UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 OR 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1995
Commission File Number: 2-88927
FIRST KEYSTONE CORPORATION
(Exact name of small business issuer 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:
(717) 752-3671
Indicated by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock, $2 Par Value, 808,429 shares as of September 30, 1995.
<PAGE>
<TABLE>
PART I. - FINANCIAL INFORMATION
FIRST KEYSTONE CORPORATION
BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except per share data)
<CAPTION>
September December
1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,699 $ 4,812
Interest bearing deposits with banks 148 484
Investment securities:
Held to maturity securities, approximate
fair value of $25,237 and $26,909 25,664 27,793
Available-for-sale securities carried at
estimated fair value 68,656 52,153
Loans, net of unearned income 126,361 118,184
Allowance for loan losses (1,840) (1,801)
Net loans $124,521 $116,383
Bank premises and equipment 3,047 3,029
Other real estate 0 235
Interest receivable 2,029 1,273
Other assets 447 702
Total Assets $228,211 $206,864
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 17,051 $ 16,682
Interest bearing 171,590 155,598
Total deposits $188,641 $172,280
Securities sold under agreements to
repurchase $ 4,251 $ 4,826
Other short-term borrowings 1,800 659
Long-term borrowings 8,000 7,500
Accrued expenses and other liabilities 1,754 811
Total Liabilities $204,446 $186,076
STOCKHOLDERS' EQUITY
Common stock, par value $2 per share $ 1,617 $ 1,617
Surplus 3,829 3,829
Retained earnings 17,159 15,357
Allowance for unrealized gains (loss)
on available for sale on debt and equity
investment securities 1,160 (15)
Total Stockholders' Equity $ 23,765 $ 20,788
Total Liabilities and Stockholders' Equity $228,211 $206,864
<FN>
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED September 30, 1995 AND 1994
(Unaudited)
(Amounts in thousands, except per share data)
<CAPTION>
1995 1994
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 7,982 $ 6,860
Interest and dividend income on securities 4,118 3,224
Interest on deposits in banks 120 19
Total Interest Income $12,220 $10,103
INTEREST EXPENSE
Interest on deposits $ 5,483 $ 4,191
Interest on securities sold under
agreement to repurchase 135 96
Interest on borrowed money 480 348
Total Interest Expense $ 6,098 $ 4,635
Net interest income $ 6,122 $ 5,468
Provision for loan losses 117 6
Net Interest Income After Provision
for Loan Losses $ 6,005 $ 5,462
OTHER INCOME
Service charges on deposit accounts $ 395 $ 315
Other non-interest income 259 247
Investment securities gains (losses) net (25) 67
Total Other Income $ 629 $ 629
OTHER EXPENSES
Salaries and employee benefits $ 1,656 $ 1,588
Net occupancy and fixed asset expense 574 537
Other non-interest expense 1,218 1,126
Total Other Expenses $ 3,448 $ 3,251
Income before income taxes $ 3,186 $ 2,840
Applicable income tax (benefit) 681 605
Net Income $ 2,505 $ 2,235
Net Income Per Weighted Share Outstanding $ 3.10 $ 2.76
<FN>
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED September 30, 1995 AND 1994
(Unaudited)
(Amounts in thousands, except per share data)
<CAPTION>
1995 1994
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,734 $2,378
Interest and dividend income on securities 1,516 1,052
Interest on deposits in banks 47 12
Total Interest Income $4,297 $3,442
INTEREST EXPENSE
Interest on deposits $1,982 $1,449
Interest on securities sold under agreement
to repurchase 49 31
Interest on borrowed money 165 112
Total Interest Expense $2,196 $1,592
Net interest income $2,101 $1,850
Provision for loan losses 43 3
Net Interest Income After Provision for Loan Losses $2,058 $1,847
OTHER INCOME
Service charges on deposit accounts $ 139 $ 106
Other non-interest income 92 81
Investment securities gains (losses) net (2) 16
Total Other Income $ 229 $ 203
OTHER EXPENSES
Salaries and employee benefits $ 537 $ 514
Net occupancy and fixed asset expense 198 179
Other non-interest expense 302 365
Total Other Expenses $1,037 $1,058
Income before income taxes $1,250 $ 992
Applicable income tax (benefit) 271 227
Net Income $ 979 $ 765
Net Income Per Weighted Share Outstanding $ 1.21 $ .95
<FN>
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30, 1995 AND 1994
(Unaudited)
(Amounts In Thousands)
<CAPTION>
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,505 $ 2,235
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan losses 117 6
Provision for depreciation 243 251
Premium amortization on investment
securities 191 249
Discount accretion on investment
securities (112) (27)
(Gain) loss on sales of investment
securities 25 (67)
(Gain) loss on sales of other real
estate owned 38 (5)
Deferred income tax (benefit) 43 20
(Increase) decrease in interest
receivable and other assets (802) (238)
Increase (decrease) in interest payable,
accrued expenses and other liabilities 587 52
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,835 $ 2,476
INVESTING ACTIVITIES
Purchases of investment securities
available-for-sale $(28,904) $(14,806)
Proceeds from sales of investment
securities available for sale 12,646 14,781
Proceeds from maturities and redemptions
of investment securities available
for sale 3,063 8,787
Purchase of investment securities
held-to-maturity (5,608) (1,013)
Proceeds from maturities and redemption
of investment securities held to maturity 6,114 0
Net (increase) decrease in loans (8,255) (6,278)
Proceeds from sale of other real estate owned 197 10
Purchase of premises and equipment (261) (593)
NET CASH USED BY INVESTING ACTIVITIES $(21,008) $ 888
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 16,361 $ 2,593
Net increase (decrease) in short-term borrowings 566 (4,388)
Net increase (decrease) in long-term borrowings 500 1,500
Cash dividends (703) (655)
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 16,724 $ (950)
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENT $ (1,449) $ 2,414
CASH AND CASH EQUIVALENTS, BEGINNING 5,296 3,951
CASH AND CASH EQUIVALENTS, ENDING $ 3,847 $ 6,365
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for
Interest $ 5,706 $ 4,562
Income Taxes 641 555
<FN>
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
FIRST KEYSTONE CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
September 30, 1995
(Unaudited)
Note 1.
The accounting and reporting policies of First Keystone Corporation and
Subsidiaries conform to generally accepted accounting principles and to general
practices within the banking industry. These consolidated interim financial
statements include the accounts of First Keystone Corporation and its wholly
owned subsidiaries, The First National Bank of Berwick and FKC Realty
Corporation. All significant inter-company balances have been eliminated.
Note 2.
The accompanying consolidated interim financial statements are unaudited.
In management's opinion, the consolidated interim financial statements reflect
a fair presentation of the consolidated financial position of First Keystone
Corporation and Subsidiaries, and the results of their operations and their
cash flows for the interim periods presented. Further, the consolidated
interim financial statements reflect all adjustments, which are in the opinion
of management, necessary to present fairly the consolidated financial condition
and consolidated results of operations and cash flows for the interim period
presented and that all such adjustments to the consolidated financial
statements are of a normal recurring nature.
Note 3.
The results of operations for the nine-month period ended September 30,
1995, are not necessarily indicative of the results to be expected for the full
year.
Note 4.
Net income per share of common stock for the interim periods is based on
the weighted average number of shares for each period retroactively adjusted to
reflect stock dividends; 1995 - 808,429 shares and 1994 - 808,429 shares.
Note 5.
Loans - Loans generally are stated at their outstanding unpaid principal
balances net of any deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans. Interest income is accrued on the
unpaid principal balance. Discounts and premiums are amortized to income using
the interest method. Loan origination fees net of certain direct origination
costs are deferred and recognized as an adjustment of the yield (interest
income) of the related loans.
Nonaccrual loans - Generally, a loan (including a loan impaired under
Statement 114) is classified as nonaccrual and the accrual of interest on such
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
nonaccrual 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 credit losses. Interest received on nonaccrual loans generally
is either applied against principal or reported as interest income, according
to management's judgment as to the collectibility of principal. Generally,
loans are restored to accrual status when the obligation is brought current,
has performed in accordance with the contractual terms for a reasonable period
of time and the ultimate collectibility of the total contractual principal and
interest is no longer in doubt.
Allowance for Credit Losses - The allowance for credit losses is
established through provisions for credit losses charged against income. Loans
deemed to be uncollectible are charged against the allowance for credit losses,
and subsequent recoveries, if any, are credited to the allowance. Beginning in
1995, the Company adopted Financial Accounting Standards Board Statement No.
114, "Accounting by Creditors for Impairment of a Loan." Under the new
standard, the 1995 allowance for credit losses related to loans that are
identified for evaluation in accordance with Statement 114 is based on
discounted cash flows using the loan's initial effective interest rate or the
fair value of the collateral for certain collateral dependent loans. Prior to
1995, the allowance for credit losses related to these loans was based on
undiscounted cash flows or the fair value of the collateral for collateral
dependent loans.
The allowance for credit losses is maintained at a level believed adequate
by management to absorb estimated probable credit losses. Management's
periodic evaluation of the adequacy of the allowance is based on the Company'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.
The following table presents changes in the allowance for credit loans:
<TABLE>
(Amounts in thousands)
<S> <C>
Balance at January 1, 1995 $1,801
Provided for credit loans 117
Recoveries 24
Charge offs (102)
Balance at September 30, 1995 $1,840
</TABLE>
At September 30, 1995, there was a total principal balance outstanding in
the amount of $409,208 for impaired (non accrual) loans as determined under
FASB 114. The valuation method required by FASB 114 using the discounted cash
flow method indicated a value for these loans in the amount of $177,347.
Accordingly, the difference of $231,861 represents the allowance for credit
losses attributable to loans covered by FASB 114.
The total allowance for loan losses is $1,840,000 at September 30, 1995,
and in management's opinion it is more than adequate to cover the specific FASB
114 allowance as well as all other foreseeable possible losses. Accordingly,
no additional allowance is required to provide for the impact of adoption of
FASB 114 in 1995 to date.
Foreclosed Assets - Foreclosed assets are comprised of property acquired
through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure
and loans classified as in-substance foreclosure. In accordance with Statement
114, a loan is classified as in-substance foreclosure when the Company has
taken possession of the collateral regardless of whether formal foreclosure
proceedings take place. Loans previously classified as in-substance
foreclosure but for which the Company has not taken possession of the
collateral are reclassified to loans. The reclassification did not impact the
Company's financial condition or results of operations. Foreclosed assets
initially are recorded at fair value at 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 (1) cost or (2) fair
value minus estimated costs to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in loss on foreclosed real
estate.
Note 6.
The consolidated interim financial statements have been prepared in
accordance with requirements of From 10-QSB and therefore does not include all
the disclosures normally required by generally accepted accounting principles,
or those normally made in the Corporation's annual 10-KSB filing. The reader
of these consolidated interim financial statements may wish to refer to the
Corporation's annual report or Form 10-KSB for the period ended December 31,
1994, filed with the Securities and Exchange Commission.
<PAGE>
FIRST KEYSTONE CORPORATION
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
September 30, 1995
FINANCIAL CONDITION
Total assets of the Corporation increased by $21,347,000 from
December 31, 1994, to September 30, 1995, to a level of $228,211,000. The
increase in total assets was largely a result of total deposits increasing to
$188,641,000, up $16,361,000 from December 31, 1994.
Other significant balance sheet changes for the nine-month period ended
September 30, 1995, were: net loans increased by $8,138,000, available for
sale securities carried at fair value increased $16,503,000, short-term and
long-term borrowings increased $1,641,000, and total stockholders' equity
increased $2,977,000.
ALLOWANCE FOR LOAN LOSSES
Management performs a quarterly analysis to determine the adequacy of the
allowance for loan losses. The methodology in determining adequacy
incorporates specific and general allocations together with a risk/loss
analysis on various segments of the portfolio according to an internal loan
review process. Management maintains its loan review and loan classification
standards consistent with those of its regulatory supervisory authority.
Management feels, considering the conservative portfolio composition, which is
largely composed of small retail loans (mortgages and installments) with
minimal classified assets, low delinquencies, and favorable loss history, that
the allowance for loan loss is adequate to cover foreseeable future losses.
Any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed under Industry
Guide 3 do not (i) represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity, or capital resources, or (ii) represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms.
The company was required to adopt Financial Accounting Standards Board
Statement No. 114, "Accounting by Creditors for Impairment of a Loan" - Refer
to Note 5 above for details.
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.
Liquidity is achieved through steady increases in core deposits, our
investment portfolio, and access to borrowed funds.
RESULTS OF OPERATIONS
Net income for the third quarter or the three months ended September 30,
1995, was $979,000, an increase of 28.0% over the third quarter of 1994. The
increase resulted in net income for the nine months ended September 30, 1995,
of $2,505,000, an increase of $270,000 over the same period in 1994.
For the nine months ended September 30, 1995, net interest income, our
primary source of net income, increased $654,000, or 12.0% over the same period
in 1994. Because of an increase in actual loan losses, our provision increased
to $117,000 as of September 30, 1995, from $6,000 in 1994. Other income in the
first nine months of 1995 was the same as 1994; however, other income before
investment security gains and losses was actually $92,000 higher than the same
nine month period in 1994. Other expense increased $197,000, or 6.1%.
Net income per weighted share outstanding was $3.10 for the nine months
ended September 30, 1995, as compared to $2.76 in 1994. We remain committed to
increase net interest income through the generation of quality loans.
Continued loan growth, together with manageable loan losses and limited
increases in other expenses, will provide the foundation for strong net income
results throughout 1995 and into 1996.
<PAGE>
PART II - OTHER INFORMATION
A. Reports on Form 8-K
The Registrant has filed no reports on Form 8-K for this quarter.
<PAGE>
FIRST KEYSTONE CORPORATION
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST KEYSTONE CORPORATION
Registrant
Date: November 10, 1995 /s/ J. GERALD BAZEWICZ
J. Gerald Bazewicz
President and
Chief Executive Officer
Date: November 10, 1995 /s/ DAVID R. SARACINO
David R. Saracino
Treasurer/Assistant Secretary
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 36994
<INT-BEARING-DEPOSITS> 148
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25664
<INVESTMENTS-CARRYING> 68656
<INVESTMENTS-MARKET> 0
<LOANS> 126361
<ALLOWANCE> (1840)
<TOTAL-ASSETS> 228211
<DEPOSITS> 188641
<SHORT-TERM> 6051
<LIABILITIES-OTHER> 1754
<LONG-TERM> 8000
<COMMON> 1617
0
0
<OTHER-SE> 22148
<TOTAL-LIABILITIES-AND-EQUITY> 228211
<INTEREST-LOAN> 7982
<INTEREST-INVEST> 4118
<INTEREST-OTHER> 120
<INTEREST-TOTAL> 12220
<INTEREST-DEPOSIT> 5483
<INTEREST-EXPENSE> 615
<INTEREST-INCOME-NET> 6122
<LOAN-LOSSES> 117
<SECURITIES-GAINS> (25)
<EXPENSE-OTHER> 3448
<INCOME-PRETAX> 3186
<INCOME-PRE-EXTRAORDINARY> 3186
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2505
<EPS-PRIMARY> 3.10
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.31
<LOANS-NON> 523
<LOANS-PAST> 212
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3613
<ALLOWANCE-OPEN> 1801
<CHARGE-OFFS> 102
<RECOVERIES> 24
<ALLOWANCE-CLOSE> 1840
<ALLOWANCE-DOMESTIC> 1840
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 298
</TABLE>
