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, 2002
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 23-2576479
--------------------------------- ----------------------
(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 May 9, 2002: 2,053,631
Transitional Small Business Disclosure Format Yes ___ No X
FIRST KEYSTONE FINANCIAL, INC.
Contents
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Financial Condition as of
March 31, 2002 and September 30, 2001 .................................................................1
Unaudited Condensed Consolidated Statements of Income for the Three
and Six Months Ended March 31, 2002 and 2001 ......................................................... 2
Unaudited Condensed Consolidated Statement of Changes in Stockholders'
Equity for the Six Months Ended March 31, 2002 ........................................................3
Unaudited Condensed Consolidated Statements of Cash Flows for the Six
Months Ended March 31, 2002 ...........................................................................4
Notes to Unaudited Condensed 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
i
ITEM 1.FINANCIAL STATEMENTS
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)
March 31 September 30
2002 2001
--------- ---------
ASSETS
Cash and amounts due from depository institutions $ 6,614 $ 3,753
Interest-bearing deposits with depository institutions 14,702 15,378
--------- ---------
Total cash and cash equivalents 21,316 19,131
Investment securities available for sale 70,389 62,564
Mortgage-related securities available for sale 103,644 117,608
Loans held for sale 225
Mortgage-related securities held to maturity - at amortized cost
(approximate fair value of $10,650 at March 31, 2002
and $11,550 at September 30, 2001) 10,638 11,454
Loans receivable (net of allowance for loan losses of $2,168
at March 31, 2002 and $2,019 at September 30, 2001) 266,889 247,664
Accrued interest receivable 3,271 3,353
Real estate owned 361 887
Federal Home Loan Bank stock - at cost 6,321 6,917
Office properties and equipment - net 3,631 3,690
Deferred income taxes 542
Cash surrender value of life insurance 14,562 14,021
Prepaid expenses and other assets 2,570 1,536
--------- ---------
TOTAL ASSETS $ 504,134 $ 489,050
========= =========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 321,610 $ 311,601
Advances from Federal Home Loan Bank 126,153 126,070
Accrued interest payable 1,136 1,804
Advances from borrowers for taxes and insurance 2,026 696
Deferred income taxes 282
Accounts payable and accrued expenses 2,002 1,776
--------- ---------
Total liabilities 452,927 442,229
--------- ---------
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debentures of the Company 20,898 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:
2,053,631 shares at March 31, 2002 and 2,033,707 shares at September 30, 2001 14 14
Additional paid-in capital 13,499 13,536
Common stock acquired by stock benefit plans (1,072) (1,147)
Treasury stock at cost: 658,925 at March 31, 2002
and 686,293 at September 30, 2001 (8,334) (8,583)
Accumulated other comprehensive income 1,096 2,664
Retained earnings - partially restricted 25,106 24,137
--------- ---------
Total stockholders' equity 30,309 30,621
--------- ---------
TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES AND STOCKHOLDERS' EQUITY $ 504,134 $ 489,050
========= =========
See notes to unaudited condensed consolidated financial statements
1
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
Three months ended Six months ended
March 31 March 31
2002 2001 2002 2001
-------- -------- -------- --------
INTEREST INCOME:
Interest on:
Loans $ 4,691 $ 4,613 $ 9,406 $ 9,305
Mortgage-related securities 1,660 2,242 3,613 4,355
Investment securities:
Taxable 612 601 1,203 1,155
Tax-Exempt 272 257 538 525
Dividends 133 148 292 271
Interest-bearing deposits 48 131 120 359
-------- -------- -------- --------
Total interest income 7,416 7,992 15,172 15,970
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on:
Deposits 2,450 3,252 5,347 6,447
Federal Home Loan Bank advances 1,704 1,795 3,444 3,792
Other borrowings 2
-------- -------- -------- --------
Total interest expense 4,154 5,047 8,791 10,241
-------- -------- -------- --------
NET INTEREST INCOME 3,262 2,945 6,381 5,729
PROVISION FOR LOAN LOSSES 135 135 270 270
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,127 2,810 6,111 5,459
-------- -------- -------- --------
NON-INTEREST INCOME (LOSS):
Service charges and other fees 257 235 528 464
Net gain (loss) on sale of:
Loans 3 34 15 69
Investment securities (20)
Real estate owned 62 60 20
Real estate operations (41) (16) (62) (34)
Increase in cash surrender value 168 160 338 334
Other 22 25 46 55
-------- -------- -------- --------
Total non-interest income 471 438 905 908
-------- -------- -------- --------
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,102 1,022 2,181 2,032
Occupancy and equipment expenses 316 310 627 593
Professional fees 254 164 443 390
Federal deposit insurance premium 14 13 29 27
Data processing 115 100 215 201
Advertising 129 82 223 168
Minority interest in expense of subsidiaries 405 393 812 786
Other 442 433 891 702
-------- -------- -------- --------
Total non-interest expense 2,777 2,517 5,421 4,899
-------- -------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 821 731 1,595 1,468
INCOME TAX EXPENSE 137 116 257 243
-------- -------- -------- --------
NET INCOME $ 684 $ 615 $ 1,338 $ 1,225
======== ======== ======== ========
BASIC EARNINGS PER COMMON SHARE $ 0.35 $ 0.30 $ 0.70 $ 0.59
======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE $ 0.34 $ 0.28 $ 0.66 $ 0.57
======== ======== ======== ========
See notes to unaudited condensed consolidated financial statements.
2
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED 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 1,338 1,338
Other comprehensive loss, net of tax:
Net unrealized loss on securities (1,568) (1,568)
-------- --------
Comprehensive loss (230)
--------
ESOP stock committed to be released 75 75
Excess of fair value above cost of
ESOP shares committed to be released 72 72
Exercise of stock options (109) 249 140
Dividends - $.18 per share (369) (369)
-------- -------- --------- --------- -------- -------- --------
BALANCE AT MARCH 31, 2002 $ 14 $ 13,499 $ (1,072) $ (8,334) $ 1,096 $ 25,106 $ 30,309
-------- -------- --------- --------- -------- -------- --------
See notes to unaudited condensed consolidated financial statements.
3
FIRST KEYSTONE FINANCIAL, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Six months ended
March 31
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net income $ 1,338 $ 1,225
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation and amortization 231 216
Amortization of premiums and discounts 33 (96)
(Gain) loss on sales of:
Loans (15) (69)
Investments 20
Real estate owned (60) (20)
Provision for loan losses 270 270
Amortization of stock benefit plans 147 115
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (195) (13,107)
Loans sold in the secondary market 420 14,723
Accrued interest receivable 82 (90)
Prepaid expenses and other assets (1,575) 5,738
Accrued interest payable (668) (319)
Accrued expenses 226 (78)
-------- --------
Net cash provided by operating activities 254 8,508
-------- --------
INVESTING ACTIVITIES:
Loans originated (86,332) (22,740)
Purchases of:
Investment securities available for sale (12,095) (15,613)
Mortgage-related securities available for sale (9,284) (39,875)
Redemption (purchase) of FHLB stock 596 (175)
Proceeds from sales of real estate owned 796 220
Proceeds from sales of investment securities 2,980
Principal collected on loans 66,754 20,353
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 180
Mortgage-related securities available for sale 21,809 10,134
Mortgage-related securities held to maturity 813 811
Purchase of property and equipment (172) (322)
Net expenditures on real estate acquired through foreclosure and in development (5) (159)
-------- --------
Net cash used in investing activities (13,960) (47,366)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 10,009 29,605
Net increase (decrease) in FHLB advances 83 (14,016)
Net increase in advances from borrowers for taxes and insurance 1,330 1,119
Exercise of stock options 140
Issuance of preferred trust securities 8,000
Purchase of preferred trust securities (3,302)
Purchase of treasury stock (269)
Cash dividend (369) (358)
-------- --------
Net cash provided by financing activities 15,891 16,081
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,185 (22,777)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,131 40,114
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,316 $ 17,337
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest on deposits and borrowings $ 9,459 $ 14,510
Transfers of loans receivable into real estate owned 284 549
Cash payments of income taxes 375
See notes to unaudited condensed consolidated financial statements.
4
FIRST KEYSTONE FINANCIAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in 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 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, 2002 are not necessarily indicative of the results to be
expected for the fiscal year ending September 30, 2002 or any other
period The unaudited condensed 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.
2. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities
are as follows:
March 31, 2002
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 $ 9,973 $ 118 $10,091
5 to 10 years 1,852 119 $ 32 1,939
Municipal obligations 21,712 134 163 21,683
Corporate bonds 17,315 170 824 16,661
Mutual funds 5,009 31 4,978
Asset-backed securities 2,993 2,993
Preferred stocks 8,587 20 242 8,365
Other equity investments 2,778 901 3,679
------- ------- ------- -------
Total $70,219 $ 1,462 $ 1,292 $70,389
======= ======= ======= =======
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:
March 31, 2002
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
-------- -------- -------- --------
Available for Sale:
FHLMC pass-through certificates $ 6,403 $ 202 $ 2 $ 6,603
FNMA pass-through certificates 11,903 211 12,114
GNMA pass-through certificates 40,055 558 17 40,596
Collateralized mortgage obligations 43,811 527 7 44,331
-------- -------- -------- --------
Total $102,172 $ 1,498 $ 26 $103,644
======== ======== ======== ========
Held to Maturity:
FHLMC pass-through certificates $ 2,002 $ 58 $ 2,060
FNMA pass-through certificates 4,213 33 $ 35 4,211
Collateralized mortgage obligations 4,423 44 4,379
-------- -------- -------- --------
Total $ 10,638 $ 91 $ 79 $ 10,650
======== ======== ======== ========
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
March 31 September 30
2002 2001
--------- ---------
Real estate loans:
Single-family $ 172,014 $ 160,289
Construction and land 27,277 29,117
Multi-family and commercial 48,889 43,472
Home equity and lines of credit 25,753 25,847
Consumer loans 1,109 1,125
Commercial loans 6,210 8,158
--------- ---------
Total loans 281,252 268,008
Loans in process (11,328) (17,016)
Allowance for loan losses (2,168) (2,181)
Deferred loan fees (867) (1,147)
--------- ---------
Loans receivable - net $ 266,889 $ 247,664
========= =========
The following is an analysis of the allowance for loan losses:
Six Months Ended
March 31
-----------------------
2002 2001
------- -------
Balance beginning of period $ 2,181 $ 2,019
Provisions charged to income 270 270
Charge-offs (288) (139)
Recovery 5 1
------- -------
Total $ 2,168 $ 2,151
======= =======
7
At March 31, 2002 and September 30, 2001, non-performing loans (which
consist of loans in excess of 90 days delinquent) amounted to
approximately $4,091 and $2,302, respectively.
Assets classified as substandard (which includes real estate owned)
amounted to $4.8 million and $3.5 million at March 31, 2002 and
September 30, 2001, respectively. The increase in classified assets was
due to the classification of three loans to borrowers whose financial
results have weakened increasing the possibility that they will be
unable to comply with the terms of their loan agreements. The Company
is aggressively pursuing the repayment of the amounts borrowed and will
continue monitoring to the adequacy of the collateral. Although
management believes the Bank's reserves are adequate at March 31, 2002,
recovery of the carrying value of the loans are 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:
March 31 September 30
2002 2001
----------------------- -----------------------
Amount Percent Amount Percent
-------- ----- -------- -----
Non-interest bearing $ 7,469 2.3% $ 5,698 1.8%
NOW 52,063 16.2 45,161 14.5
Passbook 41,038 12.8 37,806 12.1
Money market demand 48,287 15.0 40,781 13.1
Certificates of deposit 172,753 53.7 182,155 58.5
-------- ----- -------- -----
Total $321,610 100.0% $311,601 100.0%
======== ===== ======== =====
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 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,
---------------------------- ----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Numerator $ 684 $ 615 $ 1,338 $ 1,225
Denominators:
Basic shares outstanding 1,927,878 2,080,246 1,918,475 2,084,155
Effect of dilutive securities 112,538 78,473 106,221 72,890
---------- ---------- ---------- ----------
Diluted shares outstanding 2,040,416 2,158,719 2,024,696 2,157,045
========== ========== ========== ==========
EPS:
Basic $ 0.35 $ 0.30 $ 0.70 $ 0.59
Diluted $ 0.34 $ 0.28 $ 0.66 $ 0.57
8
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, 2002 AND SEPTEMBER 30, 2001
Total assets of the Company increased $15.1 million, or 3.1%, from $489.1
million at September 30, 2001 to $504.1 million at March 31, 2002. The growth
was due mainly to increases in loans receivable of $19.2 million, or 7.8%, and
investment securities available for sale of $7.8 million, or 12.5%, partially
offset by a decrease in mortgage-related securities of $14.0 million, or 11.9%.
The asset growth was primarily funded by increased deposits and the reinvestment
of cash flows from mortgage-related securities.
Deposits increased $10.0 million, or 3.2%, from $311.6 million at September 30,
2001 to $321.6 million at March 31, 2002. The increase resulted from increases
of $19.4 million, or 15.0%, in core deposits (which consist of passbook, money
market, NOW and non-interest-bearing accounts) partially offset by a $9.4
million, or 5.2%, decrease in certificates of deposit. The increase in core
deposits reflects the Bank's continued emphasis on developing corporate deposit
relationships.
On November 28, 2001, First Keystone Capital Trust II, a trust formed under
Delaware law, that is a subsidiary of the Company, issued $8.0 million of pooled
trust preferred securities at a variable interest rate based on LIBOR plus a
margin. The interest is cumulative and payable semi-annually in arrears. The
Company has the option, subject to required regulatory approval, to prepay the
securities beginning December 8, 2006. On November 15, 2001, the Company
purchased $3.5 million of the existing 9.7% fixed rate trust preferred
securities that were issued in August 1997. The purchase is shown net of the
"Company-obligated mandatorily redeemable preferred securities of a subsidiary
trust holding solely junior subordinated debentures of the Company" in the
consolidated statement of financial condition.
Stockholders' equity decreased $312,000 due to a decrease in the accumulated
comprehensive income of $1.6 million to $1.1 million and to dividends paid
partially offset by net income.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31,
2002 AND 2001
Net Income.
Net income was $684,000, or $.34 per diluted share, for the three months ended
March 31, 2002 as compared to $615,000, or $.28 per diluted share, for the same
period in 2001. Net income for the six months ended March 31, 2002 was $1.3
million, or $.66 per diluted share, as compared to $1.2 million, or $.57 per
diluted share, for the same period in 2001. The $69,000, or 11.2%, increase in
net income for the three months ended March 31, 2002 was due to a $317,000
increase in net interest income partially offset by a $260,000 increase in
non-interest expense. The $113,000, or 9.2%, increase in net income for the six
months ended March 31, 2002 compared to the same period in 2001 was primarily
due to $651,000 increase in net interest income partially offset by a $522,000
increase in non-interest expense.
9
Net Interest Income.
Net interest income increased $317,000, or 10.8%, to $3.3 million and $651,000,
or 11.4%, to $6.4 million for the three and six months ended March 31, 2002,
respectively. Such increases were primarily due to $893,000, or 17.7%, and $1.4
million, or 14.2%, decreases in interest expense for the three and six months
ended March 31, 2002, respectively, which were partially offset by $576,000, or
7.2%, and $789,000, or 4.9%, decreases in interest income during such periods.
The average balance of interest-earning assets increased $29.4 million and $36.5
million for the three and six months ended March 31, 2002, respectively, as
compared to the same periods in 2001. Calculated on a fully taxable equivalent
basis, the weighted average yield earned on interest-earning assets for the
three and six months ended March 31, 2002 decreased 94 basis points to 6.38%
compared to the 2001 period. In addition, net interest expense was affected by
an increase in the average balance of interest-bearing liabilities of $26.5
million and $32.3 million for the three and six months ended March 31, 2002,
respectively, as compared to the same periods in 2001. For the three months
ended March 31, 2002, the weighted average rate paid on such liabilities
decreased 110 basis points to 3.75% from 4.85% for the same period in the prior
fiscal year and 102 basis points to 3.96% for the six months ended March 31,
2001 as compared to 4.98% for the six months ended March 31, 2001. Due to the
declining interest rate environment during 2001 and into the first quarter of
2002, the rates paid on interest-bearing liabilities, consisting of deposits and
borrowings, adjusted at a faster pace than the Company's interest-earning
assets, consisting primarily of loans and investment securities. The interest
rate spread and net interest margin, on a fully tax equivalent basis, increased
to 2.62% and 2.86%, respectively, for the three months ended March 31, 2002 as
compared to 2.46% and 2.75%, respectively, for the same period in 2001. The
interest rate spread and net interest margin, on a fully taxable equivalent
basis, were 2.55% and 2.79%, respectively, for the six months ended March 31,
2002 as compared to 2.45% and 2.73%, respectively, for the same period in 2001.
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 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 and six months ended March 31, 2002, the provision for loan losses
remain unchanged at $135,000 and $270,000, respectively compared for the same
period in 2001. At March 31, 2002, non-performing assets totaled $4.5 million,
or .88% of total assets, as compared to $3.2 million at September 30, 2001.
The Company's coverage ratio, which is the ratio of the allowance for loan
losses to non-performing assets, was 48.7% and 68.4% at March 31, 2001 and
September 30, 2001, respectively. The coverage ratio was adversely affected by
the placement of three commercial real estate loans totaling $2.4 million during
the second quarter of fiscal 2002. The Bank owns a 25% participation interest in
two loans totaling $1.9 million which consist of loans secured by an 18-hole
golf course and golf house, located in Avondale, Pennsylvania. The golf facility
is fully operational and continues to generate revenues. The other participating
loan of $495,000, which represents a 25% participating interest, is secured by a
partially completed storage facility in Clifton Heights, Pennsylvania. The lead
lender is in the process of foreclosing on the loans. Based on recent appraisals
and other factors, management presently believes the Company has provided
appropriate reserves for these properties. However, there can be no assurances
that additions to such reserves will not be necessary in future periods.
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.
10
Non-interest Income.
Non-interest income increased $33,000, or 7.5%, to $471,000 for the three months
ended March 31, 2002 as compared to the same period in 2001. The increase for
the three months ended March 31, 2002 was primarily due to a 62,000, or 100%,
increase in the net gain on sale of real estate owned and $22,000, or 9.4%,
increase in service charges and other fees, partially offset by a decline in the
net gain on sale of loans and losses on real estate operations. For the six
months ended March 31, 2002, non-interest income decreased $3,000 or .3% to
$905,000 as compared to the same period in the prior year. The slight decrease
during the six months ended March 31, 2002 was primarily a result of declines in
the net gain on sale of loans and investment securities and increased expenses
related to real estate operations offset by increases in service charges and
other fees and gain on sales of real estate owned.
Management believes the expense of real estate operations related to the
nonperforming commercial real estate loans as discussed above will significantly
increase in the upcoming quarters in connection to the operation of the golf
facility. Because the operation is seasonal and highly dependent on weather,
public usage and the general economy, estimates of such expenses would be highly
speculative at this time.
Non-interest Expense.
Non-interest expense increased $260,000, or 10.3%, during the three months ended
March 31, 2002 as compared to the same period in 2001. Increases of $80,000,
$90,000, and $47,000 were incurred in compensation and employee benefits,
professional fees, and advertising, respectively. For the six months ended March
31, 2002, non-interest expense increased $522,000, or 10.7%, primarily due to
increases of $149,000 and $189,000 in compensation and employee benefits and
other non-interest expenses, respectively. The increase in salary and employee
benefits during the 2002 periods reflected normal salary and benefit expense
increases as well as additional costs associated with branch expansion. The
increase in other non-interest expense was primarily due to increases in bank
service charges, supplies and cash losses.
Income Tax Expense.
Income tax expense increased $21,000 to $137,000 and $14,000 to $257,000 for the
three and six months ended March 31, 2002, respectively. The increases were the
result of increases in income before income taxes as compared to the same
periods in 2001.
Critical Accounting Policies.
In management's opinion, the most critical accounting policy impacting the
Company's financial statements is the evaluation of the allowance for loan
losses. Management carefully monitors the credit quality of the loan portfolio
and makes estimates about the amount of credit losses that have been incurred at
each financial statement date. Management evaluates the fair value of collateral
supporting the impaired loans using independent appraisals and other measures of
fair value. This process involves subjective judgments and assumptions and is
subject to change based on factors that may be outside the control of the
Company.
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 March 31, 2002, the Company had short-term
borrowings (due within one year or currently callable by the Federal Home Loan
Bank of Pittsburgh ("FHLB"), outstanding of $81.0 million, all of which
consisted of advances from the FHLB.
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, 2002, the total approved
loan commitments outstanding amounted to $26.9 million, not including loans in
process. At the same date, commitments under unused lines of credit amounted to
$21.3 million. Certificates of deposit scheduled to mature in one year or less
at March 31, 2002 totaled $108.6 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 March 31, 2002, 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 March 31,
2002, the Bank had tangible capital and core capital equal to 7.9% of adjusted
total assets and total capital equal to 16.8% of risk-weighted assets.
12
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, 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 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 March 31,
2002.
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 $ 23,222 $(29,334) (55.81)% 4.89% (52.11)%
200 33,329 (19,228) (36.59) 6.83 (33.10)
100 43,418 (9,138) (17.39) 8.66 (15.18)
0 52,557 10.21
(100) 55,461 2,904 5.53 10.60 3.82
(1) Based on the portfolio value of the Bank's assets in the base case
scenario
As of March 31, 2002, the Company's NPV was $52.6 million or 10.21% of the
market value of assets. Following a 200 basis point increase in interest rates,
the Company's "post shock" NPV was $19.2 million or 6.83% of the market value of
assets. The change in the NPV ratio or the Company's sensitivity measure was
(3.37)%.
13
PART II
Item 1. Legal Proceedings
The Company is involved in routine legal proceedings occurring in the
ordinary course of business which, in the aggregate, are believed by
management to be immaterial to the financial condition of the Company.
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
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: May 15, 2002 By: /s/ Donald S. Guthrie
---------------------
Donald S. Guthrie
President and Chief Executive Officer
Date: May 15, 2002 By: /s/ Thomas M. Kelly
-------------------
Thomas M. Kelly
Executive Vice-President and Chief
Financial Officer
15