SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 May 8, 2003: 1,985,847
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
March 31, 2003 and September 30, 2002 1
Unaudited Consolidated Statements of Income for the Three and Six
Months Ended March 31, 2003 and 2002 2
Unaudited Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended March 31, 2003 3
Unaudited Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 2003 and 2002 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 14
Item 4. Controls and Procedures 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
-i-
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)
March 31 September 30
ASSETS 2003 2002
- ------ ---- ----
Cash and amounts due from depository institutions $ 10,000 $ 4,753
Interest-bearing deposits with depository institutions 8,069 19,870
--------- ---------
Total cash and cash equivalents 18,069 24,623
Investment securities available for sale 74,485 80,624
Mortgage-related securities available for sale 122,245 85,674
Loans held for sale 530 501
Investment securities held to maturity - at amortized cost
(approximate fair value of $3,100 at March 31, 2003) 3,068
Mortgage-related securities held to maturity - at amortized cost
(approximate fair value of $4,990 at March 31, 2003
and $9,090 at September 30, 2002) 4,884 8,855
Loans receivable (net of allowance for loan loss of $2,720 at March 31, 2003
and $2,358 at September 30, 2002) 288,562 288,776
Accrued interest receivable 2,932 2,971
Real estate owned 328 248
Federal Home Loan Bank stock - at cost 7,771 6,571
Office properties and equipment - net 3,373 3,491
Cash surrender value of life insurance 14,733 14,362
Prepaid expenses and other assets 1,671 1,650
--------- ---------
TOTAL ASSETS $ 542,651 $ 518,346
========= =========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 346,243 $ 330,765
Advances from Federal Home Loan Bank 137,520 126,237
Accrued interest payable 864 1,000
Advances from borrowers for taxes and insurance 2,072 832
Deferred income taxes 87 424
Accounts payable and accrued expenses 2,443 5,413
--------- ---------
Total liabilities 489,229 464,671
--------- ---------
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts solely holding junior subordinated debentures of the Company 20,861 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: 1,985,847 shares at March 31, 2003 and
2,008,611 shares at September 30, 2002 14 14
Additional paid-in capital 13,399 13,622
Employee stock ownership plan (914) (995)
Treasury stock at cost: 726,709 shares at March 31, 2003 and 703,945 shares
at September 30, 2002 (9,687) (9,175)
Accumulated other comprehensive income 2,546 3,200
Retained earnings - partially restricted 27,203 26,129
--------- ---------
Total stockholders' equity 32,561 32,795
--------- ---------
TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES AND STOCKHOLDERS' EQUITY $ 542,651 $ 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 Six months ended
March 31 March 31
-------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
INTEREST INCOME:
Interest on:
Loans $4,783 $ 4,691 $ 9,834 $ 9,406
Mortgage-related securities 1,192 1,660 2,302 3,613
Investment securities:
Taxable 596 612 1,202 1,203
Tax-exempt 275 272 575 538
Dividends 97 133 192 292
Interest-bearing deposits 30 48 85 120
----- ----- ------ ------
Total interest income 6,973 7,416 14,190 15,172
----- ----- ------ ------
INTEREST EXPENSE:
Interest on:
Deposits 1,866 2,450 3,833 5,347
Federal Home Loan Bank advances 1,707 1,704 3,448 3,444
----- ----- ------ ------
Total interest expense 3,573 4,154 7,281 8,791
----- ----- ------ ------
NET INTEREST INCOME 3,400 3,262 6,909 6,381
PROVISION FOR LOAN LOSSES 195 135 390 270
----- ----- ------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,205 3,127 6,519 6,111
----- ----- ------ ------
NON-INTEREST INCOME (LOSS):
Service charges and other fees 242 257 514 528
Net gain (loss) on sales of:
Loans held for sale 75 3 212 15
Investment and mortgage-related securities 39 50 (20)
Increase in cash surrender value 166 168 333 338
Other 18 22 46 46
----- ----- ------ ------
Total non-interest income 540 450 1,155 907
----- ----- ------ ------
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,236 1,102 2,392 2,181
Occupancy and equipment 328 316 613 627
Professional fees 149 254 364 443
Federal deposit insurance premium 14 14 28 29
Data processing 128 115 248 215
Advertising 78 129 198 223
Net cost of (income from) operation of other real estate 17 (21) 22 2
Minority interest in expense of subsidiaries 402 405 816 812
Other 557 442 1,152 891
----- ----- ------ ------
Total non-interest expense 2,909 2,756 5,833 5,423
----- ----- ------ ------
INCOME BEFORE INCOME TAX EXPENSE 836 821 1,841 1,595
INCOME TAX EXPENSE 143 137 367 257
----- ----- ------ ------
NET INCOME $ 693 $ 684 $ 1,474 $ 1,338
====== ======= ======== =======
BASIC EARNINGS PER COMMON SHARE $ 0.36 $ 0.35 $ 0.77 $ 0.70
====== ======= ======== =======
DILUTED EARNINGS PER COMMON SHARE $ 0.34 $ 0.34 $ 0.73 $ 0.66
====== ======= ======== =======
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)
Employee
Additional stock
Common paid-in ownership Treasury
stock capital plan stock
----- ------- ---- -----
BALANCE AT OCTOBER 1, 2002 $ 14 $ 13,622 $(995) $(9,175)
Net income
Other comprehensive income, net of tax:
Net unrealized loss on securities
net of reclassification adjustment(1)
Comprehensive income
ESOP stock committed to be released 81
Excess of fair value above cost of
ESOP shares committed to be released 92
Purchase of treasury stock (1,009)
Exercise of stock options (315) 497
Dividends - $.20 per share
------- -------- ----- -------
BALANCE AT MARCH 31, 2003 $ 14 $ 13,399 $(914) $(9,687)
======= ======== ===== =======
Accumulated Retained
other earnings- Total
comprehensive partially stockholders'
income restricted equity
------ ---------- ------
BALANCE AT OCTOBER 1, 2002 $3,200 $26,129 $32,795
Net income 1,474 1,474
Other comprehensive income, net of tax:
Net unrealized loss on securities
net of reclassification adjustment(1) (654) (654)
---- ----
Comprehensive income 820
---
ESOP stock committed to be released 81
Excess of fair value above cost of
ESOP shares committed to be released 92
Purchase of treasury stock (1,009)
Exercise of stock options 182
Dividends - $.20 per share (400) (400)
------ ------- -------
BALANCE AT MARCH 31, 2003 $2,546 $27,203 $32,561
====== ======= =======
(1) Disclosure of reclassification amount, net of tax for the six months
ended March 31, 2003:
Net unrealized depreciation arising during the period $(687)
Less: reclassification adjustment for net gains included in net income 33
------
Net unrealized loss on securities $(654)
=====
See notes to unaudited consolidated financial statements.
-3-
FIRST KEYSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Six months ended
March 31
------------------------
2003 2002
---- ----
OPERATING ACTIVITIES:
Net income $ 1,474 $ 1,338
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for depreciation and amortization 210 231
Amortization of premiums and discounts 309 33
(Gain) loss on sales of:
Loans held for sale (212) (15)
Investment and mortgage-related securities (50) 20
Real estate owned 1 (60)
Provision for loan losses 390 270
Amortization of employee stock ownership plan 173 147
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale (13,621) (195)
Loans sold in the secondary market 13,592 420
Accrued interest receivable 39 82
Prepaid expenses and other assets (392) (1,575)
Accrued interest payable (136) (668)
Accrued expenses (2,970) 226
-------- --------
Net cash (used in) provided by operating activities (1,193) 254
-------- --------
INVESTING ACTIVITIES:
Loans originated (71,742) (86,332)
Purchases of:
Mortgage-related securities available for sale (77,276) (9,284)
Investment securities available for sale (6,998) (12,095)
Investment securities held to maturity (3,069)
Purchase (redemption) of FHLB stock (1,200) 596
Proceeds from sales of real estate owned 150 796
Proceeds from sales of investment and mortgage-related securities 6,543 2,980
Principal collected on loans 71,600 66,754
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale 10,453 180
Mortgage-related securities available for sale 35,524 21,809
Mortgage-related securities held to maturity 3,972 813
Purchase of property and equipment (92) (172)
Net expenditures on real estate owned (5)
-------- --------
Net cash used in investing activities (32,135) (13,960)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposit accounts 15,478 10,009
Net increase in FHLB advances 11,283 83
Issuance of trust preferred securities 8,000
Purchase of trust preferred securities (3,302)
Net increase in advances from borrowers for taxes and insurance 1,240 1,330
Exercise of stock options 182 140
Purchase of treasury stock (1,009)
Cash dividends (400) (369)
-------- --------
Net cash provided by financing activities 26,774 15,891
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (6,554) 2,185
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,623 19,131
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,069 $ 21,316
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest on deposits and borrowings $ 7,417 $ 9,459
Cash payments of income taxes 450 284
Transfers of loans receivable into real estate owned 231 375
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 the results for
the periods presented.
The results of operations for the three and six month periods ended March
31, 2003 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:
March 31, 2003
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
Available for Sale:
U.S. Government agency bonds:
Less than 1 year $ 2,998 $ 12 $ 3,010
1 to 5 years 7,900 25 7,925
5 to 10 years 1,870 188 2,058
Municipal obligations 17,324 617 17,941
Corporate bonds 14,297 802 $ 579 14,520
Mutual funds 14,009 17 11 14,015
Asset-backed securities 2,285 17 2,302
Preferred stocks 8,566 377 629 8,314
Other equity investments 3,376 1,024 4,400
-------- ------- ------ --------
Total $ 72,625 $ 3,079 $1,219 $74,485
======== ======== ====== =======
Held to Maturity:
Corporate bonds $ 3,068 $ 32 $ 3,100
======== ======== ========
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:
March 31, 2003
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gain Loss Fair Value
---- ---- ---- ----------
Available for Sale:
FHLMC pass-through certificates $ 7,853 $ 240 $ 8,093
FNMA pass-through certificates 28,644 475 $ 15 29,104
GNMA pass-through certificates 19,786 978 20,764
Collateralized mortgage obligations 63,962 446 124 64,284
-------- ------- ---- ---------
Total $ 120,245 $ 2,139 $139 $122,245
======== ====== ==== ========
Held to Maturity:
FHLMC pass-through certificates $ 687 $ 38 $ 725
FNMA pass-through certificates 2,614 66 $ 2 2,678
Collateralized mortgage obligations 1,583 5 1 1,587
------- ------ --- -------
Total $4,884 $109 $3 $4,990
====== ==== == ======
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:
March 31 September 30
2003 2002
---- ----
Real estate loans:
Single-family $170,099 $173,736
Construction and land 32,425 28,292
Multi-family and commercial 62,683 60,379
Home equity and lines of credit 27,929 27,595
Consumer loans 1,264 1,202
Commercial loans 10,895 11,919
---------- --------
Total loans 305,295 303,123
Loans in process (13,600) (11,384)
Allowance for loan losses (2,720) (2,358)
Deferred loan fees (413) (605)
-------- --------
Loans receivable - net $288,562 $288,776
======== ========
The following is an analysis of the allowance for loan losses:
Six Months Ended
March 31
----------------------
2003 2002
------- -------
Balance beginning of period $2,358 $2,181
Provisions charged to income 390 270
Charge-offs (38) (288)
Recoveries 10 5
------ ------
Total $2,720 $2,168
====== ======
At March 31, 2003 and September 30, 2002, non-performing loans (which
include loans in excess of 90 days delinquent) amounted to approximately
$3,282 and $5,138, respectively. At March 31, 2003, non-performing loans
primarily consisted of single-family residential mortgage loans
aggregating $600,000 and three commercial real estate loans totaling $2.4
million.
5. DEPOSITS
Deposits consist of the following major classifications:
March 31 September 30
2003 2002
--------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
Non-interest bearing $ 12,907 3.7% $ 10,094 3.1%
NOW 58,204 16.8 54,048 16.3
Passbook 43,991 12.7 41,659 12.6
Money market demand 51,814 15.0 48,722 14.7
Certificates of deposit 179,327 51.8 176,242 53.3
-------- ------ -------- -----
Total $346,243 100.0% $ 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 shares 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:
For the Three Months Ended For the Six Months Ended
March 31, March 31,
---------------------------- ----------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Numerator $ 693 $ 684 $ 1,474 $ 1,338
Denominators:
Basic shares outstanding 1,912,579 1,927,878 1,909,516 1,918,475
Effect of dilutive securities 131,603 112,538 116,849 106,221
---------- ---------- ---------- ----------
Diluted shares outstanding 2,044,182 2,040,416 2,026,365 2,024,696
========== ========== ========== ==========
EPS:
Basic $ 0.36 $ 0.35 $ 0.77 $ 0.70
Diluted $ 0.34 $ 0.34 $ 0.73 $ 0.66
7. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS No.
149 amends and clarifies accounting for derivative instruments and hedging
activities under Statement 133. In addition, this Statement clarifies
under what circumstances a contract with an initial net investment meets
the characteristic of a derivative and when a derivative contains a
financing component that warrants special reporting in the statement of
cash flows. This statement is effective for contracts entered into or
modified after June 30, 2003. The Company does not anticipate that this
statement will have a material impact on the Company
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities.". This interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements",
addresses consolidation by business enterprises of variable interest
entities with certain characteristics. FIN 46 is effective immediately for
all enterprises with variable interests in variable interest entities
created after January 31, 2003 and is effective beginning with the
September 30, 2003 quarterly financial statements for all variable
interests in a variable interest entity created before February 1, 2003.
The Company does not anticipate that the adoption of FIN 46 will have a
material impact on the Company's financial condition or results of
operations.
-8-
8. STOCK-BASED COMPENSATION
The Company applies APB Opinion No. 25 in accounting for stock options
and, accordingly, no compensation expense has been recognized in the
financial statements. Had the Company determined compensation expense
based on the fair value at the grant date for its stock option in
accordance with the fair value method in SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below.
For the Three Months Ended For the Six Months Ended
March 31, March 31,
-------------------------- --------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income, as reported $ 693 $ 684 $ 1,474 $ 1,338
Less: Total stock-based employee compensation expense determined
under fair value method for all options, net of tax 18 16 37 31
--------- --------- --------- ---------
Pro forma net income $ 675 $ 668 $ 1,437 $ 1,307
--------- --------- --------- ---------
Earnings per share:
Basic - as reported $ 0.36 $ 0.35 $ 0.77 $ 0.70
Basic - pro forma $ 0.35 $ 0.35 $ 0.75 $ 0.68
Diluted - as reported $ 0.34 $ 0.34 $ 0.73 $ 0.66
Diluted - pro forma $ 0.33 $ 0.33 $ 0.71 $ 0.64
-9-
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 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 MARCH 31, 2003 AND SEPTEMBER 30, 2002
Total assets of the Company increased $24.3 million, or 4.7%, from $518.3
million at September 30, 2002 to $542.7 million at March 31, 2003. The growth
was due primarily to increases in mortgage-related securities available for sale
of $36.6 million, or 42.7%, partially offset by decreases in cash and cash
equivalents of $6.6 million, or 26.6%, investment securities available for sale
of $6.1 million, or 7.6%, and mortgage-related securities held to maturity of
$4.0 million, or 44.8%. The asset growth was funded by increased deposits, and
to a lesser extent, the use of Federal Home Loan Bank ("FHLB") advances.
Deposits increased $15.5 million, or 4.7%, from $330.8 million at September 30,
2002 to $346.3 million at March 31, 2003. The increase resulted from increases
of $12.2 million, or 7.9%, 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 the continued uncertain climate in the
equities market. FHLB advances increased $11.3 million, or 8.9%, to fund asset
growth with short-term borrowings.
Stockholders' equity decreased $234,000 to $32.6 million primarily due to
decreases in the cost of the repurchasing of 53,994 shares of common stock, the
accumulated other comprehensive income of $654,000 and dividends paid of
$400,000 partially offset by net income of $1.5 million.
-10-
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31,
2003 AND 2002
NET INCOME.
Net income was $693,000, or $.34 per diluted share, for the three months ended
March 31, 2003 as compared to $684,000, or $.34 per diluted share, for the same
period in 2002. The $9,000, or 1.3%, increase in net income for the three months
ended March 31, 2003 was due to a $78,000, or 2.5%, increase in net interest
income after provision for loan losses and a $90,000, or 20%, in non-interest
income partially offset by a $153,000, or 5.6% increase in non-interest expense.
Net income for the six months ended March 31, 2003 was $1.5 million, or $.73 per
diluted share, as compared to $1.3 million, or $.66 per diluted share, for the
same period in 2002. The $136,000, or 10.2%, increase in net income for the six
months ended March 31, 2003 was primarily due to a $408,000, or 6.7%, increase
in net interest income after provision for loan losses and a $248,000, or 27.3%,
increase in non-interest income partially offset by a $410,000, or 7.6%,
increase in non-interest expense and a $110,000, or 42.8%, increase in income
tax expense.
NET INTEREST INCOME.
Net interest income increased $138,000, or 4.2%, to $3.4 million and $528,000,
or 8.3%, to $6.9 million for the three and six months ended March 31, 2003,
respectively. Such increases were primarily due to $581,000, or 14.0%, and $1.5
million, or 17.2%, decreases in interest expense for the three and six months
ended March 31, 2003, respectively, which were partially offset by $453,000, or
6.0%, and $978,000, or 6.4%, decreases in interest income, on a tax-equivalent
basis, during such periods. The average balance of interest-earning assets
increased $25.3 million and $19.5 million for the three and six months ended
March 31, 2003, respectively, as compared to the same periods in 2002.
Calculated on a fully taxable equivalent basis, the weighted average yield
earned on interest-earning assets for the three months ended March 31, 2003
decreased 69 basis points to 5.69% compared to the 2002 period and 66 basis
points to 5.86% for the six months ended March 31, 2003. In addition, net
interest expense was affected by an increase in the average balance of
interest-bearing liabilities of $23.3 million and $18.5 million for the three
and six months ended March 31, 2003, respectively, as compared to the same
periods in 2002. For the three months ended March 31, 2003, the weighted
average rate paid on such liabilities decreased 68 basis points to 3.07% from
3.75% for the same period in the prior fiscal year and 81 basis points to 3.15%
for the six months ended March 31, 2003 as compared to 3.96% for the six months
ended March 31, 2002. Due to the low interest rate environment existing
throughout 2002 and continuing in the first quarter of calendar 2003, the rates
paid on interest-bearing liabilities, consisting of deposits and borrowings,
adjusted at a faster pace than the Company's interest-earning assets,
consisting primarily of loans and investment securities. The interest rate
spread, on a fully tax equivalent basis, remained at 2.62% while the interest
rate margin decreased to 2.81% for the three months ended March 31, 2003 as
compared to 2.86% for the same period in 2002. The interest rate spread and net
interest margin, on a fully tax equivalent basis, were 2.71% and 2.90%,
respectively, for the six months ended March 31, 2003 as compared to 2.55% and
2.79%, respectively, for the same period in 2002. However, management
anticipates that the net interest spread and margin will 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. The
Company's provision for loan losses increased to $195,000 for the three months
ended March 31, 2003 as compared to $135,000 for the same period in 2002. For
the six months ended March 31, 2003 and 2002 the provision for loan losses
amounted to $390,000 and $270,000, respectively. The increases in the 2003
periods were due, to a large part, to the three non-performing assets
aggregating $2.4 million as discussed below.
-11-
At March 31, 2003, non-performing assets totaled $3.6 million or .67% of total
assets, a decrease of $1.8 million from September 30, 2002. The decrease in
non-performing assets was primarily due to a $1.3 million commercial real estate
loan returning to current status combined with a decrease in non-performing
residential loans and real estate owned. The Company's coverage ratio, which is
the ratio of the allowance for loan losses to non-performing assets, was 75.4%
and 43.8% at March 31, 2003 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 totaling $1.9 million in two
loans which are 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 $82,000 and $215,000 for the three and six months ended March 31,
2003. 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% participation
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 Company 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.
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 $90,000, or 20.0%, to $540,000 for the three
months ended March 31, 2003 as compared to the same period in 2002. The increase
for the three months ended March 31, 2003 was primarily due to a $72,000
increase in the gain on sale of loans resulting from the increase in the amount
of long term, fixed-rate single-family residential loans being originated for
sale into the secondary market. Such sales are being undertaken to reduce the
Bank's potential interest rate risk resulting from future increases in interest
rates. 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 $39,000 increase in the gain on sales of
mortgage-related securities partially offset by a $15,000, or 5.8%, decrease in
service charges and other fees compared to the same period in the prior year.
For the six months ended March 31, 2003, non-interest income increased $248,000,
or 27.3%, to $1.2 million as compared to the same period during the prior year.
Increases in income of $197,000 and $70,000 were recognized from the sales of
loans and investment securities and mortgage-related securities, respectively,
during the six months ended, March 31, 2003 as compared to the same period in
2002.
NON-INTEREST EXPENSE.
Non-interest expense increased $153,000, or 5.6%, during the three months ended
March 31, 2003 as compared to the same period in 2002. Increases of $134,000 and
$115,000 were incurred in compensation and employee benefits and other
non-interest expense, respectively, partially offset by a $105,000, or 41.3%,
decrease in professional fees due to a general reduction in legal fees. For the
six months ended March 31, 2003, non-interest expense increased $410,000, or
7.6%, primarily due to increases of $211,000 and $261,000 in compensation and
employee benefits and other non-interest expenses, respectively partially offset
by a $79,000, or 17.8%, decrease in professional fees due to a general reduction
in legal fees. The increase in salary and employee benefits reflected normal
merit 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 operation of the three non-performing commercial real estate
loans as previously discussed.
INCOME TAX EXPENSE.
Income tax expense increased $6,000 to $143,000 and $110,000 to $367,000 for the
three and six months ended March 31, 2003, respectively. The increases were the
result of increases in income before income taxes as compared to the same
periods in 2002 and the income recognized was being taxed at the full taxable
rate.
-12-
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.
LIQUIDITY AND CAPITAL RESOURCES.
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing and financing activities. The Company's primary
sources of funds are deposits, amortization, prepayment and maturities of
outstanding loans and mortgage-related securities, sales of loans, maturities of
investment securities and other short-term investments, borrowing and funds
provided from operations. While scheduled payments from the amortization of
loans and mortgage-related securities and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. In addition, the Company invests excess
funds in overnight deposits and other short-term interest-earning assets which
provide liquidity to meet lending requirements. The Company has been able to
generate sufficient cash through its deposits as well as borrowings to satisfy
its funding commitments. At March 31, 2003, the Company had short-term
borrowings (due within one year or currently callable by the FHLB) outstanding
of $112.2 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 March 31, 2003, total approved
loan commitments outstanding amounted to $9.1 million, not including loans in
process. At the same date, commitments under unused lines of credit amounted to
$27.5 million. Certificates of deposit scheduled to mature in one year or less
at March 31, 2003 totaled $119.1 million. Based upon its historical experience,
management believes that a significant portion of maturing deposits will remain
with the Company.
As of March 31, 2003, 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 March 31,
2003, the Bank had tangible capital and core capital equal to 8.0% of adjusted
total assets and total capital equal to 15.4% 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.
-13-
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 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 March 31, 2003.
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 $ 23,372 $(18,609) (44.33)% 4.50% (40.55)%
200 31,490 (10,491) (24.99) 5.91 (21.93)
100 48,219 (3,761) (8.96) 7.02 (7.26)
0 41,981 7.57
(100) 39,459 (2,521) (6.01) 7.05 (6.87)
(1) Based on the portfolio value of the Bank's assets in the base case
scenario
As of March 31, 2003, the Company's NPV was $42.0 million or 7.57% of the market
value of assets. Following a 200 basis point increase in interest rates, the
Company's "post shock" NPV was $31.5 million or 5.92% of the market value of
assets. The change in the NPV ratio or the Company's sensitivity measure was
(1.66)%.
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)%.
-14-
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" 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"). Our CEO and CFO concluded as a result of
such Control Evaluation that our disclosure controls and procedures are
effective.
Disclosure controls and procedures 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.
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 such internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
-15-
PART II
Item 1. Legal Proceedings
No material changes in the legal proceedings previously disclosed in
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
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)
(b) Reports on Form 8-K
Date Item and Description
- ---- --------------------
02/03/2003 Item 9. On January 31, 2003, the Company issued a press
release reporting its earnings for the quarter ended
December 31, 2002.
-16-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST KEYSTONE FINANCIAL, INC.
Date: May 15, 2003 By: /s/ Donald S. Guthrie
----------------------------------
Donald S. Guthrie
Chairman and Chief Executive Officer
Date: May 15, 2003 By: /s/ Thomas M. Kelly
----------------------------------
Thomas M. Kelly
President and Chief Financial Officer
-17-
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: May 15, 2003 s/ Donald S. Guthrie
-------------------------------------------------
Donald S. Guthrie
Chairman of the Board and Chief Executive Officer
-18-
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: May 15, 2003 s/ Thomas M. Kelly
--------------------------------------
Thomas M. Kelly
President and Chief Financial Officer
-19-