UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
Quarterly Report Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002
Commission File Number: 2-88927
FIRST KEYSTONE CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2249083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
111 West Front Street, Berwick, PA 18603
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (570) 752-3671
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical date:
Common Stock, $2 Par Value, 2,975,180 shares as of June 30, 2002.
PART I. - FINANCIAL INFORMATION
Item. 1 Financial Statements
FIRST KEYSTONE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
June December
2002 2001
(Unaudited)
ASSETS
Cash and due from banks $ 12,435 $ 6,500
Interest bearing deposits with banks 688 50
Available-for-sale securities
carried at estimated fair value 185,268 178,099
Investment securities, held to
maturity securities, estimated
fair value of $6,469 and $5,986 6,478 6,009
Loans, net of unearned income 202,915 198,224
Allowance for loan losses 3,133 2,922
________ ________
Net loans $199,782 $195,302
Bank premises and equipment 3,295 3,275
Accrued interest receivable 3,052 2,994
Other assets 1,256 1,243
________ ________
Total Assets $412,254 $393,472
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 27,982 $ 25,576
Interest bearing 280,498 269,105
________ ________
Total deposits $308,480 $294,681
Short-term borrowings 6,696 11,566
Long-term borrowings 50,250 45,250
Accrued interest and other expenses 1,731 2,083
Other liabilities 1,047 196
________ ________
Total Liabilities $368,204 $353,776
STOCKHOLDERS' EQUITY
Common stock, par value $2
per share $ 6,150 $ 5,867
Surplus 12,584 9,761
Retained earnings 25,534 26,450
Accumulated other comprehensive
income (loss) 2,879 715
Treasury stock at cost 100,000
shares in 2002 and 100,000
in 2001 (3,097) (3,097)
________ ________
Total Stockholders' Equity $ 44,050 $ 39,696
________ ________
Total Liabilities and
Stockholders' Equity $412,254 $393,472
======== ========
See Accompanying Notes to Financial Statements
1
FIRST KEYSTONE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)
(Amounts in thousands except per share data)
2002 2001
INTEREST INCOME
Interest and fees on loans $ 3,771 $ 3,981
Interest and dividend income on
securities 2,686 2,727
Interest on deposits in banks 8 68
_________ _________
Total Interest Income $ 6,465 $ 6,776
INTEREST EXPENSE
Interest on deposits $ 1,961 $ 3,180
Interest on short-term borrowings 36 84
Interest on long-term borrowings 646 585
_________ _________
Total Interest Expense $ 2,643 $ 3,849
Net interest income $ 3,822 $ 2,927
Provision for loan losses 125 85
_________ _________
Net Interest Income After
Provision for Loan Losses $ 3,697 $ 2,842
OTHER INCOME
Service charges on deposit
accounts $ 322 $ 309
Other non-interest income 240 217
Investment securities gains
(losses) net (97) 38
_________ _________
Total Other Income $ 465 $ 564
OTHER EXPENSES
Salaries and employee benefits $ 997 $ 955
Net occupancy and fixed asset
expense 262 265
Other non-interest expense 646 603
_________ _________
Total Other Expenses $ 1,905 $ 1,823
Income before income taxes $ 2,257 $ 1,583
Applicable income tax (benefit) 538 339
_________ _________
Net Income $ 1,719 $ 1,244
========= =========
PER SHARE DATA
Net Income $ .58 $ .42
Cash Dividends .20 .19
Weighted Average Shares
Outstanding 2,975,180 2,975,180
See Accompanying Notes to Financial Statements
2
FIRST KEYSTONE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)
(Amounts in thousands except per share data)
2002 2001
INTEREST INCOME
Interest and fees on loans $ 7,486 $ 7,930
Interest and dividend income on
securities 5,362 5,374
Interest on deposits in banks 9 169
_________ _________
Total Interest Income $ 12,857 $ 13,473
INTEREST EXPENSE
Interest on deposits $ 4,011 $ 6,356
Interest on short-term borrowings 84 196
Interest on long-term borrowings 1,260 1,177
_________ _________
Total Interest Expense $ 5,355 $ 7,729
Net interest income $ 7,502 $ 5,744
Provision for loan losses 300 185
_________ _________
Net Interest Income After
Provision for Loan Losses $ 7,202 $ 5,559
OTHER INCOME
Service charges on deposit
accounts $ 583 $ 577
Other non-interest income 389 417
Investment securities gains
(losses) net 8 51
_________ _________
Total Other Income $ 980 $ 1,045
OTHER EXPENSES
Salaries and employee benefits $ 2,024 $ 1,911
Net occupancy and fixed asset
expense 510 527
Other non-interest expense 1,187 1,086
_________ _________
Total Other Expenses $ 3,721 $ 3,524
Income before income taxes $ 4,461 $ 3,080
Applicable income tax (benefit) 1,070 633
_________ _________
Net Income $ 3,391 $ 2,447
========= =========
PER SHARE DATA
Net Income $ 1.14 $ .82
Cash Dividends .40 .38
Weighted Average Shares
Outstanding 2,975,180 2,975,180
See Accompanying Notes to Financial Statements
3
FIRST KEYSTONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)
(Amounts in thousands) 2002 2001
OPERATING ACTIVITIES
Net income $ 3,391 $ 2,447
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision or loan losses 300 185
Provision for depreciation and
amortization 187 215
Premium amortization on investment
securities 240 112
Discount accretion on investment
securities (382) (506)
Gain on sale of mortgage loans (110) (48)
Proceeds from sale of mortgage loans 4,917 3,950
Originations of mortgage loans for
resale (5,049) (2,578)
(Gain) loss on sales of investment
securities (8) (51)
(Gain) loss on sales of other real
estate owned 0 (35)
Deferred income tax (benefit) (86) (80)
(Increase) decrease in interest
receivable and other assets (192) 2,306
Increase (decrease) in interest
payable, accrued expenses and
other liabilities (499) (262)
________ ________
Net Cash Provided by Operating
Activities $ 2,709 $ 5,655
INVESTING ACTIVITIES
Purchases of investment securities
available for sale $(44,825) $(54,152)
Purchases of investment securities
held to maturity (983) 0
Proceeds from sales of investment
securities available for sale 31,502 15,290
Proceeds from maturities and
redemptions of investment
securities available for sale 9,605 12,622
Proceeds from maturities and
redemption of investment
securities held to maturity 502 5,777
Net (increase) decrease in loans (4,538) (8,619)
Purchase of premises and equipment (207) (36)
Proceeds from sale of other real
estate owned 75 291
________ ________
Net Cash Used by Investing
Activities $ (8,869) $(28,827)
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 13,799 $ 29,992
Net increase (decrease) in short-term
borrowings (4,870) 225
Net increase (decrease)in
Long-term borrowings 5,000 (1,000)
Acquisition of treasury stock (24) 0
Proceeds from sale of treasury
stock 18 0
Cash dividends (1,190) (1,133)
________ ________
Net Cash Provided by Financing
Activities $ 12,733 $ 28,084
Increase (Decrease) in Cash and
Cash Equivalent 6,573 4,912
Cash and Cash Equivalents, Beginning 6,550 9,161
________ ________
Cash and Cash Equivalents, Ending $ 13,123 $ 14,073
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during period for
Interest $ 5,537 $ 6,042
Income Taxes 1,582 654
See Accompanying Notes to Financial Statements
4
FIRST KEYSTONE CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of First Keystone Corporation and
Subsidiary (the "Corporation") are in accordance with accounting
principles generally accepted in the United States of America and
conform to common practices within the banking industry. The more
significant policies follow:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
First Keystone Corporation and its wholly-owned Subsidiary, The
First National Bank of Berwick (the "Bank"). All significant
inter-company balances and transactions have been eliminated in
consolidation.
NATURE OF OPERATIONS
The Corporation, headquartered in Berwick, Pennsylvania,
provides a full range of banking, trust and related services through
its wholly owned Bank subsidiary and is subject to competition from
other financial institutions in connection with these services. The
Bank serves a customer base which includes individuals, businesses,
public and institutional customers primarily located in the
Northeast Region of Pennsylvania. The Bank has ten full service
offices and 14 ATMs located in Columbia, Luzerne and Montour
Counties. The Corporation and its subsidiary must also adhere to
certain federal banking laws and regulations and are subject to
periodic examinations made by various federal agencies.
SEGMENT REPORTING
The Corporation's banking subsidiary acts as an independent
community financial services provider, and offers traditional
banking and related financial services to individual, business and
government customers. Through its branch and automated teller
machine network, the Bank offers a full array of commercial and
retail financial services, including the taking of time, savings and
demand deposits; the making of commercial, consumer and mortgage
loans; and the providing of other financial services. The Bank also
performs personal, corporate, pension and fiduciary services through
its Trust Department.
Management does not separately allocate expenses, including the
cost of funding loan demand, between the commercial, retail, trust
and mortgage banking operations of the Corporation. Currently,
management measures the performance and allocates the resources of
First Keystone Corporation as a single segment.
USE OF ESTIMATES
The preparation of these consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America, requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of these consolidated financial statements and the reported
amounts of income and expenses during the reporting periods. Actual
results could differ from those estimates.
INVESTMENT SECURITIES
The Corporation classifies its investment securities as either
"Held-to-Maturity" or "Available-for-Sale" at the time of purchase.
Debt securities are classified as Held-to-Maturity when the
Corporation has the ability and positive intent to hold the
securities to maturity. Investment securities Held-to-Maturity are
carried at cost adjusted for amortization of premium and accretion
of discount to maturity.
5
Debt securities not classified as Held-to-Maturity and equity
securities are included in the Available-for-Sale category and are
carried at fair value. The amount of any unrealized gain or loss,
net of the effect of deferred income taxes, is reported as other
comprehensive income (loss) in the Consolidated Statement of
Stockholders' Equity. Management's decision to sell Available-for-Sale
securities is based on changes in economic conditions
controlling the 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.
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.
6
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 these loans. When
originated mortgage loans are sold and servicing is retained, a
servicing asset is capitalized based on relative fair value at the
date of sale. Servicing assets are amortized as an offset to other
fees in proportion to, and over the period of, estimated net
servicing income. The unamortized cost is included in other assets
in the accompanying consolidated balance sheet. The servicing rights
are periodically evaluated for impairment based on their relative
fair value.
FORECLOSED ASSETS HELD FOR SALE
Real estate properties acquired through, or in lieu of, loan
foreclosure are held for sale and are initially recorded at fair
value on the date of foreclosure establishing a new cost basis.
After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell and is included in other
assets. Revenues derived from and costs to maintain the assets and
subsequent gains and losses on sales are included in other
non-interest income and expense.
INVESTMENT IN REAL ESTATE VENTURE
In October of 2000, the Bank became a limited partner in a real
estate venture that owns and operates an affordable residential
low-income housing apartment building for elderly residents. The
investment is accounted for under the effective yield method under
the Emerging Issues Task Force (EITF) 94-1 "Accounting for Tax
Benefits Resulting from Investments in Affordable Housing Projects".
The carrying value of the investment as of June 30, 2002, and
December 31, 2001, was $589,506 and $617,284, respectively, and is
carried in Other Assets in the accompanying consolidated balance
sheet.
INCOME TAXES
The provision for income taxes is based on the results of
operations, adjusted primarily for tax-exempt income. Certain items
of income and expense are reported in different periods for
financial reporting and tax return purposes. Deferred tax assets and
liabilities are determined based on the differences between the
consolidated financial statement and income tax bases of assets and
liabilities measured by using the enacted tax rates and laws
expected to be in effect when the timing differences are expected to
reverse. Deferred tax expense or benefit is based on the difference
between deferred tax asset or liability from period to period.
STOCK BASED COMPENSATION
The Corporation accounts for stock options and shares issued
under the Stock Option Incentive Plan in accordance with Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees". Under this method no compensation expense is
recognized for stock options when the exercise price equals the fair
value of the options at the grant date. Under provisions of
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock Based Compensation", the fair value of a stock
option is required to be recognized as compensation expense over the
service period (generally the vesting period). As permitted under
SFAS No. 123 the Corporation has elected to continue to account for
its stock option plan in accordance with APB No. 25.
PER SHARE DATA
Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share, requires dual presentation of basic and fully
diluted earnings per share. Basic earnings per share is calculated
by dividing net income by the weighted average number of shares of
common stock outstanding at the end of each period. Diluted earnings
per share is calculated by increasing the denominator for the
assumed conversion of all potentially dilutive
7
securities. The Corporation's dilutive securities are limited to
stock options which currently have no effect on earnings per share
since the market price per share historically has not been greater
than the lowest stock option exercise price.
Per share data has been adjusted retroactively for stock splits
and stock dividends.
CASH FLOW INFORMATION
For purposes of reporting consolidated cash flows, cash and
cash equivalents include cash on hand and due from other banks and
interest bearing deposits in other banks. The Corporation considers
cash classified as interest bearing deposits with other banks as a
cash equivalent since they are represented by cash accounts
essentially on a demand basis.
TRUST ASSETS AND INCOME
Property held by the Corporation in a fiduciary or agency
capacity for its customers is not included in the accompanying
consolidated financial statements since such items are not assets of
the Corporation. Trust Department income is generally recognized on
a cash basis and is not materially different than if it were
reported on an accrual basis.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities", is generally effective for
transactions occurring after March 31, 2001. For recognition and
reclassification of collateral and for disclosure related to
securitization transactions and collateral, the effective date is
for fiscal years ending after December 15, 2000. SFAS No. 140
replaces SFAS No. 125 and provides revisions to the standards for
accounting and requirements for certain disclosures relating to
securitzations and other transfers of financial assets. The standard
does not have any 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 2002 consolidated financial statements. Such
reclassifications have no effect on the Corporation's consolidated
financial condition or net income.
Note 2. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the periods ended
June 30, 2002, and June 30, 2001, were as follows:
(amounts in thousands)
2002 2001
Balance, January 1 $2,922 $2,702
Provision charged to operations 300 185
Loans charged off (169) (232)
Recoveries 80 48
______ ______
Balance, June 30 $3,133 $2,703
====== ======
At June 30, 2002, the recorded investment in loans that are
considered to be impaired as defined by SFAS No. 114 was $159,501.
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.
8
At June 30, 2002, there were no significant commitments to lend
additional funds with respect to non-accrual and restructured loans.
Note 3. SHORT-TERM BORROWINGS
Federal funds purchased, securities sold under agreements to
repurchase and Federal Home Loan Bank advances generally represent
overnight or less than 30-day borrowings. U.S. Treasury tax and loan
notes for collections made by the Bank are payable on demand.
Note 4. LONG-TERM BORROWINGS
Long-term borrowings are comprised of advances from the Federal
Home Loan Bank. Under terms of a blanket agreement, collateral for
the loans are secured by certain qualifying assets of the
Corporation's banking subsidiary which consist principally of first
mortgage loans and certain investment securities.
Note 5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK
The Corporation is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of
those instruments reflect the extent of involvement the Corporation
has in particular classes of financial instruments. The Corporation
does not engage in trading activities with respect to any of its
financial instruments with off-balance sheet risk.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those instruments.
The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance
sheet instruments.
The Corporation may require collateral or other security to
support financial instruments with off-balance sheet credit risk.
The contract or notional amounts at June 30, 2002, and December 31,
2001, were as follows:
(amounts in thousands) June 30, December 31,
2002 2001
____ ____
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $21,894 $21,853
Standby letters of credit $ 3,462 $ 2,589
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
9
necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the counter-party. Collateral held
varies but may include accounts receivable, inventory, property,
plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by
the Corporation to guarantee the performance of a customer to a
third party. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan
facilities to customers. The Corporation may hold collateral to
support standby letters of credit for which collateral is deemed
necessary.
The Corporation grants commercial, agricultural, real estate
mortgage and consumer loans to customers primarily in the counties
of Columbia, Luzerne, and Montour, Pennsylvania. It is management's
opinion that the loan portfolio was well balanced and diversified at
June 30, 2002, to the extent necessary to avoid any significant
concentration of credit risk. However, its debtors ability to honor
their contracts may be influenced by the region's economy.
Note 6. STOCKHOLDERS' EQUITY
Changes in Stockholders' Equity for the period ended June 30,
2002, were are follows:
(Amounts in thousands, except common share data)
Common Common
Shares Stock Surplus
______ ______ _______
Balance at January 1, 2002 2,933,727 $5,867 $ 9,761
Comprehensive Income:
Net Income
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects
Total Comprehensive
income (loss)
Purchase of 1,000 shares
treasury stock
Sale of 1,000 shares
treasury stock (6)
5% Stock Dividend 141,453 283 2,829
Dividends in lieu of
fractional shares
Cash dividends -
$.40 per share
_________ ______ _______
Balance at June 30, 2002 3,075,180 $6,150 $12,584
(Amounts in thousands, except common share data)
Accumulated
Compre- Other
hensive Retained Comprehensive
Income Earnings Income (Loss)
______ ______ _______
Balance at January 1, 2002 $26,450 $ 715
Comprehensive Income:
Net Income $3,391 3,391
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects 2,164 2,164
______
Total Comprehensive
income (loss) $5,555
======
Purchase of 1,000 shares
treasury stock
Sale of 1,000 shares
treasury stock
5% Stock Dividend (3,112)
Dividends in lieu of
fractional shares (5)
Cash dividends -
$.40 per share (1,190)
_______ ______
Balance at June 30, 2002 $25,534 $2,879
(Amounts in thousands, except common share data)
Treasury
Stock Total
Balance at January 1, 2002 $(3,097) $39,696
Comprehensive Income:
Net Income 3,391
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects 2,164
Total Comprehensive
income (loss)
Purchase of 1,000 shares
treasury stock (24) (24)
Sale of 1,000 shares
treasury stock 24 18
5% Stock Dividend
Dividends in lieu of
fractional shares (5)
Cash dividends -
$.40 per share (1,190)
_______ _______
Balance at June 30, 2002 $(3,097) $44,050
The 5% stock dividend declared June 25, 2002, and distributed
in August 2002 has been included as a part of Consolidated
Stockholders' equity above. The related dividend attributable to
fractional shares is reflected in dividends and in other liabilities
as of June 30, 2002.
10
Note 7. MANAGEMENT'S ASSERTIONS AND COMMENTS REQUIRED TO
BE PROVIDED WITH FORM 10Q FILING
In management's opinion, the consolidated interim financial
statements reflect fair presentation of the consolidated financial
position of First Keystone Corporation and Subsidiary, and the
results of their operations and their cash flows for the interim
periods presented. Further, the consolidated interim financial
statements are unaudited, however they reflect all adjustments,
which are in the opinion of management, necessary to present fairly
the consolidated financial condition and consolidated results of
operations and cash flows for the interim period presented and that
all such adjustments to the consolidated financial statements are of
a normal recurring nature.
The results of operations for the six-month period ended June
30, 2002, are not necessarily indicative of the results to be
expected for the full year.
These consolidated interim financial statements have been
prepared in accordance with requirements of Form 10Q and therefore
do not include all disclosures normally required by accounting
principles generally accepted in the United States of America
applicable to financial institutions as included with consolidated
financial statements included in the Corporation's annual Form 10K
filing. The reader of these consolidated interim financial
statements may wish to refer to the Corporation's annual report or
Form 10K for the period ended December 31, 2001, filed with the
Securities and Exchange Commission.
11
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of First Keystone Corporation:
We have reviewed the accompanying consolidated balance sheet of
First Keystone Corporation and Subsidiary as of June 30, 2002, and
the related consolidated statements of income and cash flows for the
three and six-month periods ended June 30, 2002 and 2001. These
consolidated financial statements are the responsibility of the
management of First Keystone Corporation and Subsidiary.
We conducted our reviews in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the consolidated financial statements
referred to above for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated
balance sheet of First Keystone Corporation and Subsidiary as of
December 31, 2001, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended
(not presented herein); and in our report dated January 10, 2002, we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 2001, is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ J. H. Williams & Co., LLP
J. H. Williams & Co., LLP
Kingston, Pennsylvania
July 18, 2002
12
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Quarterly Report of First Keystone
Corporation (the "Company") on Form 10Q for the period ending June
30, 2002, as filed with the Securities and Exchange Commission (the
"Report"), we,
J. Gerald Bazewicz, President and CEO, and David R. Saracino, Vice
President and CFO, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
1. The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results
of operations of the Company as of the dates and for the
periods expressed in the Report.
/s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and CEO
/s/ David R. Saracino
David R. Saracino
Vice President and CFO
August 9, 2002
13
Item 2. First Keystone Corporation Management's Discussion
and Analysis of Financial Condition and
Results of Operation as of June 30, 2002
This quarterly report contains certain forward-looking
statements (as defined in the Private Securities Litigation Reform
Act of 1995), which reflect management's beliefs and expectations
based on information currently available. These forward-looking
statements are inherently subject to significant risks and
uncertainties, including changes in general economic and financial
market conditions, the Corporation's ability to effectively carry
out its business plans and changes in regulatory or legislative
requirements. Other factors that could cause or contribute to such
differences are changes in competitive conditions, and pending or
threatened litigation. Although management believes the expectations
reflected in such forward-looking statements are reasonable, actual
results may differ materially.
RESULTS OF OPERATIONS
First Keystone Corporation realized earnings for the second
quarter of 2002 of $1,719,000, an increase of $475,000, or 38.2%
from the second quarter of 2001. Six months net income for the
period ended June 30, 2002, amounted to $3,391,000, an increase of
38.6% over the $2,447,000 net income reported June 30, 2001. The
increase in net income in 2002 was primarily the result of the
widening of our net interest margin resulting in increased net
interest income. On a per share basis, net income per share
increased to $1.14 for the six months of 2002 compared to $.82 for
the first six months of 2001, while dividends increased to $.40 per
share up from $.38 in 2001, or an increase of 5.3% per share. Data
has been adjusted to reflect a 5% stock dividend declared June 25,
2002.
Year-to-date net income annualized amounts to a return on
average common equity of 16.34% and a return on assets of 1.70%.
For the six months ended June 30, 2001, these measures were 13.00%
and 1.30%, respectively on an annualized basis.
NET INTEREST INCOME
The major source of operating income for the Corporation is net
interest income, defined as interest income less interest expense.
In the second quarter of 2002, interest income amounted to
$6,465,000, a decrease of $311,000 or 4.6% from the second quarter
of 2001. Interest expense amounted to $2,643,000 in the second
quarter of 2002, a decrease of $1,206,000, or 31.3% from the second
quarter of 2001. Accordingly, net interest income amounted to
$3,822,000 in the second quarter of 2002, an increase of $895,000,
or 30.6% over the second quarter of 2001. Year-to-date for the six
months ended June 30, 2002, net interest income increased
$1,758,000, or 30.6% to $7,502,000 from $5,744,000 in 2001. The net
interest margin improvement resulting in the increased net interest
income reflects reduced deposit and borrowing costs.
Our net interest margin for the quarter ended June 30, 2002,
was 4.24% compared to 3.44% for the quarter ended June 30, 2001.
For the six months ended June 30, 2002, our net interest margin was
4.21% compared to 3.46% for the first six months of 2001.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the quarter ended June 30,
2002, was $125,000 compared to the $85,000 provision for the second
quarter of 2001. Year-to-date, the provision for loan losses
amounts to $300,000 in 2002 as compared to the $185,000 provision
for the period ended June 30, 2001. Net charge-offs amounted to
$89,000 for the six months ended June 30, 2002, as compared to
$184,000 for the first six months of 2001.
14
The allowance for loan losses as a percentage of loans, net of
unearned interest remains strong at 1.54% as of June 30, 2002, and
1.47% as of December 31, 2001.
NON-INTEREST INCOME
Total non-interest or other income was $465,000 for the quarter
ended June 30, 2002, as compared to $564,000 for the quarter ended
June 30, 2001. Excluding investment security gains and losses,
non-interest income was $562,000 for the second quarter of 2002, as
compared to $526,000 in the second quarter of 2001, an increase of
6.8%. For the six months ended June 30, 2002, total non-interest
income was $980,000, a decrease of $65,000, or 6.2% from the first
six months of 2001. A decrease in other non-interest income and
securities gains in the first six months of 2002 account for the
overall reduction in total non-interest or other income.
NON-INTEREST EXPENSES
Total non-interest, or other expenses, was $1,905,000 for the
quarter ended June 30, 2002, as compared to $1,823,000 for the
quarter ended June 30, 2001. The increase of $82,000, or 4.5% is
comprised of salary and benefits increasing $42,000, occupancy
expense decreasing $3,000, and other non-interest expense increasing
$43,000.
For the six months ended June 30, 2002, total non-interest
expense was $3,721,000, an increase of $197,000, or 5.6% over the
first six months of 2001. Expenses associated with employees
(salaries and employee benefits) continue to be the largest category
of non-interest expenses. Salaries and benefits amount to 54.4% of
total non-interest expense for the six months ended June 30, 2002,
as compared to 54.2% for the first six months of 2001. Salaries and
benefits amounted to $2,024,000 for the six months ended June 30,
2002, an increase of $113,000, or 5.9% over the first six months of
2001. Net occupancy expense amounted to $510,000 for the six-months
ended June 30, 2002, a decrease of $17,000, or 3.2% from 2001.
Other non-interest expenses amounted to $1,187,000 for the six
months ended June 30, 2002, an increase of $101,000, or 9.3% over
the first six months of 2001. Even with the increase in non-interest
expenses in 2002, our overall non-interest expense
continues at less than 2% of average assets on an annualized basis.
This places us among the leaders of our peer financial institutions
at controlling non-interest expense.
INCOME TAXES
Effective tax planning has helped produce favorable net income.
The effective total income tax rate was 23.8% for the second quarter
of 2002 as compared to 21.4% for the second quarter of 2001. For
the six months ended June 30, 2002, our tax liability amounted to
$1,070,000 for an effective tax rate of 24.0% as compared to an
effective tax rate of 20.6% for the first six months of 2001. The
increase in our effective tax rate was due primarily to the limited
opportunities to purchase municipal (tax-free investments)
securities at attractive interest rates within the maturity ranges
we desired.
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased to $412,254,000 as of June 30, 2002, an
increase of $18,782,000, or 4.8% over year-end 2001. Total deposits
increased to $308,480,000 as of June 30, 2002, an increase of
$13,799,000, or 4.7% over year-end 2001.
15
The Corporation used the increase in total deposits to fund
primarily an increase in earnings assets, in particular, total loans
and investment securities.
EARNING ASSETS
Our primary earning asset, loans, net of unearned income
increased to $202,915,000 as of June 30, 2002, from $198,224,000, or
2.4% since year-end 2001. The loan portfolio is well diversified
and increases in the portfolio have been primarily from increased
originations of real estate loans and commercial loans secured by
real estate. Asset quality remains strong with past-due loans and
non-performing loans being relatively stable.
In addition to loans, another primary earning asset is our
investment portfolio which also increased in size from December 31,
2001, to June 30, 2002. Held-to-maturity securities amounted to
$6,478,000 as of June 30, 2002, an increase of $469,000, or 7.8%
since year-end 2001. Likewise, available-for-sale securities
increased to $185,268,000 as of June 30, 2002, an increase of
$7,169,000, or 4.0% from year-end 2001. Interest bearing deposits
with banks increased to $688,000 on June 30, 2002, as compared to
$50,000 as of December 31, 2001.
ALLOWANCE FOR LOAN LOSSES
Management performs a quarterly analysis to determine the
adequacy of the allowance for loan losses. The methodology in
determining adequacy incorporates specific and general allocations
together with a risk/loss analysis on various segments of the
portfolio according to an internal loan review process. Management
maintains its loan review and loan classification standards
consistent with those of its regulatory supervisory authority.
Management feels, considering the conservative portfolio
composition, which is largely composed of small retail loans
(mortgages and installments) with minimal classified assets, low
delinquencies, and favorable loss history, that the allowance for
loan loss is adequate to cover foreseeable future losses.
Any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed under
Industry Guide 3 do not (i) represent or result from trends or
uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources, or
(ii) represent material credits about which management is aware of
any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment
terms.
The company was required to adopt Financial Accounting
Standards Board Statement No. 114, "Accounting by Creditors for
Impairment of a Loan" - Refer to Note 2 above for details.
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual and restructured
loans, other real estate and foreclosed assets, together with the
loans past-due 90 days or more and still accruing. As of June 30,
2002, total non-performing assets were $1,457,000 as compared to
$1,394,000 on December 31, 2001. Non-performing assets to total
loans and foreclosed assets was .72% as of June 30, 2002, and .70%
as of December 31, 2001.
Interest income received on non-performing loans as of June 30,
2002, was $7,149 compared to $72,382 as of December 31, 2001.
Interest income, which would have been recorded on these loans under
the original terms as of June 30, 2002, and December 31, 2001, was
$61,913 and $93,258, respectively. As of June 30, 2002 and December
31, 2001, there was no outstanding commitments to advance additional
funds with respect to these non-performing loans.
16
DEPOSITS AND OTHER BORROWED FUNDS
As indicated previously, total deposits increased by
$13,799,000 as non-interest bearing deposits increased by $2,406,000
and interest bearing deposits increased by $11,393,000 as of June
30, 2002, from year-end 2001. Total short-term and long-term
borrowings remained stable at $56,946,000 as of June 30, 2002, as
compared to $56,816,000 as of year-end 2001.
CAPITAL STRENGTH
Normal increases in capital are generated by net income, less
cash dividends paid out. Also, accumulated other comprehensive
income derived from unrealized gains on investment securities
available-for-sale increased shareholders' equity, or capital, net
of taxes, by $2,879,000 as of June 30, 2002, and $715,000 as of
December 31, 2001. Our stock repurchase plan repurchased 100,000
shares as of June 30, 2002 and December 31, 2001. This had an
effect of our reducing our total stockholders' equity by $3,097,000.
Total stockholders' equity was $44,055,000 as of June 30, 2002,
and $39,696,000 as of December 31, 2001. Leverage ratio and risk
based capital ratios remain very strong. As of June 30, 2002, our
leverage ratio was 10.24% compared to 9.79% as of December 31, 2001.
In addition, Tier I risk based capital and total risk based capital
ratio as of June 30, 2002, were 15.23% and 16.50%, respectively.
The same ratios as of December 31, 2001, were 15.01% and 16.26%,
respectively.
LIQUIDITY
The liquidity position of the Corporation remains adequate to
meet customer loan demand and deposit fluctuation. Managing
liquidity remains an important segment of asset liability
management. Our overall liquidity position is maintained by an
active asset liability management committee.
Management feels its current liquidity position is
satisfactorily given a very stable core deposit base which has
increased annually. Secondly, our loan payments and principal
paydowns on our mortgage backed securities provide a steady source
of funds. Also, short-term investments and maturing investment
securities represent additional sources of liquidity. Finally,
short-term borrowings are readily accessible at the Federal Reserve
Bank discount window, Atlantic Central Bankers Bank, or the Federal
Home Loan Bank.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Annual Meeting of Shareholders of First Keystone
Corporation held on Tuesday, April 16, 2002, at 10:00
a.m.
Votes Votes
Directors Elected Votes For Against Withheld
_________________ _________ ______ _______
Don E. Bower 2,106,444 25,588 0
John L. Coates 2,102,800 29,232 0
Dudley P. Cooley 2,105,869 26,163 0
Broker
Directors Elected Abstentions Non-Votes
_________________ ___________ _________
Don E. Bower 0 0
John L. Coates 0 0
Dudley P. Cooley 0 0
Directors Continuing:
____________________
Budd L. Beyer, term expires in 2003
Frederick E. Crispin, Jr., term expires in 2003
Jerome F. Fabian, term expires in 2003
Robert J. Wise, term expires in 2003
John Arndt, term expires in 2004
J. Gerald Bazewicz, term expires in 2004
Robert E. Bull, term expires in 2004
Matters Voted Upon:
__________________
Selection of J. H. Williams & Co. LLP, as auditors for the
Corporation.
Votes For - 2,095,838
Votes Against - 26,766
Votes Withheld - 0
Abstentions - 9,428
Broker Non-Votes - 0
Item 5. Other Information
None.
18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 Regulation S-K
Exhibit Number Description of Exhibit
3i Articles of Incorporation, as amended
(Incorporated by reference to Exhibit 3(i) to
the Registrant's Report on Form 10-Q for the
quarter ended March 31, 2001)
3ii By-Laws, as amended (Incorporated by
reference to Exhibit 3(ii) to the
Registrant's Report on Form 10-Q for the
quarter ended March 31, 2001)
10.1 Supplemental Employee Retirement Plan
(Incorporated by reference to Exhibit 10 to
Registrant's Annual Report on Form 10-K for
the year ended December 31, 2000)
10.2 Management Incentive Compensation Plan
(Incorporated by reference to Exhibit 10 to
Registrant's Report on Form 10-Q for the
quarter ended September 30, 2001)
10.3 Profit Sharing Plan (Incorporated by
reference to Exhibit 10 to Registrant's
Report on Form 10-Q for the quarter ended
September 30, 2001)
10.4 First Keystone Corporation 1998 Stock
Incentive Plan (Incorporated by reference to
Exhibit 10 to Registrant's Report on Form
10-Q for the quarter ended
September 30, 2001)
11 Statement RE: Computation of Earnings Per
Share.
(b) During the quarter ended June 31, 2002, the
registrant filed the following reports on Form 8-K:
Date of Report Item Description
______________ ____ ___________
June 6, 2002 5 Press release announcing earnings
increase
June 26, 2002 5 Press release announcing declaration of
a 5% stock dividend
19
FIRST KEYSTONE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly cause this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST KEYSTONE CORPORATION
Registrant
August 9, 2002 /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and
Chief Executive Officer
(Principal Executive Officer)
August 9, 2002 /s/ David R. Saracino
David R. Saracino
Treasurer/Assistant Secretary
(Principal Accounting Officer)
20
INDEX TO EXHIBITS
Exhibit Description
_______ ___________
3i Articles of Incorporation, as amended
(Incorporated by reference to Exhibit 3(i) to
the Registrant's Report on Form 10-Q for the
quarter ended March 31, 2001)
3ii By-Laws, as amended (Incorporated by reference
to Exhibit 3(ii) to the Registrant's Report on
Form 10-Q for the quarter ended March 31, 2001)
9 None.
10.1 Supplemental Employee Retirement Plan
(Incorporated by reference to Exhibit 10 to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 2000)
10.2 Management Incentive Compensation Plan
(Incorporated by reference to Exhibit 10 to
Registrant's Report on Form 10-Q for the quarter
ended September 30, 2001)
10.3 Profit Sharing Plan (Incorporated by reference
to Exhibit 10 to Registrant's Report on Form
10-Q for the quarter ended September 30, 2001)
10.4 First Keystone Corporation 1998 Stock Incentive
Plan (Incorporated by reference to Exhibit 10 to
Registrant's Report on Form 10-Q for the quarter
ended September 30, 2001)
11 Compensation of Earning Per Share
21