10-Q 1 form10q.txt 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, 2005 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 an accelerated filer (as defined in Rul 12b-2 of the Exchange Act). Yes [X] No [ ] The number of shares outstanding of the issuer's common stock as of November 1, 2005, was 4,392,520. PART I. - FINANCIAL INFORMATION Item. 1 Financial Statements FIRST KEYSTONE CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
(Amounts in thousands) September December 2005 2004 (Unaudited) ASSETS Cash and due from banks $ 7,688 $ 6,150 Interest bearing deposits with banks 11,774 36 Investment securities, available for sale securities carried at estimated fair value 253,532 235,692 Investment securities, held to maturity securities, estimated fair value of $3,257 and $3,364 3,257 3,361 Loans, net of unearned income 232,084 233,800 Allowance for loan losses (3,677) (3,828) ________ ________ Net loans $228,407 $229,972 ________ ________ Bank premises and equipment net 5,130 5,369 Other real estate owned 216 0 Accrued interest receivable 2,517 2,727 Cash surrender value of bank owned life insurance 11,357 11,033 Goodwill 1,224 1,224 Other assets 1,620 2,051 ________ ________ TOTAL ASSETS $526,722 $497,615 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits Non-interest bearing $ 42,573 $ 35,803 Interest bearing 333,040 322,153 ________ ________ TOTAL DEPOSITS $375,613 $357,956 Short-term borrowings 12,490 15,512 Long-term borrowings 65,535 66,910 Accrued interest and other expenses 2,214 1,877 Other liabilities 16,193 2,048 ________ ________ TOTAL LIABILITIES $472,045 $444,303 STOCKHOLDERS' EQUITY Common stock, par value $2 per share $ 9,079 $ 9,079 Surplus 12,389 12,505 Retained earnings 35,088 32,469 Accumulated other comprehensive income 2,530 3,767 Less treasury stock at cost 147,053 shares in 2005 and 148,264 in 2004 (4,409) (4,508) ________ ________ TOTAL STOCKHOLDERS' EQUITY $ 54,677 $ 53,312 ________ ________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $526,722 $497,615 ======== ======== See Accompanying Notes to Consolidated Financial Statements
1 FIRST KEYSTONE CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED September 30, 2005 AND 2004 (Unaudited)
(Amounts in thousands except per share data) 2005 2004 INTEREST INCOME Interest and fees on loans $3,746 $3,673 Interest and dividend income on securities 2,887 2,649 Deposits in banks 4 11 ______ ______ TOTAL INTEREST INCOME $6,637 $6,333 ______ ______ INTEREST EXPENSE Deposits $2,080 $1,745 Short-term borrowings 164 35 Long-term borrowings 737 737 ______ ______ TOTAL INTEREST EXPENSE $2,981 $2,517 ______ ______ Net interest income $3,656 $3,816 Provision for loan losses 150 675 ______ ______ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES $3,506 $3,141 ______ ______ NON-INTEREST INCOME Trust department $ 106 $ 115 Service charges and fees 586 581 Bank owned life insurance income 109 112 Gain on sale of loans 14 83 Investment securities gains (losses) - net 89 411 Other 11 11 ______ ______ TOTAL NON-INTEREST INCOME $ 915 $1,313 ______ ______ NON-INTEREST EXPENSES Salaries and employee benefits $1,144 $1,126 Occupancy, net 152 177 Furniture and equipment 148 182 Professional services 99 146 State shares tax 121 112 Other 581 523 ______ ______ TOTAL NON-INTEREST EXPENSES $2,245 $2,266 ______ ______ Income before income taxes $2,176 $2,188 Income tax expense 372 398 ______ ______ Net Income $1,804 $1,790 ====== ====== PER SHARE DATA Basic $ .41 $ .41 Diluted .41 .41 Cash dividends per share .20 .18 See Accompanying Notes to Consolidated Financial Statements
2 FIRST KEYSTONE CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED September 30, 2005 AND 2004 (Unaudited)
(Amounts in thousands except per share data) 2005 2004 INTEREST INCOME Interest and fees on loans $10,985 $10,878 Interest and dividend income on securities 8,537 7,936 Deposits in banks 44 26 Interest on federal funds sold 3 0 _______ _______ TOTAL INTEREST INCOME $19,569 $18,840 _______ _______ INTEREST EXPENSE Deposits $ 5,804 $ 5,127 Short-term borrowings 324 102 Long-term borrowings 2,265 2,159 _______ _______ TOTAL INTEREST EXPENSE $ 8,393 $ 7,388 _______ _______ Net interest income $11,176 $11,452 Provision for loan losses 500 950 _______ _______ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES $10,676 $10,502 _______ _______ NON-INTEREST INCOME Trust department $ 358 $ 414 Service charges and fees 1,634 1,637 Bank owned life insurance income 324 336 Gain on sale of loans 54 181 Investment securities gains (losses) - net 232 576 Other 32 61 _______ _______ TOTAL NON-INTEREST INCOME $ 2,634 $ 3,205 _______ _______ NON-INTEREST EXPENSE Salaries and employee benefits $ 3,669 $ 3,610 Occupancy, net 431 502 Furniture and equipment 499 542 Professional services 300 319 State shares tax 360 334 Other 1,706 1,582 _______ _______ TOTAL NON-INTEREST EXPENSES $ 6,965 $ 6,889 _______ _______ Income before income taxes $ 6,345 $ 6,818 Income tax expense 1,089 1,384 _______ _______ Net Income $ 5,256 $ 5,434 ======= ======= PER SHARE DATA Basic $ 1.20 $ 1.24 Diluted 1.19 1.23 Cash Dividends .60 .53 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, 2005 AND 2004 (Unaudited)
(Amounts in thousands) 2005 2004 OPERATING ACTIVITIES Net income $ 5,256 $ 5,434 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 500 950 Stock option expense 0 48 Provision for depreciation and amortization 409 447 Premium amortization on investment securities 318 626 Accretion of core deposit net discount (65) (71) Discount accretion on investment securities (522) (389) Gain on sale of mortgage loans (54) (181) Proceeds from sale of mortgage loans 3,930 11,669 Originations of mortgage loans for resale (4,512) (4,941) (Gain) loss on sales of investment securities (232) (576) Deferred income tax (benefit) (6) (313) (Increase) decrease in interest receivable and other assets 664 (4) Increase in cash surrender value of bank owned life insurance (324) (336) Increase (decrease) in interest payable, accrued expenses and other liabilities 210 353 _________ ________ Net Cash Provided by Operating Activities $ 5,572 $ 12,716 _________ ________ INVESTING ACTIVITIES Purchases of investment securities available-for-sale $(105,676) $(67,902) Purchase of investment securities held-to-maturity 0 (1,630) Proceeds from sales of investment securities available-for-sale 71,423 40,845 Proceeds from maturities and redemptions of investment securities available-for-sale 29,858 22,616 Proceeds from maturities and redemption of investment securities held-to-maturity 104 5,490 Net (increase) decrease in loans 1,486 (11,643) Purchase of premises and equipment (97) (871) Final settlement on acquisition of branch 0 (414) _________ ________ Net Cash Used by Investing Activities $ (2,902) $(13,509) FINANCING ACTIVITIES Net increase (decrease) in deposits $ 17,657 $ 9,912 Net increase (decrease) in short-term borrowings (3,022) (2,485) Net increase (decrease) in long-term borrowings (1,375) 3,965 Acquisition of treasury stock (112) 0 Proceeds from sale of treasury stock 95 45 Cash dividends (2,637) (2,340) Dividend paid in lieu of fractional shares 0 (3) _________ ________ Net Cash Provided by Financing Activities $ 10,606 $ 9,094 Increase (Decrease) in Cash and Cash Equivalents 13,276 8,301 Cash and Cash Equivalents, Beginning 6,186 5,941 _________ ________ Cash and Cash Equivalents, Ending $ 19,462 $ 14,242 ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during period for: Interest $ 8,233 $ 7,419 Income Taxes 556 1,562 See Accompanying Notes to Consolidated Financial Statements
4 FIRST KEYSTONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005 (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 10 full service offices and 13 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. 5 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) (see Note 6). 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 and dividend income on securities. 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. 6 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 outstanding loan commitments in this category did not give rise to any losses for the nine month period ended September 30, 2005 and year ended December 31, 2004, 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 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. 7 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 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 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 $128,000 in 2005 and 2004. The amortization of the investments in the limited partnerships was $72,000 and $92,000 for the nine months ended September 30, 2005 and 2004, respectively. The carrying value of the investments as of September 30, 2005 and December 31, 2004 was $719,000 and $791,000, respectively and is carried 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 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 date of acquisition. The Corporation accounts for goodwill pursuant to the Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Intangible Assets". SFAS No. 142 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, 2004, 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 acquired certificates of deposit acquired in January 2004 when the Bank assumed deposit accounts of the branch of another financial institution. 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 which were part of the deposit accounts assumed of the branch by another financial institution. 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. 8 STOCK BASED COMPENSATION The Corporation had 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 - an amendment of FASB Statement No. 123" and also follows the guidance in SFAS No. 123R, effective for periods ending after June 15, 2005. The Corporation elected to use the "prospective method" of accounting for stock options as allowed by the Standard. Accordingly, compensation expense was recognized for the year ended December 31, 2004 in the amount of $48,000 being the vested portion attributable to stock options granted in 2003. No options were granted in 2004. Stock options were granted September 27, 2005 with a total related compensation expense of $22,000. The expense will be recognized over the vesting period. Accordingly, $11,000 will be expensed in the fourth quarter of 2005 and the balance of $11,000 will be expensed in the first quarter of 2006. 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. CASH FLOW INFORMATION For purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand and due from other banks and interest bearing deposits in other banks. The Corporation considers cash classified as interest bearing deposits with other banks as a cash equivalent since they are represented by cash accounts essentially on a demand basis. TRUST ASSETS AND INCOME Property held by the Corporation in a fiduciary or agency capacity for its customers is not included in the accompanying consolidated financial statements since such items are not assets of the Corporation. Trust Department income is generally recognized on a cash basis and is not materially different than if it were reported on an accrual basis. RECENT ACCOUNTING PRONOUNCEMENTS In January 2004, the Financial Accounting Standards Board (FASB) issued Staff Position No. 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003", which allows companies to recognize or defer recognizing the effects of the Medicare Prescription Drug Improvement and Modernization Act of 2003, or Medicare Act, for annual financial statements of fiscal years ending after December 7, 2003. The Medicare Act introduced both a Medicare prescription drug 9 benefit and a federal subsidy to sponsors of retiree health care plans that provide a benefit at least "actuarially equivalent" to the Medicare benefit. These provisions of the Medicare Act affect accounting measurements. This standard does not have any material impact on the Corporation's consolidated financial condition or results of operations. In September 2004, the FASB issued Staff Position Emerging Issues Task Force ("EITF") Issue No. 03-01, "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-01, The Meaning of Other Than Temporary Impairment and Its Application to Certain Investments", which delays the effective date for the measurement and recognition guidance contained in EITF Issue No. 03-01. EITF Issue No. 03-01 provides guidance for evaluating whether an investment is other than temporarily impaired and was originally effective for other than temporarily impaired evaluations made in reporting periods beginning after June 15, 2004. The delay in the effective date for the measurement and recognition guidance contained in paragraphs 10 through 20 of EITF Issue No. 03-01 does not suspend the requirement to recognize other than temporary impairment as required by existing authoritative literature. The disclosure guidance in paragraphs 21 and 22 of EITF Issue No. 03-01 remains effective. The delay will be superseded concurrent with the final issuance of EITF Issue No. 03-01a, which is expected to provide implementation guidance on matters such as impairment evaluations for declines in value caused by increases in interest rates and/or sector spreads. In December 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 153, "Exchanges of Nonmonetary Assets," which amends APB Opinion No. 29, "Accounting for Nonmonetary Transactions". SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in Opinion No. 29 and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmenetary exchanges occurring in fiscal periods beginning after June 15, 2005. This standard did not have any material impact on the Corporation's consolidated financial condition or results of operations. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share Based Payment". This Statement is a revision of SFAS No. 123, "Accounting for Stock Based Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees", and its related guidance. SFAS No. 123 (revised 2004) established standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services. This Statement requires that the cost resulting from all share based payment transactions be recognized in the financial statements. This Statement established fair value as the measurement objective in accounting for share based payment arrangements and requires all entities to apply a fair value based measurement method in accounting for share based payment transactions with employees, except for equity instruments held by employee share ownership plans. This Statement is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. This standard did not have any material impact on the Corporation's consolidated financial condition or results of operations. 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 month period ended September 30, 2005 and 2004, was approximately $173,000 and $232,000, respectively. RECLASSIFICATIONS Certain amounts in the consolidated financial statements of prior periods have been reclassified to conform with presentation used in the 2005 consolidated financial statements. Such reclassifications have no effect on the Corporation's consolidated financial condition or net income. 10 Note 2. ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the periods ended September 30, 2005, and September 30, 2004, were as follows:
(amounts in thousands) 2005 2004 ______ ______ Balance, January 1 $3,828 $3,524 Provision charged to operations 500 950 Loans charged off (678) (195) Recoveries 27 35 ______ ______ Balance, September 30 $3,677 $4,314 ====== ======
At September 30, 2005, the total recorded investment in loans that are considered to be impaired as defined by SFAS No. 114 was $1,734,000. These impaired loans had a related allowance for loan losses of $140,000. 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, 2005, there were no significant commitments to lend additional funds with respect to non accrual and restructured loans. Non accrual loans at September 30, 2005 and December 31, 2004 were $1,734,000 and $3,405,000, respectively, all of which were considered impaired. Loans past due 90 days or more and still accruing interest amounted to $31,000 and $69,000 on September 30, 2005 and December 31, 2004, 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. 11 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, 2005, and December 31, 2004, were as follows:
(amounts in thousands) September 30, December 31, 2005 2004 ____ ____ Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $20,207 $22,363 Financial standby letters of credit 1,251 1,760 Performance standby letters of credit 268 265
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 September 30, 2005, 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. 12 Note 6. STOCKHOLDERS' EQUITY Changes in Stockholders' Equity for the period ended September 30, 2005, were are follows:
(Amounts in thousands, except common share data) Common Common Shares Stock Surplus ______ ______ _______ Balance at January 1, 2005 4,539,573 $9,079 $12,505 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) Sale of 6,211 shares treasury stock (116) Purchase of 5,000 shares of treasury stock Cash dividends - $.60 per share _________ ______ _______ Balance at September 30, 2005 4,539,573 $9,079 $12,389 ========= ====== ======= (Amounts in thousands, except common share data) Accumulated Compre- Other hensive Retained Comprehensive Income Earnings Income (Loss) ______ _______ ___________ Balance at January 1, 2005 $32,469 $3,767 Comprehensive Income: Net Income $5,256 5,256 Change in unrealized gain (loss) on investment securities available-for-sale, net of reclassification adjustment and tax effects (1,237) (1,237) ______ Total comprehensive income (loss) $4,019 ====== Sale of 6,211 shares treasury stock Purchase of 5,000 shares of treasury stock Cash dividends - $.60 per share (2,637) _______ ______ Balance at September 30, 2005 $35,088 $2,530 ======= ====== (Amounts in thousands, except common share data) Treasury Stock Total _____ _____ Balance at January 1, 2005 $(4,508) $53,312 Comprehensive Income: Net Income 5,256 Change in unrealized gain (loss) on investment securities available-for-sale, net of reclassification adjustment and tax effects (1,237) Total comprehensive income (loss) Sale of 6,211 shares treasury stock 211 95 Purchase of 5,000 shares of treasury stock (112) (112) Cash dividends - $.60 per share (2,637) _______ _______ Balance at September 30, 2005 $(4,409) $54,677 ======= =======
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, 2005, 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, 2004, filed with the Securities and Exchange Commission. 13 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, 2005, and the related consolidated statements of income for the three and nine month periods ended September 30, 2005 and 2004, and the consolidated statements of cash flows for the nine month periods ended September 30, 2005 and 2004. 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, 2004, 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 January 24, 2005, 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, 2004, 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 October 17, 2005 14 Item 2. First Keystone Corporation Management's Discussion and Analysis of Financial Condition and Results of Operation as of September 30, 2005 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 2005 of $1,804,000, an increase of $14,000 or 0.8% over the third quarter of 2004. Nine months net income for the period ended September 30, 2005, amounted to $5,256,000, a decrease of 3.3% from the $5,434,000 net income reported September 30, 2004. Net interest income tightened in both the third quarter of 2005 and for the first nine months of 2005. In addition, non interest income declined in both the third quarter and year to date in 2005 primarily due to a reduction in both trust department income and gains on sale of loans. Finally, investment securities gains were also less in 2005 than 2004. A substantial reduction in the provision for loan losses accounts primarily for the increase in third quarter 2005 net income. Also, year to date provision for loan losses of $500,000 in 2005 as compared to $950,000 in 2004 help offset the reduction in net interest income and non interest income as the corporation continued its excellent control over non interest expense. On a per share basis, net income per share was $1.20 for the nine months of 2005, as compared to $1.24 for the first nine months of 2004, while dividends increased to $.60 per share up from $.53 in 2004, or an increase of 13.2%. Year to date net income annualized amounts to a return on average common equity of 12.95% and a return on assets of 1.39%. For the nine months ended September 30, 2004, these measures were 13.80% and 1.47%, 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 2005, interest income amounted to $6,637,000, an increase of $304,000 or 4.8% from the third quarter of 2004. Interest expense amounted to $2,981,000 in the third quarter of 2005, an increase of $464,000 or 18.4% over the third quarter of 2004. Accordingly, net interest income amounted to $3,656,000 in the third quarter of 2005, a decrease of $160,000, or 4.2% from the third quarter of 2004. Year to date for the nine months ended September 30, 2005, total interest income increased $729,000, or 3.9% from the first nine months of 2004. Total interest expense increased $1,005,000, or 13.6% for the first nine months of 2005 over 2004. This resulted in net interest income decreasing $276,000 to $11,176,000 as of September 30, 2005. Our net interest margin for the quarter ended September 30, 2005, was 3.46% compared to 3.64% for the quarter ended September 30, 2004. For the nine months ended September 30, 2005, our net interest margin was 3.49% compared to 3.61% for the first nine months of 2004. 15 PROVISION FOR LOAN LOSSES The provision for loan losses for the quarter ended September 30, 2005, was $150,000 compared to $675,000 for the third quarter of 2004. Year to date, the provision for loan losses amounts to $500,000 in 2005 as compared to the $950,000 provision for the period ended September 30, 2004. Net charge offs amounted to $651,000 for the nine months ended September 30, 2005, as compared to $160,000 for the first nine months of 2004. The allowance for loan losses as a percentage of loans, net of unearned interest was 1.58% as of September 30, 2005, and 1.64% as of December 31, 2004. NON-INTEREST INCOME Total non interest or other income was $915,000 for the quarter ended September 30, 2005, as compared to $1,313,000 for the quarter ended September 30, 2004. Excluding investment security gains and losses, non interest income was $826,000 for the third quarter of 2005, as compared to $902,000 in the third quarter of 2004, a decrease of 8.4%. For the nine months ended September 30, 2005, total non interest income was $2,634,000, as compared to $3,205,000, or a 17.8% decrease from the first nine months of 2004. In both the third quarter of 2005 and for the nine months ended September 30, 2005, the decrease in non interest income was primarily the result of a decrease in trust department revenue, reduced gains on sale of loans, and reduced gains on investment securities. NON-INTEREST EXPENSES Total non interest, or other expenses, was $2,245,000 for the quarter ended September 30, 2005, as compared to $2,266,000 for the quarter ended September 30, 2004, a decrease of $21,000, or 0.9%. For the nine months ended September 30, 2005, total non interest expense was $6,965,000, an increase of $76,000, or 1.1% over the first nine months of 2004. Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non interest expenses. Salaries and benefits amount to 52.7% of total non interest expense for the nine months ended September 30, 2005, as compared to 52.4% for the first nine months of 2004. Salaries and benefits amounted to $3,669,000 for the nine months ended September 30, 2005, an increase of $59,000, or 1.6% over the first nine months of 2004. Net occupancy expense, along with furniture and equipment expense and professional services expense all decreased for the nine months ended September 30, 2005, from 2004. Other non interest expense and state shares tax expense increased moderately in 2005. Our overall non interest expense continues at less than 2% of average assets on an annualized basis. This places us among the leaders of our peer financial institutions at controlling non interest expense. INCOME TAXES Effective tax planning has helped produce favorable net income. The effective total income tax rate was 17.1% for the third quarter of 2005 as compared to 18.2% for the third quarter of 2004. For the nine months ended September 30, 2005, our tax liability amounted to $1,089,000 for an effective tax rate of 17.2% as compared to an effective tax rate of 20.3% for the first nine months of 2004. The decrease in our effective tax rate was due primarily to the tax savings derived from our investment in bank owned life insurance and additional investment in municipal securities. 16 ANALYSIS OF FINANCIAL CONDITION ASSETS Total assets increased to $526,722,000 as of September 30, 2005, an increase of $29,107,000, or 5.8% over year end 2004. Total deposits increased to $375,613,000 as of September 30, 2005, an increase of $17,657,000, or 4.9% over year end 2004. The Corporation used the increase in total deposits to fund primarily an increase in earnings assets, in particular, investment securities. Borrowings decreased $4,397,000 from December 31, 2004. Short term borrowings decreased to $12,490,000 as of September 30, 2005, down $3,022,000 from year end 2004. Long term borrowings decreased to $65,535,000 as of September 30, 2005, down $1,375,000 from year end 2004. EARNING ASSETS Our primary earning asset, loans, net of unearned income decreased to $232,084,000 as of September 30, 2005, down $1,716,000, or 0.7% from year end 2004. The loan portfolio is well diversified and the decreases in the portfolio has been primarily from reduced originations of real estate loans. In addition to loans, another primary earning asset is our investment portfolio which has increased in size from December 31, 2004, to September 30, 2005. Held to maturity securities amounted to $3,257,000 as of September 30, 2005, a decrease of $104,000, or 3.1% from year end 2004. However, available for sale securities increased to $253,532,000 as of September 30, 2005, an increase of $17,840,000, or 7.6% since year end 2004. Interest bearing deposits with banks increased to $11,774,000 on September 30, 2005, as compared to $36,000 as of December 31, 2004. 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. The company 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. 17 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, 2005, total non performing assets were $1,980,000 as compared to $3,480,000 on December 31, 2004. Non performing assets to total loans and foreclosed assets was .85% as of September 30, 2005, and 1.49% as of December 31, 2004. Interest income received on non performing loans as of September 30, 2005, was $2,000 compared to $113,000 as of December 31, 2004. Interest income, which would have been recorded on these loans under the original terms as of September 30, 2005, and December 31, 2004, was $101,000 and $253,000, respectively. As of September 30, 2005 and December 31, 2004, 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 $17,657,000 as non interest bearing deposits increased by $6,770,000 and interest bearing deposits increased by $10,887,000 as of September 30, 2005, from year end 2004. Total short term and long term borrowings decreased by $4,397,000 from year end 2004. CAPITAL STRENGTH Normal increases in capital are generated by net income, less cash dividends paid out. Also, accumulated other comprehensive income derived from unrealized gains on investment securities available for sale increased shareholders' equity, or capital net of taxes, by $2,530,000 as of September 30, 2005, and $3,767,000 as of December 31, 2004. Our stock repurchase plan repurchased 147,053 shares as treasury stock as of September 30, 2005 and 148,264 shares as treasury stock as of December 31, 2004. This had an effect of our reducing our total stockholders' equity by $4,409,000 on September 30, 2005, and $4,508,000 as of December 31, 2004. Total stockholders' equity was $54,677,000 as of September 30, 2005, and $53,312,000 as of December 31, 2004. Leverage ratio and risk based capital ratios remain very strong. As of September 30, 2005, our leverage ratio was 9.98% compared to 9.61% as of December 31, 2004. In addition, Tier I risk based capital and total risk based capital ratio as of September 30, 2005, were 17.40% and 18.81%, respectively. The same ratios as of December 31, 2004, were 16.23% and 17.68%, 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. 18 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, 2004. The composition of rate sensitive assets and rate sensitive liabilities as of September 30, 2005 is very similar to December 31, 2004. 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 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. 19 PART II - OTHER INFORMATION Item 1. Legal Proceedings None. 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, 2005 ---- ---- ---- 100,000 August 1 - August 31, 2005 3,000 22.65 3,000 97,000 Sept. 1 - Sept. 30, 2005 2,000 22.10 2,000 95,000 Total 5,000 22.38 5,000 95,000
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 19, 2005, at 10:00 a.m.
Votes Votes Directors Elected Votes For Against Withheld _________________ _________ ______ _______ Don E. Bower 3,749,367 37,108 0 John L. Coates 3,672,725 113,750 0 Dudley P. Cooley 3,749,535 36,940 0 Broker Directors Elected Abstentions Non-Votes _________________ ___________ _________ Don E. Bower 0 0 John L. Coates 0 0 Dudley P. Cooley 0 0
20 Directors Continuing: ____________________ Budd L. Beyer, term expires in 2006 Frederick E. Crispin, Jr., term expires in 2006 Jerome F. Fabian, term expires in 2006 Robert J. Wise, term expires in 2006 John E. Arndt, term expires in 2007 J. Gerald Bazewicz, term expires in 2007 Robert E. Bull, term expires in 2007 Matters Voted Upon: __________________ Selection of J. H. Williams & Co. LLP, as auditors for the Corporation. Votes For - 3,753,249 Votes Against - 3,064 Votes Withheld - 0 Abstentions - 30,162 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. 21 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, 2001). 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, 2001). 10.1 Supplemental Employee Retirement Plan 10.2 Management Incentive Compensation Plan (Incorporated by reference to Exhibit 10 to Registrant's Report on Form 10Q for the quarter ended September 30, 2001). 10.3 Profit Sharing Plan (Incorporated by reference to Exhibit 10 to Registrant's Report on Form 10Q 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 10Q for the quarter ended September 30, 2001). 14 Code of Ethics (Incorporated by reference to Exhibit 14 to the Registrant's Annual Report on 10K for the year ended December 31, 2003). 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. (b) During the quarter ended September 30, 2004, the registrant filed the following reports on Form 8-K: Date of Report Item Description ______________ ____ ___________ July 29, 2005 5 On July 29, 2005, the Registrant issued a press release announcing its earnings for the quarter ended June 30, 2005. July 29, 2005 5 On July 29, 2005, the Registrant issued a press release announcing a newly approved stock repurchase plan. 22 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 8, 2005 /s/ J. Gerald Bazewicz J. Gerald Bazewicz President and Chief Executive Officer (Principal Executive Officer) November 8, 2005 /s/ David R. Saracino David R. Saracino Treasurer/Chief Financial Officer (Principal Accounting Officer) 23 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, 2001) 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, 2001) 9 None. 10.1 Supplemental Employee Retirement Plan 10.2 Management Incentive Compensation Plan (Incorporated by reference to Exhibit 10 to Registrant's Report on Form 10Q for the quarter ended September 30, 2001) 10.3 Profit Sharing Plan (Incorporated by reference to Exhibit 10 to Registrant's Report on Form 10Q 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 10Q for the quarter ended September 30, 2001) 14 Code of Ethics (Incorporated by reference to Exhibit 14 to the Registrant's Annual Report on 10K for the year ended December 31, 2003). 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