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, 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 February 12, 2002: 2,053,631
Transitional Small Business Disclosure Format Yes No X
FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
Page
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
Unaudited Consolidated Statements of Financial Condition as of
December 31, 2001 and September 30, 2001 ........................................ 1
Unaudited Consolidated Statements of Income for the Three
Months Ended December 31, 2001 and 2000.......................................... 2
Unaudited Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended December 31, 2001..................................... 3
Unaudited Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 2001 and 2000................................................. 4
Notes to Unaudited 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........................ 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 14
Item 2. Changes in Securities and Use of Proceeds....................................... 14
Item 3. Defaults Upon Senior Securities................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders............................ 14
Item 5. Other Information............................................................... 14
Item 6. Exhibits and Reports on Form 8-K................................................ 14
SIGNATURES.................................................................................... 15
i
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)
December 31 September 30
ASSETS 2001 2001
- ------ --------- ----------
Cash and amounts due from depository institutions $ 5,455 $ 3,753
Interest-bearing deposits with depository institutions 22,446 15,378
--------- ---------
Total cash and cash equivalents 27,901 19,131
Investment securities available for sale 67,224 62,564
Mortgage-related securities available for sale 109,946 117,608
Loans held for sale 225
Mortgage-related securities held to maturity - at amortized cost
(approximate fair value of $11,250 at December 31, 2001
and $11,550 at September 30, 2001) 11,225 11,454
Loans receivable - net 255,057 247,664
Accrued interest receivable 3,239 3,353
Real estate owned 808 887
Federal Home Loan Bank stock - at cost 6,917 6,917
Office properties and equipment - net 3,680 3,690
Deferred income taxes 227
Cash surrender value of life insurance 14,361 14,021
Prepaid expenses and other assets 1,634 1,536
--------- ---------
TOTAL ASSETS $ 502,219 $ 489,050
========= =========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 319,467 $ 311,601
Advances from Federal Home Loan Bank 126,112 126,070
Accrued interest payable 1,171 1,804
Advances from borrowers for taxes and insurance 1,894 696
Deferred income taxes 282
Accounts payable and accrued expenses 2,441 1,776
--------- ---------
Total liabilities 451,085 442,229
--------- ---------
Company-obligated mandatorily redeemable preferred securities of a subsidiary
trust holding solely junior subordinated debentures of the Company 20,910 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: 2,040,515 shares at December 31, 2001 and
2,033,707 shares at September 30, 2001 14 14
Additional paid-in capital 13,536 13,536
Common stock acquired by stock benefit plans (1,110) (1,147)
Treasury stock at cost: 672,041 at December 31, 2001
and 686,293 at September 30, 2001, respectively (8,498) (8,583)
Accumulated other comprehensive income 1,675 2,664
Retained earnings - partially restricted 24,607 24,137
--------- ---------
Total stockholders' equity 30,224 30,621
--------- ---------
TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND STOCKHOLDERS' EQUITY $ 502,219 $ 489,050
========= =========
See notes to unaudited consolidated financial statements.
1
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
Three months ended
December 31
---------------------
2001 2000
------ ------
INTEREST INCOME:
Interest on:
Loans $ 4,716 $ 4,692
Mortgage-related securities 1,953 2,113
Investment securities:
Taxable 591 555
Tax-exempt 301 241
Dividends 124 149
Interest-bearing deposits 72 228
------- -------
Total interest income 7,757 7,978
------- -------
INTEREST EXPENSE:
Interest on:
Deposits 2,897 3,195
Federal Home Loan Bank advances 1,741 1,997
Other borrowings 2
------- -------
Total interest expense 4,638 5,194
------- -------
NET INTEREST INCOME 3,119 2,784
PROVISION FOR LOAN LOSSES 135 135
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,984 2,649
------- -------
NON-INTEREST INCOME:
Service charges and other fees 271 229
Net gain (loss) on sales of:
Loans 12 35
Investment securities (20)
Real estate owned (3) 20
Real estate operations (22) (18)
Increase in cash surrender value 171 174
Other 24 30
------- -------
Total non-interest income 433 470
------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,079 1,010
Occupancy and equipment expenses 310 283
Professional fees 190 226
Federal deposit insurance premium 15 14
Data processing 100 101
Advertising 93 86
Minority interest in expense of subsidiaries 407 393
Other 450 269
------- -------
Total non-interest expense 2,644 2,382
------- -------
INCOME BEFORE INCOME TAX EXPENSE 773 737
INCOME TAX EXPENSE 120 127
------- -------
NET INCOME $ 653 $ 610
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.34 $ 0.29
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.32 $ 0.28
======= =======
See notes to unaudited consolidated financial statements.
2
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(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 restricted equity
---------------------------------------------------------------------------------------
BALANCE AT OCTOBER 1, 2001 $14 $13,536 $(1,147) $(8,583) $2,664 $24,137 $30,621
--- -------- -------- -------- ------- -------- -------
Net income 653 653
Other comprehensive income, net of tax:
Net unrealized loss on securities
net of reclassification adjustment(1) (989) (989)
------ ------
Comprehensive loss (336)
-----
ESOP stock committed to be released 37 37
Excess of fair value above cost of
ESOP shares committed to be released 34 34
Exercise of stock options (34) 85 51
Dividends - $.09 per share (183) (183)
--- -------- -------- -------- ------- -------- -------
BALANCE AT DECEMBER 31, 2001 $14 $13,536 $(1,110) $(8,498) $ 1,675 $24,607 $30,224
=== ======== ======== ======== ======= ======== =======
(1) Disclosure of reclassification amount, net of tax for the three months ended
December 31, 2001:
Net unrealized depreciation arising during the period $(1,002)
Less: reclassification adjustment for net losses included in net income (13)
---------
Net unrealized loss on securities $ (989)
=========
See notes to unaudited consolidated financial statements.
3
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three months ended
December 31
----------------------------
2001 2000
---- ----
OPERATING ACTIVITIES:
Net income $ 653 $ 610
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for depreciation and amortization 116 105
Accretion of premiums and discounts (61) (57)
(Gain) loss on sales of:
Loans (12) (35)
Investments 20
Real estate owned 3 (20)
Provision for loan losses 135 135
Amortization of stock benefit plans 71 56
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (9,581)
Loans sold in the secondary market 225 9,480
Accrued interest receivable 114 195
Prepaid expenses and other assets (438) 6,054
Accrued interest payable (633) (185)
Accounts payable and accrued expenses 665 427
-------- --------
Net cash provided by operating activities 858 7,184
-------- --------
INVESTING ACTIVITIES:
Loans originated (45,253) (11,145)
Purchases of:
Mortgage-related securities available for sale (21,219)
Investment securities available for sale (8,095) (7,930)
Purchase of FHLB stock (175)
Proceeds from sales of real estate owned 197 220
Proceeds from sales of investment securities 2,980
Principal collected on loans 37,723 8,794
Proceeds from maturities, calls, or repayments of:
Mortgage-related securities available for sale 6,554 3,904
Mortgage-related securities held to maturity 228 359
Purchase of property and equipment (106) (299)
Net expenditures on real estate acquired through foreclosure and in development (73)
-------- --------
Net cash used in investing activities (5,772) (27,564)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 7,866 11,463
Net increase (decrease) in FHLB advances 42 (6,458)
Issuance of preferred trust securities 8,000
Purchase of preferred trust securities (3,290)
Net increase in advances from borrowers for taxes and insurance 1,198 1,007
Exercise of stock options 51
Purchase of treasury stock (156)
Cash dividend (183) (179)
-------- --------
Net cash provided by financing activities 13,684 5,677
-------- --------
INCREASE( DECREASE) IN CASH AND CASH EQUIVALENTS 8,770 (14,703)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,131 40,114
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 27,901 $ 25,411
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest on deposits and borrowings $ 5,259 $ 5,379
Cash payments of income taxes $ 50
Transfers of loans receivable into real estate owned $ 121
See notes to unaudited consolidated financial statements.
4
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
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 presentation of results for the periods.
The results of operations for the three month period ended December 31,
2001 are not necessarily indicative of the results to be expected for
the fiscal year ending September 30, 2002 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, 2001.
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, but are not limited to, 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, 2001
-------------------------------------------------------
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 $ 5,967 $ 143 $ 6,110
5 to 10 years 1,847 170 2,017
Municipal obligations 21,891 512 $ 144 22,259
Corporate bonds 17,315 289 759 16,845
Mutual funds 5,009 10 4,999
Preferred stocks 8,590 26 276 8,340
Asset-backed securities 2,991 23 3,014
Other equity investments 2,778 862 3,640
-------- --- --------- --------
Total $66,388 $2,025 $1,189 $67,224
======= ====== ====== =======
5
September 30, 2001
------------------------------------------------------
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 $ 2,961 $ 172 $ 3,133
5 to 10 years 1,843 207 2,050
Municipal obligations 21,890 739 $ 3 22,626
Corporate bonds 14,333 277 523 14,087
Mutual funds 5,009 3 8 5,004
Preferred stocks 9,474 5 282 9,197
Asset-backed securities 2,986 16 2,970
Other equity investments 2,778 719 3,497
-------- ------- -------- --------
Total $61,274 $2,122 $832 $62,564
======== ======= ======== ========
3. MORTGAGE-RELATED SECURITIES
Mortgage-related securities available for sale and mortgage-related
securities held to maturity are summarized as follows:
December 31, 2001
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
Available for Sale:
FHLMC pass-through certificates $ 7,579 $ 236 $ 7,815
FNMA pass-through certificates 13,231 279 13,510
GNMA pass-through certificates 38,113 612 38,725
Collateralized mortgage obligations 49,322 627 $53 49,896
---------- ---- --- ----------
Total $108,245 $1,754 $53 $109,946
======== ====== === ========
Held to Maturity:
FHLMC pass-through certificates $ 2,268 $ 58 $ 2,326
FNMA pass-through certificates 4,472 38 $60 4,450
Collateralized mortgage obligations 4,485 18 29 4,474
--------- -------- ------ ---------
Total $11,225 $114 $89 $11,250
======= ==== === =======
6
September 30, 2001
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
Available for Sale:
FHLMC pass-through certificates $ 8,832 $ 343 $ 9,175
FNMA pass-through certificates 14,570 486 15,056
GNMA pass-through certificates 42,804 1,103 43,907
Collateralized mortgage obligations 48,658 814 $2 49,470
------- ------- --- ---------
Total $114,864 $2,746 $2 $117,608
======== ====== == ========
Held to Maturity:
FHLMC pass-through certificates $ 2,285 $ 68 $ 3 $ 2,350
FNMA pass-through certificates 4,684 70 54 4,700
Collateralized mortgage obligations 4,485 49 34 4,500
--------- ---- --- ---------
Total $11,454 $187 $91 $11,550
======= ==== === =======
4. LOANS RECEIVABLE
Loans receivable consist of the following:
December 31 September 30
2001 2001
---- ----
Real estate loans:
Single-family $165,914 $160,289
Construction and land 29,930 29,117
Multi-family and commercial 45,737 43,472
Home equity and lines of credit 25,581 25,847
Consumer loans 1,160 1,125
Commercial loans 6,073 8,158
-------- ---------
Total loans 274,395 268,008
Loans in process (16,044) (17,016)
Allowance for loan losses (2,301) (2,181)
Deferred loan fees (993) (1,147)
-------- ---------
Loans receivable - net $255,057 $247,664
======== =========
The following is an analysis of the allowance for loan losses:
Three Months Ended
December 31
2001 2000
---- ----
Balance beginning of period $2,181 $2,019
Provisions charged to income 135 135
Charge-offs (15) (62)
------ -------
Total $2,301 $2,092
====== ======
7
At December 31, 2001 and September 30, 2001, non-performing loans
(which include loans in excess of 90 days delinquent) amounted to
approximately $1,911 and $2,302, respectively. For both periods,
non-performing loans consist primarily of single-family properties.
Assets classified as substandard (which includes real estate owned)
amounted to $3,524 and $5,416 at September 30, 2001 and December 31,
2001, respectively. The increase in the classified assets was due to
the classification of three loans in which the borrowers' financial
results have been weak raising the possibility that they will be unable
to comply with the terms of their loan agreements. The Company will
aggressively pursue the repayment of the amounts borrowed and monitor
the adequacy of the collateral. Although management believes the
reserves are adequate at this time, recovery of the carrying value of
the loan is dependent to a great extent on economic, operating and
other conditions that are beyond the control of the Company.
5. DEPOSITS
Deposits consist of the following major classifications:
December 31 September 30
2001 2001
------------------------ -----------------------
Amount Percent Amount Percent
----------- ---------- -------- -----------
Non-interest bearing $ 7,375 2.3% $ 5,698 1.8%
NOW 50,417 15.8 45,161 14.5
Passbook 37,583 11.8 37,806 12.1
Money market demand 43,748 13.7 40,781 13.1
Certificates of deposit 180,344 56.4 182,155 58.5
-------- ----- -------- -----
Total $319,467 100.0% $311,601 100.0%
======== ===== ======== =====
8
6. 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 for which the
exercise price of the options is lower than the market price of the
common stock for the dates presented.
The calculated basic and diluted earnings per share ("EPS") is as
follows:
Three Months Ended
December 31
---------------------------
2001 2000
---------- ---------
Numerator $653 $610
Denominator:
Basic shares outstanding 1,909,276 2,087,979
Effect of dilutive securities 105,221 66,939
---------- ---------
Dilutive shares deemed outstanding 2,014,497 2,154,918
========== =========
Earnings per share:
Basic $0.34 $0.29
Diluted $0.32 $0.28
(1,868)
---------
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2001 AND SEPTEMBER 30, 2001
Total assets of the Company increased $13.2 million or 2.7% from $489.1 million
at September 30, 2001 to $502.2 million at December 31, 2001. The growth was
funded by increases in deposits and the net proceeds from the issuance of $8.0
million of trust preferred securities. These funds were invested primarily in
cash and cash equivalents which increased $8.8 million to $27.9 million and
loans receivable which increased $7.4 million to $255.1 million during the
quarter.
Deposits increased $7.9 million or 2.5% from $311.6 million at September 30,
2001 to $319.5 million at December 31, 2001. The increase resulted from
increases of $9.7 million or 7.5% in core deposits (which consist of passbook,
money market, NOW and non-interest bearing accounts) and were offset by a $1.8
million or 1.0% decline in certificates of deposit as customers chose to invest
in more liquid NOW and money market accounts.
On November 28, 2001, the Company, through a special purpose subsidiary, issued
$8.0 million in a pooled trust preferred security at a floating interest rate of
375 basis over the London Interbank Offered Rate ("LIBOR") for six month
Eurodollar deposits. Interest is reset semi-annually and the security is
callable after December 8, 2006. The maturity date is December 8, 2031. In
addition, the Company purchased $3.5 million of the 9.7% fixed trust preferred
security issued in August 1997 by another of it's special purpose subsidiaries.
For financial statement presentation, the repurchase is shown net of the
original issuance.
Stockholders' equity decreased $397,000 as net income less dividends was offset
by a decrease in the market valuation, net of taxes, of securities available for
sale of $989,000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001
AND 2000
Net Income.
Net income was $653,000 for the three months ended December 31, 2001 as compared
to $610,000 for the same period in 2000. The $43,000 or 7.0% increase in net
income for the three months ended December 31, 2001 was primarily due to a
$335,000 increase in net interest income partially offset by a $37,000 decrease
in non-interest income and a $262,000 increase in non-interest expense.
Net Interest Income.
Net interest income increased $335,000 or 12.0% to $3.1 million for the three
months ended December 31, 2001 as compared to the same period in 2000. The
increase was due to a $556,000 or 10.7% decrease in interest expense which was
partially offset by a $221,000 or 2.8% decrease in interest income as compared
to the 2000 period. The $221,000 decrease in interest income was primarily due
to an 86 basis point (on a fully tax equivalent basis) decrease in the yield
earned on interest-earning assets, partially offset by a $42.0 million or 9.8%
increase in the average balance of interest-earning assets. The $556,000
decrease in interest expense was primarily due to a 93 basis point decrease in
the weighted average rate paid thereon offset, in part, by an increase of $38.1
million or 9.4% in the average balance of interest-bearing liabilities for the
three months ended December 31, 2001, as compared to the same period in 2000.
During calendar 2001, the Federal Reserve Board decreased the targeted federal
funds rate eleven times to 1.75%.
10
Consequently, during the quarter, the rates paid on interest-bearing
liabilities, consisting of deposits and borrowings adjusted at a faster pace
than its interest-earning assets, consisting primarily of loans and investment
securities. The interest rate spread and net interest margin, on a fully tax
equivalent basis, were 2.51% and 2.74%, respectively, for the three months ended
December 31, 2001 as compared to 2.43% and 2.70%, respectively, for the same
period in 2000.
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, 2001 and 2000, the
provision for loan losses amounted to $135,000. At December 31, 2001,
non-performing assets totaled $2.7 million or .54% of total assets, a decrease
of $470,000 from September 30, 2001. The Company's coverage ratio, which is the
ratio of the allowance to non-performing assets, was 84.6% and 68.4% at December
31, 2001 and September 30, 2001, respectively. Classified assets were $5,416 and
$3,524 at December 31, 2001 and September 30, 2001, respectively (see Note 4 to
the unaudited Consolidated Financial Statements).
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 decreased $37,000 or 7.9% to $433,000 for the three months
ended December 31, 2001 as compared to the same period in 2000. The decrease was
a result of declines in both the net gain on sale of loans and real estate owned
and a loss on the sale of an investment security partially offset by a $42,000,
or 18.3%, increase in service charges and other fees.
Operating Expenses.
Operating expenses increased $262,000 or 11.0% during the three months ended
December 31, 2001 as compared to the same period in 2000. The increase was due
to a $69,000 increase in salaries and employee benefits, a $27,000 increase in
occupancy and equipment expenses and a $181,000 increase in other non- interest
expenses, partially offset by a $36,000 decrease in professional fees. The
increase in salary and employee benefits and occupancy and equipment expenses
reflected normal increases and additional costs associated with branch
expansion. The increase in other non-interest expenses was due to increases in
bank service charges, supplies and cash losses.
Income Tax Expense.
Income tax expense decreased minimally $7,000 to $120,000 during the three
months ended December 31, 2001 as compared to the same period in 2000. The
decrease was primarily a result of the increased portion of income comprised of
non- taxable income.
11
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, 2001, the Company had short-term
borrowings (due within one year or currently callable by the FHLB) outstanding
of $71.0 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, 2001, 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
$20.0 million. Certificates of deposit scheduled to mature in one year or less
at December 31, 2001 totaled $134.0 million. Based upon its historical
experience, management believes that a significant portion of maturing deposits
will remain with the Company.
The Company has not used, and has no intention to use, any significant
off-balance sheet financing arrangements for liquidity purposes. The Company's
financial instruments with off-balance sheet risk are limited to its obligations
to fund loans to customers pursuant to existing commitments. In addition, the
Company has not had, and has no intention to have, any significant transactions,
arrangements or other relationships with any unconsolidated, limited purpose
entities that could materially affect its liquidity or capital resources. The
Company has not, and does not intend to, trade in commodity contracts.
As of December 31, 2001, 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,
2001, the Bank had tangible capital and core capital equal to 7.7% of adjusted
total assets and total capital equal to 16.8% of risk-weighted assets.
12
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 included as an exhibit to the Annual
Report on Form 10-K for the year ended September 30, 2001.
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, 2001.
Net Portfolio Value
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------------
Changes in
Rates in Net Portfolio
Basis Dollar Percentage Value As a % of Change in
Points Amount Change Change Assets Percentage (1)
- --------------------------------------------------------------------------------------------------------------
300 $20,117 $(28,812) (58.89)% 4.25% (55.40)%
200 30,328 (18,601) (38.02) 6.24 (34.52)
100 40,846 (8,083) (16.52) 8.16 (14.38)
0 48,929 9.53
(100) 54,802 5,873 12.00 10.44 10.97
(200)
(300)
(1) Based on the portfolio value of the Bank's assets in the base case scenario
As of December 31, 2001, the Company's NPV was $48.9 million or 9.53% of the
market value of assets. Following a 200 basis point increase in interest rates,
the Company's "post shock" NPV was $30.3 million or 6.24% of the market value of
assets. The change in the NPV ratio or the Company's sensitivity measure was
(3.29)%.
13
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 23, 2002, the Annual Meeting of stockholders of the
Company was held to elect management's nominee 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
Edward Calderoni 1,737,262 174,898
With respect to the ratification of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending September
30, 2002, the results were as follows: 1,904,901 votes for , 6,364
votes against and 895 votes abstaining.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
14
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, 2002 By: /s/ Donald S. Guthrie
-------------------------------------
Donald S. Guthrie
President and Chief Executive Officer
Date: February 14, 2002 By: /s/ Thomas M. Kelly
-------------------------------------
Thomas M. Kelly
Executive Vice-President
and Chief Financial Officer
15