UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
September 30, 2009
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
_________ to _________
Commission File Number: 2-88927
FIRST KEYSTONE CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2249083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
111 West Front Street, Berwick, PA 18603
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (570) 752-3671
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non accelerated filer, or a smaller
reporting company. See definitions of "large accelerated filer,"
"accelerated filer," and "small reporting company" in Rule 12b-2 of
the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [X]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
On November 6, 2009 there were 5,440,126 shares of the Registrant's
common stock outstanding.
PART I. - FINANCIAL INFORMATION
Item. 1 Financial Statements
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
September December
2009 2008
(Unaudited)
ASSETS
Cash and due from banks $ 4,650 $ 9,945
Interest-bearing deposits in
other banks 20,285 6
Investment securities available-
for-sale carried at estimated
fair value 267,426 240,175
Investment securities, held-to-
maturity securities, estimated
fair value 2009 $4,988 and
2008 $2,958 4,978 2,990
Loans, net of unearned income 407,953 408,367
Allowance for loan losses (5,275) (5,195)
________ ________
Net loans $402,678 $403,172
Premises and equipment - Net 11,830 9,169
Accrued interest receivable 4,043 4,228
Cash surrender value of bank
owned life insurance 17,431 17,157
Goodwill 19,133 19,133
Other assets 5,061 8,923
________ ________
TOTAL ASSETS $757,515 $714,898
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 61,977 $ 58,178
Interest bearing 514,437 446,455
________ ________
TOTAL DEPOSITS $576,414 $504,633
Short-term borrowings 23,283 55,332
Long-term borrowings 74,998 82,062
Accrued interest and other expenses 3,455 3,488
Other liabilities 572 236
________ ________
TOTAL LIABILITIES $678,722 $645,751
________ ________
STOCKHOLDERS' EQUITY
Common stock, par value $2 per share $ 11,375 $ 11,375
Surplus 30,269 30,269
Retained earnings 41,012 38,414
Accumulated other comprehensive
income (loss) 2,377 (4,671)
Less treasury stock at cost 247,641
shares in 2009 and 2008 (6,240) (6,240)
________ ________
TOTAL STOCKHOLDERS' EQUITY $ 78,793 $ 69,147
________ ________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $757,515 $714,898
======== ========
See Accompanying Notes to Consolidated Financial Statements
1
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)
(Amounts in thousands except per share data)
2009 2008
INTEREST INCOME
Interest and fees on loans $6,216 $6,401
Interest and dividend income
on securities 3,213 3,078
Deposits in banks 4 12
______ ______
TOTAL INTEREST INCOME $9,433 $9,491
______ ______
INTEREST EXPENSE
Deposits $2,823 $3,374
Short-term borrowings 85 164
Long-term borrowings 990 861
______ ______
TOTAL INTEREST EXPENSE $3,898 $4,399
______ ______
Net interest income $5,535 $5,092
Provision for loan losses 150 75
______ ______
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $5,385 $5,017
______ ______
NON-INTEREST INCOME
Trust department $ 112 $ 134
Service charges and fees 611 644
Bank owned life insurance income 184 177
Gain on sale of loans 57 46
Investment securities gains
(losses) - net (11) 11
Other 120 118
______ ______
TOTAL NON-INTEREST INCOME $1,073 $1,130
______ ______
NON-INTEREST EXPENSES
Salaries and employee benefits $2,023 $1,816
Occupancy, net 307 262
Furniture and equipment 283 237
Professional services 132 101
State shares tax 177 171
FDIC Insurance 204 84
Other 762 775
______ ______
TOTAL NON-INTEREST EXPENSES $3,888 $3,446
______ ______
Income before income taxes $2,570 $2,701
Income tax expense 484 474
______ ______
Net Income $2,086 $2,227
====== ======
PER SHARE DATA
Basic $ .39 $ .41
Diluted .39 .41
Cash dividends per share .23 .22
See Accompanying Notes to Consolidated Financial Statements
2
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)
(Amounts in thousands except per share data)
2009 2008
INTEREST INCOME
Interest and fees on loans $18,621 $19,079
Interest and dividend income
on securities 9,574 8,938
Deposits in banks 7 78
Interest on fed funds sold 0 14
_______ _______
TOTAL INTEREST INCOME $28,202 $28,109
_______ _______
INTEREST EXPENSE
Deposits $ 8,650 $10,719
Short-term borrowings 286 490
Long-term borrowings 2,947 2,589
_______ _______
TOTAL INTEREST EXPENSE $11,883 $13,798
_______ _______
Net interest income $16,319 $14,311
Provision for loan losses 600 200
_______ _______
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $15,719 $14,111
_______ _______
NON-INTEREST INCOME
Trust department $ 338 $ 418
Service charges and fees 1,745 1,830
Bank owned life insurance income 557 518
Gain on sale of loans 153 88
Investment securities gains
(losses) - net 122 134
Other 504 245
_______ _______
TOTAL NON-INTEREST INCOME $ 3,419 $ 3,233
_______ _______
NON-INTEREST EXPENSE
Salaries and employee benefits $ 5,890 $ 5,469
Occupancy, net 877 798
Furniture and equipment 827 682
Professional services 303 297
State shares tax 523 511
FDIC Insurance 979 137
Other 2,165 2,350
_______ _______
TOTAL NON-INTEREST EXPENSES $11,564 $10,244
_______ _______
Income before income taxes $ 7,574 $ 7,100
Income tax expense 1,223 1,265
_______ _______
Net Income $ 6,351 $ 5,835
======= =======
PER SHARE DATA
Basic $ 1.17 $ 1.07
Diluted 1.17 1.07
Cash Dividends .69 .66
See Accompanying Notes to Consolidated Financial Statements
3
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30, 2009 AND 2008
(Unaudited)
(Amounts in thousands)
2009 2008
OPERATING ACTIVITIES
Net income $ 6,351 $ 5,835
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 600 200
Stock option expense 0 18
Provision for depreciation and
amortization 526 733
Premium amortization on
investment securities 199 84
Accretion of core deposit
net discount 200 82
Discount accretion on investment
securities (891) (496)
Gain on sale of mortgage loans (153) (88)
Proceeds from sale of mortgage
loans 14,751 5,602
Originations of mortgage loans
for resale (19,300) (10,096)
Gain(loss) on sale of
foreclosed real estate 5 (30)
Gain on sales of investment
securities (122) (66)
Deferred income tax (benefit) (145) (167)
(Increase) decrease in interest
receivable and other assets 113 (467)
Increase in cash surrender value
of bank owned life insurance (557) (518)
Decrease in interest payable,
accrued expenses and other
liabilities (173) (339)
________ ________
Net Cash Provided by
Operating Activities $ 1,404 $ 287
________ ________
INVESTING ACTIVITIES
Purchases of investment
securities available-for-sale $(87,155) $(75,513)
Purchase of investment
securities held-to-maturity (2,000) (467)
Proceeds from sales of
investment securities
available-for-sale 53,932 32,579
Proceeds from maturities
and redemptions of
investment securities
available-for-sale 17,440 32,899
Proceeds from bank owned
life insurance 530 0
Proceeds from maturities and
redemption of investment
securities held-to-maturity 12 2,011
Net (increase) decrease in loans 4,394 (17,448)
Purchase of premises and equipment (2,685) (461)
Proceeds from sale of foreclosed
assets 155 337
Decrease in other liabilities
related to acquisition 0 (133)
________ ________
Net Cash Used by Investing
Activities $(15,377) $(26,196)
________ ________
FINANCING ACTIVITIES
Net increase in deposits $ 71,797 $ 20,743
Net increase (decrease) in
short-term borrowings (32,049) 284
Proceeds from long-term
borrowings 0 15,000
Repayment of long-term
borrowings (7,038) (9,065)
Proceeds from sale of
treasury stock 0 1
Cash dividends (3,753) (3,590)
________ ________
Net Cash Provided by
Financing Activities $ 28,957 $ 23,373
________ ________
Decrease in Cash and Cash
Equivalents 14,984 (2,536)
Cash and Cash Equivalents,
Beginning 9,951 9,975
________ ________
Cash and Cash Equivalents,
Ending $ 24,935 $ 7,439
======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during period for:
Interest $ 11,975 $ 14,060
Income Taxes 1,151 1,202
See Accompanying Notes to Consolidated Financial Statements
4
FIRST KEYSTONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(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, First
Keystone National Bank (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. With the opening of our new
Mountain Top, Pennsylvania office effective October 1, 2009, the
Bank has 15 full service offices and 17 ATMs located in Columbia,
Luzerne, Montour and Monroe 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 Changes
in 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 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 and losses.
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.
6
The allowance for loan losses is maintained at a level
estimated by management to be adequate to absorb potential loan
losses. Management's periodic evaluation of the adequacy of the
allowance for loan losses is based on the Corporation's past loan
loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay
(including the timing of future payments), the estimated value of
any underlying collateral, composition of the loan portfolio,
current economic conditions, and other relevant factors. This
evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to
significant change.
PREMISES AND EQUIPMENT
Premises, 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 may retain 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. The total of foreclosed real estate
properties included in other assets amounted to $133,000 and $28,000
at September 30, 2009 and December 31, 2008, respectively.
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.
INVESTMENTS IN REAL ESTATE VENTURES
The Bank is a limited partner in real estate ventures that own
and operate affordable residential low income housing apartment
buildings for elderly residents. The investments are accounted for
under the effective yield method under the FASB ASC 323 Qualified
Affordable Housing Project Investments (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 credits allocated, net of any amortization of the investment
in the limited partnerships, are recognized in the consolidated
statements of income as a component of income tax expense. The
amount of tax credits allocated to the Bank were $187,000 in 2009
and 2008, and the amortization of the investments in the limited
partnerships were $116,000 and
7
PAGE>
$111,000 for the nine months ended September 30, 2009 and 2008,
respectively. The carrying value of the investments as of September
30, 2009 and December 31, 2008 was $729,000 and $844,000,
respectively, and is included in other assets in the accompanying
consolidated balance sheets.
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.
GOODWILL, OTHER INTANGIBLE ASSETS, AND PREMIUM DISCOUNT
Goodwill resulted from the acquisition of the Pocono Community
Bank in November 2007 (See Note 2) and of certain fixed and
operating assets acquired and deposit liabilities assumed of the
branch of another financial institution in Danville, Pennsylvania,
in January 2004. Such goodwill represents the excess cost of the
acquired assets relative to the assets fair value at the dates of
acquisition. The Corporation accounts for goodwill pursuant to the
FASB ASC 350-1- Goodwill and Other Intangibles (SFAS) No. 142,
"Goodwill and Intangible Assets". During the first quarter of 2008,
$152,000 of liabilities were recorded related to the Pocono
acquisition as a purchase accounting adjustment resulting in an
increase in the excess purchase price. The amount was comprised of
the finalization of severance agreements and contract terminations
related to the acquisition. The standard includes requirements to
test goodwill for impairments rather than to amortize goodwill. The
Corporation has tested the goodwill included in its consolidated
balance sheet at December 31, 2008, and has determined there was no
impairment as of that date.
Intangible assets are comprised of core deposit intangibles and
premium discount (negative premium) on certificates of deposit
acquired. The core deposit intangible is being amortized over the
average life of the deposits acquired as determined by an
independent third party. Premium discount (negative premium) on
acquired certificates of deposit resulted from the valuation of
certificate of deposit accounts by an independent third party. The
book value of certificates of deposit acquired was greater than
their fair value at the date of acquisition which resulted in a
negative premium due to higher cost of the certificates of deposit
compared to the cost of similar term financing.
STOCK BASED COMPENSATION
The Corporation sponsors a stock option plan. The Corporation
accounts for stock based compensation pursuant to FASB ASC 718-10
Compensation - Stock Compensation SFAS 123R, "Share Based Payment",
using the modified prospective application method. The fair values
of the stock awards are determined using the estimated expected
life. The Corporation recognizes stock based compensation expense
on the straight line basis over the period the stock award is earned
by the employee. The most recent options issued were in December
2007.
PER SHARE DATA
FASB ASC 260-10 Earnings Per Share(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. The
most recent options issued were in December 2007.
8
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.
SUBSEQUENT EVENTS
Management has evaluated subsequent events through November 9,
2009, which is the date that the Corporation's financial statements
were available to be issued. No material subsequent events have
occurred since September 30, 2009 that required recognition or
disclosures in the accompanying financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
FASB ASC 820-10 - In February 2008, the FASB issued new
guidance impacting FASB ASC 820-10, (FASB Staff Position No. 157-2).
The staff position delays the effective date of FASB ASC 820-10
(SFAS No. 157) for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis. The delay expired
January 1, 2009, and the expiration of the delay did not have a
material impact on the Corporation's consolidated financial
positions or results of operations.
FASB ASC 805 - In December 2007, the FASB issued new guidance
impacting FASB ASC 805, Business Combinations (SFAS No 141(R)
Business Combinations). The new guidance establishes principles and
requirements for how an acquiring company (1) recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any noncontrolling interest in
the acquiree, (2) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase, and (3)
determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of
the business combination. The new standard became effective for the
Corporation on January 1, 2009. The adoption of this standard did
not have a material impact on the Corporation's consolidated
financial position or results of operations.
FASB ASC 810-10 - In December 2007, the FASB issued FASB ASC
810-10, Consolidation (Statement No. 160 Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51). FASB
ASC 810-10 requires the ownership interests in subsidiaries held by
parties other than the parent be clearly identified, labeled and
presented in the consolidated balance sheet within equity, but
separate from the parent's equity. It also requires the amount of
consolidated net income attributable to the parent and the
noncontrolling interest to be clearly identified and presented on
the face of the consolidated statement of income. The new standard
became effective for the Corporation on January 1, 2009. The
adoption of this standard did not have a material impact on the
Corporation's consolidated financial position or results of
operations.
FASB ASC 815-10 - In March 2008, the FASB issued FASB ASC
815-10, Derivatives and Hedging (Statement No. 161 Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133). FASB ASC 815-10 requires enhanced disclosures
about how and why an entity uses derivative instruments, how
derivative instruments and related items are accounted for and how
derivative instruments and related hedged items affect an entity's
financial position, financial performance and cash flows. The new
standard became effective for the Corporation on January 1, 2009.
The adoption of this standard did no have a material impact on the
Corporation's consolidated financial position or results of
operations.
9
FASB ASC 855 - In May 2009, the FASB issued FASB ASC 855,
Subsequent Events (Statement No. 165 Subsequent Events). FASB ASC
855 establishes the period after the balance sheet date during which
management shall evaluate events or transactions that may occur for
potential recognition or disclosure in financial statements and the
circumstances under which an entity shall recognize events or
transactions that occur after the balance sheet date. FASB ASC 855
also requires disclosure of the date through which subsequent events
have been evaluated. The Company adopted this standard for the
interim reporting period ending June 30, 2009. The adoption of this
standard did not have a material impact on the Corporation's
consolidated financial position or results of operations.
FASB ASC 860 - In June 2009, the FASB issued new guidance
impacting FASB ASC 860, Transfers and servicing (Statement No. 166
Accounting for Transfers of Financial Assets, an amendment of FASB
Statement No. 140). The new guidance removes the concept of a
qualifying special purpose entity and limits the circumstances in
which a financial asset, or portion of a financial asset, should be
derecognized when the transferor has not transferred the entire
financial asset to an entity that is not consolidated with the
transferor in the financial statements being presented and/or when
the transferor has continuing involvement with the transferred
financial asset. The new standard will become effective for the
Corporation on January 1, 2010. The Corporation is currently
evaluating the impact of adopting the new standard on the
consolidated financial statements.
FASB ASC 810-10 - In June 2009, the FASB issued new guidance
impacting FASB ASC 810-10, Consolidation (Statement No. 167
Amendments to FASB Interpretation No. 46(R)). The new guidance
amends tests for variable interest entities to determine whether a
variable interest entity must be consolidated. FASB ASC 810-10
requires an entity to perform an analysis to determine whether an
entity's variable interest or interests give it a controlling
financial interest in a variable interest entity. This standard
requires ongoing reassessments of whether an entity is the primary
beneficiary of a variable interest entity and enhanced disclosures
that provide more transparent information about an entity's
involvement with a variable interest entity. The new guidance will
become effective for the Company on January 1, 2010 and the
Corporation is currently evaluating the impact of adopting the
standard on the consolidated financial statements.
FASB ASC 105-10 - In June 2009, the FASB issued FASB ASC
105/10, Generally Accepted Accounting Principles (Statement No. 168
The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles). The new guidance replaces
SFAS No. 162 and establishes the FASB Accounting Standards
Codification as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP"). Rules and interpretative
releases of the Securities and Exchange Commission under federal
securities laws are also sources of authoritative GAAP for SEC
registrants. The new standard became effective for financial
statements issued for interim and annual periods ending after
September 15, 2009. The adoption of this statement did not have a
material impact on the Corporation's consolidated financial position
or results of operations. Technical references to generally accepted
accounting principles included in the Notes to Consolidated
Financial Statements are provided under the new FASB ASC structure
with the prior terminology included parenthetically.
FASB ASC 715-20-50 - In December 2008, the FASB issued new
guidance impacting FASB ASC 715-20-50, Compensation Retirement
Benefits, Defined Benefit Plans, General (FASB Staff Position No.
132(R)- 1, Employers' Disclosures about Postretirement Benefit Plan
Assets). This provides guidance on an employer's disclosures about
plan assets of a defined benefit pension or other postretirement
plan. The guidance requires disclosure of the fair value of each
major category of plan assets for pension plans and other
postretirement benefit plans. This standard becomes effective for
the Corporation on January 1, 2010. The Corporation is currently
evaluating the impact of adopting the new guidance on the
consolidated financial statements, but it is not expected to have a
material impact.
FASB ASC 825-10-50 - In April 2009, the FASB issued new
guidance impacting FASB ASC 825-10-50, Financial Instruments (FASB
Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial Instruments). This guidance amends existing
GAAP to require disclosures about fair values of financial
instruments for interim reporting periods as well as in annual
financial statements. The guidance also amends existing GAAP to
require those disclosures in summarized financial information at
interim reporting periods. The Corporation adopted this standard for
the interim reporting period ending March 31, 2009.
10
FASB ASC 320-10 - In April 2009, the FASB issued new guidance
impacting FASB ASC 320-10, Investments - Debt and Equity Securities
(FASB Staff Position No. FAS 115-2, Recognition and Presentation of
Other Than Temporary Impairments). This guidance amends the other
than temporary impairment guidance in U.S. generally accepted
accounting principles for debt securities. If an entity determines
that it has an other than temporary impairment on a security, it
must recognize the credit loss on the security in the income
statement. The credit loss is defined as the difference between the
present value of the cash flows expected to be collected and the
amortized cost basis. FASB ASC 320-10 expands disclosures about
other than temporary impairment and requires that the annual
disclosures in existing generally accepted accounting principles be
made for interim reporting periods. The Corporation adopted this
guidance for the interim reporting period ending March 31, 2009.
FASB ASC 820 - In April 2009, the FASB issued new guidance
impacting FASB ASC 820, Fair Value Measurements and Disclosures
(FASB Staff Position No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly). This provides additional guidance on determining fair
value when the volume and level of activity for the asset or
liability have significantly decreased when compared with normal
market activity for the asset or liability. A significant decrease
in the volume or level of activity for the asset or liability is an
indication that transactions or quoted prices may not be
determinative of fair value because transactions may not be orderly.
In that circumstance, further analysis of transactions or quoted
prices is needed, and an adjustment to the transactions or quotes
prices may be necessary to estimate fair value. The Corporation
adopted this guidance for the interim reporting period ending March
31, 2009 and it did not have a material impact on the Corporation's
consolidated financial position or results of operations.
SAB 111 - In April 2009, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 111 ("SAB 111"). SAB 111 amends
Topic 5.M in the Staff Accounting Bulletin series entitled Other
Than Temporary Impairment of Certain Investments in Debt and Equity
Securities. On April 9, 2009, the FASB issued new guidance impacting
FASB ASC 320-10, Investments, Debt and Equity Securities (FASB Staff
Position No. FAS 115-2 and FAS 124-2, Recognition and Presentation
of Other Than Temporary Impairments). SAB 111 maintains the previous
views related to equity securities and amends Topic 5.M to exclude
debt securities from its scope. SAB 111 was effective for the
Corporation as of March 31, 2009. There was no material impact to
the Corporation's consolidated financial position or results of
operations upon adoption.
SAB 112 - In June 2009, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 112 ("SAB 112"). SAB 112
revises or rescinds portions of the interpretative guidance included
in the Staff Accounting Bulletin series in order to make the
interpretative guidance consistent with the recent pronouncements by
the FASB, specifically FASB ASC 805 and FASB ASC 810-10 (SFAS No.
141(R) and SFAS No. 160). SAB 112 was effective for the Company as
of June 30, 2009. There was no material impact to the Corporation's
consolidated financial position or results of operations upon
adoption.
FASB ASC 323 - In November 2008, the FASB Emerging Issues Task
Force reached a consensus on FASB ASC 323, Investments - Equity
Method and Joint Ventures (Issue No. 08-6, Equity Method Investment
Accounting Considerations). The new guidance clarifies the
accounting for certain transactions and impairment considerations
involving equity method investments. An equity investor shall not
separately test an investee's underlying assets for impairment but
will recognize its share of any impairment charge recorded by an
investee in earnings and consider the effect of the impairment on
its investment. An equity investor shall account for a share
issuance by an investee as if the investor had sold a proportionate
share of its investment, with any gain or loss recognized in
earnings. The new guidance became effective for the Corporation on
January 1, 2009 and did not have a material impact on the
Corporation's consolidated financial position or results of
operations.
FASB ASC 350 - In November 2008, the FASB Emerging Issues Task
Force reached a consensus on FASB ASC 350, Intangibles, Goodwill and
Other (Issue No. 08-7, Accounting for Defensive Intangible Assets).
The new guidance clarifies how to account for defensive intangible
assets subsequent to initial measurement. The guidance applies to
acquired intangible assets in situations in which an entity does not
intend to actively use an asset but intends to hold the asset to
prevent others from obtaining access to the asset. A defensive
intangible asset should be accounted for as a separate unit of
accounting with an expected life that reflects the consumption of
the expected benefits related to the asset. The benefit from holding
a defensive intangible asset is the direct and indirect cash flows
resulting from
11
the entity preventing others from using the asset. The new guidance
was effective for intangible assets acquired on or after January 1,
2009 and did not have a material impact on the Corporation's
consolidated financial position or results of operations.
FASB ASC 260-10 - In June 2008, the FASB issued new guidance
impacting FASB ASC 260-10, Earnings Per Share (FSP No. EITF 03-06-1,
Determining Whether Instruments Granted in Share Based Payment
Transactions are Participating Securities). This new guidance
concluded that all outstanding unvested share based payment awards
that contain rights to nonforfeitable dividends participate in
undistributed earnings with common shareholders and therefore are
considered participating securities for purposes of computing
earnings per share. Entities that have participating securities that
are not convertible into common stock are required to use the "two
class" method of computing earnings per share. The two class method
is an earnings allocation formula that determines earnings per share
for each class of common stock and participating security according
to dividends declared (or accumulated) and participation rights in
undistributed earnings. This new guidance was effective for fiscal
years beginning after December 15, 2008 and interim periods within
those fiscal years. This new guidance became effective for the
Corporation on January 1, 2009 and did not have a material impact on
the Corporation's consolidated financial position or results of
operations.
FASB ASC 820-10 - In August 2009, the FASB issued an update
(ASC No. 2009-05, Measuring Liabilities at Fair Value) impacting
FASB ASC 820-10, Fair Value Measurements and Disclosures. The update
provides clarification about measuring liabilities at fair value in
circumstances where a quoted price in an active market for an
identical liability is not available and the valuation techniques
that should be used. The update also clarifies that when estimating
the fair value of a liability, a reporting entity is not required to
include a separate input or adjustment to other inputs relating to
the existence of a restriction that prevents the transfer of the
liability. This update became effective for the Corporation for the
reporting period ending September 30, 2009 and did not have a
material impact on the Corporation's consolidated financial position
or results of operations.
FASB ASC 820-10 - In September 2009, the FASB issued an update
(ASC No. 2009-12, Investments in Ceratin Entities That Calculate Net
Asset Value per Share (or its equivalent)) impacting FASB ASC
820-10, Fair Value Measurements and Disclosures. The amendments in
this update permit, as a practical expedient, a reporting entity to
measure the fair value of an investment that is within the scope of
the amendments in this update on the basis of the net asset value
per share of the investment (or its equivalent) if the net asset
value of the investment is calculated in a manner consistent with
the measurement principles of Topic 946, Financial Services
Investment Companies. The amendments in this update also require
disclosures by major category of investment about the attributes of
investments within the scope of the amendments in this update, such
as the nature of any restrictions on the ability to redeem an
investment on the measurement date. This update becomes effective
for the Corporation for interim and annual reporting periods ending
after December 15, 2009. The Corporation is currently evaluating the
impact of adopting the new guidance on the consolidated financial
statements, but it is not expected to have a material impact.
ADVERTISING COSTS
It is the Corporation's policy to expense advertising costs in
the period in which they are incurred. Advertising expense for the
nine months ended September 30, 2009 and 2008 was approximately
$190,000 and $239,000, respectively.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements of
prior periods have been reclassified to conform with presentation
used in the 2009 consolidated financial statements. Such
reclassifications have no effect on the Corporation's consolidated
financial condition or net income.
12
Note 2. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the periods ended
September 30, 2009, and September 30, 2008, were as follows:
(amounts in thousands)
September 30, September 30,
2009 2008
____ ____
Balance, January 1 $5,195 $5,047
Provision charged to
operations 600 200
Loans charged off (559) (194)
Recoveries 39 186
______ ______
Balance, September 30 $5,275 $5,239
====== ======
At September 30, 2009, the total recorded investment in loans
that are considered to be impaired as defined by SFAS No. 114 was
$2,595,000. 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 September 30, 2009, there were no significant commitments to
lend additional funds with respect to non accrual and restructured
loans.
Non-accrual loans at September 30, 2009 and December 31, 2008
were $2,595,000 and $1,718,000, respectively, all of which were
considered impaired.
Loans past due 90 days or more and still accruing interest
amounted to $0 and $15,000 on September 30, 2009 and December 31,
2008, respectively.
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.
13
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 September 30, 2009 and December
31, 2008 were as follows:
(amounts in thousands)
September 30, December 31,
2009 2008
____ ____
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $57,074 $52,762
Financial standby letters
of credit 843 904
Performance standby letters
of credit 6,954 6,936
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, Montour, and Monroe Pennsylvania. It is
management's opinion that the loan portfolio was well balanced and
diversified at September 30, 2009, 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.
14
Note 6. STOCKHOLDERS' EQUITY
Changes in Stockholders' Equity for the period ended September
30, 2009, were are follows:
(Amounts in thousands, except common share data)
Common Common
Shares Stock Surplus
______ ______ _______
Balance at January 1, 2009 5,687,767 $11,375 $30,269
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 -
$.69 per share
_________ _______ _______
Balance at September 30, 2009 5,687,767 $11,375 $30,269
========= ======= =======
(Amounts in thousands, except common share data)
Accumulated
Compre- Other
hensive Retained Comprehensive
Income Earnings Income (Loss)
______ ______ __________
Balance at January 1, 2009 $38,414 $(4,671)
Comprehensive Income:
Net Income $6,351 6,351
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects 7,048 7,048
_______
Total Comprehensive
income (loss) $13,299
=======
Cash dividends -
$.69 per share (3,753)
_______ _______
Balance at September 30, 2009 $41,012 $ 2,377
======= =======
(Amounts in thousands, except common share data)
Treasury
Stock Total
_____ _____
Balance at January 1, 2009 $(6,240) $69,147
Comprehensive Income:
Net Income 6,351
Change in unrealized
gain (loss) on
investment securities
available-for-sale,
net of reclassification
adjustment and tax
effects 7,048
Total Comprehensive
income (loss)
Cash dividends -
$.69 per share (3,753)
_______ _______
Balance at September 30, 2009 $(6,240) $78,793
======= =======
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 nine month period ended
September 30, 2009, 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, 2008, filed with the Securities and Exchange
Commission.
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 September 30, 2009,
and the related consolidated statements of income for the three and
nine month periods ended September 30, 2009 and 2008 and cash flows
for the nine month periods ended September 30, 2009 and 2008. These
consolidated interim financial statements are the responsibility of
the management of First Keystone Corporation and Subsidiary.
We conducted our reviews in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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 the standards of
the Public Company Accounting Oversight Board (United States), 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 interim 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 the auditing
standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheet of First Keystone
Corporation and Subsidiary as of December 31, 2008, and the related
consolidated statements of income, changes in stockholders' equity,
and cash flows for the year then ended (not presented herein); and
in our report dated March 9, 2009, 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, 2008, 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
November 9, 2009
16
Item 2. First Keystone Corporation Management's
Discussion and Analysis of Financial Condition
and Results of Operation as of September 30, 2009
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 third
quarter of 2009 of $2,086,000, a decrease of $141,000 or 6.3% from
the third quarter of 2008. Nine months net income for the period
ended September 30, 2009, amounted to $6,351,000, an increase of
516,000 or 8.8% from the $5,835,000 net income reported September
30, 2008. Net interest income increased in both the third quarter
of 2009 and for the first nine months of 2009 when compared to the
same period in 2008. The higher net interest income in 2009 was due
to a positively sloped yield curve and an expansion of our net
interest margin. Earnings in the third quarter were adversely
affected by our decision to increase our provision for loan losses
since past dues and charged off loans increased during the quarter.
A decline in non interest income of $57,000 or 5.0% reduced third
quarter net income. Finally, non interest expense increased during
the third quarter due to additional hires associated with our
Mountain Top office opening on October 1, 2009 and one time expenses
from our conversion to a new core operating system in September
2009. Earnings for the nine months ended September 30, 2009 were
positively affected by increased interest income and non interest
income. The increase of 8.8% in net income during the first three
quarters of 2009 was accomplished even though FDIC insurance expense
increased $842,000 to $979,000 as of September 30, 2009. On a per
basis, net income per share was $1.17 for the first nine months of
2009, as compared to $1.07 for the first nine months of 2009, while
dividends were at $.69 per share as compared to $.66 at the end of
the first three quarters in 2008.
Year to date net income annualized amounts to a return on
average common equity of 11.97% and a return on assets of 1.15%.
For the nine months ended September 30, 2008, these measures were
11.26% and 1.12%, respectively on an annualized basis.
NET INTEREST INCOME
The major source of operating income for the Corporation is net
interest income, defined as interest income less interest expense.
In the third quarter of 2009, interest income amounted to
$9,433,000, a decrease of $58,000 or 0.6% from the third quarter of
2008. Interest expense amounted to $3,898,000 in the third quarter
of 2009, a decrease of $501,000 or 11.4% from the third quarter of
2008. Accordingly, net interest income amounted to $5,535,000 in
the third quarter of 2009, an increase of $443,000, or 8.7% from the
third quarter of 2008. Year to date for the nine months ended
September 30, 2009, total interest income increased $93,000, or 0.3%
to $28,202,000 from $28,109,000 in the first nine months of 2008.
Total interest expense decreased $1,915,000, or 13.9% to $11,883,000
for the first nine months of 2009 from $13,798,000 in the first nine
months of 2008. This resulted in net interest income increasing
$2,008,000 to $16,319,000 as of September 30, 2009 from $14,311,000
as of September 30, 2008, an increase of 14.0%.
Our net interest margin for the quarter ended September 30,
2009, was 3.60% compared to 3.49% for the quarter ended September
30, 2008. For the nine months ended September 30, 2009, our net
interest margin was 3.59% compared to 3.30% for the first nine
months of 2008.
17
PROVISION FOR LOAN LOSSES
The provision for loan losses for the quarter ended September
30, 2009, was $150,000 compared to $75,000 for the third quarter of
2008. Year to date, the provision for loan losses amounts to
$600,000 in 2009 as compared to the $200,000 provision for the
period ended September 30, 2008. The increased provision for loan
losses was a result of increased net charge offs. Net charge offs
amounted to $520,000 for the nine months ended September 30, 2009,
as compared to $8,000 for the first nine months of 2008.
The allowance for loan losses as a percentage of loans, net of
unearned interest was 1.29% as of September 30, 2009, and 1.27% as
of December 31, 2008.
NON-INTEREST INCOME
Total non interest or other income was $1,073,000 for the
quarter ended September 30, 2009, as compared to $1,130,000 for the
quarter ended September 30, 2008. Excluding investment securities
gains and losses, non interest income was $1,084,000 for the third
quarter of 2009, as compared to $1,119,000 in the third quarter of
2008, a decrease of 3.1%. For the nine months ended September 30,
2009, total non interest income was $3,419,000, as compared to
$3,233,000, or a 5.8% increase from the first nine months of 2008.
Excluding investment securities gains and losses, non interest
income for the nine months ended September 30, 2009 was $3,297,000,
an increase of 6.4% from the $3,099,000 reported in 2008. For the
nine months ended September 30, 2009, the increase in non interest
income was primarily the result of an increase in bank owned life
insurance income, an increase on gains on sale of loans, and an
increase in other non interest income.
NON-INTEREST EXPENSES
Total non interest, or other expenses, was $3,888,000 for the
quarter ended September 30, 2009, as compared to $3,446,000 for the
quarter ended September 30, 2008, an increase of $442,000 or 12.8%.
The majority of the increase in non-interest expenses in the third
quarter of 2009 relate to the opening of a new branch office, the
conversion to a new core operating system, and higher FDIC
insurance.
For the nine months ended September 30, 2009, total non
interest expense was $11,564,000, an increase of $1,320,000, or
12.9% over the first nine months of 2008. Expenses associated with
employees (salaries and employee benefits) continue to be the
largest category of non interest expenses. Salaries and benefits
amount to 50.9% of total non interest expense for the nine months
ended September 30, 2009, as compared to 53.4% for the first nine
months of 2008. Salaries and benefits amounted to $5,890,000 for
the nine months ended September 30, 2009, an increase of $421,000,
or 7.7% over the first nine months of 2008. The increase is
associated with additional hires in 2009 as well as salary and
benefit increases. Net occupancy expense, including furniture and
equipment, amounted to $1,704,000 for the nine months ended
September 30, 2009, an increase of $224,000, or 15.1% from 2008.
The increase reflects costs associated with a new branch opening and
a new core processing system. Professional services increased
$6,000 or 2.0% from the first nine months of 2008. State shares tax
increased $12,000 or 2.3% over the first nine months of 2008. FDIC
insurance amounted to $979,000 as of September 30, 2009, a
substantial increase of $842,000 over 2008. Other non interest
expenses amounted to $2,165,000 for the nine months ended September
30, 2009, a decrease of $185,000, or 7.9% from the first nine months
of 2008. Even with the increase in non interest expenses in 2009,
our overall non interest expense continues at slightly more than
2.0% of average assets on an annualized basis. This places us among
the leaders of our peer financial institutions at controlling non
interest expense.
18
INCOME TAXES
Effective tax planning has helped produce favorable net income.
The effective total income tax rate was 18.8% for the third quarter
of 2009 as compared to 17.5% for the third quarter of 2008. For the
nine months ended September 30, 2009, our tax expense amounted to
$1,223,000 for an effective tax rate of 16.1% as compared to an
effective tax rate of 17.8% for the first nine months of 2008.
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased to $757,515,000 as of September 30,
2009, an increase of $42,617,000, or 6.0% over year end 2008. Total
deposits increased to $576,414,000 as of September 30, 2009, an
increase of $71,781,000, or 14.2% over year end 2008.
The Corporation used the increase in total deposits to fund
primarily an increase in investment securities since loan demand was
weak. In addition, borrowings were reduced. Total borrowings
decreased $39,113,000 from December 31, 2008. Short term borrowings
decreased to $23,283,000 as of September 30, 2009, down from
$55,332,000 at year end 2008. Long term borrowings decreased to
$74,998,000 as of September 30, 2009, down $7,064,000 from
$82,062,000 at year end 2008.
EARNING ASSETS
Our primary earning asset, loans, net of unearned income
decreased slightly to $407,953,000 as of September 30, 2009, a
decrease of $414,000, or 0.1% from year end 2008. The loan
portfolio is well diversified and the decline in the portfolio has
been primarily from reduced originations of both consumer loans and
commercial loans.
In addition to loans, another primary earning asset is our
investment portfolio which increased in size from December 31, 2008,
to September 30, 2009. Available for sale securities amounted to
$267,426,000 as of September 30, 2009, an increase of $27,251,000,
or 11.3% from year end 2008. Held to maturity securities increased
to $4,978,000 as of September 30, 2009, an increase of $1,988,000,
or 66.5% since year end 2008. Interest bearing deposits with banks
increased to $20,285,000 on September 30, 2009, as compared to
$6,000 as of December 31, 2008.
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 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.
19
The Corporation follows the guidance in FASB ASC 310-10-35
Receivables Subsequent Measurement SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan". Refer to Note 1 above for
details.
NON-PERFORMING ASSETS
Non-performing assets consist of non accrual and restructured
loans, other real estate and foreclosed assets, together with the
loans past due 90 days or more and still accruing. As of September
30, 2009, total non performing assets were $2,728,000 as compared to
$1,761,000 on December 31, 2008. Non performing assets to total
loans and foreclosed assets was .67% as of September 30, 2009, and
..43% as of December 31, 2008.
Interest income received on non performing loans as of
September 30, 2009, was $31,000 compared to $95,000 as of December
31, 2008. Interest income, which would have been recorded on these
loans under the original terms as of September 30, 2009, and
December 31, 2008, was $94,000 and $149,000, respectively. As of
September 30, 2009 and December 31, 2008, 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 by
$71,781,000 as non interest bearing deposits increased by $3,799,000
and interest bearing deposits increased by $67,982,000 as of
September 30, 2009, from year end 2008. Total short term and long
term borrowings decreased by $39,113,000 from year end 2008.
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 or losses on investment
securities available for sale increased shareholders' equity, or
capital net of taxes, by $2,377,000 as of September 30, 2009, and
decreased capital by $4,671,000 as of December 31, 2008. Treasury
stock as of September 30, 2009 and December 31, 2008 had an effect
of our reducing our total stockholders' equity by $6,240,000 on
September 30, 2009 and December 31, 2008.
Total stockholders' equity was $78,793,000 as of September 30,
2009, and $69,147,000 as of December 31, 2008. Leverage ratio and
risk based capital ratios remain very strong. As of September 30,
2009, our leverage ratio was 7.89% compared to 7.59% as of December
31, 2008. In addition, Tier I risk based capital and total risk
based capital ratio as of September 30, 2009, were 11.10% and
12.13%, respectively. The same ratios as of December 31, 2008, were
10.95% and 12.02%, 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.
20
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk
There have been no material changes in the Company's
quantitative and qualitative market risks since December 31, 2008.
The composition of rate sensitive assets and rate sensitive
liabilities as of September 30, 2009 is very similar to December 31,
2008.
ITEM 4. 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 75 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.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. There have been no material changes in our "Risk
Factors" as previously disclosed in our Annual
Report on Form 10K for the year ended December 31,
2008.
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
Total
Number Maximum
of Shares Number of
Purchased Shares That
as Part of May Yet Be
Total Publicly Purchased
Number Average Announced Under the
of Shares Price Paid Plans or Plans or
Period Purchased per Share Programs Programs
______ _________ _________ ________ ________
July 1 -
July 31,
2009 ---- ---- ---- 112,098
August 1 -
August 31,
2009 ---- ---- ---- 112,098
Sept. 1 -
Sept. 30,
2009 ---- ---- ---- 112,098
Total ---- ---- ---- 112,098
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, May 5, 2009 at 10:00
a.m.
Votes Votes
Directors Elected Votes For Against Withheld
_________________ _________ ______ _______
Jerome F. Fabian 4,379,282 27,419 0
John G. Gerlach 4,206,948 199,753 0
David R. Saracino 4,206,740 199,961 0
Broker
Directors Elected Abstentions Non-Votes
_________________ ___________ _________
Jerome F. Fabian 0 0
John G. Gerlach 0 0
David R. Saracino 0 0
22
Directors Continuing:
____________________
John E. Arndt, term expires in 2010
J. Gerald Bazewicz, term expires in 2010
Robert E. Bull, term expires in 2010
Joseph B. Conahan, Jr., term expires in 2010
Don E. Bower, term expires in 2011
Robert A. Bull, term expires in 2011
Matters Voted Upon:
__________________
Selection of J. H. Williams & Co. LLP, as auditors for the
Corporation.
Votes For - 4,399,923
Votes Against - 2,862
Votes Withheld - 0
Abstentions - 3,916
Broker Non-Votes - 0
Item 5. Other Information
The Company made no material changes to the
procedures by which shareholders may recommend
nominees to the Company's Board of Directors.
23
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 10Q for the
quarter ended March 31, 2006).
3ii By Laws, as amended (Incorporated by reference
to Exhibit 3(ii) to the Registrant's Report on
Form 10Q for the quarter ended March 31, 2006).
10.1 Supplemental Employee Retirement Plan
(Incorporated by reference to Exhibit 10 to the
Registrant's Report on Form 10Q for the quarter
ended September 30, 2005).
10.2 Management Incentive Compensation Plan
(Incorporated by reference to Exhibit 10 to the
Registrant's Report on Form 10Q for the quarter
ended September 30, 2006).
10.3 Profit Sharing Plan (Incorporated by reference
to Exhibit 10 to the Registrant's Report on Form
10Q for the quarter ended September 30, 2006).
10.4 First Keystone Corporation 1998 Stock Incentive
Plan (Incorporated by reference to Exhibit 10 to
the Registrant's Report on Form 10Q for the
quarter ended September 30, 2006).
14 Code of Ethics (Incorporated by reference to
Exhibit 14 to the Registrant's Report on Form 8K
dated January 9, 2007).
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer.
32.1 Section 1350 Certification of Chief Executive
Officer.
32.2 Section 1350 Certification of Chief Financial
Officer.
24
FIRST KEYSTONE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly cause this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST KEYSTONE CORPORATION
Registrant
November 9, 2009 /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and
Chief Executive Officer
(Principal Executive Officer)
November 9, 2009 /s/ Diane C.A. Rosler
Diane C.A. Rosler
Chief Financial Officer
(Principal Accounting Officer)
25
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 10Q for the
quarter ended March 31, 2006).
3ii By Laws, as amended (Incorporated by reference
to Exhibit 3(ii) to the Registrant's Report on
Form 10Q for the quarter ended March 31, 2006).
10.1 Supplemental Employee Retirement Plan
(Incorporated by reference to Exhibit 10 to the
Registrant's Report on Form 10Q for the quarter
ended September 30, 2005).
10.2 Management Incentive Compensation Plan
(Incorporated by reference to Exhibit 10 to the
Registrant's Report on Form 10Q for the quarter
ended September 30, 2006).
10.3 Profit Sharing Plan (Incorporated by reference
to Exhibit 10 to the Registrant's Report on Form
10Q for the quarter ended September 30, 2006).
10.4 First Keystone Corporation 1998 Stock Incentive
Plan (Incorporated by reference to Exhibit 10 to
the Registrant's Report on Form 10Q for the
quarter ended September 30, 2006).
14 Code of Ethics (Incorporated by reference to
Exhibit 14 to the Registrant's Report on Form 8K
dated January 9, 2007).
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer.
32.1 Section 1350 Certification of Chief Executive
Officer.
32.2 Section 1350 Certification of Chief Financial
Officer.
26