UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
Quarterly Report Pursuant to Section 13 OR 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 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
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date:
Common Stock, $2 Par Value, 889,147 shares as of March 31, 1996.
<PAGE>
<TABLE>
PART I. - FINANCIAL INFORMATION
FIRST KEYSTONE CORPORATION
BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except per share data)
<CAPTION>
March December
1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,778 $ 4,657
Interest bearing deposits with banks 28 1,963
Available-for-sale securities carried at
estimated fair value 75,425 64,704
Investment securities, held to maturity
securities, estimated fair value of
$22,238 and $23,439 22,360 23,421
Mortgages held for resale 67 104
Loans, net of unearned income $127,024 $127,957
Allowance for loan losses (1,871) (2,015)
Net loans $125,153 $125,942
Bank premises and equipment 3,020 3,066
Other real estate 46 0
Interest receivable 1,842 1,875
Other assets 515 301
Total Assets $233,234 $226,033
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 15,287 $ 17,622
Interest bearing 176,770 169,698
Total deposits $192,057 $187,320
Securities sold under agreements to
repurchase $ 3,480 $ 3,199
Other short-term borrowings 3,575 1,160
Long-term borrowings 8,000 7,000
Accrued expenses and other liabilities 1,426 1,955
Total Liabilities $208,538 $200,634
STOCKHOLDERS' EQUITY
Common stock, par value $2 per share $ 1,778 $ 1,617
Surplus 6,654 3,829
Retained earnings 15,590 17,889
Allowance for unrealized gains (loss) on
available for sale on debt and equity
investment securities 674 2,064
Total Stockholders' Equity $ 24,696 $ 25,399
Total Liabilities and Stockholders' Equity $233,234 $226,033
<FN>
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
(Amounts in thousands except per share data)
<CAPTION>
1996 1995
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,801 $2,579
Interest and dividend income on securities 1,405 1,251
Interest on deposits in banks 47 9
Total Interest Income $4,253 $3,839
INTEREST EXPENSE
Interest on deposits $1,955 $1,669
Interest on short-term borrowings 49 60
Interest on long-term borrowings 125 132
Total Interest Expense $2,129 $1,861
Net interest income $2,124 $1,978
Provision for loan losses 25 12
Net Interest Income After Provision
for Loan Losses $2,099 $1,966
OTHER INCOME
Service charges on deposit accounts $ 130 $ 113
Other non-interest income 109 91
Investment securities gains (losses) net 1 (32)
Total Other Income $ 240 $ 172
OTHER EXPENSES
Salaries and employee benefits $ 617 $ 574
Net occupancy and fixed asset expense 207 182
Other non-interest expense 331 473
Total Other Expenses $1,155 $1,229
Income before income taxes $1,184 $ 909
Applicable income tax (benefit) 216 192
Net Income $ 968 $ 717
Net Income Per Weighted Share Outstanding $1.14 $ .85
<FN>
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
(Amounts in thousands)
<CAPTION>
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 968 $ 717
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision or loan losses 25 12
Provision for depreciation and
amortization 79 75
Premium amortization on investment
securities 47 63
Discount accretion on investment
securities (21) (46)
(Gain) loss on sales of investment
securities (1) 32
Deferred income tax (benefit) 18 11
(Gain) loss on sales of other real
estate owned 0 13
(Increase) decrease in interest
receivable and other assets (181) (508)
Increase (decrease) in interest payable,
accrued expenses and other liabilities 165 379
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,099 $ 748
INVESTING ACTIVITIES
Purchases of investment securities
available for sale $(18,561) $(6,120)
Proceeds from sales of investment
securities available for sale 5,299 985
Proceeds from maturities and redemptions
of investment securities available for sale 1,441 1,114
Purchase of investment securities held to
maturity (996) (3,508)
Proceeds from maturities and redemption of
investment securities held to maturity 1,029 2,725
Proceeds from sale of other real estate owned 0 108
Proceeds from sales of loans 65 0
Net (increase) decrease in loans 690 (1,768)
Purchase of premises and equipment (33) (25)
NET CASH USED BY INVESTING ACTIVITIES $(11,066) $(6,489)
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 4,737 $ 5,552
Net increase (decrease) in short-term
borrowings 2,696 (961)
Net increase (decrease)in long-term
borrowings 1,000 500
Cash dividends (280) (234)
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 8,153 $ 4,857
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENT $ (1,814) $ (884)
CASH AND CASH EQUIVALENTS, BEGINNING 6,620 5,296
CASH AND CASH EQUIVALENTS, ENDING $ 4,806 $ 4,412
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for
Interest $ 2,079 $ 1,653
Income Taxes 102 51
<FN>
See Accompanying Notes to Financial Statements
</TABLE>
<PAGE>
FIRST KEYSTONE CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
March 31, 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 three-month period ended March 31,
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; 1996 - 848,344
shares and 1995 - 848,344 shares.
Note 5.
LOANS
Loans are stated at their outstanding 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 a loan is discontinued when the
contractual payment of principal or interest has become 90 days past due or
management has serious doubts about further collectibility of principal or
interest, even though the loan currently is performing. A loan may remain
on accrual status if it is in the process of collection and is either
guaranteed or well secured. When a loan is placed on non-accrual status,
unpaid interest credited to income in the current year is reversed, and
unpaid interest accrued in prior years is charged against the allowance for
credit 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 credit
losses:
<S> <C>
Balance at January 1, 1996 $2,015
Provisions charged off 25
Loans charged off (175)
Recoveries 6
Balance at March 31, 1996 $1,871
</TABLE>
At March 31, 1996, the recorded investment in loans that are considered
to be impaired under Statement No. 114 was $352,392, which were all non-
accrual loans. The related allowance for loan losses for the impaired loans
utilizing standards provided in Statement No. 114 is $70,882. 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
March 31, 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 - - -
Cash dividends - $.31 per share - - -
10% stock dividend 80,718 161 2,825
Dividends paid in lieu of
fractional shares - - -
Change in unrealized gain
(loss) on investment
securities available
for sale - - -
Balance at March 31, 1996 889,147 $1,778 $6,654
<CAPTION>
Net Realized
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 968 - 968
Cash dividends - $.31 per share (276) - (276)
10% stock dividend (2,986) - -
Dividends in lieu of
fractional shares (5) - (5)
Change in unrealized gain
(loss) on investment
securities available
for sale - (1,390) (1,390)
Balance at March 31, 1996 $15,590 $ 674 $24,696
</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
March 31, 1996
FINANCIAL CONDITION
Total assets of the Corporation increased by $7,201,000 from
December 31, 1995, to March 31, 1996, to a level of $233,234,000. The
increase in total assets was largely a result of total deposits increasing
to $192,057,000, up $4,737,000 from December 31, 1995, and borrowings
increasing by $3,415,000.
Other significant balance sheet changes for the three-month period
ended March 31, 1996, were: available for sale securities carried at fair
value increased $10,721,000, investment securities held to maturity
decreased $1,061,000 and total stockholders' equity decreased $703,000.
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.
<PAGE>
RESULTS OF OPERATIONS
Net income for the first quarter or the three months ended March 31,
1996, was $968,000, an increase of 35.0% over the first quarter of 1995.
The increase is largely a result of net interest income increasing $146,000,
or 7.4% over 1995, total other income increasing $68,000, or 39.5% over 1995,
and total other expenses declining $74,000, or 6.0% over 1995.
As indicated, the increase in net income resulted from improvements in
several areas. The net interest income increase was due to the maintenance
of our net interest margin which increased in 1995 over prior years. Total
other income, even before investment security gains and losses amounted to
$239,000 in 1996, an increase of 17.2% over $204,000 in the first three
months of 1995. Total other expenses fell primarily due to the substantial
reduction in FDIC insurance. Finally, while our income before income taxes
increased to $1,184,000 in 1996, an increase of 30.3% over 1995, our tax
liability increased only $24,000, or 12.5% in 1996 over 1995 levels. Our
effective tax rate for the first quarter of 1996 was 18.2% as compared to
21.1% in 1995.
Net income per weighted share outstanding was $1.14 for the three
months ended March 31, 1996, as compared to $.85 in 1995. Cash dividends
per share increased to $.31 as of March 31, 1996, as compared to $.26 in
March 1995. We remain committed to increase net interest income through the
generation of quality loans. Continued loan growth, together with
manageable loan losses and cost control over other expenses, will 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 From 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 cause this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST KEYSTONE CORPORATION
Registrant
May 14, 1996 /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and
Chief Executive Officer
May 14, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 4778
<INT-BEARING-DEPOSITS> 28
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22360
<INVESTMENTS-CARRYING> 75425
<INVESTMENTS-MARKET> 0
<LOANS> 127024
<ALLOWANCE> (1871)
<TOTAL-ASSETS> 233234
<DEPOSITS> 192057
<SHORT-TERM> 7055
<LIABILITIES-OTHER> 1426
<LONG-TERM> 8000
<COMMON> 1778
0
0
<OTHER-SE> 22918
<TOTAL-LIABILITIES-AND-EQUITY> 233234
<INTEREST-LOAN> 2801
<INTEREST-INVEST> 1405
<INTEREST-OTHER> 47
<INTEREST-TOTAL> 4253
<INTEREST-DEPOSIT> 1955
<INTEREST-EXPENSE> 174
<INTEREST-INCOME-NET> 2124
<LOAN-LOSSES> 25
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 1155
<INCOME-PRETAX> 1184
<INCOME-PRE-EXTRAORDINARY> 1184
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 968
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.36
<LOANS-NON> 419
<LOANS-PAST> 33
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1197
<ALLOWANCE-OPEN> 2015
<CHARGE-OFFS> 150
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 1871
<ALLOWANCE-DOMESTIC> 1871
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 501
</TABLE>
