATTERS
Dividends are paid by the Corporation to shareholders which are
mainly provided by dividends from the Bank. However, national banking
laws place certain restrictions on the amount of cash dividends
allowed to be paid by the Bank to the Corporation. Generally, the
limitation provides that dividend payments may not exceed the Bank's
current year's retained income plus retained net income for the
preceding two years. Accordingly, in 2000, without prior regulatory
approval, the Bank may declare dividends to the Corporation in the
amount of $3,320,652 plus additional amounts equal to the net income
earned in 2000 for the period January 1, 2000, through the date of
declaration, less any dividends which may have already been paid in
2000. Regulations also limit the amount of loans and advances from the
Bank to the Corporation to 10% of consolidated net assets.
The Corporation is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and
possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Corporation's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation
must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting
practices. The Corporation's capital amounts and classification are
also subject to qualitative judgements by the regulators about
components, risk weightings, and other factors. Management believes,
as of December 31, 1999 and 1998, that the Corporation and the Bank
met all capital adequacy requirements to which they are subject.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
fourth in the table below) of Total and Tier I Capital (as defined in
the regulations) to Risk-Weighted Assets (as defined), and of Tier I
Capital (as defined) to Average Assets (as defined).
18 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
As of December 31, 1999, the most recent notification from the
Office of the Comptroller of the Currency categorized the Bank as Well
Capitalized under the regulatory framework for prompt corrective
action. To be categorized as Well Capitalized, the Bank must maintain
minimum Total Risk-Based, Tier I Risked-Based, and Tier I Leverage
Ratios as set forth in the table. There are no conditions or events
since the notification that management believes have changed the
Bank's category.
<TABLE>
<CAPTION>
(Amounts in thousands) Actual
______
Amount Ratio
______ _____
<S> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets) $33,920 18.25%
Tier I Capital
(to Risk Weighted Assets) 31,604 17.01%
Tier I Capital
(to Average Assets) 31,604 9.71%
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $34,080 20.17%
Tier I Capital
(to Risk Weighted Assets) 31,554 18.92%
Tier I Capital
(to Average Assets) 31,554 9.95%
<CAPTION>
For Capital
(Amounts in thousands) Adequacy Purposes
_________________
Amount Ratio
______ _____
<S> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets) $14,865 8.00%
Tier I Capital
(to Risk Weighted Assets) 7,433 4.00%
Tier I Capital
(to Average Assets) 13,016 4.00%
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $13,557 8.00%
Tier I Capital
(to Risk Weighted Assets) 6,779 4.00%
Tier I Capital
(to Average Assets) 11,371 4.00%
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
(Amounts in thousands) Action Provisions
_________________
Amount Ratio
______ _____
<S> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets) $18,581 10.00%
Tier I Capital
(to Risk Weighted Assets) 11,149 6.00%
Tier I Capital
(to Average Assets) 16,270 5.00%
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $16,947 10.00%
Tier I Capital
(to Risk Weighted Assets) 10,168 6.00%
Tier I Capital
(to Average Assets) 14,214 5.00%
</TABLE>
The Corporation's capital ratios are not materially different
from those of the Bank.
NOTE 15 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 December 31, 1999, and 1998 were as
follows:
<TABLE>
<CAPTION>
1999 1998
____ ____
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $17,348,615 $17,230,239
Standby letters of credit $ 632,654 $ 937,438
</TABLE>
19
<PAGE>
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 December 31, 1999,
to the extent necessary to avoid any significant concentration of
credit risk.
NOTE 16 COMPREHENSIVE INCOME
The Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income, as of
January 1, 1998. Accounting principals generally require that
recognized revenue, expenses, gains and losses be included in net
income. Certain changes in assets and liabilities, such as unrealized
gains and losses on available-for-sale investment securities, along
with net income comprise comprehensive income that is reported as a
component of consolidated stockholders' equity. The adoption of SFAS
No. 130 had no effect on the Corporation's consolidated net income or
stockholders' equity.
The components of other comprehensive income and related tax
effects are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
_______________________
1999 1998 1997
____ ____ ____
<S> <C> <C> <C>
Unrealized holding gains
(losses) on available-for-
sale investment securities $(8,458,502) $133,777 $1,740,650
Less reclassification
adjustment for gains
realized in income 123,738 178,634 67,957
___________ ________ __________
Net unrealized gains (losses) $(8,582,240) $(44,857) $1,672,693
Tax effects 2,930,174 9,620 (595,310)
___________ ________ __________
Net of tax amount $(5,652,066) $(35,237) $1,077,383
</TABLE>
NOTE 17 STOCKHOLDERS' EQUITY
On April 15, 1997, the Board of Directors declared a 10% stock
dividend paid May 16, 1997, to shareholders of record May 2, 1997. A
total of 88,762 shares were issued as a result of this stock dividend
with a total value transferred from retained earnings of $3,289,844,
including cash in lieu of fractional shares.
On January 27, 1998, the Board of Directors approved a 3 for 1
stock split issued in the form of a 200% stock dividend to be paid
March 2, 1998, to shareholders of record February 10, 1998. A total of
1,955,818 shares were issued resulting in a transfer from retained
earnings in the amount of $3,911,636 at par value.
On February 10, 1998, the Board of Directors adopted a stock
incentive plan and reserved 100,000 shares of common stock for
issuance under the plan for certain employees of the Bank. Under the
Plan, options are granted at fair market value and the time period
during which any option granted may be exercised may not commence
before six months or continue beyond the expiration of ten years after
the option is awarded.
A summary of the stock incentive plan awards and activity were
are follows:
<TABLE>
<CAPTION>
Number
Exercise of Options Options
Grant Date Price Employees Awarded Exercised
_____ _________ ______ ________
<S> <C> <C> <C> <C>
September 22, 1998 $33.50 22 11,000 0
September 28, 1999 $26.25 25 12,000 0
</TABLE>
20 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
All data with respect to shares, net income and cash dividends
per share, and weighted average number of shares outstanding was
retroactively adjusted to reflect the additional shares issued.
NOTE 18 FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about financial instruments,
whether or not required to be recognized in the consolidated balance
sheet, for which it is practicable to estimate such fair value. In
cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques.
These techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Fair
value estimates derived through these techniques cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. SFAS
No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying
value of the Corporation.
The following methods and assumptions were used by the
Corporation in estimating its fair value disclosures for financial
instruments:
CASH AND DUE FROM BANKS, SHORT-TERM INVESTMENTS, ACCRUED INTEREST
RECEIVABLE AND ACCRUED INTEREST PAYABLE
The fair values are equal to the current carrying values.
INVESTMENT SECURITIES
Fair values have been individually determined based on currently
quoted market prices. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
LOANS
Fair values are estimated for categories of loans with similar
financial characteristics. Loans were segregated by type such as
commercial, tax-exempt, real estate mortgages and consumer. For
estimation purposes each loan category was further segmented into
fixed and adjustable rate interest terms and also into performing and
non-performing classifications.
The fair value of each category of performing loans is calculated
by discounting future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities.
Fair value for non-performing loans is based on managements'
estimate of future cash flows discounted using a rate commensurate
with the risk associated with the estimated future cash flows. The
assumptions used by management are judgmentally determined using
specific borrower information.
DEPOSITS
Under SFAS No. 107, the fair value of deposits with no stated
maturity, such as Demand Deposits, Savings Accounts and Money Market
Accounts is equal to the amount payable on demand at December 31,
1999, and 1998.
Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
SHORT-TERM AND LONG-TERM BORROWINGS
The fair values of short-term and long-term borrowings are
estimated using discounted cash flow analyses based on the
Corporation's incremental borrowing rate for similar instruments.
21
<PAGE>
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
Management estimates that there are no material differences
between the notional amount and the estimated fair value of those off-balance
sheet items since they are primarily composed of unfunded loan
commitments which are generally priced at market at the time of
funding.
At December 31, 1999 and 1998, the carrying values and estimated
fair values of financial instruments of the Corporation are presented
in the table below:
<TABLE>
<CAPTION>
1999
________________________
Carrying Estimated
Amount Fair Value
______ __________
<S> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 6,883,976 $ 6,883,976
Short-term investments 80,157 80,157
Investment securities 135,030,818 134,803,106
Net loans 182,631,352 181,374,636
Accrued interest receivable 2,238,835 2,238,835
FINANCIAL LIABILITIES:
Deposits 244,680,184 244,140,095
Short-term borrowings 31,594,327 31,593,182
Long-term borrowings 26,000,000 25,404,360
Accrued interest payable 1,203,132 1,203,132
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS:
Commitments to extend credit 17,348,615
Standby letters of credit 632,654
<CAPTION>
1998
________________________
Carrying Estimated
Amount Fair Value
______ __________
<S> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 7,033,112 $ 7,033,112
Short-term investments 22,489 22,489
Investment securities 130,685,545 130,715,908
Net loans 159,111,597 161,783,048
Accrued interest receivable 2,133,030 2,133,030
FINANCIAL LIABILITIES:
Deposits 247,091,519 247,738,736
Short-term borrowings 6,633,646 6,635,422
Long-term borrowings 13,000,000 13,240,392
Accrued interest payable 974,367 986,399
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS:
Commitments to extend credit 17,230,239
Standby letters of credit 937,438
</TABLE>
22 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
NOTE 19 PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for First Keystone Corporation
(parent company only) was as follows:
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31
__________________
1999 1998
____ ____
<S> <C> <C>
ASSETS
Cash in subsidiary bank $ 228,926 $ 994,725
Investment in subsidiary bank 27,714,846 31,380,695
Investment in other equity securities 1,716,916 1,797,009
Prepayments and other assets 92,983 -
___________ ___________
TOTAL ASSETS $29,753,671 $34,172,429
LIABILITIES
Payable to subsidiary bank $99,742 $32,294
Accrued expenses and other liabilities 296,410 386,986
___________ ___________
TOTAL LIABILITIES $ 396,152 $ 419,280
STOCKHOLDERS' EQUITY
Preferred stock $ - $ -
Common stock 5,867,454 5,867,454
Surplus 9,761,066 9,761,066
Retained earnings 20,285,218 17,123,122
Accumulated other comprehensive
income (loss) (3,459,538) 2,192,528
Treasury stock, at cost (3,096,681) (1,191,021)
___________ ___________
TOTAL STOCKHOLDERS' EQUITY $29,357,519 $33,753,149
___________ ___________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $29,753,671 $34,172,429
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Year Ended December 31
___________________________
1999 1998 1997
____ ____ ____
<S> <C> <C> <C>
INCOME
Dividends from subsidiary bank $3,227,100 $3,344,449 $1,386,901
Dividends - other 45,243 41,423 40,173
Securities gains 51,000 117,203 103,145
Interest 12,772 24,560 16,650
__________ __________ __________
TOTAL INCOME $3,336,115 $3,527,635 $1,546,869
Operating Expenses 35,075 36,999 28,984
__________ __________ __________
Income Before Taxes and
Equity in Undistributed
Net Income of Subsidiary $3,301,040 $3,490,636 $1,517,885
Income tax expense 17,159 47,572 41,756
__________ __________ __________
Income Before Equity
in Undistributed Net
Income of Subsidiary $3,283,881 $3,443,064 $1,476,129
Equity in undistributed
income of Subsidiary 1,876,184 1,444,468 3,184,111
__________ __________ __________
NET INCOME $5,160,065 $4,887,532 $4,660,240
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year Ended December 31
____________________________
1999 1998 1997
____ ____ ____
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,160,065 $ 4,887,532 $ 4,660,240
Adjustments to reconcile net
income to net cash provided
by operating activities:
Securities gains (51,000) (117,202) (103,145)
Equity in undistributed
net income of Subsidiary (1,876,184) (1,444,468) (3,184,111)
Increase (decrease) in
prepaid expenses and
other assets (92,983) - 11,400
Increase (decrease) in
advances payable to
Subsidiary 67,448 28,552 (3,003)
Increase (decrease) in
accrued expenses and
other liabilities (15,390) (14,955) 32,149
___________ ___________ ___________
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 3,191,956 $ 3,339,459 $ 1,413,530
INVESTING ACTIVITIES
Purchase of equity securities $ (142,626) $ (201,023) $ (59,431)
Proceeds from sale of equity
securities 88,500 179,904 163,196
___________ ___________ ___________
NET CASH PROVIDED (USED)
IN INVESTING ACTIVITIES $ (54,126) $ (21,119) $ 103,765
FINANCING ACTIVITIES
Acquisition of treasury stock $(1,905,660) $(1,191,021) $ -
Cash dividends paid (1,997,969) (1,726,192) (1,386,901)
Dividends paid in lieu of
fractional shares - - (5,650)
___________ ___________ ___________
NET CASH (USED) BY
FINANCING ACTIVITIES $(3,903,629) $(2,917,213) $(1,392,551)
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS $ (765,799) $ 401,127 $ 124,744
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 994,725 593,598 468,854
___________ ___________ ___________
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 228,926 $ 994,725 $ 593,598
</TABLE>
24 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of First Keystone Corporation:
We have audited the accompanying consolidated balance sheets of
First Keystone Corporation and Subsidiary as of December 31, 1999 and
1998, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is
to express an opinion on these consolidated financial statements based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of First Keystone Corporation and Subsidiary as of
December 31, 1999 and 1998, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/J. H. Williams & Co., LLP
J. H. Williams & Co., LLP
Kingston, Pennsylvania
January 10, 2000
25
<PAGE>
Management's Discussion and Analysis
___________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
PURPOSE
The purpose of the Management Discussion and Analysis of First
Keystone Corporation, a bank holding company (the Corporation), and
its wholly owned subsidiary, The First National Bank of Berwick (the
Bank), is to assist the reader in reviewing the financial information
presented and should be read in conjunction with the consolidated
financial statements and other financial data contained herein.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Versus Year Ended December 31, 1998
Net income increased to $5,160,065 for the year ended December
31, 1999, as compared to $4,887,532 for the prior year. The net income
for 1999 marked the 17th consecutive year that earnings and earnings
per share have increased. Earnings per share, both basic and diluted,
for 1999 were $1.80 as compared to $1.67 in 1998. The Corporation's
return on average assets declined to 1.58% in 1999 from 1.72% in 1998.
However, the return on average equity increased to 16.12% in 1999 from
14.68% in 1998. Return on equity increased since net income increased
5.6% and equity capital fell in 1999. The reduction in equity capital
was a result of our stock repurchase plan and a loss on accumulated
other comprehensive income representing the accumulated after tax loss
on our available-for-sale securities.
Net interest income, as indicated below in Table 1, increased by
$910,000 to $11,284,000 for the year ended December 31, 1999,
primarily due to the growth in average earning assets. The
Corporation's net interest income on a fully taxable equivalent basis
increased $1,175,000, or 10.0% in 1999 to $12,958,000.
Year Ended December 31, 1998 Versus Year Ended December 31, 1997
Net income increased to $4,887,532 for the year ended December
31, 1998, as compared to $4,660,240 in 1997. Earnings per share, both
basic and diluted, for 1998 was $1.67 as compared to $1.59 in 1997.
The Corporation's return on average assets and return on average
equity was 1.72% and 14.68%, respectively in 1998, as compared to
1.83% and 15.92%, respectively
in 1997.
Net interest income increased by $410,000 to $10,374,000 for the
year ended 1998. The Corporation's net interest income on a fully
taxable equivalent basis increased 5.1% in 1998 or $569,000 as
indicated in Table 1 to $11,783,000.
NET INTEREST INCOME
The major source of operating income for the Corporation is net
interest income, defined as interest income less interest expense. The
amount of interest income is dependent upon both the volume of earning
assets and the level of interest rates. In addition, the volume of
non-performing loans affects interest income. The amount of interest
expense varies with the amount of funds needed to support earnings
assets, interest rates paid on deposits and borrowed funds, and
finally, the level of interest free deposits.
Table 2 on the following page provides a summary of average
outstanding balances of earning assets and interest bearing
liabilities with the associated interest income and expense as well as
average rates earned and paid as of year-end 1999, 1998, and 1997.
<TABLE>
Table 1 - Net Interest Income
<CAPTION>
(Amounts in thousands) 1999/1998
_____________________________
Increase/(Decrease)
__________________
1999 Amount % 1998
____ ______ ___ ____
<S> <C> <C> <C> <C>
Interest Income $23,172 $2,469 11.9 $20,703
Interest Expense 11,888 1,559 15.1 10,329
_______ ______ _______
Net Interest Income 11,284 910 8.8 10,374
Tax Equivalent Adjustment 1,674 265 18.8 1,409
_______ ______ _______
Net Interest Income
(fully tax equivalent) $12,958 $1,175 10.0 $11,783
<CAPTION>
(Amounts in thousands) 1998/1997
____________________________
Increase/(Decrease)
__________________
1998 Amount % 1997
____ ______ ___ ____
<S> <C> <C> <C> <C>
Interest Income $20,703 $1,358 7.0 $19,345
Interest Expense 10,329 948 10.1 9,381
_______ ______ _______
Net Interest Income 10,374 410 4.1 9,964
Tax Equivalent Adjustment 1,409 159 12.7 1,250
_______ ______ _______
Net Interest Income
(fully tax equivalent) $11,783 $ 569 5.1 $11,214
</TABLE>
The yield on earning assets was 7.86% in 1999, 8.07% in 1998, and
8.37% in 1997. The rate paid on interest bearing liabilities decreased
to 4.37% after decreasing to 4.50% in 1998 from 4.56% in 1997. A 21
basis point decline in the yield on earning assets, together with just
a 13 basis decrease on the rate paid on interest bearing liabilities
in 1999 put additional pressure on the net interest margin. The effect
was a decrease in our net
27
<PAGE>
Management's Discussion and Analysis
_____________________________________________________________________
<TABLE>
Table 2 - Distribution of Assets, Liabilities and Stockholders' Equity
<CAPTION>
1999
___________________________________
Avg. Balance Revenue Yield
/Expense /Rate
___________ ________ _____
<S> <C> <C> <C>
Interest Earning Assets:
Loans:
Commercial<F1> $ 18,510,931 $ 1,590,855 8.59%
Real Estate<F1> 131,870,649 10,799,473 8.19%
Installment Loans,
Net<F1><F2> 24,289,440 2,269,305 9.34%
Fees on Loans 0 (9,119) 0%
____________ ___________ ____
Total Loans (Including
Fees)<F3> $174,671,020 $14,650,514 8.39%
Investment Securities:
Taxable $ 84,228,396 $ 5,357,426 6.36%
Tax Exempt<F1> 53,607,172 4,672,106 8.72%
____________ ___________ ____
Total Investment Securities $137,835,568 $10,029,532 7.28%
Interest Bearing Deposits
in Banks 3,452,932 166,666 4.83%
____________ ___________ ____
Total Interest-Earning
Assets $315,959,520 $24,846,711 7.86%
Non-Interest Earning Assets:
Cash and Due From Banks $7,167,881
Allowance for Loan Losses (2,490,397)
Premises and Equipment 3,785,614
Other Real Estate Owned 48,151
Other Assets 2,835,955
___________
Total Non-Interest
Earning Assets 11,347,204
____________
Total Assets $327,306,724
Interest-Bearing Liabilities:
Savings, NOW Accounts,
and Money Markets $100,597,697 $2,967,250 2.95%
Time Deposits 125,229,509 6,528,815 5.21%
Short-Term Borrowings 5,337,884 288,553 5.41%
Long-Term Borrowings 17,700,701 1,009,032 5.70%
Securities Sold U/A to
Repurchase 22,969,459 1,094,546 4.77%
____________ ___________ ____
Total Interest-Bearing
Liabilities $271,835,250 $11,888,196 4.37%
Non-Interest Bearing
Liabilities:
Demand Deposits $ 21,650,871
Other Liabilities 1,808,797
Stockholders' Equity 32,011,806
____________
Total Liabilities/
Stockholders' Equity $327,306,724
Net Interest Income
Tax Equivalent $12,958,515
Margin Analysis:
Interest Income/Earning
Assets 7.86%
Interest Expense/Earning
Assets 3.76%
Net Interest Income/
Earning Assets 4.10%
28 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
Management's Discussion and Analysis
___________________________________________________________________
<CAPTION>
1998
___________________________________
Avg. Balance Revenue Yield
/Expense /Rate
___________ _______ _____
<S> <C> <C> <C>
Interest Earning Assets:
Loans:
Commercial <F1> $ 18,349,551 $ 1,645,311 8.97%
Real Estate <F1> 116,452,691 9,986,605 8.58%
Installment Loans,
Net <F1> <F2> 18,989,332 1,861,608 9.80%
Fees on Loans 0 7,819 0%
____________ ___________ ____
Total Loans (Including
Fees) <F3> $153,791,574 $13,501,343 8.78%
Investment Securities:
Taxable $ 70,371,073 $ 4,481,462 6.37%
Tax Exempt <F1> 45,379,362 3,882,311 8.56%
____________ ___________ ____
Total Investment Securities $115,750,435 $ 8,363,773 7.23%
Interest Bearing Deposits
in Banks 4,486,588 246,822 5.50%
____________ ___________ ____
Total Interest-Earning
Assets $274,028,597 $22,111,938 8.07%
Non-Interest Earning Assets:
Cash and Due From Banks $ 6,586,890
Allowance for Loan Losses (2,374,338)
Premises and Equipment 3,531,253
Other Real Estate Owned 14,533
Other Assets 2,387,914
____________
Total Non-Interest Earning
Assets 10,146,252
Total Assets $284,174,849
Interest-Bearing Liabilities:
Savings, NOW Accounts, and
Money Markets $100,617,034 $3,248,282 3.23%
Time Deposits 108,004,662 5,960,085 5.52%
Short-Term Borrowings 849,372 45,149 5.32%
Long-Term Borrowings 13,871,969 817,313 5.89%
Securities Sold U/A to
Repurchase 6,158,768 258,319 4.19%
____________ ___________ ____
Total Interest-Bearing
Liabilities $229,501,805 $10,329,148 4.50%
Non-Interest Bearing
Liabilities:
Demand Deposits $18,970,283
Other Liabilities 2,401,369
Stockholders' Equity 33,301,392
____________
Total Liabilities/
Stockholders' Equity $284,174,849
Net Interest Income Tax
Equivalent $11,782,790
Margin Analysis:
Interest Income/Earning
Assets 8.07%
Interest Expense/Earning
Assets 3.77%
Net Interest Income/
Earning Assets 4.30%
<CAPTION>
1997
___________________________________
Avg. Balance Revenue/ Yield/
Expense Rate
__________ _______ ____
<S> <C> <C> <C>
Interest Earning Assets:
Loans:
Commercial <F1> $ 18,047,317 $ 1,534,446 8.50%
Real Estate <F1> 109,683,131 9,412,077 8.58%
Installment Loans,
Net <F1> <F2> 17,344,819 2,124,094 12.25%
Fees on Loans 0 (76,037) 0%
____________ ___________ _____
Total Loans
(Including Fees) <F3> $145,075,267 $12,994,580 8.96%
Investment Securities:
Taxable $ 57,852,149 $ 3,868,888 6.69%
Tax Exempt <F1> 38,362,932 3,467,215 9.04%
Total Investment Securities $ 96,215,081 $ 7,336,103 7.62%
Interest Bearing Deposits
in Banks 4,776,405 264,015 5.53%
____________ ___________ _____
Total Interest-Earning
Assets $246,066,753 $20,594,698 8.37%
Non-Interest Earning Assets:
Cash and Due From Banks $ 5,378,688
Allowance for Loan Losses (2,295,089)
Premises and Equipment 3,161,431
Other Real Estate Owned 47,946
Other Assets 2,240,113
____________
Total Non-Interest Earning
Assets 8,533,089
____________
Total Assets $254,599,842
Interest-Bearing Liabilities:
Savings, NOW Accounts, and
Money Markets $ 89,137,426 $ 2,853,898 3.20%
Time Deposits 100,012,779 5,583,373 5.58%
Short-Term Borrowings 1,119,789 64,408 5.75%
Long-Term Borrowings 11,646,849 713,710 6.13%
Securities Sold U/A to
Repurchase 3,992,063 165,663 4.15%
____________ ___________
Total Interest-Bearing
Liabilities $205,908,906 $ 9,381,052 4.56%
Non-Interest Bearing
Liabilities:
Demand Deposits $ 17,712,235
Other Liabilities 1,712,920
Stockholders' Equity 29,265,781
____________
Total Liabilities/
Stockholders' Equity $254,599,842
Net Interest Income
Tax Equivalent $11,213,646
Margin Analysis:
Interest Income/Earning
Assets 8.37%
Interest Expense/Earning
Assets 3.81%
Net Interest Income/
Earning Assets 4.56%
______________________
<FN>
<F1>Tax-exempt income has been adjusted to a tax equivalent basis using an
incremental rate of 34%.
<F2>Installment loans are stated net of unearned interest.
<F3>Average loan balances include non-accrual loans. Interest income on
non-accrual loans is not included.
</FN>
</TABLE>
29
<PAGE>
Management's Discussion and Analysis
___________________________________________________________________
interest margin to 4.10% in 1999 as compared to 4.30% in 1998 and
4.56% in 1997. The continued maintenance of an adequate net interest
margin is a primary concern being addressed by management on an
ongoing basis.
The decline in net interest margin was due primarily to the
combination of a lower yield on earning assets, an increased reliance
on higher cost borrowed funds, and a lower contribution from non-interest
bearing demand deposits. The narrowing of our net interest
margin is consistent with industry trends. The trend reflects
increased competition for both loans and deposits.
Table 3 sets forth certain information regarding changes in
interest income and interest expense for the periods indicated for
each category of interest earning assets and interest bearing
liabilities. Information is provided on changes attributable to (i)
changes in volume (changes in average volume multiplied by prior
rate); (ii) changes in rate (changes in average rate multiplied by
prior average volume); and, (iii) changes in rate and volume (changes
in average volume multiplied by change in average rate).
In 1999, the increase in net interest income of $1,175,000
resulted from a change in volume of $1,243,000 and a decrease of
$68,000 due to changes in rate. In 1998, there was an increase in net
interest income of $569,000 resulted from a change in volume of
$1,212,000 and a decrease of $643,000 due to changes in rate.
<TABLE>
Table 3 - Changes in Income and Expense, 1999 and 1998
<CAPTION>
(Amounts in thousands) 1999 COMPARED TO 1998
_______________________
VOLUME RATE NET
_____ ____ ___
<S> <C> <C> <C>
Interest Income:
Loans, Net $1,833 $(684) $1,149
Taxable Investment Securities 882 (7) 875
Tax-Exempt Investment Securities 704 86 790
Other Short-Term Investments (57) (23) (80)
______ _____ ______
Total Interest Income $3,362 $(628) $2,734
Interest Expense:
Savings, Now, and Money Markets $(1) $(280) $(281)
Time Deposits 950 (382) 568
Short-Term Borrowings 239 5 244
Long-Term Borrowings 226 (34) 192
Securities Sold U/A to Repurchase 705 131 836
______ _____ ______
Total Interest Expense $2,119 $(560) $1,559
______ _____ ______
Net Interest Income $1,243 $ (68) $1,175
<CAPTION>
(Amounts in thousands) 1998 COMPARED TO 1997
_____________________
VOLUME RATE NET
______ ____ ___
<S> <C> <C> <C>
Interest Income:
Loans, Net $ 781 $(274) $ 507
Taxable Investment Securities 837 (225) 612
Tax-Exempt Investment Securities 634 (219) 415
Other Short-Term Investments (16) (1) (17)
______ _____ ______
Total Interest Income $2,236 $(719) $1,517
Interest Expense:
Savings, Now, and Money Markets $367 $ 27 $ 394
Time Deposits 446 (69) 377
Short-Term Borrowings (15) (4) (19)
Long-Term Borrowings 136 (33) 103
Securities Sold U/A to Repurchase 90 3 93
______ _____ ______
Total Interest Expense $1,024 $ (76) $ 948
______ _____ ______
Net Interest Income $1,212 $(643) $ 569
________________________
The change in interest due to both volume and yield/rate has been allocated
to change due to volume and change due to yield/rate in proportion to the
absolute value of the change in each.
Balance on non-accrual loans are included for computational purposes.
Interest income on non-accrual loans is not included.
Interest income exempt from federal tax was $3,249,720 in 1999, $2,735,553
in 1998, and $2,426,231 in 1997. Tax-exempt income has been adjusted to a
tax-equivalent basis using an incremental rate of 34%.
</TABLE>
PROVISION FOR LOAN LOSSES
For the year ended December 31, 1999, the provision for loan
losses was $325,000 as compared to $275,000 as of December 31, 1998,
an increase of 18.2%. The Corporation's provision for loan losses for
the year ended December 31, 1997, was $325,000, the same as 1999. The
provision was increased in 1999 primarily because of the loan growth
experienced by the Corporation. Net charge-offs by the Corporation for
the fiscal year end December 31, 1999, 1998, and 1997, were $146,000,
$225,000, and $221,000, respectively.
The allowance for loan losses as a percentage of loans, net of
unearned interest, was 1.40% as of December 31, 1999, 1.50% as of
December 31, 1998, and 1.56% as of December 31, 1997.
On a quarterly basis, the Corporation's Board of Directors and
management performs a detailed analysis of the adequacy of the
allowance for loan losses. This analysis includes an evaluation of
credit risk concentration, delinquency trends, past loss experience,
current economic conditions, composition of the loan portfolio,
classified loans and other relevant factors.
30 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
Management's Discussion and Analysis
___________________________________________________________________
The Corporation will continue to monitor its allowance for loan
losses and make future adjustments to the allowance through the
provision for loan losses as conditions warrant. Although the
Corporation believes that the allowance for loan losses is adequate to
provide for losses inherent in the loan portfolio, there can be no
assurance that future losses will not exceed the estimated amounts or
that additional provisions will not be required in the future.
The Bank is subject to periodic regulatory examination by the
Office of the Comptroller of the Currency (OCC). As part of the
examination, the OCC will assess the adequacy of the bank's allowance
for loan losses and may include factors not considered by the Bank. In
the event that an OCC examination results in a conclusion that the
Bank's allowance for loan losses is not adequate, the Bank may be
required to increase its provision for loan losses.
NON-INTEREST INCOME
Non-interest income is derived primarily from trust department
revenue, service charges and fees, other miscellaneous revenue and the
gain on the sale of mortgage loans. In addition, investment security
gains or losses also impact total non-interest income.
For the year ended December 31, 1999, non-interest income
increased $86,000, or 5.3% as compared to an increase of $367,000 for
the year ended December 31, 1998. Table 4 provides the major
categories of non-interest income and each respective change.
Excluding investment security gains, non-interest income in 1999
increased $141,000, or 9.7%. This compares to an increase of
$256,000, or 21.4% in 1998 before investment security gains. Income
from the trust department, which consists of fees generated from
individual and corporate accounts, increased in 1999 by $52,000 after
increasing by $68,000 in 1998. Increased income from the trust
department was due primarily to new business and increasing market
value of accounts.
Service charges and fees, consisting primarily of service charges
on deposit accounts, was the largest source of non-interest income in
1999 and 1998. Service charges and fees increased by $190,000, or
25.3% in 1999 compared to an increase of $81,000, or 12.1% in 1998.
A higher volume of debit and other transactions led to the growth
in both years.
Other income decreased by $10,000, or 20.4% in 1999 compared to
an increase of $15,000, or a 44.1% in 1998. The gain on sale of
mortgages provided $35,000 in 1999, a decrease of $91,000 over 1998.
Because of rising interest rates in 1999, we were not able to
recognize significant gains on the sale of mortgage loans we
originated for the secondary market. During 1998 when rates were the
less volatile, the gain on the sale of mortgage loans was greater.
Since the Corporation continues to service the mortgages which are
sold, this provides a source for continued non-interest income.
<TABLE>
Table 4 - Non-Interest Income
<CAPTION>
(Amounts in thousands) 1999/1998
__________________________
Increase/(Decrease)
_________________
1999 Amount % 1998
____ ______ ___ ____
<S> <C> <C> <C> <C>
Trust Department $ 577 $ 52 9.9 $ 525
Service Charges and Fees 940 190 25.3 750
Other 39 (10) (20.4) 49
Gain on Sale of Mortgages 35 (91) (72.2) 126
______ ____ ______
Subtotal $1,591 $141 9.7 $1,450
Investment Securities Gains 124 (55) (30.7) 179
______ ____ ______
Total $1,715 $ 86 5.3 $1,629
<CAPTION>
(Amounts in thousands) 1998/1997
__________________________
Increase/(Decrease)
___________________
1998 Amount % 1997
____ _____ __ ____
<S> <C> <C> <C> <C>
Trust Department $ 525 $ 68 14.9 $ 457
Service Charges and Fees 750 81 12.1 669
Other 49 15 44.1 34
Gain on Sale of Mortgages 126 92 270.6 34
______ ____ ______
Subtotal 1,450 $256 21.4 $1,194
Investment Securities Gains 179 111 163.2 68
______ ____ ______
Total $1,629 $367 29.1 $1,262
</TABLE>
NON-INTEREST EXPENSES
Non-interest expense consists of salaries and benefits,
occupancy, furniture and equipment, and other miscellaneous expenses.
Table 5 provides the yearly non-interest expense by category, along
with the change, amount and percentage.
Total non-interest expense increased by $775,000, or 14.0% in
1999 compared to an increase of $601,000, or 12.2% in 1998. Expenses
associated with employees (salaries and employee benefits) continue to
be the largest non-interest expenditure. Salaries and employee
benefits amounted to 54.7% of total non-interest expense in 1999 and
52.2% in 1998. Salaries and employee benefits increased $565,000, or
19.6% in 1999 and $261,000, or 9.9% in 1998. The increase in both
years were due to an
31
<PAGE>
Management's Discussion and Analysis
___________________________________________________________________
increased number of employees, plus normal salary adjustments and
increased benefit costs. Full time equivalent employees total 122 as
of December 31, 1999, compared to 105 in 1998, and 98 in 1997.
Net occupancy expense decreased $2,000, or 0.5% in 1999 as
compared to an increase of $71,000, or 21.4% in 1998. Furniture and
equipment expense increased $35,000, or 6.8% in 1999 compared to an
increase of $28,000, or 5.7% in 1998. The increase in furniture and
equipment expense in 1999 and 1998 relate to higher depreciation
associated with computer processing and related equipment. Other
operating expenses increased $177,000, or 10.2% in 1999 as compared to
an increase of $241,000, or 16.2% in 1998. Higher other expenses are
associated with increased professional fees, postage, supplies,
insurance, marketing, and advertising.
The overall level of non-interest expense continues to below,
relative to our peers. In fact, our total non-interest expense was
less than 2% of average assets in both 1999 and 1998. Non-interest
expense as a percentage of average assets under 2% places us among the
leaders in our peer financial institution categories in controlling
non-interest expense.
<TABLE>
Table 5 - Non-Interest Expense
<CAPTION>
(Amounts in thousands) 1999/1998
________________________________
Increase/(Decrease)
__________________
1999 Amount % 1998
____ ______ ______ ____
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $3,453 $565 19.6 $2,888
Occupancy, Net 401 (2) (.5) 403
Furniture and Equipment 551 35 6.8 516
Other 1,905 177 10.2 1,728
______ ____ ______
Total $6,310 $775 14.0 $5,535
<CAPTION>
(Amounts in thousands) 1998/1997
____________________________
Increase/(Decrease)
__________________
1998 Amount % 1997
____ ______ ______ ____
<S> <C> <C> <C> <C>
Salaries and Employee Benefits $2,888 $261 9.9 $2,627
Occupancy, Net 403 71 21.4 332
Furniture and Equipment 516 28 5.7 488
Other 1,728 241 16.2 1,487
______ ____ ______
Total $5,535 $601 12.2 $4,934
</TABLE>
INCOME TAX EXPENSE
Income tax expense for the year ended December 31, 1999, was
$1,203,966 as compared to $1,304,606 and $1,307,436 for the years
ended December 31, 1998, and December 31, 1997, respectively. In 1999
and 1998, our income tax expense decreased even though income before
taxes increased $171,893 in 1999 and $224,462 in 1998. An increase in
tax exempt interest, derived from both our tax-free loans and
municipal investment securities in 1999 and 1998, resulted in a lower
income tax liability. The effective income tax rate was 18.9% in 1999,
20.9% in 1998, and 21.7% in 1997. The limited availability of
municipal investments at attractive interest rates may result in a
higher effective tax rate in future years.
FINANCIAL CONDITION
GENERAL
Total assets increased to $333,515,787, at year-end 1999, an
increase of 10.1% over year-end 1998. As of December 31, 1999, total
deposits amounted to $244,680,184, a decrease of 1.0% over 1998.
Assets as of December 31, 1998, were $303,028,481, an increase of
13.3% over 1997, while total deposits as of year-end 1998 amounted to
$247,091,519, an increase of 13.5% over 1997.
The increase in assets primarily reflects the deployment of
proceeds from borrowings and deposits into loans and investment
securities. The Corporation continues to maintain and manage its asset
growth. Our strong equity capital position provides us an opportunity
to leverage our asset growth. Borrowings did increase in 1999 by
$37,960,681 and in 1998 by $4,531,486. The additional borrowings in
1999 were used to fund our asset growth since deposits declined
$2,411,335. Core deposits, which include demand deposits, interest
bearing demand deposits, money market accounts, savings accounts, and
time deposits of individuals are our most significant source of funds.
Despite successful sales campaigns which attracted new customers and
generated growth in retail certificates of deposit (time deposits of
individuals), the loss of a substantial commercial deposit account and
a shifting of our customer preferences led to an overall decline in
deposits during 1999.
EARNING ASSETS
Earning assets are defined as those assets that produce interest
income. By maintaining a healthy asset utilization rate, i.e., the
volume of earning assets as a percentage of total assets, the
Corporation maximizes income. The earning asset ratio equaled 96.0% as
of December 31, 1999, compared to 96.4% as of December 31, 1998, and
96.4% at December 1, 1997. This indicates that the management of
earning assets is a priority and non-earning assets, primarily cash
and due from banks, fixed assets and other assets, are maintained at
minimal levels. The primary earning assets are loans and investment
securities.
32 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
Management's Discussion and Analysis
___________________________________________________________________
LOANS
Total loans, net of unearned income, increased to $185,230,902 as
of December 31, 1999, as compared to $161,532,639 as of December 31,
1998. Table 6 provides data relating to the composition of the
Corporation's loan portfolio on the dates indicated. Total loans, net
of unearned income increased $23,698,000, or 14.7% in 1999 compared to
an increase of $9,382,000, or 6.2% in 1998 and an increase of
$18,890,000, or 14.2% in 1997.
The loan portfolio is well diversified and increases in the
portfolio the last two years have been primarily from real estate
loans, commercial loans secured by real estate, and consumer loans.
Also, in 1999 tax exempt loans increased to a new record level. In
1999, approximately $6,000,000 of residential mortgage loans were sold
in the secondary market and approximately $5,600,000 were sold in
1998. The Corporation will continue to originate and market long-term
fixed rate residential mortgage loans which conform to secondary
market requirements. The Corporation derives ongoing income from the
servicing of mortgages sold in the secondary market.
The noted loan growth was achieved without a significant
percentage increase in delinquencies or charge-offs. The Corporation
internally underwrites each of its loans to comply with prescribed
policies and approval levels established by its Board of Directors.
<TABLE>
Table 6 - Loans Outstanding, Net of Unearned Income
<CAPTION>
(Amounts in thousands) December 31,
_____________________________
1999 1998 1997
____ ____ ____
<S> <C> <C> <C>
Commercial, financial and
agricultural:
Commercial secured by real estate $ 55,514 $ 43,366 $ 41,566
Commercial - other 17,864 16,579 17,241
Tax exempt 4,133 2,254 2,566
Real estate (primarily residential
mortgage loans) 83,099 77,858 72,901
Consumer loans 30,595 26,205 22,009
________ ________ ________
Total Gross Loans $191,205 $166,262 $156,283
Less: Unearned income and
unamortized loan fees net
of costs 5,974 4,729 4,132
________ ________ ________
Total Loans, net of unearned income $185,231 $161,533 $152,151
<CAPTION>
(Amounts in thousands) December 31,
_________________
1996 1995
____ ____
<S> <C> <C>
Commercial, financial and
agricultural:
Commercial secured by real estate $ 33,103 $ 28,846
Commercial - other 13,574 17,563
Tax exempt 2,263 3,602
Real estate (primarily residential
mortgage loans) 65,145 58,438
Consumer loans 23,027 23,681
________ ________
Total Gross Loans $137,112 $132,130
Less: Unearned income and
unamortized loan fees net
of costs 3,851 4,069
________ ________
Total Loans, net of unearned income $133,261 $128,061
</TABLE>
INVESTMENT SECURITIES
The Corporation uses investment securities to not only generate
interest and dividend revenue, but also to help manage interest rate
risk and to provide liquidity to meet operating cash needs.
The investment portfolio has been allocated between securities
available for sale and securities held to maturity. No investment
securities were established in a trading account. Available for sale
securities increased to $123,468,000 in 1999, a 5.8% increase over
1998. At December 31, 1999, the net unrealized loss, net of the tax
effect, on these securities was $3,459,538 and is included in
stockholders' equity as accumulated other comprehensive loss. At
December 31, 1998, accumulated other comprehensive income amounted to
$2,192,528. The increase in interest rates during 1999 reduced the
market value of our available-for-sale securities. Held-to-maturity
securities declined $2,422,000, or a 17.3% decrease over 1998. Table 7
provides data on the carrying value of our investment portfolio on the
dates indicated. The vast majority of investment security purchases
are allocated as available for sale. This provides the Corporation
with increased flexibility should there be a need or desire to
liquidate an investment security.
The investment portfolio includes short-term investments, U.S.
Treasury Securities, U.S. Government Agencies, corporate obligations,
mortgage backed securities, state and municipal securities, and other
debt securities. In addition, the investment portfolio includes equity
securities consisting primarily of common stock investments in the
Federal Reserve Bank and the Federal Home Loan Bank, as well as other
bank holding companies and commercial banks.
Securities available-for-sale may be sold as part of the overall
asset and liability management process. Realized gains and losses are
reflected in the results of operations on our statements of income.
The investment portfolio does not contain any structured notes, step-up bonds,
or any off-balance sheet derivatives.
During 1999, interest bearing deposits in other banks increased
to $80,157 from $22,489 in 1998. Balances in interest bearing deposits
in other banks were kept low as funds were invested in marketable
securities to maximize income while still addressing liquidity needs.
33
<PAGE>
Management's Discussion and Analysis
___________________________________________________________________
<TABLE>
Table 7 - Carrying Value of Investment Securities
<CAPTION>
(Amounts in thousands) December 31,
__________________
1999
__________________
Available Held to
for Sale Maturity
________ ________
<S> <C> <C>
U.S. Treasury $ 0 $ 0
U. S. Government Corporations
and Agencies 61,733 8,170
State and Municipal 54,541 3,393
Other Securities 0 0
Equity Securities 7,194 0
________ _______
Total Investment Securities $123,468 $11,563
<CAPTION>
(Amounts in thousands) December 31,
__________________
1998
__________________
Available Held to
for Sale Maturity
________ ________
<S> <C> <C>
U.S. Treasury $ 7,486 $ 0
U. S. Government Corporations
and Agencies 52,633 10,594
State and Municipal 52,369 3,391
Other Securities 0 0
Equity Securities 4,213 0
________ _______
Total Investment Securities $116,701 $13,985
<CAPTION>
(Amounts in thousands) December 31,
__________________
1997
___________________
Available Held to
for Sale Maturity
________ ________
<S> <C> <C>
U.S. Treasury $10,442 $ 0
U. S. Government Corporations
and Agencies 34,253 13,612
State and Municipal 33,996 3,197
Other Securities 0 0
Equity Securities 2,960 0
_______ _______
Total Investment Securities $81,651 $16,809
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses constitutes the amount available to
absorb losses within the loan portfolio. As of December 31, 1999, the
allowance for loan losses was $2,600,000 as compared to the December
31, 1998, amount of $2,421,000 and the December 31, 1997, amount of
$2,371,000. The allowance for loan losses is established through a
provision for loan losses charged to expenses. Loans are charged
against the allowance for possible loan losses when management
believes that the collectibility of the principal is unlikely. The
risk characteristics of the loan portfolio are managed through the
various control processes, including credit evaluations of individual
borrowers, periodic reviews, and diversification by industry. Risk is
further mitigated through the application of lending procedures such
as the holding of adequate collateral and the establishment of
contractual guarantees.
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. This
assessment results in an allowance consisting of two components,
allocated and unallocated. 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
losses is adequate to cover foreseeable future losses. Table 8
contains an analysis of our Allowance for Loan Losses indicating
charge-offs and recoveries by the year. In 1999, net charge-offs as a
percentage of average loans were .08% compared to .15% in 1998 and
.15% in 1997. Net charge-offs amounted to $146,000 in 1999 as compared
to $225,000 and $221,000 in 1998 and 1997, respectively.
It is the policy of management and the Corporation's Board of
Directors to provide for losses on both identified and unidentified
losses inherent in its loan portfolio. A provision for loan losses is
charged to operations based upon an evaluation of the potential losses
in the loan portfolio. This evaluation takes into account such factors
as portfolio concentrations, delinquency, trends, trends of non-accrual and
classified loans, economic conditions, and other relevant
factors.
The loan review process which is conducted quarterly, is an
integral part of our evaluation of the loan portfolio. A detailed
quarterly analysis to determine the adequacy of the Corporation's
allowance for loan losses is reviewed by our Board of Directors.
With our manageable level of net charge-offs and the additions to
the reserve from our provision out of operations, the allowance for
loan losses as a percentage of average loans amounted to 1.49% in
1999, 1.57% in 1998, and 1.63% in 1997.
34 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
Management's Discussion and Analysis
___________________________________________________________________
<TABLE>
Table 8 - Analysis of Allowance for Loan Losses
<CAPTION>
(Amounts in thousands) Years Ended December 31,
______________________
1999 1998 1997
____ ____ _____
<S> <C> <C> <C>
Balance at beginning of period $2,421 $2,371 $2,267
Charge-offs:
Commercial, financial, and
agricultural 25 66 107
Real estate - mortgage 20 42 54
Installment loans to individuals 213 161 111
______ ______ ______
258 269 272
Recoveries:
Commercial, financial, and
agricultural 23 0 7
Real estate - mortgage 62 8 17
Installment loans to individuals 27 36 27
______ ______ ______
112 44 51
Net charge-offs 146 225 221
Additions charged to operations 325 275 325
______ ______ ______
Balance at end of period $2,600 $2,421 $2,371
Ratio of net charge-offs during
the period to average loans
outstanding during the period .08% .15% .15%
Allowance for loan losses to average
loans outstanding during the period 1.49% 1.57% 1.63%
<CAPTION>
(Amounts in thousands) Years Ended December 31,
______________________
1996 1995
____ ____
<S> <C> <C>
Balance at beginning of period $2,015 $1,802
Charge-offs:
Commercial, financial, and
agricultural 214 18
Real estate - mortgage 0 118
Installment loans to individuals 88 50
______ ______
302 186
Recoveries:
Commercial, financial, and
agricultural 12 6
Real estate - mortgage 8 2
Installment loans to individuals 17 19
______ ______
37 27
Net charge-offs 265 159
Additions charged to operations 517 372
______ ______
Balance at end of period $2,267 $2,015
Ratio of net charge-offs during the
period to average loans outstanding
during the period .21% .13%
Allowance for loan losses to average
loans outstanding during the period 1.76% 1.65%
</TABLE>
Table 9 sets forth the allocation of the Bank's allowance for
loan losses by loan category and the percentage of loans in each
category to total loans receivable at the dates indicated. The portion
of the allowance for loan losses allocated to each loan category does
not represent the total available for future losses that may occur
within the loan category, since the total loan loss allowance is a
valuation reserve applicable to the entire loan portfolio.
<TABLE>
Table 9 - Allocation of Allowance for Loan Losses
<CAPTION>
(Amounts in thousands) December 31,
_____________________________________
1999 % <F1> 1998 % <F1>
____ ____ ____ ____
<S> <C> <C> <C> <C>
Commercial, financial,
and agricultural $ 308 11.2 $ 253 9.8
Real estate - mortgage 1,431 75.5 1,237 74.3
Installments to
individuals 425 13.3 319 15.9
Unallocated 436 N/A 612 N/A
______ _____ ______ _____
$2,600 100.0 $2,421 100.0
<CAPTION>
(Amounts in thousands) December 31,
_____________________________________
1997 % <F1> 1996 % <F1>
____ ____ ____ ____
<S> <C> <C> <C> <C>
Commercial, financial,
and agricultural $ 271 12.1 $ 303 10.7
Real estate - mortgage 1,135 73.9 1,088 72.5
Installments to
individuals 241 14.0 203 16.8
Unallocated 724 N/A 673 N/A
______ _____ ______ _____
$2,371 100.0 $2,267 100.0
<CAPTION>
(Amounts in thousands) December 31,
_______________________________________
1995 % <F1>
____ ____
<S> <C> <C>
Commercial, financial,
and agricultural $ 344 17.4
Real estate - mortgage 663 66.1
Installments to
individuals 443 16.5
Unallocated 565 N/A
______ _____
$2,015 100.0
______________________
<FN>
<F1>
Percentage of loans in each category to total loans.
</FN>
</TABLE>
NON-PERFORMING ASSETS
The recent growth experienced by the Corporation has not resulted
in a corresponding percentage increase in delinquencies and non-performing
loans. Table 10 details the Corporation's non-performing
assets at the dates indicated.
Non-accrual loans are generally delinquent on which principal or
interest is past-due approximately 90 days or more, depending upon the
type of credit and the collateral. When a loan is placed on non-accrual status,
any unpaid interest is charged against income.
Restructured loans are loans where the borrower has been granted a
concession in the interest rate or payment amount because of financial
problems. Other real estate owned/foreclosed assets represents
property acquired through foreclosure, or considered to be an in-substance
foreclosure.
35
<PAGE>
Management's Discussion and Analysis
___________________________________________________________________
The total of non-performing assets did decrease to $750,000 as of
December 31, 1999, as compared to $881,000 as of December 31, 1998.
Non-accrual and restructured loans declined from $854,000 in 1998 to
$618,000 in 1999. Other real estate/foreclosed assets, consisting of
two real estate parcels, increased to $85,000 in 1999. The Corporation
is in the process of selling the two real estate parcels and any loss
should be minimal. Loans past-due 90 days or more and still accruing
increased to $47,000 in 1999 from $27,000 in 1998. Our allowance for
loan losses to total non-performing assets remains very strong at
346.6% in 1999 and 274.8% in 1998.
Loan quality is monitored closely, and we actively work with
borrowers to resolve credit problems. Excluding the assets disclosed
in Table 10, management is not aware of any information about
borrowers' possible credit problems, which cause serious doubt as to
their ability to comply with present loan repayment terms.
Should the economic climate no longer continue to be stable or
begin to deteriorate, borrowers may experience difficulty, and the
level of non-performing loans and assets, charge-offs and
delinquencies could rise and possibly require additional increases in
our allowance for loan losses.
In addition, regulatory authorities, as an integral part of their
examinations, periodically review the allowance for possible loan and
lease losses. They may require additions to allowances based upon
their judgements about information available to them at the time of
examination.
Interest income received on non-performing loans in 1999 and 1998
was $6,380 and $5,610, respectively. Interest income, which would have
been recorded on these loans under the original terms in 1999 and 1998
was $68,569 and $96,425, respectively. At December 31, 1999, the
Corporation had no outstanding commitments to advance additional funds
with respect to these non-performing loans.
A concentration of credit exists when the total amount of loans
to borrowers, who are engaged in similar activities that are similarly
impacted by economic or other conditions, exceed 10% of total loans.
As of December 31, 1999, 1998, and 1997, management is of the opinion
that there were no loan concentrations exceeding 10% of total loans.
There is a concentration of real estate mortgage loans in the
loan portfolio. Real estate mortgages comprise 74.8% of the loan
portfolio as of December 31, 1999, down from 75.0% in 1998. Real
estate mortgages consist of both residential and commercial real
estate loans. The real estate loan portfolio is well diversified in
terms of borrowers and collateral. Also, the real estate loan
portfolio has a mix of both fixed rate and adjustable rate mortgages.
The real estate loans are concentrated primarily in our marketing area
and are subject to risks associated with the local economy.
<TABLE>
Table 10 - Non-Performing Assets
<CAPTION>
(Amounts in thousands) December 31,
____________________________________
1999 1998 1997 1996 1995
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Non-accrual and restructured
loans $ 618 $ 854 $ 321 $ 267 $ 557
Other real estate/foreclosed
assets 85 0 29 84 0
Loans past-due 90 days or more
and still accruing 47 27 336 263 68
______ ______ ______ ______ ______
Total non-performing assets $ 750 $ 881 $ 686 $ 614 $ 625
Non-performing assets to
period-end loans and
foreclosed assets .40% .55% .45% .46% .48%
Total non-performing assets
to total assets .22% .29% .26% .25% .28%
Total allowance for loan
losses to total non-
performing assets 346.6% 274.8% 345.7% 369.2% 322.4%
</TABLE>
DEPOSITS AND OTHER BORROWED FUNDS
Consumer and commercial retail deposits are attracted primarily
by First Keystone's subsidiary bank's nine full service office
locations. The Bank offers a broad selection of deposit products and
continually evaluates its interest rates and fees on deposit products.
The Bank regularly reviews competing financial institutions and takes
in account prevailing market rates, especially when establishing
interest rates on certificates of deposit.
Deposits decreased by $2,411,335, or a 1.0% decrease when
comparing December 31, 1999, to December 31, 1998. This decrease
compares to deposit increases of 13.5% in 1998 and 9.6% in 1997.
During 1999, the Corporation experienced a deposit reduction in
both non-interest bearing and interest bearing deposits. Non-interest
bearing deposits decreased to $20,919,398 as of December 31, 1999, a
decrease of
36 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
Management's Discussion and Analysis
___________________________________________________________________
$1,829,676, or 8.0% over 1998. Interest bearing deposits amounted to
$223,760,786 as of December 31, 1999, a decrease of $581,659, or 0.3%
over 1998.
During 1999 and 1998, the Corporation increased its reliance on
both short-term borrowings and long-term borrowings to fund primarily
loan growth and its stock repurchase program. Total borrowings were
$57,594,327 as of December 31, 1999, compared to $19,633,646 on
December 31, 1998. Short-term borrowings are comprised of federal
funds purchased, securities sold under agreements to repurchase, U.S.
Treasury demand notes, and overnight, as well as short-term borrowings
from the Federal Home Loan Bank (FHLB).
Long-term borrowings are typically FHLB term borrowings with a
maturity of one year or more. Some of the additional term borrowings
were made to take advantage of special rates offered by the FHLB. In
connection with FHLB borrowings and securities sold under agreements
to repurchase, the Corporation maintains certain eligible assets as
collateral.
CAPITAL STRENGTH
Normal increases in capital are generated by net income, less
cash dividends paid out. Also, the net unrealized gains or losses on
investment securities available for sale decreased shareholders'
equity or capital in 1999, referred to as accumulated other
comprehensive income (loss). The total net decrease in capital was
$4,395,630 in 1999 after an increase of $1,935,082 in 1998. The
accumulated other comprehensive income amounted to a loss of
$3,459,538 in 1999 and a gain of $2,192,528 in 1998. Another factor
for the decrease in equity capital in 1999 relates to our stock
repurchase plan. The Corporation's Board of Directors approved
repurchasing up to 100,000 shares of common stock. As of December 31,
1999, the Corporation had repurchased 100,000 shares at a cost of
$3,096,681.
Return on equity (ROE) is computed by dividing net income by
average stockholders' equity. This ratio was 16.12% for 1999, 14.68%
for 1998, and 15.92% for 1997. Refer to Performance Ratios on Page 2 -
Summary of Selected Financial Data for a more expanded listing of the
ROE.
Adequate capitalization of banks and bank holding companies is
required and monitored by regulatory authorities. Table 11 reflects
risk-based capital ratios and the leverage ratio for our Corporation
and Bank. The Corporation's leverage ratio was 10.02% at December 31,
1999, and 10.50% as of December 31, 1998.
The Corporation has consistently maintained regulatory capital
ratios at or above the "well capitalized" standards. For additional
information on capital ratios, see Note 14 to the Consolidated
Financial Statements. The risk-based capital ratios also decreased
somewhat in 1999 from 1998 for both the Corporation and the Bank, but
remain strong. The risk-based capital calculation assigns various
levels of risk to different categories of bank assets, requiring
higher levels of capital for assets with more risk. Also measured in
the risk-based capital ratio is credit risk exposure associated with
off-balance sheet contracts and commitments. The following table
indicates capital ratios as of December 31, 1999, and December 31,
1998, for the Corporation and the Bank.
<TABLE>
Table 11 - Capital Ratios
<CAPTION>
December 31, 1999
_________________
Corporation Bank
___________ ____
<S> <C> <C>
Risk-Based Capital:
Tier I risk-based capital ratio 16.43% 17.00%
Total risk-based capital ratio
(Tier 1 and Tier 2) 17.85% 18.25%
Leverage Ratio:
Tier I capital to average assets 10.02% 9.71%
<CAPTION>
December 31, 1998
_________________
Corporation Bank
___________ ____
<S> <C> <C>
Risk-Based Capital:
Tier I risk-based capital ratio 18.62% 18.92%
Total risk-based capital ratio
(Tier 1 and Tier 2) 20.11% 20.17%
Leverage Ratio:
Tier I capital to average assets 10.50% 9.95%
</TABLE>
LIQUIDITY MANAGEMENT
Effective liquidity management ensures that the cash flow
requirements of depositors and borrowers, as well as the operating
cash needs of the Corporation, are met.
Liquidity is needed to provide the funding requirements of
depositors withdrawals, loan growth, and other operational needs.
Asset liquidity is provided by investment securities maturing in one
year or less, other short-term investments, federal funds sold, and
cash and due from banks. At year-end 1999, cash and due from banks and
interest-bearing deposits in other banks totaled $6,964,133 as
compared to $7,055,601 at year-end 1998. Additionally, maturing loans
and repayment of loans are another source of asset liquidity.
37
<PAGE>
Management's Discussion and Analysis
___________________________________________________________________
Liability liquidity is accomplished by maintaining a core deposit
base, acquired by attracting new deposits and retaining maturing
deposits. Also, short-term borrowings provide funds to meet
liquidity.
Management feels its current liquidity position is satisfactory
given the factors that the Corporation has 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 investments
represent additional sources of liquidity.
Finally, the Corporation's subsidiary bank does have access to
funds on a short-term basis from the Federal Reserve Bank discount
window. Also, Fed funds can be purchased by means of a borrowing line
at the Atlantic Central Bankers Bank. The Corporation has indirect
access to the capital markets through its membership in the Federal
Home Loan Bank. Advances, both short-term and long-term, are available
to help address any liquidity needs.
<TABLE>
Table 12 - Loan Maturities and Interest Sensitivity<F1>
<CAPTION>
(Amounts in thousands) December 31, 1999
_______________________________
One year One thru Over five
or less five years years Total
<S> <C> <C> <C> <C>
Commercial, Financial and
Agricultural
Fixed interest rate $ 5,895 $ 9,706 $13,220 $28,821
Variable interest rate 28,176 22,908 3,867 54,951
_______ _______ _______ _______
Total $34,071 $32,614 $17,087 $83,772
Real Estate Construction
Fixed interest rate $ 99 $ 1,253 $ 0 $ 1,352
Variable interest rate $ 0 $ 0 $ 0 $ 0
__________________________
<FN>
<F1>
Excludes residential mortgages and consumer loans.
</FN>
</TABLE>
FORWARD LOOKING STATEMENTS
The sections that follow, Market Risk Management, Asset/Liability
Management, and Year 2000 Compliance contain certain forward looking
statements. These forward looking statements involve significant risks
and uncertainties, including changes in economic and financial market
conditions. The Corporation's ability to execute its business plans,
including its plan to address the Year 2000 issue, and the ability of
third parties to effectively address their Year 2000 issues are
significant risks. Although First Keystone Corporation believes that
the expectations reflected in such forward looking statements are
reasonable, actual results may differ materially.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in
the fair value of financial instruments due to changes in interest
rates, exchange rates and equity prices. First Keystone Corporation's
market risk is composed primarily of interest rate risk. The
Corporation's interest rate risk results from timing differences in
the repricing of assets, liabilities, off-balance sheet instruments,
and changes in relationships between ratio indices and the potential
exercise of explicit or embedded options.
Increases in the level of interest rates also may adversely
affect the fair value of the Corporation's securities and other
earning assets. Generally, the fair value of fixed-rate instruments
fluctuates inversely with changes in interest rates. As a result,
increases in interest rates could result in decreases in the fair
value of the Corporation's interest-earning assets, which could
adversely affect the Corporation's results of operations if sold, or,
in the case of interest earning assets classified as available for
sale, the Corporation's stockholders' equity, if retained. Under The
Financial Accounting Standards Board (FASB) Statement 115, changes in
the unrealized gains and losses, net of taxes, on securities
classified as available for sale will be reflected in the
Corporation's stockholders' equity. As of December 31, 1999, the
Corporation's securities portfolio included $123,467,820 in securities
classified as available for sale. Accordingly, with the magnitude of
the Corporation's holdings of securities available for sale, changes
in interest rates could produce significant changes in the value of
such securities and could produce significant fluctuations in the
stockholders' equity of the Corporation. The Corporation does not own
any trading assets.
38 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
Management's Discussion and Analysis
___________________________________________________________________
ASSET/LIABILITY MANAGEMENT
The principal objective of asset liability management is to
manage the sensitivity of the net interest margin to potential
movements in interest rates and to enhance profitability through
returns from managed levels of interest rate risk. The Corporation
actively manages the interest rate sensitivity of its assets and
liabilities. Several techniques are used for measuring interest rate
sensitivity. A positive gap occurs when the amount of interest
sensitive assets exceeds interest sensitive liabilities. This position
would contribute positively to net-interest income in a rising
interest rate environment. Conversely, the Corporation's balance sheet
has more liabilities repricing than assets and is liability sensitive
or negatively gapped. This position would contribute positively to net
interest income in a falling rate environment.
Limitations of gap analysis as illustrated in Table 13 include:
a) assets and liabilities which contractually reprice within the same
period may not, in fact, reprice at the same time or to the same
extent; b) changes in market interest rates do not affect all assets
and liabilities to the same extent or at the same time, and c)
interest rate gaps reflect the Corporation's position on a single day
(December 31, 1999 in the case of the following schedule) while the
Corporation continually adjusts its interest sensitivity throughout
the year.
Also in Table 13, the Corporation has elected to incorporate some
interest bearing demand deposits and savings deposits as rate
sensitive in the three months or less time frame. The result is a
negative gap in that time frame of $35,913,000. However, much of our
interest bearing demand deposits and savings deposits are considered
core deposits and are not rate sensitive, especially in the three
months or less time frame. Accordingly, the Corporation feels it is
only slightly negatively gapped with exposure to an increase in
interest rates limited within policy guidelines. As discussed
previously, a negative gap will decrease net interest income should
interest rates rise. Despite the Corporation's negative gap position,
the impact of a rapid rise in interest rates as occurred in 1994 and
1999, did not have a significant effect on our net interest income.
<TABLE>
Table 13 - Interest Rate Sensitivity Analysis
<CAPTION>
(Amounts in thousands) December 31, 1999
_____________________________
3 Months 3 - 12 1 - 5
or Less Months Years
______ ______ _____
<S> <C> <C> <C>
Rate Sensitive Assets:
Cash and cash equivalent $ 80 $ 0 $ 0
Loans 32,331 22,732 69,321
Investments 11,428 7,344 30,564
________ ________ ________
Total Rate Sensitive Assets $ 43,839 $ 30,076 $ 99,885
Rate Sensitive Liabilities:
Interest-bearing deposits $ 45,354 $ 62,490 $ 35,287
Short-term borrowings 31,398 196 0
Long-term borrowings 3,000 5,250 5,000
________ ________ ________
Total Rate Sensitive
Liabilities $ 79,752 $ 67,936 $ 40,287
Interest Rate Sensitivity:
Current period $(35,913) $(37,860) $ 59,598
Cumulative gap (35,913) (73,773) (14,175)
Cumulative gap to total assets (10.77%) (22.12%) (4.25%)
<CAPTION>
(Amounts in thousands) December 31, 1999
_____________________________
Over
5 Years Total
<S> <C> <C>
Rate Sensitive Assets:
Cash and cash equivalent $ 0 $ 80
Loans 58,247 182,631
Investments 85,694 135,030
________ ________
Total Rate Sensitive Assets $143,941 $317,741
Rate Sensitive Liabilities:
Interest-bearing deposits $ 80,629 $223,760
Short-term borrowings 0 31,594
Long-term borrowings 12,750 26,000
________ ________
Total Rate Sensitive
Liabilities $ 93,379 $281,354
Interest Rate Sensitivity:
Current period $ 50,562 $ 36,387
Cumulative gap 36,387
Cumulative gap to total assets 10.91%
</TABLE>
Interest Rate Risk Measurement
The Bank's Asset/Liability Committee (ALCO) is responsible for
reviewing the interest rate sensitivity position and establishing
policies to monitor and limit exposure to interest rate risk. The
guidelines established by ALCO are reviewed by the Corporation's Board
of Directors. One of the primary goals of asset/liability management
is to maximize net interest income and the net value of the
Corporation's future cash flows within established interest rate risk
limits.
Another way management reviews its interest sensitivity position
in addition to earnings simulation modeling is net present value
estimation. While each of these interest rate risk measurements has
limitations, taken together they represent a reasonably comprehensive
view of the magnitude of interest rate risk in the Corporation.
39
<PAGE>
Management's Discussion and Analysis
___________________________________________________________________
Earnings Simulation Modeling
Earnings simulation modeling is the primary mechanism used in
assessing the impact of changes in interest rates on net interest
income. The model reflects management's assumptions related to asset
yields and rates paid on liabilities, deposit sensitivity, size and
composition of the balance sheet. The assumptions are based on what
management believes at that time to be the most likely interest rate
environment. Management also evaluates the impact of higher and lower
interest rates. Management cannot predict the direction of interest
rates or how the mix of assets and liabilities will change. The use of
this information will help formulate strategies to minimize the
unfavorable effect on net interest income caused by interest rate
changes.
Table 14 presents an analysis of the changes in net-interest
income and net present value of the balance sheet resulting from an
increase or decrease of two percentage points (200 basis points) in
the level of interest rates. The calculated estimates of change in net
interest income and net present value of the balance sheet are
compared to current limits approved by ALCO and the Board of
Directors. The earnings simulation model projects net-interest income
would increase by approximately 5.64% if rates fell gradually by two
percentage points over one year. The model projects a decrease of
approximately 5.14% in net-interest income if rates rise gradually by
two percentage points over one year. Both of these forecasts are
within the one year policy guidelines of 10%.
Net Present Value Estimation
The net present value measure is used for helping to determine
levels of risk at a point in time present in the balance sheet that
might not be taken into account in the earnings simulation model. The
net present value of the balance sheet is defined as the discounted
present value of asset cash flows minus the discounted present value
of liability cash flows. At year-end, a 200 basis point immediate
decrease in rates is estimated to increase net present value by 17.4%.
Additionally, net present value is projected to decrease by 39.6% if
rates increase immediately by 200 basis points, both within policy
limits restricting these amounts to 50%. During 1999, the
Corporation's net present value risk position grew more liability
sensitive. The change in position was primarily a result of higher
interest rates and repurchases of the Corporation's own stock.
The computation of the effects of hypothetical interest rate
changes are based on many assumptions. They should not be relied upon
solely as being indicative of actual results, since the computations
do not contemplate actions management could undertake in response to
changes in interest rates.
<TABLE>
Table 14 - Effect of Change in Interest Rates
<CAPTION>
Projected ALCO
Change Guidelines
______ _________
<S> <C> <C>
Effect on Net Interest Income
1-year Net Income simulation
Projection
200 bp Ramp vs Stable Rate 5.64% (10%)
+200 bp Ramp vs Stable Rate (5.14%) (10%)
Effect on Net Present Value
of Balance Sheet
Static Net Present Value Change
200 bp Shock vs Stable Rate 17.4% (50%)
+200 bp Shock vs Stable Rate (39.6%) (50%)
</TABLE>
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.
40 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
<PAGE>
Management's Discussion and Analysis
___________________________________________________________________
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.
MARKET PRICE/DIVIDEND HISTORY
First Keystone Corporation's common stock is quoted on the Over
The Counter (OTC) Bulletin Board under the symbol "FKYS." The table
below reports the highest and lowest per share prices known to the
Corporation and the dividends paid during the periods indicated. All
amounts are restated to reflect a 10% stock dividend paid in May 1997
and a 3 for 1 split in the form of a 200% dividend paid in March 1998.
These prices do not necessarily reflect any dealer or retail markup,
markdown or commission.
<TABLE>
Table 15 - Market Price/Dividend History <F1>
<CAPTION>
1999
__________________________
Common Stock Dividends
High/Low Paid
_______ ____
<S> <C> <C>
First Quarter $33.50/$30.00 $.17
Second Quarter $30.25/$28.50 .17
Third Quarter $29.00/$26.25 .17
Fourth Quarter $26.25/$20.25 .19
<CAPTION>
1998
__________________________
Common Stock Dividends
High/Low Paid
_______ ____
<S> <C> <C>
First Quarter $30.25/$19.08 $.14
Second Quarter $32.50/$29.50 .14
Third Quarter $36.13/$32.00 .14
Fourth Quarter $34.38/$32.50 .17
<CAPTION>
1997
__________________________
Common Stock Dividends
High/Low Paid
_______ ____
<S> <C> <C>
First Quarter $11.21/$10.74 $.106
Second Quarter $14.33/$10.92 .117
Third Quarter $14.33/$14.33 .117
Fourth Quarter $19.08/$16.63 .133
<FN>
<F1>
Reflects adjustment for stock dividends more fully described in Note
1.
</FN>
</TABLE>
The following brokerage firms make a market in First Keystone
Corporation stock:
Janney Montgomery Scott, Inc. 1801 Market Street
Philadelphia, PA 19103
(800) 526-6397
Ryan, Beck and Company 150 Monument Road
Suite 106
Bala Cynwyd, PA 19004
(800) 223-8969
Tucker Anthony Cleary Gull 2101 Oregon Pike
Lancaster, PA 17601
(717) 519-6020
41
<PAGE>
Management's Discussion and Analysis
___________________________________________________________________
<TABLE>
Table 16 - Quarterly Results of Operations (Unaudited)
<CAPTION>
(Amounts in thousands, except per share)
Three Months Ended
_____________________________________
1999 March June September December
31 30 30 31
_____ ____ ________ _______
<S> <C> <C> <C> <C>
Interest income $5,435 $5,765 $5,900 $6,072
Interest expense 2,745 2,994 3,030 3,119
Net interest income $2,690 $2,771 $2,870 $2,953
Provision for loan losses 75 100 50 100
Other non-interest income 364 478 461 412
Non-interest expense 1,491 1,517 1,588 1,714
______ ______ ______ ______
Income before income taxes $1,488 $1,632 $1,693 $1,551
Income taxes 265 332 338 269
______ ______ ______ ______
Net income $1,223 $1,300 $1,355 $1,282
Per share<F1> $ .42 $ .45 $ .47 $ .45
<CAPTION>
(Amounts in thousands, except per share)
Three Months Ended
_____________________________________
1998 March June September December
31 30 30 31
_____ ____ ________ _______
<S> <C> <C> <C> <C>
Interest income $4,952 $5,183 $5,226 $5,342
Interest expense 2,446 2,531 2,613 2,739
______ ______ ______ ______
Net interest income $2,506 $2,652 $2,613 $2,603
Provision for loan
losses 50 75 50 100
Other non-interest
income 352 324 427 525
Non-interest expense 1,351 1,308 1,379 1,497
______ ______ ______ ______
Income before income
taxes $1,457 $1,593 $1,611 $1,531
Income taxes 316 345 342 302
______ ______ ______ ______
Net income $1,141 $1,248 $1,269 $1,229
Per share<F1> $ .39 $ .43 $ .43 $ .42
<FN>
<F1>
Reflects adjustment for stock dividends more fully described in Note 1.
</FN>
</TABLE>
42 FIRST KEYSTONE CORPORATION (BULLET) Annual Report 1999
