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, 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 August 9, 2002: 2,002,050
Transitional Small Business Disclosure Format Yes No X
------ -------
FIRST KEYSTONE FINANCIAL, INC.
CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Statements of Financial Condition as of
June 30, 2002 and September 30, 2001................................... 1
Unaudited Condensed Consolidated Statements of Income for the Three
and Nine Months Ended June 30, 2002 and 2001.......................... 2
Unaudited Condensed Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months Ended June 30, 2002 ........................ 3
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 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
i
ITEM 1. FINANCIAL STATEMENTS
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
- -----------------------------------------------
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ------------------------------------------------------------------
(dollars in thousands)
June 30 September 30
ASSETS 2002 2001
- ------ ----------- ----------
Cash and amounts due from depository institutions $ 9,528 $ 3,753
Interest-bearing deposits with depository institutions 20,229 15,378
----------- ----------
Total cash and cash equivalents 29,757 19,131
Investment securities available for sale 71,597 62,564
Mortgage-related securities available for sale 92,380 117,608
Loans held for sale 225
Mortgage-related securities held to maturity - at amortized cost
(approximate fair value of $9,840 at June 30, 2002 and $11,550 at September 30, 2001) 9,698 11,454
Loans receivable (net of allowance for loan losses of $2,227
at June 30, 2002 and $2,019 at September 30, 2001) 282,708 247,664
Accrued interest receivable 3,190 3,353
Real estate owned 280 887
Federal Home Loan Bank stock - at cost 6,821 6,917
Office properties and equipment - net 3,596 3,690
Cash surrender value of life insurance 14,761 14,021
Prepaid expenses and other assets 1,803 1,536
----------- ----------
TOTAL ASSETS $516,591 $489,050
=========== ==========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------
Liabilities:
Deposits $325,598 $311,601
Advances from Federal Home Loan Bank 131,195 126,070
Accrued interest payable 1,044 1,804
Advances from borrowers for taxes and insurance 3,089 696
Deferred income taxes 349 282
Accounts payable and accrued expenses 2,515 1,776
---------- -----------
Total liabilities 463,790 442,229
---------- -----------
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debentures of the Company 20,889 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:
2,013,631 shares at June 30, 2002 and 2,033,707 shares at September 30, 2001 14 14
Additional paid-in capital 13,513 13,536
Common stock acquired by stock benefit plans (1,034) (1,147)
Treasury stock at cost: 698,925 at June 30, 2002 and 686,293 at September 30, 2001 (9,037) (8,583)
Accumulated other comprehensive income 2,792 2,664
Retained earnings - partially restricted 25,664 24,137
---------- ----------
Total stockholders' equity 31,912 30,621
---------- ----------
TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES AND STOCKHOLDERS' EQUITY $516,591 $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 Nine months ended
June 30 June 30
---------------- ------------------
2002 2001 2002 2001
-------- ------- -------- ---------
INTEREST INCOME:
Interest on:
Loans $4,920 $4,679 $14,326 $13,984
Mortgage-related securities 1,523 2,267 5,136 6,622
Investment securities:
Taxable 647 578 1,850 1,732
Tax-Exempt 301 257 839 782
Dividends 113 176 405 448
Interest-bearing deposits 43 86 163 445
------- ------- -------- ---------
Total interest income 7,547 8,043 22,719 24,013
------- ------- -------- ---------
INTEREST EXPENSE:
Interest on:
Deposits 2,159 3,314 7,507 9,761
Federal Home Loan Bank advances 1,737 1,774 5,181 5,566
Other borrowings 2
------- ------- -------- ---------
Total interest expense 3,896 5,088 12,688 15,329
------- ------- -------- ---------
NET INTEREST INCOME 3,651 2,955 10,031 8,684
PROVISION FOR LOAN LOSSES 135 135 405 405
------- ------- -------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,516 2,820 9,626 8,279
------- ------- -------- ---------
NON-INTEREST INCOME (LOSS):
Service charges and other fees 261 248 789 712
Net gain (loss) on sale of:
Loans 34 15 103
Investment securities 3 63 (17) 63
Real estate owned 24 83 20
Real estate operations (55) (13) (116) (47)
Increase in cash surrender value 171 163 509 497
Other 21 34 68 89
------- ------- -------- ---------
Total non-interest income 425 529 1,331 1,437
------- ------- -------- ---------
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,250 1,015 3,431 3,047
Occupancy and equipment expenses 313 297 939 890
Professional fees 217 191 660 580
Federal deposit insurance premium 14 13 43 41
Data processing 100 100 316 301
Advertising 123 99 346 267
Minority interest in expense of subsidiaries 420 393 1,232 1,179
Other 588 451 1,478 1,153
------- ------- -------- ---------
Total non-interest expense 3,025 2,559 8,445 7,458
------- ------- -------- ---------
INCOME BEFORE INCOME TAX EXPENSE 916 790 2,512 2,258
INCOME TAX EXPENSE 173 129 431 372
------- ------- -------- ---------
NET INCOME $ 743 $ 661 $ 2,081 $ 1,886
======= ======= ======== =========
BASIC EARNINGS PER COMMON SHARE $ 0.39 $ 0.33 $ 1.08 $ 0.91
======= ======= ======== =========
DILUTED EARNINGS PER COMMON SHARE $ 0.36 $ 0.31 $ 1.02 $ 0.88
======= ======= ======== =========
See notes to unaudited condensed consolidated financial statements.
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 2,081 2,081
Other comprehensive income, net of tax:
Net unrealized gain on securities
net of reclassification adjustment 128 128
----- ------
Comprehensive income 2,209
ESOP stock committed to be released 113 113
Excess of fair value above cost of
ESOP shares committed to be released 120 120
Purchase of treasury stock (818) (818)
Exercise of stock options (143) 364 221
Dividends - $.27 per share (554) (554)
---- ------- -------- -------- ------ ------- -------
BALANCE AT JUNE 30, 2002 $14 $13,513 $(1,034) $(9,037) $2,792 $25,664 $31,912
==== ======= ======== ======== ====== ======= =======
See notes to unaudited condensed consolidated financial statements.
FIRST KEYSTONE FINANCIAL, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------
(dollars in thousands)
Nine months ended
June 30
---------------------
2002 2001
---------- --------
OPERATING ACTIVITIES:
Net income $ 2,081 $ 1,886
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation and amortization 345 328
Amortization of premiums and discounts (61) (65)
(Gain) loss on sales of:
Loans (15) (103)
Investments available for sale 17 (25)
Mortgage-related securities available for sale (38)
Real estate owned (83) (20)
Provision for loan losses 405 405
Provision for real estate losses 18
Amortization of stock benefit plans 233 199
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (275) (19,329)
Loans sold in the secondary market 500 22,328
Accrued interest receivable 163 187
Prepaid expenses and other assets (1,007) 4,116
Accrued interest payable (760) (276)
Accrued expenses 739 317
-------- --------
Net cash provided by operating activities 2,300 9,910
-------- --------
INVESTING ACTIVITIES:
Loans originated (130,643) (46,060)
Purchases of:
Investment securities available for sale (19,694) (15,613)
Mortgage-related securities available for sale (9,284) (48,879)
Redemption (purchase) of FHLB stock 96 (245)
Proceeds from sales of real estate owned 871 578
Proceeds from sales of:
Investment securities available for sale 3,983 1,025
Mortgage-related securities available for sale 6,926
Principal collected on loans 95,298 32,696
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 7,180
Mortgage-related securities available for sale 33,971 22,984
Mortgage-related securities held to maturity 1,751 1,228
Purchase of property and equipment (251) (411)
Net expenditures on real estate acquired through foreclosure (5) (159)
-------- --------
Net cash used in investing activities (16,727) (45,930)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 13,997 41,080
Net increase (decrease) in FHLB advances 5,125 (18,974)
Net increase in advances from borrowers for taxes and insurance 2,393 2,149
Exercise of stock options 221
Issuance of preferred trust securities 8,000
Purchase of preferred trust securities (3,311)
Purchase of treasury stock (818) (3,045)
Cash dividend (554) (531)
-------- --------
Net cash provided by financing activities 25,053 20,679
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,626 (15,341)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,131 40,114
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,757 $ 24,773
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest on deposits and borrowings $ 13,488 $ 19,641
Transfers of loans receivable into real estate owned 308 589
Cash payments of income taxes 550 125
See notes to unaudited condensed consolidated financial statements.
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 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, 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:
June 30, 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 $ 9,880 $ 134 $10,014
5 to 10 years 1,856 195 2,051
Municipal obligations 21,712 413 $ 1 22,124
Corporate bonds 16,287 359 532 16,114
Mutual funds 5,009 8 5,001
Asset-backed securities 3,000 14 3,014
Preferred stocks 8,586 233 18 8,801
Other equity investments 3,476 1,032 30 4,478
-------- ------ ------ -------
Total $69,806 $2,380 $ 589 $71,597
======== ====== ====== =======
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
Asset-backed securities 2,986 16 2,970
Preferred stocks 9,474 5 282 9,197
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:
June 30, 2002
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
------------------------------------------------
Available for Sale:
FHLMC pass-through certificates $ 5,633 $ 269 $ 5,902
FNMA pass-through certificates 11,141 409 11,550
GNMA pass-through certificates 36,480 1,047 37,527
Collateralized mortgage obligations 36,683 718 37,401
------- ------- --------
Total $89,937 $2,443 $92,380
======= ====== =======
Held to Maturity:
FHLMC pass-through certificates $1,548 $ 62 $1,610
FNMA pass-through certificates 3,815 69 $4 3,880
Collateralized mortgage obligations 4,335 16 1 4,350
------ ------ --- -------
Total $9,698 $147 $5 $9,840
====== ==== == ======
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
June 30 September 30
2002 2001
-------- ---------
Real estate loans:
Single-family $176,120 $160,289
Construction and land 28,408 29,117
Multi-family and commercial 57,093 43,472
Home equity and lines of credit 26,607 25,847
Consumer loans 1,154 1,125
Commercial loans 10,276 8,158
-------- --------
Total loans 299,658 268,008
Loans in process (13,992) (17,016)
Allowance for loan losses (2,227) (2,181)
Deferred loan fees (731) (1,147)
-------- --------
Loans receivable - net $282,708 $247,664
======== ========
The following is an analysis of the allowance for loan losses:
Nine Months Ended
June 30
-----------------
2002 2001
------ ------
Balance beginning of period $2,181 $2,019
Provisions charged to income 405 405
Charge-offs (368) (366)
Recoveries 9 154
------ ------
Total $2,227 $2,212
====== ======
At June 30, 2002 and September 30, 2001, non-performing loans (which
consist of loans in excess of 90 days delinquent) amounted to
approximately $3,873 million and $2,302 million, respectively. At June
30, 2002, non-performing loans primarily consisted of single-family
residential mortgage loans aggregating $1.4 million and three
commercial real estate loans totaling $2.4 million. At September 30,
2001, non-performing loans consisted primarily of single-family
properties.
Assets classified as substandard (which includes real estate owned)
amounted to $4.2 million and $3.5 million at June 30, 2002 and
September 30, 2001, respectively. The increase in classified assets
was due to the classification of three loans to borrowers whose
financial condition 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 the adequacy of the collateral. Although
management believes the Bank's reserves for loan losses are adequate
at June 30, 2002, recovery of the carrying value of the loans 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:
June 30 September 30
2002 2001
------------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
Non-interest bearing $ 10,426 3.2% $ 5,698 1.8%
NOW 52,515 16.1 45,161 14.5
Passbook 42,408 13.0 37,806 12.1
Money market demand 49,699 15.3 40,781 13.1
Certificates of deposit 170,550 52.4 182,155 58.5
------- ----- -------- -----
Total $325,598 100.0% $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 Nine Months Ended
June 30, June 30,
------------------------ ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Numerator $743 $661 $2,081 $1,886
Denominators:
Basic shares
outstanding 1,924,740 2,025,074 1,920,563 2,064,461
Effect of dilutive
securities 137,248 95,483 115,952 67,421
--------- --------- --------- ---------
Diluted shares
outstanding 2,061,988 2,120,557 2,036,515 2,131,882
========= ========= ========= =========
EPS:
Basic $0.39 $0.33 $1.08 $0.91
Diluted $0.36 $0.31 $1.02 $0.88
7. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." The provisions of this
statement related to the rescission of SFAS No. 4 are effective for
fiscal years beginning after May 15, 2002. Management has not
determined the impact of applying these provisions. Certain provisions
of the statement relating to SFAS No. 13 are effective for
transactions occurring after May 15, 2002. All other provisions of the
statement are effective for financial statements issued on or after
May 15, 2002. These provisions had no impact on the Company's
financial statements.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by
the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity.
Statement 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002.
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, 2002 AND SEPTEMBER 30, 2001
Total assets of the Company increased $27.5 million, or 5.6%, from $489.1
million at September 30, 2001 to $516.6 million at June 30, 2002. The growth
was due mainly to increases in loans receivable of $35.0 million, or 14.1%,
cash and cash equivalents of $10.6 million, or 55.5%, and investment
securities available for sale of $9.0 million, or 14.4%, partially offset by a
decrease in mortgage-related securities available for sale of $25.2 million,
or 21.4%. The increase in loans receivable was mainly attributed to a $15.7
million, or 30.5%, increase in commercial real estate and business loans as
well as a $15.8 million, or 9.9%, increase in residential loans compared to
September 30, 2001. The Company continues to emphasize on originating higher
yielding loans in accordance with the Company's strategic plan. The asset
growth was primarily funded by increased deposits and the reinvestment of cash
flows from mortgage-related securities.
Deposits increased $14.0 million, or 4.5%, from $311.6 million at September
30, 2001 to $325.6 million at June 30, 2002 due to increases of $25.6 million,
or 19.8%, in core deposits (which consist of passbook, money market, NOW and
non-interest-bearing accounts) partially offset by a $11.6 million, or 6.4%,
decrease in certificates of deposit. The increase in core deposits reflects
the Bank's continued emphasis on developing corporate deposit relationships.
In addition, the Company increased the amount of trust preferred securities
from $16.2 million at September 30, 2001 to $20.9 million at June 30, 2002 by
the issuance of $8.0 million of trust preferred securities offset, in part, by
a $3.5 million purchase from a prior issuance of the Company's trust preferred
securities.
Stockholders' equity increased $1.3 million due to an increase in net income
and accumulated comprehensive income partially offset by quarterly dividends
paid and the repurchase of shares of common stock pursuant to the Company's
on-going stock repurchase program.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE
30, 2002 AND 2001
NET INCOME.
Net income was $743,000, or $.36 per diluted share, for the three months ended
June 30, 2002 as compared to $661,000, or $.31 per diluted share, for the same
period in 2001. Net income for the nine months ended June 30, 2002 was $2.1
million, or $1.02 per diluted share, as compared to $1.9 million, or $.88 per
diluted share, for the same period in 2001. The $82,000, or 12.4%, increase in
net income for the three months ended June 30, 2002 was due to a $696,000
increase in net interest income partially offset by a $104,000 decrease in
non-interest income combined with a $466,000 increase in non-interest expense.
The $195,000, or 10.3%, increase in net income for the nine months ended June
30, 2002 compared to the same period in 2001 was primarily due to $1.3 million
increase in net interest income partially offset by a$106,000 decrease in
non-interest income combined with a $987,000 increase in non-interest expense.
NET INTEREST INCOME.
Net interest income increased $696,000, or 23.6%, to $3.7 million and $1.3
million, or 15.5%, to $10.0 million for the three and nine months ended June
30, 2002, respectively. Such increases were primarily due to $1.2 million, or
23.4%, and $2.6 million, or 17.2%, decreases in interest expense for the three
and nine months ended June 30, 2002, respectively, which were partially offset
by $496,000, or 6.2%, and $1.3 million, or 5.4%, decreases in interest income
during such periods. The average balance of interest-earning assets increased
$22.5 million and $31.4 million for the three and nine months ended June 30,
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 nine months ended June 30, 2002
decreased 74 basis points to 6.41% and 85 basis points to 6.49%, respectively,
compared to the 2001 period. In addition, net interest expense was affected by
an increase in the average balance of interest-bearing liabilities of $19.1
million and $27.9 million for the three and nine months ended June 30, 2002,
respectively, as compared to the same periods in 2001. For the three months
ended June 30, 2002, the weighted average rate paid on such liabilities
decreased 127 basis points to 3.48% from 4.75% for the same period in the
prior fiscal year and 110 basis points to 3.80% for the nine months ended June
30, 2002 as compared to 4.90% for the nine months ended June 30, 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 downward 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 2.93% and 3.15%, respectively, for the three
months ended June 30, 2002 as compared to 2.41% and 2.69%, respectively, for
the same period in 2001. The interest rate spread and net interest margin, on
a fully tax equivalent basis, were 2.69% and 2.92%, respectively, for the nine
months ended June 30, 2002 as compared to 2.44% and 2.71%, 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 nine months ended June 30, 2002, the provision
for loan losses remain unchanged at $135,000 and $405,000, respectively
compared to the same periods in 2001. At June 30, 2002, non-performing assets
totaled $4.2 million, or .80% of total assets, as compared to $3.2 million, or
..65% of total assets, at September 30, 2001.
The Company's coverage ratio, which is the ratio of the allowance for loan
losses to non-performing assets, was 53.6% and 68.4% at June 30, 2002 and
September 30, 2001, respectively. The coverage ratio was adversely affected by
the inclusion of three commercial real estate loans totaling $2.4 million on
non-performing status 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. However, The Company has incurred a represented share of
expenses of approximately $110,000 for fiscal 2002. Management believes the
expense of real estate operations will continue in the upcoming quarters in
connection to the operation of the golf facility. 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 on all three loans is in the process of foreclosing on the loans.
Based on recent appraisals and other factors, management presently believes
the Bank 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.
NON-INTEREST INCOME.
Non-interest income decreased $104,000, or 19.7%, to $425,000 for the three
months ended June 30, 2002 as compared to the same period in 2001. The
decrease for the three months ended June 30, 2002 was primarily due to a
$70,000 decrease on the sale of assets and $42,000 increase in the cost of
real estate operations. For the nine months ended June 30, 2002, non-interest
income decreased $106,000 or 7.4% to $1.3 million as compared to the same
period during the prior year. The decrease during the nine months ended June
30, 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 partially offset by increases in service charges and other fees.
NON-INTEREST EXPENSE.
Non-interest expense increased $466,000, or 18.2%, during the three months
ended June 30, 2002 as compared to the same period in 2001. Increases of
$235,000, $26,000, $24,000 and $137,000 were incurred in salaries and employee
benefits, professional fees, advertising and other non-interest expense,
respectively. The increase in salaries and employee benefit expenses was
related to both the effect of increased fair market value of the Company's
common stock related to the ESOP expense as well as declines in asset values
with respect to certain supplemental benefit plans which required additional
accruals. In addition, compensation increased due to general salary increases
and the hiring of additional personnel. Other non-interest expense increased
primarily due to expenses relating to the workout of non-performing commercial
real estate loans aggregating $2.4 million. For the nine months ended June 30,
2002, non-interest expense increased $987,000, or 13.2%, primarily due to
increases of $384,000, $80,000, $79,000 and $325,000 in salaries and employee
benefits, professional fees, advertising and other non-interest expense,
respectively. The increase in salaries 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 workout expenses, bank
service charges, and cash losses.
INCOME TAX EXPENSE.
Income tax expense increased $44,000 to $173,000 and $59,000 to $431,000 for
the three and nine months ended June 30, 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.
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 that 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, 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 $86.0
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 long-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 June 30, 2002, commitments
outstanding for investment securities and approved loans amounted to $3.1 and
$31.0 million, respectively. At the same date, commitments under unused lines
of credit amounted to $16.4 million. Certificates of deposit scheduled to
mature in one year or less at June 30, 2002 totaled $98.9 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 June 30, 2002, the Bank had regulatory capital that 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 June 30, 2002, the Bank had tangible capital and core capital equal to 7.9%
of adjusted total assets and total capital equal to 16.2% of risk-weighted
assets.
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 Office of Thrift Supervision
("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 an increase or decrease
in rates, whichever produces a larger decline. The following table sets forth
the Bank's NPV as of June 30, 2002.
Net Portfolio Value
Changes in Net Portfolio
Rates in Dollar Percentage Value As a % Change in
Basis Points Amount Change Change of Assets Percentage (1)
------------- ---------- ---------- ------------- ---------------- -----------------
(dollars in thousands)
300 $27,477 $(23,938) (46.56)% 5.60% (42.45)%
200 36,471 (14,945) (29.07) 7.25 (25.49)
100 44,982 (6,433) (12.51) 8.71 (10.48)
0 51,416 9.73
(100) 51,364 (51) (0.10) 9.60 (1.35)
(1) Based on the portfolio value of the Bank's assets in the base case
scenario
As of June 30, 2002, the Company's NPV was $51.4 million or 9.73% of the
market value of assets. Following a 200 basis point increase in interest
rates, the Company's "post shock" NPV was $36.4 million or 7.25% of the market
value of assets. The change in the NPV ratio or the Company's sensitivity
measure was (2.48)%.
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
Exhibit Description
99.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)