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 June 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 June 30, 1996.
<PAGE>
<TABLE>
PART I. - FINANCIAL INFORMATION
FIRST KEYSTONE CORPORATION
BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except per share data)
<CAPTION>
June December
1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,879 $ 4,657
Interest bearing deposits with banks 30 1,963
Investment securities:
Held-to-maturity securities, approximate
fair value of $21,115 and $23,439 21,375 23,421
Available-for-sale securities carried at
estimated fair value 79,245 64,704
Mortgages held for resale 439 104
Loans, net of unearned income 126,021 127,957
Allowance for loan losses (1,929) (2,015)
Net loans $124,092 125,942
Bank premises and equipment 2,949 3,066
Other real estate 46 0
Interest receivable 1,986 1,875
Other assets 507 301
Total Assets $235,548 $226,033
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 17,032 $ 17,622
Interest bearing 176,007 169,698
Total deposits 193,039 187,320
Short-term borrowings 9,312 4,359
Long-term borrowings 7,000 7,000
Accrued expenses and other liabilities 1,227 1,955
Total Liabilities $210,578 $200,634
STOCKHOLDERS' EQUITY
Common stock, par value $2 per share $ 1,778 $ 1,617
Surplus 6,654 3,829
Retained earnings 16,408 17,889
Allowance for unrealized gains (loss)
on available for sale on debt and
equity investment securities 130 2,064
Total Stockholders' Equity $ 24,970 $ 25,399
Total Liabilities and Stockholders'
Equity $235,548 $226,033
<FN>
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 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 $5,598 $5,248
Interest and dividend income on securities 2,968 2,602
Interest on deposits in banks 77 73
Total Interest Income 8,643 $7,923
INTEREST EXPENSE
Interest on deposits $3,912 $3,501
Interest on short-term borrowings 105 109
Interest on long-term borrowings 264 292
Total Interest Expense $4,281 $3,902
Net interest income $4,362 $4,021
Provision for loan losses 90 74
Net Interest Income After Provision
for Loan Losses $4,272 $3,947
OTHER INCOME
Service charges on deposit accounts $ 271 $ 256
Other non-interest income 246 167
Investment securities gains (losses) net (2) (23)
Total Other Income $ 515 $ 400
OTHER EXPENSES
Salaries and employee benefits $1,189 $1,119
Net occupancy and fixed asset expense 388 376
Other non-interest expense 659 916
Total Other Expenses $2,236 $2,411
Income before income taxes $2,551 $1,936
Applicable income tax (benefit) 490 410
Net Income $2,061 $1,526
Net Income Per Weighted Share Outstanding $ 2.37 $ 1.76
<FN>
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 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 $2,797 $2,669
Interest and dividend income on securities 1,563 1,351
Interest on deposits in banks 30 64
Total Interest Income $4,390 $4,084
INTEREST EXPENSE
Interest on deposits $1,957 $1,832
Interest on short-term borrowings 56 49
interest on long-term borrowings 139 160
Total Interest Expense $2,152 $2,041
Net interest income $2,238 $2,043
Provision for loan losses 65 62
Net Interest Income After Provision for
Loan Losses $2,173 $1,981
OTHER INCOME
Service charges on deposit accounts $ 141 $ 143
Other non-interest income 137 76
Investment securities gains (losses) net (3) 9
Total Other Income $ 275 $ 228
OTHER EXPENSES
Salaries and employee benefits $ 572 $ 545
Net occupancy and fixed asset expense 181 194
Other non-interest expense 328 443
Total Other Expenses $1,081 $1,182
Income before income taxes and
change in accounting principle $1,367 $1,027
Applicable income tax (benefit) 274 218
Net Income $1,093 $ 809
Net Income Per Weighted Share Outstanding $ 1.26 $ .93
<FN>
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
(Amounts In Thousands)
<CAPTION>
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,061 $ 1,526
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan losses 90 74
Provision for depreciation and
amortization 159 150
Premium amortization on investment
securities 88 118
Discount accretion on investment
securities (42) (75)
(Gain) loss on sales of investment
securities 2 23
(Gain) loss on sales of other real
estate owned 0 38
Deferred income tax (benefit) 43 16
(Increase) decrease in interest
receivable and other assets (120) (440)
Increase (decrease) in interest payable,
accrued expenses and other liabilities 25 407
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,306 $ 1,837
INVESTING ACTIVITIES
Purchases of investment securities
available-for-sale $(35,035) $(14,997)
Proceeds from sales of investment
securities available for sale 15,579 9,814
Proceeds from maturities and redemptions
of investment securities available
for sale 2,984 2,056
Purchase of investment securities
held-to-maturity (996) (5,608)
Proceeds from maturities and redemption
of investment securities held to maturity 1,998 3,198
Net (increase) decrease in loans 1,314 (2,844)
Proceeds from sale of other real
estate owned 0 197
Purchase of premises and equipment (42) (184)
Proceeds from sales of loans 65 0
NET CASH USED BY INVESTING ACTIVITIES $(14,133) $ (8,368)
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 5,719 $ 11,917
Net increase (decrease) in short-term
borrowings 4,953 (341)
Net increase (decrease) in long-term
borrowings 0 2,500
Cash dividends (556) (469)
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 10,116 $ 13,607
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENT $ (1,711) $ 7,076
CASH AND CASH EQUIVALENTS, BEGINNING 6,620 5,296
CASH AND CASH EQUIVALENTS, ENDING $ 4,909 $ 12,372
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for
Interest $ 4,352 $ 3,635
Income Taxes 501 413
<FN>
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
FIRST KEYSTONE CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
June 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 six-month period ended June 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 - 868,746 shares and 1995 -
868,746 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
<PAGE>
credit losses. Potential problem loans are identified by management as a
part of its loan review process.
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 credit
losses:
<S> <C>
Balance $2,015
Provisions charged to corporation 90
Loans charged-off (194)
Recoveries 18
Balance at June 30, 1996 $1,929
</TABLE>
At June 30, 1996, the recorded investment in loans that are considered
to be impaired under Statement No. 114 was $324,041, which were all non-
accrual loans. The related allowance for loan losses for the impaired loans
utilizing standards provided in Statement No. 114 is $186,093. 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
June 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 80,718 0 0
Cash dividends - $.31
per share 0 0 0
10% stock dividend 0 161 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 JUNE 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 2,061 0 2,061
Cash dividends - $.31
per share (551) 0 (551)
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 (1,934) (1,934)
BALANCE AT JUNE 30, 1996 $16,408 $ 130 $24,970
</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
June 30, 1996
FINANCIAL CONDITION
Total assets of the Corporation increased by $9,515,000 from
December 31, 1995, to June 30, 1996, to a level of $235,548,000. The
increase in total assets was largely a result of total deposits increasing
to $193,039,000, up $5,719,000 from December 31, 1995 and short-term
borrowing increasing by $4,953,000.
The increase in deposits and short-term borrowings were used
principally to fund an increase in available for sale securities since loan
demand was stagnate. Net loans actually decreased $1,850,000 from year-end
1995 to June 30, 1996. Combined with a reduction of $1,933,000 in interest
bearing deposits with banks and a reduction of $2,046,000 in investment
securities held-to-maturity, available-for-sale securities increased
$14,541,000 on an estimated fair market value basis.
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 second quarter or the three months ended June 30,
1996, was $1,093,000, an increase of 35.1% over the second quarter of 1995.
The increase resulted in net income for the six months ended June 30, 1996,
of $2,061,000, an increase of $535,000, or 35% over the same period in 1995.
For the six months ended June 30, 1996, net interest income, our
primary source of net income, increased $341,000, or 8.5% over the same
period in 1995. With an increase in actual loan losses, our provision
increased to $90,000 as of June 30, 1996, from $74,000 in 1995. Other
income increased $115,000 in the first half of 1996 over 1995, primarily
because of an increase in other non-interest (fee) income. Other expense
fell $175,000, or 7.3% as of June 30, 1996, compared to June 30, 1995. The
majority of the decrease relates to the savings realized on FDIC insurance
premiums.
Net income per weighted share outstanding was $2.37 for the six months
ended June 30, 1996, as compared to $1.76 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, should provide the foundation for strong net
income results throughout 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: August 8, 1996 /s/ J. GERALD BAZEWICZ
J. Gerald Bazewicz
President and
Chief Executive Officer
Date: August 8, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 4879
<INT-BEARING-DEPOSITS> 30
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21375
<INVESTMENTS-CARRYING> 79245
<INVESTMENTS-MARKET> 0
<LOANS> 126021
<ALLOWANCE> 1929
<TOTAL-ASSETS> 235548
<DEPOSITS> 193039
<SHORT-TERM> 9312
<LIABILITIES-OTHER> 1227
<LONG-TERM> 7000
<COMMON> 1778
0
0
<OTHER-SE> 23192
<TOTAL-LIABILITIES-AND-EQUITY> 235548
<INTEREST-LOAN> 5598
<INTEREST-INVEST> 2968
<INTEREST-OTHER> 77
<INTEREST-TOTAL> 8643
<INTEREST-DEPOSIT> 3912
<INTEREST-EXPENSE> 369
<INTEREST-INCOME-NET> 4362
<LOAN-LOSSES> 90
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 2236
<INCOME-PRETAX> 2551
<INCOME-PRE-EXTRAORDINARY> 2551
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2061
<EPS-PRIMARY> 2.37
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.35
<LOANS-NON> 324
<LOANS-PAST> 68
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1061
<ALLOWANCE-OPEN> 2015
<CHARGE-OFFS> 106
<RECOVERIES> 19
<ALLOWANCE-CLOSE> 1928
<ALLOWANCE-DOMESTIC> 1928
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 559
</TABLE>
