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 June 30, 1998
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, 2,933,727 shares as of June 30, 1998.
<PAGE>
PART I. - FINANCIAL INFORMATION
Item. 1 Financial Statements
<TABLE>
FIRST KEYSTONE CORPORATION
BALANCE SHEETS
(Unaudited)
<CAPTION>
(Amounts in thousands, except per share data)
June December
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,080 $ 6,400
Interest bearing deposits with banks 4,721 7,084
Available-for-sale securities carried
at estimated fair value 97,449 81,651
Investment securities, held to maturity
securities, estimated fair value
of $15,615 and $16,833 15,566 16,808
Loans, net of unearned income 155,880 152,150
Allowance for loan losses (2,399) (2,371)
Net loans $153,481 $149,779
Bank premises and equipment 3,398 3,436
Interest receivable 2,146 1,998
Other assets 416 242
Total Assets $282,257 $267,398
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 20,342 $ 18,398
Interest bearing 202,780 199,249
Total deposits $223,122 $217,647
Short-term borrowings 7,820 6,102
Long-term borrowings 16,000 9,000
Accrued expenses 1,358 1,522
Other liabilities 826 1,309
Total Liabilities $249,126 $235,580
STOCKHOLDERS' EQUITY
Common stock, par value $2 per
share; authorized 10,000,000
shares 1998, 3,000,000 shares
1997; issued 2,933,727 in
1998 and 977,909 in 1997 $ 5,867 $ 1,956
Surplus 9,761 9,761
Retained earnings 15,530 17,873
Unrealized gain (loss) on investment
securities available
for sale, net of taxes 2,063 2,228
Less treasury stock at cost 2,785
shares in 1998 and 0 in 1997 (90) 0
Total Stockholders' Equity $ 33,131 $ 31,818
Total Liabilities and
Stockholders' Equity $282,257 $267,398
<FN>
See Accompanying Notes to Financial Statements
</FN>
</TABLE>
1
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<CAPTION>
(Amounts in thousands except per share data)
1998 1997
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,372 $3,159
Interest and dividend income
on securities 1,777 1,516
Interest on deposits in banks 34 70
Total Interest Income $5,183 $4,745
INTEREST EXPENSE
Interest on deposits $2,242 $2,029
Interest on short-term borrowings 80 45
Interest on long-term borrowings 209 202
Total Interest Expense $2,531 $2,276
Net interest income $2,652 $2,469
Provision for loan losses 75 100
Net Interest Income After Provision
for Loan Losses $2,577 $2,369
OTHER INCOME
Service charges on deposit accounts $ 175 $ 160
Other non-interest income 124 120
Investment securities gains
(losses) net 25 (7)
Total Other Income $ 324 $ 273
OTHER EXPENSES
Salaries and employee benefits $ 679 $ 613
Net occupancy and fixed asset expense 223 207
Other non-interest expense 406 366
Total Other Expenses $1,308 $1,186
Income before income taxes $1,593 $1,456
Applicable income tax (benefit) 345 309
Net Income $1,248 $1,147
Net Income Per Weighted
Shares Outstanding $ .43 $ .39
<FN>
See Accompanying Notes to Financial Statements
</FN>
</TABLE>
2
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<CAPTION>
(Amounts in thousands except per share data)
1998 1997
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 6,659 $ 6,145
Interest and dividend income
on securities 3,338 3,127
Interest on deposits in banks 138 81
Total Interest Income $10,135 $ 9,353
INTEREST EXPENSE
Interest on deposits $ 4,475 $ 4,026
Interest on short-term borrowings 138 123
Interest on long-term borrowings 364 364
Total Interest Expense $ 4,977 $ 4,513
Net interest income
$ 5,158 $ 4,840
Provision for loan losses 125 150
Net Interest Income After
Provision for Loan Losses $ 5,033 $ 4,690
OTHER INCOME
Service charges on deposit
accounts $ 334 $ 306
Other non-interest income 282 259
Investment securities gains
(losses) net 60 (1)
Total Other Income $ 676 $ 564
OTHER EXPENSES
Salaries and employee benefits $ 1,400 $ 1,272
Net occupancy and fixed
asset expense 451 399
Other non-interest expense 808 730
Total Other Expenses $ 2,659 $ 2,401
Income before income taxes $ 3,050 $ 2,853
Applicable income tax (benefit) 661 583
Net Income $ 2,389 $ 2,270
Net Income Per Weighted
Share Outstanding $ .81 $ .77
<FN>
See Accompanying Notes to Financial Statements
</FN>
</TABLE>
3
<PAGE>
<TABLE>
FIRST KEYSTONE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<CAPTION>
(Amounts in thousands)
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,389 $ 2,270
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision or loan losses 125 150
Provision for depreciation
and amortization 175 155
Premium amortization on
investment securities 132 60
Discount accretion on investment
securities (64) (62)
Gain on sale of mortgage loans (30) 0
Proceeds from sale of mortgage loans 931 0
Originations of mortgage loans
for resale (3,679) 0
(Gain) loss on sales of investment
securities (60) 1
Deferred income tax (benefit) 0 (3)
(Gain) loss on sale of other real
estate owned 0 (1)
(Increase) decrease in interest
receivable and other assets (323) 34
Increase (decrease) in interest
payable, accrued expenses and
other liabilities (576) 99
Net Cash Provided by Operating
Activities $ (980) $ 2,703
INVESTING ACTIVITIES
Purchases of investment securities
available for sale $(30,828) $(10,945)
Proceeds from sales of investment
securities available for sale 7,693 16,885
Proceeds from maturities and
redemptions of investment
securities available for sale 7,118 2,358
Purchase of investment securities
held to maturity (677) 0
Proceeds from maturities and
redemption of investment
securities held to maturity 1,895 1,165
Net (increase) decrease in loans (1,049) (13,553)
Purchase of premises and equipment (137) (645)
Proceeds from sale of other real
estate owned 0 43
Net Cash Used by Investing
Activities $(15,985) $ (4,692)
FINANCING ACTIVITIES
Net increase (decrease) in
deposits $ 5,475 $ 6,050
Net increase (decrease) in
short-term borrowings 1,718 (185)
Net increase (decrease)in
long-term borrowings 7,000 3,000
Acquisition of treasury stock (90) 0
Cash dividends (821) (659)
Net Cash Provided by Financing
Activities $ 13,282 $ 8,206
Increase (Decrease) in Cash and
Cash Equivalent $ (3,683) $ 6,217
Cash and Cash Equivalents, Beginning 13,484 5,179
Cash and Cash Equivalents, Ending $ 9,801 $ 11,396
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during period for
Interest $ 5,077 $ 4,377
Income Taxes 627 555
<FN>
See Accompanying Notes to Financial Statements
</FN>
</TABLE>
4
<PAGE>
FIRST KEYSTONE CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
Note 1.
The accounting and reporting policies of First Keystone
Corporation and Subsidiary 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,
1998, 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; 1998 - 2,933,534 shares and 1997 - 2,933,727 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:
(Amounts in thousands)
<S> <C>
Balance at January 1, 1998 $2,372
Provisions charged to operations 125
Loans charged off (123)
Recoveries 25
Balance at June 30, 1998 $2,399
</TABLE>
At June 30, 1998, the recorded investment in loans that are
considered to be impaired under Statement No. 114 was $83,981. 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 27, 1998, the Board of Directors approved a 3 for 1
stock split issued in the form of a 200% stock dividend distributed on
March 2, 1998, to shareholders of record on February 10, 1998.
6
<PAGE>
<TABLE>
<CAPTION>
(Amounts in thousands except Common Shares data)
Common Common Retained
Shares Stock Surplus Earnings
<S> <C> <C> <C> <C>
Balance at January 1, 1998 977,909 $1,956 $9,761 $17,873
Net Income 2,389
Cash dividends - $.78
per share (821)
3 for 1 stock split in
the form of a 200%
stock dividend 1,955,818 3,911 (3,911)
Purchase of 2,785 shares
of Treasury Stock
Change in unrealized
gain (loss) on
investment securities
available for sale 0 0 0 0
Balance at June 30, 1998 2,933,727 $5,867 $9,761 $15,530
<CAPTION>
Net
Unrealized
Gain (Loss)
on
Investment
Securities
Treasury Available
Stock For Sale Total
<S> <C> <C> <C>
Balance at January 1, 1998 $2,228 $31,818
Net Income 2,389
Cash dividends - $.78
per share (821)
3 for 1 stock split in
the form of a 200% stock
dividend 0
Purchase of 2,785 shares
of Treasury Stock (90) (90)
Change in unrealized gain
(loss) on investment
securities available
for sale 0 (165) (165)
Balance at June 30, 1998 (90) $2,063 $33,131
</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-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-K filing. The reader of these consolidated interim
financial statements may wish to refer to the Corporation's annual
report or Form 10-K for the period ended December 31, 1997, 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 June 30, 1998
RESULTS OF OPERATIONS
First Keystone Corporation realized record earnings for the
second quarter of 1998 of $1,248,000, an increase of $101,000, or 8.8%
over the second quarter of 1997. Six months net income for the period
ended June 30, 1998, amounted to $2,389,000, an increase of 5.2% over
the $2,270,000 net income reported June 30, 1997. On a per share
basis, net income per share increased to $.81 for the six months of
1998 compared to $.77 for the first six months of 1997, while
dividends increased to $.28 per share up from $.22 in 1997.
Year-to-date net income annualized amounts to a return on average
common equity of 14.67% and a return on assets of 1.74%. For the six
months ended June 30, 1997, these measures were 16.18% and 1.84%,
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 second quarter of 1998 and year-to-date in 1998, interest income
has increased more than interest expense resulting in improved net
interest income. In the second quarter of 1998, interest income
amounted to $5,183,000, an increase of $438,000 or 9.2% over the
second quarter of 1997. Interest expense amounted to $2,531,000 in
the second quarter of 1998, an increase of $255,000, or 11.2% over the
second quarter of 1997. Accordingly, net interest income amounted to
$2,652,000 in the second quarter of 1998, an increase of $183,000, or
7.4% over the second quarter of 1997. Year-to-date for the six months
ended June 30, 1998, total interest income increased $782,000, or 8.4%
over the first six months of 1997. Total interest expense increased
$464,000, or 10.3% for the first six months of 1998 over 1997. This
resulted in net interest income increasing $318,000, or 6.6% for the
six months ended June 30, 1998, over 1997.
Our net interest margin for the quarter ended June 30, 1998, was
4.46% compared to 4.57% for the quarter ended June 30, 1997. For the
six months ended June 30, 1998, our net interest margin was 4.33%
compared to 4.54% for the first six months of 1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the quarter ended June 30,
1998, was $75,000 compared to $100,000 for the second quarter of 1997.
Year-to-date, the provision for loan losses amounts to $125,000 in
1998 as compared to the $150,000 provision for the period ended June
30, 1997. The provision for possible loan losses decreased slightly
in 1998 but our allowance for loan losses of $2,399,000 as of June 30,
1998, compared favorably to our allowance for loan losses of
$2,371,000 as of December 31, 1997. Net charge-offs totaled $98,000
for the six months ended June 30, 1998, as compared to $115,000 for
the first six months of 1997. Our non-performing assets, consisting
of non-performing loans and foreclosed assets, increased to $966,000
as of June 30, 1998, as compared to $284,000 as of June 30, 1997,
representing .62% and .19%, respectively of loans net of unearned
income and foreclosed assets.
Loans past-due 90 days or more still accruing amounted to
$352,000 as of June 30, 1998, and $222,000 as of June 30, 1997. The
allowance for loan losses as a percentage of loans, net of unearned
interest was 1.54% as of June 30, 1998, and 1.56% as of June 30, 1997.
8
<PAGE>
NON-INTEREST INCOME
Total non-interest or other income was $324,000 for the quarter
ended June 30, 1998, as compared to $273,000 for the quarter ended
June 30, 1997. Excluding investment security gains and losses, non-
interest income was $299,000 for the second quarter of 1998, an
increase of $19,000 over the second quarter of 1997. For the six
months ended June 30, 1998, total non-interest income was $676,000, an
increase of $112,000, or 19.9% over the first six months of 1997.
Security gains of $60,000, largely from the sale of equity securities,
plus an overall increase in service charges and fees, account for the
$112,000 increase in non-interest income year-to-date in 1998.
NON-INTEREST EXPENSES
Total non-interest, or other expenses, was $1,308,000 for the
quarter ended June 30, 1998, as compared to $1,186,000 for the quarter
ended June 30, 1997. The increase of $122,000 is comprised of salary
and benefits increasing $66,000, occupancy expense increasing $16,000,
and other non-interest expense increasing $40,000.
For the six months ended June 30, 1998, total non-interest
expense was $2,659,000, an increase of $258,000, or 10.7% over the
first six months of 1997. Expenses associated with employee (salaried
employee benefits) continues to be the largest category of non-
interest expenses. Salaries and benefits amount to 52.7% of total
non-interest expense for the six months ended June 30, 1998, as
compared to 53.0% for the first six months of 1997. Salaries and
benefits amounted to $1,400,000 for the six months ended June 30,
1998, an increase of $128,000, or 10.1% over the first six months of
1997. The increase was a result of normal salary adjustments and an
increased number of employees. Net occupancy expense amounted to
$451,000 for the six-months ended June 30, 1998, an increase of
$52,000, or 13.0% over 1997, primarily as a result of opening our
seventh full service office. Other non-interest expenses amounted to
$808,000 for the six months ended June 30, 1998, an increase of
$78,000, or 10.7% over the first six months of 1997. Our overall non-
interest expense of less than 2% of average assets on an annualized
basis for 1998 and 1997, 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 21.7% for the second quarter
of 1998 as compared to 21.2% for the second quarter of 1997. For the
six months ended June 30, 1998, our tax liability amounted to $661,000
for an effective tax rate of 21.7% as compared to an effective tax
rate of 20.4% for the first six months of 1997. The increase in our
effective tax rate 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 $282,257,000 as of June 30, 1998, an
increase of $14,859,000, or 5.6% over year-end 1997. Total deposits
increased to $223,122,000 as of June 30, 1998, an increase of
$5,475,000, or 2.5% over year-end 1997.
The Corporation used borrowed funds to support asset growth not
provided by deposit growth. Long-term borrowing increased to
$16,000,000 as of June 30, 1998, up from $9,000,000 at December 31,
1997.
9
<PAGE>
EARNING ASSETS
Our primary earning asset, loan, net of unearned income increased
to $155,880,000 as of June 30, 1998, up $3,730,000, or 2.5% since
year-end 1997. 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 only a relatively small increase in loans, our investment
portfolio increased in size from December 31, 1997, to June 30, 1998.
Held-to-maturity securities amounted to $15,566,000 as of June 30,
1998, a decrease of $1,242,000, or 7.4% since year-end 1997. However,
available-for-sale securities increased to $97,449,000 as of June 30,
1998, an increase of $15,798,000, or 19.3% from year-end 1997.
Interest bearing deposits with banks amounted to $4,721,000 as of June
30, 1998, down from $7,084,000 as of December 31, 1997.
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-accrued and restricted
loans, together with foreclosed assets. As of June 30, 1998, total
non-performing assets were $966,000 as compared to $350,000 on
December 31, 1997. Non-performing assets to total loans and
foreclosed assets was .62% as of June 30, 1998, and .23% as of
December 31, 1997.
Loans past-due 90 days or more and still accruing amounted to
$352,000 as of June 30, 1998, as compared to $336,000 on December 31,
1997.
Interest income received on non-performing loans as of June 30,
1998, was $4,918 compared to $7,006 as of December 31, 1997. Interest
income, which would have been recorded on these loans under the
original terms as of June 30, 1998, and December 31, 1997, was $46,662
and $30,027, respectively. As of June 30, 1998 and December 31, 1997,
there was no outstanding commitments to advance additional funds with
respect to these non-performing loans.
10
<PAGE>
DEPOSITS AND OTHER BORROWED FUNDS
As indicated previously, deposit growth amounted to $5,475,000 as
total deposits increased to $223,122,000 as of June 30, 1998, up from
$217,647,000 as of year-end 1997. During 1998, the Corporation
experienced deposit growth in both non-interest bearing deposits and
interest bearing deposits.
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 $2,063,000 as of June 30, 1998, and $2,228,000 as of
December 31, 1997.
Leverage ratio and risk based capital ratios remain very strong.
As of June 30, 1998, our leverage ratio was 11.10% as compared to
11.23% as of December 31, 1997. In addition, Tier 1 risk based
capital and total risk based capital ratio as of June 30, 1998, were
19.52% and 20.78%, respectively. The same ratios as of December 31,
1997, were 19.43% and 20.68%, respectively.
In June 1998, the Board of Directors of First Keystone
Corporation approved a stock repurchase plan authorizing the
repurchase of up to 100,000 shares of common stock. As of June 30,
1998, the Corporation had repurchased 2,785 shares of First Keystone
Corporation common stock. The repurchased shares will be held as
treasury shares available in connection with future stock dividends
and stock splits, our employee stock option plan, and other corporate
purposes.
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.
YEAR 2000 COMPLIANCE
First Keystone Corporation is in the process of becoming Year
2000 compliant. The expenses for maintenance or modification of
software associated with the Year 2000 will be expensed as incurred.
The costs of new software will be capitalized and amortized over the
its useful life. The cost of becoming 2000 compliant is not expected
to be material. The amount expensed in 1997 was immaterial and the
Corporation does not expect the amounts required to be expensed in
1998 and 1999 to have a material effect on its financial position or
results of operation.
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 21, 1998, at
9:00 a.m.
<TABLE>
<CAPTION>
Votes Votes
Directors Elected Votes For Against Withheld
<S> <C> <C> <C>
John Arndt 2,446,769 31,851 0
J. Gerald Bazewicz 2,446,769 31,851 0
Robert E. Bull 2,455,394 23,226 0
<CAPTION>
Broker
Directors Elected Abstentions Non-Votes
<S> <C> <C>
John Arndt 0 0
J. Gerald Bazewicz 0 0
Robert E. Bull 0 0
</TABLE>
Directors Continuing:
Budd L. Beyer, term expires in 2000
John L. Coates, term expires in 1999
Dudley P. Cooley, term expires in 1999
Frederick E. Crispin, term expires in 2000
Stanley E. Oberrender, term expires in 1999
Robert E. Wise, term expires in 2000
Matters Voted Upon:
Selection of J. H. Williams & Co., as auditors for the Corporation.
Votes For - 2,451,737
Votes Against - 15,315
Votes Withheld - 0
Abstentions - 11,568
Broker Non-Votes - 0
Item 5. Other Information
3 for 1 Stock Split in the Form of a 200% Stock
Dividend - refer to Consolidated Notes to Financial
Statements Note 6 appearing on page 6 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 as of
June 30, 1998 (Also 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
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
August 11, 1998 /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and
Chief Executive Officer
(Principal Executive Officer)
August 11, 1998 /s/ David R. Saracino
David R. Saracino
Treasurer/Assistant Secretary
(Principal Accounting Officer)
14
<PAGE>
INDEX TO EXHIBITS
Exhibit Description Page
3(i) Articles of Incorporation, 16
as amended as of June 30,
1998 (Also incorporated by
reference to Exhibit 3(i)
to Registrant's Annual
Report of Form 10-KSB for
the year ended December 31,
1996)
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 18
27 Financial Data Schedule
15
<PAGE>
EXHIBIT 3(i)
ARTICLES OF AMENDMENT
DOMESTIC BUSINESS CORPORATION
FIRST KEYSTONE CORPORATION
111 WEST FRONT STREET
BERWICK, PENNSYLVANIA 18603
COLUMBIA COUNTY
In compliance with the requirements of 15 Pa.C.S. paragraph 1915
(relating to Articles of Amendment), the undersigned business
corporation, desiring to amend its Articles, does hereby certify and
state that:
1. The Name of the Corporation is:
First Keystone Corporation
2. The Address, including street and number, of its Registered
Office in this Commonwealth is: (The Department of State
is hereby authorized to correct the following statement to
conform to the records of the Department):
111 West Front Street, P.O. Box 289, Columbia County,
Berwick, Pennsylvania 18603
3. The Statute by or under which the Corporation was
Incorporated is:
Business Corporation Law of 1933, Act of May 5, 1993, P.L.
364, as amended.
4. The Date of its Incorporation is:
July 6, 1983
5. The Manner in which the Amendment was Adopted by the
Corporation is:
The amendment was duly approved and adopted, and proposed
to the Shareholders, by the Board of Directors of the
Corporation at a Meeting of the Board of Directors of the
Corporation duly called, convened and held on February 10,
1998. The amendment was duly adopted by the Shareholders
of the Corporation pursuant to Section 1914(a) and (b) of
the Business Corporation Law of 1988, as amended, at the
1998 Annual Meeting of Shareholders of the Corporation duly
called, convened and held pursuant to a Notice of Annual
Meeting of Shareholders, Proxy Statement, and Form of Proxy
dated March 27, 1998 and first sent on or about March 27,
1998 by United States Mail, first class postage prepaid, to
the Shareholders of record as of the Record Date of March
10, 1998. The 1998 Annual Meeting of shareholders was held
at 9:00 a.m., prevailing time, on Tuesday, April 21, 1998
at the main office of The First National Bank of Berwick,
111 West Front Street, Berwick, Pennsylvania 18603. The
total number of shares outstanding was 2,933,727 with each
share entitled to one vote. The total number of shares
entitled to vote was 2,933,727. The total number of shares
that voted for the amendment was 2,376,425, the total
number of shares that voted against the amendment was
66,663, and the total number of shares that abstained from
voting on the matter was 35,532. Thus, the amendment was
approved and adopted by 81% of the outstanding shares of
Common Stock of the Corporation, constitutes greater than a
majority of the outstanding shares of Common Stock required
to approved and adopt the amendment.
16
<PAGE>
6. The Amendment Adopted by the Corporation set forth in full
is:
5. The aggregate number of shares which the Corporation
shall have authority to issue is 10,000,000 shares of
Common Stock of the par value of $2.00 per share (the
"Common Stock").
IN TESTIMONY WHEREOF, the undersigned Corporation has caused
these Articles of Amendment to be signed by a duly authorized officer
and its corporate seal, duly attested by another such officer, to be
hereunto affixed this 30th day of April, 1998.
Attest: FIRST KEYSTONE CORPORATION
/s/ John L. Coates By: /s/ J. Gerald Bazewicz
John L. Coates J. Gerald Bazewicz
Secretary President
(CORPORATE SEAL)
17
EXHIBIT 11
FIRST KEYSTONE CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Quarter Ended June 30,
1998 1997
(Dollars in Thousands)
<S> <C> <C>
Primary
Net Income $ 2,389 $ 2,270
Shares<F1>
Weighted average number of
common shares outstanding 2,933,534 2,933,727
Adjustments - increases or
decreases None None
Weighted average number of
common shares outstanding
as adjusted 2,933,534 2,933,727
Primary earnings per common
share $ .81 $ .77
Assuming full dilution
Net Income $ 2,389 $ 2,270
Shares<F1>
Weighted average number of
common shares outstanding 2,933,534 2,933,727
Adjustments - increases or
decreases None None
Weighted average number of
common shares outstanding
as adjusted 2,933,534 2,933,727
Earnings per common share
assuming full dilution $ .81 $ .77
<FN>
<F1>
Restated to reflect a 3 for 1 stock split issued in the form of a 200%
stock dividend paid in 1998.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,080
<INT-BEARING-DEPOSITS> 4,721
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 97,449
<INVESTMENTS-CARRYING> 15,566
<INVESTMENTS-MARKET> 15,615
<LOANS> 155,880
<ALLOWANCE> 2,399
<TOTAL-ASSETS> 282,257
<DEPOSITS> 223,122
<SHORT-TERM> 7,820
<LIABILITIES-OTHER> 2,184
<LONG-TERM> 16,000
0
0
<COMMON> 5,867
<OTHER-SE> 27,264
<TOTAL-LIABILITIES-AND-EQUITY> 282,257
<INTEREST-LOAN> 6,659
<INTEREST-INVEST> 3,338
<INTEREST-OTHER> 138
<INTEREST-TOTAL> 10,135
<INTEREST-DEPOSIT> 4,475
<INTEREST-EXPENSE> 502
<INTEREST-INCOME-NET> 5,158
<LOAN-LOSSES> 125
<SECURITIES-GAINS> 60
<EXPENSE-OTHER> 2,659
<INCOME-PRETAX> 3,050
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,389
<EPS-PRIMARY> .81
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.33
<LOANS-NON> 962
<LOANS-PAST> 352
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,735
<ALLOWANCE-OPEN> 2,372
<CHARGE-OFFS> 123
<RECOVERIES> 25
<ALLOWANCE-CLOSE> 2,399
<ALLOWANCE-DOMESTIC> 2,399
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 472
</TABLE>
