1
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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 March 31, 2001
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.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2576479
- ----------------------------------------- ---------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
22 West State Street
Media, Pennsylvania 19063
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(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 May 8, 2001: 2,226,716
Transitional Small Business Disclosure Format Yes [ ] No [X]
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FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 2001 (Unaudited) and September 30, 2000 ....................... 1
Consolidated Statements of Income for the Three and Six
Months Ended March 31, 2001 and 2000 (Unaudited) ........................ 2
Consolidated Statement of Changes in Stockholders' Equity for the Six
Months Ended March 31, 2001 (Unaudited) ................................. 3
Consolidated Statements of Cash Flows for the Six
Months Ended March 31, 2001 (Unaudited) ................................. 4
Notes to Consolidated Financial Statements (Unaudited) .................. 5
Item 2. Managements'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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ITEM 1. FINANCIAL STATEMENTS
FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
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(dollars in thousands)
March 31 September 30
ASSETS 2001 2000
--------- ------------
(Unaudited)
Cash and amounts due from depository institutions $ 3,583 $ 2,891
Interest-bearing deposits with depository institutions 13,754 37,223
--------- ---------
Total cash and cash equivalents 17,337 40,114
Investment securities available for sale 60,830 42,215
Mortgage-related securities available for sale 129,246 96,257
Loans held for sale 1,483 3,099
Mortgage-related securities held to maturity - at amortized cost
(approximate fair value of $12,230 at March 31, 2001
and $12,580 at September 30, 2000) 12,240 13,056
Loans receivable - net 232,439 230,686
Accrued interest receivable 3,463 3,373
Real estate owned 1,411 947
Federal Home Loan Bank stock - at cost 6,847 6,672
Office properties and equipment - net 3,730 3,624
Deferred income taxes 204 2,319
Prepaid expenses and other assets 15,363 21,101
--------- ---------
TOTAL ASSETS $ 484,593 $ 463,463
========= =========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 302,167 $ 272,562
Advances from Federal Home Loan Bank 128,886 132,902
Securities sold under agreements to repurchase 10,000
Accrued interest payable 1,975 2,294
Advances from borrowers for taxes and insurance 1,891 772
Accounts payable and accrued expenses 2,086 2,164
--------- ---------
Total liabilities 437,005 420,694
--------- ---------
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: 2,226,716 and 2,251,716 shares at March 31, 2001
and September 30, 2000, respectively 14 14
Additional paid-in capital 13,537 13,491
Common stock acquired by stock benefit plans (1,218) (1,287)
Treasury stock at cost: 493,284 and 468,284 shares at March 31, 2001
and September 30, 2000, respectively (5,891) (5,622)
Accumulated other comprehensive income (loss) 1,720 (2,386)
Retained earnings - partially restricted 23,226 22,359
--------- ---------
Total stockholders' equity 31,388 26,569
--------- ---------
TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY $ 484,593 $ 463,463
========= =========
See notes to unaudited consolidated financial statements.
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FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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(dollars in thousands, except per share data)
Three months ended Six months ended
March 31 March 31
-------------------- ----------------------
2001 2000 2001 2000
------- ------- -------- --------
INTEREST INCOME:
Interest on:
Loans $ 4,613 $ 4,546 $ 9,305 $ 8,988
Mortgage-related securities 2,242 2,155 4,355 4,258
Investments 1,006 801 1,951 1,604
Interest-bearing deposits 131 118 359 239
------- ------- -------- --------
Total interest income 7,992 7,620 15,970 15,089
------- ------- -------- --------
INTEREST EXPENSE:
Interest on:
Deposits 3,252 2,761 6,447 5,444
Federal Home Loan Bank advances 1,795 1,585 3,792 3,150
Other borrowings 294 2 591
------- ------- -------- --------
Total interest expense 5,047 4,640 10,241 9,185
------- ------- -------- --------
NET INTEREST INCOME 2,945 2,980 5,729 5,904
PROVISION FOR LOAN LOSSES 135 105 270 210
------- ------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,810 2,875 5,459 5,694
------- ------- -------- --------
NON-INTEREST INCOME (LOSS):
Service charges and other fees 235 234 464 452
Net gain (loss) on sale of:
Loans 34 59 69 113
Real estate owned 2 20 (8)
Real estate operations (16) (18) (34) (46)
Other income 185 165 389 348
------- ------- -------- --------
Total non-interest income 438 442 908 859
------- ------- -------- --------
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,022 896 2,032 1,768
Occupancy and equipment expenses 310 288 593 546
Professional fees 164 218 390 442
Federal deposit insurance premium 13 14 27 52
Data processing 100 100 201 200
Advertising 82 105 168 236
Minority interest in expense of subsidiary 393 393 786 786
Other 433 356 702 716
------- ------- -------- --------
Total non-interest expense 2,517 2,392 4,899 4,746
------- ------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 731 925 1,468 1,807
INCOME TAX EXPENSE 116 187 243 366
------- ------- -------- --------
NET INCOME $ 615 $ 738 $ 1,225 $ 1,441
======= ======= ======== ========
BASIC EARNINGS PER COMMON SHARE $ 0.30 $ 0.36 $ 0.59 $ 0.70
======= ======= ======== ========
DILUTED EARNINGS PER COMMON SHARE $ 0.28 $ 0.35 $ 0.57 $ 0.67
======= ======= ======== ========
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)
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(dollars in thousands)
Common
stock Accumulated Retained
Additional acquired by other earnings- Total
Common paid-in stock benefit Treasury comprehensive partially stockholders'
stock capital plans stock income (loss) restricted equity
------ ---------- ------------- -------- ------------- ---------- -------------
BALANCE AT SEPTEMBER 30, 2000 $14 $13,491 $(1,287) $(5,622) $(2,386) $22,359 $26,569
Net income 1,225 1,225
Other comprehensive gain, net of tax 4,106 4,106
ESOP stock committed to be released 69 69
Excess of fair value above cost of
ESOP shares committed to
be released 46 46
Purchase of treasury stock (269) (269)
Dividends - $.16 per share (358) (358)
--- ------- ------- ------- ------- ------- -------
BALANCE AT MARCH 31, 2001 $14 $13,537 $(1,218) $(5,891) $ 1,720 $23,226 $31,388
=== ======= ======= ======= ======= ======= =======
See notes to consolidated financial statements.
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FIRST KEYSTONE FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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(dollars in thousands)
Six months ended
March 31
----------------------
2001 2000
-------- --------
OPERATING ACTIVITIES:
Net income $ 1,225 $ 1,441
Adjustments to reconcile net income to net
cash used in operating activities:
Provision for depreciation and amortization 216 214
Amortization of premiums and discounts (96) (75)
(Gain) loss on sales of:
Loans (69) (113)
Real estate owned (20) 8
Provision for loan losses 270 210
Amortization of stock benefit plans 115 175
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (13,107) (18,906)
Loans sold in the secondary market 14,723 18,045
Accrued interest receivable (90) 31
Prepaid expenses and other assets 5,738 52
Accrued interest payable (319) 119
Accrued expenses (78) (1,518)
-------- --------
Net cash provided by (used in) operating activities 8,508 (317)
-------- --------
INVESTING ACTIVITIES:
Loans originated (22,740) (34,307)
Purchases of:
Investment securities available for sale (15,613) (109)
Mortgage-related securities available for sale (39,875) (10,826)
Purchase of FHLB stock (175)
Proceeds from sales of real estate owned 220 188
Principal collected on loans 20,353 25,862
Proceeds from maturities, calls, or repayments of:
Mortgage-related securities available for sale 10,134 6,872
Mortgage-related securities held to maturity 811 751
Purchase of property and equipment (322) (792)
Net expenditures on real estate acquired through foreclosure and in development (159) (80)
-------- --------
Net cash used in investing activities (47,366) (12,441)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 29,605 15,147
Net decrease in FHLB advances and other borrowings (14,016) (3,820)
Net increase in advances from borrowers for taxes and insurance 1,119 1,158
Purchase of treasury stock (269)
Cash dividend (358) (315)
-------- --------
Net cash provided by financing activities 16,081 12,170
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (22,777) (588)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 40,114 20,015
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,337 $ 19,427
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest on deposits and borrowings $ 14,510 $ 8,919
Transfers of loans receivable into real estate owned 549 872
Cash payments of income taxes 100
See notes to unaudited consolidated financial statements.
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FIRST KEYSTONE FINANCIAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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(dollars in thousands, except per share amounts)
1. BASIS OF PRESENTATION
The accompanying unaudited 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 of the three and six month periods ended
March 31, 2001 are not necessarily indicative of the results to be
expected for the fiscal year ending September 30, 2001 or any other
period. 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.
2. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities
are as follows:
March 31, 2001
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
Available for Sale:
U.S. Treasury securities and securities
of U.S. Government agencies:
1 to 5 years $ 2,948 $ 127 $3,075
5 to 10 years 8,832 119 $ 5 8,946
Municipal obligations 21,889 737 2 22,624
Corporate bonds 7,811 143 245 7,709
Mutual funds 2,000 10 1,990
Asset-backed securities 2,975 9 2,966
Preferred stocks 10,500 20 438 10,082
Other equity investments 2,778 660 3,438
------- ------ ------ -------
Total $59,733 $1,806 $ 709 $60,830
======= ====== ====== =======
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September 30, 2000
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
Available for Sale:
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:
March 31, 2001
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
Available for Sale:
FHLMC pass-through certificates $ 12,562 $ 277 $ 2 $ 12,837
FNMA pass-through certificates 23,895 353 24,248
GNMA pass-through certificates 45,543 448 32 45,959
Collateralized mortgage obligations 45,737 513 48 46,202
-------- ------ ------- --------
Total $127,737 $1,591 $ 82 $129,246
======== ====== ======= ========
Held to Maturity:
FHLMC pass-through certificates $ 2,472 $ 38 $ 10 $ 2,500
FNMA pass-through certificates 5,284 19 83 5,220
Collateralized mortgage obligations 4,484 28 2 4,510
-------- ------ ------- --------
Total $ 12,240 $ 85 $ 95 $ 12,230
======== ====== ======= ========
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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
======= ==== ====== =======
The collateralized mortgage obligations contain both fixed and
adjustable classes of bonds which are repaid in accordance with a
predetermined priority. The underlying collateral of the bonds
primarily consist of loans which are insured or guaranteed by FHLMC,
FNMA, or the GNMA.
The mortgage-related securities designated as available for sale, by
definition, could be sold in response to changes in interest rates and
cash flows or for restructuring purposes.
5. LOANS RECEIVABLE
March 31 September 30
2001 2000
--------- ------------
Real estate loans:
Single-family $ 158,241 $ 160,143
Construction and land 17,813 17,905
Multi-family and commercial 39,320 37,870
Home equity and lines of credit 23,005 22,597
Consumer loans 1,410 1,343
Commercial loans 5,907 4,475
--------- ---------
Total loans 245,696 244,333
Loans in process (9,942) (10,330)
Allowance for loan losses (2,151) (2,019)
Deferred loan fees (1,164) (1,298)
--------- ---------
Loans receivable - net $ 232,439 $ 230,686
========= =========
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The following is an analysis of the allowance for loan losses:
Six Months Ended
March 31
----------------------
2001 2000
------- -------
Balance beginning of period $ 2,019 $ 1,928
Provisions charged to income 270 210
Charge-offs (139) (189)
Recovery 1
------- -------
Total $ 2,151 $ 1,949
======= =======
At March 31, 2001 and September 30, 2000, non-performing loans (which
consist of loans in excess of 90 days delinquent) amounted to
approximately $1,831 and $2,515, respectively.
6. DEPOSITS
Deposits consist of the following major classifications:
March 31 September 30
2001 2000
--------------------- ---------------------
Amount Percent Amount Percent
-------- ------- -------- -------
Non-interest bearing accounts $ 6,701 2.2% $ 6,764 2.5%
NOW accounts 46,934 15.5 38,898 14.3
Passbook accounts 37,469 12.4 37,861 13.9
Money market demand accounts 31,471 10.4 23,583 8.6
Certificate accounts 179,592 59.5 165,456 60.7
-------- ----- -------- -----
Total $302,167 100.0% $272,562 100.0%
======== ===== ======== =====
7. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, 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 and six months ended March 31, 2001 and 2000, the
Company's comprehensive income was as follows:
Three Months Ended Six Months Ended
March 31 March 31
-------------------- --------------------
2001 2000 2001 2000
------ ------- ------ -------
Net income $ 615 $ 738 $1,225 $ 1,441
Net change in unrealized gain (loss) in
available for sale securities 1,892 (2,374) 4,106 (1,768)
------ ------- ------ -------
Total comprehensive income (loss) $2,507 $(1,636) $5,331 $ (327)
====== ======= ====== =======
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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 shares 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:
For the Three Months Ended For the Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Numerator $ 615 $ 738 $ 1,225 $ 1,441
Denominators:
Basic shares outstanding 2,080,246 2,054,313 2,084,155 2,059,531
Effect of dilutive securities 78,473 39,143 72,890 80,715
---------- ---------- ---------- ----------
Diluted shares outstanding 2,158,719 2,093,456 2,157,045 2,140,246
========== ========== ========== ==========
EPS:
Basic $ 0.30 $ 0.36 $ 0.59 $ 0.70
Diluted $ 0.28 $ 0.35 $ 0.57 $ 0.67
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2001 AND SEPTEMBER 30, 2000
Total assets of the Company increased $21.1 million or 4.6% from $463.5 million
at September 30, 2000 to $484.6 million at March 31, 2001. The growth was due
mainly to increases in investment and mortgage-related securities available for
sale of $51.6 million and loans receivable of $1.8 million partially offset by a
decrease in cash and cash equivalents of $22.8 million and a decrease in other
assets of $5.7 million. The increase in the investment and mortgage-related
securities available for sale portfolios and the decrease in other assets
reflected the reinvestment of proceeds from the portfolio restructuring which
occurred in the fourth quarter of fiscal 2000 combined with the general growth
in the portfolio. The asset growth was primarily funded by increased deposits
and by the reinvestment of cash and cash equivalents into mortgage-related and
investment securities.
Deposits increased $29.6 million or 10.9% from $272.6 million at September 30,
2000 to $302.2 million at March 31, 2001. The increase resulted from increases
of $15.5 million or 14.4% in core deposits (which consist of passbook, money
market, NOW and non-interest bearing accounts) and of $14.1 million or 8.5% in
certificates of deposit. The increase in core deposits reflects the continued
emphasis on corporate deposit relationships.
Stockholders' equity increased $4.8 million primarily due to 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 AND SIX MONTHS ENDED MARCH 31,
2001 AND 2000
Net Income.
Net income was $615,000 for the three months ended March 31, 2001 as compared to
$738,000 for the same period in 2000 while net income for the six months period
ended March 31, 2001 was $1.2 million as compared to $1.4 million for the same
period in 2000. The $123,000 or 16.7% decrease in net income for the three
months ended March 31, 2001 was due to a $65,000 decrease in net interest income
after provision for loan losses combined with a $125,000 increase in
non-interest expense partially offset by a $71,000 decrease in income tax
expense. The $216,000 or 15.0% decrease in net income for the six months ended
March 31, 2001 compared to the same period in 2000 was primarily due to $235,000
decrease in net interest income after provision for loan losses combined with a
$153,000 increase in non-interest expense, partially offset by a $123,000
decrease in income tax expense and $49,000 increase in other income.
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Net Interest Income.
Net interest income decreased $35,000 or 1.2% to $2.9 million and $175,000 to
$5.7 million for the three and six months ended March 31, 2001, respectively.
Such decreases were primarily due to $407,000 or 8.8% and $1.1 million or 11.5%
increases in interest expense for the three and six months ended March 31, 2001,
respectively, which were partially offset by $372,000 or 4.9% and $881,000 or
5.8% increases in interest income during such periods. The average balance of
interest-earning assets increased $26.8 million and $19.9 million for the three
and six months ended March 31, 2001, respectively, as compared to the same
periods in 2000. Calculated on a fully taxable equivalent basis, the weighted
average yield earned on interest-earning assets for the three months ended March
31, 2001 decreased 11 basis points to 7.32% compared to the 2000 period.
However, with respect to the six month period ended March 31, 2001, the weighted
average yield on a fully taxable basis increased by seven basis points to 7.43%
as compared to the same period in 2000. In addition, net interest income was
affected by an increase in the average balance of interest-bearing liabilities
of $18.0 million and $14.7 million for the three and six months ended March 31,
2001, respectively, as compared to the same period in 2000. For the three months
ended March 31, 2001, the weighted average rate paid on such liabilities
increased 19 basis points to 4.85% from 4.66% for the same period in the prior
fiscal year and increased 35 basis points to 4.98% for the six months ended
March 31, 2001 as compared to 4.63% for the six months ended March 31, 2000. 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 amounted to 2.46%
and 2.75% for the three months ended March 31, 2001 as compared to 2.77% and
2.97% for the same period in 2000. The interest rate spread and net interest
margin were 2.45% and 2.73%, respectively, for the six months ended March 31,
2001 as compared to 2.73% and 2.94% for the same periods in 2000.
Provision for Loan Losses.
Provisions for loan losses are charged to earnings to bring the total allowance
for loan losses to 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 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 March 31, 2001, the provision for loan losses amounted to
$135,000 as compared to $105,000 for the same period in 2000. For the six months
ended March 31, 2001 and 2000, the provision for loan losses was $270,000 and
$210,000, respectively. At March 31, 2001, non-performing assets totaled $3.2
million or .67% of total assets. The Company's coverage ratio, which is the
ratio of the allowance for loan losses to non-performing assets, was 66.3% and
58.3% at March 31, 2001 and September 30, 2000, respectively.
Management will continue to review its loan portfolio to determine the extent,
if any, to which additional loss provisions may be deemed necessary. There can
be no assurance that the allowance for loan 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.
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Non-interest Income.
Non-interest income decreased $4,000 or .9% to $438,000 and increased $49,000 or
5.7% to $908,000 for the three and six months ended March 31, 2001,
respectively, as compared to the same periods in 2000. The slight decrease for
the three months ended March 31, 2001 was primarily due to a decrease in net
gain on sale of loans partially offset by an increase in other income. The
increase during the six months ended March 31, 2001 was primarily a result of
decreases in the amount of losses incurred from real estate operations and
increases in other income offset by a decrease in the net gain on sales of
loans.
Non-interest Expense.
Non-interest expenses increased $125,000 or 5.2% during the three months ended
March 31, 2001 as compared to the same period in 2000. Increases of $126,000 and
$77,000 were incurred in compensation and employee benefits and other expenses,
respectively, partially offset by reductions of $54,000 and $23,000 in
professional fees and advertising. For the six months ended March 31, 2001,
operating expenses increased $153,000 or 3.2% due to increases of $264,000 and
$47,000 in compensation and employee benefits and occupancy and equipment
expenses offset by decreases of $68,000, $52,000, and $25,000 in advertising,
professional fees, and federal insurance premiums, respectively. 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 $71,000 to $116,000 for the three months ended
March 31, 2001 compared to March 31, 2000, while decreasing $123,000 to $243,000
for the six months ended March 31, 2001. The decreases were a result of lower
earnings as well as increases in tax-exempt assets.
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 March 31, 2001, the Company had short-term
borrowings outstanding of $12.9 million, all of which consisted of advances from
the Federal Home Loan Bank of Pittsburgh.
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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 pay maturing certificates of deposit and
savings withdrawals, fund loan commitments At March 31, 2001, the total approved
loan commitments outstanding amounted to $10.8 million, not including loans in
process. At the same date, commitments under unused lines of credit amounted to
$10.4 million. Certificates of deposit scheduled to mature in one year or less
at March 31, 2001 totaled $132.4 million. Based upon its historical experience,
management believes that a significant portion of maturing deposits will remain
with the Company.
First Keystone Federal Savings Bank (the "Bank"), the Company's wholly owned
subsidiary, was previously 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. In March 2001, the OTS
amended its regulations to remove such requirement. However, insured
institutions are still required to maintain sufficient levels of liquidity for
safety and soundness purposes. The Bank's average monthly liquidity ratio for
March 2001 was 40.3%.
As of March 31, 2001, the Bank had regulatory capital in excess of applicable
limits. The Bank is required under certain federal 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
equal to at least 8.0% of its total risk-weighted assets. At March 31, 2001, the
Bank had tangible and core capital equal to 8.2% of adjusted total assets and
total capital equal to 18.6% of risk-weighted assets.
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ITEM 3. QUANTITATIVE AND QUALITATIVE 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 on 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 analysis 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 table sets forth the Bank's NPV as of December 31,
2000.
Net Portfolio Value
Changes in
Rates in Dollar Percentage Net Portfolio Value Change in
Basis Points Amount Change Change As a % of Assets Percentage (1)
- --------------------------------------------------------------------------------------------------
(dollars in thousands)
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 September 30, 2000, the Company's NPV was $46.2 million or 9.94% of the
market value of assets. Following a 200 basis point increase in interest rates,
the Company's "post shock" NPV was $29.1 million or 6.58% of the market value of
assets. The change in the NPV ratio or the Company's sensitivity measure was
(3.36)%.
Based upon the Company's knowledge as of the date hereof, the Company does not
believe that there has been any material change in the Company's asset and
liability position or the market value of the Company's portfolio equity since
December 31, 2000.
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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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
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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: May 14, 2001 By: /s/ Donald S. Guthrie
----------------------------------
Donald S. Guthrie
President and Chief Executive Officer
Date: May 14, 2001 By: /s/ Thomas M. Kelly
-----------------------------------
Thomas M. Kelly
Executive Vice-President and Chief
Financial Officer
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