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, 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 23-0469351
- ------------------------------------ ----------------------
(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
------ ------
Indicate by check mark whether the Registrant is an accelerator file (as defined
in Rule 12b-2 of the Exchange Act) Yes No X
------ ------
Number of shares of Common Stock outstanding as of February 12, 2002: 2,025,241
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, 2002 and September 30, 2002 1
Unaudited Consolidated Statements of Income for the Three
Months Ended December 31, 2002 and 2001 2
Unaudited Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended December 31, 2002 3
Unaudited Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 2002 and 2001 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 13
Item 4. Controls and Procedures 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-
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
- -----------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL
- ----------------------------------------------
(dollars in thousands)
December 31 September 30
ASSETS 2002 2002
- ------ ------------------ -------------
Cash and amounts due from depository institutions $ 13,408 $ 4,753
Interest-bearing deposits with depository institutions 16,713 19,870
------- -------
Total cash and cash equivalents 30,121 24,623
Investment securities available for sale 76,132 80,624
Mortgage-related securities available for sale 92,612 85,674
Loans held for sale 630 501
Mortgage-related securities held to maturity - at amortized cost
(approximate fair value of $6,570 at December 31, 2002
and $9,090 at September 30, 2002) 6,424 8,855
Loans receivable (net of allowance for loan loss of $2,530
and $2,358 at December 31, 2002 and September 30, 2002, respectively) 291,452 288,776
Accrued interest receivable 2,951 2,971
Real estate owned 235 248
Federal Home Loan Bank stock - at cost 7,064 6,571
Office properties and equipment - net 3,440 3,491
Cash surrender value of life insurance 14,559 14,362
Prepaid expenses and other assets 1,744 1,650
------- -------
TOTAL ASSETS $527,364 $518,346
======== ========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------
Liabilities:
Deposits $338,374 $330,765
Advances from Federal Home Loan Bank 126,279 126,237
Accrued interest payable 907 1,000
Advances from borrowers for taxes and insurance 2,056 832
Deferred income taxes 93 424
Accounts payable and accrued expenses 6,035 5,413
-------- --------
Total liabilities 473,744 464,671
-------- --------
Company-obligated mandatorily redeemable preferred securities of subsidiaries
trusts holding solely junior subordinated debentures of the Company 20,870 20,880
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: 2,011,541 shares at December 31, 2002 and
2,008,611 shares at September 30, 2002 14 14
Additional paid-in capital 13,455 13,622
Employee stock option plans (955) (995)
Treasury stock at cost: 701,015 shares at December 31, 2002 and 703,945 shares
at September 30, 2002 (9,033) (9,175)
Accumulated other comprehensive income 2,560 3,200
Retained earnings - partially restricted 26,709 26,129
-------- --------
Total stockholders' equity 32,750 32,795
-------- --------
TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES AND STOCKHOLDERS' EQUITY $527,364 $518,346
======== ========
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
-----------------
2002 2001
------- -------
INTEREST INCOME:
Interest on:
Loans $ 5,050 $ 4,716
Mortgage-related securities 1,110 1,953
Investment securities:
Taxable 606 591
Tax-exempt 300 301
Dividends 95 124
Interest-bearing deposits 56 72
------- -------
Total interest income 7,217 7,757
------- -------
INTEREST EXPENSE:
Interest on:
Deposits 1,967 2,897
Federal Home Loan Bank advances 1,740 1,741
------- -------
Total interest expense 3,707 4,638
------- -------
NET INTEREST INCOME 3,510 3,119
PROVISION FOR LOAN LOSSES 195 135
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,315 2,984
------- -------
NON-INTEREST INCOME:
Service charges and other fees 272 271
Net gain (loss) on sales of:
Loans held for sale 136 12
Investment securities 11 (20)
Increase in cash surrender value 167 171
Other income 28 24
------- -------
Total non-interest income 614 458
------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,156 1,079
Occupancy and equipment 286 310
Professional fees 215 190
Federal deposit insurance premium 14 15
Data processing 120 100
Advertising 120 93
Net cost of operation of other real estate 5 25
Minority interest in expense of subsidiaries 414 407
Other 594 450
------- -------
Total non-interest expense 2,924 2,669
------- -------
INCOME BEFORE INCOME TAX EXPENSE 1,005 773
INCOME TAX EXPENSE 224 120
------- -------
NET INCOME $ 781 $ 653
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.41 $ 0.34
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.39 $ 0.32
======= =======
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)
Accumulated Retained
Additional Employee other earnings- Total
Common paid-in stock option Treasury comprehensive partially stockholders'
stock capital plans stock income restricted equity
------ ---------- ------------ --------- ------------- ---------- ------------
BALANCE AT OCTOBER 1, 2002 $14 $13,622 $(995) $(9,175) $ 3,200 $26,129 $32,795
Net income 781 781
Other comprehensive income, net of
tax:
Net unrealized loss on securities
net of reclassification
adjustment(1) (640) (640)
------
Comprehensive income 141
---
ESOP stock committed to be released 40 40
Excess of fair value above cost of
ESOP shares committed to be released 39 39
Purchase of treasure stock (92) (92)
Exercise of stock options (206) 234 28
Dividends - $.10 per share (201) (201)
--- ------- ----- ------- ------- ------- -------
BALANCE AT DECEMBER 31, 2002 $14 $13,455 $(955) $(9,033) $ 2,560 $26,709 $32,750
=== ======= ===== ======= ======= ======= =======
(1) Disclosure of reclassification amount, net of tax for the three
months ended December 31, 2002:
<Table>
Net unrealized depreciation arising during the period $(633)
Less: reclassification adjustment for net gains included in net income 7
-----
Net unrealized loss on securities $(640)
=====
</Table>
See notes to unaudited consolidated financial statements.
-3-
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
- -----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------
(dollars in thousands)
Three months ended
December 31
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net income $ 781 $ 653
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for depreciation and amortization 106 116
Amortization and accretion of premiums and discounts 176 (61)
(Gain) loss on sales of:
Loans held for sale (136) (12)
Investment securities (11) 20
Real estate owned (2) 3
Provision for loan losses 195 135
Amortization of employee stock option plans 79 71
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (9,318)
Loans sold in the secondary market 9,189 225
Accrued interest receivable 20 114
Prepaid expenses and other assets (291) (438)
Accrued interest payable (93) (633)
Accounts payable and accrued expenses 622 665
-------- --------
Net cash provided by operating activities 1,317 858
-------- --------
INVESTING ACTIVITIES:
Loans originated (40,823) (45,253)
Purchases of:
Mortgage-related securities available for sale (26,970)
Investment securities available for sale (3,998) (8,095)
Purchase of FHLB stock (493)
Proceeds from sales of real estate owned 15 197
Proceeds from sales of investment securities 2,011 2,980
Principal collected on loans 38,121 37,723
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 5,497
Mortgage-related securities available for sale 19,834 6,554
Mortgage-related securities held to maturity 2,432 228
Purchase of property and equipment (55) (106)
-------- --------
Net cash used in investing activities (4,429) (5,772)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 7,609 7,866
Net increase (decrease) in FHLB advances 42 42
Issuance of preferred trust securities 8,000
Purchase of preferred trust securities (3,290)
Net increase in advances from borrowers for taxes and insurance 1,224 1,198
Exercise of stock options 28 51
Purchase of treasure stock (92)
Cash dividend (201) (183)
-------- --------
Net cash provided by financing activities 8,610 13,684
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 5,498 8,770
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,623 19,131
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 30,121 $ 27,901
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest on deposits and borrowings $ 3,800 $ 5,271
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 statement of results for the periods.
The results of operations for the three month period ended December 31,
2002 are not necessarily indicative of the results to be expected for
the fiscal year ending September 30, 2003 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, 2002.
2. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities
available for sale, by contractual maturities, are as follows:
December 31, 2002
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
U.S. Government agency bonds:
Less than 1 year $ 2,992 $ 52 $ 3,044
1 to 5 years 6,900 34 6,934
5 to 10 years 1,866 207 2,073
Municipal obligations 19,015 612 19,627
Corporate bonds 15,296 629 $ 567 15,358
Mutual funds 14,009 26 6 14,029
Asset-backed securities 2,541 17 2,558
Preferred stocks 8,567 214 582 8,199
Other equity investments 3,376 954 20 4,310
------- ------ ------ -------
Total $74,562 $2,745 $1,175 $76,132
======= ====== ====== =======
September 30, 2002
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
U.S. Government agency bonds:
1 to 5 years $11,986 $ 128 $12,114
5 to 10 years 1,861 210 2,071
Municipal obligations 19,012 788 19,800
Corporate bonds 14,299 827 $406 14,720
Mutual funds 14,009 42 6 14,045
Asset-backed securities 2,837 16 2,853
Preferred stocks 10,682 293 224 10,751
Other equity investments 3,476 884 90 4,270
------- ------ ---- -------
Total $78,162 $3,188 $726 $80,624
======= ====== ==== =======
-5-
3. MORTGAGE-RELATED SECURITIES
Mortgage-related securities available for sale and mortgage-related
securities held to maturity are summarized as follows:
December 31, 2002
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
Available for Sale:
FHLMC pass-through certificates $ 4,089 $ 259 $ 4,348
FNMA pass-through certificates 22,295 510 22,805
GNMA pass-through certificates 27,603 1,222 28,825
Collateralized mortgage obligations 36,316 350 $32 36,634
------ ------ --- -------
Total $90,303 $2,341 $32 $92,612
======= ====== === =======
Held to Maturity:
FHLMC pass-through certificates $ 972 $ 58 $ 1,030
FNMA pass-through certificates 3,054 86 3,140
Collateralized mortgage obligations 2,398 4 $ 2 2,400
------ ------ --- -------
Total $6,424 $ 148 $ 2 $ 6,570
====== ====== === =======
September 30, 2002
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
--------- ---------- ---------- -----------
Available for Sale:
FHLMC pass-through certificates $ 4,986 $ 275 $ 5,261
FNMA pass-through certificates 13,009 454 13,463
GNMA pass-through certificates 32,407 1,214 33,621
Collateralized mortgage obligations 32,884 449 $4 33,329
------ ------ -- -------
Total $83,286 $2,392 $4 $85,674
======= ====== == =======
Held to Maturity:
FHLMC pass-through certificates $1,433 $ 77 $1,510
FNMA pass-through certificates 3,574 96 3,670
Collateralized mortgage obligations 3,848 62 3,910
------ ------ -------
Total $8,855 $ 235 $ 9,090
====== ====== =======
-6-
4. LOANS RECEIVABLE
Loans receivable consist of the following:
December 31 September 30
2002 2002
------------- ---------------
Real estate loans:
Single-family $173,780 $173,736
Construction and land 31,534 28,292
Multi-family and commercial 59,792 60,379
Home equity and lines of credit 27,868 27,595
Consumer loans 1,246 1,202
Commercial loans 11,510 11,919
-------- --------
Total loans 305,730 303,123
Loans in process (11,186) (11,384)
Allowance for loan losses (2,530) (2,358)
Deferred loan fees (562) (605)
-------- --------
Loans receivable - net $291,452 $288,776
======== ========
The following is an analysis of the allowance for loan losses:
Three Months Ended
December 31
----------------------
2002 2001
---- ----
Balance beginning of period $2,358 $2,181
Provisions charged to income 195 135
Charge-offs (31) (15)
Recoveries 8
------ ------
Total $2,530 $2,301
====== ======
At December 31, 2002 and September 30, 2002, non-performing loans (which
include loans in excess of 90 days delinquent) amounted to approximately
$3,815 and $5,138, respectively. At December 31, 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.
5. DEPOSITS
Deposits consist of the following major classifications:
December 31 September 30
2002 2002
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
Non-interest bearing $ 13,849 4.1% $ 10,094 3.1%
NOW 57,325 17.0 54,048 16.3
Passbook 41,307 12.2 41,659 12.6
Money market demand 50,230 14.8 48,722 14.7
Certificates of deposit 175,663 51.9 176,242 53.3
-------- ----- -------- -----
Total $338,374 100.0% $330,765 100.0%
======== ===== ======== =====
-7-
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 share outstanding and
common share equivalents that would arise from the exercise of
dilutive securities. All dilutive shares consist of options the
exercise price of which is lower than the market price of the common
stock covered thereby at the dates presented.
The calculated basic and diluted earnings per share ("EPS") is as
follows:
Three Months Ended
December 31
-----------------------
2002 2001
--------- ---------
Numerator $781 $653
Denominators:
Basic shares outstanding 1,906,521 1,909,276
Effect of dilutive securities 111,212 105,221
--------- ---------
Dilutive shares outstanding 2,017,733 2,014,497
========= =========
Earnings per share:
Basic $0.41 $0.34
Diluted $0.39 $0.32
7. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation --Transition and Disclosure,
an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No.
123 to provide alternative methods of transition in connection with a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement amends
the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results. This statement is
effective for financial statements for fiscal years ending after
December 15, 2002. The Company is required to adopt certain disclosure
provisions for interim periods beginning after December 15, 2002.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others." This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. This
Interpretation also incorporates, without change, the guidance in FASB
Interpretation No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others," which is being superseded. The initial
recognition and initial measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The disclosure requirements in this Interpretation are
effective for financial statements of interim or annual periods ending
after December 15, 2002. The Company currently has no guarantees that
would be required to be recognized, measured or disclosed under this
Interpretation.
-8-
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 management's current
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 DECEMBER 31, 2002 AND SEPTEMBER 30, 2002
Total assets of the Company increased $9.0 million or 1.7% from $518.3 million
at September 30, 2002 to $527.4 million at December 31, 2002. The growth was due
mainly to increases in cash and cash equivalents of $5.5 million, or 22.3%,
mortgage-related securities available for sale of $6.9 million, or 8.1%,
partially offset by a decrease in investment securities available for sale of
$4.5 million, or 5.6% and mortgage-related securities held to maturity of $2.4
million, or 27.4%. The increase in cash and cash equivalents was mainly
attributed to the inflow of cash repayments from loan refinancings and
investment securities as well as accelerated prepayments of the mortgage-related
securities portfolio. The asset growth was funded by increased deposits.
Deposits increased $7.6 million or 2.3% from $330.8 million at September 30,
2002 to $338.4 million at December 31, 2002. The increase resulted from
increases of $8.2 million or 5.3% in core deposits (which consist of passbook,
money market, NOW and non-interest bearing accounts) reflecting the Company's
emphasis on commercial business accounts and related non-interest bearing
checking accounts. In addition, the increases in the money market demand
accounts were also due to the continued uncertain climate in the equities
market.
Stockholders' equity decreased $45,000 to $32.8 million primarily due to a
decrease in the accumulated other comprehensive income of $640,000 and dividends
paid of $201,000 partially offset by net income of $781,000.
-9-
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
DECEMBER 31, 2002 AND 2001
NET INCOME.
- -----------
Net income was $781,000 for the three months ended December 31, 2002 as compared
to $653,000 for the same period in 2001. The $128,000 or 19.6% increase in net
income for the three months ended December 31, 2002 was primarily due to a
$331,000 increase in net interest income after provision for loan losses and a
$156,000 increase in non-interest income partially offset by a $255,000 increase
in non-interest expense and a $104,000 increase in income tax expense.
NET INTEREST INCOME.
- --------------------
Net interest income increased $391,000, or 12.5%, to $3.5 million for the three
months ended December 31, 2002 as compared to the same period in 2001. The
increase was primarily due to a $931,000, or 20.1%, decrease in interest expense
which was partially offset by a $540,000, or 7.0%, decrease in interest income
as compared to the 2001 period. The $540,000 decrease in interest income was
primarily due to a 67 basis point (on a fully tax equivalent basis) decrease in
the weighted yield earned on the Company's interest-earning assets, partially
offset by a $16.3 million, or 3.5%, increase in the average balance of such
assets. The $931,000 decrease in interest expense was primarily due to a 94
basis point decrease in the weighted average rate paid on interest-bearing
liabilities offset, in part, by an increase of $13.8 million, or .1%, in the
average balance of such liabilities for the three months ended December 31,
2002, as compared to the same period in 2001.
The interest rate spread and net interest margin, on a fully tax equivalent
basis, were 2.79% and 2.98%, respectively, for the three months ended December
31, 2002 as compared to 2.51% and 2.74%, respectively, for the same period in
2001. Management anticipates that the net interest margin will continue to
compress as assets continue to reprice downward with the continued historically
low interest levels without a corresponding decrease in rates paid.
PROVISION FOR LOAN LOSSES.
- --------------------------
Provisions for loan losses are charged to earnings to maintain the total
allowance for loan losses at a level believed by management to cover all known
and inherent losses in the loan portfolio which are both probable and reasonably
estimable. Management's analysis includes consideration of the Company's
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, 2002 and 2001, the provision for loan losses
amounted to $195,000 and $135,000, respectively.
At December 31, 2002, non-performing assets totaled $4.1 million or .77% of
total assets, a decrease of $1.3 million from September 30, 2002. The decrease
in non-performing assets was due to a commercial real estate loan returning to
current status. The Company's coverage ratio, which is the ratio of the
allowance for loan losses to non-performing assets, was 62.5% and 43.8% at
December 31, 2002 and September 30, 2002, respectively. Included in
non-performing assets are three commercial real estate loans totaling $2.4
million. 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 a golf
house located in Avondale, Pennsylvania. The golf facility is fully operational
and continues to generate revenues. However, in connection with the operations
of the facility, the Company has incurred its representative share of expenses
totaling of approximately $133,000 for the three months ended December 31, 2002.
Management believes that the Company will continue to incur expenses in the
upcoming quarters in connection with 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 adequate reserves for these
properties. However, there can be no assurances that additions to such reserves
will not be necessary in future periods.
-10-
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 increased $156,000 or 34.1% to $614,000 for the three months
ended December 31, 2002 as compared to the same period in 2001. The increase for
the three months ended December 31, 2002 was primarily due to a $124,000
increase on the gain on sale of loans resulting from the considerable increase
in the amount of single-family residential loans being originated and sold into
the secondary market. However, there can be no assurances the Company will
continue to sell loans at the current volume due to the possibility of interest
rate increases and a slowdown in the refinancing activity. In addition, the
increase in non-interest income was due to a $31,000 increase on the gain on
sale of investment securities compared to the same period in the prior year.
OPERATING EXPENSES.
- -------------------
Operating expenses increased $255,000 or 9.6% during the three months ended
December 31, 2002 compared to the same period in 2001. The increase was
primarily due to a $77,000 increase in salaries and employee benefits, a $27,000
increase in data processing and a $144,000 increase in other non-interest
expenses, partially offset by a $24,000 decrease in occupancy and equipment
expenses.
The increase in salary and employee benefits reflected normal increases, the
hiring of additional personnel and higher employee benefit costs. The increase
in other non-interest expense was primarily due to expenses related to the
workout of the three non-performing commercial real estate loans as previously
discussed.
INCOME TAX EXPENSE.
- -------------------
Income tax expense increased $104,000 to $224,000 during the three months ended
December 31, 2002 as compared to the same period in 2001. The increases were the
result of increases in income before income taxes as compared to the same
periods in 2001.
CRITICAL ACCOUNTING POLICIES.
- -----------------------------
The Company has identified the evaluation of the allowance for loan losses as a
critical accounting policy where amounts are sensitive to material variation.
This policy is significantly affected by management judgment and uncertainties
and there is a likelihood that materially different amounts would be reported
under different, but reasonably plausible, conditions or assumptions. 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 December 31, 2002, the Company had short-term
borrowings (due within one year or currently callable by the FHLB) outstanding
of $101.4 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, 2002, total approved
loan commitments outstanding amounted to $9.7 million, not including loans in
process. At the same date, commitments under unused lines of credit amounted to
$19.6 million. Certificates of deposit scheduled to mature in one year or less
at December 31, 2002 totaled $111.9 million. Based upon its historical
experience, management believes that a significant portion of maturing deposits
will remain with the Company.
As of December 31, 2002, the Bank had regulatory capital which was in excess of
applicable requirements. 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,
2002, the Bank had tangible capital and core capital equal to 8.2% of adjusted
total assets and total capital equal to 16.6% of risk-weighted assets.
IMPACT OF INFLATION AND CHANGING PRICES.
- ----------------------------------------
The Consolidated Financial Statements of the Company and related notes presented
herein have been prepared in accordance with generally accepted accounting
principles which requires the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation to a larger
extent than interest rates. In the current interest rate environment, liquidity
and the maturity structure of the Company's assets and liabilities are critical
to the maintenance of acceptable performance levels.
-12-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 for the year ended September 30, 2002.
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 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, 2002.
Net Portfolio Value
(Dollars in thousands)
------------------------------------------------------------------------------------------------------------
Changes in Net
Rates in Dollar Percentage Portfolio Value As Change in
Basis Points Amount Change Change a % of Assets Percentage (1)
------------------------------------------------------------------------------------------------------------
300 $31,374 $(11,122) (26.17)% 6.14% (20.16)%
200 35,738 (6,758) (15.90) 6.84 (12.87)
100 41,035 (1,461) (3.44) 7.69 (1.91)
0 42,496 7.85
(100) 37,757 (4,739) (11.15) 6.93 (11.72)
(1) Based on the portfolio value of the Bank's assets in the base
case scenario
As of December 31, 2002, the Company's NPV was $42.5 million or 7.85% of the
market value of assets. Following a 200 basis point increase in interest rates,
the Company's "post shock" NPV was $35.7 million or 6.84% of the market value of
assets. The change in the NPV ratio or the Company's sensitivity measure was
(1.01)%.
-13-
ITEM 4. CONTROLS AND PROCEDURES
QUARTERLY EVALUATION OF THE COMPANY'S DISCLOSURE CONTROLS AND INTERNAL CONTROLS.
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, the
Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls") in accordance with
the provisions of Rules 13a-14 and 13a-15 of the Securities Exchange Act of 1934
(the "Exchange Act"). This evaluation ("Controls Evaluation") was done under the
supervision and with the participation of management, including the Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO").
Disclosure Controls are the Company's controls and other procedures that are
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files under the Exchange
Act is accumulated and communicated to the Company's management, including its
CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. The Company's management,
including the CEO and CFO, does not expect that its Disclosure Controls or its
"internal controls and procedures for financial reporting" ("Internal Controls")
will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
CONCLUSIONS. Based upon the Controls Evaluation, the CEO and CFO have concluded
that, subject to the limitations noted above, the Disclosure Controls are
effective to timely alert management to material information relating to the
Company, including its consolidated subsidiaries, during the period for which
its periodic reports are being prepared.
In accord with SEC requirements, the CEO and CFO note that, since the date of
the Controls Evaluation to the date of this Quarterly Report, there have been no
significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
-14-
PART II
Item 1. Legal Proceedings
-----------------
No material changes in the legal proceedings previously disclosed in
section Item 3 of the Company's Annual Report on Form 10-K for the
year ended September 30, 2002.
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 22, 2003, the Annual Meeting of Stockholders of the
Company was held to elect management's nominees 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:
Votes
----------------------------
Nominee For Withheld
------- ---------- --------
Donald S. Guthrie 1,793,089 31,544
Edmund Jones 1,786,727 37,906
With respect to the ratification of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending September
30, 2003, the results were as follows: 1,824,033 votes for, 598 votes
against and 2 votes abstaining.
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)
-15-
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, 2003 By: /s/ Donald S. Guthrie
-----------------------------------
Donald S. Guthrie
Chairman and Chief Executive Officer
Date: February 14, 2003 By: /s/ Thomas M. Kelly
-------------------------
Thomas M. Kelly
President and Chief Financial Officer
-16-
CERTIFICATION
I, Donald S. Guthrie, Chairman of the Board and Chief Executive Officer of
First Keystone Financial, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Keystone
Financial, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003 /s/ Donald S. Guthrie
--------------------------
Donald S. Guthrie
Chairman of the Board and Chief
Executive Officer
-17-
CERTIFICATION
I, Thomas M. Kelly, President and Chief Financial Officer of First Keystone
Financial, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Keystone
Financial, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 14, 2003 /s/ Thomas M. Kelly
-----------------------------------
Thomas M. Kelly
President and Chief Financial Officer
-18-