UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-K
[x] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Or
[ ] TRANSITION REPORT UNDER 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 Number)
111 West Front Street, 18603
Berwick, Pennsylvania (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (570) 752-3671
__________________________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, par value $2.00 per share
__________________________________
Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the past 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 if there is no disclosure of delinquent
filers in response to Item 405 of Regulation S-K contained in this
form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10K
or any amendment to this Form 10K. [X]
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 aggregate market value of the voting stock held by non
affiliates on the Registrant based on the closing price as of March
8, 2005, was approximately $79,345,260.
The number of shares outstanding of the issuer's Common Stock, as
of March 8, 2005, was 4,392,846 shares of Common Stock, par value
$2.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 2005 definitive Proxy Statement
are incorporated by reference in Part III of this Report.
FIRST KEYSTONE CORPORATION
FORM 10-K
Table of Contents
Part I Page
______ ____
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of
Security Holders 9
Part II
_______
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters 10
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk 27
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 61
Item 9A. Controls and Procedures 61
Item 9B. Other Information 61
Part III
________
Item 10. Directors and Executive Officers of
the Registrant 62
Item 11. Executive Compensation 62
Item 12. Security Ownership of Certain
Beneficial Owners and Management 62
Item 13. Certain Relationships and Related
Transactions 62
Item 14. Principal Accountant Fees and Services 62
Part IV
_______
Item 15. Exhibits, Financial Statement Schedules 63
Signatures 65
Exhibit 21 68
Exhibit 23 69
Exhibit 31.1 70
Exhibit 31.2 71
Exhibit 32.1 72
Exhibit 32.2 73
i
FIRST KEYSTONE CORPORATION
FORM 10-K
PART I
Forward Looking Statements
__________________________
The management of First Keystone Corporation (Corporation),
has made forward looking statements in this annual report on Form
10 K. These forward looking statements may be subject to risks and
uncertainties. Forward looking statements include the information
concerning possible or assumed future results of operations of the
Corporation and its subsidiary, The First National Bank of Berwick
(Bank). When words such as "believes," "expects," "anticipates" or
similar expressions occur in this annual report, management is
making forward looking statements.
Shareholders should note that many factors, some of which are
discussed elsewhere in this annual report, could affect the future
financial results of the Corporation and its subsidiary, both
individually and collectively, and could cause those results to
differ materially from those expressed in the forward looking
statements contained in this annual report on Form 10 K. These
factors include the following:
* operating, legal and regulatory risks;
* economic, political and competitive forces affecting our
banking, securities, asset management and credit services
businesses; and
* the risk that our analyses of these risks and forces could
be incorrect and or that the strategies developed to
address them could be unsuccessful.
The Corporation undertakes no obligation to publicly revise or
update these forward looking statements to reflect events or
circumstances that arise after the date of this report. Readers
should carefully review the risk factors described in other
documents that are filed periodically with the Securities and
Exchange Commission (SEC).
ITEM 1. BUSINESS
First Keystone Corporation is a Pennsylvania business
corporation, and a bank holding company, registered with and
supervised by the Board of Governors of the Federal Reserve System.
The Corporation was incorporated on July 6, 1983, and commenced
operations on July 2, 1984, upon consummation of the acquisition of
all of the outstanding stock of The First National Bank of Berwick.
The Corporation has one wholly owned subsidiary, the Bank, which
has a commercial banking operation and trust department as its
major lines of business. Since commencing operations, the
Corporation's business has consisted primarily of managing and
supervising the Bank, and its principal source of income has been
dividends paid by the Bank. Greater than 98% of the Corporation's
revenue and profit came from the commercial banking department for
the years ended December 31, 2004, 2003, and 2002, and was the only
reportable segment. At December 31, 2004, the Corporation had
total consolidated assets, deposits and stockholders' equity of
approximately $497.6 million, $358.0 million and $53.3 million,
respectively.
The Bank was organized in 1864. The Bank is a national
banking association that is a member of the Federal Reserve System.
Its deposits are insured by the Federal Deposit Insurance
Corporation (FDIC) to the maximum extent of the law regulated by
The Office of the Comptroller of the Currency (OCC). The Bank, has
ten branch locations (five branches within Columbia County, four
branches within Luzerne County, and one branch in Montour County,
Pennsylvania), and is a full service commercial bank providing a
wide range of services to individuals and small to medium sized
businesses in its Northeastern and Central Pennsylvania market
area. The Bank's commercial banking activities include accepting
time, demand, and savings deposits and making secured and unsecured
commercial, real estate and consumer loans. Additionally, the Bank
also provides personal and corporate trust and agency services to
individuals, corporations, and others, including trust investment
accounts, investment advisory services, mutual funds, estate
planning, and management of pension and profit sharing plans.
1
Supervision and Regulation
__________________________
The Corporation is subject to the jurisdiction of the SEC and
of state securities laws for matters relating to the offering and
sale of its securities. The Corporation is currently subject to
the SEC's rules and regulations relating to company's whose shares
are registered under Section 12 of the Securities Exchange Act of
1934, as amended.
The Corporation is also subject to the provisions of the Bank
Holding Company Act of 1956, as amended , and to supervision by the
Federal Reserve Board. The Bank Holding Company Act requires the
Corporation to secure the prior approval of the Federal Reserve
Board before it owns or controls, directly or indirectly, more than
5% of the voting shares of substantially all of the assets of any
institution, including another bank.
The Bank Holding Company Act also prohibits acquisition of
control of a bank holding company, such as the Corporation, without
prior notice to the Federal Reserve Board. Control is defined for
this purpose as the power, directly or indirectly, to direct the
management or policies of a bank holding company or to vote 25% (or
10%, if no other person or persons acting on concert, holds a
greater percentage of the Common Stock) or more of the
Corporation's Common Stock.
The Corporation is required to file an annual report with the
Federal Reserve Board and any additional information that the
Federal Reserve Board may require pursuant to the Bank Holding
Company Act. The Federal Reserve Board may also make examinations
of the Corporation and any or all of its subsidiaries.
The Bank is subject to federal and state statutes applicable
to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System and to banks whose deposits
are insured by the FDIC. Bank operations are also subject to
regulations of the OCC, the Federal Reserve Board and the FDIC.
The primary supervisory authority of the Bank is the OCC,
which regulates and examines the Bank. The OCC has the authority
under the Financial Institutions Supervisory Act to prevent a
national bank from engaging in an unsafe or unsound practice in
conducting its business.
Federal and state banking laws and regulations govern, among
other things, the scope of a bank's business, the investments a
bank may make, the reserves against deposits a bank must maintain,
loans a bank makes and collateral it takes, and the activities of a
bank with respect to mergers and consolidations and the
establishment of branches.
As a subsidiary of a bank holding company, the Bank is subject
to certain restrictions imposed by the Federal Reserve Act on any
extensions of credit to the bank holding company or its
subsidiaries, on investments in the stock or other securities of
the bank holding company or its subsidiaries and on taking such
stock or securities as collateral for loans. The Federal Reserve
Act and Federal Reserve Board regulations also place certain
limitations and reporting requirements on extensions of credit by a
bank to principal shareholders of its parent holding company, among
others, and to related interests of such principal shareholders.
In addition, such legislation and regulations may affect the terms
upon which any person becoming a principal shareholder of a holding
company may obtain credit from banks with which the subsidiary bank
maintains a correspondent relationship.
Under the Federal Deposit Insurance Act , the OCC possesses
the power to prohibit institutions regulated by it (such as the
Bank) from engaging in any activity that would be an unsafe or
unsound banking practice or would otherwise be in violation of the
law.
Permitted Non-Banking Activities
________________________________
The Federal Reserve Board permits bank holding companies to
engage in non banking activities so closely related to banking,
managing or controlling banks as to be a proper incident thereto.
The Corporation does not at this time engage in any of these non
banking activities, nor does the Corporation have any current plans
to engage in any other permissible activities in the foreseeable
future.
2
Legislation and Regulatory Changes
__________________________________
From time to time, various types of federal and state
legislation have been proposed that could result in additional
regulations of, and restrictions on, the business of the Bank. It
cannot be predicted whether any such legislation will be adopted or
how such legislation would affect the business of the Bank. As a
consequence of the extensive regulation of commercial banking
activities in the United States, the Bank's business is
particularly susceptible to being affected by federal legislation
and regulations that may increase the costs of doing business.
From time to time, legislation is enacted which has the effect
of increasing the cost of doing business, limiting or expanding
permissible activities or affecting the competitive balance between
banks and other financial institutions. No prediction can be made
as to the likelihood of any major changes or the impact such
changes might have on the Corporation and the Bank. Certain
changes of potential significance to the Corporation which have
been enacted recently and others which are currently under
consideration by Congress or various regulatory agencies are
discussed below.
Federal Deposit Insurance Corporation Improvement Act of 1991
_____________________________________________________________
The FDICIA established five different levels of capitalization
of financial institutions, with "prompt corrective actions" and
significant operational restrictions imposed of institutions that
are capital deficient under the categories. The five categories
are:
* well capitalized
* adequately capitalized
* undercapitalized
* significantly undercapitalized, and
* critically undercapitalized.
To be considered well capitalized, an institution must have a
total risk based capital ratio of at least 10%, a Tier 1 risk based
capital ratio of at least 6%, a leverage capital ratio of 5%, and
must not be subject to any order or directive requiring the
institution to improve its capital level. An institution falls
within the adequately capitalized category if it has a total risk
based capital ratio of at least 8%, a Tier 1 risk based capital
ratio of at least 4%, and a leverage capital ratio of at least 4%.
Institutions with lower capital levels are deemed to be
undercapitalized, significantly undercapitalized or critically
undercapitalized, depending on their actual capital levels. In
addition, the appropriate federal regulatory agency may downgrade
an institution to the next lower capital category upon a
determination that the institution is in an unsafe or unsound
condition, or is engaged in an unsafe or unsound practice.
Institutions are required under FDICIA to closely monitor their
capital levels and to notify their appropriate regulatory agency of
any basis for a change in capital category. On December 31, 2004,
the Corporation and the Bank exceeded the minimum capital levels of
the well capitalized category.
Regulatory oversight of an institution becomes more stringent
with each lower capital category, with certain "prompt corrective
actions" imposed depending on the level of capital deficiency.
Other Provisions of FDICIA
__________________________
Each depository institution must submit audited financial
statements to its primary regulator and the FDIC, which reports are
made publicly available. In addition, the audit committee of each
depository institution must consist of outside directors and the
audit committee at "large institutions" (as defined by FDIC
regulation) must include members with banking or financial
management expertise. The audit committee at "large institutions"
must also have access to independent outside counsel. In addition,
an institution must notify the FDIC and the institution's primary
regulator of any change in the institutions independent auditor,
and annual management letters must be provided to the FDIC and the
depository institution's primary regulator. The regulations define
a "large institution" as one with over $500 million in assets,
which does not include the Bank. Also, under the rule, an
institution's independent auditor must examine the institution's
internal controls over financial reporting and perform agreed upon
procedures to test compliance with laws and regulations concerning
safety and soundness.
3
Under FDICIA, each federal banking agency must prescribe
certain safety and soundness standards for depository institutions
and their holding companies. Three types of standards must be
prescribed:
* asset quality and earnings
* operational and managerial, and
* compensation
Such standards would include a ratio of classified assets to
capital, minimum earnings, and, to the extent feasible, a minimum
ratio of market value to book value for publicly traded securities
of such institutions and holding companies. Operational and
managerial standards must relate to:
* internal controls, information systems and
internal audit systems
* loan documentation
* credit underwriting
* interest rate exposure
* asset growth, and
* compensation, fees and benefits
FDICIA also sets forth Truth in Savings disclosure and
advertising requirements applicable to all depository institutions.
Real Estate Lending Standards. Pursuant to the FDICIA, the
OCC and other federal banking agencies adopted real estate lending
guidelines which would set loan to value ratios for different types
of real estate loans. A LTV ratio is generally defined as the
total loan amount divided by the appraised value of the property at
the time the loan is originated. If the institution does not hold
a first lien position, the total loan amount would be combined with
the amount of all senior liens when calculating the ratio. In
addition to establishing the LTV ratios, the guidelines require all
real estate loans to be based upon proper loan documentation and a
recent appraisal of the property.
Regulatory Capital Requirements
_______________________________
The federal banking regulators have adopted certain risk based
capital guidelines to assist in the assessment of the capital
adequacy of a banking organization's operations for both
transactions reported on the balance sheet as assets and
transactions, such as letters of credit, and recourse agreements,
which are recorded as off balance sheet items. Under these
guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with
low credit risk, such as certain U.S. Treasury securities, to 100%
for assets with relatively high credit risk, such as business
loans.
4
The following table presents the Corporation's capital ratios
at December 31, 2004:
(In Thousands)
Tier I Capital $ 48,212
Tier II Capital 4,290
Total Capital 52,502
Adjusted Total Average Assets 501,677
Total Adjusted Risk-Weighted Assets297,048
Tier I Risk-Based Capital Ratio16.23%
Required Tier I Risk-Based Capital Ratio 4.00%
Excess Tier I Risk-Based Capital Ratio 12.23%
Total Risk-Based Capital Ratio17.68%
Required Total Risk-Based Capital Ratio 8.00%
Excess Total Risk-Based Capital Ratio 9.68%
Tier I Leverage Ratio9.61%
Required Tier I Leverage Ratio 4.00%
Excess Tier I Leverage Ratio 5.61%
_______________________
Includes off balance sheet items at credit equivalent values less
intangible assets.
Tier I Risk Based Capital Ratio is defined as the ratio of Tier I
Capital to Total Adjusted Risk Weighted Assets.
Total Risk Based Capital Ratio is defined as the ratio of Tier I
and Tier II Capital to Total Adjusted Risk Weighted Assets.
Tier I Leverage Ratio is defined as the ratio of Tier I Capital to
Adjusted Total Average Assets.
The Corporation's ability to maintain the required levels of
capital is substantially dependent upon the success of
Corporation's capital and business plans; the impact of future
economic events on the Corporation's loan customers; and the
Corporation's ability to manage its interest rate risk and
investment portfolio and control its growth and other operating
expenses. See also, the information under the caption "Capital
Strength" appearing on page 23 of this 2004 Annual Report on Form
10K.
Effect of Government Monetary Policies
______________________________________
The earnings of the Corporation are and will be affected by
domestic economic conditions and the monetary and fiscal policies
of the United States government and its agencies.
The Federal Reserve Board have had, and will likely continue
to have, an important impact on the operating results of commercial
banks through its power to implement national monetary policy in
order to, among other things, curb inflation or combat a recession.
The Federal Reserve Board has a major effect upon the levels of
bank loans, investments and deposits through its open market
operations in United States government securities and through its
regulations of, among other things, the discount rate on borrowings
of member banks and the reserve requirements against member bank
deposits. It is not possible to predict the nature and impact of
future changes in monetary and fiscal policies.
Effects of Inflation
____________________
Inflation has some impact on the Bank's operating costs.
Unlike industrial companies, however, substantially all of the
Bank's assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on the Bank's
performance than the general levels of inflation. Over short
periods of time, interest rates may not necessarily move in the
same direction or in the same magnitude as prices of goods and
services.
5
Environmental Regulation
________________________
There are several federal and state statutes that regulate the
obligations and liabilities of financial institutions pertaining to
environmental issues. In addition to the potential for attachment
of liability resulting from its own actions, a bank may be held
liable, under certain circumstances, for the actions of its
borrowers, or third parties, when such actions result in
environmental problems on properties that collateralize loans held
by the bank. Further, the liability has the potential to far
exceed the original amount of the loan issued by the Bank.
Currently, neither the Corporation nor the Bank is a party to any
pending legal proceeding pursuant to any environmental statute, nor
are the Corporation and the Bank aware of any circumstances that
may give rise to liability under any such statute.
Interest Rate Risk
__________________
Federal banking agency regulations specify that the Bank's
capital adequacy include an assessment of the Bank's interest rate
risk exposure. The standards for measuring the adequacy and
effectiveness of a banking organization's Interest Rate Risk (IRR)
management includes a measurement of Board of Directors and senior
management oversight, and a determination of whether a banking
organization's procedures for comprehensive risk management are
appropriate to the circumstances of the specific banking
organization. The First National Bank of Berwick has internal IRR
models that are used to measure and monitor IRR. Additionally, the
regulatory agencies have been assessing IRR on an informal basis
for several years. For these reasons, the Corporation does not
expect the addition of IRR evaluation to the agencies' capital
guidelines to result in significant changes in capital requirements
for the Bank.
The Gramm-Leach-Bliley Act of 2000
__________________________________
On November 12, 2000, President Clinton signed into law the
Gramm Leach Bliley Act of 2000, which is also known as the
Financial Services Modernization Act. The act repeals some
Depression era banking laws and will permit banks, insurance
companies and securities firms to engage in each others' businesses
after complying with certain conditions and regulations. The act
grants to community banks the power to enter new financial markets
as a matter of right that larger institutions have managed to do on
an ad hoc basis. At this time, our company has no plans to pursue
these additional possibilities.
Our Corporation does not believe that the Financial Services
Modernization Act will have an immediate positive or negative
material effect on our operations. However, the act may have the
result of increasing the amount of competition that our Corporation
faces from larger financial service companies, many of whom have
substantially more financial resources than our Corporation, which
may now offer banking services in addition to insurance and
brokerage services.
The Sarbanes-Oxley Act
______________________
On July 30, 2002, President Bush signed into law the Sarbanes
Oxley Act of 2002. The Act was in response to public concerns
regarding corporate accountability in connection with recent high
visibility accounting scandals. The stated goals of the Sarbanes
Oxley Act are:
* to increase corporate responsibility;
* to provide for enhanced penalties for
accounting and auditing improprieties
at publicly traded companies; and
* to protect investors by improving the accuracy
and reliability of corporate disclosures pursuant
to the securities laws.
The Sarbanes Oxley Act generally applies to all companies,
both U.S. and non U.S., that file periodic reports with the SEC
under the Securities Exchange Act of 1934. The legislation
includes provisions, among other things:
* governing the services that can be provided by a
public company's independent auditors and the
procedures for approving such services;
* requiring the chief executive officer and chief
financial officer to certify certain matters
relating to the company's periodic filings under
the Exchange Act;
* requiring expedited filings of reports by insiders
of their securities transactions and containing
other provisions relating to insider conflicts
of interest;
6
* increasing disclosure requirements relating to
critical financial accounting policies and
their application;
* increasing penalties for securities law
violations; and
* creating a new public accounting oversight board,
a regulatory body subject to SEC jurisdiction
with broad powers to set auditing, quality
control and ethics standards for accounting firms.
The American Jobs Creation Act of 2004
______________________________________
In 2004, the American Jobs Creation Act was enacted as the
first major corporation tax act in years. The act addresses a
number of areas of corporate taxation including executive deferred
compensation restrictions. The impact of the act on the
Corporation is unknown at this time, but management is monitoring
its developments.
History and Business - Bank
___________________________
The Bank's legal headquarters are located at 111 West Front
Street, Berwick, Pennsylvania.
As of December 31, 2004, the Bank had total assets of
$497,615,000, total shareholders' equity of $53,312,000 and total
deposits and other liabilities of $444,303,000.
The Bank engages in a full service commercial banking
business, including accepting time and demand deposits, and making
secured and unsecured commercial and consumer loans. The Bank's
business is not seasonal in nature. Its deposits are insured by
the FDIC to the extent provided by law. The Bank has no foreign
loans or highly leveraged transaction loans, as defined by the
Federal Reserve Board. Substantially all of the loans in the
Bank's portfolio have been originated by the Bank. Policies
adopted by the Board of Directors are the basis by which the Bank
conducts its lending activities.
At December 31, 2004, the Bank had 117 full time employees and
32 part time employees. In the opinion of management, the Bank
enjoys a satisfactory relationship with its employees. The Bank is
not a party to any collective bargaining agreement.
Competition - Bank
__________________
The Bank competes actively with other area commercial banks
and savings and loan associations, many of which are larger than
the Bank, as well as with major regional banking and financial
institutions. The Bank's major competitors in Columbia and Luzerne
counties are:
* First Columbia Bank & Trust Co. of Bloomsburg
* PNC Bank, N.A.
* Columbia County Farmers National Bank of Bloomsburg
* M & T Bank
* FNB Bank, NA
* First Federal Bank
In the county of Montour, credit unions are our major
competitors along with M & T Bank, FNB Bank, NA and Sovereign Bank.
The Bank is generally competitive with all competing financial
institutions in its service area with respect to interest rates
paid on time and savings deposits, service charges on deposit
accounts and interest rates charged on loans.
Concentration
_____________
The Corporation and the Bank are not dependent for deposits
nor exposed by loan concentrations to a single customer or to a
small group of customers the loss of any one or more of whom would
have a materially adverse effect on the financial condition of the
Corporation or the Bank.
Available Information
_____________________
The Corporation's common stock is registered under Section
12(b) of the Securities Exchange Act of 1934. The Corporation is
subject to the informational requirements of the Exchange Act, and,
accordingly, files reports, proxy statements and other information
with the Securities and Exchange Commission. The reports, proxy
statements and other information filed with the SEC are available
for inspection and copying at the SEC's Public Reference Room at
Judiciary Plaza, 450 Fifth Street, N.W.,
7
Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The Corporation is an electronic filer with the SEC.
The SEC maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers
that file electronically with the SEC. The SEC's internet site
address is www.sec.gov.
A copy of the Corporation's Annual Report on Form 10K may be
obtained without charge from our website at
www.firstkeystonecorporation.com or via email at fnb@fnbbwk.com.
Information may also be obtained via written request to Investor
Relations at First Keystone Corporation, Attention: J. Gerald
Bazewicz, 111 West Front Street, Berwick, Pennsylvania 18603.
ITEM 2. DESCRIPTION OF PROPERTIES
The Corporation owns no property other than through the Bank.
These are:
Type of Square
Location Ownership Footage Use
________ _________ _______ ___
Columbia County, PA
111 W. Front Street,
Berwick Owned 12,500 Administrative
office, banking and
trust services.
117-119 W. Front Street,
Berwick Owned .1413 No building,
Acres held for expansion.
105 Market Street Leased 4,000 Computer/
(second floor) Annual accounting
Rental department.
$36,780
2nd & Market Streets, Owned 1.45 No buildings,
Berwick Acres Present use,
parking.
701 Freas Avenue,
Berwick Owned 3,744 Banking services.
Giant Market Leased 500 Banking services.
50 Briar Creek Plaza Annual
Rental
$33,419
2301 Columbia Owned 7,000 Banking services.
Boulevard, Bloomsburg
Third & Race Streets, Owned 2,500 Banking services.
Mifflinville
8
Type of Square
Location Ownership Footage Use
________ _________ _______ ___
Luzerne County, PA
Salem Township Owned 3,700 Banking services.
400 Fowler Avenue,
Berwick
West Third Street, Leased 2,300 Banking services.
Nescopeck Annual
Rental
$15,600
1540 Sans Souci Owned 4,000 Banking services.
Highway, Wilkes-Barre
179 South Wyoming Leased 3,000 Banking services.
Avenue, Kingston Annual
Rental
$51,000
Montour County, PA
1519 Bloom Road Owned 6,480 Banking services.
Danville
It is Management's opinion that the facilities currently
utilized are suitable and adequate for the Corporation's current
and immediate future purposes.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and/or the Bank are defendants in various
legal proceedings arising in the ordinary course of their business.
However, in the opinion of management of the Corporation and the
Bank, there are no proceedings pending to which the Corporation and
the Bank is a party or to which their property is subject, which,
if determined adversely to the Corporation and the Bank, would be
material in relation to the Corporation's and Bank's individual
profits or financial condition, nor are there any proceedings
pending other than ordinary routine litigation incident to the
business of the Corporation and the Bank. In addition, no material
proceedings are pending or are known to be threatened or
contemplated against the Corporation and the Bank by government
authorities or others.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the
fiscal year covered by this report to a vote of security holders
through the solicitation of proxies or otherwise.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
SHAREHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
The Corporation's Common Stock is traded in the over the
counter market on the OTC Bulletin Board under the symbol "FKYS".
The following table sets forth:
* The quarterly high and low prices for a share of the
Corporation's Common Stock during the periods indicated
as reported to the management of the Corporation and
* Quarterly dividends on a share of the Common Stock with
respect to each quarter since January 1, 2003.
The following table reflects the high and low closing sale
prices reported for First Keystone Corporation's common stock, and
the cash dividends declared on First Keystone Corporation's common
stock, for the periods indicated, after giving retroactive effect
to a 3 for 2 stock split in the form of a 50% stock dividend paid
on May 11, 2004.
MARKET VALUE OF COMMON STOCK
Per Share
High Low Dividend
____ ___ ________
2004:
First quarter $25.50 $24.00 $.17
Second quarter $25.50 $24.25 $.18
Third quarter $24.50 $22.75 $.18
Fourth quarter $23.25 $21.90 $.20
2003:
First quarter $20.77 $17.17 $.16
Second quarter $21.67 $19.50 $.16
Third quarter $22.67 $21.33 $.16
Fourth quarter $24.33 $22.50 $.17
As of December 31, 2004, the Corporation had approximately 628
shareholders of record.
The Corporation has paid dividends since commencement of
business in 1984. It is the present intention of the Corporation's
Board of Directors to continue the dividend payment policy;
however, further dividends must necessarily depend upon earnings,
financial condition, appropriate legal restrictions and other
factors relevant at the time the Board of Directors of the
Corporation considers dividend policy. Cash available for dividend
distributions to shareholders of the Corporation must initially
come from dividends paid by the Bank to the Corporation.
Therefore, the restrictions on the Bank's dividend payments are
directly applicable to the Corporation.
Transfer Agent:
The First National Bank of Berwick (570) 752-3671
111 West Front Street
Berwick, PA 18603
10
The following brokerage firms make a market in First Keystone
Corporation common stock:
Legg Mason Wood Walker Inc. (800) 888-6673
Janney Montgomery Scott LLC (800) 526-6397
Ryan, Beck and Company (800) 223-6807
Boenning & Scattergood, Inc. (800) 842-8928
Ferris Baker Watts, Inc. (800) 638-7411
Dividend Restrictions on the Bank
_________________________________
The OCC rules govern the payment of dividends by national
banks. Consequently, the Bank, which is subject to these rules,
may not pay dividends from capital (unimpaired common and preferred
stock outstanding) but only from retained earnings after deducting
losses and bad debts therefrom. To the extent that (1) the Bank
has capital surplus in an amount in excess of common capital and
(2) the Bank can prove that such surplus resulted from prior period
earnings, the Bank, upon approval of the OCC, may transfer earned
surplus to retained earnings and thereby increase its dividend
capacity.
The Bank may not pay any dividends on its capital stock during
a period in which it may be in default in the payment of its
assessment for a deposit insurance premium due to the FDIC, nor may
it pay dividends on Common Stock until any cumulative dividends on
the Bank's preferred stock (if any) have been paid in full. The
Bank has never been in default in the payments of its assessments
to the FDIC; and the Bank has no outstanding preferred stock. In
addition, under the Federal Deposit Insurance Act (912 U.S.C.
Section 1818), dividends cannot be declared and paid if the OCC
obtains a cease and desist order because, in the opinion of the
OCC, such payment would constitute an unsafe and unsound banking
practice. As of December 31, 2004, there was $3,041,000 in
unrestricted retained earnings and net income available at the Bank
that could be paid as a dividend to the Corporation under the
current OCC regulations.
Dividend Restrictions on the Corporation
________________________________________
Under the Pennsylvania Business Corporation Law of 1988, as
amended, the Corporation may not pay a dividend if, after giving
effect thereto, either:
* The Corporation would be unable to pay its debts as they
become due in the usual course of business or;
* The Corporation's total assets would be less than its total
liabilities.
The determination of total assets and liabilities may be based
upon:
* Financial statements prepared on the basis of generally
accepted accounting principles,
* Financial statements that are prepared on the basis of
other accounting practices and principles that are
reasonable under the circumstances, or;
* A fair valuation or other method that is reasonable under
the circumstances.
11
ITEM 6. SELECTED FINANCIAL DATA
(Amounts in thousands, except per share)
Year Ended December 31,
_______________________________
2003 2002 2001
____ ____ ____
SELECTED FINANCIAL DATA:
Total Assets $497,615 $481,840 $439,526
Total Investment securities 239,053 231,272 215,755
Net loans 229,972 225,549 198,343
Total Deposits 357,956 343,020 330,745
Stockholders' equity 53,312 51,351 49,096
SELECTED OPERATING DATA:
Interest income $ 25,036 $ 25,063 $ 25,862
Interest expense 10,006 10,200 11,342
________ ________ ________
Net interest income $ 15,030 $ 14,863 $ 14,520
Provision for loan losses 1,750 500 550
________ ________ ________
Net interest income after
provision for loan and
lease losses $ 13,280 $ 14,363 $ 13,970
Other income 4,596 3,275 2,285
Other expense 9,426 8,371 7,811
________ ________ ________
Income before income taxes $ 8,450 $ 9,267 $ 8,444
Income tax expense 1,663 1,950 1,857
________ ________ ________
Net income $ 6,787 $ 7,317 $ 6,587
======== ======== ========
PER COMMON SHARE DATA:
Net income $ 1.55 $ 1.66 $ 1.48
Cash dividends .73 .65 .57
PERFORMANCE RATIOS:
Return on average assets 1.37% 1.57% 1.59%
Return on average equity 12.76% 14.27% 14.93%
Dividend payout ratio 47.41% 39.41% 38.33%
Average equity to average
assets ratio 10.76% 11.00% 10.66%
Year Ended December 31,
______________________
2001 2000
____ ____
SELECTED FINANCIAL DATA:
Total Assets $393,472 $360,342
Total Investment securities 184,107 156,438
Net loans 195,302 187,969
Total Deposits 294,681 271,473
Stockholders' equity 39,696 36,658
SELECTED OPERATING DATA:
Interest income $ 26,836 $ 25,650
Interest expense 14,465 13,995
________ ________
Net interest income $ 12,371 $ 11,655
Provision for loan losses 610 425
________ ________
Net interest income after
provision for loan and
lease losses $ 11,761 $ 11,230
Other income 2,346 1,875
Other expense 7,180 6,787
________ ________
Income before income taxes $ 6,927 $ 6,318
Income tax expense 1,494 1,110
________ ________
Net income $ 5,433 $ 5,208
======== ========
PER COMMON SHARE DATA:
Net income $ 1.22 $ 1.43
Cash dividends .51 .49
PERFORMANCE RATIOS:
Return on average assets 1.41% 1.52%
Return on average equity 13.85% 16.55%
Dividend payout ratio 42.24% 41.90%
Average equity to average
assets ratio 10.16% 9.20%
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of Management's Discussion and Analysis of First
Keystone Corporation, a bank holding company (the Corporation), and
its wholly owned subsidiary, The First National Bank of Berwick
(the Bank), is to assist the reader in reviewing the financial
information presented and should be read in conjunction with the
consolidated financial statements and other financial data
contained herein.
This annual 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. Although
management believes the expectations reflected in such forward
looking statements are reasonable, actual results may differ
materially.
RESULTS OF OPERATIONS
Year Ended December 31, 2004 Versus Year Ended December 31, 2003
Net income increased to $6,787,000 for the year ended December
31, 2004, as compared to $7,317,000 for the prior year, a decrease
of 7.2%. Earnings per share, both basic and diluted, for 2004 were
$1.55 and $1.54, respectively, as compared to $1.66 and $1.65 in
2003. Cash dividends per share increased to $.73 in 2004 from $.65
in 2003, an increase of 12.3%.
The Corporation's return on average assets was 1.37% in 2004
as compared to 1.57% in 2003. Return on average equity decreased to
12.76% in 2004 from 14.27% in 2003. Even though there was an
increase in interest rates in 2004, the continued relatively low
interest rate environment resulted in a small overall decrease of
interest income to $25,036,000 down 0.1% from 2003. Likewise, there
was the accompanying decrease in the cost of funds which resulted
in interest expense of $10,006,000 in 2004, a decrease of 1.9% from
2003.
Net interest income, as indicated below in Table 1, increased
by $167,000 or 1.1% to $15,030,000 for the year ended December 31,
2004. The Corporation's net interest income on a fully taxable
equivalent basis increased $238,000, or 1.5% to $16,565,000 in 2004
as compared to an increase of $452,000, or 2.8% to $16,327,000 in
2003.
Year Ended December 31, 2003 Versus Year Ended December 31, 2002
Net income increased to $7,317,000 for the year ended December
31, 2003, as compared to $6,587,000 in 2002. Earnings per share,
both basic and diluted, for 2003 were $1.66 and $1.65,
respectively, as compared to $1.48 in 2002. The Corporation's
return on average assets and return on average equity was 1.57% and
14.27%, respectively in 2003, as compared to 1.59% and 14.93%,
respectively in 2002.
Net interest income increased by $343,000 or 2.4% to
$14,863,000 for the year ended 2003. The Corporation's net interest
income on a fully taxable equivalent basis increased 2.8% in 2003
or $452,000 to $16,327,000 as indicated in Table 1 as compared to
$15,875,000 for the year ended 2002.
Table 1 - Net Interest Income
(Amounts in thousands)
2004/2003
________________________________
Increase/(Decrease)
__________________
2004 Amount % 2003
____ ______ __ ____
Interest Income $25,036 $(27) (.1) $25,063
Interest Expense 10,006 (194) (1.9) 10,200
_______ _____ _______
Net Interest Income 15,030 167 1.1 14,863
Tax Equivalent Adjustment 1,535 71 4.8 1,464
_______ ____ _______
Net Interest Income
(fully tax equivalent) $16,565 $238 1.5 $16,627
======= ==== =======
(Amounts in thousands) 2003/2002
________________________________
Increase/(Decrease)
_________________
2003 Amount % 2002
____ _____ ___ ____
Interest Income $25,063 $ (799) (3.1) $25,862
Interest Expense 10,200 (1,142) (10.1) 11,342
_______ ______ _______
Net Interest Income 14,863 343 2.4 14,520
Tax Equivalent Adjustment 1,464 109 8.0 1,355
_______ ______ _______
Net Interest Income
(fully tax equivalent) $16,327 $ 452 2.8 $15,875
======= ====== =======
13
Table 2 - Distribution of Assets, Liabilities and Stockholders' Equity
2004
___________________________________
Average Revenue/ Yield/
Balance Expense Rate
_______ _______ ____
Interest Earning Assets:
Loans:
Commercial$ 32,658 $ 2,251 6.89%
Real Estate172,314 10,720 6.22%
Installment Loans, Net28,123 1,680 5.97%
Fees on Loans 0 (36) 0%
________ _______ _____
Total Loans (Including
Fees)$233,095 $14,615 6.27%
________ _______ _____
Investment Securities:
Taxable $161,464 $7,378 4.57%
Tax Exempt70,928 4,519 6.37%
________ _______ _____
Total Investment Securities $232,392 $11,897 5.12%
________ _______ _____
Interest Bearing Deposits
in Banks 4,152 51 1.23%
Federal Funds Sold 328 8 2.37%
________ _______ _____
Total Interest-Earning Assets $469,967 $26,571 5.65%
________ _______ _____
Non-Interest Earning Assets:
Cash and Due From Banks $ 6,561
Allowance for Loan Losses (3,744)
Premises and Equipment 5,453
Foreclosed Assets Held for Sale 0
Other Assets 16,268
________
Total Non-Interest Earning
Assets 24,538
________
Total Assets $494,505
========
Interest-Bearing Liabilities:
Savings, NOW Accounts, and
Money Markets $142,385 $1,335 .94%
Time Deposits 186,534 5,573 2.99%
Short-Term Borrowings 2,736 41 1.50%
Long-Term Borrowings 64,144 2,932 4.57%
Securities Sold U/A to
Repurchase 7,357 125 1.70%
________ _______ _____
Total Interest-Bearing
Liabilities $403,156 $10,006 2.48%
________ _______ _____
Non-Interest Bearing
Liabilities:
Demand Deposits $ 34,000
Other Liabilities 4,144
Stockholders' Equity 53,205
________
Total Liabilities/
Stockholders' Equity $494,505
========
Net Interest Income Tax
Equivalent $16,565
=======
Net Interest Spread 3.17%
Net Interest Margin 3.52%
2003
___________________________________
Average Revenue/ Yield/
Balance Expense Rate
_______ _______ ____
Interest Earning Assets:
Loans:
Commercial$ 30,194 $ 1,839 6.09%
Real Estate158,468 10,575 6.67%
Installment Loans, Net24,169 1,964 8.13%
Fees on Loans 0 72 0%
________ _______ _____
Total Loans (Including
Fees)$212,831 $14,450 6.79%
________ _______ _____
Investment Securities:
Taxable $167,551 $ 7,797 4.65%
Tax Exempt61,188 4,249 6.94%
________ _______ _____
Total Investment Securities $228,739 $12,046 5.27%
________ _______ _____
Interest Bearing Deposits
in Banks 3,105 32 1.03%
Federal Funds Sold 0 0 0%
________ _______ _____
Total Interest-Earning Assets $444,675 $26,528 5.97%
________ _______ _____
Non-Interest Earning Assets:
Cash and Due From Banks $ 6,614
Allowance for Loan Losses (3,309)
Premises and Equipment 3,683
Foreclosed Assets Held for Sale 0
Other Assets 14,751
________
Total Non-Interest Earning
Assets 21,739
________
Total Assets $466,414
========
Interest-Bearing Liabilities:
Savings, NOW Accounts, and
Money Markets $133,138 $ 1,455 1.09%
Time Deposits 183,358 6,015 3.28%
Short-Term Borrowings 4,421 53 1.19%
Long-Term Borrowings 53,272 2,588 4.86%
Securities Sold U/A to
Repurchase 6,016 90 1.50%
________ _______ _____
Total Interest-Bearing
Liabilities $380,205 $10,201 2.68%
________ _______ _____
Non-Interest Bearing
Liabilities:
Demand Deposits $ 30,103
Other Liabilities 4,817
Stockholders' Equity 51,289
________
Total Liabilities/
Stockholders' Equity $466,414
========
Net Interest Income Tax
Equivalent $16,327
=======
Net Interest Spread 3.28%
Net Interest Margin 3.67%
2002
___________________________________
Average Revenue/ Yield/
Balance Expense Rate
_______ _______ ____
Interest Earning Assets:
Loans:
Commercial$ 28,280 $ 1,795 6.35%
Real Estate146,708 10,930 7.45%
Installment Loans, Net26,159 2,269 8.68%
Fees on Loans 0 118 0%
________ _______ _____
Total Loans (Including
Fees)$201,147 $15,112 7.51%
________ _______ _____
Investment Securities:
Taxable $141,884 $ 8,213 5.79%
Tax Exempt52,611 3,814 7.25%
________ _______ _____
Total Investment Securities $194,495 $12,027 6.18%
________ _______ _____
Interest Bearing Deposits
in Banks 5,194 78 1.51%
Federal Funds Sold 0 0 0%
________ _______ _____
Total Interest-Earning Assets $400,836 $27,217 6.79%
________ _______ _____
Non-Interest Earning Assets:
Cash and Due From Banks $ 6,620
Allowance for Loan Losses (3,061)
Premises and Equipment 3,365
Foreclosed Assets Held for Sale 26
Other Assets 6,260
________
Total Non-Interest Earning
Assets 13,210
________
Total Assets $414,046
========
Interest-Bearing Liabilities:
Savings, NOW Accounts, and
Money Markets $123,269 $ 1,845 1.50%
Time Deposits 161,262 6,272 3.89%
Short-Term Borrowings 1,379 25 1.82%
Long-Term Borrowings 46,930 3,078 6.56%
Securities Sold U/A to
Repurchase 6,357 122 1.91%
________ _______ _____
Total Interest-Bearing
Liabilities $339,197 $11,342 3.34%
________ _______ _____
Non-Interest Bearing Liabilities:
Demand Deposits $ 27,401
Other Liabilities 3,318
Stockholders' Equity 44,130
________
Total Liabilities/
Stockholders' Equity $414,046
========
Net Interest Income Tax
Equivalent $15,875
=======
Net Interest Spread 3.45%
Net Interest Margin 3.96%
______________________
Tax-exempt income has been adjusted to a tax equivalent basis using an
incremental rate of 34%, and statutory interest expense disallowance.
Installment loans are stated net of unearned interest.
Average loan balances include non-accrual loans. Interest income on non
accrual loans is not included.
14
NET INTEREST INCOME
The major source of operating income for the Corporation is
net interest income. Net interest income is the difference between
interest income on earning assets, such as loans and securities,
and the interest expense on liabilities used to fund those assets,
including deposits and other borrowings. The amount of interest
income is dependent upon both the volume of earning assets and the
level of interest rates. In addition, the volume of non performing
loans affects interest income. The amount of interest expense
varies with the amount of funds needed to support earning assets,
interest rates paid on deposits and borrowed funds, and finally,
the level of interest free deposits.
Table 2 on the preceding pages provides a summary of average
outstanding balances of earning assets and interest bearing
liabilities with the associated interest income and interest
expense as well as average tax equivalent rates earned and paid as
of year end 2004, 2003, and 2002.
The yield on earning assets was 5.65% in 2004, 5.97% in 2003,
and 6.79% in 2002. The rate paid on interest bearing liabilities
was 2.48% in 2004, 2.68% in 2003, and 3.34% in 2002. This resulted
in a decrease in our net interest spread to 3.17% in 2004, as
compared to 3.28% in 2003, and 3.45% in 2002. As Table 2
illustrates, our net interest margin also declined in 2004.
The net interest margin, which is interest income less
interest expenses divided by average earnings assets, was 3.52% in
2004 as compared to 3.67% in 2003 and 3.96% in 2002. The net
interest margins are presented on a tax equivalent basis. The
decrease in net interest margin in both 2004 and 2003 was due
primarily to the interest rate on earning assets decreasing more
than the interest rate on liabilities.
In an effort to maintain or try to increase our net interest
margin, we look to higher earning asset yields in 2005. However, it
is apparent that margin expansion will be limited by the flattening
of the yield curve.
Table 3 sets forth changes in interest income and interest
expense for the periods indicated for each category of interest
earning assets and interest bearing liabilities. Information is
provided on changes attributable to (i) changes in volume (changes
in average volume multiplied by prior rate); (ii) changes in rate
(changes in average rate multiplied by prior average volume); and,
(iii) changes in rate and volume (changes in average volume
multiplied by change in average rate).
Table 3 - Changes in Income and Expense, 2004 and 2003
(Amounts in thousands) 2004 COMPARED TO 2003
______________________________
VOLUME RATE NET
_____ ____ ___
Interest Income:
Loans, Net $1,376 $(1,211) $ 165
Taxable Investment Securities (283) (136) (419)
Tax-Exempt Investment
Securities 676 (405) 271
Other Short-Term Investments 14 13 27
______ _______ _____
TOTAL INTEREST INCOME $1,783 $(1,739) $ 44
______ _______ _____
Interest Expense:
Savings, Now, and Money Markets $ 101 $ (220) $(119)
Time Deposits 104 (546) (442)
Short-Term Borrowings (20) 8 (12)
Long-Term Borrowings 528 (184) 344
Securities Sold U/A to
Repurchase 20 15 35
______ _______ _____
TOTAL INTEREST EXPENSE $ 733 $ (927) $(194)
______ _______ _____
NET INTEREST INCOME $1,050 $ (812) $ 238
====== ======= =====
(Amounts in thousands) 2003 COMPARED TO 2002
______________________________
VOLUME RATE NET
_____ ____ ___
Interest Income:
Loans, Net $ 878 $(1,539) $ (661)
Taxable Investment Securities 1,486 (1,901) (415)
Tax-Exempt Investment
Securities 622 (188) 434
Other Short-Term Investments (32) (15) (47)
______ _______ _______
TOTAL INTEREST INCOME $2,954 $(3,643) $ (689)
______ _______ _______
Interest Expense:
Savings, Now, and Money Markets $ 148 $ (538) $ (390)
Time Deposits 859 (1,116) (257)
Short-Term Borrowings 55 (28) 27
Long-Term Borrowings 416 (906) (490)
Securities Sold U/A to
Repurchase (6) (25) (31)
______ _______ _______
TOTAL INTEREST EXPENSE $1,472 $(2,613) $(1,141)
______ _______ _______
NET INTEREST INCOME $1,482 $(1,030) $ 452
====== ======= =======
__________________
The change in interest due to both volume and yield/rate has been allocated
to change due to volume and change due to yield/rate in proportion to the
absolute value of the change in each.
Balance on non-accrual loans are included for computational purposes.
Interest income on non-accrual loans is not included.
Interest income exempt from federal tax was $3,260,000 in 2004, $3,091,000
in 2003, and $2,928,000 in 2002. Tax-exempt income has been adjusted to a
tax-equivalent basis using an incremental rate of 34%.
15
In 2004, the increase in net interest income of $238,000
resulted from a change in volume of $1,050,000 and a decrease of
$812,000 due to changes in rate. In 2003, there was an increase in
net interest income of $452,000 resulted from a change in volume of
$1,482,000 and a decrease of $1,030,000 due to changes in rate.
PROVISION FOR LOAN LOSSES
For the year ended December 31, 2004, the provision for loan
losses was $1,750,000 as compared to $500,000 as of December 31,
2003. The Corporation's provision for loan losses for the year
ended December 31, 2002, was $550,000. The provision in 2004,
increased primarily because of the additional net charge offs and
an increase in non accrual loans. Net charge offs by the
Corporation for the fiscal year end December 31, 2004, 2003, and
2002, were $1,446,000, $150,000, and $298,000, respectively.
The allowance for loan losses as a percentage of loans, net of
unearned interest, was 1.64% as of December 31, 2004, 1.54% as of
December 31, 2003, and 1.58% as of December 31, 2002.
On a quarterly basis, the Corporation's Board of Directors and
management performs a detailed analysis of the adequacy of the
allowance for loan losses. This analysis includes an evaluation of
credit risk concentration, delinquency trends, past loss
experience, current economic conditions, composition of the loan
portfolio, classified loans and other relevant factors.
The Corporation will continue to monitor its allowance for
loan losses and make future adjustments to the allowance through
the provision for loan losses as conditions warrant. Although the
Corporation believes that the allowance for loan losses is adequate
to provide for losses inherent in the loan portfolio, there can be
no assurance that future losses will not exceed the estimated
amounts or that additional provisions will not be required in the
future.
The Bank is subject to periodic regulatory examination by the
Office of the Comptroller of the Currency (OCC). As part of the
examination, the OCC will assess the adequacy of the bank's
allowance for loan losses and may include factors not considered by
the Bank. In the event that an OCC examination results in a
conclusion that the Bank's allowance for loan losses is not
adequate, the Bank may be required to increase its provision for
loan losses.
NON-INTEREST INCOME
Non interest income is derived primarily from trust department
revenue, service charges and fees, income on bank owned life
insurance, other miscellaneous revenue and the gain on the sale of
mortgage loans. In addition, investment securities gains or losses
also impact total non interest income.
For the year ended December 31, 2004, non interest income
increased $1,321,000, or 40.3% as compared to an increase of
$990,000, or 43.3% for the year ended December 31, 2003. Table 4
provides the major categories of non interest income and each
respective change comparing the past three years.
Excluding investment securities gains, non interest income in
2004 increased $540,000, or 18.1%. This compares to an increase of
$720,000, or 31.9% in 2003 before investment securities gains.
Income from the trust department, which consists of fees generated
from individual and corporate accounts, increased in 2004 by
$39,000 after decreasing by $24,000 in 2003. Decreased income from
the trust department in 2003 was due primarily to the decline in
market value of accounts.
Service charges and fees, consisting primarily of service
charges on deposit accounts, was the largest source of non interest
income in 2004 and 2003. Service charges and fees increased by
$525,000, or 30.5% in 2004 compared to an increase of $351,000, or
25.6% in 2003. The increases in 2004 and 2003 resulted primarily
from increasing revenue from NSF charges generated from a courtesy
overdraft program.
Income on Bank Owned Life Insurance (BOLI) decreased $39,000
to $446,000 in 2004 as compared to an increase of $383,000 to
$485,000 in 2003. In October 2002 the Bank purchased $10 million of
Bank Owned Life Insurance. The income from BOLI represents the
increase in the cash surrender value of BOLI and is intended to
partially cover the costs of the Bank's employee benefit plan,
including group life, disability, and health insurance.
16
The gain on sale of mortgages provided $221,000 in 2004 as
compared to $234,000 in 2003. The slight decrease in gains on sale
of mortgages was largely a function of the decreased volume of
mortgages sold in the secondary market during the past year. Since
the Corporation continues to service the mortgages which are sold,
this provides a source for additional non interest income on an
ongoing basis.
Other income amounted to $75,000 for 2004, an increase of
$28,000 or 59.6% over the $47,000 reported in 2003.
Table 4 - Non-Interest Income
(Amounts in thousands) 2004/2003
_______________________________
Increase/(Decrease)
__________________
2004 Amount % 2003
____ _____ __ ____
Trust Department $ 525 $ 39 8.0 $ 486
Service Charges and Fees 2,249 525 30.5 1,724
Income on Bank Owned Life
Insurance 446 (39) (8.0) 485
Gain on Sale of Mortgages 221 (13) (5.6) 234
Other 75 28 59.6 47
______ ______ ______
Subtotal $3,516 $ 540 18.1 $2,976
Investment Securities Gains 1,080 781 261.2 299
______ ______ ______
Total $4,596 $1,321 40.3 $3,275
====== ====== ======
(Amounts in thousands) 2003/2002
______________________________
Increase/(Decrease)
__________________
2003 Amount % 2002
____ _____ __ ____
Trust Department $ 486 $(24) (4.7) $ 510
Service Charges and Fees 1,724 351 25.6 1,373
Income on Bank Owned Life
Insurance 485 383 375.5 102
Gain on Sale of Mortgages 234 6 2.6 228
Other 47 4 9.3 43
______ ____ ______
Subtotal $2,976 $720 31.9 $2,256
Investment Securities Gains 299 270 931.0 29
______ ____ ______
Total $3,275 $990 43.3 $2,285
====== ==== ======
NON-INTEREST EXPENSE
Non interest expense consists of salaries and benefits,
occupancy, furniture and equipment, and other miscellaneous
expenses. Table 5 provides the yearly non interest expense by
category, along with the amount, dollar changes, and percentage of
change.
Total non interest expense increased by $1,055,000, or 12.6%
in 2004 compared to an increase of $560,000, or 7.2% in 2003.
Expenses associated with employees (salaries and employee benefits)
continue to be the largest non interest expenditure. Salaries and
employee benefits amounted to 51.8% of total non interest expense
in 2004 and 53.1% in 2003. Salaries and employee benefits increased
$436,000, or 9.8% in 2004 and $224,000, or 5.3% in 2003. The
increases in both years were due to an increase in the profit
sharing contribution, plus normal salary adjustments and increased
benefit costs. The number of full time equivalent employees was 130
as of December 31, 2004, and 129 as of December 31, 2003.
Net occupancy expense increased $89,000, or 15.7% in 2004 as
compared to an increase of $81,000, or 16.7% in 2003. Furniture and
equipment expense increased $139,000, or 21.6% in 2004 compared to
an increase of $27,000, or 4.4% in 2003. The increase in occupancy
and furniture and equipment expense in 2004 relates primarily to
increased expenses at our new Danville Office and our new Scott
Township Office. Other operating expenses increased $391,000, or
14.4% in 2004 as compared to an increase of $228,000, or 9.2% in
2003. Increases in professional fees, postage, supplies, insurance,
marketing, advertising, and state shares tax account for much of
the increase in other operating expenses in both 2004 and 2003.
The overall level of non-interest expense remains low,
relative to our peers. In fact, our total non interest expense was
less than 2% of average assets in both 2004 and 2003. Non interest
expense as a percentage of average assets under 2% places us among
the leaders in our peer financial institution categories in
controlling non interest expense.
17
Table 5 - Non-Interest Expense
(Amounts in thousands) 2004/2003
_______________________________
Increase/(Decrease)
__________________
2004 Amount % 2003
____ _____ ___ ____
Salaries and Employee Benefits $4,882 $ 436 9.8 $4,446
Occupancy, Net 656 89 15.7 567
Furniture and Equipment 782 139 21.6 643
Other and State Shares Tax 3,106 391 14.4 2,715
______ ____ ______
Total $9,426 $1,055 12.6 $8,371
====== ====== ======
(Amounts in thousands) 2003/2002
______________________________
Increase/(Decrease)
_________________
2003 Amount % 2002
____ _____ ___ ____
Salaries and Employee Benefits $4,446 $224 5.3 $4,222
Occupancy, Net 567 81 16.7 486
Furniture and Equipment 643 27 4.4 616
Other and State Shares Tax 2,715 228 9.2 2,487
______ ____ ______
Total $8,371 $560 7.2 $7,811
====== ==== ======
INCOME TAX EXPENSE
Income tax expense for the year ended December 31, 2004, was
$1,663,000 as compared to $1,950,000 and $1,857,000 for the years
ended December 31, 2003, and December 31, 2002, respectively. In
2004, our income tax expense decreased because income before taxes
decreased $817,000 to $8,450,000 from $9,267,000 in 2003. In 2003,
our income before taxes increased $823,000 as compared to 2002. The
corporation looks to maximize its tax exempt interest derived from
both tax free loans and tax free municipal investments without
triggering alternative minimum tax. The effective income tax rate
was 19.7% in 2004, 21.0% in 2003, and 22.0% in 2002. The limited
availability of tax free municipal investments at attractive
interest rates may result in a higher effective tax rate in future
years.
FINANCIAL CONDITION
GENERAL
Total assets increased to $497,615,000, at year end 2004, an
increase of 3.3% over year end 2003. As of December 31, 2004, total
deposits amounted to $357,956,000, an increase of 4.4% over 2003.
Assets as of December 31, 2003, were $481,840,000, an increase of
9.6% over 2002, while total deposits as of year end 2003 amounted
to $343,020,000, an increase of 3.7% from 2002.
In 2004, the increase in assets primarily reflects the
deployment of deposits into loans and investment securities. The
Corporation continues to maintain and manage its asset growth. Our
strong equity capital position provides us an opportunity to
further leverage our asset growth. Borrowings increased in 2004 by
$7,733,000 after increasing in 2003 by $19,872,000. Increased
borrowings in 2004 were used primarily to fund investment
securities purchases, while increased borrowings in 2003 funded
principally loan growth. Core deposits, which include demand
deposits and interest bearing demand deposits (NOWs), money market
accounts, savings accounts, and time deposits of individuals
continues to be our most significant source of funds. In 2004 and
2003, several successful sales campaigns attracted new customers
and generated growth in retail certificates of deposit (time
deposits of individuals) as well as savings and money market
accounts.
EARNING ASSETS
Earning assets are defined as those assets that produce
interest income. By maintaining a healthy asset utilization rate,
i.e., the volume of earning assets as a percentage of total assets,
the Corporation maximizes income. The earning asset ratio (average
interest earning assets divided by average total assets) equaled
95.0% for 2004, compared to 95.3% for 2003, and 96.8% for 2002.
This indicates that the management of earning assets is a priority
and non earning assets, primarily cash and due from banks, fixed
assets and other assets, are maintained at minimal levels. The
primary earning assets are loans and investment securities.
LOANS
Total loans, net of unearned income, increased to $233,800,000
as of December 31, 2004, as compared to a balance of $229,073,000
as of December 31, 2003. Table 6 provides data relating to the
composition of the Corporation's loan portfolio on the dates
indicated. Total loans, net of unearned income increased
$4,727,000, or 2.1% in 2004 compared to an increase of $27,556,000,
or 13.7% in 2003. In 2004, loan growth was limited as our
outstanding balances on residential mortgage and consumer loans
declined. This contrasts the low interest rate environment
prevalent during 2003 which resulted in a substantial increase in
residential mortgage loans, commercial loans secured by real estate
and other commercial loans.
18
The loan portfolio is well diversified and increases in the
portfolio in 2004 were only in commercial loans secured by real
estate. In 2003, the increase in loans was diversified primarily in
commercial real estate, commercial loans, and residential mortgage
loans. Outstanding balances on tax exempt loans and consumer loans
declined in both 2004 and 2003. The Corporation continues to
originate and sell certain long term fixed rate residential
mortgage loans which conform to secondary market requirements. The
Corporation derives ongoing income from the servicing of mortgages
sold in the secondary market.
The Corporation continues to internally underwrites each of
its loans to comply with prescribed policies and approval levels
established by its Board of Directors.
Table 6 - Loans Outstanding, Net of Unearned Income
(Amounts in thousands) December 31,
________________________
2004 2003 2002
____ ____ ____
Commercial, financial and
agricultural:
Commercial secured by
real estate $ 86,734 $ 73,433 $ 65,352
Commercial - other 33,470 33,890 23,639
Tax exempt 3,629 3,930 4,393
Real estate (primarily
residential mortgage loans) 92,408 96,422 85,145
Consumer loans 20,824 25,626 28,640
________ ________ ________
Total Gross Loans $237,065 $233,301 $207,169
Less: Unearned income and
unamortized loan fees
net of costs 3,265 4,228 5,652
________ ________ ________
Total Loans, net of unearned
income $233,800 $229,073 $201,517
======== ======== ========
(Amounts in thousands) December 31,
________________________
2001 2000
____ ____
Commercial, financial and
agricultural:
Commercial secured by
real estate $ 61,135 $ 53,608
Commercial - other 24,062 22,674
Tax exempt 7,958 3,798
Real estate (primarily
residential mortgage loans) 79,483 84,330
Consumer loans 32,075 32,845
________ ________
Total Gross Loans $204,713 $197,255
Less: Unearned income and
unamortized loan fees
net of costs 6,489 6,583
________ ________
Total Loans, net of unearned
income $198,224 $190,672
======== ========
INVESTMENT SECURITIES
The Corporation uses investment securities to not only
generate interest and dividend revenue, but also to help manage
interest rate risk and to provide liquidity to meet operating cash
needs.
The investment portfolio has been allocated between securities
available for sale and securities held to maturity. No investment
securities were established in a trading account. Available for
sale securities increased to $235,692,000 in 2004, a 4.3% increase
over 2003. At December 31, 2004, the net unrealized gain, net of
the tax effect, on these securities was $3,767,000 and is included
in stockholders' equity as accumulated other comprehensive gain. At
December 31, 2003, accumulated other comprehensive income, net of
tax effect, amounted to $5,489,000. In 2004, held to maturity
securities declined $1,868,000, or a 35.7% decrease from 2003 after
declining $703,000, or a 11.9% decrease in 2003. Table 7 provides
data on the carrying value of our investment portfolio on the dates
indicated. The vast majority of investment security purchases are
allocated as available for sale. This provides the Corporation with
increased flexibility should there be a need or desire to
liquidate an investment security.
The investment portfolio includes U.S. Government Corporations
and Agencies, corporate obligations, mortgage backed securities,
state and municipal securities, and other debt securities. In
addition, the investment portfolio includes restricted equity
securities consisting primarily of common stock investments in the
Federal Reserve Bank and the Federal Home Loan Bank. Marketable
equity securities consists of common stock investments in other
commercial banks and bank holding companies.
Securities available for sale may be sold as part of the
overall asset and liability management process. Realized gains and
losses are reflected in the results of operations on our statements
of income. The investment portfolio does not contain any structured
notes, step up bonds, or any off balance sheet derivatives.
During 2004, interest bearing deposits in other banks
increased to $36,000 from $28,000 in 2003. Balances in interest
bearing deposits in other banks were kept relatively low as funds
were invested in marketable securities to maximize income while
still addressing liquidity needs.
19
Table 7 - Carrying Value of Investment Securities
(Amounts in thousands) December 31,
_______________________
2004
_______________________
Available Held to
for Sale Maturity
_________ ________
U. S. Government Corporations
and Agencies $111,636 $ 638
State and Municipal 86,593 2,723
Corporate 29,302 0
Marketable Equity Securities 2,695 0
Restricted Equity Securities 5,466 0
________ ______
Total Investment Securities $235,692 $3,361
======== ======
(Amounts in thousands) December 31,
_______________________
2003
_______________________
Available Held to
for Sale Maturity
_________ ________
U. S. Government Corporations
and Agencies $100,486 $3,153
State and Municipal 78,711 2,076
Corporate 36,025 0
Marketable Equity Securities 5,654 0
Restricted Equity Securities 5,167 0
________ ______
Total Investment Securities $226,043 $5,229
======== ======
(Amounts in thousands) December 31,
______________________
2002
_______________________
Available Held to
for Sale Maturity
_________ ________
U. S. Government Corporations
and Agencies $ 77,806 $4,272
State and Municipal 84,809 1,660
Corporate 38,446 0
Marketable Equity Securities 5,310 0
Restricted Equity Securities 3,452 0
________ ______
Total Investment Securities $209,823 $5,932
======== ======
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses constitutes the amount available
to absorb losses within the loan portfolio. As of December 31,
2004, the allowance for loan losses was $3,828,000 as compared to
$3,524,000 and $3,174,000 as of December 31, 2003 and 2002,
respectively. The allowance for loan losses is established through
a provision for loan losses charged to expenses. Loans are charged
against the allowance for possible loan losses when management
believes that the collectibility of the principal is unlikely. The
risk characteristics of the loan portfolio are managed through the
various control processes, including credit evaluations of
individual borrowers, periodic reviews, and diversification by
industry. Risk is further mitigated through the application of
lending procedures such as the holding of adequate collateral and
the establishment of contractual guarantees.
Management performs a quarterly analysis to determine the
adequacy of the allowance for loan losses. The methodology in
determining adequacy incorporates specific and general allocations
together with a risk/loss analysis on various segments of the
portfolio according to an internal loan review process. This
assessment results in an allocated allowance. Management maintains
its loan review and loan classification standards consistent with
those of its regulatory supervisory authority.
Management feels based upon its methodology, that the
allowance for loan losses is adequate to cover foreseeable future
losses. Table 8 contains an analysis of our Allowance for Loan
Losses indicating charge offs and recoveries by the year and annual
additional provisions charged to operations. In 2004, net charge
offs as a percentage of average loans were .62% compared to .07% in
2003 and .15% in 2002. Net charge offs amounted to $1,446,000 in
2004 as compared to $150,000 and $298,000 in 2003 and 2002,
respectively. The increased net charge offs in 2004 resulted
primarily from part of one large commercial loan relationship,
which was deemed impaired and placed on non accrual, being charged
off. The balance of the relationship is on non accrual and included
in Table 10 - Non Performing Assets.
20
Table 8 - Analysis of Allowance for Loan Losses
(Amounts in thousands) Years Ended December 31,
_______________________
2004 2003 2002
____ ____ _____
Balance at beginning of period $3,524 $3,174 $2,922
Charge-offs:
Commercial, financial, and
agricultural 1,209 43 66
Real estate - mortgage 132 22 140
Installment loans to individuals 143 133 196
______ ______ ______
1,484 198 402
Recoveries:
Commercial, financial, and
agricultural 0 1 0
Real estate - mortgage 18 1 77
Installment loans to individuals 20 46 27
______ ______ ______
38 48 104
Net charge-offs 1,446 150 298
Additions charged to operations 1,750 500 550
______ ______ ______
Balance at end of period $3,828 $3,524 $3,174
====== ====== ======
Ratio of net charge-offs during the
period to average loans
outstanding during the period .62% .07% .15%
Allowance for loan losses to
average loans outstanding during
the period 1.64% 1.66% 1.58%
(Amounts in thousands) Years Ended December 31,
_______________________
2001 2000
____ ____
Balance at beginning of period $2,702 $2,600
Charge-offs:
Commercial, financial, and
agricultural 109 79
Real estate - mortgage 111 44
Installment loans to individuals 238 226
______ ______
458 349
Recoveries:
Commercial, financial, and
agricultural 21 0
Real estate - mortgage 3 10
Installment loans to individuals 44 16
______ ______
68 26
Net charge-offs 390 323
Additions charged to operations 610 425
______ ______
Balance at end of period $2,922 $2,702
Ratio of net charge-offs during the
period to average loans
outstanding during the period .20% .17%
Allowance for loan losses to
average loans outstanding during
the period 1.50% 1.44%
It is the policy of management and the Corporation's Board of
Directors to provide for losses on both identified and
unidentified losses inherent in its loan portfolio. A provision for
loan losses is charged to operations based upon an evaluation of
the potential losses in the loan portfolio. This evaluation takes
into account such factors as portfolio concentrations,
delinquency, trends, trends of non accrual and classified loans,
economic conditions, and other relevant factors.
The loan review process which is conducted quarterly, is an
integral part of our evaluation of the loan portfolio. A detailed
quarterly analysis to determine the adequacy of the Corporation's
allowance for loan losses is reviewed by our Board of Directors.
With our manageable level of net charge offs and the additions
to the reserve from our provision out of operations, the allowance
for loan losses as a percentage of average loans amounted to 1.64%
to 2004, 1.66% in 2003, and 1.58% in 2002.
Table 9 sets forth the allocation of the Bank's allowance for
loan losses by loan category and the percentage of loans in each
category to total loans receivable at the dates indicated. The
portion of the allowance for loan losses allocated to each loan
category does not represent the total available for future losses
that may occur within the loan category, since the total loan loss
allowance is a valuation reserve applicable to the entire loan
portfolio.
Table 9 - Allocation of Allowance for Loan Losses
(Amounts in thousands) December 31,
_________________
2004 %
____ _____
Commercial, financial, and agricultural $ 858 14.3
Real estate - mortgage 2,594 77.1
Consumer and other loans 308 8.6
Unallocated 68 N/A
______ ____
$3,828 100.0
====== =====
(Amounts in thousands) December 31,
_________________
2003 %
____ _____
Commercial, financial, and agricultural $ 775 15.4
Real estate - mortgage 2,106 72.6
Consumer and other loans 378 12.0
Unallocated 265 N/A
______ _____
$3,524 100.0
====== =====
(Amounts in thousands) December 31,
_________________
2002 %
____ _____
Commercial, financial, and agricultural $ 488 12.4
Real estate - mortgage 1,812 75.0
Consumer and other loans 357 12.6
Unallocated 517 N/A
______ _____
$3,174 100.0
====== =====
(Amounts in thousands) December 31,
_________________
2001 %
____ _____
Commercial, financial, and agricultural $ 605 14.9
Real estate - mortgage 1,826 71.2
Consumer and other loans 458 13.9
Unallocated 33 N/A
______ _____
$2,922 100.0
====== =====
(Amounts in thousands) December 31,
_________________
2000 %
____ _____
Commercial, financial, and agricultural $ 316 10.7
Real estate - mortgage 1,606 71.1
Consumer and other loans 557 18.2
Unallocated 223 N/A
______ _____
$2,702 100.0
====== =====
______________________
Percentage of loans in each category to total loans.
21
NON-PERFORMING ASSETS
From the continuing economic slowdown in 2003, the Corporation
experienced an increase in delinquencies and non performing loans
in 2004. Table 10 details the Corporation's non performing assets
at the dates indicated.
Non accrual loans are generally delinquent on which principal
or interest is past due approximately 90 days or more, depending
upon the type of credit and the collateral. When a loan is placed
on non accrual status, any unpaid interest is charged against
income. Restructured loans are loans where the borrower has been
granted a concession in the interest rate or payment amount because
of financial problems. Foreclosed assets held for sale represents
property acquired through foreclosure, or considered to be an in
substance foreclosure.
The total of non performing assets increased to $3,480,000 as
of December 31, 2004, as compared to $768,000 as of December 31,
2003. Non accrual and restructured loans increased to $3,405,000 in
2004 from $735,000 in 2003. Foreclosed assets increased slightly to
$6,000 in 2004 from zero in 2003. Loans past due 90 days or more
and still accruing also increased to $69,000 in 2004 from $33,000
in 2003. Our allowance for loan losses to total non performing
assets declined to 110.1% in 2004 as compared to 458.9% in 2003.
With the decline in asset quality, the corporation has retained an
independent outside loan review consultant to closely monitor
overall loan quality.
Improving loan quality is a priority, and we actively work
with borrowers to resolve credit problems. Excluding the assets
disclosed in Table 10, management is not aware of any information
about borrowers' possible credit problems, which cause serious
doubt as to their ability to comply with present loan repayment
terms.
Should the economic climate no longer continue to be stable or
begin to deteriorate, borrowers may experience difficulty, and the
level of non performing loans and assets, charge offs and
delinquencies could rise and possibly require additional increases
in our allowance for loan losses.
In addition, regulatory authorities, as an integral part of
their examinations, periodically review the allowance for possible
loan and lease losses. They may require additions to allowances
based upon their judgements about information available to them at
the time of examination.
Interest income received on non performing loans in 2004 and
2003 was $113,000 and $38,000, respectively. Interest income, which
would have been recorded on these loans under the original terms in
2004 and 2003 was $253,000 and $61,000, respectively. At December
31, 2004, the Corporation had no outstanding commitments to advance
additional funds with respect to these non performing loans.
A concentration of credit exists when the total amount of
loans to borrowers, who are engaged in similar activities that are
similarly impacted by economic or other conditions, exceed 10% of
total loans. As of December 31, 2004, 2003 and 2002, management is
of the opinion that there were no loan concentrations exceeding 10%
of total loans.
Table 10 - Non-Performing Assets
(Amounts in thousands) December 31,
_______________
2004 2003 2002
____ ____ ____
Non-accrual and restructured loans $3,405 $735 $458
Foreclosed assets 6 0 0
Loans past-due 90 days or more and
still accruing 69 33 0
______ ____ ____
Total non-performing assets $3,480 $768 $458
====== ==== ====
Non-performing assets to period-end
loans and foreclosed assets 1.49% .34% .23%
Total non-performing assets to
total assets .70% .16% .10%
Total allowance for loan losses to
total non-performing assets 110.0% 458.9% 693.7%
(Amounts in thousands) December 31,
_______________
2001 2000
____ ____
Non-accrual and restructured loans $1,102 $719
Foreclosed assets 75 13
Loans past-due 90 days or more and
still accruing 217 10
_____ ____
Total non-performing assets $1,394 $742
====== ====
Non-performing assets to period-end
loans and foreclosed assets .70% .39%
Total non-performing assets to
total assets .35% .21%
Total allowance for loan losses to
total non-performing assets 209.6% 364.2%
22
There is a concentration of real estate mortgage loans in the
loan portfolio. Real estate mortgages comprise 76.6% of the loan
portfolio as of December 31, 2004, up from 74.1% in 2003. Real
estate mortgages consist of both residential and commercial real
estate loans. The real estate loan portfolio is well diversified in
terms of borrowers, collateral, interest rates, and maturities.
Also, the real estate loan portfolio has a mix of both fixed rate
and adjustable rate mortgages. The real estate loans are
concentrated primarily in our marketing area and are subject to
risks associated with the local economy.
DEPOSITS AND OTHER BORROWED FUNDS
Consumer and commercial retail deposits are attracted
primarily by First Keystone's subsidiary bank's ten full service
office locations. The Bank offers a broad selection of deposit
products and continually evaluates its interest rates and fees on
deposit products. The Bank regularly reviews competing financial
institutions interest rates along with prevailing market rates,
especially when establishing interest rates on certificates of
deposit.
Deposits increased by $14,936,000, or a 4.4% increase when
comparing December 31, 2004, to December 31, 2003. This increase
compares to a deposit increase of 3.7% in 2003 and an increase of
12.2% in 2002.
During 2004, the Corporation experienced a deposit increase in
both non interest bearing and interest bearing deposits. Non
interest bearing deposits amounted to $35,803,000 as of December
31, 2004, an increase of $5,751,000 over 2003. Interest bearing
deposits amounted to $322,153,000 as of December 31, 2004, an
increase of $9,185,000, or 2.9% over 2003.
During 2004, the Corporation increased its reliance on
borrowings. Short term borrowings amounted to $15,512,000 as of
year end 2004, an increase of $3,768,000 from 2003. Long term
borrowings increased $3,965,000 in 2004 to $66,910,000 as of
December 31, 2004. Total borrowings were $82,422,000 as of December
31, 2004, compared to $74,689,000 on December 31, 2003. Short term
borrowings are comprised of federal funds purchased, securities
sold under agreements to repurchase, U.S. Treasury demand notes,
and short term borrowings from the Federal Home Loan Bank (FHLB).
Long term borrowings are typically FHLB term borrowings with a
maturity of one year or more. Some of the additional term
borrowings were made to tak