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 June 30, 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.
--------------------------------
(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 August 10, 2001: 2,033,707
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
Unaudited Consolidated Statements of Financial Condition as of
June 30, 2001 and September 30, 2000 ............................................ 1
Unaudited Consolidated Statements of Income for the Three and Nine
Months Ended June 30, 2001 and 2000.............................................. 2
Unaudited Consolidated Statement of Changes in Stockholders' Equity for the Nine
Months Ended June 30, 2001....................................................... 3
Unaudited Consolidated Statement of Cash Flows for the Nine
Months Ended June 30, 2001....................................................... 4
Notes to Consolidated Financial Statements....................................... 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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ITEM 1. FINANCIAL STATEMENTS
FIRST KEYSTONE FINANCIAL, INC.
- ------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
(dollars in thousands)
June 30 September 30
ASSETS 2001 2000
- ------ --------- ------------
Cash and amounts due from depository institutions $ 4,136 $ 2,891
Interest-bearing deposits with depository institutions 20,637 37,223
--------- ---------
Total cash and cash equivalents 24,773 40,114
Investment securities available for sale 59,802 42,215
Mortgage-related securities available for sale 117,854 96,257
Loans held for sale 100 3,099
Mortgage-related securities held to maturity - at amortized cost
(approximate fair value of $11,780 at June 30, 2001
and $12,580 at September 30, 2000) 11,820 13,056
Loans receivable - net 243,407 230,686
Accrued interest receivable 3,186 3,373
Real estate owned 1,031 947
Federal Home Loan Bank stock - at cost 6,917 6,672
Office properties and equipment - net 3,707 3,624
Deferred income taxes 366 2,319
Prepaid expenses and other assets 16,985 21,101
--------- ---------
TOTAL ASSETS $ 489,948 $ 463,463
========= =========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 313,642 $ 272,562
Advances from Federal Home Loan Bank 123,928 132,902
Securities sold under agreements to repurchase 10,000
Accrued interest payable 2,018 2,294
Advances from borrowers for taxes and insurance 2,921 772
Accounts payable and accrued expenses 2,481 2,164
--------- ---------
Total liabilities 444,990 420,694
--------- ---------
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: 2,033,707 and 2,251,716 shares at June 30, 2001
and September 30, 2000, respectively 14 14
Additional paid-in capital 13,502 13,491
Common stock acquired by stock benefit plans (1,183) (1,287)
Treasury stock at cost: 686,293 and 468,284 shares at June 30, 2001
and September 30, 2000, respectively (8,583) (5,622)
Accumulated other comprehensive income (loss) 1,294 (2,386)
Retained earnings - partially restricted 23,714 22,359
--------- ---------
Total stockholders' equity 28,758 26,569
--------- ---------
TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY $ 489,948 $ 463,463
========= =========
See notes to unaudited consolidated financial statements.
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FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
- -----------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(dollars in thousands, except per share data)
Three months ended Nine months ended
June 30 June 30
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
INTEREST INCOME:
Interest on:
Loans $ 4,679 $ 4,795 $ 13,984 $ 13,783
Mortgage-related securities 2,267 2,199 6,622 6,457
Investments 1,011 862 2,962 2,467
Interest-bearing deposits 86 161 445 400
-------- -------- -------- --------
Total interest income 8,043 8,017 24,013 23,107
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on:
Deposits 3,314 2,896 9,761 8,340
Federal Home Loan Bank advances 1,774 1,764 5,566 4,914
Other borrowings 294 2 886
-------- -------- -------- --------
Total interest expense 5,088 4,954 15,329 14,140
-------- -------- -------- --------
NET INTEREST INCOME 2,955 3,063 8,684 8,967
PROVISION FOR LOAN LOSSES 135 105 405 315
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,820 2,958 8,279 8,652
-------- -------- -------- --------
NON-INTEREST INCOME (LOSS):
Service charges and other fees 248 246 712 698
Net gain on sale of:
Loans 34 58 103 171
Mortgage-related and investment securities 63 63
Real estate owned 25 20 16
Real estate operations (13) (27) (47) (72)
Other income 197 474 586 823
-------- -------- -------- --------
Total non-interest income 529 776 1,437 1,636
-------- -------- -------- --------
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,015 1,033 3,047 2,801
Occupancy and equipment expenses 297 287 890 832
Professional fees 191 221 580 664
Federal deposit insurance premium 13 14 41 66
Data processing 100 100 301 301
Advertising 99 105 267 341
Minority interest in expense of subsidiary 393 393 1,179 1,179
Other 451 461 1,153 1,177
-------- -------- -------- --------
Total non-interest expense 2,559 2,614 7,458 7,361
-------- -------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 790 1,120 2,258 2,927
INCOME TAX EXPENSE 129 261 372 627
-------- -------- -------- --------
NET INCOME $ 661 $ 859 $ 1,886 $ 2,300
======== ======== ======== ========
BASIC EARNINGS PER COMMON SHARE $ 0.33 $ 0.42 $ 0.91 $ 1.11
======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE $ 0.31 $ 0.41 $ 0.88 $ 1.07
======== ======== ======== ========
See notes to unaudited consolidated financial statements.
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FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
- -----------------------------------------------
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(dollars in thousands)
Common
stock Accumulated
Additional acquired by other
Common paid-in stock benefit Treasury comprehensive
stock capital plans stock income (loss)
-------- ------------ -------------- -------- --------------
BALANCE AT OCTOBER 1, 2000 $ 14 $ 13,491 $ (1,287) $ (5,622) $ (2,386)
Net income
Other comprehensive income, net of tax 3,680
ESOP stock committed to be released 104
Excess of fair value above cost of ESOP
shares committed to be released 77
Exercise of stock options (66) 84
Purchase of treasury stock (3,045)
Dividends - $.24 per share
-------- -------- -------- -------- --------
BALANCE AT JUNE 30, 2001 $ 14 $ 13,502 $ (1,183) $ (8,583) $ 1,294
======== ======== ======== ======== ========
Retained
earnings- Total
partially stockholders'
restricted equity
---------- ------------
BALANCE AT OCTOBER 1, 2000 $ 22,359 $ 26,569
Net income 1,886 1,886
Other comprehensive income, net of tax 3,680
ESOP stock committed to be released 104
Excess of fair value above cost of ESOP
shares committed to be released 77
Exercise of stock options 18
Purchase of treasury stock (3,045)
Dividends - $.24 per share (531) (531)
-------- --------
BALANCE AT JUNE 30, 2001 $ 23,714 $ 28,758
======== ========
See notes to unaudited consolidated financial statements.
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FIRST KEYSTONE FINANCIAL, INC.
- ------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(dollars in thousands)
Nine months ended
June 30
-----------------------
2001 2000
---- ----
OPERATING ACTIVITIES:
Net income $ 1,886 $ 2,300
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and amortization 328 323
Amortization of premiums and discounts (65) (169)
Gain on sales of:
Loans (103) (171)
Investment securities available for sale (25)
Mortgage-related securities available for sale (38)
Real estate owned (20) (16)
Provision for loan losses 405 315
Amortization of stock benefit plans 199 262
Distribution of policy value in demutualization (278)
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (19,329) (30,088)
Loans sold in the secondary market 22,328 28,765
Accrued interest receivable 187 135
Prepaid expenses and other assets 4,116 62
Accrued interest payable (276) 544
Accounts payable and accrued expenses 317 (700)
-------- --------
Net cash provided by operating activities 9,910 1,284
-------- --------
INVESTING ACTIVITIES:
Loans originated (46,060) (50,048)
Purchases of:
Investment securities available for sale (15,613) (3,033)
Mortgage-related securities available for sale (48,879) (10,826)
Purchase of FHLB stock (245)
Proceeds from sales of real estate owned 578 361
Proceeds from sales of:
Investment securities available for sale 1,025
Mortgage-related securities available for sale 6,926
Principal collected on loans 32,696 42,487
Proceeds from maturities, calls, or repayments of:
Mortgage-related securities available for sale 22,984 10,487
Mortgage-related securities held to maturity 1,228 1,094
Purchase of property and equipment (411) (938)
Net expenditures on real estate acquired through foreclosure and in development (159) (128)
-------- --------
Net cash used in investing activities (45,930) (10,544)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 41,080 15,138
Net decrease in FHLB advances and other borrowings (18,974) (2,777)
Net increase in advances from borrowers for taxes and insurance 2,149 2,133
Purchase of treasury stock (3,045)
Cash dividends (531) (473)
-------- --------
Net cash provided by financing activities 20,679 14,021
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (15,341) 4,761
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 40,114 20,015
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,773 $ 24,776
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest on deposits and borrowings $ 19,641 $ 13,596
Transfers of loans receivable into real estate owned 589 1,121
Cash payments of income taxes 125 275
See notes to unaudited consolidated financial statements.
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FIRST KEYSTONE FINANCIAL, INC.
- ------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(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
accounting principles generally accepted in the United States of
America 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 nine month periods ended
June 30, 2001 are not necessarily indicative of the results to be
expected for the fiscal year ending September 30, 2001. The unaudited
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:
June 30, 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 $ 2,954 $ 118 $ 3,072
5 to 10 years 8,837 104 $ 22 8,919
Municipal obligations 21,890 563 59 22,394
Corporate bonds 7,815 145 197 7,763
Mutual funds 2,000 12 1,988
Asset-backed securities 2,980 11 2,969
Preferred stocks 9,474 15 293 9,196
Other equity investments 2,778 723 3,501
------- ------- ------- -------
Total $58,728 $ 1,668 $ 594 $59,802
======= ======= ======= =======
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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:
June 30, 2001
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- --------
Available for Sale:
FHLMC pass-through certificates $ 11,624 $ 199 $ 30 $ 11,793
FNMA pass-through certificates 15,938 141 18 16,061
GNMA pass-through certificates 45,108 355 155 45,308
Collateralized mortgage obligations 44,241 494 43 44,692
-------- -------- -------- --------
Total $116,911 $ 1,189 $ 246 $117,854
======== ======== ======== ========
Held to Maturity:
FHLMC pass-through certificates $ 2,308 $ 44 $ 22 $ 2,330
FNMA pass-through certificates 5,028 27 55 5,000
Collateralized mortgage obligations 4,484 2 36 4,450
-------- -------- -------- --------
Total $ 11,820 $ 73 $ 113 $ 11,780
======== ======== ======== ========
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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 consists of loans which are insured or guaranteed by FHLMC,
FNMA or GNMA.
The mortgage-related securities designated as available for sale, by
definition, can be sold in response to changes in interest rates and
cash flows or for restructuring purposes.
5. LOANS RECEIVABLE
Loans receivable consist of the following:
June 30 September 30
2001 2000
---- ----
Real estate loans:
Single-family $ 160,985 $ 160,143
Construction and land 22,932 17,905
Multi-family and commercial 42,218 37,870
Home equity and lines of credit 24,357 22,597
Consumer loans 1,369 1,343
Commercial business loans 7,718 4,475
--------- ---------
Total loans 259,579 244,333
Loans in process (12,852) (10,330)
Allowance for loan losses (2,212) (2,019)
Deferred loan fees (1,108) (1,298)
--------- ---------
Loans receivable - net $ 243,407 $ 230,686
========= =========
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The following is an analysis of the allowance for loan losses:
Nine Months Ended
June 30
---------------------
2001 2000
---- ----
Balance beginning of period $ 2,019 $ 1,928
Provision charged to income 405 315
Charge-offs (366) (316)
Recoveries 154
------- -------
Total $ 2,212 $ 1,927
======= =======
At June 30, 2001 and September 30, 2000, non-performing loans (which
consist of loans in excess of 90 days delinquent) amounted to
approximately $1,948 and $2,515, respectively.
6. DEPOSITS
Deposits consist of the following major classifications:
June 30 September 30
2001 2000
--------------------- ---------------------
Amount Percent Amount Percent
------ ------- ------ -------
Non-interest-bearing accounts $ 6,131 2.0% $ 6,764 2.5%
NOW accounts 48,932 15.6 38,898 14.3
Passbook accounts 38,423 12.2 37,861 13.9
Money market demand accounts 36,123 11.5 23,583 8.6
Certificate accounts 184,033 58.7 165,456 60.7
-------- ----- -------- -----
Total $313,642 100.0% $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 nine months ended June 30, 2001 and 2000, the
Company's comprehensive income was as follows:
Three Months Ended Nine Months Ended
June 30 June 30
--------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
Net income $ 661 $ 859 $ 1,886 $ 2,300
Net change in unrealized gain (loss) in
available for sale securities (426) 458 3,680 (1,309)
------- ------- ------- -------
Total comprehensive income $ 235 $ 1,317 $ 5,566 $ 991
======= ======= ======= =======
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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 securities consist of options the exercise
prices which are 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 Nine Months Ended
June 30 June 30
-------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
Numerator $ 661 $ 859 $ 1,886 $ 2,300
Denominators:
Basic shares outstanding 2,025,074 2,064,807 2,064,461 2,064,769
Effect of dilutive shares 95,483 51,730 67,421 80,234
---------- ---------- ---------- ----------
Diluted shares outstanding 2,120,557 2,116,537 2,131,882 2,145,003
========== ========== ========== ==========
Shares outstanding
EPS:
Basic $ 0.33 $ 0.42 $ 0.91 $ 1.11
Diluted $ 0.31 $ 0.41 $ 0.88 $ 1.07
9. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued two
new pronouncements: Statement of Financial Accounting Standards ("SFAS")
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS 141 prohibits the use of the pooling-of-interest
method for business combinations initiated after June 30, 2001 and to all
business combinations initiated before such date which are completed after
June 30, 2001 (that is, the date of the acquisitions July 2001 or later).
There are also transition provisions that apply to business combinations
completed before July 1, 2001, that were accounted for by the purchase
method. SFAS 142 is effective for fiscal years beginning after December
15, 2001 (unless early adopted) to all goodwill and other intangible
assets recognized in an entity's statement of financial position at that
date, regardless of when those assets were initially recognized. The
Company can elect to adopt the provisions of SFAS 142 for the fiscal year
beginning October 1, 2001. The Company is currently evaluating the
provisions of SFAS 142 and has not determined whether to early adopt such
provisions.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this Quarterly Report on Form 10-Q
includes certain "forward- looking statements" based on current management
expectations. The Company's actual results could differ materially, as defined
in the Securities Act of 1933 and the Securities Exchange Act of 1934, from
management's expectations. Such forward-looking statements include statements
regarding management's current intentions, beliefs or expectations as well as
the assumptions on which such statements are based. These forward-looking
statements are subject to significant business, economic and competitive
uncertainties and contingencies, many of which are not subject to the Company's
control. Stockholders and potential stockholders are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those contemplated by such forward-looking statements. Factors that could cause
future results to vary from current management expectations include, but are not
limited to, general economic conditions, legislative and regulatory changes,
monetary and fiscal policies of the federal government, changes in tax policies,
rates and regulations of federal, state and local tax authorities, changes in
interest rates, deposit flows, the cost of funds, demand for loan products,
demand for financial services, competition, changes in the quality or
composition of the Company's loan and investment portfolios, changes in
accounting principles, policies or guidelines, availability and cost of energy
resources and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
fees.
The Company undertakes no obligation to update or revise any forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results that occur subsequent to the date
such forward-looking statements are made.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2001 AND SEPTEMBER 30, 2000
Total assets of the Company increased $26.5 million or 5.7% from $463.5 million
at September 30, 2000 to $489.9 million at June 30, 2001. The growth was due
mainly to increases in investment and mortgage-related securities available for
sale of $39.2 million and loans receivable (including loans held for sale) of
$9.7 million partially offset by a decrease in cash and cash equivalents of
$15.3 million and prepaid expenses and other assets of $4.1 million. The
increase in the investment and mortgage-related securities available for sale
portfolios and the decrease in prepaid expenses and other assets reflected the
continuing deployment of the proceeds resulting from the portfolio restructuring
which occurred during the fourth quarter of fiscal 2000 combined with the
general growth in these portfolios. The asset growth was primarily funded by
increased deposits and by the reinvestment of cash and cash equivalents into
investment and mortgage-related securities.
Deposits increased $41.1 million or 15.1% from $272.6 million at September 30,
2000 to $313.6 million at June 30, 2001. The increase resulted from increases of
$22.5 million or 21.0% in core deposits (which consist of passbook, money
market, NOW and non-interest-bearing accounts) and of $18.6 million or 11.2% in
certificates of deposit. The increase in core deposits reflects the Company's
continued emphasis on developing and expanding retail and business deposit
relationships.
Stockholders' equity increased $2.2 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 offset in part by the repurchase of shares of common
stock pursuant to the Company's on-going stock repurchase programs and quarterly
dividends paid.
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COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 2001 AND 2000
Net Income.
Net income was $661,000 for the three months ended June 30, 2001 as compared to
$859,000 for the same period in 2000 while net income for the nine months period
ended June 30, 2001 was $1.9 million as compared to $2.3 million for the same
period in 2000. The $198,000 or 23.1% decrease in net income for the three
months ended June 30, 2001 was due to a $138,000 decrease in net interest income
after provision for loan losses and $247,000 decrease in non-interest income
partially offset by a $55,000 decrease in non-interest expense combined with a
$132,000 decrease in income tax expense. The $414,000 or 18.0% decrease in net
income for the nine months ended June 30, 2001 compared to the same period in
2000 was primarily due to $373,000 decrease in net interest income after
provision for loan losses, a $199,000 decrease in non-interest income and a
$97,000 increase in non-interest expense, partially offset by a $255,000
decrease in income tax expense.
Net Interest Income.
Net interest income decreased $108,000 or 3.5% to $3.0 million and $283,000 or
3.2% to $8.7 million for the three and nine months ended June 30, 2001,
respectively. Such decreases were primarily due to $134,000 or 2.7% and $1.2
million or 8.4% increases in interest expense for the three and nine months
ended June 30, 2001, respectively, which were partially offset by $26,000 or
0.3% and $906,000 or 3.9% increases in interest income during such periods. The
average balance of interest-earning assets increased $27.2 million and $22.3
million for the three and nine months ended June 30, 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 and nine months ended June 30, 2001 decreased 43 basis points to 7.15% and
10 basis points to 7.44%, respectively, compared to the 2000 periods. In
addition, net interest income was affected by an increase in the average balance
of interest-bearing liabilities of $19.5 million and $16.3 million for the three
and nine months ended June 30, 2001, respectively, as compared to the same
periods in 2000. For the three months ended June 30, 2001, the weighted average
rate paid on such liabilities decreased nine basis points to 4.75% from 4.84%
for the same period in the prior fiscal year and increased 20 basis points to
4.90% for the nine months ended June 30, 2001 as compared to 4.70% for the nine
months ended June 30, 2000. The greater decline in yields earned on
interest-earning assets in the third quarter of fiscal 2001 as compared to the
same period in fiscal 2000 was due to the fact that the Company's assets
adjusted at a faster pace than its interest-bearing liabilities in the declining
interest rate environment experienced during most of fiscal 2001. The interest
rate spread and net interest margin amounted to 2.41% and 2.69% for the three
months ended June 30, 2001 as compared to 2.74% and 2.96% for the same period in
2000. The interest rate spread and net interest margin were 2.44% and 2.71%,
respectively, for the nine months ended June 30, 2001 as compared to 2.73% and
2.95% for the same periods in 2000.
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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 June 30, 2001, the provision for loan losses amounted to
$135,000 as compared to $105,000 for the same period in 2000. For the nine
months ended June 30, 2001 and 2000, the provision for loan losses was $405,000
and $315,000, respectively. At June 30, 2001, non-performing assets totaled $3.0
million or 0.61% of total assets as compared to $3.5 million or 0.75% of total
assets at September 30, 2000. The decline in non-performing assets was primarily
due to a decrease of $567,000 in non-performing loans reflecting the Company's
continuing efforts to facilitate the disposition of non-performing assets. The
Company's coverage ratio, which is the ratio of the allowance for loan losses to
non-performing assets, was 74.3% and 58.3% at June 30, 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.
Non-interest Income.
Non-interest income decreased $247,000 or 31.8% to $529,000 and $199,000 or
12.2% to $1.4 million for the three and nine months ended June 30, 2001,
respectively, as compared to the same periods in 2000. The decrease for the
three and nine months ended June 30, 2001 was primarily due to a decrease in
other income relating to an insurance company that demutualized and made a
one-time distribution of its common stock to its policyholders (including the
Company) during the third quarter of fiscal 2000. Excluding such income,
non-interest income for the three and nine months ended June 30, 2000 would have
been $498,000 and $1.4 million, respectively. In addition, the decrease during
the nine months ended June 30, 2001 was also due to a $68,000 decrease in the
gain on sale of loans which was partially offset by the gain on sale of
mortgage-related and investment securities, a reduced level of losses incurred
from real estate operations and increased service charges and other fees.
Non-interest Expense.
Non-interest expenses decreased $55,000 or 2.1% during the three months ended
June 30, 2001 as compared to the same period in 2000. Decreases of $30,000 and
$18,000 were experienced in professional fees and compensation and employee
benefits, respectively, partially offset by an increase of $10,000 in occupancy
and equipment expenses. For the nine months ended June 30, 2001, operating
expenses increased $97,000 or 1.3% due to increases of $246,000 and $58,000 in
compensation and employee benefits and occupancy and equipment expenses,
respectively, offset by decreases of $84,000, $74,000, $25,000 and $24,000 in
professional fees, advertising, federal insurance premiums, and other expenses,
respectively.
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Income Tax Expense.
Income tax expense decreased $132,000 to $129,000 for the three months ended
June 30, 2001 compared to June 30, 2000, while decreasing $255,000 to $372,000
for the nine months ended June 30, 2001. The decreases were a result of lower
earnings as well as the increased proportion of the Company's income derived
from 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 June 30, 2001, the Company had short-term borrowings
outstanding of $7.9 million, all of which consisted of advances from the Federal
Home Loan Bank 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 loan 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 and to fund loan commitments At June 30, 2001, the total approved
loan commitments outstanding amounted to $8.1 million, not including loans in
process. At the same date, commitments under unused lines of credit amounted to
$13.2 million. Certificates of deposit scheduled to mature in one year or less
at June 30, 2001 totaled $152.6 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 June 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
June 2001 was 43.7%.
As of June 30, 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 June 30, 2001, the
Bank had tangible and core capital equal to 7.9% of adjusted total assets and
total capital equal to 17.4% 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 June 30,
2001.
Net Portfolio Value
Changes in Net Portfolio
Rates in Dollar Percentage Value As a % of Change in
Basis Points Amount Change Change Assets Percentage (1)
- ------------------------------------------------------------------------------------------
(dollars in thousands)
300 $ 25,334 $(26,570) (51.19)% 5.45% (47.24)%
200 34,598 (17,306) (33.34) 7.26 (29.72)
100 43,627 (8,277) (15.95) 8.91 (13.75)
0 51,904 10.33
(100) 54,569 2,665 15.13 10.68 3.39
(200) 52,754 1,815 3.50 10.21 1.16
(300) 49,138 (2,766) (5.33) 9.40 (9.00)
(1) Based on the portfolio value of the Bank's assets in the base case scenario
As of June 30, 2001, the Company's NPV was $51.9 million or 10.33% of the market
value of assets. Following a 200 basis point increase in interest rates, the
Company's "post shock" NPV was $34.6 million or 7.26% of the market value of
assets. The change in the NPV ratio or the Company's sensitivity measure was
(3.07)%.
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)%.
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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: August 13, 2001 By: /s/ Donald S. Guthrie
-----------------------------------------
Donald S. Guthrie
President and Chief Executive Officer
Date: August 13, 2001 By: /s/ Thomas M. Kelly
-----------------------------------------
Thomas M. Kelly
Executive Vice-President and Chief
Financial Officer
16