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, 1996
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, 889,147 shares as of September 30, 1996.
<PAGE>
<TABLE>
PART I. - FINANCIAL INFORMATION
FIRST KEYSTONE CORPORATION
BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except per share data)
<CAPTION>
September December
1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,309 $ 4,657
Interest bearing deposits with banks 23 1,963
Investment securities:
Held to maturity securities, approximate
fair value of $20,418 and $23,439 20,680 23,421
Available-for-sale securities carried at
estimated fair value 79,574 64,704
Mortgages held for resale 950 104
Loans, net of unearned income 131,344 127,957
Allowance for loan losses (1,959) (2,015)
Net loans $129,385 $125,942
Bank premises and equipment 2,898 3,066
Other real estate 46 0
Interest receivable 1,924 1,875
Other assets 359 301
Total Assets $241,148 $226,033
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 18,521 $ 17,622
Interest bearing 179,911 169,698
Total deposits $198,432 $187,320
Short-term borrowings $ 5,972 $ 4,359
Long-term borrowings 9,000 7,000
Accrued expenses and other liabilities 1,426 1,955
Total Liabilities $214,830 $200,634
STOCKHOLDERS' EQUITY
Common stock, par value $2 per share $ 1,778 $ 1,617
Surplus 6,654 3,829
Retained earnings 17,324 17,889
Allowance for unrealized gains (loss)
on available for sale on debt and equity
investment securities 562 2,064
Total Stockholders' Equity $ 26,318 $ 25,399
Total Liabilities and Stockholders' Equity $241,148 $226,033
<FN>
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED September 30, 1996 AND 1995
(Unaudited)
(Amounts in thousands, except per share data)
<CAPTION>
1996 1995
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 8,468 $ 7,982
Interest and dividend income on securities 4,638 4,118
Interest on deposits in banks 79 120
Total Interest Income $13,185 $12,220
INTEREST EXPENSE
Interest on deposits $ 5,864 $ 5,483
Interest on short-term borrowings 185 176
Interest on long-term borrowings 390 439
Total Interest Expense $ 6,439 $ 6,098
Net interest income $ 6,746 $ 6,122
Provision for loan losses 135 117
Net Interest Income After Provision
for Loan Losses $ 6,611 $ 6,005
OTHER INCOME
Service charges on deposit accounts $ 423 $ 395
Other non-interest income 356 259
Investment securities gains (losses) net (2) (25)
Total Other Income $ 777 $ 629
OTHER EXPENSES
Salaries and employee benefits $ 1,792 $ 1,656
Net occupancy and fixed asset expense 565 574
Other non-interest expense 974 1,218
Total Other Expenses $ 3,331 $ 3,448
Income before income taxes $ 4,057 $ 3,186
Applicable income tax (benefit) 804 681
Net Income $ 3,253 $ 2,505
Net Income Per Weighted Share Outstanding $ 3.72 $ 2.86
<FN>
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED September 30, 1996 AND 1995
(Unaudited)
(Amounts in thousands, except per share data)
<CAPTION>
1996 1995
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,870 $2,734
Interest and dividend income on securities 1,670 1,516
Interest on deposits in banks 2 47
Total Interest Income $4,542 $4,297
INTEREST EXPENSE
Interest on deposits $1,952 $1,982
Interest on short-term borrowings 80 67
Interest on long-term borrowings 126 147
Total Interest Expense $2,158 $2,196
Net interest income $2,384 $2,101
Provision for loan losses 45 43
Net Interest Income After Provision for Loan Losses $2,339 $2,058
OTHER INCOME
Service charges on deposit accounts $ 152 $ 139
Other non-interest income 110 92
Investment securities gains (losses) net 0 (2)
Total Other Income $ 262 $ 229
OTHER EXPENSES
Salaries and employee benefits $ 603 $ 537
Net occupancy and fixed asset expense 177 198
Other non-interest expense 315 302
Total Other Expenses $1,095 $1,037
Income before income taxes $1,506 $1,250
Applicable income tax (benefit) 314 271
Net Income $1,192 $ 979
Net Income Per Weighted Share Outstanding $ 1.36 $ 1.12
<FN>
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30, 1996 AND 1995
(Unaudited)
(Amounts In Thousands)
<CAPTION>
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,253 $ 2,505
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan losses 135 117
Provision for depreciation 218 243
Premium amortization on investment
securities 112 191
Discount accretion on investment
securities (64) (112)
(Gain) loss on sales of investment
securities 2 25
(Gain) loss on sales of other real
estate owned 0 38
Deferred income tax (benefit) 44 43
(Increase) decrease in interest
receivable and other assets (107) (802)
Increase (decrease) in interest payable,
accrued expenses and other liabilities 193 587
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,786 $ 2,835
INVESTING ACTIVITIES
Purchases of investment securities
available-for-sale $(35,238) $(28,904)
Proceeds from sales of investment
securities available for sale 15,579 12,646
Proceeds from maturities and redemptions
of investment securities available
for sale 3,536 3,063
Purchase of investment securities
held-to-maturity (996) (5,608)
Proceeds from maturities and redemption
of investment securities held to maturity 2,672 6,114
Net (increase) decrease in loans (4,535) (8,255)
Proceeds from sale of other real estate owned 0 197
Purchase of premises and equipment (50) (261)
Proceeds from sale of loans 65 0
NET CASH USED BY INVESTING ACTIVITIES $(18,967) $(21,008)
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 11,112 $ 16,361
Net increase (decrease) in short-term borrowings 1,613 566
Net increase (decrease) in long-term borrowings 2,000 500
Cash dividends (832) (703)
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 13,893 $ 16,724
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENT $ (1,288) $ (1,449)
CASH AND CASH EQUIVALENTS, BEGINNING 6,620 5,296
CASH AND CASH EQUIVALENTS, ENDING $ 5,332 $ 3,847
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for
Interest $ 6,419 $ 5,706
Income Taxes 777 641
<FN>
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
FIRST KEYSTONE CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
September 30, 1996
(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 subsidiary, The First National Bank of Berwick. 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 Subsidiary, 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,
1996, 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; 1996 - 875,595 shares and 1995 - 875,595 shares.
Note 5.
Loans are stated at their outstanding unpaid principal balances, net of
any deferred fees or costs, unearned income and the allowance for loan losses.
Interest on loans is accrued on the principal amount outstanding, primarily on
an actual day basis. Non-refundable loan fees and certain direct costs are
deferred and amortized over the life of the loans using the interest method.
The amortization is reflected as an interest yield adjustment, and the
deferred portion of the net fees and costs is reflected as a part of the loan
balance.
Non-Accrual Loans - Generally, a loan (including a loan impaired under
Statement of Financial Accounting Standards No. 114) is classified as non-
accrual 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 non-accrual status, unpaid interest
credited to income in the current year is reversed, and unpaid interest
accrued in prior years is charged against the allowance for loan losses.
Potential problem loans are identified by management as a part of its loan
review process.
<PAGE>
Income recognition is in accordance with Statement of Financial
Accounting Standards No. 118. Certain non-accrual loans may continue to
perform, that is, payments are still being received. Generally, the payments
are applied to principal. These loans remain under constant scrutiny and if
performance continues, interest income may be recorded on a cash basis based
on management's judgement as to collectibility of principal.
Allowance for Loan Losses - The allowance for loan losses is established
through provisions for loan losses charged against income. Loans deemed to be
uncollectible are charged against the allowance for loan losses, and
subsequent recoveries, if any, are credited to the allowance.
The Corporation adheres to the principles provided by Statement of
Financial Accounting Standards No.114, "Accounting by Creditors for Impairment
of a Loan" as amended by Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure." Under these standards, the allowance for loan losses related to
loans that are identified for evaluation in accordance with Statement No. 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. Statement No. 118 allows the continued use of existing methods for
income recognition on impaired loans and amends disclosure requirements to
require information about the recorded investment in certain impaired loans
and related income recognition on those loans. The allowance for loan losses
is maintained at a level by management to be adequate to absorb estimated
potential loan losses. Management's periodic evaluation of the adequacy of
the allowance for loan losses is based on the Corporation's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral, composition of
the loan portfolio, current economic conditions, and other relevant factors.
This evaluation is inherently subjective as it requires material estimates,
including the amounts and timing of future cash flows expected to be received
on impaired loans that may be susceptible to significant change.
<TABLE>
<CAPTION>
The following table presents the changes in the allowance for loan
losses:
<S> <C>
Balance at January 1, 1996 $2,015
Provisions charged to corporation 135
Loans charged-off (219)
Recoveries 28
Balance at September 30, 1996 $1,959
</TABLE>
At September 30, 1996, the recorded investment in loans that are
considered to be impaired under Statement No. 114 was $365,146, which were all
non-accrual loans. The related allowance for loan losses for the impaired
loans utilizing standards provided in Statement No. 114 is $140,838. No
additional charge to operations is required since the total allowance for loan
losses is estimated by management to be adequate to provide for the loan loss
allowance under Statement No. 114 as well as any other potential loan losses.
Note 6.
On January 4, 1996, the Board of Directors declared a 10% stock dividend
paid February 16, 1996, to Shareholders of Record January 4, 1996. The stock
dividend was valued based on the market price of $37.00 per share on January
4, 1996. A total of 80,718 shares were issued as a result of the stock
dividend with a total value of $2,991,188 including cash in lieu of fractional
shares. Shown below is a summary of stockholders' equity through September
30, 1996, showing the effect of the dividend.
<PAGE>
<TABLE>
<CAPTION>
COMMON COMMON
SHARES STOCK SURPLUS
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 808,429 $1,617 $3,829
Net income 0 0 0
Cash dividends - $.93
per share 0 0 0
10% stock dividend 80,718 161 2,825
Dividends paid in lieu of
fractional shares 0 0 0
Change in unrealized gain
(loss) on investment
securities available
for sale 0 0 0
BALANCE AT SEPTEMBER 30, 1996 889,147 $1,778 $6,654
<CAPTION>
NET UNREALIZED
GAIN (LOSS)
ON INVESTMENT
SECURITIES
RETAINED AVAILABLE
EARNINGS FOR SALE TOTAL
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 $17,889 $ 2,064 $25,399
Net income 3,253 0 3,253
Cash dividends - $.93
per share (827) 0 (827)
10% stock dividend (2,986) 0 0
Dividends paid in lieu of
fractional shares (5) 0 (5)
Change in unrealized gain
(loss) on investment
securities available
for sale 0 (1,502) (1,502)
BALANCE AT SEPTEMBER 30, 1996 $17,324 $ 562 $26,318
</TABLE>
Note 7.
As required on January 1, 1996, the Corporation adopted Statement No.
121,: "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." The Statement requires that long-lived assets and
certain identifiable intangibles are classified into two categories for the
purpose of accounting for an impairment of assets: those to be held and used
and those to be disposed of. Assets to be held and used must be reviewed
whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. An impairment loss is indicated if the sum of the
expected future cash flows, undiscounted and without interest charges, is less
than the carrying amount of the assets. An impairment loss must be recognized
as the amount by which the carrying amount of the asset exceeds the fair value
of the asset so determined. Implementation of this Statement did not have any
effect on the consolidated financial condition or results of operations of the
Corporation.
Note 8.
The consolidated interim financial statements have been prepared in
accordance with requirements of Form 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,
1995, 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, 1996
FINANCIAL CONDITION
Total assets of the Corporation increased by $15,115,000 from
December 31, 1995, to September 30, 1996, to a level of $241,148,000. The
increase in total assets was largely a result of total deposits increasing to
$198,432,000, up $11,112,000 from December 31, 1995 and total borrowings
increasing by $3,613,000.
The increase in deposits and borrowings were used principally to fund an
increase in available for sale securities along with a small increase in
loans. Loans, net of unearned income increased $3,387,000 from year-end 1995
to September 30, 1996. Available-for-sale securities increased $14,870,000 on
an estimated fair market value basis from year-end 1995 to September 30, 1996.
A reduction of $1,940,000 in interest bearing deposits with banks and a
reduction of $2,741,000 in investment securities held-to-maturity were the
other significant balance sheet changes.
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.
Furthermore, the company was required to adopt Financial Accounting
Standards Board Statement No. 114, "Accounting by Creditors for Impairment of
a Loan". Since the company does not have any "impaired loans" by definition
under Statement 114, there is no impact on the June 30, 1996, financial
statements.
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.
<PAGE>
RESULTS OF OPERATIONS
Net income for the third quarter or the three months ended September 30,
1996, was $1,192,000, an increase of 21.8% over the third quarter of 1995.
The increase resulted in net income for the nine months ended September 30,
1996, of $3,253,000, an increase of $748,000, or 29.9% over the same period in
1995.
For the nine months ended September 30, 1996, net interest income, our
primary source of net income, increased $624,000, or 10.2% over the same
period in 1995. With an increase in actual loan losses, our provision
increased to $135,000 as of September 30, 1996, from $117,000 in 1995. Other
income increased $148,000 in the first nine months of 1996 over 1995, because
of an increase in service charges on deposit accounts and other non-interest
(fee) income. Total other expenses fell $117,000, or 3.4% as of September 30,
1996, compared to September 30, 1995. The majority of the decrease relates to
the savings realized on FDIC insurance premiums.
Net income per weighted share outstanding was $3.72 for the nine months
ended September 30, 1996, as compared to $2.86 in 1995. 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 1996 and into 1997.
<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 12, 1996 /s/ J. GERALD BAZEWICZ
J. Gerald Bazewicz
President and
Chief Executive Officer
Date: November 12, 1996 /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-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 5309
<INT-BEARING-DEPOSITS> 23
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 79574
<INVESTMENTS-CARRYING> 20680
<INVESTMENTS-MARKET> 0
<LOANS> 131344
<ALLOWANCE> 1959
<TOTAL-ASSETS> 241148
<DEPOSITS> 198432
<SHORT-TERM> 5972
<LIABILITIES-OTHER> 1426
<LONG-TERM> 9000
<COMMON> 1778
0
0
<OTHER-SE> 24540
<TOTAL-LIABILITIES-AND-EQUITY> 241148
<INTEREST-LOAN> 8468
<INTEREST-INVEST> 4638
<INTEREST-OTHER> 79
<INTEREST-TOTAL> 13185
<INTEREST-DEPOSIT> 5864
<INTEREST-EXPENSE> 575
<INTEREST-INCOME-NET> 6746
<LOAN-LOSSES> 135
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 3331
<INCOME-PRETAX> 4057
<INCOME-PRE-EXTRAORDINARY> 4057
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3253
<EPS-PRIMARY> 3.72
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.41
<LOANS-NON> 364
<LOANS-PAST> 55
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1027
<ALLOWANCE-OPEN> 2015
<CHARGE-OFFS> 84
<RECOVERIES> 27
<ALLOWANCE-CLOSE> 1958
<ALLOWANCE-DOMESTIC> 1958
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 436
</TABLE>
