UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
Quarterly Report Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2003
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 (Zip Code)
executive 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, 2,956,283 shares as of March 31, 2003.
PART I. - FINANCIAL INFORMATION
Item. 1 Financial Statements
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
March December
2003 2002
(Unaudited)
ASSETS
Cash and due from banks $ 6,663 $ 7,396
Interest bearing deposits with banks 4,994 60
Available-for-sale securities
carried at estimated fair value 217,869 209,823
Investment securities, held-to-
maturity securities, estimated
fair value of $4,999 and $5,925 5,005 5,932
Loans, net of unearned income 203,239 201,517
Allowance for loan losses (3,300) (3,174)
________ ________
Net loans $199,939 $198,343
Bank premises and equipment 3,432 3,430
Accrued interest receivable 2,892 3,069
Cash surrender value of bank
owned life insurance 10,223 10,102
Other assets 1,459 1,371
________ ________
Total Assets $452,476 $439,526
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 30,312 $ 30,057
Interest bearing 316,861 300,689
________ ________
Total deposits $347,173 $330,746
Short-term borrowings 5,501 9,067
Long-term borrowings 45,750 45,750
Accrued interest and other expenses 2,077 1,648
Other liabilities 2,534 3,219
________ ________
Total Liabilities $403,035 $390,430
STOCKHOLDERS' EQUITY
Common stock, par value $2 per share 6,154 6,150
Surplus 12,596 12,584
Retained earnings 28,460 27,395
Accumulated other comprehensive
income (loss) 5,855 6,544
Less treasury stock at cost 120,924
shares in 2003 and 119,181
shares in 2002 (3,624) (3,577)
________ ________
Total Stockholders' Equity $ 49,441 $ 49,096
Total Liabilities and
Stockholders' Equity $452,476 $439,526
======== ========
See Accompanying Notes to Consolidated Financial Statements
1
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED March 31, 2003 AND 2002
(Unaudited)
(Amounts in thousands except per share data)
2003 2002
INTEREST INCOME
Interest and fees on loans $ 3,570 $ 3,715
Interest and dividend income
on securities 2,670 2,676
Interest on deposits in banks 17 1
_______ _______
Total Interest Income $ 6,257 $ 6,392
_______ _______
INTEREST EXPENSE
Interest on deposits $ 1,974 $ 2,050
Interest on short-term borrowings 27 48
Interest on long-term borrowings 591 614
_______ _______
Total Interest Expense $ 2,592 $ 2,712
_______ _______
Net interest income $ 3,665 $ 3,680
Provision for loan losses 150 175
_______ _______
Net Interest Income After
Provision for Loan Losses $ 3,515 $ 3,505
_______ _______
OTHER INCOME
Service charges on deposit accounts $ 357 $ 261
Other non-interest income 353 149
Investment securities gains
(losses) net 35 105
_______ _______
Total Other Income $ 745 $ 515
_______ _______
OTHER EXPENSES
Salaries and employee benefits $ 1,083 $ 1,027
Net occupancy and fixed asset
expense 293 248
Other non-interest expense 643 541
_______ _______
Total Other Expenses $ 2,019 $ 1,816
_______ _______
Income before income taxes $ 2,241 $ 2,204
Applicable income tax (benefit) 463 532
_______ _______
Net Income $ 1,778 $ 1,672
======= =======
PER SHARE DATA
Net Income Per Share:
Basic $ .60 $ .56
Diluted .60 .56
Cash dividends per share .24 .20
See Accompanying Notes to Consolidated Financial Statements
2
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED March 31, 2003 AND 2002
(Unaudited)
(Amounts in thousands)
2003 2002
OPERATING ACTIVITIES
Net income $ 1,778 $ 1,672
Adjustments to reconcile net income
to net cash provided (used)
by operating activities:
Provision for loan losses 150 175
Provision for depreciation
and amortization 123 91
Premium amortization on
investment securities 248 111
Discount accretion on investment
securities (114) (205)
Gain on sale of mortgage loans (99) 0
Proceeds from sale of mortgage loans 3,153 0
Originations of mortgage loans for
resale (4,447) (3,022)
(Gain) loss on sales of
investment securities (35) (105)
(Gain) loss on sale of other
real estate owned 11 0
Deferred income tax (benefit) (64) (51)
(Increase) decrease in interest
receivable and other assets 113 (188)
Increase in cash surrender bank
owned life insurance (121) 0
Increase (decrease) in interest
payable, accrued expenses
and other liabilities 154 (5)
________ ________
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES $ 850 $ (1,527)
INVESTING ACTIVITIES
Purchases of investment
securities available-for-sale $(28,802) $(17,509)
Purchases of investment securities
held-to-maturity 0 (983)
Proceeds from sales of investment
securities available-for-sale 9,180 15,780
Proceeds from maturities and
redemptions of investment
securities available for sale 11,125 4,508
Proceeds from maturities and
redemption of investment
securities held-to-maturity 246 257
Net (increase) decrease in loans (446) (1,518)
Purchase of premises and equipment (111) (45)
Proceeds from sale of other real
estate owned 42 75
________ ________
NET CASH (USED) BY INVESTING
ACTIVITIES $ (8,766) $ 565
FINANCING ACTIVITIES
Net increase (decrease) in
deposits $ 16,427 $ 2,491
Net increase (decrease) in
short-term borrowings (3,566) (1,011)
Net increase (decrease) in
long-term borrowings 0 0
Acquisition of treasury stock (120) 0
Proceeds from sale of treasury
stock 37 0
Proceeds from issuance of common
stock 52 0
Cash dividends (713) (595)
________ ________
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 12,117 $ 885
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 4,201 $ (77)
CASH AND CASH EQUIVALENTS, BEGINNING 7,456 6,550
________ ________
CASH AND CASH EQUIVALENTS, ENDING $ 11,657 $ 6,473
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during period for
Interest $ 2,620 $ 2,859
Income Taxes 0 144
See Accompanying Notes to Consolidated Financial Statements
3
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(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.
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.
4
The cost of debt securities classified as Held-to-Maturity or
Available-for-Sale is adjusted for amortization of premiums and
accretion of discounts to expected maturity. Such amortization and
accretion, as well as interest and dividends is included in interest
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 on an actual
day basis. Loan origination fees and certain direct loan origination
costs have been deferred with the net amount amortized using the
interest method over the contractual life of the related loans as an
interest yield adjustment.
Mortgage loans held for resale are carried at the lower of cost
or market on an aggregate basis. These loans are sold without
recourse to the Corporation.
Past-Due Loans - Generally, a loan is considered to be past-due when
scheduled loan payments are in arrears 15 days or more. Delinquent
notices are generated automatically when a loan is 15 days past-due,
depending on the type of loan. Collection efforts continue on loans
past-due beyond 60 days that have not been satisfied, when it is
believed that some chance exists for improvement in the status of
the loan. Past-due loans are continually evaluated with the
determination for charge-off being made when no reasonable chance
remains that the status of the loan can be improved.
Non-Accrual Loans - Generally, a loan is classified as non-accrual
and the accrual of interest on such a loan is discontinued when the
contractual payment of principal or interest has become 90 days past
due or management has serious doubts about further collectibility of
principal or interest, even though the loan currently is performing.
A loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well secured. When a loan is
placed on non-accrual status, unpaid interest credited to income in
the current year is reversed and unpaid interest accrued in prior
years is charged against the allowance for loan losses. Certain
non-accrual loans may continue to perform, that is, payments are still
being received. Generally, the payments are applied to principal.
These loans remain under constant scrutiny and if performance
continues, interest income may be recorded on a cash basis based on
management's judgement as to collectibility of principal.
Allowance for Loan Losses - The allowance for loan losses is
established through provisions for loan losses charged against
income. Loans deemed to be uncollectible are charged against the
allowance for loan losses and subsequent recoveries, if any, are
credited to the allowance.
A principal factor in estimating the allowance for loan losses
is the measurement of impaired loans. A loan is considered impaired
when, based on current information and events, it is probable that
the Corporation will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Under current
accounting standards, the allowance for loan losses related to
impaired loans is based on discounted cash flows using the effective
interest rate of the loan or the fair value of the collateral for
certain collateral dependent loans.
The allowance for loan losses is maintained at a level
estimated by management to be adequate to absorb potential loan
losses. Management's periodic evaluation of the adequacy of the
allowance for loan losses is based on the Corporation's past loan
loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay
(including the timing of future payments), the estimated value of
any underlying collateral, composition of the loan portfolio,
current economic conditions, and other relevant factors. This
evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to
significant change.
DERIVATIVES
The Bank has outstanding loan commitments that relate to the
origination of mortgage loans that will be held for resale.
Pursuant to Statement of Financial Accounting Standards (SFAS) No.
133 "Accounting for Derivative Instruments and Hedging Activities"
as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" and the guidance
contained within the Derivatives Implementation Group Statement 133
Implementation Issue No. C 13, the Bank has accounted for such loan
commitments as derivative instruments. The
5
effective date of the implementation guidance is the first day of
the first fiscal quarter beginning after April 10, 2002. The
outstanding loan commitments in this category did not give rise to
any losses for the period ending after the implementation date, as
the fair market value of each outstanding loan commitment exceeded
the Bank's cost basis in each outstanding loan commitment.
PREMISES AND EQUIPMENT
Premises, improvements and equipment are stated at cost less
accumulated depreciation computed principally on the straight-line
method over the estimated useful lives of the assets. Long-lived
assets are reviewed for impairment whenever events or changes in
business circumstances indicate that the carrying value may not be
recovered. Maintenance and minor repairs are charged to operations
as incurred. The cost and accumulated depreciation of the premises
and equipment retired or sold are eliminated from the property
accounts at the time of retirement or sale, and the resulting gain
or loss is reflected in current operations.
MORTGAGE SERVICING RIGHTS
The Corporation originates and sells real estate loans to
investors in the secondary mortgage market. After the sale, the
Corporation 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 REAL ESTATE
Real estate properties acquired through, or in lieu of, loan
foreclosure are held for sale and are initially recorded at fair
value on the date of foreclosure establishing a new cost basis.
After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell and is included in other
assets. Revenues derived from and costs to maintain the assets and
subsequent gains and losses on sales are included in other
non-interest income and expense.
BANK OWNED LIFE INSURANCE
The Corporation invests in Bank Owned Life Insurance (BOLI)
with split dollar life provisions. Purchase of BOLI provides life
insurance coverage on certain employees with the Corporation being
owner and beneficiary of the policies.
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".
Under the effective yield method, the Bank recognizes tax credits as
they are allocated and amortizes the initial cost of the investment
to provide a constant effective yield over the period that the tax
credits are allocated to the Bank. Under this method, the tax
credit allocated, net of any amortization of the investment in the
limited partnership, is recognized in the consolidated statements of
income as a component of income tax expense. The annual amount of
tax credits allocated to the Bank were $80,866 for each of the years
2003 and 2002, and the annual amortization of the limited
partnership investment was $57,820 and $55,263 in 2003 and 2002,
respectively. The annual amounts are prorated for interim periods.
The carrying value of the investment as of March 31, 2003 and
December 31, 2002, was $547,566 and $562,021, 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.
6
STOCK BASED COMPENSATION
The Corporation accounted for stock options and shares issued
under the Stock Option Incentive Plan through December 31, 2002 in
accordance with Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees". Under this method no
compensation expense is recognized for stock options when the
exercise price equals the fair value of the options at the grant
date. Under provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock Based Compensation",
the fair value of a stock option is required to be recognized as
compensation expense over the service period (generally the vesting
period). As permitted under SFAS No. 123 the Corporation had elected
to continue to account for its stock option plan in accordance with
APB No. 25.
As of the first quarter 2003, the Corporation adopted Statement
of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock Based Compensation - Transition and Disclosures" (See recent
accounting pronouncements). The Corporation elected to use the
"prospective method" of accounting for stock options as allowed by
the Standard. Since no stock options were granted during the first
quarter of 2003, application of the newly required standard had no
impact on the Corporation's Consolidated Financial Condition or
Results of Operations for the period ended March 31, 2003.
PER SHARE DATA
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share", requires dual presentation of basic and fully
diluted earnings per share. Basic earnings per share is calculated
by dividing net income by the weighted average number of shares of
common stock outstanding at the end of each period. Diluted earnings
per share is calculated by increasing the denominator for the
assumed conversion of all potentially dilutive securities. The
Corporation's dilutive securities are limited to stock options which
had no effect on earnings per share for the periods presented since
the market price per share was not greater than the lowest stock
option exercise price for these periods.
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.
The Corporation transferred loans to foreclosed assets held for
sale in the amounts of $91,527 and $0 for the periods ended March
31, 2003 and 2002, respectively.
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. 142,
"Goodwill and Other Intangible Assets" is generally effective for
fiscal years beginning after December 31, 2001, and addresses the
financial accounting and reporting for acquired goodwill and other
intangible assets and replaces APB Opinion No. 17, "Intangible
Assets". The statement addresses how intangible assets that are
acquired individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for in
financial statements upon their acquisition. Goodwill and other
intangible assets with an indefinite useful life should not be
amortized but should be tested for impairment at least annually.
Intangibles that are separable from goodwill and that have a
determinable useful life should be amortized over the determinable
useful life. The standard does not have any impact on the
Corporation's consolidated financial condition or results of
operations.
Statement of Financial Accounting Standards (SFAS) No. 143,
"Accounting for Asset Retirement Obligations" is generally effective
for financial statements for fiscal years beginning after June 15,
2002. The statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to
legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction development
and (or) the normal operation of a long-lived asset. The Statement
requires that the
7
fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long
lived asset. This standard does not have any impact on the
Corporation's consolidated financial condition or results of
operations.
Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets" is
generally effective for financial statements issued for fiscal years
beginning after December 15, 2001, and for interim periods within
those fiscal years. The statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The
statement replaces FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of", and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", for the
disposal of a "segment of a business" (as previously defined in that
Opinion). The statement also amends ARB No. 51, "Consolidated
Financial Statements", to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. This
standard does not have any impact on the Corporation's consolidated
financial conditions or results of operations.
Statement of Financial Accounting Standards (SFAS) No. 145,
"Recession of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections" is generally effective
for financial statements issued on or after May 15, 2002. The
statement rescinds FASB Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt", and an amendment of that statement,
FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements". The statement amends FASB Statement No.
13, "Accounting for Leases", to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions.
The statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions.
This standard does not have any impact on the Corporation's
consolidated financial condition or results of operations.
Statement of Financial Accounting Standards (SFAS) No. 148,
"Accounting for Stock-Based Compensation - Transition and
Disclosure" is generally effective for financial statements for
fiscal years and interim periods beginning after December 31, 2002.
The statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. The statement also amends the
disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about
the method of accounting for stock-based compensation and the effect
of the method used on reported results. The Corporation has elected
to adopt SFAS 148 for the first quarter 2003 using the "prospective
method" of accounting for stock options as allowed for in the
Standard.
ADVERTISING COSTS
It is the Corporation's policy to expense advertising costs in
the period in which they are incurred. Advertising expense for the
periods ended March 31, 2003 and 2002, was approximately $43,734 and
$43,876, respectively.
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.
8
NOTE 2. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the periods ended
March 31, 2003, and March 31, 2002, were as follows:
(amounts in thousands)
2003 2002
____ ____
Balance, January 1 $3,174 $2,922
Provision charged to operations 150 175
Loans charged off (41) (62)
Recoveries 17 5
______ ______
Balance, March 31 $3,300 $3,040
At March 31, 2003, the recorded investment in loans that are
considered to be impaired as defined by SFAS No. 114 was $41,119. No
additional charge to operations was required to provide for the
impaired loans since the total allowance for loan losses is
estimated by management to be adequate to provide for the loan loss
allowance required by SFAS No. 114 along with any other potential
losses.
At March 31, 2003, there were no significant commitments to
lend additional funds with respect to non-accrual and restructured
loans.
Non-accrual loans at March 31, 2003, and December 31, 2002,
were $539,783 and $457,565, respectively.
Loans past-due 90 days or more and still accruing interest
amounted to zero on both March 31, 2003 and December 31,2002.
NOTE 3. SHORT-TERM BORROWINGS
Federal funds purchased, securities sold under agreements to
repurchase and Federal Home Loan Bank advances generally represent
overnight or less than 30-day borrowings. U.S. Treasury tax and loan
notes for collections made by the Bank are payable on demand.
NOTE 4. LONG-TERM BORROWINGS
Long-term borrowings are comprised of advances from the Federal
Home Loan Bank (FHLB). Under terms of a blanket agreement,
collateral for the loans are secured by certain qualifying assets of
the Corporation's banking subsidiary which consist principally of
first mortgage loans and certain investment securities.
NOTE 5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET
RISK AND CONCENTRATIONS OF CREDIT RISK
The Corporation is a party to financial instruments with off
balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of
those instruments reflect the extent of involvement the Corporation
has in particular classes of financial instruments. The Corporation
does not engage in trading activities with respect to any of its
financial instruments with off-balance sheet risk.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those instruments.
9
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 March 31, 2003, and December 31,
2002, were as follows:
(amounts in thousands) March 31, December 31,
2003 2002
____ ____
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $25,862 $24,742
Standby letters of credit 3,530 3,630
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, 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
March 31, 2003, 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.
10
NOTE 6. STOCKHOLDERS' EQUITY
Changes in Stockholders' Equity for the period ended March 31,
2003 were are follows:
(Amounts in thousands, except common share data)
Common Common
Shares Stock Surplus
______ ______ _______
Balance at January 1, 2003 3,075,180 $6,150 $12,584
Comprehensive Income:
Net Income
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects
Total Comprehensive
income (loss)
Cash dividends -
$.24 per share
Purchase of 4,000 shares
of treasury stock
Sale of 2,257 shares of
of treasury stock (36)
Sale of 2,027 shares of
common stock 2,027 4 48
_________ ______ _______
Balance at March 31, 2003 3,077,207 $6,154 $12,596
========= ====== =======
(Amounts in thousands, except common share data)
Accumulated
Compre- Other
hensive Retained Comprehensive
Income Earnings Income (Loss)
______ ______ _______
Balance at January 1, 2003 $27,395 $6,544
Comprehensive Income:
Net Income $1,778 1,778
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects (689) (689)
______
Total Comprehensive
income (loss) $1,089
======
Cash dividends -
$.24 per share (713)
Purchase of 4,000 shares
of treasury stock
Sale of 2,257 shares of
of treasury stock
Sale of 2,027 shares of
common stock
_______ ______
Balance at March 31, 2003 $28,460 $5,855
======= ======
(Amounts in thousands, except common share data)
Treasury
Stock Total
_____ _____
Balance at January 1, 2003 $(3,577) $49,096
Comprehensive Income:
Net Income 1,778
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects (689)
Total Comprehensive
income (loss)
Cash dividends -
$.24 per share (713)
Purchase of 4,000 shares
of treasury stock (120) (120)
Sale of 2,257 shares of
of treasury stock 73 37
Sale of 2,027 shares of
common stock 52
_______ _______
Balance at March 31, 2003 $(3,624) $49,441
======= =======
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 periods presented and that all such adjustments
to the consolidated financial statements are of a normal recurring
nature. The independent accountants, J. H. Williams & Co., LLP,
reviewed these consolidated financial statements as stated in their
accompanying review report.
The results of operations for the three-month period ended March
31, 2003, are not necessarily indicative of the results to be expected
for the full year.
These consolidated interim financial statements have been
prepared in accordance with requirements of Form 10Q and therefore do
not include all disclosures normally required by generally accepted
accounting principles applicable to financial institutions as included
with consolidated financial statements included in the Corporation's
annual Form 10K filing. The reader of these consolidated interim
financial statements may wish to refer to the Corporation's annual
report or Form 10K for the period ended December 31, 2002, 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 March 31, 2003, and the
related consolidated statements of income and cash flows for the
three-month periods ended March 31, 2003, and 2002. These
consolidated interim 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 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, 2002, 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 13, 2003, 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, 2002, 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
April 17, 2003
12
Item 2. First Keystone Corporation Management's Discussion
and Analysis of Financial Condition and
Results of Operation as of March 31, 2003
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 first
quarter of 2003 of $1,778,000, an increase of $106,000, or 6.3% over
the first quarter of 2002. The increase in net income for the first
quarter of 2003 was primarily the result of an increase of $230,000,
or 44.7% in other income. Net interest income declined slightly in
the first quarter of 2003 with the tightening of our net interest
margin due to lower asset yields. On a per share basis, net income
per share increased to $.60 for the first three months of 2003
compared to $.56 for the first three months of 2002, while dividends
increased to $.24 per share up from $.20 in 2002, or an increase of
20.0%.
Year-to-date net income annualized amounts to a return on average
common equity of 13.96% and a return on assets of 1.59%. For the
three months ended March 31, 2002, these measures were 16.21% and
1.70%, respectively on an annualized basis.
NET INTEREST INCOME
The major source of operating income for the Corporation is net
interest income, defined as interest income less interest expense. In
the first quarter of 2003, interest income amounted to $6,257,000, a
decrease of $135,000 or 2.1% from the first quarter of 2002, while
interest expense amounted to $2,592,000 in the first quarter of 2003,
a decrease of $120,000, or 4.4% from the first quarter of 2002. As a
result, net interest income decreased $15,000, or 0.4% to $3,665,000
from $3,680,000 in first quarter of 2002.
Our net interest margin for the quarter ended March 31, 2003, was
3.80% compared to 4.17% for the quarter ended March 31, 2002.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the quarter ended March 31,
2003, was $150,000, compared to the $175,000 provision for the first
quarter of 2002. Net charge-offs totaled $24,000 for the three months
ended March 31, 2003, as compared to $57,000 for the first three
months of 2002. The allowance for loan losses as a percentage of
loans, net of unearned interest, was 1.62% as of March 31, 2003, as
compared to 1.58% as of December 31, 2002, and 1.50% as of March 31,
2002.
NON-INTEREST INCOME
Total non-interest income or other income was $745,000 for the
quarter ended March 31, 2003, as compared to $515,000 for the quarter
ended March 31, 2002, an increase of $230,000, or 44.7%. Excluding
investment security gains and losses, non-interest income was $710,000
for the first quarter of 2003, an increase of $300,000 over the first
quarter
13
of 2002. An increase in service charges on deposit accounts and an
increase in other non-interest income primarily derived from the
increase in cash surrender value of bank owned life insurance, were
reasons for the higher non-interest income in 2003.
NON-INTEREST EXPENSES
Total non-interest expenses, or other expenses, was $2,019,000
for the quarter ended March 31, 2003, as compared to $1,816,000 for
the quarter ended March 31, 2002. The increase of $203,000, or 11.2%
is comprised of salary and benefits increasing $56,000, occupancy and
fixed asset expense increasing $45,000, and other non-interest expense
increasing $102,000.
Expenses associated with employees (salaries and employee
benefits) continue to be the largest category of non-interest
expenses. Salaries and benefits amounted to $1,083,000, or 53.6% of
total non-interest expense for the three months ended March 31, 2003,
as compared to 56.6% for the first three months of 2002. Net
occupancy and fixed asset expense amounted to $293,000 for the three
months ended March 31, 2003, an increase of $45,000, or 18.1%. Other
non-interest expenses amounted to $643,000 for the three months ended
March 31, 2003, an increase of $102,000, or 18.9% over the first three
months of 2002. Even with the increase in our non-interest expense in
the first quarter, our overall non-interest expense is less than 2% of
average assets on an annualized basis, which places us among the
leaders of our peer financial institutions at controlling total
non-interest expense.
INCOME TAXES
Effective tax planning has helped produce favorable net income.
The effective total income tax rate was 20.7% for the first quarter of
2003 as compared to 24.1% for the first quarter of 2002. The
decrease in our effective tax rate in the first quarter of 2003 was
due primarily to the tax savings derived from our investment in bank
owned life insurance in the fourth quarter of 2002.
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased to $452,476,000 as of March 31, 2003, an
increase of $12,950,000, or 2.9% over year-end 2002. Total deposits
increased to $347,173,000 as of March 31, 2003, an increase of
$16,427,000, or 5.0% over year-end 2002.
With the increase in total deposits, the Corporation did not
increase borrowed funds. Short-term borrowings decreased to
$5,501,000 as of March 31, 2003, as compared to $9,067,000 as of
December 31, 2002. Long-term borrowings were unchanged from year-end
2002.
EARNING ASSETS
Our primary earning asset, loans, net of unearned income
increased to $203,239,000 as of March 31, 2003, up $1,722,000, or 0.9%
since year-end 2002. 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. Overall asset quality remains strong with past-due loans and
non-performing assets remaining relatively stable.
Besides loans, another primary earning asset is our investment
portfolio, which increased in size from
December 31, 2002, to March 31, 2002. Held-to-maturity securities
amounted to $5,005,000 as of March 31, 2003, a decrease of $927,000
from December 31, 2002. However, available-for-sale securities
amounted to $217,869,000 as of March 31, 2003, an increase of
$8,046,000, or 3.8% from year-end 2002. Interest bearing deposits
with banks increased as of March 31, 2003, to $4,994,000 from $60,000
at year-end 2002.
14
ALLOWANCE FOR LOAN LOSSES
Management performs a quarterly analysis to determine the
adequacy of the allowance for loan losses. The methodology in
determining adequacy incorporates specific and general allocations
together with a risk/loss analysis on various segments of the
portfolio according to an internal loan review process. Management
maintains its loan review and loan classification standards consistent
with those of its regulatory supervisory authority. Management feels,
considering the conservative portfolio composition, which is largely
composed of small retail loans (mortgages and installments) with
minimal classified assets, low delinquencies, and favorable loss
history, that the allowance for loan loss is adequate to cover
foreseeable future losses.
Any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed under
Industry Guide 3 do not (i) represent or result from trends or
uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources, or
(ii) represent material credits about which management is aware of any
information which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
The Corporation was required to adopt Financial Accounting
Standards Board Statement No. 114, "Accounting by Creditors for
Impairment of a Loan" - Refer to Note 5 above for details.
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual and restructured
loans, other real estate and foreclosed assets, together with loans
past-due 90 days or more and still accruing. As of March 31, 2003,
total non-performing assets were $577,000 as compared to $458,000 on
December 31, 2002. Non-performing assets to total loans and
foreclosed assets was .28% as of March 31, 2003, and .23% as of
December 31, 2002.
Interest income received on non-performing loans as of March 31,
2003, was $1,792 compared to $19,179 as of December 31, 2002.
Interest income, which would have been recorded on these loans under
the original terms as of March 31, 2003, and December 31, 2002, were
$11,137 and $38,956, respectively. As of March 31, 2003 and
December 31, 2002, there was no outstanding commitments to advance
additional funds with respect to these non-performing loans.
DEPOSITS AND OTHER BORROWED FUNDS
As indicated previously, total deposits increased $16,427,000 as
non-interest bearing deposits increased by $255,000 and interest
bearing deposits increased by $16,172,000 as of March 31, 2003, from
year-end 2002. An increase in certificates of deposits (under
$100,000) was primary reason for the growth in interest bearing
deposits. Total short-term and long-term borrowings declined by
$3,566,000 from year-end 2002.
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
$5,855,000 as of March 31, 2003, and $6,544,000 as of December 31,
2002. Our stock repurchase plan repurchased 120,924 shares as of
March 31, 2003 and 119,181 shares as of December 31, 2002. This had
an effect of our reducing our total stockholders' equity by $3,624,000
on March 31, 2003, and $3,577,000 as of December 31, 2002.
15
Total stockholders' equity was $49,441,000 as of March 31, 2003,
and $49,096,000 as of December 31, 2002. Leverage ratio and risk
based capital ratios remain very strong. As of March 31, 2003, our
leverage ratio was 9.74% compared to 9.78% as of December 31, 2002.
In addition, Tier I risk based capital and total risk based capital
ratio as of March 31, 2003, were 14.31% and 15.51%, respectively. The
same ratios as of December 31, 2002, were 15.80% and 17.11%,
respectively.
LIQUIDITY
The liquidity position of the Corporation remains adequate to
meet customer loan demand and deposit fluctuation. Managing liquidity
remains an important segment of asset liability management. Our
overall liquidity position is maintained by an active asset liability
management committee.
Management feels its current liquidity position is satisfactorily
given a very stable core deposit base which has increased annually.
Secondly, our loan payments and principal paydowns on our mortgage
backed securities provide a steady source of funds. Also, short-term
investments and maturing investment securities represent additional
sources of liquidity. Finally, short-term borrowings are readily
accessible at the Federal Reserve Bank, Atlantic Central Bankers Bank,
or the Federal Home Loan Bank.
Item 3. Controls and Procedures
a) Evaluation of disclosure controls and procedures. The
company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the company
files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and
procedures performed within 90 days of the filing date of this report,
the chief executive and chief financial officers of the company
concluded that the company's disclosure controls and procedures were
adequate.
b) Changes in internal controls. The Company made no
significant changes in its internal controls or in other factors that
could significantly affect these controls subsequent to the date of
the evaluation of the controls by the Chief Executive and Chief
Financial officers.
16
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 15, 2003, at 10:00
a.m.
Votes Votes
Directors Elected Votes For Against Withheld
_________________ _________ ______ _______
Budd L. Beyer 2,239,286 29,476 0
Frederick E. Crispin, Jr. 2,240,680 28,082 0
Jerome F. Fabian 2,241,104 27,658 0
Robert J. Wise 2,240,042 28,720 0
Broker
Directors Elected Abstentions Non-Votes
_________________ _________ ______
Budd L. Beyer 0 0
Frederick E. Crispin, Jr. 0 0
Jerome F. Fabian 0 0
Robert J. Wise 0 0
Directors Continuing:
____________________
John Arndt, term expires in 2004
J. Gerald Bazewicz, term expires in 2004
Robert E. Bull, term expires in 2004
Don E. Bower, term expires in 2005
John L. Coates, term expires in 2005
Dudley P. Cooley, term expires in 2005
Matters Voted Upon:
__________________
Selection of J. H. Williams & Co. LLP, as auditors for the
Corporation.
Votes For - 2,251,664
Votes Against - 469
Votes Withheld - 0
Abstentions - 16,629
Broker Non-Votes - 0
Item 5. Other Information
None.
17
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.
99.1 Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350
99.2 Certification of Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350
(b) During the quarter ended March 30, 2003, the
registrant filed the following reports on Form 8-K:
Date of Report Item Description
______________ ____ ___________
January 31, 2003 5 Press release announcing 20th
Consecutive Year of Increased Earnings
18
FIRST KEYSTONE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly cause this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST KEYSTONE CORPORATION
Registrant
May 9, 2003 /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and
Chief Executive Officer
(Principal Executive Officer)
May 9, 2003 /s/ David R. Saracino
David R. Saracino
Treasurer/Assistant Secretary
(Principal Accounting Officer)
19
CERTIFICATION
I, J. Gerald Bazewicz, President and Chief Executive Officer,
certify, that:
1. I have reviewed this quarterly report on Form 10-Q for the
period ended March 31, 2003, of First Keystone Corporation.
2. Based on my knowledge, the quarterly report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of the internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls.
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect the internal controls subsequent to the
date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
/s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and Chief Executive Officer
Date: May 9, 2003
20
CERTIFICATION
I, David R. Saracino, Treasurer and Chief Financial Officer,
certify, that:
1. I have reviewed this quarterly report on Form 10-Q for the
period ended March 31, 2003, of First Keystone Corporation.
2. Based on my knowledge, the quarterly report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of the internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls.
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect the internal controls subsequent to the
date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
/s/ David R. Saracino
David R. Saracino
Treasurer and Chief Financial Officer
Date: May 9, 2003
21
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
99.1 Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350
99.2 Certification of Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350
22