10-K: First Keystone Corporation Reports Net Loss Due to Goodwill Impairment in 2024

First Keystone Corporation experienced a net loss in 2024, primarily due to a significant goodwill impairment charge.

Summary

• First Keystone Corporation reported a net loss of $13.203 million for the year ended December 31, 2024, compared to a net income of $5.560 million in the prior year.
• The primary reason for the decrease in net income was the recognition of a full goodwill impairment charge of $19.133 million during the first quarter of 2024.
• Earnings per share, both basic and diluted, were $(2.14) in 2024, compared to $0.91 in 2023.
• Dividends per share remained constant at $1.12 for both 2024 and 2023.
• The return on average assets was (0.93)% in 2024, a decrease from 0.42% in 2023.
• Return on average equity also decreased to (12.04)% in 2024 from 4.55% in 2023.
• Total interest income increased by 25.3% to $71.422 million in 2024, driven by increased interest rates and growth in real estate loans.
• Total interest expense increased by 40.4% to $39.143 million, mainly due to higher interest paid on deposits and long-term borrowings.
• At December 31, 2024, the Corporation had total consolidated assets of approximately $1.4 billion, deposits of $1.0 billion, and stockholders' equity of $107 million.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to the reported net loss and goodwill impairment. While there are some positive aspects, the overall tone is cautious and concerned about future challenges.

Positives

• Total interest income increased by $14.434 million, or 25.3%, due to increased interest rates and loan growth.
• Deposits increased by $65.441 million, or 6.7%, indicating continued customer confidence.
• Net loans increased by 4.1%, reflecting growth in the loan portfolio.
• The Bank maintained capital ratios above the required capital conservation buffer.
• The Corporation is actively monitoring and restructuring its portfolios to become more asset sensitive.

Negatives

• The Corporation reported a net loss of $13.203 million, a significant decline from the previous year's net income.
• A full goodwill impairment charge of $19.133 million significantly impacted the bottom line.
• Return on average assets and return on average equity decreased substantially.
• Total non-interest expense increased significantly due to the goodwill impairment.
• The Corporation's net interest income continues to be liability sensitive.

Risks

• The Corporation is subject to interest rate risk, which could adversely affect earnings if rates change unexpectedly.
• Lending risk is present, particularly with a significant portion of the loan portfolio secured by commercial real estate.
• If the allowance for credit losses is insufficient, earnings could decrease.
• Communication, information, and technology systems are vulnerable to interruptions or security breaches.
• Severe weather, natural disasters, disease pandemics, acts of war or terrorism and other external events could significantly impact the Corporations business.
• The Corporation operates in a highly competitive industry.
• The Basel III capital requirements may require the Corporation to maintain higher levels of capital, which could reduce its profitability.
• Past and future bank failures may adversely affect the national, regional, and local business environment, results of operation, and capital.
• The Corporations profitability depends significantly on economic conditions in the Commonwealth of Pennsylvania.
• The Corporation may not be able to attract and retain skilled people.
• The Corporation is subject to claims and litigation pertaining to fiduciary responsibility.
• The trading volume in the Corporations common stock is less than that of other larger financial services companies.
• The Corporation continually encounters technological change.
• The Corporation may need or be compelled to raise additional capital in the future, but that capital may not be available when it is needed and on terms favorable to current shareholders.
• The Corporation is subject to environmental liability risk associated with lending activities.
• The Corporations ability to pay dividends is subject to limitations.
• The increasing use of social media platforms presents new risks and challenges and our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could materially adversely impact our business.

Future Outlook

The Corporation could experience a decrease in net interest income if market rates remain static or increase, as the Corporations net interest income continues to be liability sensitive. To negate the potential impact of a decreasing net interest margin, the Corporation will continue to focus on attracting organic loan growth and core deposits such as checking, savings, and money market accounts, thereby further reducing its dependence on higher priced certificates of deposit and short-term borrowings. The Corporation is actively monitoring and restructuring its portfolios to become more asset sensitive, which will allow for better performance in a static or rates-up environment. The Corporation will continue to evaluate the potential impact of short-term rate fluctuations in 2025, as well as the slope and position of the yield curve.

Management Comments

• Management believes the Corporation meets the conditions of the Federal Reserves small bank holding company policy statement and is therefore excluded from consolidated capital requirements at December 31, 2024; however, the Bank remains subject to regulatory capital requirements administered by the federal banking agencies.
• Management considers, based upon its methodology, that the allowance for credit losses is adequate to cover foreseeable future losses.
• Management believes the loan portfolio is well diversified.

Industry Context

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs.

Comparison to Industry Standards

• The document does not provide enough information to make a detailed comparison to industry standards.
• However, it does mention competition from national, regional, and community banks, credit unions, and non-bank firms.
• The document also mentions that the Bank is generally competitive with these institutions with respect to interest rates paid on deposits, service charges, and interest rates charged on loans.
• The document does not provide specific benchmarks or metrics for comparison.

Legal Proceedings

• The Corporation and/or the Bank are defendants in various legal proceedings arising in the ordinary course of their business.
• However, in the opinion of management of the Corporation and the Bank, there are no proceedings pending to which the Corporation and the Bank is a party or to which their property is subject, which, if determined adversely to the Corporation and the Bank, would be material in relation to the Corporations and Banks individual profits or financial condition, nor are there any proceedings pending other than ordinary routine litigation incident to the business of the Corporation and the Bank.
• In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation and the Bank by government authorities or others.

Related Party Transactions

• Certain directors, executive officers and immediate family members of First Keystone Corporation and its subsidiary, and companies in which they are principal owners (i.e., at least 10% ownership), were indebted to the Corporation at December 31, 2024 and 2023.
• The loans do not involve more than the normal risk of collectability nor present other unfavorable features.
• Deposits from certain officers, directors and immediate family members and/or their related companies held by the Bank amounted to $24,998,000 and $26,988,000 at December 31, 2024 and 2023, respectively.
• Funds from certain officers, directors and immediate family members and/or their related companies held in the Trust Department amounted to $12,302,000 at December 31, 2024.

Stakeholder Impact

• Shareholders experienced a net loss and a decrease in the value of their shares.
• Employees may be affected by cost-cutting measures or restructuring efforts.
• Customers may experience changes in products or services.
• Suppliers and creditors may be impacted by the Corporations financial performance.

Next Steps

• The Corporation will continue to monitor its allowance for credit losses and make future adjustments to the allowance through the provision for credit losses as conditions warrant.
• The Corporation will continue its close monitoring efforts in 2025 to improve loan quality.
• The Corporation will continue to evaluate the potential impact of short-term rate fluctuations in 2025, as well as the slope and position of the yield curve.

Key Dates

Keywords

goodwill impairment, net loss, financial results, capital ratios, interest income, interest expense, loan portfolio, deposits, First Keystone Corporation, banking