UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
Quarterly Report Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1997
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 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, 977,909 shares as of September 30, 1997.
<PAGE>
PART I. - FINANCIAL INFORMATION
Item. 1 Financial Statements
<TABLE>
FIRST KEYSTONE CORPORATION
BALANCE SHEETS
(Unaudited)
<CAPTION>
(Amounts in thousands, except per share data)
September December
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,920 $ 5,147
Interest bearing deposits with banks 5,414 32
Available-for-sale securities carried
at estimated fair value 81,217 81,146
Investment securities, held to
maturity securities, estimated fair
value of $17,691 and $19,955 17,668 20,080
Loans, net of unearned income 151,377 133,261
Allowance for loan losses (2,322) (2,267)
Net loans $149,055 $130,994
Bank premises and equipment 3,397 2,881
Other real estate 0 46
Interest receivable 2,008 1,959
Other assets 366 272
Total Assets $265,045 $242,557
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 18,998 $ 17,805
Interest bearing 195,012 180,741
Total deposits $214,010 $198,546
Short-term borrowings 6,016 5,121
Long-term borrowings 12,000 10,000
Accrued expenses 1,450 1,128
Other liabilities 937 289
Total Liabilities $234,413 $215,084
STOCKHOLDERS' EQUITY
Common stock, par value $2
per share $ 1,956 $ 1,778
Surplus 9,761 6,655
Retained earnings 17,059 17,890
Unrealized gain (loss) on
investment securities available
for sale, net of taxes 1,856 1,150
Total Stockholders' Equity $ 30,632 $ 27,473
Total Liabilities and
Stockholders' Equity $265,045 $242,557
<FN>
See Accompanying Notes to Financial Statements
</FN>
</TABLE>
1
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<CAPTION>
(Amounts in thousands except per share data)
1997 1996
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,364 $2,870
Interest and dividend income on
securities 1,465 1,670
Interest on deposits in banks 119 2
Total Interest Income $4,948 $4,542
INTEREST EXPENSE
Interest on deposits $2,174 $1,952
Interest on short-term borrowings 49 80
Interest on long-term borrowings 194 126
Total Interest Expense $2,417 $2,158
Net interest income $2,531 $2,384
Provision for loan losses 50 45
Net Interest Income After
Provision for Loan Losses $2,481 $2,339
OTHER INCOME
Service charges on deposit accounts $ 149 $ 152
Other non-interest income 117 110
Investment securities gains
(losses) net 20 0
Total Other Income $ 286 $ 262
OTHER EXPENSES
Salaries and employee benefits $ 658 $ 603
Net occupancy and fixed asset expense 218 177
Other non-interest expense 347 315
Total Other Expenses $1,223 $1,095
Income before income taxes $1,544 $1,506
Applicable income tax (benefit) 359 314
Net Income $1,185 $1,192
Net Income Per Weighted Share
Outstanding $ 1.21 $ 1.22
<FN>
See Accompanying Notes to Financial Statements
</FN>
</TABLE>
2
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<CAPTION>
(Amounts in thousands except per share data)
1997 1996
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 9,509 $ 8,468
Interest and dividend income
on securities 4,592 4,638
Interest on deposits in banks 200 79
Total Interest Income $14,301 $13,185
INTEREST EXPENSE
Interest on deposits $ 6,200 $ 5,864
Interest on short-term borrowings 172 185
Interest on long-term borrowings 558 390
Total Interest Expense $ 6,930 $ 6,439
Net interest income $ 7,371 $ 6,746
Provision for loan losses 200 135
Net Interest Income After
Provision for Loan Losses $ 7,171 $ 6,611
OTHER INCOME
Service charges on deposit accounts $ 455 $ 423
Other non-interest income 376 356
Investment securities gains
(losses) net 19 (2)
Total Other Income $ 850 $ 777
OTHER EXPENSES
Salaries and employee benefits $ 1,930 $ 1,792
Net occupancy and fixed asset
expense 617 565
Other non-interest expense 1,077 974
Total Other Expenses $ 3,624 $ 3,331
Income before income taxes $ 4,397 $ 4,057
Applicable income tax (benefit) 942 804
Net Income $ 3,455 $ 3,253
Net Income Per Weighted Share
Outstanding $ 3.53 $ 3.33
<FN>
See Accompanying Notes to Financial Statements
</FN>
</TABLE>
3
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<CAPTION>
(Amounts in thousands)
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,455 $ 3,253
Adjustments to reconcile net income
to net cash provided
by operating activities:
Provision for loan losses 200 135
Provision for depreciation 232 218
Premium amortization on investment
securities 90 112
Discount accretion on investment
securities (96) (64)
(Gain) loss on sales of investment
securities (9) 2
(Gain) loss on sales of other real
estate owned (1) 0
Deferred income tax (benefit) 0 44
(Increase) decrease in interest
receivable and other assets (143) (107)
Increase (decrease) in interest
payable, accrued expenses and
other liabilities 571 193
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 4,289 $ 3,786
INVESTING ACTIVITIES
Purchases of investment securities
available-for-sale $(19,100) $(35,238)
Proceeds from sales of investment
securities available for sale 17,058 15,579
Proceeds from maturities and
redemptions of investment
securities available for sale 3,678 3,536
Purchase of investment securities
held-to-maturity 0 (996)
Proceeds from maturities and
redemption of investment
securities held to maturity 1,839 2,672
Net (increase) decrease in loans (18,303) (4,535)
Proceeds from sale of other real
estate owned 43 0
Purchase of premises and equipment (748) (50)
Proceeds from sale of loans 42 65
NET CASH USED BY INVESTING
ACTIVITIES $(15,491) $(18,967)
FINANCING ACTIVITIES
Net increase (decrease) in
deposits $ 15,464 $ 11,112
Net increase (decrease) in
short-term borrowings 895 1,613
Net increase (decrease) in
long-term borrowings 2,000 2,000
Cash dividends (1,002) (832)
NET CASH PROVIDED BY
FINANCING ACTIVITIES $ 17,357 $ 13,893
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENT $ 6,155 $ (1,288)
CASH AND CASH EQUIVALENTS,
BEGINNING 5,179 6,620
CASH AND CASH EQUIVALENTS, ENDING $ 11,334 $ 5,332
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during period for
Interest $ 6,927 $ 6,419
Income Taxes 869 777
<FN>
See Accompanying Notes to Financial Statements
</FN>
</TABLE>
4
<PAGE>
FIRST KEYSTONE CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(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, 1997, 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 outstanding for each
period; 1997 and 1996 - 977,909 shares after giving effect to stock
dividends.
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 installment loans is recognized as income
over the term of each loan, generally, by the "actuarial method".
Interest on other loans is primarily recognized based upon the
principal amount outstanding. Loan origination fees and certain
direct loan origination costs have been deferred and the net amount
amortized using the interest method over the contractual life of the
related loans as an interest yield adjustment.
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.
5
<PAGE>
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.
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 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, 1997 $2,267
Provisions charged to operations 200
Loans charged off (190)
Recoveries 45
Balance at September 30, 1997 $2,322
</TABLE>
At September 30, 1997, the recorded investment in loans that are
considered to be impaired under Statement No. 114 was $48,136. 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 April 15, 1997, the Board of Directors declared a 10% stock
dividend payable May 16, 1997, to shareholders of record May 2, 1997.
The stock dividend was valued based on the market price of $37.00 per
share on May 2, 1997. A total of 88,762 shares were issued as a
result of the stock dividend with a total value of $3,289,844,
including cash in lieu of fractional shares.
6
<PAGE>
<TABLE>
<CAPTION>
(Amounts in thousands except Common Shares data)
Common Common
Shares Stock Surplus
<S> <C> <C> <C>
Balance at January 1, 1997 889,147 $1,778 $6,655
Net Income 0 0 0
10% stock dividend 88,762 178 3,106
Dividends paid in lieu of
fractional shares 0 0 0
Cash dividends - $1.05 per
share 0 0 0
Change in unrealized gain
(loss) on investment
securities available
for sale 0 0 0
Balance at June 30, 1997 977,909 $1,956 $9,761
<CAPTION>
Net Unrealized
Gain (Loss)
on Investment
Securities
Retained Available
Earnings For Sale Total
<S> <C> <C> <C>
Balance at January 1, 1997 $17,890 $1,150 $27,473
Net Income 3,455 0 3,455
10% stock dividend (3,284) 0 0
Dividends paid in lieu of
fractional shares (6) 0 (6)
Cash dividends - $.67 per
share (996) 0 (996)
Change in unrealized gain
(loss) on investment
securities available
for sale 0 706 706
Balance at June 30, 1997 $17,059 $1,856 $30,632
</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 From 10-Q 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, 1996, filed
with the Securities and Exchange Commission.
7
<PAGE>
Item 2. First Keystone Corporation Management's Discussion and
Analysis of Financial Condition and Results of Operation
as of September 30, 1997
RESULTS OF OPERATIONS
First Keystone Corporation realized earnings for the third
quarter of 1997 of $1,185,000, a decrease of $7,000, or 0.6% over the
third quarter of 1996. The decrease in net income for the third
quarter of 1997 was a result of reduced growth in net interest income
and a substantial increase in other expenses. Other expenses, non-
interest expenses, increased 11.7% in the third quarter of 1997 over
1996 primarily because of expenses relating to our seventh full
service office opening in the beginning of the fourth quarter of 1997.
Nine months net income for the period ended September 30, 1997,
amounted to $3,455,000, an increase of 6.2% over the $3,253,000 net
income reported September 30, 1996. On a per share basis, net income
per share increased to $3.53 for the nine months of 1997 compared to
$3.33 for the first nine months of 1996, while dividends increased to
$1.02 per share up from $.85 in 1996, or an increase of 20%.
Year-to-date net income annualized amounts to a return on
average common equity of 16.10% and a return on assets of 1.82%. For
the nine months ended September 30, 1996, these measures were 16.28%
and 1.83%, respectively on an annualized basis.
NET INTEREST INCOME
The major source of operating income for the Corporation is net
interest income, defined as interest income less interest expense. In
the third quarter of 1997 and year-to-date in 1997, interest income
has increased more than interest expense resulting in improved net
interest income. However, in the third quarter of 1997, interest
income amounted to $4,948,000, an increase of $406,000 or 8.9% over
the third quarter of 1996, while interest expense amounted to
$2,417,000 in the third quarter of 1997, an increase of $259,000, or
12.0% over the third quarter of 1997. Accordingly, net interest
income was $2,531,000 in the third quarter of 1997, an increase of
$147,000, or 6.2% over the third quarter of 1996. The increase in net
interest income for the third quarter was less than previous quarters
in 1997 as our interest margin tightened. Year-to-date for the nine
months ended September 30, 1997, net interest income increased
$625,000, or 9.3% over the first nine months of 1996.
Our net interest margin for the quarter ended September 30,
1997, was 4.41% compared to 4.41% for the quarter ended September 30,
1996. For the nine months ended September 30, 1997, our net interest
margin was 4.50% compared to 4.50% for the first nine months of 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the quarter ended September
30, 1997, was $50,000 compared to $45,000 for the third quarter of
1996. Year-to-date, the provision for loan losses increased to
$200,000 in 1997 over the $135,000 provision for the nine months ended
September 30, 1996. The provision for possible loan losses was
increased in 1997 to cushion us against possible increased charge-offs
associated with an increase in loans, net of unearned interest of
$19,083,000 from September 30, 1996, to September 30, 1997. Net
charge-offs totaled $145,000 for the nine months ended September 30,
1997, as compared to $257,000 for the first nine months of 1996. The
allowance for loan losses as a percentage of loans, net of unearned
interest, was 1.53% as of September 30, 1997, as compared to 1.49% as
of September 30, 1996.
8
<PAGE>
NON-INTEREST INCOME
Total non-interest or other income was $286,000 for the quarter
ended September 30, 1997, as compared to $262,000 for the quarter
ended September 30, 1996. Excluding investment security gains and
losses, non-interest income was $266,000 for the third quarter of
1997, an increase of $4,000 over the third quarter of 1996. For the
nine months ended September 30, 1997, total non-interest income was
$850,000, an increase of $73,000, or 9.4% over the first nine months
of 1996. Increased fees generated by our trust department, an
increase in service charges on deposit accounts, and an increase in
security gains were the primary reasons for the $73,000 year-to-date
increase in non-interest income.
NON-INTEREST EXPENSES
Total non-interest, or other expenses, was $1,223,000 for the
quarter ended September 30, 1997, as compared to $1,095,000 for the
quarter ended September 30, 1996. The increase of $128,000 is
comprised of salary and benefits increasing $55,000, occupancy expense
increasing $41,000, and other non-interest expense increasing $32,000.
Increased non-interest expenses will continue as a result of increased
personnel expenses and overhead expenses associated with a new office
opening in October 1997.
For the nine months ended September 30, 1997, total non-interest
expense was $3,624,000, an increase of $293,000, or 8.8% over the
first nine months of 1996. Expenses associated with employee
(salaried employee benefits) continues to be the largest category of
non-interest expenses. Salaries and benefits amount to 53.3% of total
non-interest expense for the nine months ended September 30, 1997, as
compared to 53.8% for the first nine months of 1996. Salaries and
benefits amounted to $1,930,000 for the nine months ended September
30, 1997, an increase of $138,000, or 7.7% over the first nine months
of 1996. Net occupancy expense amounted to $617,000 for the nine-
months ended September 30, 1997, an increase of $52,000, or 9.2% over
1996. Other non-interest expenses amounted to $1,077,000 for the nine
months ended September 30, 1997, an increase of $103,000, or 10.6%
over the first nine months of 1996. Even though our non-interest
expenses increased in the third quarter more than historic averages,
our overall non-interest expense of less than 2% of average assets on
an annualized basis, places us among the leaders of our peer financial
institutions at controlling total non-interest expense.
INCOME TAXES
Effective tax planning has helped produce favorable net income.
The effective total income tax rate was 23.3% for the third quarter of
1997 as compared to 20.8% for the third quarter of 1996. For the nine
months ended September 30, 1997, our tax liability amounted to
$942,000 for an effective tax rate of 21.4% as compared to an
effective tax rate of 19.8% for the first nine months of 1996. The
increase in our effective tax rate in the third quarter of 1997 and
year-to-date 1997 was due primarily to the limited opportunities to
purchase municipal (tax-free investments) securities at attractive
interest rates.
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased to $265,045,000 as of September 30, 1997,
an increase of $22,488,000, or 9.3% over year-end 1996. Total
deposits increased to $214,010,000 as of September 30, 1997, an
increase of $15,464,000, or 7.8% over year-end 1996.
9
<PAGE>
The Corporation used borrowed funds to support asset growth not
provided by deposit growth. Long-term borrowing increased to
$12,000,000 as of September 30, 1997, up from $10,000,000 at December
31, 1996. In addition, short-term borrowing increased to $6,016,000
as of September 30, 1997, an increase of 17.5% over year-end 1996.
EARNING ASSETS
Our primary earning asset, loan, net of unearned income
increased to $151,377 as of September 30, 1997, up $18,116,000, or
13.6% since year-end 1996. The loan portfolio is well diversified and
increases in the portfolio have been primarily from increased
originations of real estate loans and commercial loans secured by real
estate.
With the substantial increase in loans, our investment portfolio
was reduced in size from December 31, 1996, to September 30, 1997.
Held-to-maturity securities amounted to $17,668,000 as of September
30, 1997, a decrease of $2,412,000, or 12.0% since year-end 1996.
Available-for-sale securities amounted to $81,217,000 as of September
30, 1997, an increase of only $71,000, or .09% from year-end 1996.
Interest bearing deposits with banks amounted to $5,414,000 as of
September 30, 1997, up from $32,000 as of December 31, 1996, as funds
were kept short-term for liquidity and in anticipation of funding loan
commitments.
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.
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual and restructured
loans, together with foreclosed assets. As of September 30, 1997,
total non-performing assets were $312,000 as compared to $351,000 on
December 31, 1996. Non-performing assets to total loans and
foreclosed assets was 21% as of September 30, 1997, and .26% as of
December 31, 1996.
Loans past-due 90 days or more and still accruing amounted to
$88,000 as of September 30, 1997, as compared to $263,000 on December
31, 1996.
10
<PAGE>
Interest income received on non-performing loans as of September
30, 1997, was $2,743 compared to $3,048 as of December 31, 1996.
Interest income, which would have been recorded on these loans under
the original terms as of September 30, 1997, and December 31, 1996,
were $24,816 and $46,924, respectively. As of September 30, 1997 and
December 31, 1996, there was no outstanding commitments to advance
additional funds with respect to these non-performing loans.
DEPOSITS AND OTHER BORROWED FUNDS
As indicated previously, deposit growth amounted to $15,464,000
as total deposits increased to $214,010,000 as of September 30, 1997,
up from $198,546,000 as of year-end 1996. During 1997, the
Corporation has experienced an increase in non-interest bearing
deposits of $1,193,000, while interest bearing deposits increased
$14,271,000. The majority of the increase in interest bearing
deposits can be associated with an increase in certificates of
deposit.
CAPITAL STRENGTH
Normal increases in capital are generated by net income, less
cash dividends paid out. Also, net unrealized gains on investment
securities available-for-sale increased shareholders' equity, or
capital by $1,856,000 as of September 30, 1997, and $1,150,000 as of
December 31, 1996.
Leverage ratio and risk based capital ratios remain very strong.
As of September 30, 1997, our leverage ratio was 11.06% as compared to
10.87% as of December 31, 1996. In addition, Tier 1 risk based
capital and total risk based capital ratio as of September 30, 1997,
were 18.93% and 20.18%, respectively. The same ratios as of December
31, 1996, were 19.29% and 20.55%, respectively.
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.
Management feels its current liquidity position is
satisfactorily given a very stable core deposit base which has
increased annually. Secondly, our loan payments and principal
paydowns on our mortgage backed securities provide and steady source
of funds. Also, short-term investments and maturing investment
securities represent additional sources of liquidity. Finally, short-
term borrowings are readily accessible at the Federal Reserve Bank
discount window, Atlantic Central Bankers Bank, or the Federal Home
Loan Bank.
11
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Annual Meeting of Shareholders of First Keystone
Corporation held on Tuesday, April 15, 1997, at 9:00
a.m.
<TABLE>
<CAPTION>
Votes Votes
Directors Elected Votes For Against Withheld
<S> <C> <C> <C>
Budd L. Beyer 754,543 6,453 0
Frederick E. Crispin, Jr. 754,543 6,453 0
Robert J. Wise 754,514 6,482 0
<CAPTION>
Broker
Directors Elected Abstentions Non-Votes
<S> <C> <C>
Budd L. Beyer 0 0
Frederick E. Crispin, Jr. 0 0
Robert J. Wise 0 0
</TABLE>
Directors Continuing:
John Arndt, term expires in 1998
J. Gerald Bazewicz, term expires in 1998
Robert E. Bull, term expires in 1998
John L. Coates, term expires in 1999
Dudley P. Cooley, term expires in 1999
Stanley E. Oberrender, term expires in 1999
F. Stuart Straub, term expires in 1998
Matters Voted Upon:
Selection of J. H. Williams & Co., as auditors for the
Corporation. Votes For - 760,537
Votes Against - 48
Votes Withheld - 0
Abstentions - 411
Broker Non-Votes - 0
Item 5. Other Information
10% Stock Dividend - refer to Consolidated Notes to
Financial Statements Note 6 appearing on page 5 of
this Form 10-Q.
12
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 Regulation S-K
Exhibit Number Description of Exhibit
3(i) Articles of Incorporation, as amended
(Incorporated by reference to Exhibit 3(i) to
Registrant's Annual Report of Form 10-KSB for
the year ended December 31, 1996.)
3(ii) Bylaws, as amended (Incorporated by reference
to Exhibit 3(ii) to Registrant's Annual Report
on Form 10-KSB for the year ended
December 31, 1996.)
10 Material Contracts (Incorporated by reference
to Exhibit 10 to Registrant's Form 10Q for the
quarter ended June 30, 1997)
11 Statement RE: Computation of Earnings Per
Share.
27 Financial Data Schedule.
(b) The Registrant has filed no reports on Form 8-K for
this quarter.
13
<PAGE>
FIRST KEYSTONE CORPORATION
SIGNATURES
Pursuant to the requirements 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
November 14, 1997
J. Gerald Bazewicz
President and
Chief Executive Officer
(Principal Executive Officer)
November 14, 1997
David R. Saracino
Treasurer/Assistant Secretary
(Principal Accounting Officer)
14
<PAGE>
INDEX TO EXHIBITS
Exhibit Description Page
10 Material Contracts
Profit Sharing Plan Summary
(Incorporated by reference to
Exhibit 10 (Page 16) to
Registrant's Form 10Q for the
quarter ended June 30, 1997)
Deferred Compensation (Incorporated
by reference to Exhibit 10
(Page 17) to Registrant's
Form 10Q for the quarter ended
June 30, 1997)
Other Executive Benefits
(Incorporated by reference to
Exhibit 99 (Page 9) of the
Corporation's Annual Report
on Form 10-KSB for the year
ended December 31, 1996)
Management Incentive Compensation Plan
(Incorporated by reference to
Exhibit 10 (Page 18) to
Registrant's Form 10Q for the
quarter ended June 30, 1997)
11 Compensation of Earning Per Share 19
27 Financial Data Schedule
15
EXHIBIT 11
FIRST KEYSTONE CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Quarter Ended September 30,
1997 1996
(Dollars in Thousands)
<S> <C> <C>
Primary
Net Income $ 1,185 $ 1,192
Shares<F1>
Weighted average number of
common shares outstanding 977,909 977,909
Adjustments - increases or
decreases None None
Weighted average number of
common shares outstanding
as adjusted 977,909 977,909
Primary earnings per common share $ 1.21 $ 1.22
Assuming full dilution
Net Income $ 1,185 $ 1,192
Shares<F1>
Weighted average number of
common shares outstanding 977,909 977,909
Adjustments - increases or
decreases None None
Weighted average number of
common shares outstanding
as adjusted 977,909 977,909
Earnings per common share
assuming full dilution $ 1.21 $ 1.22
<FN>
<F1>
Restated to reflect 10% stock dividends paid in 1997.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,920
<INT-BEARING-DEPOSITS> 5,414
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 81,217
<INVESTMENTS-CARRYING> 17,668
<INVESTMENTS-MARKET> 17,691
<LOANS> 151,377
<ALLOWANCE> 2,322
<TOTAL-ASSETS> 265,045
<DEPOSITS> 214,010
<SHORT-TERM> 6,016
<LIABILITIES-OTHER> 2,387
<LONG-TERM> 12,000
0
0
<COMMON> 1,956
<OTHER-SE> 28,676
<TOTAL-LIABILITIES-AND-EQUITY> 265,045
<INTEREST-LOAN> 9,509
<INTEREST-INVEST> 4,592
<INTEREST-OTHER> 200
<INTEREST-TOTAL> 14,301
<INTEREST-DEPOSIT> 6,200
<INTEREST-EXPENSE> 730
<INTEREST-INCOME-NET> 7,371
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 19
<EXPENSE-OTHER> 3,624
<INCOME-PRETAX> 4,397
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,455
<EPS-PRIMARY> 3.53
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.50
<LOANS-NON> 293
<LOANS-PAST> 88
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,037
<ALLOWANCE-OPEN> 2,267
<CHARGE-OFFS> 10
<RECOVERIES> 45
<ALLOWANCE-CLOSE> 2,322
<ALLOWANCE-DOMESTIC> 2,322
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 707
</TABLE>
