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, 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 September 30, 1998.
<PAGE>
PART I. - FINANCIAL INFORMATION
Item. 1 Financial Statements
FIRST KEYSTONE CORPORATION
<TABLE>
BALANCE SHEETS
(Unaudited)
<CAPTION>
(Amounts in thousands, except per share data)
September December
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,763 $ 6,400
Interest bearing deposits with banks 10,669 7,084
Available-for-sale securities carried
at estimated fair value 107,102 81,651
Investment securities, held to maturity
securities, estimated fair value
of $14,992 and $17,691 14,864 16,808
Loans, net of unearned income 153,268 152,150
Allowance for loan losses (2,370) (2,371)
Net loans $150,898 $149,779
Bank premises and equipment 3,664 3,436
Interest receivable 2,117 1,998
Other assets 530 242
Total Assets $295,607 $267,398
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Non-interest bearing $ 21,810 $ 18,398
Interest bearing 213,045 199,249
Total deposits $234,855 $217,647
Short-term borrowings 7,467 6,102
Long-term borrowings 16,000 9,000
Accrued expenses 1,498 1,522
Other liabilities 1,258 1,309
Total Liabilities $261,078 $235,580
STOCKHOLDERS' EQUITY
Common stock, par value $2 per share $ 5,867 $ 1,956
Surplus 9,761 9,761
Retained earnings 16,389 17,873
Accumulated other comprehensive
income 2,809 2,228
Less treasury stock at cost 8,602
shares in 1998 and 0 in 1997 (297) 0
Total Stockholders' Equity $ 34,529 $ 31,818
Total Liabilities and
Stockholders' Equity $295,607 $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 SEPTEMBER 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 $3,362 $3,364
Interest and dividend income
on securities 1,797 1,465
Interest on deposits in banks 67 119
Total Interest Income $5,226 $4,948
INTEREST EXPENSE
Interest on deposits $2,304 $2,174
Interest on short-term borrowings 74 49
Interest on long-term borrowings 235 194
Total Interest Expense $2,613 $2,417
Net interest income $2,613 $2,531
Provision for loan losses 50 50
Net Interest Income After Provision
for Loan Losses $2,563 $2,481
OTHER INCOME
Service charges on deposit accounts $ 174 $ 149
Other non-interest income 224 117
Investment securities gains
(losses) net 29 20
Total Other Income $ 427 $ 286
OTHER EXPENSES
Salaries and employee benefits $ 710 $ 658
Net occupancy and fixed asset expense 256 218
Other non-interest expense 413 347
Total Other Expenses $1,379 $1,223
Income before income taxes $1,611 $1,544
Applicable income tax (benefit) 342 359
Net Income $1,269 $1,185
Net Income Per Weighted Share
Outstanding - Basic $ .43 $ .40
Net Income Per Weighted Share
Outstanding - Diluted .43 .40
<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, 1998 AND 1997
(Unaudited)
<CAPTION>
(Amounts in thousands except per share data)
1998 1997
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $10,021 $ 9,509
Interest and dividend income on
securities 5,135 4,592
Interest on deposits in banks 205 200
Total Interest Income $15,361 $14,301
INTEREST EXPENSE
Interest on deposits $ 6,779 $ 6,200
Interest on short-term borrowings 212 172
Interest on long-term borrowings 599 558
Total Interest Expense $ 7,590 $ 6,930
Net interest income $ 7,771 $ 7,371
Provision for loan losses 175 200
Net Interest Income After
Provision for Loan Losses $ 7,596 $ 7,171
OTHER INCOME
Service charges on deposit accounts $ 508 $ 455
Other non-interest income 506 376
Investment securities gains
(losses) net 89 19
Total Other Income $ 1,103 $ 850
OTHER EXPENSES
Salaries and employee benefits $ 2,110 $ 1,930
Net occupancy and fixed
asset expense 707 617
Other non-interest expense 1,221 1,077
Total Other Expenses $ 4,038 $ 3,624
Income before income taxes $ 4,661 $ 4,397
Applicable income tax (benefit) 1,003 942
Net Income $ 3,658 $ 3,455
Net Income Per Weighted Share
Outstanding - Basic $ 1.25 $ 1.18
Net Income Per Weighted Share
Outstanding - Diluted 1.25 1.18
<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, 1998 AND 1997
(Unaudited)
<CAPTION>
(Amounts in thousands)
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,658 $ 3,455
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 175 200
Provision for depreciation and
amortization 268 232
Premium amortization on investment
securities 190 90
Discount accretion on investment
securities (103) (96)
Gain on sale of mortgage loans (91) 0
Proceeds from sale of mortgage loans 4,335 42
Originations of mortgage loans
for resale (5,059) (1,079)
(Gain) loss on sales of investment
securities (89) (19)
Deferred income tax (benefit) 37 0
(Gain) loss on sales of other real
estate owned 0 (1)
(Increase) decrease in interest
receivable and other assets (407) (143)
Increase (decrease) in interest
payable, accrued expenses and
other liabilities (415) 571
Net Cash Provided by Operating
Activities $ 2,499 $ 3,252
INVESTING ACTIVITIES
Purchases of investment securities
available-for-sale $(43,896) $(19,100)
Proceeds from sales of investment
securities available for sale 8,726 17,058
Proceeds from maturities and
redemptions of investment
securities available for sale 10,645 3,678
Purchase of investment securities
held-to-maturity (677) 0
Proceeds from maturities and
redemption of investment
securities held to maturity 2,579 1,839
Net (increase) decrease in loans (570) (17,224)
Purchase of premises and equipment (403) (748)
Proceeds from sale of other real
estate owned 0 43
Net Cash Used by Investing
Activities $(23,596) $(14,454)
FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 17,208 $ 15,464
Net increase (decrease) in
short-term borrowings 1,365 895
Net increase (decrease) in
long-term borrowings 7,000 2,000
Acquisition of treasury stock (297) 0
Cash dividends (1,231) (1,002)
Net Cash Provided by Financing
Activities $ 24,045 $ 17,357
Increase (Decrease) in Cash and
Cash Equivalent $ 2,948 $ 6,155
Cash and Cash Equivalents, Beginning 13,484 5,179
Cash and Cash Equivalents, Ending $ 16,432 $ 11,334
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during period for
Interest $ 7,621 $ 6,927
Income Taxes 1,019 869
<FN>
See Accompanying Notes to Financial Statements
</FN>
</TABLE>
4
<PAGE>
FIRST KEYSTONE CORPORATION
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
September 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 nine-month period ended
September 30, 1998, are not necessarily indicative of the results to
be expected for the full year.
Note 4.
Earnings per share (EPS) is computed using the weighted-average
number of shares of common stock outstanding after giving effect to
stock dividends and the assumed exercise of stock options.
In 1998, the Corporation adopted Statement of Accounting
Standards ("SFAS") No. 128, "Earnings Per Share" which changes the
computation of EPS and requires presentation of two amounts, basic and
diluted EPS, and additional informational disclosures. The adoption
of SFAS No. 128 is required for all reporting periods after December
1997 and requires restatements for all prior periods.
The adoption of SFAS No. 128 had no effect on 1997 EPS.
<TABLE>
<CAPTION>
Year-to-date EPS have been calculated as follows:
1998 1997
<S> <C> <C>
Net Income $ 3,658 $ 3,455
Number of weighted shares
outstanding:
Basic 2,931,648 2,933,727
Fully diluted 2,931,746 2,933,727
Earnings per share:
Basic $ 1.25 $ 1.18
Fully diluted 1.25 1.18
</TABLE>
5
<PAGE>
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.
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 $2,371
Provisions charged to operations 175
Loans charged off (209)
Recoveries 33
Balance at September 30, 1998 $2,370
</TABLE>
6
<PAGE>
At September 30, 1998, the recorded investment in loans that are
considered to be impaired under Statement No. 114 was $112,382. 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.
On September 22, 1998, the Board of Directors awarded options to
purchase 11,000 shares at $33.50 per share in varying amounts to 22
management personnel under the 1998 Stock Incentive Plan.
As of January 1, 1998, the Corporation adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of total nonowner changes in stockholders'
equity. For the Corporation, total nonowner changes in stockholders'
equity includes net income and unrealized gains and losses on the
Corporation's available-for-sale securities. SFAS No. 130 did not
have any effect on the Corporation's consolidated financial condition
or operations.
<TABLE>
<CAPTION>
(Amounts in thousands except Common Shares data)
Compre-
Common Common hensive
Shares Stock Surplus Income
<S> <C> <C> <C> <C>
Balance at January 1, 1998 977,909 $1,956 $9,761
Comprehensive Income:
Net Income $3,658
Other comprehensive
income, net of tax
Change in unrealized
gain (loss) on
investment securities
available for sale 581
Total Comprehensive
income $4,239
3 for 1 stock split in
the form of a 200%
stock dividend 1,955,818 3,911
Cash dividends -
$.42 per share
Purchase of 8,602 shares
of Treasury Stock
Balance at September
30, 1998 2,933,727 $5,867 $9,761
<CAPTION>
Accumulated
Other
Compre-
Retained hensive Treasury
Earnings Income Stock Total
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $17,873 $2,228 $31,818
Comprehensive Income:
Net Income 3,658 3,658
Other comprehensive
income, net of tax
Change in unrealized
gain (loss) on
investment securities
available for sale 581 581
Total Comprehensive
income
3 for 1 stock split in
the form of a 200%
stock dividend (3,911) 0
Cash dividends -
$.42 per share (1,231) (1,231)
Purchase of 8,602 shares
of Treasury Stock (297) (297)
Balance at September
30, 1998 $16,389 $2,809 (297) $34,529
</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
7
<PAGE>
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.
8
<PAGE>
Item 2. First Keystone Corporation Management's Discussion and
Analysis of Financial Condition and Results of Operation
as of September 30, 1998
RESULTS OF OPERATIONS
First Keystone Corporation realized earnings for the third
quarter of 1998 of $1,269,000, an increase of $84,000, or 7.1% over
the third quarter of 1997. Nine months net income for the period
ended September 30, 1998, amounted to $3,658,000, an increase of 5.9%
over the $3,455,000 net income reported September 30, 1997. On a per
share basis net income per share increased to $1.25 for the nine
months of 1998 compared to $1.18 for the first nine months of 1997,
while dividends increased to $.42 per share up from $.34 in 1997.
Year-to-date net income annualized amounts to a return on average
common equity of 14.81% and a return on assets of 1.74%. For the nine
months ended September 30, 1997, these measures were 16.10% and 1.82%,
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 1998 and year-to-date in 1998, interest income
has increased more than interest expense resulting in improved net
interest income. In the third quarter of 1998, interest income
amounted to $5,226,000, an increase of $278,000 or 5.6% over the third
quarter of 1997. Interest expense amounted to $2,613,000 in the third
quarter of 1998, an increase of $196,000, or 8.1% over the third
quarter of 1997. Accordingly, net interest income amounted to
$2,613,000 in the third quarter of 1998, an increase of $82,000, or
3.2% over the third quarter of 1997. Year-to-date for the nine months
ended September 30, 1998, total interest income increased $1,060,000,
or 7.4% over the first nine months of 1997. Total interest expense
increased $660,000, or 9.5% for the first nine months of 1998 over
1997. This resulted in net interest income increasing $400,000, or
5.4% for the nine months ended September 30, 1998, over 1997.
Our net interest margin for the quarter ended September 30, 1998,
was 4.17% compared to 4.41% for the quarter ended September 30, 1997.
For the nine months ended September 30, 1998, our net interest margin
was 4.27% compared to 4.50% for the first nine months of 1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the quarter ended September 30,
1998, was $50,000 the same as the third quarter of 1997. Year-to-
date, the provision for loan losses amounts to $175,000 in 1998 as
compared to the $200,000 provision for the period ended September 30,
1997. The provision for possible loan losses decreased slightly in
1998 but our allowance for loan losses of $2,370,000 as of September
30, 1998, remains virtually unchanged from our allowance for loan
loses of $2,371,000 as of December 31, 1997. The allowance for loan
losses as a percentage of loans, net of unearned interest, was 1.55%
as of September 30, 1998, as compared to 1.56% as of December 31,
1997, and 1.53% as of September 30, 1997. Net charge-offs totaled
$176,000 for the nine months ended September 30, 1998, as compared to
$145,000 for the first nine months of 1997. Our non-performing
assets, consisting of non-performing loans and foreclosed assets,
increased to $1,217,000 as of September 30, 1998, as compared to
$313,000 as of September 30, 1997, representing .79% and .21%,
respectively of loans net of unearned income and foreclosed assets.
Loans past-due 90 days or more still accruing amounted to $161,000 as
of September 30, 1998, and $88,000 as of September 30, 1997.
9
<PAGE>
NON-INTEREST INCOME
Total non-interest or other income was $427,000 for the quarter
ended September 30, 1998, as compared to $286,000 for the quarter
ended September 30, 1997. Excluding investment security gains and
losses, non-interest income was $398,000 for the third quarter of
1998, an increase of $132,000 over the third quarter of 1997. For the
nine months ended September 30, 1998, total non-interest income was
$1,103,000, an increase of $253,000, or 29.8% over the first nine
months of 1997. Security gains of $89,000, largely from the sale of
equity securities, plus an overall increase in service charges and
fees, account for the $253,000 increase in non-interest income year-
to-date in 1998.
NON-INTEREST EXPENSES
Total non-interest, or other expenses, was $1,379,000 for the
quarter ended September 30, 1998, as compared to $1,123,000 for the
quarter ended September 30, 1997. The increase of $156,000 is
comprised of salary and benefits increasing $52,000, occupancy expense
increasing $38,000, and other non-interest expense increasing $66,000.
For the nine months ended September 30, 1998, total non-interest
expense was $4,038,000, an increase of $414,000, or 11.4% over the
first nine months of 1997. Expenses associated with employee expense
and benefits continues to be the largest category of non-interest
expenses. Salaries and benefits amount to 52.3% of total non-interest
expense for the nine months ended September 30, 1998, as compared to
53.3% for the first nine months of 1997. Salaries and benefits
amounted to $2,110,000 for the nine months ended September 30, 1998,
an increase of $180,000, or 9.3% over the first nine months of 1997.
The increase was a result of normal salary adjustments and an
increased number of employees. Net occupancy expense amounted to
$707,000 for the nine months ended September 30, 1998, an increase of
$90,000, or 14.6% over 1997, primarily as a result of the 1998 year-
to-date figures reflecting the opening of our seventh full service
office in late 1997. Other non-interest expenses amounted to
$1,221,000 for the nine months ended September 30, 1998, an increase
of $144,000, or 13.4% over the first nine months of 1997. Even though
our non-interest expenses have increased more than historic averages,
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 21.2% for the third quarter of
1998 as compared to 23.3% for the third quarter of 1997. For the nine
months ended September 30, 1998, our tax liability amounted to
$1,003,000 for an effective tax rate of 21.5% as compared to an
effective tax rate of 21.4% for the first nine months of 1997.
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased to $295,607,000 as of September 30, 1998,
an increase of $28,209,000, or 10.5% over year-end 1997. Total
deposits increased to $234,855,000 as of September 30, 1998, an
increase of $17,208,000, or 7.9% 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 September 30, 1998, up from $9,000,000 at December
31, 1997. In addition, short-term borrowing increased to $7,467,000
as of September 30, 1998, an increase of 22.4% over year-end 1997.
10
<PAGE>
EARNING ASSETS
Our primary earning asset, loans, net of unearned income
increased to $153,268,000 as of September 30, 1998, up $1,118,000, or
0.7% since year-end 1997. The sale of long-term fixed rate
residential mortgages into the secondary market during 1998 has
depressed the growth of the loan portfolio. The loan portfolio
remains well diversified.
With only a relatively small increase in loans, our investment
portfolio increased in size from December 31, 1997, to September 30,
1998. Held-to-maturity securities amounted to $14,864,000 as of
September 30, 1998, a decrease of $1,944,000, or 11.6% since year-end
1997. However, available-for-sale securities increased to
$107,102,000 as of September 30, 1998, an increase of $25,451,000, or
31.2% from year-end 1997. Interest bearing deposits with banks
amounted to $10,669,000 as of September 30, 1998, up 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-accrual and restructured
loans, together with foreclosed assets. As of September 30, 1998,
total non-performing assets were $1,217,000 as compared to $350,000 on
December 31, 1997. Non-performing assets to total loans and
foreclosed assets was .79% as of September 30, 1998, and .23% as of
December 31, 1997.
Loans past-due 90 days or more and still accruing amounted to
$161,000 as of September 30, 1998, as compared to $336,000 on December
31, 1997.
Interest income received on non-performing loans as of September
30, 1998, was $1,160 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 September 30, 1998, and December 31, 1997,
was $29,478 and $30,027, respectively. As of September 30, 1998 and
December 31, 1997, there was no outstanding commitments to advance
additional funds with respect to these non-performing loans.
11
<PAGE>
DEPOSITS AND OTHER BORROWED FUNDS
As indicated previously, deposit growth amounted to $17,208,000
as total deposits increased to $234,855,000 as of September 30, 1998,
up from $217,647,000 as of year-end 1997. During 1998, the
Corporation has 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, accumulated other comprehensive income
(net unrealized gains on investment securities available-for-sale)
increased shareholders' equity, or capital by $2,809,000 as of
September 30, 1998, and $2,228,000 as of December 31, 1997.
Leverage ratio and risk based capital ratios remain very strong.
As of September 30, 1998, our leverage ratio was 10.98% 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 September 30, 1998,
were 20.09% and 21.34%, 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 September
30, 1998, the Corporation had repurchased 8,602 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 a 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 Year 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.
Failure of the Corporation or third parties to correct Year 2000
issues could cause disruption of operations resulting in increased
operating costs and other adverse effects. In addition, to the extent
customers' financial positions are weakened as a result of Year 2000
issues, credit quality could be affected. It is not possible to
predict with certainty all of the adverse effects that may result from
a failure of the Corporation or third parties to become fully Year
2000 compliant or whether such effects could have a material impact on
the Corporation.
12
<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, 1997, 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 - 760,537
Votes Against - 48
Votes Withheld - 0
Abstentions - 411
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.
13
<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 Form 10Q for the Quarter Ended
June 30, 1998 and Exhibit 3(i) to Registrant's
Annual Report on 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.
14
<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 13, 1998 /s/ J. Gerald Bazewicz
J. Gerald Bazewicz
President and
Chief Executive Officer
(Principal Executive Officer)
November 13, 1998 /s/ David R. Saracino
David R. Saracino
Treasurer/Assistant Secretary
(Principal Accounting Officer)
15
<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 Computation of Earnings Per Share 18
27 Financial Data Schedule
16
EXHIBIT 11
<TABLE>
FIRST KEYSTONE CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
<CAPTION>
For the Nine Month Period Ended September 30,
1998 1997
(Dollars in Thousands)
<S> <C> <C>
Primary
Net Income $ 3,658 $ 3,455
Shares<F1>
Weighted average number of
common shares outstanding 2,931,648 2,933,727
Adjustments - increases or
decreases None None
Weighted average number of
common shares outstanding
as adjusted 2,931,648 2,933,727
Primary earnings per common share $ 1.25 $ 1.18
Assuming full dilution
Net Income $ 3,658 $ 3,455
Shares<F1>
Weighted average number of
common shares outstanding 2,931,746 2,933,727
Adjustments - increases or
decreases None None
Weighted average number of
common shares outstanding
as adjusted 2,931,746 2,933,727
Earnings per common share
assuming full dilution $ 1.25 $ 1.18
<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>
18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,763
<INT-BEARING-DEPOSITS> 10,669
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,864
<INVESTMENTS-CARRYING> 107,102
<INVESTMENTS-MARKET> 107,102
<LOANS> 153,268
<ALLOWANCE> 2,370
<TOTAL-ASSETS> 295,607
<DEPOSITS> 234,855
<SHORT-TERM> 6,919
<LIABILITIES-OTHER> 2,756
<LONG-TERM> 16,548
0
0
<COMMON> 5,867
<OTHER-SE> 28,662
<TOTAL-LIABILITIES-AND-EQUITY> 295,607
<INTEREST-LOAN> 10,022
<INTEREST-INVEST> 5,134
<INTEREST-OTHER> 205
<INTEREST-TOTAL> 15,361
<INTEREST-DEPOSIT> 6,779
<INTEREST-EXPENSE> 811
<INTEREST-INCOME-NET> 7,771
<LOAN-LOSSES> 175
<SECURITIES-GAINS> 89
<EXPENSE-OTHER> 4,038
<INCOME-PRETAX> 4,661
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,658
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.25
<YIELD-ACTUAL> 4.27
<LOANS-NON> 1,213
<LOANS-PAST> 161
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,430
<ALLOWANCE-OPEN> 2,372
<CHARGE-OFFS> 209
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 2,370
<ALLOWANCE-DOMESTIC> 2,370
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 384
</TABLE>
