1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission File Number: 000-25328
FIRST KEYSTONE FINANCIAL, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-0469351
- ----------------------------------- ------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
22 West State Street
Media, Pennsylvania 19063
- ----------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (610) 565-6210
Indicate by check mark whether the Registrant (1) has filed all reports required
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
------ -------
Number of shares of Common Stock outstanding as of February 12, 2001: 2,231,716
Transitional Small Business Disclosure Format Yes No X
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FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
PAGE
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of December 31,
2000 (Unaudited) and September 30, 2000................................ 1
Consolidated Statements of Income for the Three Months Ended December
31, 2000 and 1999 (Unaudited)........................................... 2
Consolidated Statement of Changes in Stockholders' Equity for the Three
Months Ended December 31, 2000 (Unaudited)............................. 3
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 2000 and 1999 (Unaudited).................................. 4
Notes to Consolidated Financial Statements (Unaudited).................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 15
Item 2. Changes in Securities and Use of Proceeds.............................. 15
Item 3. Defaults Upon Senior Securities........................................ 15
Item 4. Submission of Matters to a Vote of Security Holders.................... 15
Item 5. Other Information...................................................... 15
Item 6. Exhibits and Reports on Form 8-K....................................... 15
SIGNATURES......................................................................... 16
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FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)
December 31 September 30
ASSETS 2000 2000
- ------ ----------- ------------
(Unaudited)
Cash and amounts due from depository institutions $ 3,112 $ 2,891
Interest-bearing deposits with depository institutions 22,299 37,223
--------- ---------
Total cash and cash equivalents 25,411 40,114
Investment securities available for sale 51,622 42,215
Mortgage-related securities available for sale 115,468 96,257
Loans held for sale 3,200 3,099
Mortgage-related securities held to maturity - at amortized cost
(approximate fair value of $12,470 at December 31, 2000
and $12,580 at September 30, 2000) 12,695 13,056
Loans receivable - net 232,977 230,686
Accrued interest receivable 3,178 3,373
Real estate owned 820 947
Federal Home Loan Bank stock - at cost 6,847 6,672
Office properties and equipment - net 3,818 3,624
Deferred income taxes 1,179 2,319
Prepaid expenses and other assets 15,047 21,101
--------- ---------
TOTAL ASSETS $ 472,262 $ 463,463
========= =========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 284,025 $ 272,562
Advances from Federal Home Loan Bank 136,444 132,902
Securities sold under agreements to repurchase 10,000
Accrued interest payable 2,109 2,294
Advances from borrowers for taxes and insurance 1,779 772
Accounts payable and accrued expenses 2,591 2,164
--------- ---------
Total liabilities 426,948 420,694
--------- ---------
Company-obligated mandatorily redeemable preferred securities of a subsidiary
trust holding solely junior subordinated debentures of the Company 16,200 16,200
Stockholders' Equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued
Common stock, $.01 par value, 20,000,000 shares authorized; issued
and outstanding: 2,236,716 shares at December 31, 2000 and
2,251,716 shares at September 30, 2000 14 14
Additional paid-in capital 13,512 13,491
Common stock acquired by stock benefit plans (1,252) (1,287)
Treasury stock at cost: 483,284 and 468,284 shares at December 31, 2000
and September 30, 2000, respectively (5,778) (5,622)
Accumulated other comprehensive loss (172) (2,386)
Retained earnings - partially restricted 22,790 22,359
--------- ---------
Total stockholders' equity 29,114 26,569
--------- ---------
TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY $ 472,262 $ 463,463
========= =========
See notes to unaudited consolidated financial statements.
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FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share data)
Three months ended
December 31
-------------------
2000 1999
------ ------
INTEREST INCOME:
Interest on:
Loans $4,692 $4,442
Mortgage-related securities 2,113 2,104
Investments 945 803
Interest-bearing deposits 228 121
------ ------
Total interest income 7,978 7,470
------ ------
INTEREST EXPENSE:
Interest on:
Deposits 3,195 2,683
Federal Home Loan Bank advances 1,997 1,566
Other borrowings 2 297
------ ------
Total interest expense 5,194 4,546
------ ------
NET INTEREST INCOME 2,784 2,924
PROVISION FOR LOAN LOSSES 135 105
------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,649 2,819
------ ------
NON-INTEREST INCOME:
Service charges and other fees 229 218
Net gain (loss) on sales of:
Loans 35 54
Real estate owned 20 (11)
Real estate operations (18) (28)
Other 204 183
------ ------
Total non-interest income 470 416
------ ------
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,010 872
Occupancy and equipment expenses 283 258
Professional fees 226 224
Federal deposit insurance premium 14 38
Data processing 101 100
Advertising 86 109
Minority interest in expense of subsidiaries 393 393
Other 269 360
------ ------
Total non-interest expense 2,382 2,354
------ ------
INCOME BEFORE INCOME TAX EXPENSE 737 881
INCOME TAX EXPENSE 127 178
------ ------
NET INCOME $ 610 $ 703
====== ======
BASIC EARNINGS PER COMMON SHARE $ 0.29 $ 0.34
====== ======
DILUTED EARNINGS PER COMMON SHARE $ 0.28 $ 0.33
====== ======
See notes to unaudited consolidated financial statements.
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FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(dollars in thousands)
Common
stock
Additional acquired by
Common paid-in stock benefit
stock capital plans
------- ---------- -------------
BALANCE AT OCTOBER 1, 2000 $ 14 $ 13,491 $(1,287)
Net income
Net unrealized gain on securities, net of tax
ESOP stock committed to be released 35
Excess of fair value above cost of
ESOP shares committed to be released 21
Purchase of treasury stock
Dividends - $.08 per share
------- -------- -------
BALANCE AT DECEMBER 31, 2000 $ 14 $ 13,512 $(1,252)
======= ======== =======
Accumulated Retained
other earnings- Total
Treasury comprehensive partially stockholders'
stock loss restricted equity
-------- ------------- ---------- -------------
BALANCE AT OCTOBER 1, 2000 $(5,622) $ (2,386) $22,359 $26,569
Net income 610 610
Net unrealized gain on securities, net of tax 2,214 2,214
ESOP stock committed to be released 35
Excess of fair value above cost of
ESOP shares committed to be released 21
Purchase of treasury stock (156) (156)
Dividends - $.08 per share (179) (179)
------- -------- -------- -------
BALANCE AT DECEMBER 31, 2000 $(5,778) $ (172) $22,790 $29,114
======= ======== ======== =======
See notes to unaudited consolidated financial statements.
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FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Three months ended
December 31
---------------------
2000 1999
------- -------
OPERATING ACTIVITIES:
Net income $ 610 $ 703
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for depreciation and amortization 105 101
Accretion of premiums and discounts (57) (35)
(Gain) loss on sales of:
Loans (35) (54)
Real estate owned (20) 11
Provision for loan losses 135 105
Amortization of stock benefit plans 56 91
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (9,581) (11,038)
Loans sold in the secondary market 9,480 10,570
Accrued interest receivable 195 230
Prepaid expenses and other assets 6,054 288
Accrued interest payable (185) 266
Accounts payable and accrued expenses 427 (707)
------- -------
Net cash provided by operating activities 7,184 531
------- -------
INVESTING ACTIVITIES:
Loans originated (11,145) (14,411)
Purchases of:
Mortgage-related securities available for sale (21,219)
Investment securities available for sale (7,930)
Purchase of FHLB stock (175)
Proceeds from sales of real estate owned 220 37
Principal collected on loans 8,794 13,909
Proceeds from maturities, calls, or repayments of:
Mortgage-related securities available for sale 3,904 3,694
Mortgage-related securities held to maturity 359 348
Purchase of property and equipment (299) (485)
Net expenditures on real estate acquired through foreclosure and
in development (73) (79)
------- -------
Net cash provided by (used in) investing activities (27,564) 3,013
------- -------
FINANCING ACTIVITIES:
Net increase in deposit accounts 11,463 2,327
Net decrease in FHLB advances (6,458) (1,030)
Net increase in advances from borrowers for taxes and insurance 1,007 1,097
Purchase of treasury stock (156)
Cash dividend (179) (157)
------- -------
Net cash provided by financing activities 5,677 2,237
------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (14,703) 5,781
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 40,114 20,015
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $25,411 $25,796
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest on deposits and borrowings $5,379 $4,280
Cash payments of income taxes 217
Transfers of loans receivable into real estate owned 729
See notes to unaudited consolidated financial statements.
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FIRST KEYSTONE FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000 (UNAUDITED) AND SEPTEMBER 30, 2000 AND
(UNAUDITED) FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(dollars in thousands, except per share amounts)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
However, such information reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the unaudited
interim periods.
The results of operations for the three month period ended December 31,
2000 are not necessarily indicative of the results to be expected for
the fiscal year ending September 30, 2001. The consolidated financial
statements presented herein should be read in conjunction with the
audited consolidated financial statements and related notes thereto
included in the Company's Annual Report to Stockholders for the year
ended September 30, 2000.
Certain information in this quarterly statement may constitute
forward-looking information that involves risks and uncertainties that
could cause actual results to differ materially from those estimated.
Persons are cautioned that such forward-looking statements are not
guarantees of future performance and are subject to various factors
which could cause actual results to differ materially from those
estimated. These factors include changes in general economic and market
conditions and the development of an interest rate environment that
adversely affects the interest rate spread or other income from the
Company's investments and operations.
2. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities
available for sale, by contractual maturities, are as follows:
December 31, 2000
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
-------- ---------- ---------- -----------
U.S. Treasury securities and securities
of U.S. Government agencies:
1 to 5 years $ 2,942 $ 84 $3,026
5 to 10 years 8,827 88 $ 90 8,825
Municipal obligations 19,180 138 106 19,212
Corporate bonds 7,807 66 318 7,555
Mutual funds 2,000 20 1,980
Preferred stocks 5,529 769 4,760
Asset-backed securities 2,969 11 2,958
Other equity investments 2,778 528 3,306
--------- ---- -------- -------
Total $ 52,032 $904 $1,314 $51,622
========= ==== ======== =======
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September 30, 2000
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---------- ---------- ---------- ----------
U.S. Treasury securities and securities
of U.S. Government agencies:
1 to 5 years $ 2,936 $ 34 $ 2,970
5 to 10 years 6,997 $ 252 6,745
Municipal obligations 18,930 11 788 18,153
Corporate bonds 4,910 314 4,596
Mutual funds 2,000 30 1,970
Preferred stocks 5,528 796 4,732
Other equity investments 2,778 384 113 3,049
---------- ---------- ---------- -----------
Total $ 44,079 $ 429 $2,293 $42,215
========== ========== ========== ===========
3. MORTGAGE-RELATED SECURITIES
Mortgage-related securities available for sale and mortgage-related
securities held to maturity are summarized as follows:
December 31, 2000
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
----------- ---------- ----------- -----------
Available for Sale:
FHLMC pass-through certificates $ 10,493 $ 131 $ 10,624
FNMA pass-through certificates 24,908 118 $ 77 24,949
GNMA pass-through certificates 37,588 237 205 37,620
Collateralized mortgage obligations 42,331 178 234 42,275
---------- ---------- ---------- -----------
Total $ 115,320 $ 664 $ 516 $115,468
========== ========== ========== ===========
Held to Maturity:
FHLMC pass-through certificates $ 2,719 $ 11 $ 30 $ 2,700
FNMA pass-through certificates 5,492 142 5,350
Collateralized mortgage obligations 4,484 64 4,420
---------- ---------- ---------- -----------
Total $ 12,695 $ 11 $ 236 $ 12,470
========== ========== ========== ===========
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September 30, 2000
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---------- ---------- -------- -----------
Available for Sale:
FHLMC pass-through certificates $ 5,759 $ 20 $ 8 $ 5,771
FNMA pass-through certificates 23,934 18 407 23,545
GNMA pass-through certificates 39,007 70 655 38,422
Collateralized mortgage obligations 29,308 72 861 28,519
---------- ---------- -------- -----------
Total $ 98,008 $ 180 $1,931 $ 96,257
========== ========== ======== ===========
Held to Maturity:
FHLMC pass-through certificates $ 2,898 $ 6 $ 74 $ 2,830
FNMA pass-through certificates 5,674 204 5,470
Collateralized mortgage obligations 4,484 204 4,280
---------- ---------- -------- -----------
Total $ 13,056 $ 6 $ 482 $ 12,580
========== ========== ======== ===========
5. LOANS RECEIVABLE
Loans receivable consist of the following:
December 31 September 30
2000 2000
----------- ------------
Real estate loans:
Single-family $161,008 $160,143
Construction and land 15,970 17,905
Multi-family and commercial 39,145 37,870
Home equity and lines of credit 23,102 22,597
Consumer loans 1,177 1,343
Commercial loans 5,700 4,475
---------- ----------
Total loans 246,102 244,333
Loans in process (9,807) (10,330)
Allowance for loan losses (2,092) (2,019)
Deferred loan fees (1,226) (1,298)
---------- ----------
Loans receivable - net $232,977 $230,686
========== ==========
The following is an analysis of the allowance for loan losses:
Three Months Ended
December 31
-------------------------
2000 1999
-------- -------
Balance beginning of period $2,019 $1,928
Provisions charged to income 135 105
Charge-offs (62) (175)
-------- -------
Total $2,092 $1,858
======== =======
At December 31, 2000 and September 30, 2000, non-performing loans
(which include loans in excess of 90 days delinquent) amounted to
approximately $2,005 and $2,515, respectively. For both periods,
non-performing loans primarily consist of single-family properties.
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10
6. DEPOSITS
Deposits consist of the following major classifications:
December 31 September 30
2000 2000
-------------------- --------------------
Amount Percent Amount Percent
---------- ------- ---------- -------
Non-interest bearing $ 6,674 2.3% $ 6,764 2.5%
NOW 41,153 14.5 38,898 14.3
Passbook 37,016 13.0 37,861 13.9
Money market demand 27,409 9.7 23,583 8.6
Certificates of deposit 171,773 60.5 165,456 60.7
---------- -------- --------- -------
Total $ 284,025 100.0% $ 272,562 100.0%
========== ======== ========= =======
7. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, effective October 1, 1999. The
statement requires disclosure of amounts from transactions and other
events which are currently excluded from the statement of operations
and are recorded directly to stockholders' equity. These transactions
and other events represent foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. Only the last of these
items, however, is currently applicable to the Company.
For the three months ended December 31, 2000 and 1999, the Company's
comprehensive income was as follows:
Three Months Ended
December 31
------------------------
2000 1999
---- ----
Net income $ 610 $ 703
Net SFAS 115 adjustment 2,214 (1,868)
----- ------
Total comprehensive income (loss) $ 2,824 $(1,165)
======= =======
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8. EARNINGS PER SHARE
Basic net income per share is based upon the weighted average number of
common shares outstanding, while diluted net income per share is based
upon the weighted average number of common share outstanding and common
share equivalents that would arise from the exercise of dilutive
securities. All dilutive shares consist of options which the exercise
price of the options is lower than the market price for the dates
presented.
The calculated basic and diluted earnings per share ("EPS") is as
follows:
Three Months Ended
December 31
--------------------------
2000 1999
---------- ----------
Numerator $ 610 $ 703
Denominators:
Basic shares outstanding 2,087,979 2,054,236
Effect of dilutive securities 66,939 64,171
---------- ----------
Dilutive shares outstanding 2,154,918 2,118,407
========== ==========
Earnings per share:
Basic $ 0.29 $ 0.34
Diluted $ 0.28 $ 0.33
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2000 (UNAUDITED) AND
SEPTEMBER 30, 2000
Total assets of the Company increased $8.8 million or 1.9% from $463.5 million
at September 30, 2000 to $472.3 million at December 31, 2000. The growth was due
mainly to increases in investment and mortgage-related securities available for
sale of $28.6 million and loans receivable of $2.3 million partially offset by a
decrease in cash and cash equivalents of $14.7 million and a decrease in other
assets of $6.1 million. The increase in the investment and mortgage-related
securities available for sale portfolios and the decrease in other assets was
primarily due to the reinvestment of proceeds from the restructuring the
portfolio which occurred in the fourth quarter of fiscal 2000 combined with
general growth in the portfolio. The asset growth was primarily funded by
increased deposits.
Deposits increased $11.5 million or 4.2% from $272.6 million at September 30,
2000 to $284.0 million at December 31, 2000. The increase resulted from
increases of $5.1 million or 16.9% in core deposits (which consist of passbook,
money market, NOW and non-interest bearing accounts) and of $6.3 million or 3.8%
in certificates of deposit.
Stockholders' equity increased $2.5 million primarily due an increase in the
market valuation, net of taxes, of securities available for sale, and to a
lesser extent, net income partially offset by the repurchase of shares of common
stock and dividends paid.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2000
AND 1999
Net Income.
Net income was $610,000 for the three months ended December 31, 2000 as compared
to $703,000 for the same period in 1999. The $93,000 or 13.2% decrease in net
income for the three months ended December 31, 2000 was primarily due to a
$140,000 decrease in net interest income partially offset by a $54,000 increase
in non-interest income.
Net Interest Income.
Net interest income decreased $140,000 or 4.8% to $2.8 million for the three
months ended December 31, 2000 as compared to the same period in 1999. The
decrease was due to a $648,000 or 14.3% increase in interest expense which was
partially offset by a $508,000 or 6.8% increase in interest income as compared
to the 1999 period. The $508,000 increase in interest income was primarily due
to a $14.0 million or 3.4% increase in the average balance of interest-earning
assets and by a 24 basis point (on a fully tax equivalent basis) increase in the
yield earned thereon. The $648,000 increase in interest expense was primarily
due to a 51 basis point increase in the weighted average rate paid thereon and
an increase of $11.3 million or 2.9% in the average balance of interest-bearing
liabilities for the three months ended December 31, 2000, as compared to the
same period in 1999. The greater increase in rates paid on interest-bearing
liabilities was due to the fact that the Company's liabilities adjusted at a
faster pace than its interest-earning assets in the rising rate environment
experienced in the past fiscal year. The interest rate spread and net interest
margin, on a fully tax equivalent basis, were 2.43% and 2.70%, respectively, for
the three months ended December 31, 2000 as compared to 2.71% and 2.92%,
respectively, for the same period in 1999.
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Provision for Loan Losses.
Provisions for loan losses are charged to earnings to maintain the total
allowance for loan losses at a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Company, the amount of the Company's classified assets, the status of past due
principal and interest payments, general economic conditions, particularly as
they relate to the amount of the Company's primary market area , and other
factors related to the collectibility of the Company's loan and loans held for
sale portfolios. For the three months ended December 31, 2000, the provision for
loan losses amounted to $135,000 as compared to $105,000 for the same period in
1999. At December 31, 2000, non- performing assets totaled $2.8 million or .60%
of total assets, a decrease of $637,000 from September 30, 2000. The Company's
coverage ratio, which is the ratio of the allowance to non-performing assets,
was 74.1% and 58.3% at December 31, 2000 and September 30, 2000, respectively.
Management continues to review its loan portfolio to determine the extent, if
any, to which further additional loss provisions may be deemed necessary. There
can be no assurance that the allowance for losses will be adequate to cover
losses which may in fact be realized in the future and that additional
provisions for losses will not be required.
Non-interest Income.
Non-interest income increased $54,000 or 13.0% to $470,000 for the three months
ended December 31, 2000 as compared to the same period in 1999. The increase was
a result of an increase in service charges and other fees, the net gain on sale
of real estate owned and other non-interest income partially offset by a $19,000
decrease in the gain on sale of loans and a small decrease in real estate
operations.
Operating Expenses.
Operating expenses had a modest overall increase of $28,000 or 1.2% during the
three months ended December 31, 2000 as compared to the same period in 1999. The
increase was due to a $138,000 increase in salaries and employee benefits and a
$25,000 increase in occupancy and equipment expenses offset primarily by a
$91,000 decrease in other non-interest expenses, $24,000 decrease in federal
deposit insurance premiums and a $23,000 decrease in advertising. The increase
in salary and employee benefits reflected normal salary increases and personnel
costs associated with branch expansion.
Income Tax Expense.
Income tax expense decreased $51,000 to $127,000 during the three months ended
December 31, 2000 as compared to the same period in 1999. The decrease was
primarily a result of a decrease in income before income taxes.
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Liquidity and Capital Resources.
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing and financing activities. The Company's primary
sources of funds are deposits, amortization, prepayment and maturities of
outstanding loans and mortgage-related securities, sales of loans, maturities of
investment securities and other short-term investments, borrowing and funds
provided from operations. While scheduled payments from the amortization of
loans and mortgage-related securities and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. In addition, the Company invests excess
funds in overnight deposits and other short-term interest-earning assets which
provide liquidity to meet lending requirements. The Company has been able to
generate sufficient cash through its deposits as well as borrowings to satisfy
its funding commitments. At December 31, 2000, the Company had short-term
borrowings outstanding of $45.5 million, all of which consisted of advances from
the FHLB of Pittsburgh.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer term basis, the Company maintains a
strategy of investing in various lending products, mortgage-related securities
and investment securities. The Company uses its sources of funds primarily to
meet its ongoing commitments, to fund maturing certificates of deposit and
savings withdrawals, fund loan commitments and maintain a portfolio of
mortgage-related and investment securities. At December 31, 2000, total approved
loan commitments outstanding amounted to $4.5 million, not including loans in
process. At the same date, commitments under unused lines of credit amounted to
$8.9 million. Certificates of deposit scheduled to mature in one year or less at
December 31, 2000 totaled $101.2 million. Based upon its historical experience,
management believes that a significant portion of maturing deposits will remain
with the Company.
The Bank is required by the Office of Thrift Supervision ("OTS") to maintain
average daily balances of liquid assets and short-term liquid assets (as
defined) in amounts equal to 4% of net withdrawable deposits and borrowings
payable in one year or less to assure its ability to meet demand from
withdrawals and repayments of short-term borrowings. The liquidity requirements
may vary from time to time at the direction of the OTS depending upon economic
conditions and deposit flows. The Bank's average monthly liquidity ratio for
December 31, 2000 was 40.4%.
As of December 31, 2000, the Bank had regulatory capital which was in excess of
applicable limits. The Bank is required under applicable federal banking
regulations to maintain tangible capital equal to at least 1.5% of its adjusted
total assets, core capital equal to at least 4.0% of its adjusted total assets
and total capital to at least 8.0% of its risk-weighted assets. At December 31,
2000, the Bank had tangible capital and core capital equal to 8.2% of adjusted
total assets and total capital equal to 18.7% of risk-weighted assets.
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Impact of Inflation and Changing Prices.
The Consolidated Financial Statements of the Company and related notes presented
herein have been prepared in accordance with generally accepted accounting
principles which requires the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation to a larger
extent than interest rates. In the current interest rate environment, liquidity
and the maturity structure of the Company's assets and liabilities are critical
to the maintenance of acceptable performance levels.
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16
QUANTITATIVE AND QUALITATIVE DISCLOSURES
DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's asset and liability management policies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" in the Company's Annual Report and Form 10-K for the year ended
September 30, 2000.
The Company utilizes reports prepared by the OTS to measure interest rate risk.
Using data from the Bank's quarterly thrift financial reports, the OTS models
the net portfolio value ("NPV") of the Bank over a variety of interest rate
scenarios. The NPV is defined as the present value of expected cash flows from
existing assets less the present value of expected cash flows from existing
liabilities plus the present value of net expected cash inflows from existing
off-balance sheet contracts. The model assumes instantaneous, parallel shifts in
the U.S. Treasury Securities yield curve of 100 to 300 basis points, either up
or down, and in 100 basis point increments.
The interest rate risk measures used by the OTS include an "Exposure Measure" or
"Post-Shock" NPV ratio and a "Sensitivity Measure". The "Post-Shock" NPV ratio
is the net present value as a percentage of assets over the various yield curve
shifts. A low "Post-Shock" NPV ratio indicates greater exposure to interest rate
risk and can result from a low initial NPV ratio or high sensitivity to changes
in interest rates. The "Sensitivity Measure" is the decline in the NPV ratio, in
basis points, caused by a 2% increase or decrease in rates, whichever produces a
larger decline. The following sets forth the Bank's NPV as of December 31, 2000.
Net Portfolio Value
(Dollars in thousands)
---------------------------------------------------------------------------------
Changes in
Rates in Dollar Percentage Net Portfolio Change in
Basis Amount Change Change Value As a % of Percentage(1)
Points Assets
---------------------------------------------------------------------------------
300 $18,581 $(26,642) (58.91)% 4.25% (55.59)%
200 27,525 (17,698) (39.13) 6.13 (35.95)
100 36,322 (8,901) (19.68) 7.89 (17.55)
0 45,223 9.57
(100) 51,104 5,880 13.00 10.62 10.97
(200) 53,981 8,758 19.37 11.07 15.67
(300) 58,525 13,302 29.41 11.82 23.51
(1) Based on the portfolio value of the Bank's assets in the base case
scenario
As of December 31, 2000, the Company's NPV was $45.2 million or 9.57% of the
market value of assets. Following a 200 basis point increase in interest rates,
the Company's "post shock" NPV was $27.5 million or 6.13% of the market value of
assets. The change in the NPV ratio or the Company's sensitivity measure was
(3.44)%.
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17
PART II
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
On January 24, 2001, the Annual Meeting of stockholders of the
Company was held to elect management's nominees for director and to
ratify the appointment of the Company's independent auditors. No
other nominations for directors were submitted. With respect to the
election of directors, the results were as follows:
Nominee For Withheld
---------------- --------- --------
William K. Betts 1,969,281 127,049
Walter J. Lewicki 1,969,281 127,049
With respect to the ratification of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending September
30, 2001, the results were as follows: 2,093,351 votes for and 2,979
votes against.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
15
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST KEYSTONE FINANCIAL, INC.
Date: February 14, 2001 By: /s/ Donald S. Guthrie
----------------------------------
Donald S. Guthrie
President and Chief Executive Officer
Date: February 14, 2001 By: /s/ Thomas M. Kelly
----------------------------------
Thomas M. Kelly
Executive Vice-President
and Chief Financial Officer
16