FIRST KEYSTONE CORP (FKYS) stock intrinsic value fair value estimate & owner earnings analysis

First Keystone Corporation is the holding company for First Keystone Community Bank, a bank organized in 1864 with 19 offices in Columbia, Luzerne, Montour, Monroe and Northampton counties in Pennsylvania (it also lends in Lehigh County). It had about $1.57 billion of assets at June 30, 2026, $1.18 billion of deposits and roughly $950 million of loans, mostly real estate. It is a bank, so interest paid to depositors is a cost of doing business and no separate debt is subtracted from its value; the $25 million of subordinated notes due December 31, 2030 and $106 million of Federal Home Loan Bank advances are funding for the bank and are charged through earnings. WHAT THE EARNINGS HISTORY SAYS. Per-share earnings were $1.52 to $2.03 from 2016 to 2020, peaked at $2.49 in 2021 and $2.35 in 2022, and fell to $0.91 in 2023 when interest expense jumped from $8.9 million to $27.9 million because deposits and borrowings repriced upward while the bond portfolio, acquired at low yields, did not. We measure earnings as net income per share, and we add back the $19.1 million goodwill write-off taken in the first quarter of 2024, which cost no cash; on that basis 2024 earned $0.96 per share rather than the reported loss of $2.14 (this corrects the figure we previously stored for that year). 2025 earned $0.99. The years before 2023 describe a bank funded at near-zero deposit cost and are not the bank as it operates now, so our starting point is the 2023 to 2025 median of $0.96 per share, not the ten-year median of $1.64. WHY WE LIFT THE EARNINGS LEVEL ABOVE THAT STARTING POINT. Last completed year, earnings per share grew about 3% ($0.96 to $0.99). We assume about $1.20 per share going forward, which is higher, and the reasons are specific and dated. Net interest income rose from $32.3 million in 2024 to $37.7 million in 2025 as the net interest margin widened from 2.40% to 2.66%, and the quarterly report filed August 6, 2026 shows it rising again: $19.4 million in the first half of 2026 against $18.3 million a year earlier, with the second quarter at $10.3 million. Before credit costs the bank earned about $11.1 million in 2025 and $5.8 million in the first half of 2026 (net interest income plus fees, less operating costs), and expense growth slowed from 7.8% in 2025 to about 4% in the first half of 2026. First-half 2026 earnings were $0.91 per share, against $0.64 a year earlier, but that includes a net credit-loss release of $0.7 million and almost no credit cost, so we do not use it. We instead take roughly $11 million of pre-credit earnings, deduct $3.0 million a year of credit cost (the average of 2024 and 2025, a level that includes the recent problem loans), apply a low tax rate of about 8% (the bank holds tax-exempt securities and loans), and divide by about 6.3 million shares. That gives roughly $1.20. CREDIT QUALITY IS THE MAIN UNCERTAINTY. Non-performing assets rose from $5.0 million to $16.9 million during 2025, or 1.79% of loans, including a $2.0 million charge-off on a developer's luxury-rental conversion that stalled and a $0.5 million charge-off on a contractor's credit line. The loss reserve of $9.4 million covered only 56% of non-performing assets at year-end, and 2025 net charge-offs were $3.0 million (0.31% of average loans). The bank also states that its margin is sensitive to rising rates because it funds itself with shorter-term liabilities, so a renewed rise in deposit costs would squeeze it. Against that, common equity tier 1 capital was 15.2% and the leverage ratio 9.6%. Tangible book value at June 30, 2026 was about $18.74 per share, after $17.2 million (about $2.72 per share) of unrealized bond losses that return to book as the bonds mature. BASE CASE, about $20 per share. Earnings stay at about $1.20 per share for the full ten years and beyond. We credit no growth. The evidence for growth is poor: per-share earnings are no higher than a decade ago, the dividend exceeds earnings, and the share count rises about 1% a year through reinvested dividends. What is credited is the margin recovery already visible in the 2025 and 2026 reports, and what persists is a 160-year-old local deposit franchise whose earnings have run between $1.5 and $2.5 per share in every year before the rate shock. The business is worth about $20 per share and it owes no additional debt beyond the funding already charged to earnings, so the shareholders' value is the same $20. BEAR CASE, about $14 per share. This builds in a full commercial real estate credit cycle of the kind the 2008 to 2011 period produced, which has not yet shown up in any filing, on top of today's disclosed problem loans. Operating earnings before credit costs are held at $10 million, below today's run-rate, because the margin stops widening and costs keep rising. Credit costs are $5 million in each of the next two years (the 2025 problem loans working out), then a three-year downturn with provisions of $8 million, $12 million and $8 million (the middle year equals roughly 1.25% of loans, in line with the worst year for community banks in that cycle), then $3 million a year. Per-share earnings are about $0.71, $0.71, $0.29, a loss of $0.32 and $0.29, then $1.00 a year permanently, with no recovery above that. Total extra provisions of about $23 million beyond a normal pace would take capital from 15.2% toward roughly 12% and still above the well-capitalized thresholds, so we assume no share issuance. The business is worth about $14 per share and the funding is already charged to earnings, so the shareholders' value is about $14, or about 75% of tangible book. A bank that survives such a cycle with its deposit base intact keeps earning a lower, but still positive, return on its capital, which is why the bear value stays below book rather than at zero. BULL CASE, about $26.80 per share. The bank's own levers work: securities acquired at low yields keep maturing and being reinvested, loan yields keep resetting, and the margin continues to widen from 2.66% toward roughly 3.1% as it did by 26 basis points in 2025, while credit costs settle near $2.5 million. Earnings rise to $1.30, $1.45 and $1.60 over three years and then stay at about $1.64, below the $2.0 to $2.5 earned in 2020 to 2022. The business is worth about $26.80 per share, with no added debt. WHAT WOULD MAKE THIS WRONG. If credit costs stay near $5 million a year with no recovery, earnings are closer to $0.80 per share and the value falls toward the bear case. If deposit costs rise again, margin gains reverse. Management holds no public earnings calls and the 2026 quarterly figures come only from the quarterly report; we could not reconcile the exact make-up of the first-half 2026 credit-cost release from the data available, and treated it as non-recurring. WHY THE MARGIN-OF-SAFETY PRICE IS $10.50. We are fairly sure of the operating earnings before credit costs, since they come from a stable local deposit base and have been about $11 million for 2025 and the first half of 2026. We are much less sure of the credit costs, which are driven by commercial real estate loans where the bank has already had two sizeable surprises in one quarter, and loss reserves cover only 56% of problem assets. The worst plausible outcome is a regional real estate downturn on top of that; the bank would survive it because of its high capital ratios and modest borrowings, but earnings could be near zero for a year and the dividend of $1.12 a year, which already exceeds earnings, would likely be cut. If we are wrong about credit costs or the margin, the shares are worth in the mid-teens, not the twenties. The price assumes a holding period of about three years. At $10.50 the current dividend alone is about a 10.7% yield, and three years of it, about $3.36, would equal roughly a third of that price if it is maintained. A 20% annual return over three years would then require a value near $14.80, about the level of our bear case, so only outcomes worse than the bear case, or a deep dividend cut combined with a slow recovery, would leave the implied return short of 20%. A price in the low teens would leave no room for a mistake on credit costs, and a price in the single digits would be unnecessarily low given the capital strength and the deposit franchise, so we land at $10.50. The shares trade over the counter, typically a few thousand shares a day. CHANGE SINCE OUR LAST ESTIMATE. The earlier estimates were built on a different basis and are not comparable. In the business itself, two things have moved since September: the first-half 2026 report showed net interest income up about 6% and earnings of $0.91 per share, which supports our higher earnings level, and credit costs remain unresolved, so we continue to value the shares below tangible book value.